Item 1A. Risk Factors
ITEM 1A—RISK FACTORS
The Company’s operations could be affected by
various risks, many of which are beyond its control. Based on current information, the Company believes that the following identifies
the most significant risk factors that could adversely affect its business. Past financial performance may not be a reliable indicator
of future performance and historical trends should not be used to anticipate results or trends in future periods.
In evaluating the Company’s business, the following
risk factors, as well as other information in this report, should be carefully considered.
Changes in government policies and firearms legislation
could adversely affect the Company’s financial results.
The sale, purchase, ownership, and use of firearms
are subject to thousands of federal, state and local governmental regulations. The basic federal laws are the National Firearms Act, the
Federal Firearms Act, and the Gun Control Act of 1968. Federal law generally prohibits the private ownership of fully automatic weapons
manufactured after 1986 and places certain restrictions on the interstate sale of firearms unless certain licenses are obtained. The Company
does not manufacture fully automatic weapons and holds all necessary licenses under these federal laws. If the scope of the National Firearms
Act is expanded to regulate firearms currently regulated by the Gun Control Act, it could make acquisition of commonly owned and used
firearms more expensive and complicated for consumers, which could have a material adverse impact on demand for Company products. Several
states currently have laws in effect similar to the aforementioned legislation.
In 2005, Congress enacted the Protection of Lawful
Commerce in Arms Act (“PLCAA”). The PLCAA was enacted to address abuses by cities and agenda-driven individuals who wrongly
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sought to make firearms manufacturers liable for legally manufactured and lawfully sold products if those products were later used in
criminal acts. The Company believes the PLCAA merely codifies common sense and long standing tort principles. If the PLCAA is repealed
or efforts to circumvent it are successful and lawsuits similar to those filed by cities and agenda-driven individuals in the late 1990s
and early 2000s are allowed to proceed, it could have a material adverse impact on the Company.
Currently, federal and several states’ legislatures
are considering additional legislation relating to the regulation of firearms. These proposed bills are numerous and extremely varied,
but many seek either to restrict or ban the sale and, in some cases, the ownership of various types of firearms. Other legislation seeks
to require new technologies, such as microstamping and so-called “smart gun” technology, which are not proven, reliable or
feasible. Such legislation became effective in California in 2013, which has limited our ability to sell certain products in California.
If similar legislation is enacted in other states, or at the Federal level, it could effectively ban or severely limit the sale of affected
firearms. There also are legislative proposals to limit magazine capacity.
The Company believes that the lawful private ownership
of firearms is guaranteed by the Second Amendment to the United States Constitution and that the widespread private ownership of firearms
in the United States will continue. However, there can be no assurance that the regulation of firearms will not become more restrictive
in the future and that any such restriction would not have a material adverse effect on the business of the Company. Numerous bills regulating
the ownership of firearms have been proposed at the state and federal levels, and these bills propose a wide variety of restrictions including,
for example, limiting the number of firearms that may be purchased in a specified time, increasing the age for ownership, imposing additional
licensing or registration requirements, creating additional restrictions on certain, common firearm features, and levying new taxes on
firearms and/or ammunition.
The Company’s results of operations could
be further adversely affected if legislation with diverse requirements is enacted .
With literally thousands of laws being proposed at
the federal, state and local levels, if even a small percentage of these laws are enacted and they are incongruent, the Company could
find it difficult, expensive or even practically impossible to comply with them, impeding new product development and distribution of
existing products.
The COVID-19 pandemic could have a significant
adverse impact on the Company’s operations, financial results, cash flow, and financial condition.
The COVID-19 pandemic created significant uncertainty
and adversely impacted many industries throughout the global economy. Thus far, the Company has been able to mitigate the impact of COVID-19
through its proactive measures. The extent to which it impacts the Company’s operations, financial results, cash flow, and financial
condition is difficult to predict and dependent upon many factors over which the Company has no control. These factors include, but are
not limited to, the duration and severity of the pandemic; government restrictions on businesses and individuals; potential significant
adverse impacts on the Company’s employees, customers, suppliers, or service providers; the impact on U.S. and global economies
and the timing and rate of economic recovery; and potential adverse effects on the financial markets, any of which could negatively impact
the Company.
