Ladies and gentlemen, thank you for standing by. Good afternoon and welcome to the AMMO, Inc. Fiscal Third Quarter 2023 Earnings Call. At this time, all participants are in a listen-only mode. [Operator Instructions] After today’s presentation, there will be an opportunity to ask questions. [Operator Instructions] Participants on this call are advised that the audio of this conference call is being broadcast live over the Internet and is also being recorded for playback purposes. I would now like to turn the call over to Scott Arnold of CORE IR, the company’s Investor Relations firm. Please go ahead, sir.

Good morning and thank you for participating in today’s conference call. Joining me from AMMO’s leadership team are Fred Wagenhals, Chairman and Chief Executive Officer; Rob Wiley, Chief Financial Officer; and Jared Smith, President and Chief Operating Officer. During this call, management will be making forward-looking statements, including statements that address AMMO’s expectations for future performance or operational results. Forward-looking statements involve risks and other factors that may cause actual results to differ materially from those statements. For more information about these risks, please refer to the Risk Factors described in AMMO’s most recently filed periodic reports on Form 10-K and Form 10-Q, the Form 8-K filed with the SEC today and the company’s press releases that accompanies this call, particularly the cautionary statements in it. Today’s conference call includes non-GAAP financial measures that AMMO believes can be useful in evaluating its performance. You should not consider this additional information in isolation or as a substitute for results prepared in accordance with GAAP. For a reconciliation of this non-GAAP financial measure to net loss, its most directly comparable GAAP financial measure please see the reconciliation table located in the company’s earnings press release. The content of this call contains time sensitive information that is accurate only as of today, February 14, 2023. Except as required by law AMMO disclaims any obligation to publicly update or revise any information to reflect events or circumstances that occur after this call. It is now my pleasure to turn the call over to Fred Wagenhals.

Thanks and I appreciate everyone joining us for our fiscal third quarter 2023 earnings call. I would like to start the call by saying how excited I am to introduce our newest management team member President and COO, Jared Smith to our shareholders. The management team spent a lot of focused time over the past year searching for the right person to join us to help us refine our operations as we moved into our new manufacturing facility at Manitowoc. Jared is the one. And from what I've seen in just the past months since he's came aboard, the board and our management team did a great job in finding someone who will be an integral piece to take this company to the next level of growth. Jared and Rob Wiley, our CFO, will discuss the market environment and our performance in detail across both the manufacturing and marketplace segment of our business, but I did want to comment on a few items before I hand the floor over to my colleagues. We started this company in 2016 with the vision and the mission to innovate and capture a meaningful share of the ammunition market, picking our spots for acquisitions, staying focused on always improving manufacturing operations. All while working to bring our customers the product they desire. We have grown by leaps and bounds in these short seven plus years and I am proud of what we've accomplished, but there is much work left to do, and we now have the team assembled to meet these challenges and are excited about the opportunities that lie before us. Regardless of the political spin we all hear coming out of Washington, the U.S. is already in the throes of a recession, and the inflationary drivers are hitting consumers hard in their…

Thank you, Fred. Good morning, everyone. First, I want to thank the AMMO team for the opportunity to be here as President and COO. I joined the company on January 6 of this year, so I've been in the saddle for a mere 39 days. So, bear with me because we've got quite a bit of ground to cover. I've spent the last 17 years in the firearm and ammunition sector and I've always seen AMMO Inc.’s ammunition and marketplace businesses following the acquisition of GunBroker.com, as best-in-class for their space and potential. What Fred and the team accomplished over the last seven years is truly remarkable. The transformative addition of the GunBroker.com marketplace to the AMMO portfolio certainly made the entire market stand-up and take notice. I ultimately joined this team because of the huge potential of the operations, opportunities to innovate, the ability to bring transformative change, and continue the growth trajectory of this company. I'm excited to share my vision for the company with you, but before we begin, one must understand the current state of the ammunition market, as well as AMMO Inc.'s position in it. For the last two quarters, the industry has seen serious headwinds from its record highs in 2021 and early 2022. Consumer confidence and increased inflations cause an erosion of the customer's wallet for other items such as gas, milk, and bread. While our cost for copper zinc, lead and labor are all up. And ammunition prices on the shelf are down in comparison. We've seen margin compression in almost every sector. The non-vertically integrated manufacturers such as AMMO gets squeezed in the middle. AMMO produces cases, loads, and manufacturers some, but few of its projectiles and none of the primary component. The supply chain for GunBroker and [indiscernible] is more…

