Greetings, and welcome to today’s AMMO Inc. Fiscal Fourth Quarter 2022 Earnings Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Reed Anderson of ICR. Thank you, Reed. You may begin.

Thank you. Good afternoon and welcome to AMMO Inc.'s conference call to discuss results for the fourth quarter and full year fiscal 2022. On the call today from AMMO Inc. with prepared remarks are Fred Wagenhals, Chairman and Chief Executive Officer; Rob Goodmanson, President; and Rob Wiley, Chief Financial Officer. By now, everyone should have access to the earnings release, which went out this afternoon at approximately 4:05 p.m. Eastern Time. If you have not received the release, it is available on the Investor Relations portion of AMMO Inc.'s website. This call is being webcast and a replay will be available on the company's website as well. Before we begin, we would like to remind everyone that our prepared remarks contain forward-looking statements and management may make additional forward-looking statements in response to your questions. These statements do not guarantee future performance and therefore, undue reliance should not be placed upon them. These statements are based on current expectations of the company's management and involve inherent risks and uncertainties, including those identified in the risk factors section of AMMO Inc.'s most recently filed forms 10-K and 10-Q. Please note that during today's call, we will discuss non-GAAP financial measures, including results on an adjusted basis. Management believes these financial measures can facilitate a more complete analysis and greater transparency in AMMO Inc.'s ongoing results of operations, particularly when comparing underlying operating results from period to period. We’ve included reconciliation of these non-GAAP measures with today's release. This call also contains time-sensitive information that is accurate only as of the date of this live broadcast June 29, 2022. AMMO Inc. assumes no obligation to update any forward-looking projections that may be made in today's release or call. Now I will turn the call over to Fred Wagenhals, Chairman and Chief Executive Officer of AMMO Inc.

Thank you, Reed, and good afternoon to everyone on the call. Fiscal 2022 was a banner year for AMMO, far exceeding even our highest expectations. Revenue reached $240.3 million, up an incredible 285% from fiscal 2021. We generated nearly $76 million in adjusted EBITDA and $0.53 in adjusted EPS for the year. We achieved all of this despite challenges such as COVID, transitioning operations from Lake City to Manitowoc, and supply chain issues. The acquisitions and integration of the GunBroker.com marketplace platform have proven to be transformational for the company's business model. We are just beginning to introduce several initiatives to further leverage profitability on the $1.8 billion in transactional volume on the platform in the past year. Over the past five years, we have grown AMMO from $2 million in revenue in 2018 to what we expect will be over $300 million in revenues in fiscal 2023. In light of this spectacular growth, I would like to focus on why we remain confident that AMMO is well positioned to double its market share over the next two to three years. First, we are at capacity in our current facility, delivering 400 million rounds of loaded ammunition this past year, which has pushed us to build our new 160,000 square foot world-class facility. We expect to increase our capacity to 1 billion rounds once fully operational. This gives us significant opportunity to increase revenue, drive down manufacturing costs, and improve margins. Next, our marketplace platform, GunBroker.com, was fully integrated in 2022, and we are now rolling out several initiatives to capture a significantly greater percentage of the transactional volume from that platform, including credit card processing, credit products, gift cards, and loyalty programs for both buyers and sellers. Finally, AMMO continues to make great progress in our military programs division, primarily with the support of our U.S. Special Forces. We have entered the last stage of our procurement path on our BMMPR program and are making advances in the development of our signature on target program. We started AMMO in 2017 with the goal of integrating technology into the ammunition industry, and by all measures, we have succeeded. Judging by our financial performance over the past fiscal year, we continue to believe that we are still early in our growth curve. There remain multiple opportunities to substantially grow revenue, enhance margins, and drive shareholder value. We intend to capitalize on those opportunities and look forward to updating our progress to shareholders at the appropriate moment. With that, I'd like to turn the call over to our President, Rob Goodmanson, to provide more detail on the operational performances for this quarter.