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The Company’s results of operations could be adversely affected
by litigation.
The Company faces risks arising from various asserted
and unasserted litigation matters. These matters include, but are not limited to, assertions of allegedly defective product design or
manufacture, alleged failure to warn, purported class actions against firearms manufacturers, generally seeking relief such as medical
expense reimbursement, property damages, and punitive damages arising from accidents involving firearms or the criminal misuse of firearms,
and those lawsuits filed on behalf of municipalities alleging harm to the general public. Various factors or developments can lead to
changes in current estimates of liabilities such as final adverse judgment, significant settlement or changes in applicable law. A future
adverse outcome in any one or more of these matters could have a material adverse effect on the Company’s financial results. See
Note 21 to the financial statements which are included in this Annual Report on Form 10-K.
The Company relies upon relationships with financial
institutions.
The Company utilizes the services of numerous financial
institutions, including banks, insurance carriers, transfer agents, and others. Anti-gun politicians, gun-control activists, and others
may target these institutions and attempt to pressure them into ceasing to do business with the Company, or to use financial relationships
to impose unacceptable and improper restrictions on the Company’s business, which could have a material adverse impact on our business,
operating results, and financial condition.
Our insurance may be insufficient to protect us from claims or losses.
We maintain insurance coverage with third-party insurers.
However, not every risk or liability is or can be protected by insurance, and, for those risks we insure, the limits of coverage we purchase
or that are reasonably obtainable in the market may not be sufficient to cover all actual losses or liabilities incurred. Moreover, there
is a risk that commercially available liability insurance will not continue to be available to us at a reasonable cost, if at all. If
liability claims or losses exceed our current or available insurance coverage, our business and prospects may be harmed.
The Company’s results of operations could
be adversely affected by a decrease in demand for Company products.
If demand for the Company’s products decreases
significantly, the Company would be unable to efficiently utilize its capacity, and profitability would suffer. Decreased demand could
result from a macroeconomic downturn, or could be specific to the firearms industry as a result of social, political, or other factors.
If the decrease in demand occurs abruptly, the adverse impact would be even greater.
The financial health of our independent distributors is critical to
our success.
Over 90% of our sales are made to 15 federally licensed,
independent wholesale distributors. We review our distributors’ financial statements and have credit insurance for many of them.
However, our credit evaluations of distributors and credit insurance may not be completely effective, especially if interest rate increases
continue to exact an additional financial strain. If one or more independent distributors experience financial distress or liquidity issues,
our sales could be adversely affected and we may not be able to collect our accounts receivable on a timely basis, which would have an
adverse impact on our operating results and financial condition.
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The Company must comply with various laws and regulations
pertaining to workplace safety and environment, environmental matters, and firearms manufacturing.
In the normal course of its manufacturing operations,
the Company is subject to numerous federal, state and local laws and governmental regulations, and governmental proceedings and orders.
These laws and regulations pertain to matters like workplace safety and environment, firearms serial number tracking and control, waste
disposal, air emissions and water discharges into the environment. Noncompliance with any one or more of these laws and regulations could
have a material adverse impact on the Company.
Misconduct of our employees or contractors could
cause us to lose customers and could have a significant adverse impact on our business and reputation.
Misconduct, fraud or other improper activities by
our employees or contractors could have a material adverse impact on our business and reputation. Such misconduct could include the failure
to comply with federal, state, local or foreign government procurement regulations, regulations regarding the protection of personal information,
laws and regulations relating to antitrust and any other applicable laws or regulations.
Product quality and performance is important
to the Company’s success.
The Company has a long history
of producing rugged, reliable firearms for the commercial market. While we believe our record of designing, manufacturing, and selling
high-quality products demonstrates our commitment to safety and quality, we have occasionally identified design and/or manufacturing issues
with respect to some firearms and, as a result, issued a product safety bulletin or initiated a product recall. Depending upon the volume
of products we have shipped into the market, any future recall or safety bulletin could harm our reputation, cause us to lose business,
and cause us to incur significant support and repair costs.
