EX-99 21 aout-ex991_11.htm EX-99.1 aout-ex991_11.htm

 

Exhibit 99.1

[●], 2020

Dear Smith & Wesson Brands, Inc. Stockholder:

On November 13, 2019, Smith & Wesson Brands, Inc., or SWBI, (then called American Outdoor Brands Corporation), announced its plan to spin-off its outdoor products and accessories business, or the Separation, to American Outdoor Brands, Inc., or AOUT (then called American Outdoor Brands Spin Co.), a newly formed wholly owned subsidiary formed in anticipation of the Separation. In connection with the Separation, AOUT will become an independent, publicly traded company holding, directly or indirectly through its subsidiaries, the assets and legal entities, subject to any related liabilities, associated with the outdoor products and accessories business of SWBI.  The Separation is expected to become effective on [●], 2020.

The Separation is subject to conditions described in the enclosed information statement. Subject to the satisfaction or waiver of these conditions, the Separation will be completed by way of a pro rata distribution, or the Distribution, of all the outstanding shares of AOUT common stock to the stockholders of record of SWBI as of the close of business on [●], 2020, the record date for the Distribution, or the Record Date. Each SWBI stockholder of record will receive one share of AOUT common stock, $0.001 par value, for every four shares of SWBI common stock, $0.001 par value, held by such stockholder as of the close of business on the Record Date. The distribution of these shares will be made in book-entry form, which means that no physical share certificates will be delivered. At any time following the consummation of the Distribution, stockholders may request that their shares of AOUT common stock be transferred to a brokerage or other account. No fractional shares of AOUT common stock will be delivered. The Distribution Agent for the Distribution will, instead, aggregate fractional shares into whole shares, sell the whole shares in the open market at prevailing prices, and distribute the net cash proceeds from the sales pro rata to each stockholder that would otherwise have been entitled to receive a fractional share in connection with the Distribution.

SWBI expects to receive an opinion from counsel to the effect that, among other things, the transfer of the assets and legal entities, subject to any related liabilities, associated with the outdoor products and accessories business of SWBI to AOUT, or the Transfer, and the Distribution will qualify as a transaction that is tax-free for U.S. federal income tax purposes, except to the extent of any cash received in lieu of fractional shares. You should consult your own tax advisor as to the particular tax consequences of the Distribution, including potential tax consequences under state, local, and non-U.S. tax laws.

The Distribution does not require SWBI stockholder approval, and you do not need to take any action to receive your shares of AOUT common stock in connection with the Distribution. Following the consummation of the Distribution, you will own common stock in both SWBI and AOUT. SWBI common stock will continue to trade on the Nasdaq Global Select Market under the ticker symbol “SWBI,” and AOUT has applied to have its shares of common stock listed on the Nasdaq Global Market under the ticker symbol “AOUT.”

The enclosed information statement, which we are mailing to all SWBI stockholders as of the close of business on the Record Date, describes the Separation in detail and contains important information about AOUT, including its historical combined financial statements. We urge you to read this information statement carefully.


We want to thank you for your support of SWBI, and we look forward to your continued support in the future.

Sincerely,

 

 

Mark P. Smith

Co-President and Co-Chief Executive Officer

Smith & Wesson Brands, Inc.

 

 

Brian D. Murphy

Co-President and Co-Chief Executive Officer

Smith & Wesson Brands, Inc.

 


[●], 2020

Dear Future American Outdoor Brands, Inc. Stockholder:

On behalf of American Outdoor Brands, Inc., it is my great privilege to welcome you as a stockholder of our company. Following our separation from Smith & Wesson Brands, Inc., we will operate as an independent, publicly traded and growth-oriented provider of quality outdoor products and accessories for hunting, fishing, camping, shooting, personal security and defense, and rugged outdoor enthusiasts.

We strive every day to provide high-quality, innovative products and brands that resonate strongly with the activities and passions of our consumers. We focus intently on our brands and the operation of our business and have organized our creative, product development, sourcing, and e-commerce teams into four brand lanes, each of which focuses on one of four distinct consumer verticals: Marksman, Defender, Harvester, and Adventurer.  These brand lanes are constructed around defined consumer types, and each brand lane is comprised of agile marketing, creative, and product teams that enable us to achieve a full spectrum of targeted growth initiatives by brand.  Importantly, each brand lane is supported by professionals who are passionate, outdoor enthusiasts in their own rite.  It is their significant expertise, combined with our experienced and entrepreneurial leadership team, that has fueled our ability to build a portfolio of 20 outdoor brands, many of which serve as lifestyle brands for our growing base of customers.

With this focused structure in place, we intend to pursue a growth strategy that includes the organic development of a stream of innovative new and differentiated rugged outdoor products that drive customer satisfaction and loyalty, accompanied by acquisitions that financially and strategically complement our business.  We will focus on cultivating and enhancing our direct-to-consumer relationships through our digital platform, and we will support that customer experience with a robust supply chain capable of meeting our exacting efficiently, quality, cost, and delivery requirements.  We believe this strategy will allow us to expand the size of our addressable market by appealing to new and larger consumer audiences in new product categories outside the rugged outdoor market.

We invite you to learn more about our company by reading the enclosed information statement, which details our strategy and plans for near and long-term growth to generate value for our stockholders. We are excited about our future as an independent company, and we look forward to your support as an American Outdoor Brands, Inc. stockholder as we begin this new and exciting chapter.

Sincerely,

 

Brian D. Murphy

President and Chief Executive Officer

American Outdoor Brands, Inc.

 

 


 

Information contained herein is subject to completion or amendment. A registration statement on Form 10 relating to these securities has been filed with the Securities and Exchange Commission under the Securities Exchange Act of 1934, as amended.

Preliminary and Subject to Completion, dated July 1, 2020

INFORMATION STATEMENT

American Outdoor Brands, Inc.

Common Stock, par value $0.001 per share

This information statement is being furnished to you as a holder of common stock of Smith & Wesson Brands, Inc., a Nevada corporation, or SWBI, in connection with the separation of its outdoor products and accessories business from its firearm business and the creation of an independent, publicly traded company now called American Outdoor Brands, Inc., a Delaware corporation. We have applied to have our common stock listed on the Nasdaq Global Market as of the effective date of the Distribution (as defined herein). We, directly or indirectly through our subsidiaries, will hold the assets and legal entities, subject to any related liabilities, associated with the outdoor products and accessories business of SWBI after their transfer to us, or the Transfer. All of the shares of our common stock owned by SWBI will be distributed to the stockholders of SWBI, or the Distribution, and, together with the Transfer, the Separation. We are currently a wholly owned subsidiary of SWBI.

Each holder of SWBI common stock will receive one share of our common stock for every four shares of SWBI common stock held as of the close of business on [●], 2020, or the Record Date.

The Distribution is expected to be completed after the Nasdaq Global Market, or Nasdaq, closing on [●], 2020. Immediately after SWBI completes the Distribution, we will be an independent, publicly traded company. We expect that, for U.S. federal income tax purposes, no gain or loss will be recognized by you, and no amount will be included in your income in connection with the Distribution, except to the extent of any cash you receive in lieu of fractional shares.

No vote or other action is required by you to receive shares of our common stock in connection with the Separation. You will not be required to pay anything for the new shares or to surrender any of your shares of SWBI common stock. We are not asking you for a proxy, and you should not send us a proxy or your share certificates.

There currently is no trading market for our common stock.  Assuming that Nasdaq authorizes our common stock for listing, we anticipate that a limited market, commonly known as a “when-issued” trading market, for our common stock will commence on [●], 2020 and will continue up to and including the Distribution Date (as defined herein). We expect the “regular-way” trading of our common stock will begin on the first trading day following the Distribution Date.

We are an “emerging growth company” as defined under the federal securities laws and, as such, may elect to comply with certain reduced public company reporting requirements. See “Information Statement Summary—Implications of Being an Emerging Growth Company.”

In reviewing this information statement, you should carefully consider the matters described under the caption “Risk Factors” beginning on page 17.

Neither the Securities and Exchange Commission, nor any state securities commission has approved or disapproved these securities or determined if this information statement is truthful or complete. Any representation to the contrary is a criminal offense.

This information statement does not constitute an offer to sell or the solicitation of an offer to buy any securities.

The date of this information statement is [●], 2020.

A Notice of Internet Availability of Information Statement Materials containing instructions describing how to access the information statement was first mailed to SWBI stockholders on or about [●], 2020.

 

 


 

TABLE OF CONTENTS

 

 

Page

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

3

INFORMATION STATEMENT SUMMARY

5

SUMMARY OF THE SEPARATION

9

QUESTIONS AND ANSWERS ABOUT THE SEPARATION

12

RISK FACTORS

17

THE SEPARATION

49

DIVIDEND POLICY

61

CAPITALIZATION

62

UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS

63

SELECTED HISTORICAL COMBINED FINANCIAL DATA

69

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

71

BUSINESS

87

MANAGEMENT

103

EXECUTIVE COMPENSATION

111

CERTAIN RELATIONSHIPS AND RELATED PERSON TRANSACTIONS

122

SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

123

MATERIAL U.S. FEDERAL INCOME TAX CONSEQUENCES OF THE DISTRIBUTION

126

DESCRIPTION OF MATERIAL INDEBTEDNESS

129

DESCRIPTION OF CAPITAL STOCK

130

WHERE YOU CAN FIND MORE INFORMATION

136

INDEX TO FINANCIAL STATEMENTS

F-1

 

 

 

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ABOUT THIS INFORMATION STATEMENT

This information statement forms part of a registration statement on Form 10 (File No. [●]) filed with the Securities and Exchange Commission, or the SEC, with respect to the shares of our common stock, par value $0.001 per share, to be distributed to SWBI stockholders in connection with the Distribution.

We and SWBI have supplied all information contained in this information statement relating to our respective companies. We and SWBI have not authorized anyone to provide you with information other than the information that is contained in this information statement. We and SWBI take no responsibility for, and can provide no assurances as to the reliability of, any other information that others may give you. This information statement is dated [●], 2020, and you should not assume that the information contained in this information statement is accurate as of any date other than such date.

Except as otherwise indicated or unless the context otherwise requires, the information included in this information statement about SWBI assumes the completion of all of the transactions referred to in this information statement in connection with the Separation.

Unless otherwise indicated or as the context otherwise requires, all references in this information statement to the following terms will have the meanings set forth below:

 

“AOUT,” “we,” “us,” “our,” and “our company,” unless the context otherwise requires, means American Outdoor Brands, Inc., the Delaware corporation that is, and at all times prior to the consummation of the Distribution will be, a wholly owned subsidiary of SWBI and will hold, directly or indirectly through its subsidiaries, the assets and legal entities, subject to any related liabilities, associated with the outdoor products and accessories business of SWBI, and whose shares SWBI will distribute in connection with the Distribution. When appropriate in the context, the foregoing terms also include the subsidiaries of this entity. These terms may be used to describe the outdoor products and accessories business prior to completion of the Separation;

 

“Distribution” means the distribution of all of the shares of our common stock owned by SWBI to stockholders of SWBI as of the close of business on the Record Date;

 

“Distribution Date” means the date on which the Distribution is consummated;

 

“firearm business” means the business, operations, products, services, and activities of SWBI’s firearm business;

 

“Nasdaq” means the Nasdaq Global Market;

 

“outdoor products and accessories business” means the business, operations, products, services, and activities of SWBI’s outdoor products and accessories business. See “Business” for more information;

 

“Related Transactions” means any transaction other than the Transfer and the Distribution consummated or to be consummated to effect the Separation, including those related to the various name changes, stock listings, and contractual arrangements between us and SWBI;

 

“SWBI” means Smith & Wesson Brands, Inc., the Nevada corporation that owns our company prior to the Separation and that after the Separation will be a separately traded public company consisting of the firearm business. When appropriate in the context, the foregoing term also includes the subsidiaries of this entity;

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“Separation,” except where the context otherwise requires, means the separation of the outdoor products and accessories business from SWBI and the creation of an independent, publicly traded company, AOUT, through the consummation of (1) the Transfer and (2) the Distribution and (3) the Related Transactions; and

 

“Transfer” means the contribution by SWBI to us of the assets, including the various legal entities that are subsidiaries of SWBI, subject to any related liabilities, associated with the outdoor products and accessories business of SWBI.

Trademarks and Trade Names

1st Response®, 24/7®, Accumax®, Ammo Vault®, Black Ops®, BOG®, Boneyard®, Bubba®, Caldwell®, Deadshot®, Deathgrip®, Delta Series®, Delta Force®, E-MAX®, Extreme Ops®, F.A.T. Wrench®, Fieldpod®, Flexware®, Frankford Arsenal®, Frontier®, Galaxy®, Golden Rod®, Great Divide®, Grip A Legend®, Gun Butler®, Homeland Security®, Hooyman®, H.R.T.®, Hydrosled®, Imperial®, Intellidropper®, Key Gear®, Jolt®, Lead Sled®, Lockdown®, M-Press®, M.A,G.I.C.®, Mag Charger®, Magnum Rifle Gong®, Night Guard®, Night Terror®, Nitro®, Non-Typical Wildlife Solutions®, Old Timer®, One Cut and You’re Through®, Orange Peel®, Outback®, Pico Light®, S.W.A.T.®, Safe-T-Lock®, Schrade®, Schrade Tough®, Search & Rescue®, Sharpfinger®, Special Ops®, Special Tactical®, Spright®, Stable Table®, Sure-Lock®, Switcheroo®, Switch-it®, Tack Driver®, Tipton®, U-Dig-It®, Ultra Glide®, Uncle Henry®, Wheeler®, XLA Bipod®, ®,  Zinx®, 10,000 Rounds in Your Pocket®, Color Guard®, Complete Focus®, Crimson Trace®, Kryptonyte®, Lasergrips®, Laserguard®, Laserlyte®, Lightguard®, LINQ®, Quick Tyme®, Rail Master®, Reaction Tyme®, Rumble Tyme®, Score Tyme®, Shockstop®, Steel Tyme®, Trigger Tyme®, and Triple Tyme® are some of the registered U.S. trademarks of our company or one of our subsidiaries. Adrenaline™, Bloodmoon™, Built for Generations™, Clandestine™, Dominion™, Don’t Settle for Average. Demand Perfection™, Duro™, Engineered for the Unknown™, Field General™, Flex Change™, It’s not protected unless it’s on LOCKDOWN™, Learn and Live™, Lockdown Puck™, Magnum Magnet™, MEAT!™, MEAT Your Maker!™, Officer™, On the Edge of Adventure™, Pile Driver™, Stinger™, Survival Born, Adventure Ready™, Secure Your Lifestyle™, The Ultimate Lifestyle™, Triple Play™, Tunnel Vision™, Turkinator™, Unmatched Accuracy at the Bench and in the Field™, UST™, Velociradar™, Water to Plate™, Your Land. Your Legacy™, Accu-Guard™, Accu-Grips™, Dart Tyme™, Defender Series™, Instant Activation™, Instinctive Activation™, Lasersaddle™, Master Series™, and Popper Tyme™ are some of the unregistered trademarks of our company or one of our subsidiaries. Trademarks licensed to us by SWBI in connection with the manufacture, distribution, marketing, advertising, promotion, merchandising, shipping, and sale of certain licensed accessory product categories include Gemtech®, M&P®, Performance Center®, Smith & Wesson®, T/C®, and Thompson/Center Arms™, among others. This information statement also may contain trademarks and trade names of other companies.

