# Outdoor Holding Co (POWW) FY 2023 MD&A

Verbatim Item 7 Management's Discussion and Analysis from Outdoor Holding Co's 10-K for fiscal year 2023.

SEC filing source: https://www.sec.gov/Archives/edgar/data/1015383/000149315223021280/form10-k.htm
Accession: 0001493152-23-021280
Filing date: 2023-06-14
Report date: 2023-03-31
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/
Previous year: /company/POWW/mda/fy2022/ (FY 2022)
Next year: /company/POWW/mda/fy2024/ (FY 2024)

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:

[[GREPCENT_TABLE]]
[["","","For the Year Ended"],["","","March 31, 2023","","","March 31, 2022"],["Net Sales","","$","191,439,801","","","$","240,269,166"],["Cost of Revenues","","","136,031,204","","","","151,505,657"],["Gross Margin","","","55,408,597","","","","88,763,509"],["Sales, General & Administrative Expenses","","","58,667,516","","","","51,614,147"],["Income (loss) from Operations","","","(3,258,919",")","","","37,149,362"],["Other income (expense)"],["Other income (expense)","","","(606,881",")","","","(615,957",")"],["Income (loss) before provision for income taxes","","$","(3,865,800",")","","$","36,533,405"],["Provision for income taxes","","","730,238","","","","3,285,969"],["Net Income (Loss)","","$","(4,596,038",")","","$","33,247,436"]]
[[/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 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

[[GREPCENT_TABLE]]
[["","","For the","","","For the"],["","","Year Ended","","","Year Ended"],["","","March 31, 2023","","","March 31, 2022"],["Reconciliation of GAAP net income to Adjusted EBITDA"],["Net Income (Loss)","","$","(4,596,038",")","","$","33,247,436"],["Provision for income taxes","","","730,238","","","","3,285,969"],["Depreciation and amortization","","","17,519,949","","","","17,339,093"],["Interest expense, net","","","632,062","","","","637,797"],["Employee stock awards","","","5,807,779","","","","5,759,000"],["Stock grants","","","179,094","","","","252,488"],["Stock for services","","","-","","","","4,200"],["Warrants issued for services","","","213,819","","","","718,045"],["Contingent consideration fair value","","","(63,764",")","","","(385,750",")"],["Other income","","","(25,181",")","","","(21,840",")"],["Proxy contest fees(1)","","","4,724,385","","","","-"],["Other nonrecurring expenses(2)","","","1,248,865","","","","-"],["Adjusted EBITDA","","$","26,371,208","","","$","60,836,438"]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["(1)","Includes proxy contest fees of $910,000 for Employee Stock Awards issued as a result of the Settlement Agreement as discussed in Note 16 of our financial statements."],["(2)","Other nonrecurring expenses consist of professional and legal fees that are nonrecurring in nature."]]
[[/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.

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:

[[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, 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.

[[GREPCENT_TABLE]]
[["","","For the Year Ended"],["","","March 31, 2023","","","March 31, 2022"],["Proprietary Ammunition","","$","10,779,035","","","$","10,071,659"],["Standard Ammunition","","","103,337,009","","","","151,387,366"],["Ammunition Casings","","","14,174,084","","","","14,201,625"],["Marketplace Revenue","","","63,149,673","","","","64,608,516"],["Total Sales","","$","191,439,801","","","$","240,269,166"]]
[[/GREPCENT_TABLE]]

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:

[[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]]

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:

[[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"],["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","","$","60,836,438","","","$","3,813,484"]]
[[/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.

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:

[[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; and"],["","\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 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.

[[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.

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:

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[[/GREPCENT_TABLE]]

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.

38

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:

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[[/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.

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.

40

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.