# Outdoor Holding Co (POWW) FY 2022 MD&A

Verbatim Item 7 Management's Discussion and Analysis from Outdoor Holding Co's 10-K for fiscal year 2022.

SEC filing source: https://www.sec.gov/Archives/edgar/data/1015383/000149315222018107/form10-k.htm
Accession: 0001493152-22-018107
Filing date: 2022-06-29
Report date: 2022-03-31
Extracted from Item 7 to the first post-MD&A boundary after HTML sanitization.
Confidence: high

Company profile: /company/POWW/
All MD&A years: /company/POWW/mda/
Next year: /company/POWW/mda/fy2023/ (FY 2023)

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:

[[GREPCENT_TABLE]]
[["","","For the Year Ended"],["","","March 31, 2022","","","March 31, 2021"],["Net Sales","","$","240,269,166","","","$","62,482,330"],["Cost of Revenues","","","151,505,657","","","","51,095,679"],["Gross Margin","","","88,763,509","","","","11,386,651"],["Sales, General & Administrative Expenses","","","51,614,147","","","","16,766,636"],["Income (loss) from Operations","","","37,149,362","","","","(5,379,985",")"],["Other income (expense)"],["Other income (expense)","","","(615,957",")","","","(2,432,309",")"],["Income (loss) before provision for income taxes","","$","36,533,405","","","$","(7,812,294",")"],["Provision for income taxes","","","3,285,969","","","","-"],["Net Income (Loss)","","$","33,247,436","","","$","(7,812,294",")"]]
[[/GREPCENT_TABLE]]

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

[[GREPCENT_TABLE]]
[["","","For the","","","For the"],["","","Year Ended","","","Year Ended"],["","","March 31, 2022","","","March 31, 2021"],["Reconciliation of GAAP net income to Adjusted EBITDA"],["Net Income (Loss)","","$","33,247,436","","","$","(7,812,294",")"],["Provision for income taxes","","","3,285,969","","","","-"],["Depreciation and amortization","","","17,339,093","","","","4,876,756"],["Interest expense, net","","","637,797","","","","3,009,094"],["Excise taxes","","","14,646,983","","","","4,286,258"],["Employee stock awards","","","5,759,000","","","","1,450,359"],["Stock grants","","","252,488","","","","278,585"],["Stock for services","","","4,200","","","","1,707,500"],["Warrants issued for services","","","718,045","","","","-"],["Contingent consideration fair value","","","(385,750",")","","","(119,731",")"],["Other income","","","(21,840",")","","","(576,785",")"],["Loss on purchase","","","-","","","","1,000,000"],["Adjusted EBITDA","","$","75,483,421","","","$","8,099,742"]]
[[/GREPCENT_TABLE]]

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:

[[GREPCENT_TABLE]]
[["","\u25cf","Employee stock awards and stock grants expense has been, and will continue to be for the foreseeable future, a significant recurring expense in the Company and an important part of our compensation strategy;"],["","\u25cf","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; and"],["","\u25cf","non-GAAP measures do not reflect changes in, or cash requirements for, our working capital needs"],["","\u25cf","other companies, including companies in our industry, may calculate the non-GAAP financial measures differently or not at all, which reduces their usefulness as comparative measures."]]
[[/GREPCENT_TABLE]]

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.

[[GREPCENT_TABLE]]
[["","","For the Year Ended"],["","","March 31, 2022","","","March 31, 2021"],["Proprietary Ammunition","","$","10,071,659","","","$","5,340,823"],["Standard Ammunition","","","151,387,366","","","","44,279,707"],["Ammunition Casings","","","14,201,625","","","","12,861,800"],["Marketplace Revenue","","","64,608,516","","","","-"],["Total Sales","","$","240,269,166","","","$","62,482,330"]]
[[/GREPCENT_TABLE]]

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:

[[GREPCENT_TABLE]]
[["","\u25cf","Increased product sales, specifically of proprietary lines of ammunition, like the STREAK VISUAL AMMUNITION\u2122, Stelth and now our tactical Armor Piercing (AP) and Hard Armor Piercing Incendiary (HAPI) precision ammunition, all of which carry higher margins as a percentage of their selling price;"],["","\u25cf","Introduction of new lines of ammunition that historically carry higher margins in the consumer and government sectors;"],["","\u25cf","Reduced component costs through operation of our ammunition segment and expansion of strategic relationships with component providers;"],["","\u25cf","Expanded use of automation equipment that reduces the total labor required to assemble finished products"],["","\u25cf","And, better leverage of our fixed costs through expanded production to support the sales objectives."]]
[[/GREPCENT_TABLE]]

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:

[[GREPCENT_TABLE]]
[["","","March 31, 2022","","","March 31, 2021"],["Current assets","","$","129,691,636","","","$","145,620,332"],["Current liabilities","","","35,823,311","","","","12,098,493"],["","","$","93,868,325","","","$","133,521,839"]]
[[/GREPCENT_TABLE]]

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.

37

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.

38

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:

[[GREPCENT_TABLE]]
[["","\u25cf","Identification of a contract with a customer"],["","\u25cf","Identification of the performance obligations in the contact"],["","\u25cf","Determination of the transaction price"],["","\u25cf","Allocation of the transaction price to the separate performance allocation"],["","\u25cf","Recognition of revenue when performance obligations are satisfied"]]
[[/GREPCENT_TABLE]]

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.

39

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.