Market and Industry Data

This information statement includes market and industry data that we obtained from industry publications, third-party studies and surveys, government agency sources, filings of public companies in our industry, and internal company surveys. Industry publications and surveys generally state that the information contained therein has been obtained from sources believed to be reliable. Although we believe the foregoing industry and market data to be reliable at the date of this information statement, this information could prove to be inaccurate as a result of a variety of matters.

 

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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

The statements contained in this information statement that are not purely historical are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. All statements other than statements of historical facts contained or incorporated herein by reference in this information statement, including statements regarding our future operating results, future financial position, business strategy, objectives, goals, plans, prospects, markets, and plans and objectives for future operations, are forward-looking statements. In some cases, you can identify forward-looking statements by terms such as “anticipates,” “believes,” “estimates,” “expects,” “intends,” “targets,” “contemplates,” “projects,” “predicts,” “may,” “might,” “plan,” “will,” “would,” “should,” “could,” “may,” “can,” “potential,” “continue,” “objective,” or the negative of those terms, or similar expressions intended to identify forward-looking statements. However, not all forward-looking statements contain these identifying words. Specific forward-looking statements in this information statement, include statements regarding our expectations regarding the methodology, effects, timing, and tax-free nature (except to the extent of any cash received in lieu of fractional shares) of the Transfer and the Distribution; our belief that no other material governmental or regulatory filings or approvals will be necessary to consummate the Distribution, other than registration under the federal securities laws of our common stock and completion of the applicable listing requirements on Nasdaq for such shares; our expectation that our common stock will be listed on the Nasdaq Global Market under the ticker symbol “AOUT”; our expectation that after the Separation, SWBI common stock will continue to be traded on the Nasdaq Global Select Market under the ticker symbol “SWBI”; our expectations regarding a “regular-way” market, an “ex-distribution” market, and a “when-issued” market in our shares of common stock between the Record Date and the Distribution Date; our belief that separating SWBI’s outdoor products and accessories business from SWBI’s firearm business is in the best interests of SWBI and its stockholders; our expectation to take advantage of certain of the reduced reporting and other requirements of the JOBS Act with respect to the periodic reports we will file with the SEC and proxy statements that we use to solicit proxies from our stockholders; our intention to enter into certain agreements with SWBI in connection with the Separation to effect the Separation and provide a framework for our relationship with SWBI after the Separation, including a Separation and Distribution Agreement, a Tax Matters Agreement, a Transition Services Agreement, an Employee Matters Agreement, a Trademark License Agreement, a Sublease Agreement, and certain commercial agreements, and the proposed terms thereof; our expectations regarding the number of shares of our outstanding common stock, the number of such shares held by our affiliates, and the number of stockholders of record following the Separation; our anticipation regarding the adverse effects of COVID-19 on our business; our belief that maintaining and further enhancing the brand recognition and reputation of our brands is critical to retaining existing customers and attracting new customers and that the importance of our brand recognition and reputation will increase; our anticipation that our advertising, marketing, and promotional efforts will increase in the foreseeable future; our anticipation that we will increasingly rely on other forms of media advertising; our plan to continue to expand our brand recognition and product loyalty through social media and our websites with generation of original content; our anticipation that we will enter into new strategic alliances; our expectation that the various claims and lawsuits, arising in the ordinary course of business, we are involved in will not have a material adverse effect on our results of operations or financial condition; our plan to introduce a continuing stream of new and differentiated high-quality rugged outdoor products that drive customer satisfaction and loyalty; our plan to expand our addressable market by appealing to new and larger audiences in new product categories outside the rugged outdoor market; our plan to cultivate and enhance our direct-to-consumer relationships through our digital platforms; our plan to expand and enhance our supply chain; our intent to pursue acquisitions that financially and strategically complement our business; our belief that we will drive customer satisfaction and loyalty by offering high-quality, innovative products on a timely and cost-effective basis; our intent to pursue and challenge infringements of our intellectual property; our expectation to have certain insurance policies in place as of the date of the Separation; our anticipation that most contract assignments and new agreements will be obtained prior to the Separation; our belief that none of the contracts or other assets requiring consent to transfer or the contracts requiring a new agreement are individually material to our business; our expectation that the increasing expenses incurred by public companies generally for reporting and corporate governance purposes will increase our legal and financial compliance costs; our anticipation that, to comply with reporting and other requirements of the Exchange Act, we will need to duplicate information technology infrastructure, implement additional financial and management controls, reporting systems, and procedures, hire additional accounting, finance, tax, treasury, and information technology staff; our expected executive officers, directors, and other key employees; our expected corporate governance policies, guidelines, and practices; our anticipated compensation and benefit plans; our anticipation that we will enter into indemnification agreements with each of our directors and executive officers; our belief that several provisions of our Amended and Restated Certificate of Incorporation, Amended and Restated

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Bylaws, and Delaware law that may discourage, delay, or prevent a merger or acquisition that stockholders may consider favorable and will protect our stockholders from coercive or otherwise unfair takeover tactics; our intention to enter into a new financing arrangement; our expectation to have $25 million of cash on hand and no third-party indebtedness as of the consummation of the Distribution; our current intention to retain all available funds and future earnings, if any, to fund the development and expansion of our business; our anticipation to not pay any cash dividends on our common stock in the foreseeable future; our expectations of costs and expenses associated with becoming an independent, publicly traded company; our expectation to incur expenditures to establish certain standalone functions, information technology systems, and other one-time costs subsequent to the completion of the Separation; our expectation that nonrecurring amounts, related to the Separation that are incurred prior to the completion of the Separation and SWBI to pay, will include costs to separate and/or duplicate information technology systems, investment banker fees (other than fees and expenses in connection with the debt financing), third-party legal and accounting fees, and similar costs; our belief we will meet known or reasonably likely future cash requirements through the combination of cash flows from operating activities, available cash balances, and available borrowings through the issuance of third-party debt; and our expectation to utilize our cash flows to continue to invest in our brands, including research and development of new product initiatives, talent and capabilities, and growth strategies, including any potential acquisitions, and to repay any indebtedness we may incur over time. All forward-looking statements included herein are based on information available to us as of the date hereof and speak only as of such date. Except as required by law, we undertake no obligation to update any forward-looking statements to reflect events or circumstances after the date of such statements. The forward-looking statements contained in or incorporated by reference into this information statement reflect our views as of the date of this information statement about future events and are subject to risks, uncertainties, assumptions, and changes in circumstances that may cause our actual results, performance, or achievements to differ significantly from those expressed or implied in any forward-looking statement. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future events, results, performance, or achievements. A number of factors could cause actual results to differ materially from those indicated by forward-looking statements.  Such factors include, among others, the effects of the coronavirus, or COVID-19, pandemic, including potential disruptions in our ability to source the raw materials necessary for the production of our products, disruptions and delays in the manufacture of our products, difficulties encumbered by retailers and other components of the distribution channel for our products; lower levels of consumer spending; our ability to introduce new products that are successful in the marketplace; interruptions of our arrangements with third-party contract manufacturers that disrupt our ability to fill our customers’ orders; increases in costs or decreases in availability of finished products, product components, and raw materials; the failure to maintain or strengthen our brand recognition and reputation; the ability to forecast demand for our products accurately; our inability to expand our e-commerce business; our inability to compete in a highly competitive market; our dependence on large customers; an increase in private label products by our customers; pricing pressures by our customers; our ability to collect our account to receivable the risk of earthquakes, fire, power outages, power losses, and telecommunication failures; our abilities to identify acquisition candidates, to complete acquisitions of potential acquisition candidates, our ability to integrate their businesses with our business, and the success of acquired companies; our ability to protect our intellectual property; the risk of complying with any applicable foreign laws or regulations and the effect of increased protective tariffs; the performance and security of our information systems; the potential for product recalls, product liability, and other claims against us; our dependable on key personnel; economic, social, political, legislative, and regulatory factors; the potential for increased regulation of firearms and firearms-related products; the state of the U.S. economy; risks associated with of our new principal facility, including the expected benefits; and other factors detailed from time to time in our reports that will be filed with the Securities and Exchange Commission, or the SEC.

 

 

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INFORMATION STATEMENT SUMMARY

This summary highlights information contained in this information statement relating to us and shares of our common stock being distributed by SWBI in connection with the Distribution. This summary may not contain all details concerning the Separation or other information that may be important to you. To better understand the Separation and our business and financial position, you should carefully review this entire information statement, including the risk factors, our historical combined financial statements, our unaudited pro forma combined financial statements, and the respective notes to those historical and pro forma financial statements.

Unless otherwise indicated, references in this information statement to fiscal 2020, fiscal 2019, and fiscal 2018 are to the fiscal years ended April 30, 2020, 2019, and 2018, respectively. Our historical combined financial statements have been prepared on a “carve-out” basis to reflect the operations, financial condition, and cash flows of the outdoor products and accessories business of SWBI during all periods shown. Our unaudited pro forma combined financial statements adjust our historical combined financial statements to give effect to our Separation from SWBI and our anticipated post-Separation capital structure.

Our Company

We are a leading provider of outdoor products and accessories encompassing hunting, fishing, camping, shooting, and personal security and defense products for rugged outdoor enthusiasts. We conceive, design, produce or source, and sell products and accessories, including shooting supplies, rests, vaults, and other related accessories; premium sportsman knives and tools for fishing and hunting; land management tools for hunting preparedness; harvesting products for post-hunt or post-fishing activities; electro-optical devices, including hunting optics, firearm aiming devices, flashlights, and laser grips; reloading, gunsmithing, and firearm cleaning supplies; and survival, camping, and emergency preparedness products.  We develop and market our products at our facility in Columbia, Missouri and contract for the manufacture and assembly of most of our products with third-parties located in Asia. We also manufacture some of our electro-optics products in our facility in Wilsonville, Oregon.

We focus on our brands and the establishment of product categories in which we believe our brands will resonate strongly with the activities and passions of consumers and enable us to capture an increasing share of our overall addressable markets. Our owned brands include Caldwell, Wheeler, Tipton, Frankford Arsenal, Hooyman, BOG, MEAT!, Uncle Henry, Old Timer, Imperial, Crimson Trace, LaserLyte, Lockdown, UST, BUBBA, and Schrade, and we license for use in association with certain products we sell additional brands, including M&P, Smith & Wesson, Performance Center by Smith & Wesson, and Thompson/Center Arms.  In focusing on the growth of our brands, we organize our creative, product development, sourcing, and e-commerce teams into four brand lanes, each of which focuses on one of four distinct consumer verticals – Marksman, Defender, Harvester, and Adventurer – with each of our brands included in one of the brand lanes. Our sales activities are focused and measured on how we go to market within the e-commerce and traditional distribution channels.  These two channels involve distinct strategies to increase revenue and enhance market share.  Our sales team is organized by customer groups, which we refer to as classes of trade, within the e-commerce and traditional channels and sells our products from all brands in all four of our brand lanes.  We measure our success through sales performance in these distribution channels against prior results and our own expectations.  

Our Marksman brands address product needs arising from consumer activities that take place primarily at the shooting range and where firearms are cleaned, maintained, and worked on. Our Defender brands include products that help consumers aim their firearms more accurately, including situations that require self-defense, and products that help secure, store, and maintain connectivity to those possessions that some consumers would consider to be high value or high consequence. Our Harvester brands focus on the activities hunters typically engage in, including hunting preparation, the hunt itself, and the activities that follow a hunt, such as meat processing. Our Adventurer brands include products that help enhance consumers’ fishing and camping experiences.

We are headquartered in Columbia, Missouri. Upon our separation from SWBI, we expect to trade under the ticker symbol “AOUT” on Nasdaq.

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Our Strategy

Our objective is to enhance our position as a leading provider of high-quality and innovative outdoor products and accessories for the hunting, fishing, camping, shooting, personal security and defense, and other rugged outdoor markets and to expand our addressable market into carefully selected new product arenas. Key elements of our strategy to achieve this objective and deliver long-term stockholder value are as follows:

 

introduce a continuing stream of innovative new and differentiated rugged outdoor products and product extensions that appeal to consumers and achieve market acceptance and that drive customer satisfaction and loyalty;

 

expand the size of our addressable market by appealing to new and larger consumer audiences in new product categories outside the rugged outdoor market;

 

cultivate and enhance direct-to-consumer relationships through our digital platforms;

 

expand and enhance our supply chain; and

 

pursue acquisitions that financially and strategically complement our current business.

Risks Associated with the Proposed Transaction and Our Business

An investment in our company is subject to a number of risks. You should carefully consider the matters discussed under the heading “Risk Factors” of this information statement.

The Separation

On November 13, 2019, SWBI announced that it was proceeding with a plan to spin-off its outdoor products and accessories business. We are currently a wholly owned subsidiary of SWBI and we will hold, directly or indirectly through our subsidiaries, all of the assets and legal entities, subject to any related liabilities, associated with SWBI’s outdoor products and accessories business. The Separation will be achieved through the transfer of all the assets and legal entities, subject to any related liabilities, of the outdoor products and accessories business to our company or our subsidiaries, which we refer to as the Transfer, and the distribution of 100% of our outstanding capital stock to holders of SWBI common stock as of the close of business on the Record Date, which we refer to as the Distribution. In connection with the Distribution, SWBI stockholders will receive one share of our common stock for every four shares of SWBI common stock held as of the close of business on the Record Date. The Separation is expected to be completed on [●], 2020. Following the Separation, SWBI stockholders as of the close of business on the Record Date will own 100% of the outstanding shares of our common stock; we will be an independent, publicly traded company, and SWBI will retain no ownership interest in our company.

In connection with the Separation, we will enter into a Separation and Distribution Agreement and several other agreements with SWBI to effect the Separation and provide a framework for our relationship with SWBI after the Separation. These agreements will provide for the allocation between us and our subsidiaries, on the one hand, and SWBI and its subsidiaries, on the other hand, of the assets, liabilities, legal entities, and obligations associated with the outdoor products and accessories business, on the one hand, and the firearm business, on the other hand, and will govern the relationship between our company and our subsidiaries, on the one hand, and SWBI and its subsidiaries, on the other hand, subsequent to the Separation. In addition to the Separation and Distribution Agreement, the other principal agreements to be entered into with SWBI include a Tax Matters Agreement, a Transition Services Agreement, an Employee Matters Agreement, a Trademark License Agreement, a Sublease, and certain commercial agreements.

The Separation, as described in this information statement, is subject to the satisfaction or waiver of certain conditions. For more information, see “The Separation—Conditions to the Distribution” included elsewhere in this information statement. We cannot provide any assurances that SWBI will complete the Separation.

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Following a strategic review, it was determined that separating SWBI’s outdoor products and accessories business from SWBI’s firearm business would be in the best interests of SWBI and its stockholders and that the Separation would create two industry-leading companies with attributes that best position each company for long-term success, including the following:

 

Distinct Focus. Each company will benefit from a distinct strategic and management focus on its specific operational and growth priorities.

 

Differentiated Investment Theses. Each company will offer differentiated and compelling investment opportunities based on its particular operating and financial model, allowing it to more closely align with its natural investor type.

 

Optimized Balance Sheet and Capital Allocation Priorities. Each company will operate with a capital structure and capital deployment strategy tailored to its specific business model and growth strategies without having to compete with the other for investment capital.

 

Direct Access to Capital Markets. Each company will have its own equity structure that will afford it direct access to the capital markets and allow it to capitalize on its unique growth opportunities appropriate to its business.

 

Alignment of Incentives with Performance Objectives. Each company will be able to offer incentive compensation arrangements for employees that are more directly tied to the performance of its business and may enhance employee hiring and retention by, among other things, improving the alignment of management and employee incentives with performance and growth objectives.

