Outdoor Holding Co (POWW)

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

This Management’s Discussion and Analysis of Financial Condition and Results of Operations is intended to provide a reader of our financial statements with management’s perspective on our financial condition, results of operations, liquidity, and certain other factors that may affect our future results. The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the audited consolidated financial statements (prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) and related notes included elsewhere in this Annual Report on Form 10-K(this "Form 10-K"). The following discussion contains forward-looking statements that are subject to risks and uncertainties. See “Special Note Regarding Forward-Looking Statements.” Actual results could differ materially from those discussed in or implied by forward-looking statements as a result of various factors, including those discussed below and elsewhere in this Form 10-K, particularly in the section entitled “Risk Factors.” Unless we state otherwise or the context otherwise requires, the terms “we,” “us,” “our” and the “Company” refer to Outdoor Holding Company (formerly AMMO, Inc.) and its consolidated subsidiaries.

Recent Developments

Discontinued Operations

Outdoor Holding Company began its operations in 2017 as a vertically integrated producer of high-performance ammunition and premium components. Following the acquisition of the GunBroker.com business in 2021, the Company conducted operations through two operating and reportable segments, Ammunition and Marketplace. The Ammunition segment engaged in the design, production and marketing of ammunition, ammunition component and related products. The Marketplace segment consists of the GunBroker e-commerce marketplace, which, in its role as an auction site, supports the lawful sale of firearms, ammunition, and hunting/shooting accessories.

In fiscal 2025, we initiated a formal review of various strategic alternatives. This review resulted in the decision to sell the Ammunition segment. On January 20, 2025, we entered into an Asset Purchase Agreement (the “Asset Purchase Agreement”) with Olin Winchester, LLC (the “Buyer”), pursuant to which the Buyer agreed to (i) acquire all assets of our business of designing, manufacturing, marketing, distributing and selling ammunition and ammunition components (collectively, the “Ammunition Manufacturing Business”) along with certain assets related to the Ammunition Manufacturing Business, including the Ammunition Manufacturing Business’ dedicated manufacturing facility in Manitowoc, WI, and (ii) assume certain liabilities related to the Ammunition Manufacturing Business, for a gross purchase price of $75.0 million, subject to adjustments for estimated net working capital and real property costs and pro-rations (the “Transaction”). The Transaction closed on April 18, 2025. The net proceeds after all adjustments totaled approximately $42.9 million. On April 21, 2025, the Company changed its name from “AMMO, Inc.” to “Outdoor Holding Company”. As of January 20, 2025, the Ammunition segment met the held for sale and discontinued operations accounting criteria. For information on discontinued operations, refer to Note 2 to our consolidated financial statements under the caption “Assets Held for Sale and Discontinued Operations” and Note 4, "Discontinued Operations".

Settlement of Litigation

As described in Item 3, “Legal Proceedings”, in April 2023, Steven F. Urvan filed a lawsuit against the Company and certain of its directors, former directors, employees, former employees, and consultants, related to the Company’s acquisition of GunBroker.com and certain affiliated companies. At the time the lawsuit was filed, Mr. Urvan was a member of the Board of Directors and our largest stockholder. As described below, Mr. Urvan now serves as Chairman of the Board of Directors and Chief Executive Officer of the Company. In May 2023, the Board of Directors established a special committee to address the litigation initiated by Mr. Urvan, as well as a separate lawsuit subsequently filed by the Company against Mr. Urvan (the lawsuit filed by Mr. Urvan together with the lawsuit filed by the Company, the “Delaware Litigation”). In the year ended March 31, 2025, we recorded an estimated liability of $29.1 million related to the Delaware Litigation.

On May 21, 2025, the Company entered into a Settlement Agreement (the “Settlement Agreement”), by and among the Company, Speedlight Group I, LLC, a Delaware limited liability company and a wholly owned subsidiary of the Company (“Speedlight”), Mr. Urvan, and the following persons, each of whom serves or previously served on the Board of Directors: Richard R. Childress, Jared Smith, Fred W. Wagenhals and Russell Williams Wallace, Jr. (collectively, the “Legacy Directors”). The Settlement Agreement became effective as of 5:00 p.m. Eastern Time on May 30, 2025, pursuant to its terms (the “Settlement Effective Date”). As a result and pursuant to the Settlement

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Agreement, effective as of the Settlement Effective Date, (i) Jared Smith resigned as a member of the Board of Directors and from his position as the Chief Executive Officer of the Company and as an officer or member of each of the Company’s direct and indirect subsidiaries and (ii) Mr. Urvan was appointed as the Chief Executive Officer of the Company and as the Chairman of the Board of Directors. In addition, in accordance with the Settlement Agreement, on June 3, 2025, the Company, Speedlight, Mr. Urvan and the Legacy Directors filed a Stipulation of Voluntary Dismissal With Prejudice dismissing, with prejudice, all claims asserted in the Delaware Litigation.

As partial consideration for the settlement, on the Settlement Effective Date, the Company issued to an affiliated designee of Mr. Urvan, a warrant to purchase 7.0 million shares of Common Stock (the “Warrant”). The Warrant has a five-year term and an exercise price of $1.81 per share. Pursuant to the terms of the Warrant, the Warrant is exercisable at the holder’s discretion, in whole or in part, on or after the six-month anniversary of the Settlement Effective Date, subject to certain accelerated vesting in certain circumstances.

In addition to the Warrant, the Company issued to an affiliated designee of Mr. Urvan, (i) an unsecured promissory note in a principal amount of $12.0 million (“Note 1”) and (ii) an unsecured promissory note in a principal amount of $39.0 million (“Note 2” and together with Note 1, the “Notes”). Note 1 bears interest at 6.50% per annum (subject to a 2.00% increase during an event of default), which interest is payable to the holder annually on the anniversary of the Settlement Effective Date, beginning on the first anniversary of the Settlement Effective Date (each interest payment due date, an “Interest Payment Date”). Note 2 bears interest at a rate per annum equal to the applicable federal rate for long-term loans in effect on the Settlement Effective Date (subject to a 2.00% increase during an event of default), which is payable to the holder annually on the Interest Payment Date.

The unpaid principal balance of Note 1 and Note 2 and all accrued and unpaid interest thereon is due on the 12th and 10th anniversary, respectively, of the Settlement Effective Date. Pursuant to the terms of Note 1 and Note 2, the Company is required to make annual prepayments of $1.0 million (inclusive of accrued and unpaid interest then due and payable) and $1.95 million, respectively, to the holder on each Interest Payment Date. The Company has the right to prepay all or any part of the principal or interest of the Notes without penalty.

With respect to Note 2, the Company also has the option, at any time prior to the first anniversary of the Settlement Effective Date, to prepay all, but not less than all, of the then-outstanding principal amount of Note 2 and accrued and unpaid interest thereon in exchange for the issuance of a warrant (the “Additional Warrant”) to purchase 13.0 million shares of Common Stock (the “Additional Warrant Shares”), provided that the Company must first obtain stockholder approval of the issuance of the Additional Warrant and the Additional Warrant Shares pursuant to Nasdaq Listing Rule 5635. The Additional Warrant, if issued, would have a five-year term and an exercise price of $1.00 per share. Pursuant to the terms of the Additional Warrant, the Additional Warrant would be exercisable at the holder’s discretion, in whole or in part, on or after the first anniversary of the issuance date. Except with respect to the exercise price and the vesting date, the terms of the Additional Warrant and the Warrant are substantially similar.

Overview

Outdoor Holding Company, is the owner of the GunBroker Marketplace ("GunBroker" or the "Marketplace"), a leading online marketplace serving the firearms and shooting sports industries.

Through our Marketplace, we allow third party sellers to list items consisting of firearms, hunting gear, fishing equipment, outdoor gear, collectibles, and much more, while facilitating compliance with federal and state laws that govern the sale of firearms and other restricted items. This allows our base of over 8.4 million users to follow ownership policies and regulations through our network of over 32,000 federally licensed firearms dealers who serve as transfer agents. The nature and operation of the Marketplace as an online auction and sales platform also affords us a unique view into the total domestic market for the purpose of understanding sales trends at a granular level across all elements of the outdoor sports and shooting space. We generate revenue from marketplace fees, which includes auction revenue, compliance fee revenue,banner advertising campaign revenue and shipping revenue. Our vision is to expand the services on GunBroker and to become a peer to those in our industry. Recent expansions we have made to the platform include the following:

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Enhanced Shopping Cart Experience: Buyers can now purchase multiple items from multiple sellers in a single checkout process, improving transaction flow and user convenience.

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Improved Checkout for Auctions and Offers: Won auctions, accepted offers, and add-on items now flow through the cart checkout system providing a more seamless purchasing experience.

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Outdoor Analytics: Formerly known as GunBroker Analytics, this tool provides participants, including sellers, manufacturers, and industry stakeholders with access to actionable insights based on the platform’s extensive transaction and listing data.

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GunBroker Advertising: This service assists sellers, manufacturers and service providers in promoting their listings and businesses through targeted digital advertising. Offers include content development, promotional emails, and banner advertisements tailored to the outdoor and shooting sports communities.

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New Homepage Redesign: We launched a fully re-imagined GunBroker.com homepage to deliver a more modern, intuitive, and efficient user experience. The redesign features enhanced visual layout, simplified navigation, dynamic promotional banners, and configurable widgets.

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Manufacturer Rebates and Buy Links: GunBroker actively promotes manufacturer rebates through its website and email campaigns. Listings with qualifying Universal Product Codes are automatically included in these promotions. Additionally, we collaborate with manufacturers to feature direct purchase links on their websites, guiding customers to new items available on GunBroker.

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Collector’s Elite Platform: This premium marketplace tier supports curated, high-value listings for rare and collectible firearms. Collector’s Elite offers sellers specialized exposure, and an exclusive listing format tailored to discerning buyers.

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Financing Tools for Sellers: We introduced integrated financing options that enable sellers to offer flexible payment plans to qualified buyers, helping expand purchasing power and drive sales of higher-value items.

Results of Continuing Operations

Fiscal Year 2025 Compared to Fiscal Year 2024

The following table presents summarized financial information for the years ended March 31, 2025 and 2024, taken from our consolidated statements of operations:

Non-GAAP Financial Measures

We analyze operational and financial data to evaluate our business, allocate our resources, and assess our performance. In addition to total net sales, net loss, and other results under GAAP, the following information includes key operating metrics and non-GAAP financial measures that we use to evaluate our business. We believe that these measures are useful for period-to-period comparisons of the Company's performance. We have included these non-GAAP financial measures in this Annual Report because they are key measures management uses to evaluate our operational performance, produce future strategies for our operations, and make strategic decisions, including those relating to operating expenses and the allocation of our resources. Accordingly, we believe that these measures provide

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useful information to investors and others in understanding and evaluating our operating results in the same manner as our management and Board of Directors.

Adjusted EBITDA

(1)
For the year ended March 31, 2025, other nonrecurring expenses consisted of a $3.2 million expense related to the Triton Settlement (see Note 2, "Summary of Significant Accounting Policies"). For the year ended March 31, 2024, other nonrecurring expenses consisted of settlement costs and the associated contingent liabilities and nonrecurring compliance expenses.

Adjusted EBITDA is a non-GAAP financial measure that displays our net loss from continuing operations, adjusted to eliminate the effect of certain items as described below. We define Adjusted EBITDA as net income (loss) from continuing operations excluding (i) provision or benefit for income taxes, (ii) depreciation and amortization, (iii) interest expense, net, (iv) share-based compensation expenses relating to employee stock awards and common stock purchase options, (v) other income (expense), net, (vi) expenses related to acquisition and divestitures, (vii) professional service and legal fees related to an investigation conducted by a special committee of the Board of Directors (the “Special Committee Investigation”) and (vii) other nonrecurring expenses, such as the contingent liability associated with the Delaware Litigation and professional service and legal fees related to the Delaware Litigation and the SEC Investigation.

We believe that it is useful to exclude these expenses because the amount of such expenses in any specific period may not directly correlate to the underlying performance of our business operations.

Non-GAAP financial measures have limitations, should be considered as supplemental in nature and are not meant as a substitute for the related financial information prepared in accordance with GAAP. These limitations include the following:

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employee stock awards and common stock purchase options expense has been, and will continue to be for the foreseeable future, a significant recurring expense for the Company and an important part of our compensation strategy;

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the assets being depreciated or amortized may have to be replaced in the future, and the non-GAAP financial measures do not reflect cash capital expenditure requirements for such replacements or for new capital expenditures or other capital commitments;

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non-GAAP measures do not reflect changes in, or cash requirements for, our working capital needs; and

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other companies, including companies in our industry, may calculate their non-GAAP financial measures differently or not at all, which reduces their usefulness as comparative measures.

Because of these limitations, you should consider the non-GAAP financial measures alongside other financial performance measures, including our net loss and our other financial results presented in accordance with GAAP.

Net Revenues

We generate revenue from marketplace fees, which includes auction revenue, compliance fee revenue, banner advertising campaign revenue and shipping revenue. Auction revenue consists of optional listing fees with variable pricing components based on customer options and final value fees based on a percentage of the final selling price of the listed item. Compliance fee revenue consists of fees charged to customers based on the final price of an item at the time of purchase. Banner advertising campaign revenue consists of fees charged for advertisement placement and impressions generated through the GunBroker website. Shipping revenue consists of fees for shipping of items sold on the GunBroker website.

Net revenues for the year ended March 31, 2025 decreased by $4.5 million, or 8.4%, from the prior year. This decrease was due to a decrease in gross merchandise sales generated from our Marketplace partially offset by a minor increase in our take rate. We believe the reduction in gross merchandise sales was a result of economic conditions and reduced discretionary spending among our customer base.

Cost of Revenues

Cost of revenues consists of costs associated with facilitating transactions on the GunBroker platform as well as advertising costs.

Cost of revenues decreased by approximately $1.2 million, or 15.6%, for the year ended March 31, 2025 compared to the year ended March 31, 2024. This decrease was the result of a reduction in advertising expenses as well as a decrease in credit card fees.

Gross Margin

Our gross margin, which measures our gross profit as a percentage of net revenues, increased to 86.9% during the year ended March 31, 2025 from 85.8% for the year ended March 31, 2024. This increase was primarily a result of our increased take rate.

Operating Expenses

Operating expenses consist of selling and marketing expenses, which include tradeshows and marketing expenses, corporate general and administrative expenses, which include legal and professional fees and as well as insurance and rent, employee salaries and related expenses, which include salaries, benefits and stock based compensation as well as depreciation and amortization expenses.

Operating expenses increased by approximately $49.9 million for the year ended March 31, 2025 compared to the year ended March 31, 2024. This increase was primarily due a $29.1 million contingency for the Delaware Litigation and a $14.1 million increase in legal and professional fees related to the restatement, the Special Committee Investigation, the SEC Investigation, and the Delaware Litigation as well as a $2.1 million increase in other legal and professional fees, $1.5 million in costs associated with acquisitions and divestitures and a $2.0 million increase in payments for director committee service.

Other Income and Expenses

For the year ended March 31, 2025, total other income was $0.8 million and was mainly comprised of interest earned on cash. Total other income of $0.1 million for the year ended March 31, 2024 was comprised of interest income on cash

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Income Taxes

For the year ended March 31, 2025, we recorded a provision for federal and state income taxes of approximately $6.3 million compared to a benefit for federal and state income taxes of $0.9 million for the year ended March 31, 2024. The change in income taxes for the year ended March 31, 2025 was the result of recording a full valuation allowance against our deferred tax assets as we concluded it is more likely than not that the net deferred tax assets will not be realized.

