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 have a material, adverse effect on its business, operating results, and financial condition.
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
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. Several state legislatures
have recently enacted laws specifically designed to circumvent the PLCAA. These laws define a firearm industry member’s failure
to implement undefined “reasonable controls” to prevent criminal misuse of firearms as a public nuisance. This type of law
is novel and untested, but if successfully used against the Company, could have a material adverse impact on the Company. If the PLCAA
is repealed or continuing 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, and a number of new laws have been enacted at the federal,
state, and local level. Enacted legislation and proposed bills are numerous and extremely varied, but many seek to limit magazine capacity,
restrict or ban the sale and, in some cases, the ownership of various
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types of firearms, or ban commonly owned firearms
with certain features. Other legislation seeks to require new technologies, such as microstamping and so-called “smart gun”
technology, which are not proven, reliable or feasible.
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 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, claimed unfair trade practices, 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 20 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 the Company’s business, operating results, and financial condition. The potential volatility of these relationships may also
impact the Company’s decision making regarding the appropriate allocation of capital to be used for activities such as internal
investment, share repurchases, and potential acquisitions.
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The Company’s insurance may
be insufficient to protect us from claims or losses.
The Company maintains insurance coverage with
third-party insurers and through a wholly-owned captive insurance company with respect to product liability claims, which the Company
established in 2024. However, not every risk or liability is or can be protected by insurance, and, for those risks it insures, the limits
of coverage it purchases, or that are reasonably obtainable in the market, or the funding level of the Company’s wholly-owned captive
insurance company 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 the Company at a reasonable cost, if at all. If liability claims or
losses exceed the Company’s current or available insurance coverage, its business 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 Company and/or 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 the Company’s
independent distributors is critical to its success.
Over 90% of the Company’s sales are made
to 13 federally licensed, independent wholesale distributors. The Company reviews its distributors’ financial statements and has
credit insurance for many of them. However, the Company’s credit evaluations of distributors and credit insurance may not be completely
effective, especially if higher interest rates continue to exact a financial strain. If one or more independent distributors experience
financial distress or liquidity issues, the Company’s sales could be adversely affected and the Company may not be able to collect
its accounts receivable on a timely basis, which would have an adverse impact on its operating results and financial condition.
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
the Company’s employees or contractors could cause the Company to lose customers and could have a significant adverse impact on
its business and reputation.
Misconduct, fraud or other improper activities
by the Company’s employees or contractors could have a material adverse impact on its 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.
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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 the Company believes its record of designing, manufacturing,
and selling high-quality products demonstrates its commitment to safety and quality, the Company has 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 the Company has shipped into the market, any future recall or safety bulletin could harm its reputation, cause
the Company to lose business, and cause the Company to incur significant support and repair costs.
The ability
to develop and produce new products is important to the Company’s success.
The Company has a long
history of designing, engineering, and manufacturing innovative new products. These new products help to drive growth, excitement, and
profitability and have historically allowed the Company to refrain from having to extend some of the aggressive promotions, discounts,
rebates, and the extension of payment terms offered by its competitors. While the Company believes it has a strong record of designing,
manufacturing, and selling new, high-quality products, failure to continue to do so in the future could harm its reputation, cause the
Company to lose business, and cause the Company to incur significant promotional costs, which would have an adverse impact on its operating
results and financial condition.
The Company may be impacted by the
actions of its competitors.
The Company remains focused on the long-term goal
of creating shareholder value. Its disciplined pricing and promotion strategy may not always benefit current period sales and profitability,
but endeavors to enhance its long-term performance and promote consistency throughout the distribution channel. Allowing both independent
distributors and retailers to confidently invest in its inventory is essential to the Company’s long-term success and leadership
in the volatile firearms market. However, the aggressive promotions, discounts, rebates, and the extension of payment terms offered by
its competitors could negatively impact the Company’s market share, which would have an adverse impact on its operating results
and financial condition.
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, Hebron, Kentucky, 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.
The Company relies
on its information and communications systems in its operations. Security breaches and other disruptions could adversely affect its business
and results of operations.
Cybersecurity threats are significant and evolving
and include, among others, malicious software, attempts to gain unauthorized access to data, ransomware, social engineering technologies
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
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addition to security threats, the Company is also
subject to other systems failures, including network, software or hardware failures, whether caused by the Company, third-party service
providers, cloud platforms, software vendors, vulnerabilities, natural disasters, power shortages, terrorist attacks or other events.