 

Incremental Stockholder Value. Each company will benefit from the investment community’s ability to value its businesses independently within the context of its particular industry with the anticipation that, over time, the aggregate market value of the companies will be higher, on a fully distributed basis and assuming the same market conditions, than if SWBI were to remain under its current configuration.

Neither we nor SWBI can assure you that, following the Separation, any of the benefits described above or otherwise in this information statement will be realized to the extent anticipated or at all. For more information, see “Risk Factors.”

Regulatory Approvals and Appraisal Rights

We must complete the necessary registration under the federal securities laws of our common stock to be issued in connection with the Distribution. We must also complete the applicable listing requirements on Nasdaq for such shares. Other than these requirements, we do not believe that any other material governmental or regulatory filings or approvals will be necessary to consummate the Distribution.

SWBI stockholders will not have any appraisal rights in connection with the Distribution.

Corporate Information

We were incorporated in Delaware on January 28, 2020. We maintain our principal executive offices at 1800 North Route Z, Columbia, Missouri 65202. Our telephone number is (800) 338-9585. Our website will be located at www.AOB.com. Our website and the information contained therein or connected thereto is not incorporated into this information statement or the registration statement of which it forms a part.

Implications of Being an Emerging Growth Company

As a company with less than $1.07 billion in revenue during our last fiscal year, we qualify as an “emerging growth company” as defined in the Jumpstart Our Business Startups Act of 2012, or the JOBS Act. We will continue to be an emerging growth company until the earliest to occur of the following:

 

the last day of the fiscal year following the fifth anniversary of the Distribution;

 

the last day of the fiscal year with at least $1.07 billion in annual revenue;

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the last day of the fiscal year in which we are deemed to be a large accelerated filer, which means that we have been public for at least 12 months, have filed at least one annual report, and the market value of our common stock that is held by non-affiliates exceeds $700 million as of the last day of our then-most recently completed second fiscal quarter; or

 

the date on which we have issued more than $1 billion of non-convertible debt during the prior three-year period.

Until we cease to be an emerging growth company, we may take advantage of reduced reporting requirements generally unavailable to other public companies. Those provisions allow us to do the following:

 

provide reduced disclosure regarding our executive compensation arrangements pursuant to the rules applicable to smaller reporting companies, which means we do not have to include a compensation discussion and analysis and certain other disclosures regarding our executive compensation;

 

not provide an auditor attestation of our internal control over financial reporting as required under Section 404 of the Sarbanes-Oxley Act of 2002, as amended, or Sarbanes-Oxley; and

 

not hold a nonbinding advisory vote on executive compensation and stockholder approval of any golden parachute payments not previously approved.

We have elected to adopt the reduced disclosure requirements described above for purposes of this information statement. In addition, for so long as we qualify as an emerging growth company, we expect to take advantage of certain of the reduced reporting and other requirements of the JOBS Act with respect to the periodic reports we will file with the SEC and proxy statements that we use to solicit proxies from our stockholders. As a result of these elections, the information that we provide in this information statement may be different than the information you may receive from other public companies in which you hold equity interests. In addition, it is possible that some investors will find our common stock less attractive as a result of these elections, which may result in a less active trading market for our common stock and higher volatility in our stock price.

In addition, the JOBS Act permits an emerging growth company to take advantage of an extended transition period to comply with new or revised accounting standards applicable to public companies. We have elected to not take advantage of the extended transition period that allows an emerging growth company to delay the adoption of certain accounting standards until those standards would otherwise apply to private companies, which means that the financial statements included in this information statement, as well as financial statements we file in the future, will be subject to all new or revised accounting standards generally applicable to public companies. Our election not to take advantage of the extended transition period is irrevocable.

 

 

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SUMMARY OF THE SEPARATION

The following is a summary of the material terms of the Separation and other related transactions.

 

Distributing Company

Smith & Wesson Brands, Inc., a Nevada corporation. Following the Distribution, SWBI will not own any shares of our common stock.

Distributed Company

American Outdoor Brands, Inc., a Delaware corporation, currently is a wholly owned subsidiary of SWBI and will hold, directly or indirectly through its subsidiaries, all of the assets and legal entities, subject to any related liabilities, associated with the outdoor products and accessories business of SWBI. Following the consummation of the Separation, we will be an independent, publicly traded company.

Distribution Ratio

Each holder of SWBI common stock will receive one share of our common stock for every four shares of SWBI common stock held as of the close of business on the Record Date.

Distributed Securities

SWBI will distribute 100% of the shares of our common stock in the Distribution. Based on the approximately 55,530,481 shares of SWBI common stock outstanding on June 22, 2020, and applying the distribution ratio of one share of our common stock for every four shares of SWBI common stock, SWBI will distribute approximately 13,882,620 shares of our common stock to SWBI stockholders that hold SWBI common stock as of the close of business on the Record Date.

Fractional Shares

Issuer Direct Corporation, acting as the Distribution Agent, will not distribute any fractional shares of our common stock to SWBI stockholders. As soon as practicable on or after the Distribution Date, the Distribution Agent will, instead, aggregate fractional shares into whole shares, sell the whole shares in the open market at prevailing market prices, and distribute the net cash proceeds from the sales, net of brokerage fees and commissions, transfer taxes, and other costs, and after making appropriate deductions of the amounts required to be withheld for U.S. federal income tax purposes, if any, pro rata to each stockholder that would otherwise have been entitled to receive a fractional share in connection with the Distribution. The Distribution Agent will determine when, how, through which broker-dealers, and at what prices to sell the aggregated fractional shares. Recipients of cash in lieu of fractional shares will not be entitled to any minimum sale price for the fractional shares or to any interest on the amounts of payments made in lieu of fractional shares. The receipt of cash in lieu of fractional shares generally will be taxable to the recipient stockholders for U.S. federal income tax purposes as described in “Material U.S. Federal Income Tax Consequences of the Distribution—The Distribution.”

Record Date

The Record Date will be the close of business on [●], 2020.

Distribution Date

The Distribution Date will be [●], 2020.

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Distribution

On the Distribution Date, SWBI will distribute 100% of the shares of our common stock to all SWBI stockholders as of the close of business on the Record Date based on the distribution ratio. The shares of our common stock will be distributed electronically in direct registration or book-entry form, and no certificates will be distributed.

On or shortly following the Distribution Date, the Distribution Agent will mail to stockholders that hold their shares directly with SWBI, and are therefore registered holders, a direct registration account statement that reflects the number of shares of our common stock that have been registered in book-entry form in their name.

For shares of SWBI stock that are held through a bank or brokerage firm, the bank or brokerage firm will credit the stockholder’s account with the shares of our common stock that they are entitled to receive in connection with the Distribution.

SWBI stockholders will not be required to make any payment, to surrender or exchange their shares of SWBI common stock, or to take any other action to receive their shares of our common stock in connection with the Distribution.

If you are a SWBI stockholder as of the close of business on the Record Date and decide to sell your shares on or before the Distribution Date, you may choose to sell your SWBI common stock with or without your entitlement to receive our common stock in connection with the Distribution. Beginning on the close of business on the Record Date and continuing up to and including the Distribution Date, we expect that there will be two markets in SWBI common stock: a “regular-way” market and an “ex-distribution” market. Shares of SWBI common stock that trade on the “regular-way” market will trade with an entitlement to receive shares of our common stock in connection with the Distribution. Shares of SWBI common stock that trade on the “ex-distribution” market will trade without an entitlement to receive shares of our common stock in connection with the Distribution. Therefore, if you sell shares of SWBI common stock on the “regular-way” market after the close of business on the Record Date and up to and including through the Distribution Date, you will be selling your right to receive shares of our common stock in connection with the Distribution. If you own shares of SWBI common stock as of the close of business on the Record Date and sell those shares on the “ex-distribution” market, up to and including through the Distribution Date, you will still receive the shares of our common stock that you would be entitled to receive in respect of your ownership, as of the Record Date, of the shares of SWBI common stock that you sold.

Conditions to the Distribution

The consummation of the Distribution is subject to the satisfaction or waiver of the following conditions, among other conditions described in this information statement:

 

     the SEC will have declared effective our registration statement on Form 10, of which this information statement is a part, under the Securities Exchange Act of 1934, as amended, or the Exchange Act; no stop order suspending the effectiveness of our registration statement on Form 10 will be in effect; no proceedings for such purpose will be pending or threatened by the SEC; and this information statement, or a notice of Internet availability thereof, will have been mailed to the holders of SWBI common stock as of the close of business on the Record Date;

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    our common stock to be delivered in connection with the Distribution will have been approved for listing on Nasdaq, subject to official notice of issuance;

 

    SWBI will have received of an opinion of Greenberg Traurig, LLP (which will not have been revoked or modified in any material respect) in the form and substance satisfactory to SWBI (in its sole discretion), or the Tax Opinion, substantially to the effect that, among other things, the Transfer and the Distribution will qualify as a tax-free transaction under Section 355 and Section 368(a)(1)(D) of the Internal Revenue Code of 1986, as amended, or the Code, for U.S. federal income tax purposes;

 

    any material governmental approvals and consents and any material permits, registrations, and consents from third parties, in each case, necessary to effect the Distribution and to permit the operation of the outdoor products and accessories business after the Distribution Date substantially as conducted as of the date of the Separation and Distribution Agreement will have been obtained; and

 

    no event or development will have occurred or exists that, in the judgment of the SWBI Board of Directors, in its sole discretion, makes it inadvisable to effect the Distribution or other transactions contemplated by the Separation and Distribution Agreement.

 

The fulfillment of these conditions will not create any obligations on SWBI’s part to effect the Separation, and the SWBI Board of Directors has reserved the right, in its sole discretion, to abandon, modify, or change the terms of the Separation, including by accelerating or delaying the timing of the consummation of all or part of the Distribution, at any time prior to the Distribution Date.

Stock Exchange Listing

We have applied to have our common stock listed on Nasdaq under the ticker symbol “AOUT.”

Dividend Policy

We currently intend to retain all available funds and any future earnings, if any, to fund the development and expansion of our business, and we do not anticipate paying any cash dividends on our common stock in the foreseeable future. See the section entitled “Dividend Policy.”

Transfer Agent

Issuer Direct Corporation

U.S. Federal Income Tax Consequences

A condition to the closing of the Separation is SWBI’s receipt of the Tax Opinion substantially to the effect that, among other things, the Transfer and the Distribution will qualify under the Code as a transaction that is tax-free to SWBI and to its stockholders. You should review the section entitled “Material U.S. Federal Income Tax Consequences of the Distribution—The Distribution” for a discussion of the material U.S. federal income tax consequences of the Distribution. You should consult your own tax advisor as to the particular tax consequences to you of the Distribution, including potential tax consequences under state, local, and non-U.S. tax laws.

 

 

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QUESTIONS AND ANSWERS ABOUT THE SEPARATION

Please see “The Separation” for a more detailed description of the matters summarized below.

Why am I receiving this document?

You are receiving this document because you are a SWBI stockholder as of the close of business on the Record Date and, as such, will be entitled to receive shares of our common stock upon completion of the transactions described in this information statement. We are sending you this document to inform you about the Separation and to provide you with information about our company and our business and operations upon completion of the Separation.

What do I have to do to participate in the Separation?

Nothing. You will not be required to pay any cash or deliver any other consideration in order to receive the shares of our common stock that you will be entitled to receive in connection with the Distribution. In addition, no stockholder approval will be required for the Separation, you are not being asked to provide a proxy with respect to any of your shares of SWBI common stock in connection with the Separation, and you should not send us a proxy.

Why is SWBI separating its outdoor products and accessories business from its firearm business?

The SWBI Board of Directors believes that separating SWBI’s outdoor products and accessories business from its firearm business and forming a new company to conduct the outdoor products and accessories business will enable the management team of each company to focus on its specific strategies, including, among others, (1) structuring its business to take advantage of growth opportunities in its specific markets, (2) tailoring its business operation and financial model to its specific long-term strategies, and (3) aligning its external financial resources, such as stock, access to markets, credit, and insurance factors, with its particular type of business. The Separation is intended to enhance the long-term performance of each business for the reasons discussed in the section entitled “The Separation—Reasons for the Separation.”

What is AOUT?

We are a newly formed Delaware corporation that will hold, directly or indirectly through our subsidiaries, all of the assets and legal entities, subject to any related liabilities, of the outdoor products and accessories business of SWBI and will be publicly traded following the Separation.

How will SWBI accomplish the Separation of its outdoor products and accessories business?

The Separation involves the Transfer (i.e., the contribution of the assets and legal entities, subject to any related liabilities, associated with SWBI’s outdoor products and accessories business to our company or our subsidiaries) and the Distribution (i.e., SWBI’s distribution to its stockholders of all the shares of our common stock). Following this Transfer and Distribution, we will be a publicly traded company independent from SWBI, and SWBI will not retain any ownership interest in our company.

What will I receive in the Distribution?

In connection with the Distribution, you will be entitled to receive one share of our common stock for every four shares of SWBI common stock held by you as of the close of business on the Record Date as well as a cash payment in lieu of any fractional shares, as discussed herein.

How does my ownership in SWBI change as a result of the Separation?

Your ownership of SWBI stock will not be affected by the Separation.

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What is the Record Date?

The Record Date for determining holders of record of SWBI common stock entitled to participate in the Distribution will be the close of business on [●], 2020. When we refer to the Record Date in this information statement, we are referring to that time and date.

When will the Distribution occur?

The Distribution is expected to occur on [●], 2020.

As a SWBI stockholder as of the Record Date, how will shares of common stock be distributed to me?

At the effective time of the Distribution, we will instruct our transfer agent and Distribution Agent to make book-entry credits for the shares of our common stock that you are entitled to receive as a stockholder of SWBI as of the close of business on the Record Date. Since shares of our common stock will be in uncertificated book-entry form, you will receive share ownership statements in place of physical share certificates.

What if I hold my shares through a broker, bank, or other nominee?

SWBI stockholders that hold their shares through a broker, bank, or other nominee will have their bank, brokerage, or other account credited with our common stock. For additional information, those stockholders should contact their broker or bank directly.

How will fractional shares be treated in the Distribution?

You will not receive fractional shares of our common stock in connection with the Distribution. The Distribution Agent will, instead, aggregate and sell on the open market any fractional shares of our common stock that would otherwise be issued in connection with the Distribution, and, if you would otherwise be entitled to receive a fractional share of our common stock in connection with the Distribution, you will instead receive the net cash proceeds of the sale attributable to such fractional share after payment of brokerage fees and commissions, transfer taxes, and other costs, and after making appropriate deductions of the amounts required to be withheld for U.S. federal income tax purposes, if any.

What are the U.S. federal income tax consequences to me of the Distribution?

A condition to the closing of the Separation is SWBI’s receipt of the Tax Opinion to the effect that the Distribution will qualify under the Code, as a transaction that is tax-free to SWBI and to its stockholders. On the basis that the Distribution so qualifies for U.S. federal income tax purposes, you will not recognize any gain or loss, and no amount will be included in your income in connection with the Distribution, except with respect to any cash received in lieu of fractional shares. You should review the section entitled “Material U.S. Federal Income Tax Consequences of the Distribution—The Distribution” for a discussion of the material U.S. federal income tax consequences of the Distribution.

How will I determine the tax basis I will have in my SWBI shares after the Distribution and the AOUT shares I receive in connection with the Distribution?