Fiscal Year 2024 Compared to Fiscal Year 2023

Results of Continuing Operations

The following table presents summarized financial information for the years ended March 31, 2024 and 2023, taken from our consolidated statements of operations:

Non-GAAP Financial Measures

Adjusted EBITDA

(1)
For the year ended March 31, 2024, other nonrecurring expenses consisted of settlement costs and the associated contingent liabilities and nonrecurring compliance expenses.

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Net Revenues

Revenues for the year ended March 31, 2024 decreased by $9.2 million, or 14.6%, from the prior year as firearm purchases continued to normalize from the peaks realized during COVID.

Cost of Revenues

Cost of revenues decreased by $1.5 million, or 16.0%, for the year ended March 31, 2024 compared to the year ended March 31, 2023. This decrease was the result of lower gross merchandise sales.

Gross Margin

Our gross margin percentage remained relatively constant at 85% for the year ended March 31, 2024 and March 31, 2023.

Operating Expenses

Operating expenses consist of selling and marketing expenses, which include advertising, tradeshows, and marketing expenses, corporate general and administrative expenses, which include legal and professional fees and as well as insurance and rent, employee salaries and related expenses, which include salaries, benefits and stock based compensation as well as depreciation and amortization expenses.

Operating expenses increased by $1.1 million for the year ended March 31, 2024 compared to the prior year. This increase was primarily due to an increase in legal and professional fees partially offset by a decrease in salaries.

Other Income and Expense

Total other income of $0.1 million for the year ended March 31, 2024 was comprised of interest income on cash. Total other expense of $0.1 million for the year ended March 31, 2023 was primarily comprised of interest expense on the insurance note.

Income Taxes

For the year ended March 31, 2024, we recorded a benefit for federal and state income taxes of approximately $0.9 million compared to $1.3 million in the year ended March 31, 2023, as a result of an increase in deferred tax assets.

Loss from Discontinued Operations

Refer to Note 4, "Discontinued Operations" in the notes to the consolidated financial statements for information regarding the Ammunition Segment which is accounted for as discontinued operations.

Liquidity and Capital Resources

As of March 31, 2025, we had $30.2 million of cash and cash equivalents, a decrease of $25.4 million from $55.6 million of cash and cash equivalents as of March 31, 2024.

Working capital is summarized and compared as follows:

Liquidity

We expect existing working capital and cash flows from operations to be adequate to fund our operations over the next 12 months. Generally, we have financed operations to date through the proceeds of stock sales, bank financings, sales of equity and related-party notes. These sources have been adequate to fund our recurring cash expenditures including but not limited to our working capital requirements, capital expenditures to expand our operations, debt repayments, and acquisitions. In the longer-term, we intend to continue to use the aforementioned sources of funding for capital expenditures, debt repayments and any potential acquisitions.

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Leases

We currently lease two locations that are used for our offices. As of March 31, 2025, we had $1.8 million of fixed lease payment obligations with $0.7 million payable within the next 12 months. As of March 31, 2024, we had $2.6 million of fixed lease payment obligations, with $0.7 million payable within the next 12 months. Please refer to Note 8, "Leases" for additional information.

Promissory Notes Issued in Settlement

On May 30, 2025, we issued Note 1 and Note 2 pursuant to the Settlement Agreement. The aggregate principal amount of Note 1 and Note 2 is $51.0 million, and we are required to make aggregate annual prepayments of $2.95 million beginning on May 30, 2026. See "Settlement Litigation" under Recent Developments above for additional information about Note 1 and Note 2.

Revolving Loan

On December 29, 2023, we entered into a Loan and Security Agreement (the “Sunflower Agreement”) by and among the Company and the other borrowers party to the Sunflower Agreement, the lenders party thereto (collectively, the “Lenders”) and Sunflower Bank, N.A., as administrative agent and collateral agent (the “Agent”), pursuant to which the Lenders provided us a revolving loan in the principal amount of the lesser of (a) $20.0 million (the “Total Commitment Amount”) and (b) the borrowing base (a formula based on certain amounts owed to borrower for goods sold or services provided and eligible inventory) (the “Revolving Loan”). The proceeds of loans under the Sunflower Agreement may be used for working capital, general corporate purposes, permitted acquisitions, to pay fees and expenses incurred in connection with the Revolving Loan, to facilitate our stock repurchase program and to fund our general business requirements.

We are obligated to pay to the Agent, for the ratable benefit of Lenders, an origination fee, prepayment fee, unused facility fee, collateral monitoring fee and Lender expenses.

We may borrow, repay and re-borrow under the Revolving Loan until December 29, 2026, at which time the commitments will terminate and all outstanding loans, together with all accrued and unpaid interest, must be repaid. If the Revolving Loan is refinanced by another lender prior to December 29, 2026, there is an additional fee payable concurrently with such refinancing based on a percentage (ranging from 1.0% to 3.0%) of the Total Commitment Amount depending on the date of the refinancing.

As of March 31, 2025, we did not have an outstanding balance on the Revolving Loan.

On April 18, 2025, we entered into a Consent and Second Amendment to the Sunflower Agreement ("Sunflower Loan Amendment"). Pursuant to the Sunflower Loan Amendment, we and the Agent agreed to, among other things: (i) release the Agent’s security interest in all collateral securing our obligations under the Sunflower Agreement upon consummation of the sale of the Ammunition Manufacturing Business; (ii) reduce all amounts available under the Revolving Loan to zero dollars as of the effective date of the Sunflower Loan Amendment; (iii) enter into an Amended and Restated Revolving Line Promissory Note in the amount of $5.0 million, representing 100% of the Revolving Line Commitment (as defined in the Sunflower Agreement) available under the Sunflower Agreement, executed by the Company in favor of Agent as of the effective date of the Sunflower Loan Amendment; and (iv) certain other amendments to the Company's customary covenants and obligations under the Sunflower Agreement that only take effect in the event the Revolving Line Availability (as defined in the Sunflower Agreement) is greater than zero dollars.

Upon signing of the Sunflower Loan Amendment, the Revolving Line Availability was reduced to zero dollars and will remain at zero dollars unless we provide the Agent with a security interest in new collateral or otherwise further amends the Sunflower Agreement.

On May 13, 2025, the Company entered into a Third Amendment to the Sunflower Agreement (the “Third Sunflower Loan Amendment”. Pursuant to the Third Sunflower Loan Amendment, we and the Agent agreed to change the definitions in the Sunflower Agreement of: (i) “AMMO, Inc” to “Outdoor Holding Company,” (ii) “Ammo” to “OHC,” (iii) “AMMO TECHNOLOGIES, INC” to “OHC TECHNOLOGIES, INC,” and (iv) AMMO MUNITIONS, INC” to “OHC MUNITIONS, INC.”

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Construction Loan

On October 14, 2021, we entered into a Construction Loan Agreement (the “Hiawatha Loan Agreement”) with Hiawatha National Bank to finance a portion of the construction costs of the Ammunition segment’s approximately 185,000 square foot Manitowoc, WI manufacturing facility (the “Construction Loan”).

As of March 31, 2025, the outstanding balance of the Construction Loan was $10.8 million. We made $240,937 and $257,425 in principal payments on the Construction Loan for the years ended March 31, 2025 and March 31, 2024, respectively.

In connection with the sale of the Ammunition segment in April 2025, the Construction Loan was paid in full on April 18, 2025.

Changes in cash flows are summarized as follows:

Operating Activities

For the year ended March 31, 2025, net cash used in operating activities was attributable to our net loss offset by an increase in accrued liabilities associated with the contingency for the potential settlement of the Delaware Litigation, non-cash depreciation and amortization expense and non-cash expense for employee stock awards, an increase in accounts payable due to an increase in invoices unpaid at the end of the year, an increase in deferred income taxes, partially offset by an increase in the valuation allowance on deferred income taxes.

For the year ended March 31, 2024, net cash provided by operating activities was attributable to non-cash transactions for depreciation and amortization and stock compensation expense for stock awards.

For the year ended March 31, 2023, net cash provided by operating activities was attributable to a reduction in accounts receivable and non-cash transactions for depreciation and amortization as well as stock-based compensation expense for stock awards offset by a decrease in accounts payable.

Investing Activities

During the year ended March 31, 2025, net cash used in investing activities consisted of $3.4 million related primarily to capitalized development costs related to our Marketplace.

During the year ended March 31, 2024, net cash used in investing activities consisted of $2.6 million related primarily to capitalized development costs related to our Marketplace.

During the year ended March 31, 2023, net cash used in investing activities consisted of approximately $1.8 million related primarily to capitalized development costs related to our Marketplace.

Financing Activities

During the year ended March 31, 2025, net cash used in financing activities consisted of $3.0 million of preferred stock dividends paid, $5.9 million used to repurchase shares of Common Stock pursuant to our repurchase plan (which included shares repurchased related to the Triton Settlement described in the Contingencies section of Note 2), and $0.7 million used to repurchase Common Stock to cover taxes on share awards issued to employees.

During the year ended March 31, 2024, net cash used in financing activities consisted of $3.2 million of insurance premium note payments, $3.0 million of preferred stock dividends paid, and $2.2 million used to repurchase shares of Common Stock pursuant to our repurchase plan partially offset by $0.1 million received from the exercise of warrants.

During the year ended March 31, 2023, net cash used in financing activities consisted of $3.0 million of preferred stock dividends paid, $2.1 million of insurance premium note payments and $0.5 million used to repurchase shares of Common Stock pursuant to our repurchase plan partially offset by $0.1 million of proceeds from warrants exercised for Common Stock.

Off-Balance Sheet Arrangements

As of March 31, 2025 and 2024, we did not have any off-balance sheet arrangements that have or are reasonably likely to have a current or future material effect on our financial condition, net sales, expenses, results of operations, liquidity capital expenditures, or capital resources.

Critical Accounting Estimates

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Our critical accounting estimates are included in our significant accounting policies as described in Note 2 of the consolidated financial statements included in Item 8, Financial Statements and Supplemental Data, of this report. Those consolidated financial statements were prepared in accordance with accounting principles generally accepted in the United States of America. Critical accounting estimates are those that we believe are most important to the portrayal of our financial condition and results of operations. The preparation of our consolidated financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses. Our estimates are evaluated on an ongoing basis and are drawn from historical operations, current trends, future business plans and other factors that management believes are relevant at the time our consolidated financial statements are prepared. Actual results may differ from our estimates. Management believes that the following accounting estimates reflect the more significant judgments and estimates we use in preparing our consolidated financial statements.

Assets Held for Sales and Discontinued Operations

A business is classified as held for sale when management having the authority to approve the action commits to a plan to sell the business, the business is available for immediate sale in its present condition and an active program to locate a buyer has been initiated. Additionally, the sale must be probable to occur during the next 12 months at a price that is reasonable in relation to its current fair value and actions required to complete the plan indicate it is unlikely significant changes to the plan will be made or the plan will be withdrawn. A business classified as held for sale is recorded at the lower of (i) its carrying amount and (ii) estimated fair value less costs to sell. When the carrying amount of the business exceeds its estimated fair value less costs to sell, a loss is recognized and updated each reporting period as appropriate. Assets held for sale are not further depreciated or amortized once such a determination is reached.

The results of operations of businesses classified as held for sale are reported as discontinued operations if the disposal represents a strategic shift that will have a major effect on the entity’s operations and financial results. When a business is identified for discontinued operations reporting: (i) results for prior periods are retrospectively reclassified as discontinued operations; (ii) results of operations are reported in a single line, net of tax, in the consolidated statement of operations; and (iii) assets and liabilities are reported as held for sale in the consolidated balance sheets in the period in which the business is classified as held for sale.

The Board of Directors initiated a formal review of strategic alternatives for the Ammunition segment during the year ended March 31, 2025. This review of strategic alternatives resulted in the decision to sell the Ammunition segment. Accordingly, we concluded the assets of the Ammunition segment met the criteria for classification as held for sale. We determined the ultimate disposal will represent a strategic shift that will have a major effect on our operations and financial results. As such, the results of the Ammunition segment are presented as discontinued operations in the accompanying consolidated statements of operations for all periods presented and the assets and liabilities of the Ammunition segment have been reflected as assets and liabilities of discontinued operations in the accompanying consolidated balance sheets for all periods presented. The Company has ceased depreciating and amortizing its long-lived assets for the Ammunition segment which primarily includes intangible assets and property and equipment. On January 20, 2025, we entered into the Asset Purchase Agreement with the Buyer, pursuant to which the Buyer agreed to (i) acquire the Ammunition Manufacturing Business along with certain assets related to the Ammunition Manufacturing Business, and (ii) assume certain liabilities related to the Ammunition Manufacturing Business, for a gross purchase price of $75.0 million, subject to customary adjustments for estimated net working capital and real property costs and pro-rations The Transaction closed on April 18, 2025. The net proceeds totaled approximately $42.9 million. The assets acquired, and the liabilities assumed by the Buyer were those primarily related to the Ammunition Manufacturing Business, including the Ammunition Manufacturing Business’ dedicated manufacturing facility in Manitowoc, WI.

We calculated an estimated loss on classification to held for sale of approximately $45.8 million, reflecting the write-down of the carrying value of the Ammunition segment to fair value less costs to sell. The fair value was determined by using market participant assumptions as there was an expected sale price for the business based on negotiations with the Buyer. Costs to sell included estimated incremental, direct costs incurred to transact the sale of the Ammunition segment. Refer to Note 4 to our consolidated financial statements for additional information.

Allowance for Credit Losses

We estimate our allowance for credit losses based on the collectability and age of the accounts receivable balances and categorization of customers that have similar financial condition.

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Goodwill

We evaluate goodwill for impairment annually or more frequently when an event occurs or circumstances change that would more likely than not reduce the fair value of the reporting unit below its carrying amount. In testing for goodwill impairment, we may elect to utilize a qualitative assessment to evaluate whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If our qualitative assessment indicates that goodwill impairment is more likely than not, we perform a two-step impairment test. We test goodwill for impairment under the two-step impairment test by first comparing the book value of net assets to the fair value of the reporting unit. If the fair value is determined to be less than the book value or qualitative factors indicate that it is more likely than not that goodwill is impaired, a second step is performed to compute the amount of impairment as the difference between the estimated fair value of goodwill and the carrying value. We estimate the fair value of the reporting units using discounted cash flows. Forecasts of future cash flows are based on our best estimate of future net sales and operating expenses, based primarily on expected category expansion, pricing, market segment share, and general economic conditions. Due to the declines in the value of our stock price and market capitalization during the years ended March 31, 2025, 2024 and 2023, we assessed qualitative factors to determine if it is more likely than not that the fair value of the Marketplace segment is less than its carrying amount. Accordingly, the impairment of goodwill was not warranted for the years ended March 31, 2025 or 2024. As of March 31, 2025 and 2024, the Company had a goodwill carrying value of $90.9 million, all of which is assigned to the Marketplace segment.

Leases

We determine if an arrangement is a lease at inception of the contract. Operating lease assets represent our right to use an underlying asset for the lease term and lease liabilities represent our obligation to make lease payments arising from the lease. Operating lease assets and liabilities are recognized at commencement date based on the present value of fixed lease payments over the lease term. Leases with an initial term of 12 months or less are not recorded on the balance sheet; instead, we recognize lease expense for these leases on a straight-line basis over the lease term. We do not account for lease components (e.g., fixed payments to use the underlying lease asset) separately from the non-lease components (e.g., fixed payments for common-area maintenance costs and other items that transfer a good or service). Some of our leases include variable lease payments, which primarily result from changes in consumer price and other market-based indices, which are generally updated annually, and maintenance and usage charges. These variable payments are excluded from the calculation of our lease assets and lease liabilities.

We utilize the interest rate implicit in the lease to determine the lease liability when the interest rate can be determined. As most of our leases do not provide an implicit rate, we use our incremental borrowing rate based on the information available at the lease commencement date in determining the present value of lease payments.