Thank you, Jared. Welcome everyone. Let me now review our third quarter financials in more detail. We are facing headwinds in the market today along with the rest of the industry, but remain excited about the new direction of our two segments in upcoming quarters with our marketplace enhancements coming online in the first half of our next fiscal year and the shift in our manufacturing strategy, which will drive profitability. As is observed by the peers within our space, we continue to see margin compression on our ammunition segment. U.S. commercial ammunition market continues to slow from the inflationary impact in global recessionary drivers being felt across most industries. The reduction in sales, higher commodity, and freight costs, along with the increased operating expenses such as the remainder of the one-time legal expenses related to the proxy contention, stock compensation, corporate insurance, and payroll have increased our cost of revenues and operating expenses, resulting in a net loss for the period. To address these increases and as discussed earlier in the call, we plan to recoup cash tied up in our inventory in our quarter ending in March. And [toward] [ph] the direction of our manufacturing operations [indiscernible] and toward the direction of our manufacturing operations the opportunities that provide enhanced profitability opportunities such as premium rights of brass, including our expanded offerings of large caliber brass. Additionally, we continue to push forward on the improvement to our GunBroker.com marketplace, which represent great leveraging opportunities that spring from this incredibly robust site. In this regard, we are currently tracking for the payment suite and cart platform to launch in the first half of our next fiscal year, which we remain reasonably confident will drive growth and profitability to the site. We ended our third quarter with total revenues of…

Thank you. [Operator Instructions] And the first question is from Matt Koranda with Roth Capital. Please go ahead.

Hey, guys. Good afternoon. Just want to start out with the AMMO business. Can you just disentangle for us, sort of the embedded price declines versus volume in that segment in the third quarter? Just curious like, you mentioned demand seems to be an issue, but just also curious sort of, how to think about production at the facility during the quarter? And was there any supply disruption or was it all a demand issue that you're experiencing currently in terms of the decline?

Hey, Matt, this is Jared Smith. First of all, thank you for your question. And I'm going to repeat the question back to make sure I heard it correctly. You're asking about in this past quarter the lack of demand or the lack of volume in sales, was that related to production issues or just pure market issues? Is that correct assumption of your question?

Yes, that's the crux of it. Thanks, Jared.

Fantastic. So, the reality is, it's a mix of both. When you move into any new facility like this new 185,000 square foot facility, there's walls that have to go up. There is racking that has to go in place. Machines have to be set, laid, and turned back on. So, is there an impact from the move? Absolutely. Was there an impact from the market? Absolutely. And sheer demand on 9 and [.223] [ph] as I said in the prior recordings, the volumes of 9 and [.223] [ph] in relation to our total capacity was affected by the market, but the real reality is that we didn't have the primers, we didn't have the powder, and we didn't have the fundamentals to shift to these other higher margin plays that we will be tuning our factory too over the next 3 months to 6 months.

Okay, got it. That's helpful, Jared. Curious also if you could just maybe speak to the changeover that you've alluded to in terms of capacity? It sounds like you're going to be going after more center fire rifle rounds, more casings in the mix on a go forward basis. Maybe just draw us a path if you could for the next couple of quarters in terms of how the capacity cuts over, what to expect as we kind of, obviously you've embedded this into the fourth quarter, but I'm just curious over the next, call it, two to three quarters, how we should expect capacity and production to trend within the AMMO business as you cut over to the, sort of more differentiated rounds and some of the more casing [indiscernible] mix that you've alluded to?

You can't compare historic AMMO production in its existing factory to what we have going forward. The other very interesting fact about this factory is that we have the ability to change over from 9 millimeter to 300 blackout on almost every one of our lines. That is a unique capability that does not exist in this market. So, our ability to draw off of and sell premium rifle cases in both short, long action is truly unique. And as I alluded to earlier, we already in the first 30 days sold out of our entire low rifle action capacity. So, what you'll see in the course of April, May, I'm sorry, February, March, April is that we will be moving off of our inventories that we have a heavy commodities products that have already been built and are in the process of being loaded and then we'll shift that production capacity to selling brass. So, instead of losing 5%, 10% margins, we'll be gaining 30% margins. You will see a reduction in the top line, but you'll see a growth in the bottom line and that's where the focus is.

Okay, got it. And then maybe just could you just clarify how you guys think about market share whether that be with OEMs or whether that be with retailers. Just curious how to think about – you guys have talked about retailers have lower purchase volumes, have you lost any customers over the last couple of quarters or are they just essentially downsizing volume across the board? How do you think about market share and what you're defending there currently and over the next couple of quarters?