Generally, for U.S. federal income tax purposes, your aggregate basis in your shares of SWBI common stock and the shares of our common stock that you receive in connection with the Distribution (including any fractional shares for which cash is received) will equal the aggregate basis of SWBI common stock held by you immediately before the consummation of the Distribution. This aggregate basis should be allocated between your shares of SWBI common stock and the shares of our common stock that you receive in connection with the Distribution (including any fractional shares for which cash is received) in proportion to the relative fair market value of each immediately following the consummation of the Distribution. See “Material U.S. Federal Income Tax Consequences of the Distribution—The Distribution.”

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How will SWBI’s common stock and AOUT’s common stock trade after the Separation?

There is currently no public market for our common stock. We have applied to have our common stock listed on Nasdaq under the ticker symbol “AOUT.” SWBI common stock will continue to trade on the Nasdaq Global Select Market under the ticker symbol “SWBI.”

If I sell my shares of SWBI common stock on or before the Distribution Date, will I still be entitled to receive AOUT shares in the Distribution with respect to the sold shares?

Beginning on the Record Date and continuing up to and including the Distribution Date, we expect that there will be two markets in SWBI common stock: a “regular-way” market and an “ex-distribution” market. Shares of SWBI common stock that trade on the “regular-way” market will trade with the entitlement to receive shares of our common stock in connection with the Distribution. Shares of SWBI common stock that trade on the “ex-distribution” market will trade without the entitlement to receive shares of our common stock in connection with the Distribution. Therefore, if you sell shares of SWBI common stock on the “regular-way” market after the close of business on the Record Date and up to and including through the Distribution Date, you will be selling your right to receive shares of our common stock in connection with the Distribution. If you own shares of SWBI common stock as of the close of business on the Record Date and sell these shares on the “ex-distribution” market, up to and including through the Distribution Date, you will still receive the shares of our common stock that you would be entitled to receive in respect of your ownership, as of the Record Date, of the shares of SWBI common stock that you sold. You are encouraged to consult with your financial advisor regarding the specific implications of selling your SWBI common stock prior to or on the Distribution Date.

Will I receive a stock certificate for AOUT shares distributed as a result of the Distribution?

No. Registered holders of SWBI common stock that are entitled to receive the Distribution will receive a book-entry account statement reflecting their ownership of our common stock. For additional information, registered stockholders in the United States, Canada, or Puerto Rico should contact SWBI’s transfer agent, Issuer Direct Corporation, in writing at 1981 Murray Holladay Road, Suite 100, Salt Lake City, UT 84117, toll free at 1-800-481-4000 or through its website at www.issuerdirect.com. Stockholders from outside the United States, Canada, and Puerto Rico may call 1-919-481-4000. See “The Separation—When and How You Will Receive the Distribution of AOUT Shares.”

Can SWBI decide to cancel the Distribution even if all the conditions have been met?

Yes. SWBI has the right to terminate, or modify the terms of, the Separation at any time prior to the Distribution Date, even if all of the conditions to the Distribution are satisfied.

Do I have appraisal rights?

No. SWBI stockholders do not have any appraisal rights in connection with the Separation.

Will AOUT have any outstanding indebtedness immediately following the Separation?

No. In addition to being capitalized with $25 million of cash as of the Distribution Date, we have received a commitment letter for a $50 million revolving line of credit to be used for general corporate purposes. The revolving line will also include an option to increase the credit commitment for an additional $15.0 million. We will have no outstanding borrowings on this line immediately following the Separation. See “The Separation—Incurrence of Debt” and “Description of Material Indebtedness.”

Does AOUT intend to pay cash dividends on its common stock?

No. We do not currently intend to pay cash dividends on our common stock. See “Dividend Policy.”

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Will the Separation affect the trading price of my SWBI stock?

Yes. The trading price of shares of SWBI common stock immediately following the consummation of the Distribution may be expected to be lower than immediately prior to that time because the trading price will no longer reflect the value of the outdoor products and accessories business. We cannot provide you with any assurance regarding the price at which the SWBI shares will trade following the Separation.

What will happen to outstanding SWBI equity compensation awards?

Outstanding SWBI equity compensation awards will be equitably adjusted simultaneously with the Distribution. These equitable adjustments are intended to maintain, immediately following the consummation of the Distribution, the intrinsic value of the award immediately prior to the consummation of the Distribution. For a more detailed description of how such awards will be adjusted, see “The Separation—Treatment of Outstanding Equity Compensation Awards.”

What will the relationship between SWBI and AOUT be following the Separation?

Following the Separation, SWBI will not own any shares of our common stock, and SWBI and we each will be independent, publicly traded companies with our own management teams. In connection with the Separation, we will enter into a Separation and Distribution Agreement and several other agreements with SWBI to effect the Separation and provide a framework for our relationship with SWBI after the Separation. These agreements will provide for the allocation between us and our subsidiaries, on the one hand, and SWBI and its subsidiaries, on the other hand, of the assets, liabilities, legal entities, and obligations associated with the outdoor products and accessories business, on the one hand, and the firearm business, on the other hand, and will govern the relationship between our company and our subsidiaries, on the one hand, and SWBI and its subsidiaries, on the other hand, subsequent to the Separation. In addition to the Separation and Distribution Agreement, the other principal agreements to be entered into with SWBI include a Tax Matters Agreement, a Transition Services Agreement, an Employee Matters Agreement, a Trademark License Agreement, a Sublease, and certain commercial agreements. See “The Separation—Agreements with SWBI.”

Who is the transfer agent for our common stock?

Issuer Direct Corporation will be the transfer agent for our common stock. Issuer Direct Corporation’s mailing address is 1981 Murray Holladay Road, Suite 100, Salt Lake City, UT 84117 and Issuer Direct Corporation’s phone number for stockholders in the United States, Canada, or Puerto Rico is Toll Free 1-800-481-4000 and for stockholders from outside the United States, Canada, and Puerto Rico is 1-919-481-4000.

Who is the Distribution Agent for the Distribution?

Issuer Direct Corporation.

Who can I contact for more information?

If you have questions relating to the mechanics of the distribution of our shares, you should contact the Distribution Agent as set forth below:

Issuer Direct Corporation

C/O: Julie Felix

1981 Murray Holladay Road, Suite 100

Salt Lake City, UT 84117

Toll Free: 1-800-481-4000

International: 1-919-481-4000

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Before the Separation, if you have questions relating to the transactions described herein, you should contact SWBI as set forth below:

Smith & Wesson Brands, Inc.

2100 Roosevelt Avenue

Springfield, Massachusetts 01104

Attention: Investor Relations

Phone: 413-747-6284

After the Separation, if you have questions relating to SWBI, you should contact SWBI as set forth below:

Smith & Wesson Brands, Inc.

2100 Roosevelt Avenue

Springfield, Massachusetts 01104

Attention: Investor Relations

Phone: 413-747-6284

After the Separation, if you have questions relating to our company, you should contact us as set forth below:

American Outdoor Brands, Inc.

1800 North Route Z

Columbia, Missouri 65202

Attention: Investor Relations

Phone: 413-747-6284

 

 

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RISK FACTORS

You should carefully consider each of the following risks and all of the other information contained in this information statement. Some of these risks relate principally to our separation from SWBI, while others relate principally to our business and the industry in which we operate or to the securities markets generally and ownership of our common stock. Our business, prospects, operating results, financial condition, and cash flows could be materially and adversely affected by any of these risks, and, as a result, the trading price of our common stock could decline.

Risks Related to Our Business

We are dependent on the proper functioning of our critical facilities, our supply chain, and distribution networks as well as the financial stability of our customers, all of which could be negatively impacted by the coronavirus, or COVID-19 in a manner that could materially adversely affect our business, financial condition or results of operations.

COVID-19 is impacting worldwide economic activity. Estimates for economic growth have been reduced as a result of COVID-19, which may have a corresponding effect on our sales activity. The virus continues to spread globally and has been declared a pandemic by the World Health Organization. The impact of this pandemic has been, and will likely continue to be, extensive in many aspects of society, which has resulted in, and will likely continue to result in, significant disruptions to the global economy, as well as businesses and capital markets around the world. With the spread of COVID-19 to the United States and other countries, it is unclear how economic activity and work flows might be impacted on a worldwide basis. Many employers in the United States have curtailed or closed their operations and others are requiring their employees to work from home or not come into their offices or facilities. In addition, the facilities of certain of our contract manufacturers and other suppliers are subject to the same and additional risks, especially since some of them are located in parts of Asia. For example, most of our third-party contract manufacturers and suppliers are located in Asia, primarily China, the place of origin of COVID-19, and, to a lesser extent, Taiwan and Japan, and, at this point, the extent to which COVID-19 may impact our results is uncertain, but it could negatively impact our business. A reduction or interruption in any of our manufacturing processes could have a material adverse effect on our business, results of operations, financial condition, and cash flows. We may also experience significant and unpredictable reductions in demand for certain products as our customers and vendors may experience financial difficulties or be unable to borrow money to fund their operations, which may adversely impact their ability to purchase our products or pay for our products on a timely basis, if at all. The impact of COVID-19 on economic activity, and its effect on our production, supply chain, distribution networks, and our customers is uncertain at this time and could have a material adverse effect on our results, especially to the extent these effects continue and/or increase in severity over an extended period of time.

A significant portion of our assets consists of goodwill, intangible assets, and fixed assets, the carrying value of which may be reduced if we determine that those assets are impaired. Most of our intangible and fixed assets have finite useful lives and are amortized or depreciated over their useful lives on either a straight-line basis or over the expected period of benefit or as revenues are earned from the sales of the related products. The underlying assumptions regarding the estimated useful lives of these intangible assets are reviewed annually and more often if an event or circumstance occurs making it likely that the carrying value of the assets may not be recoverable and are adjusted through accelerated amortization, if necessary. Whenever events or changes in circumstances indicate that the carrying value of the assets may not be recoverable, and at least annually, we test intangible assets for impairment based on estimates of future cash flows. During our fourth fiscal quarter ending April 30, 2020, we recognized an impairment of $98.9 million, which included certain impacts associated with COVID-19 that we were aware of at the time of the impairment. Based upon the ultimate scope and scale of the COVID-19 global pandemic, there may be additional materially negative impacts to the assumptions made with respect to our goodwill and other long-lived intangible assets that could result in an additional impairment of such assets.

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We must continue to introduce new products that are successful in the marketplace.

Our success depends on our ability to continue to conceive, design, produce or source, and market in a timely manner a continuing stream of innovative new products that appeal to consumers and achieve market acceptance and drive customer satisfaction and loyalty. The development of new products is a lengthy and costly process. Any new products that we develop and introduce to the marketplace may be unsuccessful in achieving customer or market acceptance or may achieve success that does not meet our expectations for a variety of reasons, including delays in introduction, unfavorable cost comparisons with alternative products, unfavorable customer or consumer acceptance, and unfavorable performance. Our business, operating results, and financial condition could be adversely affected if we fail to introduce new products that consumers want to buy or we incur significant expenses related to proposed new products that prove to be unsuccessful for any reason.

We rely to a significant extent on outsourcing for a substantial portion of our production, and any interruptions in these arrangements could disrupt our ability to fill our customers’ orders.

We source a significant portion of our made-to-order finished products and product components from third-party contract manufacturers and other suppliers located primarily in Asia. We depend on our contract manufacturers and other suppliers to maintain high levels of productivity and satisfactory delivery schedules. Our ability to secure qualified suppliers that meet our quality and other standards and to receive from them these products and components in a timely and efficient manner represents a challenge, especially with suppliers located and products and product components sourced outside of the United States. The ability of our suppliers to effectively satisfy our production requirements could also be impacted by their financial difficulty or damage to their operations caused by fire, pandemic, such as the current coronavirus pandemic, terrorist attack, natural disaster, or other events. The failure of any supplier to perform to our expectations could result in supply shortages or delays for certain products and product components and harm our business. If we experience significantly increased demand, or if we need to replace an existing supplier as a result of a lack of performance, we may be unable to supplement or replace our production capacity on a timely basis or on terms that are acceptable to us, which may increase our costs, reduce our margins, and harm our ability to deliver our products on time. For certain of our products, it may take a significant amount of time to identify and qualify a supplier that has the capability and resources to meet our product specifications in sufficient volume and satisfy our service and quality control standards. Political and economic instability in countries in which foreign suppliers are located, the financial and managerial instability of suppliers, the failure by suppliers to meet our standards, failure to meet production deadlines, insufficient quality control, problems with production capacity, labor problems experienced by our suppliers, the availability of raw materials to our suppliers, product quality issues, currency exchange rates, transport availability and cost, inflation, and other factors relating to suppliers and the countries in which they are located are beyond our control.

The U.S. foreign trade policies, tariffs, and other impositions on imported goods, trade sanctions imposed on certain countries, the limitation on the importation of certain types of goods or of goods containing certain types of materials from other countries, and other factors relating to foreign trade also are beyond our control. These and a majority of other factors affecting our suppliers and our access to products could adversely affect our business.

We do not have long-term agreements with any of our contract manufacturers or other suppliers that guarantee production capacity, prices, lead times, or delivery schedules. Our contract manufacturers and other suppliers serve other customers, a number of which may have greater production requirements than we do. As a result, our contract manufacturers and other suppliers could determine to prioritize production capacity for other customers or reduce or eliminate deliveries to us on short notice. Lower than expected manufacturing efficiencies could increase our cost and disrupt or delay our supplies. Any of these problems could result in our inability to deliver our products in a timely manner or adversely affect our business, operating results, and financial condition.

The capacity of our contract manufacturers to produce our products also depends upon the cost and availability of raw materials. Our contract manufacturers and other suppliers may not be able to obtain sufficient supply of raw materials, which could result in delays in deliveries of our products by our manufacturers or increased costs. Any shortage of raw materials or inability of a manufacturer to produce or ship our products in a timely manner, or at all, could impair our ability to ship orders of our products in a cost-efficient, timely manner and could cause us to miss the delivery requirements of our customers. As a result, we could experience cancellations of orders, refusals to accept deliveries, or reductions in our prices and margins, any of which could harm our financial performance, reputation, and operating results.

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We may receive product deliveries from suppliers that fail to conform to our quality control standards. In such circumstances, our inability to sell those products could have a negative effect on our net sales and increase our administrative and shipping costs if we are unable to obtain replacement products in a timely manner.

Damage or disruption to manufacturing and distribution capabilities of, or the disruption of deliveries from, our suppliers because of severe or catastrophic events, including weather, natural disaster, fire or explosion, terrorism, pandemics, or labor disruptions, including at ports or at our suppliers, could impair our product sales. Although we have insurance to cover potential loss from most of our suppliers for these events, we could experience losses in excess of our insured limits and any claims for various losses could be denied. In addition, failure to take adequate steps to mitigate the likelihood or potential impact of such events, or to effectively manage such events if they occur, could have a material adverse effect on us, as well as require additional resources to restore our supply chain.

The costs and availability of finished products, product components, and raw materials could affect our business and operating results.

The costs and availability of the finished products, product components, and raw materials that we need can be volatile as a result of numerous factors beyond our control, including general, domestic, and international economic conditions; labor costs; production levels; competition; consumer demand; import duties; tariffs; and currency exchange rates. This volatility can significantly affect the availability and cost of these items for us and may therefore have a material adverse effect on our business, operating results, and financial condition.

Our contract manufacturers are also subject to price volatility and labor cost and other inflationary pressures, which may, in turn, result in an increase in the amount we pay for sourced products, components, and raw materials. During periods of rising prices, there can be no assurance that we will be able to pass any portion of such increases on to customers. Conversely, when prices decline, customer demands for lower prices could result in lower sale prices and, to the extent that we have existing inventory, lower margins. As a result, fluctuations in finished products, components, or raw material prices could have a material adverse effect on our business, operating results, and financial condition.