Stock-Based Compensation

We account for stock-based compensation at fair value in accordance with Accounting Standards Codification 718 – Compensation – Stock Compensation (“ASC 718”), which requires the recognition of the cost of employee, director and non-employee services received in exchange for an award of equity over the period the employee, director or non-employee is required to perform the services in exchange for the award. Stock-based compensation is measured based on the grant-date fair value of the award. Stock-based compensation is recognized on a straight-line basis over the vesting periods and forfeitures are recognized in the periods they occur. There were 1,269,106, 1,936,951 and 1,777,294 shares of common stock issued to employees, members of the Board of Directors, and members of our advisory committee for services for the years ended March 31, 2025, 2024 and 2023, respectively.

Income Taxes

We file federal and state income tax returns in accordance with the applicable rules of each jurisdiction. We account for income taxes under the asset and liability method in accordance with Accounting Standards Codification 740 - Income Taxes (“ASC 740”). The provision for income taxes includes federal, state, and local income taxes currently payable, and deferred taxes. We recognize deferred tax assets and liabilities for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax basis. We measure deferred tax assets and liabilities using enacted tax rates expected to apply to taxable amounts in years in which those temporary differences are expected to be recovered or settled. If it is more likely than not that some portion or all of a deferred tax asset will not be realized, a valuation allowance is recognized. In accordance with ASC 740, we recognize the effect of income tax positions only if those positions are more likely than not of being sustained. We measure recognized income tax positions at the largest amount that is greater than 50%

39

likely of being realized. We reflect changes in recognition or measurement in the period in which the change in judgment occurs.

ITEM
7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

This
document contains certain “forward-looking statements”. All statements other than statements of historical fact are “forward-looking
statements” for purposes of federal and state securities laws, including, but not limited to, any projections of earnings, revenue
or other financial items; any statements of the plans, strategies, goals and objectives of management for future operations; any statements
concerning proposed new products and services or developments thereof; any statements regarding future economic conditions or performance;
any statements or belief; and any statements of assumptions underlying any of the foregoing.

30

Forward
looking statements may include the words “may,” “could,” “estimate,” “intend,” “continue,”
“believe,” “expect,” or “anticipate,” or other similar words, or the negative thereof. These forward-looking
statements present our estimates and assumptions only as of the date of this report. Accordingly, readers are cautioned not to place
undue reliance on forward-looking statements, which speak only as of the dates on which they are made. We do not undertake to update
forward-looking statements to reflect the impact of circumstances or events that arise after the dates they are made. You should, however,
consult further disclosures and risk factors we included in the section titled Risk Factors contained herein.

Overview

AMMO,
Inc., owner of the GunBroker Marketplace, the largest online marketplace serving the firearms and shooting sports industries, and
a vertically integrated producer of high-performance ammunition and premium components began its operations in 2017.

Through
our GunBroker Marketplace segment (acquired in April 2021), we allow third party sellers to list items consisting of firearms,
hunting gear, fishing equipment, outdoor gear, collectibles, and much more on our site, while facilitating compliance with federal
and state laws that govern the sale of firearms and restricted items. This allows our base of over 8.1 million users to follow
ownership policies and regulations through our network of over 31,000 federally licensed firearms dealers as transfer agents. The
nature and operation of the Marketplace as an online auction and sales platform also affords our Company a unique view into the
total domestic market for the purpose of understanding sales trends at a granular level across all elements of the outdoor sports
and shooting space. Our vision is to expand the services on GunBroker and to become a peer to those in our industry. Recent
expansions we have made to the platform are;

●
Payment Processing – facilitating payment between parties allowing sellers to offer fast and secure electronic payments
and allowing buyers to experience the ease of instant checkout.

●
Carting Ability – enables our buyers to checkout multiple items from multiple sellers in a single transaction. Our buyers are
able to finalize one transaction including both regulated and nonregulated items, while also affording them the ability to ship
their purchases to more than one location.

●
GunBroker Analytics – through the compilation and refinement of vast Marketplace data, we offer e-commerce market
analytics to our industry peers allowing them to better manage business strategy and planning. The analytics
offering will be rebranded to Outdoor Analytics during fiscal year 2025 to expand service offerings.

●
GunBroker Advertising – content creation for manufactures, email campaigns and banner ads are all part of our advertising offerings
to the outdoor industry.

Through
our Ammunition segment, we are tailoring our focus of our manufacturing operations to the production of premium pistol
and rifle ammunition and supporting industry partners with manufactured components such as premium pistol and rifle brass casings.
We will continue to leverage our flagship brands that are proprietary in nature like STREAK VISUAL AMMUNITION™ , /stelTH/™, Signature-on-Target, and HUNT and extend our product offering with premium rifle lines and brands that complement our technologically
innovative heritage. We also continue to ensure dynamic performance under the exacting standards of the U.S. military complex in
support of our cutting-edge developmental ammunition programs as we seek out and effectively execute upon new governmental-based
opportunities.

Results
of Operations

The following discussion is intended to provide our financial statements with a narrative
from the perspective of management on our financial condition, results of operations, liquidity, and certain other factors that may affect
our future results. The following information should be read in conjunction with our consolidated financial statements included
in this Annual Report beginning on page F-1.

Fiscal
Year 2024 Compared to Fiscal Year 2023

Our financial
results for the year ended March 31, 2024 reflect our transition into our new operational
strategic position, focusing on higher brass casing production and sales. We believe
that we have hired a strong team of professionals and developed innovative products to establish our presence as a high-quality
ammunition provider and marketplace. We continue to focus on building profitability through our rifle brass manufacturing. We
experienced a 24.2% decrease in our Net Revenues for the year ended March 31, 2024 compared with the year ended March 31, 2023. This
was the result of decreased revenue in both of our reporting segments due to changes in market demand as discussed below, and specifically for our
ammunition division, changes in pricing, sales mix. We
believe that the shift in our operational strategy focusing on higher brass casing production and sales negatively impacted our
sales in the year ended March 31, 2024 as compared to the year ended March 31, 2023. Additionally, equipment malfunction related to
rifle production in our manufacturing facility in Manitowoc caused lower production output contributing to lower sales
results. Our focus on creating profitability is in contrast to revenue growth.

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The
following table presents summarized financial information for the years ended March 31, 2024 and 2023, taken from our consolidated
statements of operations:

Non-GAAP
Financial Measures

We
analyze operational and financial data to evaluate our business, allocate our resources, and assess our performance. In addition to
total net sales, net loss, and other results under accounting principles generally accepted in the United States
(“GAAP”), the following information includes key operating metrics and non-GAAP financial measures that we use to
evaluate our business. We believe that these measures are useful for period-to-period comparisons of the Company. We have included
these non-GAAP financial measures in this Annual Report on Form 10-K because they are key measures we use to evaluate our
operational performance, produce future strategies for our operations, and make strategic decisions, including those relating to
operating expenses and the allocation of our resources. Accordingly, we believe that these measures provide useful information to
investors and others in understanding and evaluating our operating results in the same manner as our management and Board of
Directors.

Adjusted
EBITDA

Adjusted
EBITDA is a non-GAAP financial measures that displays our net loss, adjusted to eliminate the effect of certain items as described below.

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We
have excluded the following non-cash expenses from our non-GAAP financial measures: provision or benefit for income taxes;
depreciation and amortization; share-based or warrant-based compensation expenses; and changes to the contingent consideration fair
value. We believe that it is useful to exclude these non-cash expenses because the amount of such expenses in any specific period
may not directly correlate to the underlying performance of our business operations.

Adjusted
EBITDA as a non-GAAP financial measure also excludes other cash interest income and expense, and non-recurring expenses incurred as a
result of a proxy contest as these items are not components of our core operations.

Non-GAAP
financial measures have limitations, should be considered as supplemental in nature and are not meant as a substitute for the
related financial information prepared in accordance with GAAP. These limitations include the following:

Because
of these limitations, you should consider the non-GAAP financial measures alongside other financial performance measures, including our
net loss and our other financial results presented in accordance with GAAP.

Net
Revenues

The following table shows our revenues by the various categories that comprise our total revenues for the years ended
March 31, 2024 and March 31, 2023. “Proprietary ammunition” include those lines of ammunition that we manufacture at our facilities
and sell under the brand names “STREAK VISUAL AMMUNITION™” and “/stelTH/™”. We define “standard ammunition” as non-proprietary ammunition that directly competes with other brand
manufacturers. Our “standard ammunition” includes ammunition that we manufacture at our facilities as well as any completed
ammunition that we acquire in the open market for sale to others. Also included in this category is low cost target pistol and rifle ammunition
as well as bulk packaged ammunition that we manufacture using reprocessed brass casings. Ammunition within the standard ammunition product
line typically carries much lower gross margins than our proprietary ammunition.

Net
Revenues for the year ended March 31, 2024 decreased by $46.4 million, or 24.2%, from the prior year due to changes in market
conditions. This was due to the result of a decrease of $40.2 million in sales of bulk pistol and rifle ammunition, $4.5 million in
sales of Proprietary Ammunition, and $9.2 million in sales generated from our GunBroker Marketplace, which primarily consists of
auction revenue, as well as payment processing revenue, and shipping income, partially offset by an increase of $7.5 million in our
casing sales. We believe that the shift in our operational strategy focusing on higher brass casing production and sales negatively
impacted our sales in the year ended March 31, 2024 as compared to the year ended March 31, 2023. Additionally, equipment
malfunction related to rifle production in our manufacturing facility in Manitowoc caused lower production output contributing to
lower sales results. Management anticipates an increase in ammunition casings sales as capacities come online in its new Manitowoc
facility.

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With
our new Manitowoc facility coming online we will continue to expand distribution into commercial markets, introduce new
product lines, and continue to initiate sales to U.S. law enforcement, military, and international markets.

For example, through
our acquisition of SWK, the Company has developed and deployed a line of tactical armor piercing (“AP”) and hard armor piercing incendiary
(“HAPI”) precision ammunition to meet the lethality requirements of both the U.S. and foreign military customers. We continue to demonstrate
our AP and HAPI ammunition to military personnel at scheduled and invite only events, resulting in increased interest and procurement
discussions. The Company has since developed the ballistic match (“BMMPR”) and Signature-on-Target rounds under contract with the
U.S. Government in support of U.S. special operations which have been publicly announced pursuant to governmental authorization. Additional
work continues in support of the military operations of the U.S. and its ally military components which is not currently subject to disclosure.

It
is important to note that, although U.S. law enforcement, military and international markets represent significant opportunities for
our Company, they also have a long sales cycle. The Company’s sales team has been effective in establishing sales and distribution
channels, both in the United States and abroad, that we anticipated will drive sustained sales opportunity in the military, law enforcement,
and commercial markets.

Cost
of Revenues

Cost
of Revenues decreased by approximately $33.6 million from $136.0 million to $102.4 million for the year ended March 31, 2024 compared
to the comparable period ended in 2023. This was the result of a significant decrease in net sales as well increases to non-cash depreciation
related to increases in production equipment, expensing of increased labor, and overhead used to produce finished product during 2024
as compared to 2023. Cost of Revenues for our ammunition segment consists of product cost and cost directly and indirectly associated
with getting those products to a sellable state and for our marketplace segment, consists of cost associated with facilitating transactions
on the platform.

Gross
Margin

Our
gross margin percentage, which measures our gross profit as a percentage of sales increased to 29.4% during the year ended March 31,
2024 from 28.9% for the year ended March 31, 2023. This was primarily a result of our marketplace, GunBroker which, by nature has significantly higher margins than our manufactured products, offset
by increases in labor costs and overhead in our
ammunition segment.

We
believe that as we grow ammunition segment sales through new markets and expanded distribution that our gross margins will continue
to increase. Our goal in the next 12 to 24 months is to continue to improve our gross margins. This will be accomplished through the
following:

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Operating
Expenses

Operating
expenses consists of selling and marketing expenses, corporate general & administrative, and employee salaries and related
expenses. Operating expenses increased by approximately $2.5 million for the year ended March 31, 2024 compared to the prior year,
and increased as a percentage of sales to 42.2% in the 2024 fiscal year from 30.6% for the year ended March 31, 2023. This increase
was primarily due to a $4.9 million, or 18.4%, increase in corporate general and administrative expenses, offset by a $3.4 million,
or 71.0%, decrease in selling and marketing expenses, during the year ended March 31, 2024 compared to the prior year.

Selling and marketing expenses
consists of commissions related to our sales, as well as advertising and marketing expenses. During the year ended March 31, 2024, our
selling and marketing expenses decreased primarily as a result of decreases in sales commission due to the decrease in the amount of sales
of our products and services compared to the year ended March 31, 2023.

The
increase in our corporate general and administrative expenses was due primarily to an increase of $9.2 million of nonrecurring
expenses, consisting of professional and legal fees that are nonrecurring in nature, offset by the lack of expenses relating to a proxy contest in connection with our annual meeting of stockholders held
on January 5, 2023, in connection with which we incurred $4.7 million in expenses.

In
addition, employee salaries and related expenses increased approximately $1.0 million for the year ended March 31, 2024 compared to the
year ended March 31, 2023. Such increase was primarily the result of $0.8 million of additional payroll expenses that we incurred as
a result of the implementation of an employee bonus program during the 2024 fiscal year.

Other Income and Expenses

Total other expense for the year
ended March 31, 2024, increased by $0.4 million compared to the year ended March 31, 2023. This was primarily the result of $0.2 million
in losses recorded on the disposal of assets.

The decrease in interest expense was mainly due to additional interest of approximately $0.2 million during the year
ended March 31, 2024 compared to the prior year on our Construction Note Payable, offset by approximately $0.3 million of interest income.

Income Taxes

For the year ended March 31, 2024, we recorded a benefit for federal and state income taxes of approximately $3.8
million in comparison to a $0.7 million provision for federal and state income taxes in the year ended March 31, 2023, as a result of
the increase in our net loss before taxes during fiscal 2024 compared to the prior year.

Net
Loss

We
ended the year ended March 31, 2024 with a net loss of approximately $15.6 million compared with a Net Loss of approximately $4.6 million
for the year ended March 31, 2023.

Our
goal is to continue to improve our operating results as we focus on increasing sales and reducing our operating expenses.

35

Fiscal
Year 2023 Compared to Fiscal Year 2022

Results
of Operations

Our
financial results for the year ended March 31, 2023 reflect our newly positioned organization as
we transition into our new manufacturing facility. We believe that we have hired a strong team of professionals, developed innovative
products, and continue to raise capital sufficient to establish our presence as a high-quality ammunition provider and marketplace. We
continue to focus on growing our top line revenue and streamlining our operations. We continue to focus on growing our top line
revenue, and streamlining our operations. We experienced a 20.3% decrease in our Net Revenues for the year ended March 31, 2023 compared
with the year ended March 31, 2022. This was the result of decreased ammunition sales due to changes in market demand.

The following table presents summarized financial information for the years ended March 31, 2023 and 2022, taken
from our consolidated statements of operations:

Non-GAAP Financial Measures

Adjusted
EBITDA

In
addition to the adjustments described above, we have modified our adjusted EBITDA calculation in our 2023 fiscal year to remove the adjustment
for excise taxes as we believe this is a better representation of our operations. In prior periods, we included an adjustment for excise
taxes, but will not include this adjustment in future periods.

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Net
Revenues

The
following table shows our revenues by the various categories that comprise our total net revenues for the years ended March 31, 2023
and March 31, 2022.

Revenues for the year ended March 31, 2023 decreased by $48.8 million, or 20.3%, from the prior year almost entirely
as the result of a $48.1 million decrease in sales of bulk pistol and rifle ammunition. Sales of bulk pistol and rifle ammunition decreased
year-over-year due to changes in market conditions.