Business disruptions at one of the Company’s
manufacturing facilities could adversely affect the Company’s financial results.
The Newport, New Hampshire, Prescott, Arizona, Mayodan,
North Carolina, and Earth City, Missouri facilities are critical to the Company’s success. These facilities house the Company’s
principal production, research, development, engineering, design, and shipping operations. Any event that causes a disruption of the operation
of any of these facilities for even a relatively short period of time could have a material adverse effect on the Company’s ability
to produce and ship products and to provide service to its customers.
We rely on our information and communications systems
in our operations. Security breaches and other disruptions could adversely affect our business and results of operations.
Cyber-security threats are significant and evolving
and include, among others, malicious software, attempts to gain unauthorized access to data, and other electronic security breaches that
could lead to disruptions in mission critical systems, unauthorized release of confidential or otherwise protected information and corruption
of data. In addition to security threats, we are also subject to other systems failures, including network, software or hardware failures,
whether caused by us, third-party service providers, natural disasters, power shortages, terrorist attacks or other events. The unavailability
of our information or communications systems, the failure of these systems to perform as anticipated or any significant breach of data
security could cause loss of data, disrupt our operations, lead to financial losses from remedial actions, require significant management
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attention and resources, and negatively impact our reputation among our customers and the public, which could have a negative impact on
our financial condition, results of operations and liquidity.
The lack of available raw materials or component
parts could disrupt or even cease the Company’s manufacturing operations. Even if manufacturing operations are not disrupted, increased
costs of raw materials and component parts could adversely affect the Company’s financial results.
Third parties supply the Company with various raw
materials for its firearms and castings, such as fabricated steel components, walnut, birch, beech, maple and laminated lumber for rifle
stocks, wax, ceramic material, metal alloys, various synthetic products and other component parts. There is a limited supply of these
materials in the marketplace at any given time, which can cause the purchase prices to vary based upon numerous market factors. If market
conditions result in a significant prolonged inflation of certain prices or if adequate quantities of raw materials cannot be obtained,
the Company’s manufacturing processes could be interrupted and the Company’s financial condition or results of operations
could be materially adversely affected.
We rely primarily on third
parties for transportation of the products we manufacture as well as delivery of our raw materials.
Any increase in the cost
of the transportation of our raw materials or products, as a result of increases in fuel or labor costs, higher demand for logistics services,
consolidation in the transportation industry or otherwise, may adversely affect our results of operations. If any of these providers were
to fail to deliver raw materials to us in a timely manner, we may be unable to manufacture and deliver our products in a timely manner.
In addition, if any of these third parties were to cease operations or cease doing business with us, we may be unable to replace them
at a reasonable cost. And such failure of a third-party transportation provider could harm our reputation, negatively affect our customer
relationships and have a material adverse effect on our financial position and results of operations
The integration of Marlin
branded firearms may be more difficult than anticipated.
If we are unable to execute
our strategy related to the acquisition of Marlin assets and we are not able to manufacture Marlin branded firearms to the planned level
of quality, quantity, cost effectiveness, or timeliness as planned, our financial condition, results of operations, and reputation would
suffer.
Availability and retention
of our labor force, especially our key management, is critical to the success of the Company.
We
have observed an overall tightening and increasingly competitive labor market, which could inhibit our ability to recruit and retain the
employees we require and could lead to increased costs, such as additional overtime to meet demand and increased wage rates to attract
and retain employees. We rely on the knowledge, experience, and leadership skills of our senior management team. Our senior executives
are not bound by employment agreements. The loss of the services of one or more of our senior executives or other key personnel could
have a significant adverse impact on our business .
ITEM 1B—UNRESOLVED STAFF COMMENTS
None
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Text extracted from the filing as submitted to EDGAR. Formatting, tables and exhibits are simplified for reading; the original document is authoritative for anything you rely on.