Thanks, Fred, and thank you all for being on our annual earnings call. This has indeed been an exciting year full of enormous business opportunities and interesting challenges. We would not have been able to execute upon these opportunities so effectively without our stellar team. Fred and our entire management team put together, and our incredible successes fall squarely on their shoulders. I would now like to announce our forecast for fiscal 2023: $300 million to $310 million in revenues, $82 million to $85 million in EBITDA, and $108 million to $111 million in adjusted EBITDA for fiscal 2023. Being successful in predicting the future is best done by looking back at past successes and our historic track record, growing from $2 million to $240 million in sales in five years speaks for itself. I’d like to take a few moments now to expand upon Fred’s comments and talk about certain company initiatives at AMMO and at GunBroker.com. Obviously, we're anxious to get into our new Manitowoc, Wisconsin manufacturing facility, slated to open in just over two weeks. This facility is just around the corner from our current operation and is approximately 300% larger than our main production. In the new plant, we plan to double our output capacity of loaded ammunition over time through the deployment of new equipment, which we already own, expanding our manufacturing automation, and better leveraging our production team in their newly consolidated buildings. We are also adding cart capabilities for GunBroker.com. Currently, our 7.3 million registered users can only purchase one item at a time. Soon, they will have the ability to purchase multiple accessories at once, including ammunition. GunBroker.com, the largest outdoor website of its kind, has been around for 22 years, and we're making additional enhancements in conjunction with our auction site. We are adding new sellers to the platform to mirror Amazon, which will drive growth in users and transaction volume. Whether they are manufacturers, dealers, or distributors, we function as their online storefront, which will only add to their distribution model. This is a solid concept and is one way to monetize one of GunBroker.com’s greatest assets, data. No other company in this space has vast information in a timely manner that shows what is selling, where it's selling, and at what price levels, making trend prediction more reliable and accountable. Our goal with these initiatives is to enhance user experience, whether you're a buyer or seller. We are adding new products and product lines to the GunBroker website with over 7.3 million registered users and adding an average of approximately 55,000 new users monthly this past year. We strongly believe we will be the preferred destination in the space because of these initiatives with our two businesses. We believe we can double our revenues in both companies over the next 12 to 24 months. Again, to reiterate our forecast: $300 million to $310 million in revenues, $82 million to $85 million in EBITDA, and $108 million to $111 million in adjusted EBITDA for fiscal 2023. That is a growth story that should be paid attention to. In closing, I'd like to add that because of our success, it has allowed us to look at many unique opportunities and take advantage of that such as our support of the Ukraine war effort by donating 1 million rounds of ammunition. We're also pleased that some of our competitors finally followed our lead. With that, let me turn this over to Rob Wiley, our CFO. Rob?