Cost of Revenues

Cost of revenues decreased by
$15.5 million, or 10.2%, for the year ended March 31, 2023 compared to the year ended March 31, 2022. This was the result of the decrease
in sales of our products, as discussed in “Revenues” above, as well increases to non-cash depreciation related to increases
in production equipment, expensing of increased labor, overhead, and raw materials used to produce finished product during 2023 as compared
to 2022.

Gross Margin

Our gross margin percentage decreased
to 28.9% during the year ended March 31, 2023 from 36.9% during the year ended March 31, 2022. This was primarily a result of increases
in the costs of materials, labor, and overhead in our ammunition segment, which was offset by our online marketplace, GunBroker.com which,
by nature has significantly higher margins than our manufactured products.

Operating Expenses

Operating expenses increased by
$7.1 million for the year ended March 31, 2023 compared to the prior year, and increased as a percentage of sales to 30.6% from 21.5%
for the year ended March 31, 2022. This increase was primarily due to increases of $8.0 million, or 47.1%, in corporate general and administrative
expenses and $2.1 million, or 15.2%, in employee salaries and related expenses, offset by a $2.6 million, or 35.3%, decrease in selling
and marketing expenses, during the year ended March 31, 2023 compared to the prior year.

For the year ended March 31, 2023, we incurred additional expenses in the amounts of $5.6 million related to a proxy
contest, of which $0.9 million was included non-cash stock compensation, and $1.2 million of nonrecurring expenses.

37

Selling and marketing expenses
decreased during the year ended Marh 31, 2023, compared to the prior year, primarily as a result of the decreases in sales commission
due to the year-over-year decrease in the amount of sales of our products.

Corporate
general and administrative expenses increased year-over-year due to $6.6 million of legal and professional fees and expenses
incurred during 2023, largely related to the proxy contest, as discussed above, and $1.2 million of nonrecurring expenses, which
consist of professional and legal fees that are nonrecurring in nature, for which there were no comparable expenses during the year
ended March 31, 2022.

Employee
salaries and related expenses increased $2.1 million for the year ended March 31, 2023 compared to the year ended March 31, 2022,
primarily as a result of $2.1 million of additional payroll expenses incurred as a result of payments due upon termination without
cause as a result of the Proxy Settlement Agreement (as discussed in Note 17 – Related Party Transactions of our consolidated
financial statements) and the addition of employees in our Marketplace segment.

Other Income and Expense

For
the year ended March 31, 2023, other income and interest expense remained constant compared with year ended March 31, 2022. The
change to interest expense from the prior periods was mainly due to increases related to our Construction Note Payable of
approximately $0.3 million and decreases in activity related to our Factoring Liability and our Inventory Credit Facility of
approximately $0.3 million.

Income Taxes

For the year ended March 31, 2023, we recorded a provision for federal and state income taxes of approximately $0.7
million in comparison to $3.3 million in the year ended March 31, 2022, as a result of the decrease in net income(loss) before taxes.

Net
Income

We
ended the year ended March 31, 2023 with a net loss of approximately $4.6 million compared with a Net Income of approximately $33.2 million
for the year ended March 31, 2022.

Our
goal is to continue to improve our operating results as we focus on increasing sales and reducing our operating expenses.

Liquidity
and Capital Resources

As
of March 31, 2024, we had $55,586,441 of cash and cash equivalents, an increase of $16,452,414 from March 31, 2023.

Working
capital is summarized and compared as follows:

Liquidity

We expect existing
working capital, cash flow from operations, bank borrowings, and sales of equity and debt securities are expected to be adequate to fund
our operations over the next year. Generally, we have financed operations to date through the proceeds of stock sales, bank financings,
and related-party notes. These sources have been adequate to fund our recurring cash expenditures including but not limited to our working
capital requirements, capital expenditures to expand our operations, debt repayments, and acquisitions. We intend to continue to use
the aforementioned sources of funding for capital expenditures, debt repayments, share repurchases, and any potential acquisitions.

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Leases

We
lease three locations that are used for our offices, production, and warehousing. As of March 31, 2024, we had $2.6 million of fixed lease
payment obligations with $0.7 million payable within the next 12 months. Please refer to Note 10 – Leases for additional information.

Construction
Note Payable

We
financed a portion of our new production facility with our Construction Note Payable. We expect to make $0.8 million in principal and
interest payments within the next 12 months. The principal balance of the Construction Note will mature on October 14, 2026.

Revolving Loan

We have obtained a Revolving Loan
with Sunflower Bank, National Association (“N.A.”) for up to $20,000,000 in December of 2023. The proceeds may be used for working capital, general corporate purposes,
Permitted Acquisitions, to pay fees and expenses incurred in connection with the Revolving Line, to facilitate our stock repurchase program
and to fund our general business requirements. We have not made use of the Revolving Loan as of the date of this filing.

Changes
in cash flows are summarized as follows:

Operating
Activities

For
the year ended March 31, 2024, net cash provided by operations totaled $32.6 million. This was primarily the result of our net loss
of $15.6 million, offset by decreases to our period end inventories of $8.8 million, deposits of $6.7 million, prepaid expenses of
$4.0 million, accounts receivable of $0.4 million, increases in accounts payable of $5.1 million and increases in accrued
liabilities of $2.5 million. The cash provided by operations included the benefit of non-cash expenses for depreciation and
amortization of $18.8 million, employee stock compensation of $4.1 million, $0.4 million of allowance for credit losses, common
stock purchase options of $0.4 million, and stock grants totaling $0.2 million, which was offset by $3.8 million of deferred income
taxes.

For
the year ended March 31, 2023, net cash provided by operations totaled $35.6 million. This was primarily the result of our net loss
of $4.6 million, decreases to our period end accounts receivable of $14.4 million, inventories of $4.7 million,
deposits of $4.3 million, and  prepaid expenses of $2.8 million offset by increases in accounts payable and accrued
liabilities of $8.7 million and $2.8 million, respectively. The cash used in operations was partially offset by the benefit of
non-cash expenses for depreciation and amortization of approximately $17.5 million, employee stock compensation of $5.8 million,
$1.6 million of deferred income taxes, stock grants totaling $0.2 million, $0.2 million of allowance for credit losses, and $0.2
million of warrants issued for services.

Investing
Activities

During
the year ended March 31, 2024, we used $8.0 million in net cash for investing activities. Net cash used in investing activities
consisted of $8.0 million related to purchases of production equipment, and capitalized development costs related to our
marketplace, GunBroker.

During
the year ended March 31, 2023, we used approximately $12.5 million in net cash for investing activities. Net cash used in investing activities
consisted of approximately $12.5 million related to purchases of production equipment, the construction of our new manufacturing facility
in Manitowoc, WI, and capitalized development costs related to our marketplace, GunBroker.

Financing
Activities

During
the year ended March 31, 2024, net cash used in financing activities was $8.7 million, consisting of $3.2 million of insurance premium note payments, $3.0 million of preferred stock dividends paid, $2.2 million used to repurchase shares of Common Stock pursuant to our repurchase plan, and $0.2 million in payments of our related party note payable. These items were offset by $0.1
million of proceeds from warrants exercised for common stock. Additionally, $37.3 million was generated from accounts
receivable factoring, which was offset by payments of $37.3 million.

39

During
the year ended March 31, 2023, net cash used in financing activities was $6.7 million, consisting of $3.0 million of preferred stock dividends paid, $2.1 million of insurance premium note payments, an $0.8 million reduction
in our Inventory Credit Facility, and  $0.7 million in payments of our related party note payable. These items were offset by $1.0
million generated from our construction note payable and $0.1 million of proceeds from warrants exercised for common stock. Additionally,
approximately $71.3 million was generated from accounts receivable factoring, which was offset by payments of approximately $72.3 million.

Off-Balance
Sheet Arrangements

As
of March 31, 2024, we did not have any off-balance sheet arrangements that have or are reasonably likely to have a current or future
material effect on our financial condition, net sales, expenses, results of operations, liquidity capital expenditures, or capital resources.

Critical
Accounting Estimates and Policies

Our
discussion and analysis of our financial condition and results of operation are based upon our consolidated financial statements,
which have been prepared in accordance with U.S. GAAP. The preparation of these consolidated financial statements requires us to
make estimates and judgments that affect the reported amounts of assets, liabilities, revenues, and expenses, however actual results
may differ from these estimates. We have identified several accounting principles that we believe are key to the understanding of
our financial statements. These important accounting policies and estimates require our most difficult subjective
judgements.

We believe that certain assumptions and estimates associated with the valuation
of allowances for credit losses, valuation of deferred tax assets, inventories, useful lives of assets, goodwill, intangible assets,
stock-based compensation, and warrant-based compensation are material in nature due to the subjectivity associated with them and have
the greatest potential impact on our consolidated financial statements. Therefore, we consider the assumptions and estimates associated
with these (as further detailed below) to be our critical accounting estimates. Please refer to Note 2 – Summary of Significant
Accounting Policies of our consolidated financial statements for more information on our critical accounting estimates and policies.

Goodwill

We
evaluate goodwill for impairment annually or more frequently when an event occurs or circumstances change that would more likely than
not reduce the fair value of the reporting unit below its carrying amount. In testing for goodwill impairment, we may elect to utilize
a qualitative assessment to evaluate whether it is more likely than not that the fair value of a reporting unit is less than its carrying
amount. If our qualitative assessment indicates that goodwill impairment is more likely than not, we perform a two-step impairment test.
We test goodwill for impairment under the two-step impairment test by first comparing the book value of net assets to the fair value
of the reporting unit. If the fair value is determined to be less than the book value or qualitative factors indicate that it is more
likely than not that goodwill is impaired, a second step is performed to compute the amount of impairment as the difference between the
estimated fair value of goodwill and the carrying value. We estimate the fair value of the reporting units using discounted cash flows.
Forecasts of future cash flows are based on our best estimate of future net sales and operating expenses, based primarily on expected
category expansion, pricing, market segment share, and general economic conditions. Due to the declines in the value of our stock price
and market capitalization, we assessed qualitative factors to determine if it is more likely than not that the fair value of the Marketplace
segment is less than its carrying amount. Through our analysis we determined our stock price and market capitalization decline it is
not indicative of a decrease in the fair value of our Marketplace segment and a fair value calculation using the discounted cash flows
was more appropriate due to the operational performance of the reporting segment. Accordingly, the impairment of Goodwill was not warranted
for the year ended March 31, 2024. As of March 31, 2024, the Company has a goodwill carrying value of $90,870,094 ,
all of which is assigned to the Marketplace segment. However, due to declines in the value of the Company’s common stock and market
capitalization in previous years which have since stabilized, it is possible that the book values of our Marketplace segment could exceed its fair value, which may result in the recognition
of a material, noncash impairment of goodwill for the year ending March 31, 2025.

Use
of Estimates

The
preparation of financial statements in conformity with U.S. GAAP requires us to make estimates and assumptions that affect the amounts
of assets and liabilities and disclosure of contingent assets and liabilities at the date of the balance sheet and reported amounts of
revenue and expenses during the reporting period. Actual results could differ from those estimates. Significant estimates made in preparing
the condensed consolidated financial statements include the valuation of allowances for credit
losses, valuation of deferred tax assets, inventories, useful lives of assets, goodwill, intangible assets, stock-based compensation,
and warrant-based compensation.

Accounts
Receivable and Allowance for Credit Losses

Our
accounts receivable represents amounts due from customers for products sold and include an allowance for credit losses which
is estimated based on the aging of the accounts receivable and specific identification of uncollectible accounts. At March 31, 2024 and
March 31, 2023, we reserved $3,666,078 and $3,246,551, respectively, of allowance for credit losses.

Inventory

We
state inventories at the lower of cost or net realizable value. We determine cost by using the weighted-average cost of raw materials
method, which approximates the first-in, first-out method and includes allocations of manufacturing labor and overhead. We make provisions
when necessary, to reduce excess, potential damaged or obsolete inventories. These provisions are based on our best estimates. At March
31, 2024, and March 31, 2023, we conducted a full analysis of inventory on hand and expensed all inventory not currently in use, or for
which there was no future demand.

40

Research
and Development

To
date, we have expensed all costs associated with developing our product specifications, manufacturing procedures, and products through
our cost of products sold, as this work was done by the same employees who produced the finished product. We anticipate that it may become
necessary to reclassify research and development costs into our operating expenditures for reporting purposes as we begin to develop
new technologies and lines of ammunition.

Revenue
Recognition

We
generate revenue from the production and sale of ammunition, ammunition casings, and marketplace fee revenue, which includes auction
revenue, payment processing revenue, and shipping income. We recognize revenue according to Accounting Standard Codification –
Revenue from Contract with Customers (“ASC 606”). When the customer obtains control over the promised goods or services,
we record revenue in the amount of consideration that we can expect to receive in exchange for those goods and services. We apply the
following five-step model to determine revenue recognition:

We
only apply the five-step model when it is probable that we will collect the consideration we are entitled to in exchange for the goods
or services it transfers to the customer. At contract inception and once the contract is determined to be within the scope of ASC 606,
we assess the goods or services promised within each contract and determine those that are performance obligations, and assess whether
each promised good or service is distinct.

For
Ammunition Sales and Casing Sales, our contracts contain a single performance obligation and the entire transaction price is
allocated to the single performance obligation. We recognize as revenues the amount of the transaction price that is allocated to
the respective performance obligation when the performance obligation is satisfied or as it is satisfied. Accordingly, we recognize
revenues (net) when the customer obtains control of our product, which typically occurs upon shipment of the product or the
performance of the service based upon the terms of the contract. In the year ended March 31, 2021, we began accepting contract liabilities or deferred revenue. We
included Deferred Revenue in our Accrued Liabilities. We will recognize revenue when the performance obligation is met.

For
Marketplace revenue, the performance obligation is satisfied, and revenue is recognized as follows:

Auction
revenue consists of optional listing fees with variable pricing components based on customer options selected from the GunBroker website
and final value fees based on a percentage of the final selling price of the listed item. The performance obligation is to process the
transactions as initiated by the customer. Revenue is recognized at a point in time when the transaction is processed.

Compliance fee revenue consists
of fees charged to customers based on a percentage of the final price of an item at the time or purchased. The performance obligation
is to process the transactions as initiated by the customer. Revenue is recognized at a point in time when the transaction is processed.

Payment
processing revenue consists of fees charged to customers on a transactional basis. The performance obligation is to process the transactions
as initiated by the customer. The price is set by the GunBroker user agreement on the website based on stand-alone selling prices. Revenue
is recognized at a point in time when the transaction is processed.

Shipping
income consists of fees charged to customers for shipping of sold items listed on the GunBroker website. The performance obligation is
to ship the item sold as initiated by the customer. The price is set based on the third-party service provider selected to be used by
the customer as well as the speed and location of shipment. Revenue is recognized at a point in time when the shipping label is printed.

Banner
Advertising Campaign Revenue consists of fees charged to customers for advertisement placement and impressions generated through the
GunBroker website. The performance obligation is to generate the number of impressions specified by the customer on banner advertisements
on the GunBroker website using the placement selected by the customer. The price is set by the GunBroker user agreement on the website
based on standalone selling prices, or by advertising insertion order as negotiated by media broker. If the number of impressions promised
is not generated, the customer receives a refund and the refund is applied to the transaction price. Banner advertising campaigns generally
run for one month, and revenue is recognized at a point in time at the end of the selected month.

Product
Sales consists of fees charged for the liquidation of excess inventory for partner distributors. The performance obligation is to sell
and ship the inventory item as initiated by the customer. The price depends on whether the inventory is a fixed price item or an auction
item. For a fixed price item, the Company performs research to determine the current market rate for such an item, and the item is listed
at that price. For an auction item, the price is set by what the buyer is willing to pay. The Company acts as a principal in these transactions
due to the extent of control they have over the product prior to the sale. Due to the principal determination, gross revenue is recognized
at a point in time when the item has been shipped.