We also use numerous raw materials, including steel, wood, lead, brass, and plastics, that we purchase from third-party suppliers to produce and test our products. Uncertainties related to governmental fiscal policies, including increased duties, tariffs, or other trade restrictions, could increase the prices of finished products, components, and raw materials we purchase from third-party suppliers.

Our inability to obtain sufficient quantities of finished products and product components, raw materials, and other supplies from independent sources could result in reduced or delayed sales or lost orders. Any delay in or loss of sales could adversely impact our operating results. Many of the finished products, product components, raw materials, and other supplies that we require are available only from a limited number of suppliers.

Since we do not have long-term supply contracts with our contract manufacturers or other suppliers, we could be subject to increased costs, supply interruptions, and difficulties in obtaining finished products, product components, and raw materials. Our suppliers also may encounter difficulties and other issues in obtaining the materials necessary to produce the components and parts that we use in our products. Although we continue to expand our supply chain and seek to utilize multiple sourcing whenever possible, the time lost in seeking and acquiring new sources of supply or the inability to locate alternative sources of supply of comparable capabilities at an acceptable price, or at all, could negatively impact our net sales and profitability.

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Our business depends to a significant extent upon the brand recognition and reputation of our many brands, and the failure to maintain or strengthen our brand recognition and reputation could have a material adverse effect on our business.

The recognition and reputation of our many brands are critical aspects of our business. We believe that maintaining and further enhancing the brand recognition and reputation of our brands is critical to retaining existing customers and attracting new customers. We also believe that the importance of our brand recognition and reputation will increase as competition in our markets continues to develop.

We anticipate that our advertising, marketing, and promotional efforts will increase in the foreseeable future as we continue to seek to enhance our brand recognition and the consumer demand for our products. Historically, we have relied on print and electronic media advertising to increase consumer awareness of our brands to increase purchasing intent and conversation. We anticipate that we will increasingly rely on other forms of media advertising, including social media and digital marketing. Our future growth and profitability will depend in large part upon the effectiveness and efficiency of our advertising, promotion, public relations, and marketing programs. These brand promotion activities may not yield increased revenue and the efficacy of these activities will depend on a number of factors, including our ability to do the following:

 

determine the appropriate creative message and media mix and markets for advertising, marketing, and promotional expenditures;

 

select the right markets, media, and specific media vehicles in which to advertise;

 

identify the most effective and efficient level of spending in each market, media, and specific media vehicle; and

 

effectively manage marketing costs, including creative and media expenses, in order to maintain acceptable customer acquisition costs.

Increases in the pricing of one or more of our marketing and advertising channels could increase our marketing and advertising expenses or cause us to choose less expensive but possibly less effective marketing and advertising channels. If we implement new marketing and advertising strategies, we may incur significantly higher costs than our current costs, which in turn could adversely affect our operating results. Implementing new marketing and advertising strategies also could increase the risk of devoting significant capital and other resources to endeavors that do not prove to be cost effective. We also may incur marketing and advertising expenses significantly in advance of the time we anticipate recognizing revenue associated with such expenses, and our marketing and advertising expenditures may not generate sufficient levels of brand awareness and conversation or result in increased revenue. Even if our marketing and advertising expenses result in increased revenue, the increase might not offset our related expenditures. If we are unable to maintain our marketing and advertising channels on cost-effective terms or replace or supplement existing marketing and advertising channels with similarly or more effective channels, our marketing and advertising expenses could increase substantially, our customer base could be adversely affected, and our business, operating results, financial condition, and reputation could suffer.

In addition, we may determine that certain of our products and brands benefit from endorsements and support from particular sporting enthusiasts, athletes, or other celebrities, and those products and brands may become personally associated with those individuals. As a result, sales of the endorsed products could be materially and adversely affected if any of those individuals’ images, reputations, or popularity were to be negatively impacted.

We often rely on third parties, including product sourcing intermediaries, independent sales representatives and agents, that act on our behalf.

We often rely on third parties, including product sourcing intermediaries, independent sales representatives and agents. These representatives and agents sometimes have the actual or apparent authority to enter into agreements on our behalf. The actions of these third parties could adversely affect our business if they agree to low margin contracts or conduct themselves in a manner that damages our reputation in the marketplace. We also face a risk that these third parties could violate domestic or foreign laws, which could put us at risk for prosecution in the United States or internationally.

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Our operating results could be materially harmed if we are unable to forecast demand for our products accurately.

We often schedule internal production and place orders for finished products, product components, and raw materials with third-party suppliers before receiving firm orders from our customers. If we fail to accurately forecast customer demand, we may experience excess inventory levels or a shortage of products to deliver to our customers. Factors that could affect our ability to accurately forecast demand for our products include the following:

 

our failure to accurately forecast customer acceptance of new products;

 

an increase or decrease in consumer demand for our products or for the products of our competitors;

 

new product introductions by competitors;

 

our relationships with customers;

 

general market conditions and other factors, which may result in cancellations of orders or a reduction or increase in the rate of reorders placed by customers;

 

general market conditions, economic conditions, and consumer confidence levels, which could reduce demand for discretionary items, such as our products; and

 

the domestic political environment, including debates over the regulation of various consumer products, such as firearms.

Inventory levels in excess of customer demand may result in inventory write-downs and the sale of excess inventory at discounted prices, which could have an adverse effect on our business, operating results, and financial condition. If we underestimate demand for our products, we and our third-party suppliers may not be able to produce products to meet customer demand, and this could result in delays in the shipment of products and lost revenues, as well as damage to our reputation and customer relationships. We may not be able to manage inventory levels successfully to meet future order and reorder requirements.

An inability to expand our e-commerce business could reduce our future growth.

Consumers are increasingly shopping online via e-commerce retailers, and we face intense pressure to make our products readily and conveniently available via e-commerce services. Our success in participating in e-commerce depends on our ability to effectively use our marketing resources to communicate with existing and potential customers. To increase our e-commerce sales, we may have to be more promotional to compete, which could impact our gross margin and increase our marketing expenses. We recently developed and continue to enhance our direct-to-consumer e-commerce platform, but rely to an extent on third party e-commerce websites to sell our products, which could lead to our e-commerce customers being able to have control over the pricing of our products. This in turn could lead to adverse relationship consequences with our customers that operate brick and mortar locations as they may perceive themselves to be at a disadvantage based on the e-commerce pricing to end consumers. There is no assurance that we will be able to successfully expand our e-commerce business and respond to shifting consumer traffic patterns and direct-to-consumer buying trends.

In addition, e-commerce and direct-to-consumer operations are subject to numerous risks, including implementing and maintaining appropriate technology to support business strategies; reliance on third-party computer hardware/software and service providers; data breaches; violations of federal, state, and international laws, including those relating to online privacy, credit card fraud, telecommunication failures, electronic break-ins, and similar disruptions; and disruptions of Internet service. Our inability to adequately respond to these risks and uncertainties or to successfully maintain and expand our direct-to-consumer business may have an adverse impact on our operating results.

We plan to continue to expand our brand recognition and product loyalty through social media and our websites, with generation of original content. These efforts are intended to yield greater traffic to our websites and increase our direct-to-consumer revenue. By doing so, we will become to an extent a competitor to our customers, reducing their revenue in the process.  This could lead to adverse relationships with our online and brick and mortar retail customers, which could have an adverse impact on our operating results.

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We compete in highly competitive markets with numerous large and small competitors and with limited barriers to entry.

We operate in highly competitive markets that are characterized by competition from major and small domestic and international companies. Our competitors include Vista Outdoor and a large number of small private companies that directly compete with a limited number of our brands.

Competition in the markets in which we operate is based on a number of factors, including innovation, performance, price, quality, reliability, durability, consumer brand awareness, and customer service and support. Competition could cause price reductions, loss of market share, reduced profits, or operating losses, any of which could have a material adverse effect on our business, operating results, and financial condition. Certain of our competitors may have more established brand names and stronger market partners than we do, be more diversified than we are, or have available financial and marketing resources that are substantially greater than ours, which may allow them to invest more heavily in intellectual property, product development, and advertising. In addition, the proliferation of private labels and exclusive brands offered by department stores, chain stores, and mass channel retailers could lead to reduced sales and prices of our products.

Certain of our competitors may be willing to reduce prices and accept lower profit margins to compete with us. Further, customers often demand that suppliers reduce their prices on mature products, which could lead to lower margins.

In addition, our products compete with many other sporting and recreational products and activities for the discretionary spending of consumers. Failure to effectively compete with these activities or alternative products could have a material adverse effect on our performance.

A substantial portion of our revenue depends on a small number of large customers.

We sell our products through online retailers, sport specialty stores, sporting goods stores, dealers and distributors, and mass market home and auto retailers. Our three largest customers accounted for an aggregate of 42.2% of our revenue for fiscal 2020. Of these customers, the world’s largest e-commerce retailer accounted for 22.7% through its very extensive customer base of end consumers; SWBI accounted for 9.0% through our long-standing license agreements with it; and a very large national sport specialty chain accounted for 10.5% through its retail locations. Of our total revenue, sales pursuant to SWBI licenses accounted for an aggregate of 16.3% of our revenue for fiscal 2020 from our various sales channels.

Although we have long-established relationships with many of our customers, we generally do not have any long-term supply or binding contracts or guarantees of minimum purchases with our customers. Purchases by our customers are generally made through individual purchase orders. As a result, these customers may cancel their orders, change purchase quantities from forecast volumes, delay purchases for a number of reasons beyond our control, or change other terms of the business relationship. Significant or numerous cancellations, reductions, or delays in purchases or changes in business practices by our customers could have a material adverse effect on our business, operating results, and financial condition. In addition, because many of our costs are fixed, a reduction in customer demand could have an adverse effect on our gross profit margins and operating income.

A significant deterioration in the financial condition of our major customers could have a material adverse effect on our sales and profitability. We regularly monitor and evaluate the credit status of our customers and attempt to adjust sales terms as appropriate. Despite these efforts, substantial financial issues or a bankruptcy filing by a key customer could have a material adverse effect on our business, operating results, and financial condition.

An increase in the offering of “private label” products by our customers could negatively impact demand for our products.

Some of our large retail customers have started to directly source products similar to ours under their own private label brands. By doing so, they effectively become a competitor to our brand by eliminating our products from their supply chain, causing declines in our product demand. Furthermore, they are able to offer their private label products at a significantly reduced price and still retain profitability, therefore putting a greater amount of pricing pressure for our products to compete. If we choose to source these private label goods on behalf of our customers, our profitability on those sales is significantly reduced. As such, any additional private label activity within our customer base could have a negative impact on our business, operating results, and financial condition.  

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Retail pricing decisions made by certain of our customers could negatively impact pricing for our products in certain online marketplaces.

Many of our customers have manual or automated processes to match retail prices in the marketplace. We have a policy that requires our customers to maintain minimum advertised pricing on certain of our products, unless we allow otherwise. This policy serves to help stabilize the pricing for our products at retail. If a customer decreases its retail prices below our minimum threshold, other retailers could also reduce pricing on the same product, thus devaluing that product in the marketplace. This practice could cause us to lower our prices to customers or to compensate them financially for the loss in their inventory value, and, therefore, this could yield an adverse effect on our business, operating results, and financial condition.

Changes in the retail industry and the markets for consumer products could negatively impact existing customer relationships and our operating results.

In recent years, the retail industry has experienced consolidation and other ownership changes. In the future, retailers may further consolidate, undergo restructurings or reorganizations, realign their affiliations, or reposition the target markets for their stores. These developments could result in a reduction in the number of retailers that carry our products, increased ownership concentration within the retail industry, increased credit exposure, and increased retailer leverage over their suppliers, such as us. These changes could impact our opportunities in the market and increase our reliance on a smaller number of large customers.

We depend on a continuous flow of new orders from large, high-volume retail customers, but we may be unable to continually meet the needs of these customers. Retailers are increasing their demands on suppliers to take various actions, including the following:

 

reduce lead times for product delivery, which may require us to increase inventories and could impact the timing of reported sales;

 

require us to fulfill their direct-to-consumer website orders, or drop shipping, which could increase our cost per unit, lead to higher inventory levels, and increase freight costs;

 

improve customer service in which products are supplied directly to retailers from third-party suppliers; and

 

adopt technologies related to inventory management that may have substantial implementation costs.

We cannot provide any assurance that we can continue to successfully meet the needs of our customers. A substantial decrease in sales to any of our major customers could have a material adverse effect on our business, operating results, and financial condition.

As a result of the desire of retailers to more closely manage inventory levels, there is a growing trend among retailers to make purchases on a “just-in-time” basis. This requires us to shorten our lead times for production in certain cases and more closely anticipate demand, which could, in the future, require us to carry additional inventories. We also may be negatively affected by changes in the policies of our retail customers, such as inventory destocking, limitations on access to and time on shelf space, use of private label brands, price demands, payment terms, and other conditions, which could negatively impact our business, operating results, and financial condition.

These foregoing factors could result in a shift of bargaining power to the retail industry and in fewer outlets for our products. Further consolidations could result in price and other competition that could reduce our margins and our net sales.

We may have difficulty collecting amounts owed to us.

Certain of our customers may experience credit-related issues. We perform ongoing credit evaluations of customers, but these evaluations may not be completely effective. We grant payment terms to most customers ranging from 30 to 90 days and do not generally require collateral. However, in some instances, we provide longer payment terms. Should more customers than we anticipate experience liquidity issues, or if payments are not received on a timely basis, we may have difficulty collecting amounts owed to us by such customers and our business, operating results, and financial condition could be adversely impacted.

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Through our growth strategy, our sales could become increasingly dependent on purchases by several large customers. Consolidation in the retail industry could also adversely affect our business. If our sales were to become increasingly dependent on business with several large customers, we could experience more concentrated credit-related risks and be adversely affected by the loss or a significant decline in sales to one or more of these customers. In addition, our dependence on a smaller group of customers could result in their increased bargaining position and pressures on the prices we charge.  

We are subject to payment-related risks.

We accept a variety of payment methods, including credit cards, debit cards, electronic funds transfers, electronic payment systems, and gift cards. Accordingly, we are subject to significant and evolving regulations and compliance requirements, including obligations to implement enhanced authentication processes that could result in increased costs and liability and reduce the ease of use of certain payment methods. For certain payment methods, including credit and debit cards, as well as electronic payment systems, we pay interchange and other fees, which may increase over time. We rely on independent service providers for payment processing, including credit and debit cards. If these independent service providers become unwilling or unable to provide these services to us or if the cost of using these providers increases, our business could be harmed. We are also subject to payment card association operating rules and agreements, including data security rules and agreements, certification requirements, and rules governing electronic funds transfers, which could change or be reinterpreted to make it difficult or impossible for us to comply. If we fail to comply with these rules or requirements, or if there is a breach or compromise of our data security systems, we may be liable for losses incurred by card issuing banks or customers, subject to fines and higher transaction fees, or the loss of our ability to accept credit or debit card payments from our customers or process electronic fund transfers or facilitate other types of payments. Any failure to comply could significantly harm our brand, reputation, business, operating results, and financial condition.

Our performance is influenced by a variety of economic, social, political, legislative, and regulatory factors.

Our performance is influenced by a variety of economic, social, political, legislative, and regulatory factors. General economic conditions and consumer spending patterns can negatively impact our operating results. Economic uncertainty, unfavorable employment levels, declines in consumer confidence, increases in consumer debt levels, increased commodity prices, and other economic factors may affect consumer spending on discretionary items and adversely affect the demand for our products.