They've downsized across the board. They've also realized that they are not profitable in these positions around commodity products. Our position on the U.S. market is less than 1% total market share for the ammunition we manufacture. There is this [massive] [ph] total market share for the ammunition we manufacturer. There is this massive space out there and the trend line is for premium rifle, which is really what this factory was built around. The facility in Wisconsin is a rifle case manufacturer with the ability to produce pistol cases. And we match that brass capacity with loading capacity, but the beauty of our story going forward is that we don't have to produce the full capacity in AMMO. Our goal is to support our industrial partners, the large OEM manufacturers out there. The goal is for us to find the niche products by following the trend lines that we see within GunBroker to be able to orient our production facility around those opportunities. What are those opportunities? It's rimmed cartridges like [.44 mag and .45 colt] [ph]. It's collision across capacities that we're seeing trend very, very heavy right now due to impacts from the European theater. We are able to follow those because we don't have dedicated lines to 9 and [.223] [ph]. We have completely flexible lines dedicated to a range of calibers from 9 to [300 blackout] [ph]. It's our ability to meet that new demand because we don't produce [projectile] [ph], I don't have to turn on 9 millimeter or turn off 9 millimeter projectile machines that make up a third of our factory. When we can't sell AMMO at high margins, we'll sell brass at high margins.

Got it. Super clear. And then just maybe if you could just finally stitch that together for us either Jared or Rob. Just in the way we should be thinking about the path forward for gross margins, especially for the manufacturing business, it looks like GunBroker is relatively rocksteady on the margin front. So, really curious about the core manufacturing business. How do we think about getting back to call it that mid-to-high 20% gross margin?

Every time we sell a piece of brass, we make anywhere between 20% and 40% margin and even more on the – as you go up in caliber, the higher the margin it is. So, .338 Norma Magnum, which we have capacity for, .338 Lapua, .50 BMG, those are 50% to 60% margin plays. So, we don't have to load. We can sell brass. And when we see opportunities to load, we'll fill those niche opportunities through our existing shelves. The goal is that in the next 180 days, we will completely turn this ship over to focus on profitability, to focus on throughputs based around profitability. I go into next week with the team here and we are putting down our new budget and our forecast, and I'll have a lot more to say on this in the following weeks, but we're – because I've only sat in this seat for 39 days, there's still a lot of work to be done.

Fair enough. I appreciate all the commentary and I'll leave it there guys. Thanks.

And the next question is from Edward Riley from EF Hutton. Please go ahead.

Hi, guys. Thanks for taking my question. Last quarter, you cited expectation of strong demand from the export market, wondering if this is still the case today?

It is. It's the case today that we're seeing stronger demand from the export market. And what it's doing? It's actually diverting the larger – the larger manufacturers in this space for small [indiscernible], especially Lake City, to focus on those export opportunities, which is freeing up capacity in space, both domestically and internationally. Because their lines are focused on once again high volume, high output around [556, 762 by 51 and in some cases 50] [ph].

Okay, great. And then just on the comments around the long rifle capacity already being sold out over the past 30 days, wondering if you could maybe give us any details around the customer mix there?

It's very, very heavy towards OEM, large players that are now seeing the shift and are coming back to [indiscernible] for the quality that they've known and that they’ve bought in the past. When we say long action, that's [270, 30 odd 6, .338 Norma, .300 Win Mag, 7 millimeter Rem Mag] [ph], things where we have tremendous margins. And those are players that come to this market. They want a strong partner, an industrial partner that can help them meet their demands year-in, year-out. So, it's not a one-time customer with bad credit. That is non-strategic to our business.

Okay, got it. Thank you.

And the next question is from Mark Smith from Lake Street. Please go ahead.

Hi, guys. I've got a handful of questions here. Jared, just want to, kind of stay on the AMMO piece first. Just as – how are you looking at channel inventory domestically today? Obviously, we see issues in a lot of [.9 mill and .233, .556] [ph], are you seeing the increase in other center fire rifle even some of the specialty type rounds today, walk us through kind of where that channel inventory is and potentially how long it takes to clean up some of these calibers that have gotten too heavy?

I think the calibers that this market is overly focused on is [.9 and .223] [ph]. And they've been overly focused on it with every cyclical market that we've seen over the last 10 years. There are still really bright spaces in the market, as I said earlier, for [.44 mag, .45 long colt] [ph], all your rimmed cartridges, you still see really strong demand in this new space of 6 millimeter art, [6.5 PRC, 7 millimeter PRC] [ph], .338 Norma Magnum. Those channels are yet to be filled. And that's where we'll end up tuning our factories and our capacities towards. When you say in terms of sitting inventories, yes, there's inventory coming back on the shelf and that's due to an inflationary and recessionary effect, just total market share. But those total dollars in market share is once again primarily in that high commodity space. And we're not too concerned about those volumes sitting in the retail space because we will divert our production elsewhere.