Identity
Verification consists of fees charged to customers for identity verification in order to gain access to the GunBroker website. The performance
obligation is to process the identity verification as initiated by the customer. The price is set by the GunBroker user agreement on
the website based on a stand-alone selling price. Revenue is recognized at a point in time when the identity verification is completed.

Excise
Tax

As
a result of regulations imposed by the federal government for sales of ammunition to non-government U.S. entities, we charge and
collect an 11% excise tax for all products sold into these channels. During the years ended March 31, 2024, 2023, and 2022, we
recognized $6.2  million, $9.8 million, and $14.6 million respectively, in excise taxes. For
ease in selling to commercial markets, excise tax is included in our unit price for the products sold. We record this through net
sales and expense the offsetting tax expense to cost of goods sold.

Fair
Value of Financial Instruments

Fair
value estimates discussed herein are based upon certain market assumptions and pertinent information available to us as of March 31,
2024. The respective carrying value of certain on-balance-sheet financial instruments approximated their fair value. These financial
instruments include cash, accounts receivable, accounts payable, amounts due to related parties and the construction
note payable. Fair values were assumed to approximate carrying values because they are short term in nature and their carrying amounts
approximate fair values or they are payable on demand.

41

Income
Taxes

We
file federal and state income tax returns in accordance with the applicable rules of each jurisdiction. We account for income taxes under
the asset and liability method in accordance with Accounting Standards Codification 740 - Income Taxes (“ASC 740”). The provision
for income taxes includes federal, state, and local income taxes currently payable, and deferred taxes. We recognize deferred tax assets
and liabilities for the future tax consequences attributable to differences between the financial statement carrying amounts of existing
assets and liabilities and their respective tax basis. We measure deferred tax assets and liabilities using enacted tax rates expected
to apply to taxable amounts in years in which those temporary differences are expected to be recovered or settled. If it is more likely
than not that some portion or all of a deferred tax asset will not be realized, a valuation allowance is recognized. In accordance with
ASC 740, we recognize the effect of income tax positions only if those positions are more likely than not of being sustained. We measure
recognized income tax positions at the largest amount that is greater than 50% likely of being realized. We reflect changes in recognition
or measurement in the period in which the change in judgment occurs.

Stock-Based
Compensation

We
account for stock-based compensation at fair value in accordance with Accounting Standards Codification 718 – Compensation
– Stock Compensation (“ASC 718”), which requires the measurement and recognition of compensation expense for all
share-based payment awards to employees and directors. On April 1, 2023 we adopted ASU 2022-03, “Fair Value Measurement of
Equity Securities Subject to Contractual Sale Restrictions.” Accordingly, stock-based compensation is valued using market
value of our Common Stock. Stock-based compensation is recognized on a straight-line basis over the vesting periods and forfeitures
are recognized in the periods they occur. We account for common stock purchase option awards by estimating the fair value of each
option award on the grant date using the Black-Scholes option pricing model that uses assumption and estimates that we believe are
reasonable. There were 1,936,951 and 1,777,294 shares of common stock issued to employees, members of the Board of Directors, and
members of our advisory committee for services for the years ended March 31, 2024 and March 31, 2023, respectively.

ITEM
7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

This
document contains certain “forward-looking statements”. All statements other than statements of historical fact are “forward-looking
statements” for purposes of federal and state securities laws, including, but not limited to, any projections of earnings, revenue
or other financial items; any statements of the plans, strategies, goals and objectives of management for future operations; any statements
concerning proposed new products and services or developments thereof; any statements regarding future economic conditions or performance;
any statements or belief; and any statements of assumptions underlying any of the foregoing.

29

Forward
looking statements may include the words “may,” “could,” “estimate,” “intend,” “continue,”
“believe,” “expect,” or “anticipate,” or other similar words, or the negative thereof. These forward-looking
statements present our estimates and assumptions only as of the date of this report. Accordingly, readers are cautioned not to place
undue reliance on forward-looking statements, which speak only as of the dates on which they are made. We do not undertake to update
forward-looking statements to reflect the impact of circumstances or events that arise after the dates they are made. You should, however,
consult further disclosures and risk factors we included in the section titled Risk Factors contained herein.

Overview

AMMO,
Inc., owner of the GunBroker.com Marketplace, the largest online marketplace serving the firearms and shooting sports industries, and
a vertically integrated producer of high-performance ammunition and premium components began its operations in 2016.

Through
our GunBroker.com Marketplace segment (acquired in April 2021), we allow third party sellers to list items consisting of firearms, hunting
gear, fishing equipment, outdoor gear, collectibles, and much more on our site, while facilitating compliance with federal and state
laws that govern the sale of firearms and restricted items. This allows our base of over 7.6 million users to follow ownership policies
and regulations through our network of over 35,000 federally licensed firearms dealers as transfer agents. The nature and operation of
the Marketplace as an online auction and sales platform also affords our Company a unique view into the total domestic market for the
purpose of understanding sales trends at a granular level across all elements of the outdoor sports and shooting space. Our vision is
to expand the services on GunBroker.com and to become a peer to those in our industry. In the short term, we will be implementing the
following services;

●
Payment Processing - facilitating payment between parties allowing sellers of all sizes to offer fast and secure electronic payments
and allowing buyers to experience the ease of using a single form of payment for all items purchased,

●
Carting Ability - allowing our buyers to purchase multiple items from multiple sellers at one point in time, and,

●
GunBroker.com Analytics – through the compilation and refinement of vast Marketplace data, we plan to offer domestic market analytics
to our industry peers to allow them to better manage their businesses.

Through
our Ammunition segment, we are tailoring our focus to build a new future for our manufacturing operations focused on premium pistol and
rifle ammunition and supporting industry partners for manufactured components. We will continue to leverage our proprietary brands like
Streak Visual AmmunitionTM and Stelth subsonic ammunition and extend our product offering with premium rifle lines and brands
that complement our technologically innovative heritage. We also continue to ensure dynamic performance under the exacting standards
of the US military complex in support of our cutting-edge developmental ammunition programs as we seek out and effectively execute upon
new governmental-based opportunities.

Results
of Operations

Management’s
Discussion and Analysis of Financial Condition and Results of Operations is intended to provide our financial statements with a narrative
from the perspective of management on our financial condition, results of operations, liquidity, and certain other factors that may affect
our future results. The following information should be read in conjunction with our consolidated financial statements included in
this Annual Report beginning on page F-1.

Fiscal Year 2023 Compared to Fiscal Year 2022

Our
financial results for the year ended March 31, 2023 reflect our newly positioned organization as
we transition into our new manufacturing facility. We believe that we have hired a strong team of professionals, developed innovative
products, and continue to raise capital sufficient to establish our presence as a high-quality ammunition provider and marketplace. We
continue to focus on growing our top line revenue and streamlining our operations. We continue to focus on growing our top line
revenue, and streamlining our operations. We experienced a 20.3% decrease in our Net Revenues for the year ended March 31, 2023 compared
with the year ended March 31, 2022. This was the result of decreased ammunition sales due to changes in market demand.

30

The
following table presents summarized financial information taken from our consolidated statements of operations for the year ended March
31, 2023 compared with the year ended March 31, 2022:

Non-GAAP
Financial Measures

We
analyze operational and financial data to evaluate our business, allocate our resources, and assess our performance. In addition to total
net sales, net loss, and other results under accounting principles generally accepted in the United States (“GAAP”), the
following information includes key operating metrics and non-GAAP financial measures we use to evaluate our business. We believe these
measures are useful for period-to-period comparisons of the Company. We have included these non-GAAP financial measures in this Quarterly
Report on Form 10-Q because they are key measures we use to evaluate our operational performance, produce future strategies for our operations,
and make strategic decisions, including those relating to operating expenses and the allocation of our resources. Accordingly, we believe
these measures provide useful information to investors and others in understanding and evaluating our operating results in the same manner
as our management and board of directors.

Adjusted
EBITDA

Adjusted
EBITDA is a non-GAAP financial measures that displays our net loss, adjusted to eliminate the effect of certain items as described below.

31

We
have excluded the following non-cash expenses from our non-GAAP financial measures: provision or benefit for income taxes, depreciation
and amortization, share-based or warrant-based compensation expenses, and changes to the contingent consideration fair value. We believe
it is useful to exclude these non-cash expenses because the amount of such expenses in any specific period may not directly correlate
to the underlying performance of our business operations.

Adjusted
EBITDA as a non-GAAP financial measure also excludes other cash interest income and expense, and non-recurring expenses incurred as a
result of a proxy contest as these items are not components of our core operations.

We
have modified our Adjusted EBITDA calculation in the current period to remove the adjustment for Excise Taxes as we believe this is a
better representation of our operations. In prior periods, we included an adjustment for Excise Taxes.

Non-GAAP
financial measures have limitations, should be considered as supplemental in nature and are not meant as a substitute for the related
financial information prepared in accordance with GAAP. These limitations include the following:

Because
of these limitations, you should consider the non-GAAP financial measures alongside other financial performance measures, including our
net loss and our other financial results presented in accordance with GAAP.

Net
Sales

The
following table shows our net sales by proprietary ammunition versus standard ammunition for the periods ended March 31, 2023 and March
31, 2022. “Proprietary Ammunition” include those lines of ammunition manufactured by our facilities that are sold under the
brand names: STREAK VISUAL AMMUNITION™ and Stelth. We define “Standard Ammunition” as non-proprietary ammunition that
directly competes with other brand manufacturers. Our “Standard Ammunition” is manufactured within our facilities and may also
include completed ammunition that has been acquired in the open market for sale to others. Also included in this category is low cost
target pistol and rifle ammunition, as well as bulk packaged ammunition manufactured by us using reprocessed brass casings. Ammunition
within this product line typically carries much lower gross margins.

Sales
for the year ended March 31, 2023 decreased 20.3%, or approximately $48.8 million from the prior year due to changes in market
conditions. The decrease for period was largely the result of a decrease of $48.1 million in sales of bulk pistol and rifle
ammunition, a decrease of $0.7 million of sales of Proprietary Ammunition, a decrease of $0.1 million of our casing sales, and a
decrease of $1.5 million generated from our marketplace, GunBroker.com, which includes auction revenue, payment processing revenue,
and shipping income. Management expects the sales growth rate of Proprietary Ammunition to greatly outpace the sales of our Standard
Ammunition.

32

We
are focused on continuing to grow top line revenue quarter-over-quarter as we continue to further expand distribution into commercial
markets, introduce new product lines, and continue to initiate sales to U.S. law enforcement, military, and international markets.

Through
our acquisition of SWK, the Company has developed and deployed a line of tactical armor piercing (AP) and hard armor piercing incendiary
(HAPI) precision ammunition to meet the lethality requirements of both the US and foreign military customers. We continue to demonstrate
our AP and HAPI ammunition to military personnel at scheduled and invite only events, resulting in increased interest and procurement
discussions. The Company has since developed the ballistic match (BMMPR) and signature-on-target (SoT) rounds under contract with the
U.S. Government in support of US special operations which have been publicly announced pursuant to governmental authorization. Additional
work continues in support of the military operations of the U.S. and its ally military components which is not currently subject to disclosure.

It
is important to note that, although U.S. law enforcement, military and international markets represent significant opportunities for
our Company, they also have a long sales cycle. The Company’s sales team has been effective in establishing sales and distribution
channels, both in the United States and abroad, which are reasonably anticipated to drive sustained sales opportunity in the military,
law enforcement, and commercial markets.

Sales
outside of the United States require licenses and approval from either the U.S. Department of Commerce or the U.S. State Department,
which typically takes approximately 30 days to receive. On June 16, 2022, we renewed our annual registration with the International Traffic
in Arms Regulations (“ITAR”), which remains valid through the report date. This permits the Company to export and broker
ammunition and other controlled items covered under ITAR.

Cost
of Revenues

Cost
of Revenues decreased by approximately $15.5 million from $151.5 million
to $136.0 million for the year ended March 31, 2023 compared to the comparable period ended in 2022. This was the
result of a significant decrease in net sales as well increases to non-cash depreciation related to increases in production equipment,
expensing of increased labor, overhead, and raw materials used to produce finished product during 2023 as compared to 2022.

Gross
Margin

Our
gross margin percentage decreased to 28.9% from 36.9% during the year ended March 31, 2023 as compared to the same period in 2022. This
was a result of increased cost of materials, labor, and overhead in our ammunition segment, which was offset by our marketplace, GunBroker.com
which, by nature has significantly higher margins than our manufactured products.

We
believe as we continue to grow sales through new markets and expanded distribution that our gross margins will also increase, as evidenced
by the improvement over this time last year. Our goal in the next 12 to 24 months is to continue to improve our gross margins. This will
be accomplished through the following:

33

Operating
Expenses

Overall,
for the year ended March 31, 2023, our operating expenses increased by approximately $7.1 million and increased as a percentage of sales
from 21.5% to 30.6% in comparison to the year ended March 31, 2022. Our operating expenses include non-cash depreciation and amortization
expense of approximately $13.3 million. For the year ended March 31, 2023, we incurred additional expenses in the amounts of $5.6 million
related to a proxy contest, of which $0.9 million was included non-cash stock compensation, and $1.2 million of nonrecurring expenses.
Our operating expenses also consisted of commissions related to our sales, legal and professional fees, stock compensation expense associated
with issuance of our Common Stock in lieu of cash compensation for employees, board members, and key consultants for the organization
during the period. Operating expenses for the year ended March 31, 2023 and 2022 included noncash expenses of approximately $19.5 million
and $20.1 million, respectively.

During
the year ended March 31, 2023, our selling and marketing expenses decreased by approximately $2.6 million. The decrease was primarily
related to decreases in sales commission due to the decrease in the sale of our products.

Our
corporate general & administrative expenses increased approximately $8.0 million in the year ended March 31, 2023 from the
comparable prior period due to $6.6 million of respective legal and professional fees and expenses largely related to our proxy
contest and $1.2 million of nonrecurring expenses.

Employee
salaries and related expenses increased approximately $2.1 million for the year ended March 31, 2023 compared to the comparable period
ended in 2022. The increase when compared to the prior period, was primarily related to $2.1 million of additional payroll expenses
incurred as a result of payments due upon termination without cause as a result of the proxy contest and the addition of employees in
our Marketplace.

Depreciation
and amortization expenses for the year ended March 31, 2023 decreased by approximately $0.4 million in comparison to the prior year period.

Interest
and Other Expenses

For
the year ended March 31, 2023, interest expense remained constant compared with year ended March 31, 2022. The change from the prior periods was mainly due to increases related to our Construction Note Payable of
approximately $0.3 million and decreases in activity related to our Factoring Liability and our Inventory Credit Facility of approximately
$0.3 million.

Income
Taxes

For
the year ended March 31, 2023, we recorded a provision for federal and state income taxes of approximately $0.7 million in comparison
to $3.3 million in the prior year period ended March 31, 2022. The decreases was related to a decrease in Net Income(Loss) before Taxes.

Net
Income

We
ended the year ended March 31, 2023 with a net loss of approximately $4.6 million compared with a Net Income of approximately $33.2 million
for the year ended March 31, 2022.

Our
goal is to continue to improve our operating results as we focus on increasing sales and reducing our operating expenses.

34

Fiscal
Year 2022 Compared to Fiscal Year 2021

Results
of Operations

We experienced an increase in our gross profit margin for the year ended
March 31, 2022. This was the result of our newly acquired marketplace, GunBroker.com which, by nature has significantly higher margins
than our manufactured products.