In addition, sluggish economies and consumer uncertainty regarding future economic prospects in our key markets may have an adverse effect on the financial health of certain of our customers, which may in turn have a material adverse effect on our operating results. We extend credit to our customers for periods of varying duration based on an assessment of the customer’s financial condition, generally without requiring collateral, which increases our exposure to the risk of uncollectable receivables. In addition, we face increased risk of order reduction or cancellation when dealing with financially ailing customers or customers struggling with economic uncertainty. We may reduce our level of business with customers and distributors experiencing financial difficulties and may not be able to replace that business with other customers, which could have a material adverse effect on our financial condition, operating results, or cash flows. In times of uncertain market conditions, there is also increased risk of inventories which cannot be liquidated in an efficient manner and may result in excess levels of inventory.

Social, political, and other factors also can affect our performance. Concerns about presidential, congressional, and state elections and legislature and policy shifts resulting from those elections can affect the demand for our products. In addition, speculation surrounding increased gun control and hunting regulations at the federal, state, and local level can affect consumer demand for our products since a significant amount of our products find applications in shooting and hunting activities. Often, such concerns result in an increase in near-term consumer demand and subsequent softening of demand when such concerns subside. Inventory levels in excess of customer demand may negatively impact our business, operating results, and financial condition.

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Federal and state legislatures frequently consider legislation relating to the regulation of firearms, including amendment or repeal of existing legislation. Existing laws may also be affected by future judicial rulings and interpretations. These possible changes to existing legislation or the enactment of new legislation may seek to restrict the makeup of a firearm, including limitations on magazine capacity; mandate the use of certain technologies in a firearm; remove existing legal defenses in lawsuits; or ban the sale and in some cases, the ownership of various types of firearms and accessories. Such restrictive changes to legislation could reduce the demand for certain of our products that relate to firearms. In addition, gun-control activists may succeed in imposing restrictions or an outright ban on private gun ownership. Such restrictions or bans could have a material adverse effect on our business, operating results, and financial condition.

Our revenue and profits depend upon the level of consumer spending, which is sensitive to global economic conditions and other factors.

The success of our business depends on consumer spending, and there are a number of factors that influence consumer spending, including actual and perceived economic conditions; disposable consumer income; interest rates; consumer credit availability; employment levels; stock market performance; weather conditions; energy prices; consumer discretionary spending patterns; and tax rates in the international, national, regional, and local markets where our products are produced or sold. The current global economic environment is unpredictable, and adverse economic trends or other factors could negatively impact the level of consumer spending, which could have a material adverse impact on us.

We depend on our new distribution facility, which may not produce the benefits expected.

We are extremely dependent on our new distribution facility in Columbia, Missouri, which just recently became fully operational.  The facility houses our principal executive, administrative, financial, sales, marketing, research and development, assembly, and quality inspection operations. We will have the exclusive right to utilize approximately 361,000 square feet of the approximately 613,000 rentable square feet in the facility, as well as access to the facility’s common areas, under a sublease from SWBI. See “The Separation—Agreements with SWBI—Sublease.”

The facility includes computer controlled and automated equipment. As a result, the operations of the facility are complicated and may be subject to a number of risks related to security or computer viruses, the proper operation of software and hardware, electronic or power interruptions, and other system failures. Our ability to successfully operate the facility depends on numerous factors, including the proper design of the facility, the ability to employ an adequate number of skilled workers to operate the facility, the design and operation of computer controlled and automated systems, the design of software systems to operate the facility, and the integration of the facility into our ERP system. Difficulties or delays in performing any of these critical tasks could negatively impact our operating results.

Our ability to meet customer expectations, manage inventory, complete sales, and achieve objectives for operating profits will depend on our proper operation of the facility.

Our business is subject to the risk of earthquakes, fire, power outages, floods, and other catastrophic events and to interruption by problems such as terrorism, cyberattacks, or failure of key information technology systems.

Our business is vulnerable to damage or interruption from earthquakes, fires, floods, power losses, telecommunications failures, terrorist attacks, acts of war, human errors, criminal acts, public health crises, such as pandemics and epidemics, and other similar events. These risks are particularly substantial because we conduct substantially all of our operations from one location. We maintain casualty and business interruption insurance, but it may not adequately protect us from the types and amounts of losses we may incur or from the adverse effect that may be caused by significant disruptions in our product distribution, such as the long-term loss of customers or an erosion of our brand image. In addition, the facilities of certain of our contract manufacturers and other suppliers are subject to the same and additional risks, especially since some of them are located in parts of Asia that experience typhoons, earthquakes, other natural disasters, and public health crises. For example, most of our third-party contract manufacturers and suppliers are located in Asia, primarily China, and, to a lesser extent, Taiwan and Japan, and, at this point, the extent to which COVID-19 may impact our results is uncertain, but it could negatively impact our business.

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Our computer systems may also be vulnerable to computer viruses, criminal acts, denial-of-service attacks, ransomware, and similar disruptions from unauthorized tampering with our computer systems, which could lead to interruptions, delays, or loss of critical data. As we rely heavily on our information technology and communications systems and the Internet to conduct our business and provide high-quality customer service, these disruptions could harm our ability to run our business and either directly or indirectly disrupt our suppliers’ or manufacturers’ businesses, which could harm our business, operating results, and financial condition.

Acquisitions involve significant risks, and any acquisitions that we undertake in the future could be difficult to integrate, disrupt our business, dilute stockholder value, and harm our operating results.

We have a plan to expand our operations through acquisitions to enhance our existing products and offer new products, enter new markets and businesses, strengthen and avoid interruption from our supply chain, and improve our position in current markets and businesses. Acquisitions involve significant risks and uncertainties. We cannot accurately predict the timing, size, and success of any future acquisitions. We may be unable to identify suitable acquisition candidates or to complete the acquisitions of candidates that we identify. Increased competition for acquisition candidates or increased asking prices by acquisition candidates may increase purchase prices for acquisitions to levels beyond our financial capability or to levels that would not result in the returns required by our acquisition criteria. Acquisitions also may become more difficult in the future as we or others acquire the most attractive candidates. Unforeseen expenses, difficulties, and delays frequently encountered in connection with expansion through acquisitions could inhibit our growth and negatively impact our business, operating results, and financial condition.

Our ability to complete acquisitions that we desire to make in the future will depend upon various factors, including the following:

 

the availability of suitable acquisition candidates at attractive purchase prices;

 

the ability to compete effectively for available acquisition opportunities;

 

the availability of cash resources, borrowing capacity, or other forms of consideration at favorable pricing that would enable us to offer the required acquisition purchase prices;

 

the ability of management to devote sufficient attention to acquisition efforts; and

 

the ability to obtain any requisite governmental or other approvals.

We plan to pursue acquisitions of companies involved in what we consider the rugged outdoor market (which may include shooting, hunting, fishing, camping, hiking, personal security and defense, and a variety of other outdoor recreational and leisure activities), companies that perform manufacturing services for us or supply us with components or materials, and other businesses that we regard as complementary to our business. We may have little or no experience with certain acquired businesses, which could involve significantly different supply chains, production techniques, customers, and competitive factors than our current business. This lack of experience would require us to rely to a great extent on the management teams of these acquired businesses. These acquisitions also could require us to make significant investments in systems, equipment, facilities, and personnel in anticipation of growth. These costs could be essential to implement our growth strategy in supporting our expanded activities and resulting corporate structure changes. We may be unable to achieve some or all of the benefits that we expect to achieve as we expand into these new markets within the time frames we expect, if at all. If we fail to achieve some or all of the benefits that we expect to achieve as we expand into these new markets, or do not achieve them within the time frames we expect, our business, operating results, and financial condition could be adversely affected.

As a part of any potential acquisition, we may engage in discussions with various acquisition candidates. In connection with these discussions, we and each potential acquisition candidate may exchange confidential operational and financial information, conduct due diligence inquiries, and consider the structure, terms, and conditions of the potential acquisition. In certain cases, the prospective acquisition candidate may agree not to discuss a potential acquisition with any other party for a specific period of time and agree to take other actions designed to enhance the possibility of the acquisition, such as preparing audited financial information. Potential acquisition discussions frequently take place over a long period of time and involve difficult business integration and other issues. As a result of these and other factors, a number of potential acquisitions that from time-to-time appear likely to occur do not result in binding legal agreements and are not consummated, but may result in increased legal, consulting, and other costs.

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Unforeseen expenses, difficulties, and delays frequently encountered in connection with future acquisitions could inhibit our growth and negatively impact our profitability. Any future acquisitions may not meet our strategic objectives or perform as anticipated. In addition, the size, timing, and success of any future acquisitions may cause substantial fluctuations in our operating results from quarter to quarter. These interim fluctuations could adversely affect the market price of our common stock.

If we finance any future acquisitions in whole or in part through the issuance of common stock or securities convertible into or exercisable for common stock, existing stockholders will experience dilution in the voting power of their common stock and earnings per share could be negatively impacted. The extent to which we will be able or willing to use our common stock for acquisitions will depend on the market price of our common stock from time-to-time and the willingness of potential acquisition candidates to accept our common stock as full or partial consideration for the sale of their businesses. Our inability to use our common stock as consideration, to generate cash from operations, or to obtain additional funding through debt or equity financings in order to pursue an acquisition could limit our growth.

Any acquisitions that we undertake in the future could be difficult to integrate, disrupt our business, and harm our operations.

We may be unable to effectively complete an integration of the management, operations, facilities, accounting, and information systems of acquired businesses with our own; to implement effective controls to mitigate legal and business risks with which we have no prior experience; to manage efficiently the combined operations of the acquired businesses with our operations; to achieve our operating, growth, and performance goals for acquired businesses; to achieve additional sales as a result of our expanded operations; or to achieve operating efficiencies or otherwise realize cost savings as a result of anticipated acquisition synergies. The integration of acquired businesses involves numerous risks and uncertainties, including the following:

 

the failure of acquired businesses to achieve expected results;

 

the potential disruption of our core businesses;

 

risks associated with entering markets and businesses in which we have little or no prior experience;

 

diversion of management’s attention from our core businesses;

 

adverse effects on existing business relationships with suppliers and customers;

 

risks associated with increased regulatory or compliance matters;

 

failure to retain key customers, suppliers, or personnel of acquired businesses;

 

the potential strain on our financial and managerial controls and reporting systems and procedures;

 

greater than anticipated costs and expenses related to the integration of the acquired businesses with our business;

 

potential unknown liabilities associated with the acquired businesses;

 

risks associated with weak internal controls over information technology systems and associated cyber security risks;

 

meeting the challenges inherent in effectively managing an increased number of employees in diverse locations;

 

the risk of impairment charges related to potential write-downs of acquired assets; and

 

the challenge of creating uniform standards, controls, procedures, policies, and information systems.

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Potential strategic alliances may not achieve their objectives, which could impede our growth.

We anticipate that we will enter into new strategic alliances in the future. We continue to explore strategic alliances designed to enhance our supply chain, expand our product offerings, enter new markets, and improve our distribution channels. Our existing strategic alliances and any new strategic alliances may not achieve their intended objectives, and parties to our strategic alliances may not perform as contemplated. The failure of these alliances may impede our ability to introduce new products and enter new markets.

Our inability to protect our intellectual property or obtain the right to use intellectual property from third parties could impair our competitive advantage, reduce our sales, and increase our costs.

Our success and ability to compete depend in part on our ability to protect our intellectual property. We rely on a combination of patents, copyrights, trade secrets, trademarks, trade dress, customer records, monitoring, brand protection services, confidentiality agreements, and other contractual provisions to protect our intellectual property, but these measures may provide only limited protection. Our failure to enforce and protect our intellectual property rights or obtain the right to use necessary intellectual property from third parties may lead to our loss of trademark and service mark rights, brand loyalty, and notoriety among our customers and prospective customers. The scope of any intellectual property to which we have or may obtain rights may not prevent others from developing and selling competing products. In addition, our intellectual property may be held invalid upon challenge, or others may claim rights in, or ownership of, our intellectual property. Moreover, we may become subject to litigation with parties that claim, among other matters, that we infringed their patents or other intellectual property rights. The defense and prosecution of patent and other intellectual property claims are both costly and time-consuming and could result in a material adverse effect on our business, operating results, and financial condition.

Patents may not be issued for the patent applications that we have filed or may file in the future. Our issued patents may be challenged, invalidated, or circumvented, and claims of our patents may not be of sufficient scope or strength, or issued in the proper geographic regions, to provide meaningful protection or any commercial advantage. We have registered certain of our trademarks and trade dress in the United States and other countries. We have also recorded certain of our registered trademarks with customs officials in the United States and other countries. We may be unable to enforce existing or obtain new registrations of principle or other trademarks in key markets. Failure to obtain or enforce such registrations could compromise our ability to protect fully our trademarks and brands and could increase the risk of challenges from third parties to our use of our trademarks and brands.

In the past, we did not consistently require our employees and consultants to enter into confidentiality agreements, employment agreements, or proprietary information and invention agreements; however, we now require such agreements. As a result, these employees and consultants may try to claim some ownership interest in our intellectual property and may use our intellectual property competitively and without appropriate limitations. In addition, our acquired businesses may not have consistently required their employees and consultants to enter into confidentiality agreements, employment agreements, or proprietary information and invention agreements. Claims by such individuals may affect our business, operating results, and financial condition.

We may incur substantial expenses and devote significant resources in prosecuting others for their unauthorized use of our intellectual property rights.

We may become involved in litigation regarding patents and other intellectual property rights. Other companies, including our competitors, may develop intellectual property that is similar or superior to our intellectual property, duplicate our intellectual property, or design around our patents and proprietary rights. Other companies also may have or obtain patents or other proprietary rights that would prevent, limit, or interfere with our ability to make, use, or sell our products. Effective intellectual property protection may be unavailable or limited in some foreign countries in which we sell or source products or components or from which competing products may be sold. Unauthorized parties may attempt to copy or otherwise use aspects of our intellectual property and products that we regard as proprietary. Our means of protecting our proprietary rights in the United States or abroad may prove to be inadequate, and competitors may be able to independently develop similar intellectual property. If our intellectual property protection is insufficient to protect our intellectual property rights, we could face increased competition in the markets for our products.

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Should any of our competitors file patent applications or obtain patents that claim inventions also claimed by us, we may choose to participate in an interference proceeding to determine the right to a patent for these inventions because our business would be harmed if we fail to enforce and protect our intellectual property rights. Even if the outcome is favorable, this proceeding could result in substantial cost to us and disrupt our business.

In the future, we also may need to file lawsuits to enforce our intellectual property rights, protect our trade secrets, or determine the validity and scope of the proprietary rights of others. This type of litigation, whether successful or unsuccessful, could result in substantial costs and diversion of resources, which could have a material adverse effect on us.

We face risks relating to our international business that could adversely affect our business, operating results, and financial condition.

Our ability to conduct operations in our existing international markets and to capitalize on growth in new international markets is subject to risks associated with our doing business internationally, including the following:

 

issues related to managing international operations;

 

potentially adverse tax developments;

 

greater difficulty enforcing intellectual property rights and weaker laws protecting intellectual property rights;

 

currency exchange issues;

 

import and export controls;

 

social, political, and economic instability in the countries in which we operate;

 

local laws and regulations, including those governing labor, product safety, and environmental protection;

 

changes to international treaties and regulations;

 

changes in tariffs, import duties, or import or export restrictions;

 

limitations on our ability to efficiently repatriate cash from our foreign operations;

 

restrictive actions by foreign governments;

 

complications in complying with the laws and policies of the United States affecting the importation of goods, including tariffs, duties, quotas, and taxes;

 

required compliance with U.S. laws that impact our operations in foreign jurisdictions that do not impact local operating companies; and

 

complications in complying with trade and foreign tax laws.