Thank you, Rob. Welcome everyone. Let me now review our financial results in more detail. Total net revenues for our fiscal 2022 increased 285% or $178.1 million over the prior year. This increase was the result of our increased production capacity, coupled with strong demand from our customers resulting in $107.1 million of additional sales of bulk pistol and rifle ammunition, an increase of $4.7 million in sales from proprietary ammunition, an increase of $1.3 million in sales from our casing operations, and $64.6 million in revenue generated from our marketplace, GunBroker.com. Looking forward, we expect the sales growth rate of proprietary ammunition to significantly outpace the sales of our standard ammunition. Our gross profit percentage increased to 36.9% from 18.2% during the year compared to the prior year. This was due to the inclusion of our marketplace, GunBroker.com, which naturally has significantly higher margins than our manufactured products. We believe that as we continue to grow sales, move into new markets, and expand distribution, 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 through increased sales of our proprietary lines of ammunition. We plan to introduce new lines of ammunition that historically carry higher margins in the consumer and government sectors, reduce component costs through streamlined operations in our ammunition segment, and expand strategic relationships with component providers. We will also expand the use of automation equipment to reduce the total labor required to assemble finished products and better leverage our fixed costs through expanded production to support sales objectives. Moving on to operating expenses, our operating expenses increased by approximately $34.8 million over the prior year but decreased as a percentage of sales from 26.8% in fiscal 2021 to 21.5%, a 25% decrease in the reporting period. The dollar increase was primarily related to our GunBroker.com acquisition, including $12.1 million out of $13.7 million in non-cash depreciation and amortization expenses for the year. Total non-cash operating expenses were approximately $20.1 million for the year compared to $3.2 million in the prior year. We expect to see operating expenses continue to decrease as a percentage of sales in the 2023 fiscal year as we leverage our workforce and expand our sales opportunities. Operating income was $42.5 million for the year, compared to an operating loss of $5.4 million a year earlier. As a percentage of net revenues, operating income was 41.9%, compared to a negative 8.6% a year earlier, a 586% increase. As a result of increased revenues from production as well as our acquisition of GunBroker.com, we had a net income of approximately $33.2 million for fiscal 2022 or $0.27 per diluted share, compared to a net loss of approximately $7.8 million or $0.14 per diluted share in fiscal 2021. Adjusted net income per diluted share was $0.53, versus an adjusted net income per share of $0.07 in the prior year period. Adjusted EBITDA was $75.5 million compared to adjusted EBITDA of $8.1 million in the prior year. The significant improvement in adjusted EBITDA was due to increased sales and improved gross margins, reflecting growth in our core ammunition segment and the addition of our higher margin marketplace segment. Please note that adjusted EBITDA is a non-GAAP measure and you should refer to the reconciliation of our GAAP to non-GAAP results in today's press release for additional details. To reiterate our performance this past year, our revenues went from $61 million to $240 million. We reported net income of $33.2 million from a net loss of $7.8 million in the prior year. Our balance sheet remained strong with $23 million in cash and equivalents and essentially no outstanding debt. We are well-positioned for a swift transition into our new facility in just a few weeks, and we are guiding our 2023 fiscal year to revenues of $300 million to $310 million, EBITDA of $82 million to $85 million, and adjusted EBITDA of $108 million to $111 million. This concludes our prepared remarks. We are now ready to take questions, so I'll pass it back to our moderator. Thank you.

Our first question is from Matt Koranda with ROTH Capital.

Good afternoon. Thanks for taking the questions. Just wanted to start off with the fiscal '23 guide on revenue. Maybe if you could just comment on the expectations of the split between GunBroker.com versus the core ammunition business and the growth rates between the two for the year.

Hi, Matt. Thanks for the question. So I would expect a majority of the growth rate to come from our loaded ammunition operations. We obviously do expect growth in our GunBroker.com segment as well, but the majority of the increase will come from the loaded ammunition and our increased capacity coming from our new facility.

And then just on the AMMO business segment, could you talk about the visibility you have into the year in the past? I think you guys have shared some backlog figures, so maybe if you could share any backlog figures, it could be confidence on the numbers that you'll do this year. I know a lot of folks in the industry have talked about demand slowing a bit, but it seems like you guys do have an opportunity to take some share and there are channel fill opportunities. So, maybe you could just speak to where you see the majority of the growth coming from in the AMMO business this year.

Matt, this is Rob Goodmanson. We observe growth, as Rob Wiley mentioned, coming from the ammunition segment. We're anticipating around $230 million from that area, and I believe our backlog is fully sold, which reflects our current capacity.

Okay. So just to clarify, 100% sold within the current capacity. Could you quantify that a bit more for me? Current capacity, I guess, is influx a little bit because you have the Manitowoc facility ramping. And I assume that number may change a bit. But does that mean $230 million in the backlog, or do we have a little bit less than that just given the capacity to deliver a little bit lower than that at the moment?

No, that would be the backlog. But you pretty much answered your own question. There is a little bit of a sliding scale on the move. We anticipate and hope for everything to go smoothly and that all the machines work and capacity increases rapidly. In that case, that backlog number would be a little bit too light.

Okay. And then any revenue in the Ammo segment that is factored in from the military opportunities that you guys have highlighted? Obviously, a lot of stuff is deeper in the funnel in that space, especially with SOT, but I'm curious, have you guys factored any of that into the guide, the $230 million that you mentioned there, Rob, or is that icing on the cake for the year?

That would be an added bonus. We're not including that in our projections; you would see it very late in the process, on the specific targets, as we move quickly through the system.