Okay. And as we think about shifting over to some of these other rounds, walk us through, kind of how you weigh just shifted purely over to brass and selling brass into other OEMs to kind of hit some of this demand versus shifting lines over to [6 by PRC] [ph] or whatever the calibers maybe, kind of how you weigh that decision making?

Our decision making is based upon what we call strategic account management. Is that we are going to segment the marketplace. We're going to find the clients that have been underserved in the last year that are high creditworthy clients that we have a direct relationship and we will continue to feed those clients time and time again. When we look at things like 6.5 Creedmoor and the trend line for 6.5 Creedmoor, there are six other calibers that are coming to the market that we can then divert our focus away from these areas that are getting oversaturated and that's how we look at this space. Did that answer your question?

That does. The other piece that I just want to look rearview mirror a little bit on maybe why some of the shift wasn't done sooner? And walk me through, was it maybe just being slower on shift, some of it having the new plant or was it that you couldn't get perhaps some of the projectiles of powder that you needed to build some of these other rounds?

We couldn't get the powders to go after those other rounds. We couldn't get enough supply of primers to go after those opportunities. We couldn't get our factory up fast enough. And we did it in 13 months by the way, but we couldn't get the factory up fast enough and tuned and the [annealing lines] [ph] set up and the operations and the staffing reorganized. It was done in record pace time, but once again, that's never fast enough. But we're here now and we're shifting and we're pivoting.

Okay. And then just as we think purely about brass casing manufacturing, walk us through, kind of added capacity in the new plant and maybe where you're at today on what's your meeting, as far as your capacity just as we look purely at casings?

Historically, in the past, the maximum cases that ever came out of any previous facility related to AMMO, the maximum cases that ever came out of any previous facility related to AMMO within that 350 million to 400 million space The capacity that's available out of this plant exceeds 750 million in our current shift operation. So, we can double the capacity of cases. We have ample manufacturing and loading space to go after these opportunities. It's not going to be for a lack of capacity going forward.

Okay. Great. And you guys talked – oh, go ahead, Jared.

No, I was just saying the beauty of all this and what I didn't realize until really coming in the door and sitting down with the analytics team is that we can tune our forecast on a weekly basis based upon the trend lines that we're seeing coming out of GunBroker. It is such a data rich environment that allows us as manufacturers to make better decisions on where we're making our next investment.

Okay. And do you have more flexibility in shifting production within brass casing? Is that pretty easy if you see for instance more demand on some straight wall brass casing from other OEMs? Are you able to shift and hit that pretty quickly or is there maybe more tooling and dyes that are needed to shift some of that over?

There's always tooling and dyes that we need to invest in as new calibers evolve, but the breadth of the tooling and dye sets are already there. There's not massive CapEx that we have to put into place to make this profitable. It's existing and we can go, like I said earlier, we can go from [9 to 300 blackout] [ph] on the same machine. It's really unheard of in this industry.

Good. And then just GunBroker sounds like continues to do well. Walk us through anymore that you can end up today on where you're at, as far as learning from the demand trends that you're seeing at GunBroker and shifting that over to some of the decision-making in manufacturing ammunition.

Look, this is the piece that really baffles my mind as I came into this space is, the lack of awareness of where a GunBroker is today and where it's going within the next six months. This single transaction that's capped by a single transaction because of the way the development has been done and the ability to go to a cart is huge for a GunBroker. And by that shift of seeing where not only people are buying a 7 millimeter PRC rifle, we're seeing where they're also investing their dollars. So, we can take that data work with our industrial partners, work within our own factories, and build those relationships with those marketers and those people that are going to market to go, I want to put a package together of [7 millimeter PRC] [ph] with the latest holster or the next firearm manufacturer. That's the kind of data and the ability for us to be able to leverage going forward.

I think the last question for me and maybe Rob, this might be best for you. Any breakdown you can give us as we look at your top line guidance and I realize it's just one quarter, but any additional info you can give us on what the GunBroker sales maybe are as a breakout within your guidance, as well as any shifts even though they may be small within, kind of [casing sales] [ph] that's built into the guidance for March quarter?

Yes. Thank you, Mark. This is Rob Wiley. Typically, we don't give too granular on our guidance, but just for looking at Q4, sure you can come up with the remainder of the revenue that we're forecasting there, but we really think of the split of 60% of the ammunition casing side of the business and the remainder of 40% from the GunBroker platform.

Perfect. Thank you, guys.

Ladies and gentlemen, this concludes our question-and-answer session. I would like to turn the conference back over to Fred Wagenhals for any closing remarks.

Yes. Thank you and I know the investors can't see it from where you're sitting, but there's been a big change in this company since Jared came onboard. In 40 days, we've made a lot of progress just watch and see where we go over the next 4 months to 6 months. Thank you very much. Have a good day gentlemen.

And thank you, sir. The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.