As we source finished products, product components, and raw materials in Asia, a significant disruption of the political or financial systems in countries in that region could put these operations at risk, which could ultimately adversely affect our profitability or operating results.

We face risks associated with international activities, including those related to compliance with the Foreign Corrupt Practices Act and other applicable anti-corruption legislation.

Political and economic conditions abroad may result in a reduction of or inhibition of our growth in our sales in numerous foreign countries and our purchase of certain finished products and product components from certain countries in Asia and Europe, including China and, to a lesser extent, Taiwan and Japan. Our efforts to comply with the Foreign Corrupt Practices Act, or other applicable anti-corruption laws and regulations, may limit our international business activities, necessitate the implementation of certain processes and compliance programs, and subject us to enforcement actions or penalties for noncompliance. Both the United States and foreign governments have increased their oversight and enforcement activities in this area in recent years, and we expect applicable agencies to continue to increase such activities in the future.

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Increased protectionist tariffs and trade wars could further harm our business.

The federal government has recently put into place tariffs and other trade restrictions and signaled that it may additionally alter trade agreements and terms between the United States and China, the European Union, Canada, and Mexico, among others, including limiting trade and/or imposing tariffs on imports from such countries. In addition, China, the European Union, Canada, and Mexico, among others, have either threatened or put into place retaliatory tariffs of their own.

We are currently subject to tariffs on a significant number of our products. Increases in protectionist trade legislation in either the United States or foreign countries, such as a change in the current tariff structures, export or import compliance laws, or other trade policies, could reduce our ability to sell our products in foreign markets, the ability of foreign customers to purchase our products, and our ability to import products, components, and raw materials from foreign suppliers. The United States has imposed and threatened to impose further tariffs on a variety of products and materials imported from various foreign countries. Tariff policies of the United States may result in retaliatory actions by affected countries, potentially resulting in trade wars and increased costs for goods imported into the United States. Any tariffs that result in increased costs or unavailability of imported products or components that we obtain for resale from foreign suppliers or raw materials used in the production of our products could require us to increase the prices of the products we sell or result in lower gross margins on such products if we are unable to increase the price of such products to our customers. Furthermore, increased pricing on these products could lead to lower consumer demand.

These tariffs have the potential to significantly increase the cost of our products. In such a case, there can be no assurance that we will be able to shift manufacturing and supply agreements to non-impacted countries, including the United States, to reduce the effects of the tariffs. As a result, we may suffer margin erosion or be required to raise our prices, which may result in the loss of customers, negatively impact our operating results, or otherwise harm our business. In addition, the imposition of tariffs on products that we export to international markets could make such products more expensive compared to those of our competitors if we pass related additional costs on to our customers, which may also result in the loss of customers, negatively impact our operating results, or otherwise harm our business.

Interruptions in the proper functioning of our information systems or other issues with our ERP systems could cause disruption to our operations.

We rely extensively on our information systems to manage our business, data, communications, supply chain, ordering, pricing, billing, inventory replenishment, accounting functions, and other processes. Our systems are subject to damage or interruption from various sources, including power outages, computer and telecommunications failures, computer viruses, cyber security breaches, vandalism, severe weather conditions, catastrophic events, terrorism, and human error, and our disaster recovery planning cannot account for all eventualities. Our current, and any future, disaster recovery measures cannot address all potential contingencies. If our systems are damaged, fail to function properly, or otherwise become compromised or unavailable, we may incur substantial costs to repair or replace them, and we may experience loss of critical data and interruptions or delays in our ability to perform critical functions, which could adversely affect our business, operating results, and financial condition.

Our information technology systems require periodic modifications, upgrades, and replacements that subject us to costs and risks, including potential disruption to our internal control structure, substantial capital expenditures, additional administration and operating expenses, retention of sufficiently skilled personnel or outside firms to implement and operate existing or new systems, and other risks and costs of delays or difficulties in transitioning to new or modified systems or of integrating new or modified systems into our current systems. In addition, challenges implementing new or modified technology systems may cause disruptions in our business operations and have an adverse effect on our business operations if not anticipated and appropriately mitigated.

In conjunction with the Transition Services Agreement that we are entering into with SWBI as part of the Separation, we will continue to utilize the fully integrated ERP system, SAP, that we have been using for several years and which is administered by SWBI. Any significant change to SAP could result in a major disruption to our business, and any disruption could have a negative effect on our business, operating results, and financial condition.

Upon conclusion of the Transition Services Agreement, we intend to implement a new fully integrated ERP system. This implementation could result in a major disruption to our business, and any disruption could have a negative effect on our business, operating results, and financial condition. In addition, implementing a new ERP system may require significant resources and refinement to fully realize the expected benefits of the system.

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Breaches of our information systems could adversely affect our reputation, disrupt our operations, and result in increased costs and loss of revenue.

There have been an increasing number of cyber security incidents affecting companies around the world, which have caused operational failures or compromised sensitive or confidential corporate data. Although we do not believe our systems are at a greater risk of cyber security incidents than other similar organizations, such cyber security incidents may result in the loss or compromise of customer, financial, or operational data; loss of assets; disruption of billing, collections, or normal operating activities; disruption of electronic monitoring and control of operational systems; and delays in financial reporting and other management functions. In addition, acquisitions of smaller, closely held companies could increase our risk as they often lack the systems, policies, procedures, and controls of larger companies. Possible impacts associated with cyber security incidents (which generally are increasing in sophistication as well as frequency) may include, among others, remediation costs related to lost, stolen, or compromised data; repairs to data processing systems; increased cyber security protection costs; reputational damage; lawsuits seeking damages; regulatory actions; and adverse effects on our compliance with applicable privacy and other laws and regulations. Such occurrences could have an adverse effect on our business, operating results, and financial condition.

If our efforts to protect the security of personal information related to any of our customers, consumers, vendors, or employees are unsuccessful and unauthorized access to that personal information is obtained, or we experience a significant disruption in our computer systems or a cyber security breach, we could experience an adverse effect on our operations, we could be subject to costly government enforcement action and private litigation, and our reputation could suffer.

Our operations involve the storage and transmission of proprietary information related to customers, consumers, vendors, and employees, such as credit card and bank account numbers, and security breaches could expose us to a risk of loss of this information, government enforcement action and litigation, and possible liability. Our payment services may be susceptible to credit card and other payment fraud schemes, including unauthorized use of credit cards, debit cards, bank account information, identity theft, and merchant fraud.

If our security measures are breached as a result of third-party action, employee error, malfeasance, or otherwise, and as a result, someone obtains unauthorized access to data of our customers, consumers, vendors, or employees, our reputation may be damaged, our business may suffer, and we could incur significant liability. Because techniques used to obtain unauthorized access or to sabotage systems change frequently and generally are not recognized until launched against a target, we may be unable to anticipate these techniques or implement adequate preventative measures. If an actual or perceived breach of our security occurs, the public perception of the effectiveness of our security measures could be harmed and we could lose customers and consumers, which could adversely affect our business.

Any breach of our data security or that of our service providers could result in an unauthorized release or transfer of customer, consumer, vendor, user, or employee information; cause the loss of valuable business data; or cause a disruption in our business. These events could give rise to unwanted media attention; damage our reputation; damage our customer, consumer, employee, vendor, or user relationships; and result in lost sales, fines, or lawsuits. We may also be required to expend significant capital and other resources to protect against or respond to or alleviate problems caused by a security breach, which could harm our operating results. If we or our independent service providers or business partners experience a breach of systems compromising our customers’ sensitive data, our brand could be harmed, sales of our products could decrease, and we could be exposed to losses, litigation, or regulatory proceedings. Depending on the nature of the information compromised, we may also have obligations to notify users, law enforcement, or payment companies about the incident and may need to provide some form of remedy, such as refunds, for the individuals affected by the incident.

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Our performance is influenced by a variety of economic, social, political, legislative, and regulatory factors.

Our performance is influenced by a variety of economic, social, political, legislative, and regulatory factors. General economic conditions and consumer spending patterns can negatively impact our operating results. Economic uncertainty, unfavorable employment levels, declines in consumer confidence, increases in consumer debt levels, increased commodity prices, and other economic factors may affect consumer spending on discretionary items and adversely affect the demand for our products. Economic conditions also affect governmental, political, and budgetary policies. As a result, economic conditions also can have an effect on the sale of our products to law enforcement, government, and military customers.

Social, political, and other factors also can affect our performance. Concerns about presidential, congressional, and state elections and legislature and policy shifts resulting from those elections can affect the demand for our products. In addition, speculation surrounding increased gun control at the federal, state, and local level and heightened fears of terrorism and crime can affect consumer demand for our firearm-related products. Often, such concerns result in an increase in near-term consumer demand and subsequent softening of demand when such concerns subside. Inventory levels in excess of customer demand may negatively impact operating results.  

Our hunting and shooting products are used in association with firearms. Federal and state legislatures frequently consider legislation relating to the regulation of firearms, including amendment or repeal of existing legislation. Existing laws may also be affected by future judicial rulings and interpretations. These possible changes to existing legislation or the enactment of new legislation may seek to restrict the makeup of a firearm, including limitations on magazine capacity; mandate the use of certain technologies in a firearm; remove existing legal defenses in lawsuits; or ban the sale and, in some cases, the ownership of various types of firearms and accessories. If such restrictive changes to legislation develop, we could find it difficult, expensive, or even impossible to comply with them, impeding new product development and distribution of existing products. In addition, gun-control activists may succeed in imposing restrictions or an outright ban on private gun ownership. Such restrictions or bans could have a material adverse effect on our business, operating results, and financial condition.

We are subject to extensive regulation and could incur fines, penalties, and other costs and liabilities under such requirements.

Like other producers and sellers of consumer products, we are required to comply with a wide variety of federal, state, local, and international laws, rules, and regulations, including those related to consumer products and consumer protection, advertising and marketing, labor and employment, data protection and privacy, intellectual property, workplace safety, the environment, the import and export of products, and taxes. Our failure to comply with applicable federal, state, local, or international laws, rules, and regulations may result in our being subject to claims, lawsuits, fines, and adverse publicity that could have a material adverse effect on our business, operating results, and financial condition. These laws, rules, and regulations currently impose significant compliance requirements on our business, and more restrictive laws, rules, and regulations may be adopted in the future.

Our business involves the potential for product recalls, product liability, and other claims against us, which could affect our earnings and financial condition.

As a distributor of consumer products, we are subject to the U.S. Consumer Products Safety Act of 1972, as amended by the Consumer Product Safety Improvement Act of 2008, which empowers the Consumer Products Safety Commission to exclude from the market products that are found to be unsafe or hazardous, and similar laws under foreign jurisdictions. Under certain circumstances, the Consumer Products Safety Commission or comparable foreign agency could require us to repurchase or recall one or more of our products. Additionally, other laws and agencies regulate certain consumer products sold by us and more restrictive laws and regulations may be adopted in the future. Any repurchase or recall of our products could be costly and damage our reputation. If we were required to remove, or we voluntarily remove, our products from the market, our reputation could be tarnished and we might have large quantities of finished products that we could not sell. We also face exposure to product liability claims in the event that one of our products is alleged to have resulted in property damage, bodily injury, or other adverse effects. In addition to the risk of substantial monetary judgments, fines, or penalties that may result from any governmental investigations, product liability claims, or regulatory actions, such events could result in negative publicity that could harm our reputation in the marketplace, adversely impact the value of our brands, and result in an increase in the cost of producing our products. Similar to product liability claims, we face exposure to class action lawsuits related to the performance, safety, or advertising of our products. Such class action lawsuits could result in substantial monetary judgments, injunctions related to the sale of products, and potentially tarnish our reputation.

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Although we maintain product liability insurance in amounts that we believe are reasonable, that insurance is, in most cases, subject to large self-insured retentions for which we are responsible, and we cannot assure you that we will be able to maintain such insurance on acceptable terms, if at all, in the future or that product liability claims will not exceed the amount of insurance coverage. As a result, product recalls or product liability claims could have a material adverse effect on our business, operating results, and financial condition. In addition, we face potential other types of litigation arising out of alleged defects in our products or otherwise, such as class action lawsuits. We do not maintain insurance against many types of claims involving alleged defects in our products that do not involve personal injury or property damage. We spend substantial resources ensuring compliance with governmental and other applicable standards.

Our product liability insurance program is an occurrence-based program based on our current and historical claims experience and the availability and cost of insurance. Under SWBI, we had substantial, self-insurance for product liability risk. We are now covered under a fully-insured program for product liability risks. We cannot assure you, however, that our future product liability experience will be consistent with our past experience or that claims and awards will not substantially impact the costs of our insurance programs in the future.

We produce or source and sell products that create exposure to potential product liability, warranty liability, or personal injury claims and litigation.

Some of our products are used in applications and situations that involve risk of personal injury and death. Our products expose us to potential product liability, warranty liability, personal injury claims, and litigation relating to the use or misuse of our products, including allegations of defects in manufacturing, defects in design, a failure to warn of dangers inherent in the product or activities associated with the product, negligence, and strict liability. If successful, such claims could have a material adverse effect on our business. In addition, defects in our products could reduce demand for our products and result in a decrease in sales and market acceptance and damage to our reputation.

Components used in our products may contain undetected defects that are subsequently discovered at any point in the life of the product. In addition, we obtain many of our finished products and product components from third-party suppliers and may not be able to detect defects in such products or components until after they are sold. Defects in our products may result in a loss of sales, recall expenses, delay in market acceptance, damage to our reputation, and increased warranty costs, which could have a material adverse effect on our business, operating results, and financial condition.

Environmental laws and regulations may impact our business.

We are subject to numerous federal, state, and local laws that regulate or otherwise relate to the protection of the environment, including the Clean Air Act, the Clean Water Act, the Comprehensive Environmental Response, Compensation, and Liability Act, or CERCLA, and the Solid Waste Disposal Act, as amended by the Resource Conservation and Recovery Act, or RCRA. CERCLA, RCRA, and related state laws subject us to the potential obligation to remove or mitigate the environmental effects of the disposal or release of certain pollutants at our manufacturing facilities and at third-party or formerly owned sites at which contaminants generated by us may be located. This requires us to make expenditures of both a capital and expense nature.

In our efforts to satisfy our environmental, health, and safety responsibilities and to comply with all applicable laws and regulations, we maintain policies relating to the environmental, health, and safety standards for our operations and conduct programs to monitor compliance with various environmental regulations. However, in the normal course of our operations, we may become subject to governmental proceedings and orders pertaining to waste disposal, air emissions, and water discharges into the environment. We believe, based on the information available to us, that we are in substantial compliance with applicable environmental regulations.

We could have contamination on our properties, and we cannot predict whether our operations will cause contamination in the future. As a result, we could incur costs to clean up contamination. Furthermore, it is not possible to predict with certainty the impact on us of future environmental, health, and safety compliance requirements or of the cost of resolution of future regulatory proceedings and claims, in part because the scope of the remedies that may be required is not certain, liability under federal environmental laws is joint and several in nature, and environmental health and safety laws and regulations are subject to modification and changes in interpretation. Additional or changing environmental health and safety regulation may become burdensome in the future, and any such development could have an adverse effect on us.