The
following table presents summarized financial information taken from our consolidated statements of operations for the year ended March
31, 2022 compared with the year ended March 31, 2021:

Non-GAAP
Financial Measures

We
analyze operational and financial data to evaluate our business, allocate our resources, and assess our performance. In addition to total
net sales, net income (loss), and other results under generally accepted accounting principles (“GAAP”), the following information
includes key operating metrics and non-GAAP financial measures we use to evaluate our business. We believe these measures are useful
for period-to-period comparisons of the Company. We have included these non-GAAP financial measures in this Annual Report on Form 10-K
because they are key measures we use to evaluate our operational performance, produce future strategies for our operations, and make
strategic decisions, including those relating to operating expenses and the allocation of our resources. Accordingly, we believe these
measures provide useful information to investors and others in understanding and evaluating our operating results in the same manner
as our management and board of directors.

Adjusted
EBITDA

Adjusted
EBITDA is a non-GAAP financial measures that displays our net loss, adjusted to eliminate the effect of certain items as described below.

35

We
have excluded the following non-cash expenses from our non-GAAP financial measures: provision or benefit for income taxes, depreciation
and amortization, loss on purchase, share-based or warrant-based compensation expenses, and changes to the contingent consideration fair
value. We believe it is useful to exclude these non-cash expenses because the amount of such expenses in any specific period may not
directly correlate to the underlying performance of our business operations.

Adjusted
EBITDA as a non-GAAP financial measure also excludes other cash interest income and expense, as these items are not components of our
core operations. We have included an adjustments for our provision or benefit for income taxes.

We
have modified our Adjusted EBITDA calculation in the current period to remove the adjustment for Excise Taxes as we believe this is a
better representation of our operations. In prior periods, we included an adjustment for Excise Taxes.

Non-GAAP
financial measures have limitations, should be considered as supplemental in nature and are not meant as a substitute for the related
financial information prepared in accordance with GAAP. These limitations include the following:

Because
of these limitations, you should consider the non-GAAP financial measures alongside other financial performance measures, including our
net loss and our other financial results presented in accordance with GAAP.

Net
Sales

The
following table shows our net sales by proprietary ammunition versus standard ammunition for the periods ended March 31, 2022 and March
31, 2021. “Proprietary Ammunition” include those lines of ammunition manufactured by our facilities that are sold under the
brand names: STREAK VISUAL AMMUNITION™ and Stelth. We define “Standard Ammunition” as non-proprietary ammunition that
directly competes with other brand manufacturers. Our “Standard Ammunition” is manufactured within our facilities and may also
include completed ammunition that has been acquired in the open market for sale to others. Also included in this category is low cost
target pistol and rifle ammunition, as well as bulk packaged ammunition manufactured by us using reprocessed brass casings. Ammunition
within this product line typically carries much lower gross margins.

Sales
for the year ended March 31, 2022 increased 285% or $177.8 million over the year ended March 31, 2021. This increase was the result of
our increased production capacity coupled with increased demand from our customers which resulted in approximately $107.2 million of
increased sales in bulk pistol and rifle ammunition, an increase of approximately $4.7 million of respective sales of Proprietary Ammunition,
an increase of approximately $1.3 million of sales from our casing operations and $64.6 million in respective revenue generated from
our recently acquired marketplace, GunBroker.com, which includes auction revenue, payment processing revenue, and shipping income. Management
expects the sales growth rate of Proprietary Ammunition to greatly outpace the sales of our Standard Ammunition.

36

Cost
of Revenues

Cost
of revenues increased by approximately $100.4 million from $51.1 million to $151.5 million, respectively for the year ended March 31,
2022 compared with the year ended March 31, 2021. This was the result of a significant increase in net sales as well increases to non-cash
depreciation related to our newly acquired casing operations, expensing of increased labor, overhead, and raw materials used to produce
finished product during our 2022 fiscal year as compared to the 2021 fiscal year and additional
cost of revenues from our recent acquisition of our marketplace, GunBroker.com. As a percentage of sales, cost of goods sold decreased
by 22.8% when comparing the year ended March 31, 2022 to the year ended March 31, 2021.

Gross
Margin

Our
gross margin percentage increased to 36.9% from 18.2% during the year ended March 31, 2022 as compared to the same period in 2021. This
was a result of the inclusion of our newly acquired marketplace, GunBroker.com which, by nature has significantly higher margins than
our manufactured products.

Operating
Expenses

Overall,
for the year ended March 31, 2022, our operating expenses increased by approximately $34.8 million over the year ended March 31, 2021,
but decreased as a percentage of sales from 26.8% for the year ended March 31, 2021 to 21.5% for the year ended March 31, 2022. The increase
was primarily related to approximately $20.6 million of additional operating expenses following our merger with Gemini, including $12.1
million of depreciation and amortization expenses. Our operating expenses include non-cash depreciation and amortization expense of approximately
$13.7 million for the year ended March 31, 2022. Our operating expenses consisted of commissions related to our sales increases, stock
compensation expense associated with issuance of our Common Stock in lieu of cash compensation for employees, and board members, and
key consultants for the organization during the period. Operating expenses for the years ended March 31, 2022 and 2021 included noncash
expenses of approximately $20.1 million and $3.2 million, respectively. We expect to see administrative expenditures to continue to decrease
as a percentage of sales in the 2023 fiscal year, as we leverage our work force and expand our sales opportunities.

During
the year ended March 31, 2022, our selling and marketing expenses increased by approximately $5.4 million. The increase was primarily
related to commission on the increases in the sale of our products resulting of approximately $3.6 million of increase in commissions
and a $1.1 million increase advertising expenses for the year ended March 31, 2022 in comparison to the comparable prior year.

Our
corporate general & administrative expenses increased approximately $9.8 million in
the current period from the prior year mainly due to increased general corporate expenses related
to the addition of Gemini of approximately $5.3 million and increases in insurance expenses of $4.0 million.

Employee
salaries and related expenses increased approximately $8.6 million for the year ended March 31, 2022 compared to the comparable period
ended in 2021. This was a result of increased payroll and related expenses of $4.2 million, including $2.9 million from the addition
of Gemini, and employee stock compensation of approximately $4.3 million.

Depreciation
and amortization expenses increased approximately $12.0 million from the period principally due to the addition of assets from the Gemini
Acquisition.

Interest
and Other Expenses

For
the year ended March 31, 2022, interest expense decreased by approximately $2.4 million compared with the year ended March 31, 2021.
The change from the prior periods was mainly due to the repayment of notes and conversion of convertible promissory notes in current
and prior periods. Interest expense for the year ended March 31, 2021 included approximately $1.3 million of non-cash interest expense
recognized on the issuance of warrants to purchase Common Stock, approximately $0.4 million in debt discount amortization related to
Convertible Promissory Notes as well interest expense and debt discount amortization related to Note Payables Related Party, Note Payable,
and Convertible Promissory Notes.

Net
Income

As
a result of increases in revenues from increased production as well as our acquisition of Gemini,
we ended the year ended March 31, 2022 with net income of approximately $33.2 million compared with net losses of approximately $7.8
million for the year ended March 31, 2021.

Our
goal is to continue to improve our operating results as we focus on increasing sales and controlling our operating expenses.

37

Liquidity
and Capital Resources

As
of March 31, 2023, we had $39,134,027 of cash and cash equivalents, an increase of $15,852,552 from March 31, 2022.

Working
Capital is summarized and compared as follows:

Liquidity

Existing
working capital, cash flow from operations, bank borrowings, and sales of equity and debt securities are expected to be adequate to
fund our operations over the next year. Generally, we have financed operations to date through the proceeds of stock sales, bank
financings, and related-party notes. These sources have been adequate to fund our recurring cash expenditures including but not
limited to our working capital requirements, capital expenditures to expand our operations, debt repayments, and acquisitions. We
intend to continue to use the aforementioned sources of funding for capital expenditures, debt repayments, share repurchases and any
potential acquisitions.

Leases

We
lease four locations that are used for our offices, production, and warehousing. As of March 31, 2023, we had $1.6 million of fixed lease
payment obligations with $0.6 million payable within the next 12 months. Please refer to Note 9 – Leases for additional information.

Related
Party Note Payable

As
of March 31, 2023, we had an outstanding balance on our Related Party Note Payable of approximately $0.2 million, of which the balance
in its entirety million is due within the next 12 months.

Construction
Note Payable

We
financed a portion of our new production facility with our Construction Note Payable. We expect to make $0.8 million in principal
and interest payments within the next 12 months. The total principal balance of the Construction Note is expected to be $11.4 million
upon completion of the project and will mature on October 14, 2026.

Changes
in cash flows are summarized as follows:

Operating
Activities

For
the year ended March 31, 2023, net cash provided by operations totaled approximately $35.6 million. This was primarily the result of
net loss of approximately $4.6 million, decreases to our period end accounts receivable of $14.4 million, inventories of $4.7 million, prepaid expenses of 2.8 million, and deposits of $4.3 million which was offset by increases in accounts payable and accrued
liabilities of $8.7 million and $2.8 million, respectively. The cash used in operations were partially offset by the benefit of non-cash
expenses for depreciation and amortization of approximately $17.5 million, employee stock compensation of $5.8 million, $1.6 million
of deferred income taxes, stock grants totaling $0.2 million, $0.2 million of allowance for doubtful accounts, and $0.2 million of warrants
issued for services.

For
the year ended March 31, 2022, net cash provided by operations totaled approximately $2.9 million. This was primarily the result of net
income of approximately $33.2 million, increases to our period end inventories of $43.1 million, accounts receivable of $20.7 million,
and deposits of $8.8 million which was offset by increases in accounts payable and accrued liabilities of $9.9 million and $2.3 million,
respectively, and decreases of prepaid expenses of $1.9 million. The cash used in operations were partially offset by the benefit of
non-cash expenses for depreciation and amortization of approximately $17.3 million, employee stock compensation of $5.8 million, stock
grants totaling $0.3 million, $2.7 million of allowance for doubtful accounts, $0.8 million of warrants issued for services, $1.5 million
of deferred income taxes and a decrease related to an adjustment to the fair value of contingent consideration of $0.4 million.

Investing
Activities

During
the year ended March 31, 2023, we used approximately $12.5 million in net cash for investing activities. Net cash used in investing activities
consisted of approximately $12.5 million related to purchases of production equipment, the construction of our new manufacturing facility
in Manitowoc, WI, and capitalized development costs related to our marketplace, GunBroker.com.

During
the year ended March 31, 2022, we used approximately $69.7 million in net cash for investing activities. Net cash used in investing activities
consisted of approximately $50.5 million uses in connection with the merger of Gemini, and approximately $19.2 million related to purchases
of production equipment and the construction of our new manufacturing facility in Manitowoc, WI.

Financing
Activities

During
the year ended March 31, 2023, net cash used in financing activities was approximately $6.7 million. This was the result of approximately
$3.0 million of preferred stock dividends paid, $2.1 million of insurance premium note payments, $0.7 million in payments of our related
party note payable, and an approximate $0.8 million reduction in our Inventory Credit Facility. These items were offset by $1.0 million
generated from our construction note payable and $0.1 million of proceeds from warrants exercised for common stock. Additionally, approximately
$71.3 million was generated from accounts receivable factoring, which was offset by payments of approximately $72.3 million.

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During
the year ended March 31, 2022, net cash used in financing activities was approximately $28.2 million. This was the net effect of a $50.0
million payment on debt assumed from Gemini, $35.0 million of proceeds from the sale of our preferred stock net of approximately $3.2
million of issuance costs, approximately $2.5 million of preferred stock dividends paid, approximately $2.2 million of insurance premium
note payments, approximately $0.9 million was generated from common stock issued for exercised warrants, the $4.0 million repayment of
a note payable, and an approximate $0.3 million reduction in our Inventory Credit Facility. Additionally, approximately $121.5 million
was generated from accounts receivable factoring, which was offset by payments of approximately $122.8 million.

Off-Balance
Sheet Arrangements

As
of March 31, 2023, we did not have any off-balance sheet arrangements that have or are reasonably likely to have a current or future
material effect on our financial condition, net sales, expenses, results of operations, liquidity capital expenditures, or capital resources.

Critical
Accounting Policies

Our
discussion and analysis of our financial condition and results of operation are based upon our financial statements, which have been
prepared in accordance with U.S. GAAP. The preparation of these financial statements requires us to make estimates and judgments
that affect the reported amounts of assets, liabilities, revenues, and expenses. We have identified several accounting principles
that we believe are key to the understanding of our financial statements. These important accounting policies require our most
difficult subjective judgements.

Goodwill

We
evaluate goodwill for impairment annually or more frequently when an event occurs or circumstances change that would more likely than
not reduce the fair value of the reporting unit below its carrying amount. In testing for goodwill impairment, we may elect to utilize
a qualitative assessment to evaluate whether it is more likely than not that the fair value of a reporting unit is less than its carrying
amount. If our qualitative assessment indicates that goodwill impairment is more likely than not, we perform a two-step impairment test.
We test goodwill for impairment under the two-step impairment test by first comparing the book value of net assets to the fair value
of the reporting unit. If the fair value is determined to be less than the book value or qualitative factors indicate that it is more
likely than not that goodwill is impaired, a second step is performed to compute the amount of impairment as the difference between the
estimated fair value of goodwill and the carrying value. We estimate the fair value of the reporting units using discounted cash flows.
Forecasts of future cash flows are based on our best estimate of future net sales and operating expenses, based primarily on expected
category expansion, pricing, market segment share, and general economic conditions. Due to the declines in the value of our stock price
and market capitalization, we assessed qualitative factors to determine if it is more likely than not that the fair value of the Marketplace
segment is less than its carrying amount. Through our analysis we determined our stock price and market capitalization decline it is
not indicative of a decrease in the fair value of our Marketplace segment and a fair value calculation using the discounted cash flows
was more appropriate due to the operational performance of the reporting segment. Accordingly, the impairment of Goodwill was not warranted
for the year ended March 31, 2023. As of March 31, 2023, the Company has a goodwill carrying value of $90,870,094, all of which is assigned
to the Marketplace segment. However, due to declines in the value
of the Company’s common stock and market capitalization, it is possible that the book values of our Marketplace segment could exceed
its fair value, which may result in the recognition of a material, noncash impairment of goodwill for the year ending March 31, 2024.

Use
of Estimates

The
preparation of financial statements in conformity with U.S. GAAP requires us to make estimates and assumptions that affect the amounts
of assets and liabilities and disclosure of contingent assets and liabilities at the date of the balance sheet and reported amounts of
revenue and expenses during the reporting period. Actual results could differ from those estimates. Significant estimates made in preparing
the condensed consolidated financial statements include the valuation of allowances for doubtful accounts, valuation of deferred tax
assets, inventories, useful lives of assets, goodwill, intangible assets, stock-based compensation and warrant-based compensation.

Accounts
Receivable and Allowance for Doubtful Accounts

Our
accounts receivable represents amounts due from customers for products sold and include an allowance for uncollectible accounts which
is estimated based on the aging of the accounts receivable and specific identification of uncollectible accounts. At March 31, 2023 and
March 31, 2022, we reserved $3,246,551 and $3,055,252, respectively, of allowance for doubtful accounts.

Inventory

We
state inventories at the lower of cost or net realizable value. We determine cost by using the weighted-average cost of raw materials
method, which approximates the first-in, first-out method and includes allocations of manufacturing labor and overhead. We make provisions
when necessary, to reduce excess, potential damaged or obsolete inventories. These provisions are based on our best estimates. At March
31, 2023, and March 31, 2022, we conducted a full analysis of inventory on hand and expensed all inventory not currently in use, or for
which there was no future demand.

39

Research
and Development

To
date, we have expensed all costs associated with developing our product specifications, manufacturing procedures, and products through
our cost of products sold, as this work was done by the same employees who produced the finished product. We anticipate that it may become
necessary to reclassify research and development costs into our operating expenditures for reporting purposes as we begin to develop
new technologies and lines of ammunition.