Okay, got it. And then I’m curious since this is a unique situation where you guys are reporting Q4 toward the end of your first quarter. I'm curious if you could speak to some of the trends over the last quarter and separately between GunBroker and the Ammo segment just for directional modeling for the year, and the ramp up that you've got going in the Ammo segment. I'd assume GunBroker's been relatively steady, but maybe just correct me if I'm wrong there, and maybe any trends you've seen recently with some headlines in the news for GunBroker. And on the Ammo side of the business, just curious about how the ramp transpires, how it has transpired in the first quarter? And then how you expect it to unfold for the rest of the year.

Thanks for the question, Matt. This is Rob Wiley. I think you kind of spoke to the question itself. We see the business continuing strong, and we expect another strong quarter in the first quarter that we're currently in now. We're not going to see a big ramp in revenues until we're into the new facility, but we really expect to see the benefits of that in the third and fourth quarter of this fiscal year, once we've completed the move and have everything up and running the equipment we've already purchased, just installing and hooking up and putting it into production. But we expect to maintain current levels of production until we're up until that point.

Okay. So just to put a finer point on that, I guess in the fourth quarter, it looks like the Ammo business you did about $52 million in revenue. So maybe pulling that run rate forward in the first half of fiscal ‘23 would be the safer bet. And then assuming there's a bit more of a kicker in the third and fourth quarter in terms of revenue from the Ammo side of the business.

Yes. I think that's the right way to think about it.

Okay, got it. And then just I wanted to make sure I understood what you said in terms of the ramp-up and capacity. I think in the release, you guys talked about a billion incremental rounds. My assumption was that the facility was probably going to add more like 0.5 billion rounds in the near term. So maybe just speak to how much capacity we're adding this fiscal year for ‘23, and then over time, if we get to the billion. How soon do we get there? Maybe just so I can help folks model this out for the next year or two?

Yes. I think the way to think of it is once you're fully installed and in the new facility day one that our capacity would essentially double. And our goal is to reach a run rate of a billion rounds a year by the end of this fiscal year. So if that helps, it adds a little bit more color.

Okay. So a total of a billion, not incremental billion. Is that fair to say?

Yes, that's correct.

And then just last one for me, and I'll turn it over. The margin ramp, as we look at production in the Manitowoc facility starting in July, maybe just help folks understand how we should level set on ammunition gross margins. How has that factored into the full year adjusted EBITDA guide that you gave? Is it more of a tale of two halves where the first half is quite a bit lower than back half kind of ramps up? Or should we miss the sort of level setting on the margins for the full year?

No, I think you had it absolutely right. We expect to maintain in the first quarter and most of the second quarter, but as soon as the additional capacity comes online, we're expected to benefit from that in the third and fourth quarters of this fiscal year.

Okay, got it.

The new equipment being put in place?

Yes, absolutely. But I mean, all the vertical integration activities we have coming online, in addition to the production capacity increases. So we're very excited about moving into a new facility and seeing what we can do coming out of that.

Our next question is from Mark Smith with Lake Street Capital Markets.

I wanted to dig in real quick on just kind of cadence of sales, as we think about this next fiscal year. It's safe to assume that September quarter would likely be the lowest just as you transition equipment from the existing facility into the new facility. We will see some slowdown in business in the September quarter, and then June quarter being the next highest and more of that ramp and sales in the second half of the year, thinking specifically about loaded ammunition?

I feel confident that our second quarter will be as good as our first quarter that we just said.

And I want to dig into just gross profit margin a little bit. Certainly a bit lower here than we've seen in the other quarters of this year. Can you talk about cost pressures that you're seeing, especially as we think about components, primers, projectiles, and raw material costs? Anything where you're seeing pressure there?

No, I think the cost profiles are relatively similar to what it has been in the past. I think on our last call, we mentioned that we're really gearing up for the new manufacturing facility, so that we can make a smooth transition in the next couple of weeks when the doors finally open. That's definitely adding to the margin profile we are currently seeing today. Coming to the end of the second quarter, we expect to see the benefit of the new capacity coming online and our production capabilities and vertical integration activities to really improve our margin to a profile that we expect to see given everything we've put into it thus far, so we are very excited for this.