The unavailability of the Company’s 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 Company operations, lead to financial losses from remedial
actions, require significant management attention and resources, expose the Company to legal claims, regulatory investigations, penalties,
compliance costs, and negatively impact the Company’s reputation among its customers and the public, which could have a negative
impact on the Company’s 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.
The
Company relies primarily on third parties for transportation of the products it manufactures as well as delivery of its raw materials.
Any increase in the cost
of the transportation of the Company’s 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, increased restrictions on the transportation of firearms,
may adversely affect its results of operations. If any of these providers were to fail to deliver raw materials to the Company in a timely
manner, the Company may be unable to manufacture and deliver its products in a timely manner. In addition, if any of these third parties
were to cease operations or cease doing business with the Company, the Company may be unable to replace them at a reasonable cost. And
such failure of a third-party transportation provider could harm the Company’s reputation, negatively affect its customer relationships
and have a material adverse effect on its financial position and results of operations.
Availability
and retention of the Company’s labor force, especially its key management, is critical to the success of the Company.
The
Company has observed an overall tightening and increasingly competitive labor market, which could inhibit its ability to recruit
and retain the employees it requires and could lead to increased costs, such as additional overtime to meet demand and increased wages
and benefits to attract and retain employees. The Company relies on the knowledge, experience, and leadership skills of its senior management
team. The Company’s senior executives are generally not bound by employment agreements. The loss of the services of one or more
of the Company’s senior executives or other key personnel could have a significant adverse impact on its business .
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The Company’s business may be adversely
affected by tariffs, trade sanctions or similar government actions.
The actual or threatened imposition of tariffs, sanctions
or other restrictions on goods exported from the United States or imported into the United States, or countermeasures imposed in response
to such government actions, could increase the Company’s cost of products sold or reduce its ability to sell products globally,
which may adversely affect its operating results and financial condition. While the Company sources the majority of its materials domestically,
the imposition of tariffs could lead to increased demand and pricing on domestic materials, which could result in an increase to the Company’s
cost of products sold and a reduction in its gross margin. So far, these new tariffs and trade policies have not had a significant impact
on the Company’s business operations and financial results. However, there is no guarantee that the Company can avoid the impact
of tariff and related economic effects in the future, and these trade measures and retaliations may directly impair its business by increasing
trade-related costs or disrupting established supply chains.
The Company’s
Rights Plan could discourage, delay, or prevent a change in control over us and may affect the trading price of our Common Stock .
On October 14, 2025, the Company’s Board
of Directors approved the adoption of the Rights Plan and authorized and declared a dividend of one common stock purchase right (a “Right”)
for each share of Common Stock outstanding at the close of business on October 24, 2025 and that may become outstanding between such date
and the Distribution Date (as defined in the Rights Plan) or the earlier Expiration Date (as defined in the Rights Plan). If the Rights
become exercisable, all holders of Rights (other than the person or group triggering the Rights Plan, whose Rights would become void)
will be entitled to acquire shares of Common Stock at a 50% discount to the then-current market price or the Company may exchange each
Right held by such holders for one share of Common Stock. The Rights Plan may discourage, delay, or prevent a change of control or acquisition
of the Company, even if such action may be considered beneficial by some stockholders of the Company, and could limit the price that investors
would be willing to pay in the future for the Company’s Common Stock. The foregoing summary of the Rights Plan is qualified in its
entirety by the Rights Plan.
The Company’s
business could be negatively affected as a result of actions of activist stockholders, and such activism could adversely affect the strategic
direction and business results of the Company.
Publicly traded companies are increasingly subject
to activist stockholders advocating corporate actions such as operational, governance, management or social changes, financial restructurings,
increased borrowings, special dividends, stock repurchases, or sales of assets or entire companies to third parties or to the activist
stockholders themselves. The Company has been and may continue to be subject to actions from activist stockholders or others that may
not align with its business strategies or may not be in the best interests of all of its stockholders. Actions taken by the Company’s
Board of Directors and management in seeking to maintain constructive engagement with certain stockholders may not be successful to prevent
the occurrence of stockholder activist campaigns or changes that adversely affect the strategic direction or business results of the Company.
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