Revenue
Recognition

We
generate revenue from the production and sale of ammunition, ammunition casings, and marketplace fee revenue, which includes auction
revenue, payment processing revenue, and shipping income. We recognize revenue according to Accounting Standard Codification –
Revenue from Contract with Customers (“ASC 606”). When the customer obtains control over the promised goods or services,
we record revenue in the amount of consideration that we can expect to receive in exchange for those goods and services. We apply the
following five-step model to determine revenue recognition:

We
only apply the five-step model when it is probable that we will collect the consideration we are entitled to in exchange for the goods
or services it transfers to the customer. At contract inception and once the contract is determined to be within the scope of ASC 606,
we assess the goods or services promised within each contract and determine those that are performance obligations, and assess whether
each promised good or service is distinct.

For
Ammunition Sales and Casing Sales, our contracts contain a single performance obligation and the entire transaction price is allocated
to the single performance obligation. We recognize as revenues the amount of the transaction price that is allocated to the respective
performance obligation when the performance obligation is satisfied or as it is satisfied. Accordingly, we recognize revenues (net) when
the customer obtains control of our product, which typically occurs upon shipment of the product or the performance of the service. In
the year ended March 31, 2021, we began accepting contract liabilities or deferred revenue. We included Deferred Revenue in our Accrued
Liabilities. We will recognize revenue when the performance obligation is met.

For
Marketplace revenue, the performance obligation is satisfied, and revenue is recognized as follows:

Auction
revenue consists of optional listing fees with variable pricing components based on customer options selected from the GunBroker website
and final value fees based on a percentage of the final selling price of the listed item. The performance obligation is to process the
transactions as initiated by the customer. Revenue is recognized at a point in time when the transaction is processed.

Payment
processing revenue consists of fees charged to customers on a transactional basis. The performance obligation is to process the transactions
as initiated by the customer. The price is set by the GunBroker user agreement on the website based on stand-alone selling prices. Revenue
is recognized at a point in time when the transaction is processed.

Shipping
income consists of fees charged to customers for shipping of sold items listed on the GunBroker website. The performance obligation is
to ship the item sold as initiated by the customer. The price is set based on the third-party service provider selected to be used by
the customer as well as the speed and location of shipment. Revenue is recognized at a point in time when the shipping label is printed.

Banner
Advertising Campaign Revenue consists of fees charged to customers for advertisement placement and impressions generated through the
GunBroker website. The performance obligation is to generate the number of impressions specified by the customer on banner advertisements
on the GunBroker website using the placement selected by the customer. The price is set by the GunBroker user agreement on the website
based on standalone selling prices, or by advertising insertion order as negotiated by media broker. If the number of impressions promised
is not generated, the customer receives a refund and the refund is applied to the transaction price. Banner advertising campaigns generally
run for one month, and revenue is recognized at a point in time at the end of the selected month.

Product
Sales consists of fees charged for the liquidation of excess inventory for partner distributors. The performance obligation is to sell
and ship the inventory item as initiated by the customer. The price depends on whether the inventory is a fixed price item or an auction
item. For a fixed price item, the Company performs research to determine the current market rate for such an item, and the item is listed
at that price. For an auction item, the price is set by what the buyer is willing to pay. The Company acts as a principal in these transactions
due to the extent of control they have over the product prior to the sale. Due to the principal determination, gross revenue is recognized
at a point in time when the item has been shipped.

Identity
Verification consists of fees charged to customers for identity verification in order to gain access to the GunBroker website. The performance
obligation is to process the identity verification as initiated by the customer. The price is set by the GunBroker user agreement on
the website based on a stand-alone selling price. Revenue is recognized at a point in time when the identity verification is completed.

Excise
Tax

As
a result of regulations imposed by the Federal Government for sales of ammunition to non-government U.S. entities, we charge and
collect an 11% excise tax for all products sold into these channels. During the years ended March 31, 2023, 2022, and 2021, we
recognized approximately $9.8 million, $14.6 million, and $4.3 million respectively, in excise taxes. For ease in selling to
commercial markets, excise tax is included in our unit price for the products sold. We record this through net sales and expense the
offsetting tax expense to cost of goods sold.

Fair
Value of Financial Instruments

Fair
value estimates discussed herein are based upon certain market assumptions and pertinent information available to us as of March 31,
2023. The respective carrying value of certain on-balance-sheet financial instruments approximated their fair value. These financial
instruments include cash, accounts receivable, accounts payable, amounts due to related parties, factoring liability, and the construction
note payable. Fair values were assumed to approximate carrying values because they are short term in nature and their carrying amounts
approximate fair values or they are payable on demand.

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Income
Taxes

We
file federal and state income tax returns in accordance with the applicable rules of each jurisdiction. We account for income taxes under
the asset and liability method in accordance with Accounting Standards Codification 740 - Income Taxes (“ASC 740”). The provision
for income taxes includes federal, state, and local income taxes currently payable, and deferred taxes. We recognize deferred tax assets
and liabilities for the future tax consequences attributable to differences between the financial statement carrying amounts of existing
assets and liabilities and their respective tax basis. We measure deferred tax assets and liabilities using enacted tax rates expected
to apply to taxable amounts in years in which those temporary differences are expected to be recovered or settled. If it is more likely
than not that some portion or all of a deferred tax asset will not be realized, a valuation allowance is recognized. In accordance with
ASC 740, we recognize the effect of income tax positions only if those positions are more likely than not of being sustained. We measure
recognized income tax positions at the largest amount that is greater than 50% likely of being realized. We reflect changes in recognition
or measurement in the period in which the change in judgment occurs.

Stock-Based
Compensation

We
grant stock-based compensation to key employees and directors as a means of attracting and retaining highly qualified personnel. We also
grant stock in lieu of cash compensation for key consultants and service providers. We recognize expense related to stock-based payment
transactions in which we receive employee or non-employee services in exchange for equity.

We
account for stock-based compensation at fair value in accordance with Accounting Standards Codification 718 – Compensation –
Stock Compensation (“ASC 718”). Which requires the measurement and recognition of compensation expense for all share-based
payment awards to employees and directors. We measure
stock compensation based on reference to the closing fair market value of our Common Stock on the date of grant. Stock-based
compensation is recognized on a straight line basis over the vesting periods and forfeitures are recognized in the periods they occur.

In
addition to our base of employees, we also use the services of several contract personnel and other professionals on an “as needed
basis”. We plan to continue to use consultants, legal and patent attorneys, engineers and accountants as necessary. We may also
expand our staff to support the market roll-out of our products to both the commercial and government related organizations. A portion
of any key employee compensation likely would include direct stock grants, which would dilute the ownership interest of holders of existing
shares of our Common Stock.

ITEM
7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

This
document contains certain “forward-looking statements”. All statements other than statements of historical fact are “forward-looking
statements” for purposes of federal and state securities laws, including, but not limited to, any projections of earnings, revenue
or other financial items; any statements of the plans, strategies, goals and objectives of management for future operations; any statements
concerning proposed new products and services or developments thereof; any statements regarding future economic conditions or performance;
any statements or belief; and any statements of assumptions underlying any of the foregoing.

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Forward
looking statements may include the words “may,” “could,” “estimate,” “intend,” “continue,”
“believe,” “expect,” or “anticipate,” or other similar words, or the negative thereof. These forward-looking
statements present our estimates and assumptions only as of the date of this report. Accordingly, readers are cautioned not to place
undue reliance on forward-looking statements, which speak only as of the dates on which they are made. We do not undertake to update
forward-looking statements to reflect the impact of circumstances or events that arise after the dates they are made. You should, however,
consult further disclosures and risk factors we included in the section titled Risk Factors contained herein.

Overview

Our
vision is to modernize the ammunition industry by bringing new technologies to market. We intend to do that through acquisition and application
of intellectual property that is unique to the industry and through investing in manufacturing equipment and processes that enable us
to compete globally.

Our
innovative line of match grade armor piercing (AP), hard armor piercing incendiary (HAPI) tactical and ballistically matched (BMMPR)
rounds are the centerpiece of the Company’s strategy to address the unique needs of the armed forces community. This ammunition
was designed around a match grade portfolio of projectiles, that include a solid copper boat tail and armor piercing configuration. The
distinction between these rounds and other sold, is that the manufacturing process was engineered to ensure extremely tight tolerances
between each projectile manufactured, ensuring for the end user that the ballistic trajectory remains consistent between rounds without
regard to the actual configuration or round fired. The Company has aligned its manufacturing operations to support the large caliber
demand from military personnel, such as the 7.62x39, .300NM, .338 Lapua, 12.7 mm and .50 caliber BMG configurations. On February 2, 2021,
we announced that we restarted our improved .50 caliber manufacturing line to address increased market demand and fulfill current orders.

Through
JMC, we offer ammunition casings for pistol ammunition through large rifle ammunition. Jagemann Munitions Components is backed by decades
of manufacturing experience that allows the production of high-quality pistol brass and rifle brass components. Borne from the automotive
industry and refined over time to deliver durable and consistent sporting components, Jagemann Munition Components™, has become
one of the largest brass manufacturers in the country, with the capacity to produce more than 750 million pieces of brass each year with
the ability to scale to 1 billion rounds on an annual basis. Proud of its American-made components and capabilities, the Company now
has complete control over the manufacturing process. This results in a number of advantages when it comes to the brass that leaves our
state-of-the-art facility.

On
April 30, 2021, we acquired Gemini and nine of its subsidiaries, all of which are related to Gemini’s ownership of the Gunbroker.com
business.

GunBroker.com
is a large online marketplace dedicated to firearms, hunting, shooting and related products. Third-party sellers list items on the site
and federal and state laws govern the sale of firearms and other restricted items. Ownership policies and regulations are followed using
licensed firearms dealers as transfer agents.

The
focus for our 2023 fiscal year is to continue to expand our brand presence into the markets identified above and to continue to
grow our sales within our targeted markets. We intend to do this through establishing key strategic relationships, enrolling in government
procurement programs, establishing relationships with leading law enforcement associations and programs, expanding distributor channels,
and revitalized marketing campaigns.

Results
of Operations

Our
financial results for the year ended March 31, 2022 reflect our newly positioned organization. We have hired a strong team of professionals,
developed innovative products, and continue to establish our presence as a high-quality ammunition provider. We continue to focus on
growing our top line revenue, and streamlining our operations. We experienced an increase in our gross profit margin for the year ended
March 31, 2022. This was the result of our newly acquired marketplace, GunBroker.com which, by nature has significantly higher margins
than our manufactured products.

32

The
following table presents summarized financial information taken from our consolidated statements of operations for the year ended March
31, 2022 compared with the year ended March 31, 2021:

Non-GAAP
Financial Measures

We
analyze operational and financial data to evaluate our business, allocate our resources, and assess our performance. In addition to total
net sales, net income (loss), and other results under generally accepted accounting principles (“GAAP”), the following information
includes key operating metrics and non-GAAP financial measures we use to evaluate our business. We believe these measures are useful
for period-to-period comparisons of the Company. We have included these non-GAAP financial measures in this Annual Report on Form 10-K
because they are key measures we use to evaluate our operational performance, produce future strategies for our operations, and make
strategic decisions, including those relating to operating expenses and the allocation of our resources. Accordingly, we believe these
measures provide useful information to investors and others in understanding and evaluating our operating results in the same manner
as our management and board of directors.

Adjusted
EBITDA

Adjusted
EBITDA is a non-GAAP financial measures that displays our net loss, adjusted to eliminate the effect of certain items as described below.

33

We
have excluded the following non-cash expenses from our non-GAAP financial measures: provision or benefit for income taxes, depreciation
and amortization, loss on purchase, share-based or warrant-based compensation expenses, and changes to the contingent consideration fair
value. We believe it is useful to exclude these non-cash expenses because the amount of such expenses in any specific period may not
directly correlate to the underlying performance of our business operations.

Adjusted
EBITDA as a non-GAAP financial measure also excludes other cash interest income and expense, as these items are not components of our
core operations. We have included an adjustments for our provision or benefit for income taxes and excise taxes.

Non-GAAP
financial measures have limitations, should be considered as supplemental in nature and are not meant as a substitute for the related
financial information prepared in accordance with GAAP. These limitations include the following:

Because
of these limitations, you should consider the non-GAAP financial measures alongside other financial performance measures, including our
net loss and our other financial results presented in accordance with GAAP.

Net
Sales

The
following table shows our net sales by proprietary ammunition versus standard ammunition for the periods ended March 31, 2022 and March
31, 2021. “Proprietary Ammunition” include those lines of ammunition manufactured by our facilities that are sold under the
brand names: STREAK VISUAL AMMUNITION™ and Stelth. We define “Standard Ammunition” as non-proprietary ammunition that
directly competes with other brand manufacturers. Our “Standard Ammunition” is manufactured within our facility and may also
include completed ammunition that has been acquired in the open market for sale to others. Also included in this category is low cost
target pistol and rifle ammunition, as well as bulk packaged ammunition manufactured by us using reprocessed brass casings. Ammunition
within this product line typically carries much lower gross margins.

Sales
for the year ended March 31, 2022 increased 285% or $177.8 million over the year ended March 31, 2021. This increase was the result
of our increased production capacity coupled with increased demand from our customers which resulted in approximately $107.2
million of increased sales in bulk pistol and rifle ammunition, an increase of approximately $4.7 million of respective sales of
Proprietary Ammunition, an increase of approximately $1.3 million of sales from our casing operations and $64.6 million in respective
revenue generated from our recently acquired marketplace, GunBroker.com, which includes auction revenue, payment processing revenue,
and shipping income. Management expects the sales growth rate of Proprietary Ammunition to greatly outpace the sales of our Standard
Ammunition.

34

We
are focused on continuing to grow top line revenue quarter-over-quarter as we continue to further expand distribution into commercial
markets, introduce new product lines, and continue to initiate sales to U.S. law enforcement, military, and international markets.

Through
our acquisition of SWK, the Company has developed and deployed a new line of tactical armor piercing (AP) and hard armor piercing incendiary
(HAPI) precision ammunition to meet the lethality requirements of both the US and foreign military customers. This line was formally
launched at SHOT Show in Las Vegas, where our team demonstrated or presented the capability to more than 15 countries around the world.
We continue to demonstrate our AP and HAPI ammunition to military personnel at scheduled and invite only events, resulting in increased
interest and procurement discussions. The Company has since developed the ballistic match (BMMPR) and signature-on-target (SoT) rounds
under contract with the U.S. Government in support of US special operations which have been publicly announced pursuant to governmental
authorization. Additional work continues in support of the military operations of the U.S. and its ally military components which is
not currently subject to disclosure.

It
is important to note that, although U.S. law enforcement, military and international markets represent significant opportunities for
our Company, they also have a long sales cycle. The Company’s sales team has been effective in establishing sales and distribution
channels, both in the United States and abroad, which are reasonably anticipated to drive sustained sales opportunity in the military,
law enforcement, and commercial markets.

Sales
outside of the United States require licenses and approval from either the U.S. Department of Commerce or the U.S. State Department,
which typically takes approximately 30 days to receive. On June 16, 2022, we renewed our annual registration with the International Traffic
in Arms Regulations (“ITAR”), which remains valid through the report date. This permits the Company to export and broker
ammunition and other controlled items covered under ITAR.

Cost
of Revenues

Cost
of revenues increased by approximately $100.4 million from $51.1 million to $151.5 million, respectively for the year ended March 31,
2022 compared with the year ended March 31, 2021. This was the result of a significant increase in net sales as well increases to non-cash
depreciation related to our newly acquired casing operations, expensing of increased labor, overhead, and raw materials used to produce
finished product during our 2022 fiscal year as compared to the 2021 fiscal year and additional
cost of revenues from our recent acquisition of our marketplace, GunBroker.com. As a percentage of sales, cost of goods sold decreased
by 22.8% when comparing the year ended March 31, 2022 to the year ended March 31, 2021.