Anything in particular to call out in Q4 that put more pressure on margin?

I would say labor more than anything.

Okay.

The increased labor costs were substantial for our move into our new building to train people. It took a lot more effort than we anticipated to hire quality individuals.

Perfect. And this might be a broad base, but just walk me through what gives you confidence in your guidance for the full year as we think about the top-line. Given it sounds like demand remains strong and backlog continues to be healthy, what gives you confidence in that top-line number? This pertains to both the GunBroker.com and AMMO side. And then on the bottom line, just given inflationary pressures we're seeing today. What gives you the confidence to hit the guidance numbers you gave for this next year?

Let me take a crack at that. The inflation pressures are typically passed on anyway; we have gone through that for the last number of years, so that's not an issue. And that will continue just as it has in every company in our space. We feel confident for two main reasons: A, we're still in the midst of significant civil unrest. We have the sanctions against Russia, which accounts for 20% to 25% of the ammunition sold in the U.S. Plus, we see the U.S. Government essentially telling Lake City they cannot sell into the commercial market. All of these factors are going to be beneficial to this space. We are the only company adding any kind of capacity that allows us to not only sustain but also more than double our production capability. So, do we feel good and confident that the winds are still at our back? The short answer is yes.

Thank you. Our next question is from Edward Reilly of EF Hutton.

Hey, guys. Thanks for taking my question. We are seeing a bit of an increased level of ammunition in stock at retail stores. I was wondering from an industry level, if you could comment on pricing overall and maybe your ability to pivot towards ammunition that still has unmet demand. Are there any types of ammunition?

We are still observing all-time highs in the levels of sales prices, at least from the manufacturing side. Our sales team and production team are very conscious of market trends and continuously assess what the next big sku may be. So, we're attuned to market changes and will adjust our manufacturing as needed to deliver products that our consumers want.

Okay. Got it. And on the GunBroker.com side, could you unpack a little bit for us the initiatives you are undertaking to increase sellers and buyers on the platform?

There are several initiatives underway. As Fred mentioned, we're rolling out a suite of financial products, including credit cards and loyalty programs. These initiatives are designed to ease transactions for both sellers and buyers. Additionally, we are implementing cart functionality to allow users to purchase multiple items at once, which should enhance the shopping experience significantly. For instance, if someone buys a gun, they might also want to purchase cleaning supplies or protective gear; there are substantial margins in those accessories. Ultimately, it's about making the process more user-friendly and credible, which will drive growth in our existing base as well as attract new users. Now, while these features are being developed, they won't launch overnight, as there's a significant amount of technology and effort involved. We have been investing considerable resources into these enhancements to ensure they're executed correctly, and once they are ready, they will be rolled out seamlessly for our users.

Got it. Another question on that, just how are you making potential sellers that aren't on the website aware of these kinds of initiatives?

Some of the initiatives are not yet public because they're not ready for rollout. However, we're actively working with storefronts and manufacturers, signing on new sellers in response to their needs. Manufacturers want access to data about which products are in demand, where they're being sold, and price fluctuations—this information has historically been unavailable to them. For dealers and distributors alike, the information we collect will be invaluable. We believe this data will help us monetize our take rates, as our take rate has seen an increase from 4.6% to 5.1%. These enhancements should boost our take rate conservatively to about 8.5%.

Got it. Thanks for that. Last question for me given the facility is nearly online, how should we think about CapEx going forward?

Thanks for the question. In relation to our new facility and the production coming online with that, most of the capital expenditures to date have already been incurred. Unless we decide to add significant additional capacity going forward, there won't be substantial further capital expenditures. We are really excited to move into the new facility and begin reaping the benefits of our investments.

Thank you. Our next question is from Rob Jost with Invesco.

I'm a little bit new to your story, but I wanted to ask about cash flow. Do you have a general sense for next year with this outlook that you would be able to generate a meaningful set of cash flow going forward, or could you speak about uses of that cash flow?