Gross
Margin

Our
gross margin percentage increased to 36.9% from 18.2% during the year ended March 31, 2022 as compared to the same period in 2021. This
was a result of the inclusion of our newly acquired marketplace, GunBroker.com which, by nature has significantly higher margins than
our manufactured products.

We
believe as we continue to grow sales through new markets and expanded distribution that our gross margins will also increase, as evidenced
by the improvement over this time last year. Our goal in the next 12 to 24 months is to continue to improve our gross margins. This will
be accomplished through the following:

35

Operating
Expenses

Overall,
for the year ended March 31, 2022, our operating expenses increased by approximately $34.8 million over the year ended March 31, 2021,
but decreased as a percentage of sales from 26.8% for the year ended March 31, 2021 to 21.5% for the year ended March 31, 2022. The increase
was primarily related to approximately $20.6 million of additional operating expenses following our merger with Gemini, including $12.1
million of depreciation and amortization expenses. Our operating expenses include non-cash depreciation and amortization expense of approximately
$13.7 million for the year ended March 31, 2022. Our operating expenses consisted of commissions related to our sales increases, stock
compensation expense associated with issuance of our Common Stock in lieu of cash compensation for employees, and board members, and
key consultants for the organization during the period. Operating expenses for the years ended March 31, 2022 and 2021 included noncash
expenses of approximately $20.1 million and $3.2 million, respectively. We expect to see administrative expenditures to continue to decrease
as a percentage of sales in the 2023 fiscal year, as we leverage our work force and expand our sales opportunities.

During
the year ended March 31, 2022, our selling and marketing expenses increased by approximately $5.4 million. The increase was primarily
related to commission on the increases in the sale of our products resulting of approximately $3.6 million of increase in commissions
and a $1.1 million increase advertising expenses for the year ended March 31, 2022 in comparison to the comparable prior year.

Our
corporate general & administrative expenses increased approximately $9.8 million in
the current period from the prior year mainly due to increased general corporate expenses related
to the addition of Gemini of approximately $5.3 million and increases in insurance expenses of $4.0 million.

Employee
salaries and related expenses increased approximately $8.6 million for the year ended March 31, 2022 compared to the comparable period
ended in 2021. This was a result of increased payroll and related expenses of $4.2 million, including $2.9 million from the addition
of Gemini, and employee stock compensation of approximately $4.3 million.

Depreciation
and amortization expenses increased approximately $12.0 million from the period principally due to the addition of assets from the Gemini
Acquisition.

Interest
and Other Expenses

For
the year ended March 31, 2022, interest expense decreased by approximately $2.4 million compared with the year ended March 31, 2021.
The change from the prior periods was mainly due to the repayment of notes and conversion of convertible promissory notes in current
and prior periods. Interest expense for the year ended March 31, 2021 included approximately $1.3 million of non-cash interest expense
recognized on the issuance of warrants to purchase Common Stock, approximately $0.4 million in debt discount amortization related to
Convertible Promissory Notes as well interest expense and debt discount amortization related to Note Payables Related Party, Note Payable,
and Convertible Promissory Notes.

Net
Income

As
a result of increases in revenues from increased production as well as our acquisition of Gemini,
we ended the year ended March 31, 2022 with net income of approximately $33.2 million compared with net losses of approximately
$7.8 million for the year ended March 31, 2021.

Our
goal is to continue to improve our operating results as we focus on increasing sales and controlling our operating expenses.

36

Liquidity
and Capital Resources

As
of March 31, 2022, we had $23,281,475 of cash and cash equivalents, a decrease of $95,059,996 from March 31, 2021.

Existing
working capital, cash flow from operations, bank borrowings, and sales of equity and debt securities are expected to be adequate to fund
our operations over the next year. Generally, we have financed operations to date through the proceeds of stock sales, bank financings,
and related-party notes.

Working
Capital is summarized and compared as follows:

Changes
in cash flows are summarized as follows:

Operating
Activities

For
the year ended March 31, 2022, net cash provided by operations totaled approximately $2.9 million. This was primarily the result of net
income of approximately $33.2 million, increases to our period end inventories of $43.1 million, accounts receivable of $20.7
million, and deposits of $8.8 million which was offset by increases in accounts payable and accrued liabilities of $9.9 million and $3.2
million, respectively, and decreases of prepaid expenses of $1.6 million. The cash used in operations were partially offset by the benefit
of non-cash expenses for depreciation and amortization of approximately $17.3 million, employee stock compensation of $5.8 million, stock
grants totaling $0.3 million, $2.7 million of allowance for doubtful accounts, $1.1 million of warrants issued for services, $1.3 million
of deferred income taxes and a decrease related to an adjustment to the fair value of contingent consideration of $0.4 million.

For
the year ended March 31, 2021, net cash used in operations totaled approximately $14.4 million. This was primarily the result of a net
loss of approximately $7.8 million, increases in our period end accounts receivable of $6.1 million and our period end Inventories of
$11.5 million, which was offset by increases in accounts payable and accrued liabilities of $1.8 million and $1.8 million, respectively,
and a loss on purchase of $1.0 million. The cash used in operations were partially offset by the benefit of non-cash expenses for depreciation
and amortization of $4.9 million, employee stock compensation of $1.5 million, stock issued for services of $1.7 million, stock grants
totaling $0.3 million, and a decrease related to an adjustment to the fair value of contingent consideration of $0.1 million and forgiveness
of our paycheck protection program notes of $1.1 million.

Investing
Activities

During
the year ended March 31, 2022, we used approximately $69.7 million in net cash for investing activities. Net cash used in investing activities
consisted of approximately $50.5 million uses in connection with the merger of Gemini, and approximately $19.2 million related to purchases
of production equipment and the construction of our new manufacturing facility in Manitowoc, WI.

During
the year ended March 31, 2021, we used $7.4 million in net cash for investing activities to purchase fixed assets such as new production
equipment.

Financing
Activities

During
the year ended March 31, 2022, net cash used in financing activities was approximately $28.2 million. This was the net effect of a $50.0
million payment on debt assumed from Gemini, $35.0 million of proceeds from the sale of our preferred stock net of approximately $3.2
million of issuance costs, approximately $2.5 million of preferred stock dividends paid, approximately $2.2 million of insurance premium
note payments, approximately $0.9 million was generated from common stock issued for exercised warrants, the $4.0 million repayment of
a note payable, and an approximate $0.3 million reduction in our Inventory Credit Facility. Additionally, approximately $121.5 million
was generated from accounts receivable factoring, which was offset by payments of approximately $122.8 million.

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During
the year ended March 31, 2021, net cash provided by financing activities was $139.3 million. This was the net effect of $138.6 million
generated from the sale of Common Stock, net of cash payments of $13.9 million in conjunction with Common Stock offerings. Additionally,
$40.3 million was generated from accounts receivable factoring, which was offset by payments of $40.4 million. There was $3.5 million
cash generated from the issuance of a related party note payable. These increases to our financing activities were offset by payment
of $8.8 million on the related party notes payable, $0.5 million toward our insurance premium note payable and a $1.5 million payment
on the repurchase and cancellation of 1,000,000 shares of our Common Stock.

Liquidity

Existing
working capital, cash flow from operations, bank borrowings, and sales of equity and debt securities are expected to be adequate to fund
our operations over the next year. Generally, we have financed operations to date through the proceeds of stock sales, bank financings,
and related-party notes. These sources have been adequate to fund our recurring cash expenditures including but not limited to our working
capital requirements, capital expenditures to expand our operations, debt repayments, and acquisitions. We intend to continue use the
aforementioned sources of funding for capital expenditures, debt repayments, share repurchases and any potential acquisitions.

Leases

We lease six locations that are used for our offices, production, and warehousing. As of March 31, 2022, we had $3.5 million of fixed
lease payment obligations with $1.1 million payable within the next 12 months. Please refer to Note 8 – Leases for additional information.

Related
Party Note Payable

As
of March 31, 2022, we had an outstanding balance on our Related Party Note Payable of approximately $0.9 million, of which $0.7 million
is due within the next 12 months.

Construction
Note Payable

We
will finance a portion of our new production facility with our Construction Note Payable. We expect to make $0.6 million in principal
and interest payments within the next 12 months. The total principal balance of the Construction Note is expected to be $11.6 million
upon completion of the project and will mature on October 14, 2026.

Net
Operating Loss Carry Forwards

At
March 31, 2021, we had Federal net operating loss carry forwards (“NOLs”) for income tax purposes of approximately $31.9
million which will begin to expire in 2036. The Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) signed into
law on March 27, 2020 provided that NOLs generated in a taxable year beginning in 2018, 2019, or 2020, may now be carried back five years
and forward indefinitely. In addition, the 80% taxable income limitation is temporarily removed, allowing NOLs to fully offset net taxable
income.

During
fiscal year 2022, we had net income of $33.2 million. As a result, we plan to use the entirety of our NOLs to offset this taxable income.

Off-Balance
Sheet Arrangements

As
of March 31, 2022, we did not have any off-balance sheet arrangements that have or are reasonably likely to have a current or future
material effect on our financial condition, net sales, expenses, results of operations, liquidity capital expenditures, or capital resources.

Critical
Accounting Policies

Our
discussion and analysis of our financial condition and results of operation are based upon our financial statements, which have been
prepared in accordance with GAAP. The preparation of these financial statements requires us to make estimates and judgments that affect
the reported amounted of assets, liabilities, revenues, and expenses. We have identified several accounting principles that we believe
are key to the understanding of our financial statements. These important accounting policies require our most difficult subjective judgements.

Use
of Estimates

The
preparation of financial statements in conformity with GAAP requires us to make estimates and assumptions that affected the reported
amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the
reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates. Significant estimates
made in preparing the consolidated financial statements include the valuation of allowances for doubtful accounts, valuation of deferred
tax assets, inventories, useful lives of assets, goodwill, intangible assets, stock-based compensation and warrant-based compensation.

Goodwill

We
evaluate goodwill for impairment annually or more frequently when an event occurs or circumstances change that indicate the carrying
value may not be recoverable. In testing for goodwill impairment, we may elect to utilize a qualitative assessment to evaluate whether
it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If our qualitative assessment indicates
that goodwill impairment is more likely than not, we perform a two-step impairment test. We test goodwill for impairment under the two-step
impairment test by first comparing the book value of net assets to the fair value of the reporting units. If the fair value is determined
to be less than the book value or qualitative factors indicate that it is more likely than not that goodwill is impaired, a second step
is performed to compute the amount of impairment as the difference between the estimated fair value of goodwill and the carrying value.
We estimate the fair value of the reporting units using discounted cash flows. Forecasts of future cash flows are based on our best estimate
of future net sales and operating expenses, based primarily on expected category expansion, pricing, market segment share, and general
economic conditions. The measurement date of our annual goodwill impairment test is March 31. No impairment was recorded for the year
ended March 31, 2022. We did not have any goodwill prior to the year ended March 31, 2022 and as a result no impairment analysis was
performed on goodwill for periods prior to March 31, 2022.

Accounts
Receivable and Allowance for Doubtful Accounts

Our
accounts receivable represents amounts due from customers for products sold and include an allowance for uncollectible accounts which
is estimated based on the aging of the accounts receivable and specific identification of uncollectible accounts. At March 31, 2022 and
March 31, 2021, we reserved $3,055,252 and $148,540, respectively, of allowance for doubtful accounts.

Inventory

We
state inventories at the lower of cost or net realizable value. We determine cost by using the weighted-average cost of raw materials
method, which approximates the first-in, first-out method and includes allocations of manufacturing labor and overhead. We make provisions
when necessary, to reduce excess, potential damaged or obsolete inventories. These provisions are based on our best estimates. At March
31, 2022, and March 31, 2021, we conducted a full analysis of inventory on hand and expensed all inventory not currently in use, or for
which there was no future demand.

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Research
and Development

To
date, we have expensed all costs associated with developing our product specifications, manufacturing procedures, and products through
our cost of products sold, as this work was done by the same employees who produced the finished product. We anticipate that it may become
necessary to reclassify research and development costs into our operating expenditures for reporting purposes as we begin to develop
new technologies and lines of ammunition.

Revenue
Recognition

We
generate revenue from the production and sale of ammunition, and marketplace fee revenue, which includes auction revenue, payment processing
revenue, and shipping income. We recognize revenue according to Accounting Standard Codification - Revenue from Contract with Customers
(“ASC 606”). When the customer obtains control over the promised goods or services, we record revenue in the amount of consideration
that we can expect to receive in exchange for those goods and services. We apply the following five-step model to determine revenue recognition:

We
only apply the five-step model when it is probable that we will collect the consideration we are entitled to in exchange for the goods
or services it transfers to the customer. At contract inception and once the contract is determined to be within the scope of ASC 606,
we assess the goods or services promised within each contract and determine those that are performance obligations, and assess whether
each promised good or service is distinct. Our contracts contain a single performance obligation and the entire transaction price is
allocated to the single performance obligation. We recognize as revenues the amount of the transaction price that is allocated to the
respective performance obligation when the performance obligation is satisfied or as it is satisfied. Accordingly, we recognize revenues
(net) when the customer obtains control of our product, which typically occurs upon shipment of the product or the performance of the
service. During the year ended March 31, 2021, we began accepting contract liabilities or deferred revenue. We included Deferred Revenue
in our Accrued Liabilities. We will recognize revenue when the performance obligation is met.

Excise
Tax

As
a result of regulations imposed by the Federal Government for sales of ammunition to non-government U.S. entities, we charge and collect
an 11% excise tax for all products sold into these channels. During the year ended March 31, 2022 and 2021, we recognized $14,646,983
and $4,286,258, respectively, in excise taxes. For ease in selling to commercial markets, excise tax is included in our unit price for
the products sold. We record this through net sales and expense the offsetting tax expense to cost of goods sold.

Fair
Value of Financial Instruments

Fair
value estimates discussed herein are based upon certain market assumptions and pertinent information available to us as of March 31,
2022. The respective carrying value of certain on-balance-sheet financial instruments approximated their fair value. These financial
instruments include cash, accounts payable, and amounts due to related parties. Fair values were assumed to approximate carrying values
because they are short term in nature and their carrying amounts approximate fair values or they are payable on demand.

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Income
Taxes

We
file federal and state income tax returns in accordance with the applicable rules of each jurisdiction. We account for income taxes under
the asset and liability method in accordance with Accounting Standards Codification 740 - Income Taxes (“ASC 740”). The provision
for income taxes includes federal, state, and local income taxes currently payable, and deferred taxes. We recognize deferred tax assets
and liabilities for the future tax consequences attributable to differences between the financial statement carrying amounts of existing
assets and liabilities and their respective tax basis. We measure deferred tax assets and liabilities using enacted tax rates expected
to apply to taxable amounts in years in which those temporary differences are expected to be recovered or settled. If it is more likely
than not that some portion or all of a deferred tax asset will not be realized, a valuation allowance is recognized. In accordance with
ASC 740, we recognize the effect of income tax positions only if those positions are more likely than not of being sustained. We measure
recognized income tax positions at the largest amount that is greater than 50% likely of being realized. We reflect changes in recognition
or measurement in the period in which the change in judgment occurs.

Stock-Based
Compensation

We
grant stock-based compensation to key employees and directors as a means of attracting and retaining highly qualified personnel. We also
grant stock in lieu of cash compensation for key consultants and service providers. We recognize expense related to stock-based payment
transactions in which we receive employee or non-employee services in exchange for equity. We measure stock compensation based on the
closing fair market value of our Common Stock on the date of grant.

In
addition to our base of employees, we also use the services of several contract personnel and other professionals on an “as needed
basis”. We plan to continue to use consultants, legal and patent attorneys, engineers and accountants as necessary. We may also
expand our staff to support the market roll-out of our products to both the commercial and government related organizations. A portion
of any key employee compensation likely would include direct stock grants, which would dilute the ownership interest of holders of existing
shares of our Common Stock.