Thank you for the question. This is Rob Wiley. We do expect our cash flow, at least income and cash flow, to increase quite significantly. As you noted in the 10-K we just reported, we have positive cash flow from operations. A lot of the cash outflows this year were in relation to the addition of GunBroker.com, along with some cash outflows due to our growth. However, as we continue to grow, we will start to generate more cash flow. Also, we are pursuing a credit facility to free up some of our cash that is tied up in our working capital, which will aid us in our growth.

It seems like your inventories went up quite a bit. Is there any unwind in that next year? Or are they levels that you would expect to be characterized as kind of normal?

I believe the growth in our inventory is mainly a result of our rising sales. As our sales continue to increase, I expect our inventory levels to grow. Most of the inventory we currently hold consists of either raw materials or work in progress, so we're not holding many finished goods.

One other note regarding the increase in inventory: our shipping capacity has faced issues due to supply chain constraints. We currently have one dock for shipping and receiving, and our move to a new facility in just over two weeks will greatly enhance our logistics capabilities. Once we transition to the new facility, our operational efficiencies will improve, allowing us to move product more swiftly.

I just got back from our new facility this morning, and it's become extremely cramped in our current building. I'm genuinely impressed by what we've accomplished this last quarter under such challenging conditions to get product out the door.

That dovetails into my other question: when you think about being at full run rate in the new facility, do you have a target margin you're shooting for? Have you discussed that?

For our loaded ammunition product, we have always aimed to maintain a margin higher than 30%. Until we achieve that, we will work diligently to improve our margins.

Our next question is from JD Abouchar with Glass Creek Partners.

A question I had on the e-commerce side. With the sheer size of GunBroker, I think the last time I looked at online statistics, it had around 16 million unique users and ranked twice as high as Bass Pro in terms of website rank. The industry is shifting to direct-to-consumer, which is driving brands to balance traditional channels with a focus on online. What opportunities are available to increase your take rate while also driving both firearm and non-firearm sales to build that platform?

That's one of the points we touched on earlier. Thanks JD. We are indeed making strides by implementing cart capabilities and financial products. A significant aspect of attracting more buyers and sellers involves enhancing the distribution for these manufacturers who may still rely on brick-and-mortar alone. You can analyze numerous successful marketplaces that achieve growth through effective distribution strategies; we have a unique marketplace given our extensive user base and the influx of new users. Therefore, we can monetize the valuable information and systems we are implementing to ensure that GunBroker.com serves as a substantial growth engine.

Just a follow-up question on that. Given Fred's expertise as a premier marketer, what are your overarching plans for future marketing, SEO, and any initiatives to increase traffic to the website, or do you believe the site's strength makes those efforts unnecessary?

You can expect to see some marketing this year. We are actively working on it now. However, previously, our focus was directed toward upgrading our facilities and acquiring new equipment. Now it’s time to ramp up our marketing efforts.

Correct. Increasing technology access and improving user experiences will be integral to our marketing. As Fred mentioned, you’ll see our marketing initiatives kick off this year.

Thank you. Our next question is from Andy Johnson with Royal Capital.

Good afternoon, guys. With one day left in the current quarter, can you give a somewhat narrow range on what the revenue will be?

No.

Okay. Last fall, you said you authorized funds for purchasing shares. Can you comment on whether you've executed that?

We have not. We have invested our cash into unique opportunities this year, and I believe our capital deployments have been profitable and beneficial, as reflected in the results. When the timing is favorable for acquiring stock in the open market, it will be announced.

Got it. When you donate a million rounds of ammunition to Ukraine, how is that accounted for on Ammo’s books?

That's an expense on our books. It would show up in operating expenses.

Assuming you have navigated the regulatory process to qualify to donate, do you expect to receive any paying orders from Ukraine following the recent U.S. government support?

It's possible. Yes, it is possible, but it wasn't an expectation.

And it hasn't happened yet?

No, it hasn't.

Thank you. There are no further questions at this time. I would like to turn the floor back over to management for any closing comments.

Well, I'd like to thank you all for listening today. If you have any other questions, please feel free to reach out to us. If you'd like to talk offline, we’ll be happy to take your call. And again, thank you for your time.

And your support. Have a good day.

This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.