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We depend on key personnel, and our business may be harmed if we fail to retain and attract skilled management and other key personnel.

Our success depends to a significant extent upon the continued services of our current senior management team, including Brian D. Murphy, our President and Chief Executive Officer. The loss of Mr. Murphy or one or more of our other key executives or employees could have a material adverse effect on our business. We do not maintain “key person” insurance policies on the lives of any of our executive officers or any of our other employees. Except in the case of Mr. Murphy with whom we have an employment agreement, we employ all of our executive officers and key employees on an at-will basis, and their employment can be terminated by us or by them at any time, for any reason, and without advance notice, subject to certain severance obligations upon termination. In order to retain valuable employees, in addition to salary and cash incentives, we regard our ability as a public company to grant stock-based compensation as an important component of our ability to attract and retain key personnel. The value to employees of stock-based compensation over time will be significantly affected by movements in our stock price that are beyond our control and may at any time be insufficient to counteract offers from other companies.

Our success also depends on our ability to attract, retain, and motivate additional skilled non-management personnel. We plan to continue to expand our work force to continue to improve our business and operating results. We believe that there is significant competition for qualified personnel with the skills and knowledge that we require. Other companies with which we compete for qualified personnel may have or have access to greater financial and other resources than we do. They also may provide more diverse opportunities and better chances for career advancement. Some of these characteristics may be more appealing to high-quality candidates than those which we have to offer. If we are not able to retain our current key personnel, or attract the necessary qualified key personnel, to accomplish our business objectives, we may experience constraints that will impede the achievement of our business objectives and our ability to pursue our business strategy. New hires require significant training and, in most cases, take significant time before they achieve full productivity. New employees may not become as productive as we expect and we may be unable to hire or retain sufficient numbers of qualified individuals. If our recruiting, training, and retention efforts are not successful or do not generate a corresponding increase in revenue, our business may be harmed.

Seasonality and weather conditions may cause our operating results to vary from quarter to quarter.

Our business is seasonal. Our sales have typically been highest between August and October due to shipments around the fall hunting and holiday seasons. The seasonality of our sales may change in the future. Seasonal variations in our operating results may reduce our cash on hand, increase our inventory levels, and extend our accounts receivable collection periods. This in turn may cause us to increase our debt levels and interest expense to fund our working capital requirements.

Our annual and quarterly operating results may also fluctuate significantly as a result of a variety of other factors, including, among other things, the timing of the introduction of and advertising for our new products and those of our competitors and changes in our product mix. Variations in weather conditions may also affect our quarterly operating results as certain of our products are primarily for outdoor use. In addition, we may not be able to adjust our spending in a timely manner to compensate for any unexpected shortfall in our sales. As a result of these seasonal and quarterly fluctuations, we believe that comparisons of our operating results between different quarters within a single fiscal year, or across different fiscal years, are not necessarily meaningful and that these comparisons cannot be relied upon as indicators of our future performance, including the performance for the full year based on quarterly performance. In the event that any seasonal or quarterly fluctuations in our net sales and operating results result in our failure to meet our forecasts or the forecasts of the research analysts that may cover us in the future, the market price of our common stock could fluctuate or decline.

We may incur higher medical benefit costs in the future.

We are fully-insured for our employee medical plan. While our medical costs in recent years have generally increased at the same level as the regional average, we could experience an increase in our medical costs beyond what we have experienced or expect.

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We cannot assess the effect that legislation will have on our healthcare costs and structure or our ability to provide healthcare benefits to our employees. The Patient Protection and Affordable Care Act, as amended by the Health Care and Education Reconciliation Act of 2010, or ACA, became effective in calendar 2015 with other provisions to become effective over succeeding years.

There have been recent legislative and regulatory efforts to repeal and replace the ACA. The Tax Cuts and Jobs Act of 2017, which was adopted in December 2017, effectively eliminated certain provisions of the ACA, including the individual mandate that was scheduled to start in 2019, which would have required consumers to buy insurance or pay a penalty, subject to a limited number of exceptions. Any additional effort to repeal and replace the ACA, or the adoption by certain states, including states in which we conduct operations, of their own health care legislation, could cause us to face increased costs to cover our own employees. Changes to the healthcare requirements in the future may have an adverse effect on our business, operating results, and financial condition.

Our growth strategy may require significant additional funds, the amount of which will depend upon our working capital and general corporate needs.

Any substantial borrowings made to finance operations or future acquisitions could make us more vulnerable to a downturn in our operating results, a downturn in economic conditions, or increases in interest rates on borrowings. If our cash flow from operations is insufficient to meet our debt service requirements, we could be required to sell additional equity securities, refinance our obligations, or dispose of assets in order to meet our debt service requirements. Adequate financing may not be available if and when we need it or may not be available on terms acceptable to us. The failure to obtain sufficient financing on favorable terms and conditions could have a material adverse effect on us.

From time to time, we may seek additional equity or debt financing to provide funds for the expansion of our business. We cannot predict the timing or amount of any such financing requirements at this time. If such financing is not available on satisfactory terms, we may be unable to expand our business or to develop new business at the rate desired, and our operating results may suffer. Debt financing increases expenses and must be repaid regardless of operating results. Equity financing could result in additional dilution to existing stockholders.

We may issue a substantial amount of our common stock in the future, which could cause dilution to current investors and otherwise adversely affect our stock price.

We may issue additional shares of common stock to fund our operations, to provide competitive compensation packages to our employees, or for acquisitions. These issuances could be significant. To the extent that we issue our shares of common stock, your equity interest in us will be diluted. Any such issuance will also increase the number of outstanding shares of common stock that will be eligible for re-sale in the future. Persons receiving shares of our common stock in connection with acquisitions may be more likely to sell their common stock, which may influence the price of our common stock. In addition, the potential issuance of additional shares in connection with anticipated acquisitions could lessen demand for our common stock and result in a lower price than might otherwise be obtained.

The failure to manage our growth could adversely affect our operations.

To continue to expand our business and strengthen our competitive position, we must make significant investments in systems, equipment, facilities, product development, and personnel. In addition, we may commit significant funds to increase our sales, marketing, information technology, and research and development efforts in order to expand our business. A failure to sufficiently increase our revenue to offset those potential increased costs could adversely affect our business, operating results, and financial condition.

The failure to manage our growth effectively could adversely affect our operations. Managing our planned growth effectively will require us to take various actions, including the following:

 

enhance our operational, financial, and management systems;

 

achieve the anticipated benefits of our Columbia, Missouri facility; and

 

successfully hire, train, and motivate additional employees, including additional personnel for our product development, sales, and marketing efforts.

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The expansion of our products and customer base may result in increases in our overhead and selling expenses. We also may be required to increase staffing and other expenses as well as our expenditures on capital equipment and leasehold improvements in order to meet the demand for our products. Any increase in expenditures in anticipation of future sales that do not materialize would adversely affect our profitability.

Our operating results may involve significant fluctuations.

Various factors contribute to significant periodic and seasonal fluctuations in our operating results. These factors include the following:

 

market acceptance of our products, including new products;

 

market acceptance and new product introductions by our competitors;

 

the timing of large domestic and international orders;

 

cancellation of existing orders;

 

changes in our sales mix;

 

the cost of new product introductions;

 

problems with our supply chain;

 

the volume of customer orders relative to our capacity;

 

timing of expenditures in anticipation of future customer orders;

 

effectiveness in managing production processes and costs;

 

changes in cost and availability of labor and finished products, product components, and raw materials;

 

ability to manage inventory and inventory obsolescence;

 

pricing and other competitive pressures; 

 

changes or anticipated changes in economic, social, political, legislative, and regulatory factors;

 

the outcome of any litigation;

 

adverse publicity surrounding our products, the safety of our products, or the use of our products;

 

changes in amount and or timing of our operating expenses; and

 

changes in laws and regulations that may affect the marketability of our products.

As a result of these and other factors, we believe that period-to-period comparisons of our operating results may not be meaningful in the short term, and our performance in a particular period may not be indicative of our performance in any future period.

Liability insurance is expensive and may be difficult to obtain.

Liability insurance coverage is expensive and from time to time may be difficult or impossible to obtain, particularly as a result of the intended use of certain of our product offerings. Our insurance policies are subject to periodic review by our insurers and may not be renewed at all or on similar or favorable terms.

Compensation awards to our management may not be tied to or correspond with our improved financial results or share price.

The Compensation Committee of our Board of Directors is responsible for overseeing our compensation and employee benefit plans and practices, including our executive compensation plans and our incentive compensation and equity-based compensation plans. Our Compensation Committee has significant discretion in structuring compensation packages and may make compensation decisions based on any number of factors. As a result, compensation awards may not be tied to or correspond with our financial results or the share price of our common stock.

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Our Board of Directors may change significant corporate policies without stockholder approval.

Our investment, financing, borrowing, and dividend policies and our policies with respect to all other activities, including growth, debt, capitalization, and operations, will be determined by our Board of Directors. These policies may be amended or revised at any time and from time to time at the discretion of the Board of Directors without a vote of our stockholders. In addition, our Board of Directors may change our policies with respect to conflicts of interest provided that such changes are consistent with applicable legal requirements. A change in these policies could have an adverse effect on our business, operating results, financial condition, cash flow, per share trading price of our common stock, and ability to satisfy any debt service obligations.

Risks Related to the Separation

We may not realize the anticipated benefits from the Separation, and the Separation could harm our business.

We may not be able to achieve the full strategic and financial benefits expected to result from the Separation and such benefits may be delayed or not occur at all. The Separation is designed to enhance strategic and management focus, provide a distinct investment identity, and allow us to efficiently allocate resources and deploy capital. We may not achieve these and other anticipated benefits for a variety of reasons, including the following:

 

the Separation will require significant amounts of management’s time and effort, which may divert management’s attention from operating and growing our business;

 

following the Separation, we may be more susceptible to economic downturns and other adverse events than if we were still a part of SWBI;

 

following the Separation, our business will be less diversified than SWBI’s business prior to the Separation;

 

following the Separation, our business will experience a loss of scale and access to certain financial, managerial, and professional resources as well as product and brand power influence and recognition with some customers from which we have benefited in the past; and

 

actions required to separate the respective businesses could disrupt our operations.

If we fail to achieve some or all of the benefits expected to result from the Separation, or if such benefits are delayed, our business could be harmed.

We have no history operating as an independent company, and our historical financial information is not necessarily representative of the results that we would have achieved as an independent, publicly traded company and may not be a reliable indicator of our future results.

Our historical financial information included in this information statement has been derived from SWBI’s consolidated financial statements and accounting records and are not necessarily indicative of our future operating results, financial condition, or cash flows, nor do they reflect what our operating results, financial condition, or cash flows would have been as an independent public company during the periods presented. In particular, the historical financial information included in this information statement is not necessarily indicative of our future operating results, financial condition, or cash flows primarily because of the following factors:

 

prior to the Separation, our business was operated by SWBI as part of its broader corporate organization rather than as an independent company, and SWBI or one of its affiliates provided support for various corporate functions for us, such as information technology, medical insurance, procurement, logistics, marketing, human resources, compliance, legal, finance, and internal audit;

 

our historical financial results reflect the direct, indirect, and allocated costs for such services historically provided by SWBI, and these costs may significantly differ from the comparable expenses we would have incurred as an independent company;

 

our working capital requirements and capital expenditures historically have been satisfied as part of SWBI’s corporate-wide cash management and centralized funding programs, and our cost of debt and other capital may significantly differ from that which is reflected in our historical combined financial statements;

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the historical financial information may not fully reflect the costs associated with the Separation, including the costs related to being an independent company;

 

our historical financial information does not reflect our obligations under the various transitional and other agreements we will enter into with SWBI in connection with the Separation, though costs under such agreements are expected to be broadly similar to what was charged to the business in the past; and

 

our business currently is integrated with that of SWBI and we benefit from SWBI’s size and scale in costs, employees, and vendor and customer relationships and the costs we will incur as an independent company may significantly exceed comparable costs we would have incurred as part of SWBI and some of our customer relationships may be weakened or lost.

We based the pro forma adjustments included in this information statement on available information and assumptions that we believe are reasonable and factually supportable. Actual results, however, may vary. In addition, our unaudited pro forma financial information included in this information statement may not give effect to various ongoing additional costs that we may incur in connection with being an independent public company. Accordingly, our unaudited pro forma combined financial statements do not reflect what our operating results, financial condition, or cash flows would have been as an independent public company and are not necessarily indicative of our future financial condition or future operating results.

See “Unaudited Pro Forma Combined Financial Statements” and the notes thereto, “Selected Historical Combined Financial Data,” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included elsewhere in this information statement.

We have historically operated within SWBI, and there are risks associated with our separation from SWBI.

We have historically operated within SWBI, and a number of aspects of our current relationship with SWBI will change as a result of our separation from SWBI. For example, if the Trademark License Agreement with SWBI is not renewed after its initial five year term as a result of our failure to meet the performance metric or following the tenth year as a result of our failure to agree with SWBI about a continuation, we will not be able to use certain SWBI trademarks in connection with our business, including on our products or promotional materials. In addition, some of our customers, landlords, vendors, and other contract counterparties may have contracted with us because we were part of SWBI and we may have difficulty marketing our products or obtaining favorable terms in our leases and other contractual arrangements in the future as a result of our separation from SWBI. As part of our separation from SWBI, we will own and sell SWBI’s former outdoor products and accessories products under our Caldwell®; Crimson Trace®; Wheeler®; Tipton®; Frankford Arsenal®; Lockdown®; BOG®; Hooyman®; Schrade®; Old Timer®; Uncle Henry®; Imperial®; BUBBA®; UST®; MEAT!, and LaserLyte® brands. We will license Smith & Wesson®, M&P®, Thompson/Center Arms, and Performance Center®, all of which will be owned by SWBI. See “The Separation – Agreements with SWBI.”

We are an “emerging growth company” under the JOBS Act, and any decision on our part to comply with certain reduced reporting and disclosure requirements applicable to emerging growth companies could make our common stock less attractive to investors.

We are an emerging growth company, and, for as long as we continue to be an emerging growth company, we currently intend to take advantage of exemptions from various reporting requirements applicable to other public companies but not to “emerging growth companies,” including, not being required to have our independent registered public accounting firm audit our internal control over financial reporting under Section 404 of Sarbanes-Oxley, reduced disclosure obligations regarding executive compensation in our registration statements, periodic reports, and proxy statements, and exemptions from the requirements of holding a nonbinding advisory vote on executive compensation and stockholder approval of any golden parachute payments not previously approved. We will cease to be an emerging growth company upon the earliest to occur of the following: (i) the last day of the fiscal year following the fifth anniversary of the Distribution; (ii) the last day of the fiscal year with at least  $1.07 billion in annual revenue; (iii) the last day of the fiscal year in which we are deemed to be a large accelerated filer, which means that we have been public for at least 12 months, have filed at least one annual report, and the market value of our common stock that is held by non-affiliates exceeds $700 million as of the last day of our then-most recently completed second fiscal quarter; or (iv) the date on which we have issued more than $1 billion of non-convertible debt during the prior three-year period. We cannot predict if investors will find our common stock less attractive if we choose to rely on exemptions from certain disclosure requirements. If some investors find our common stock less attractive as a result of any choices to reduce future disclosure, there may be a less active trading market for our common stock and the price of our common stock may be more volatile.

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In addition, as our business grows, we may cease to satisfy the conditions of an “emerging growth company.” Under the JOBS Act, “emerging growth companies” can delay adopting new or revised accounting standards until such time as those standards apply to private companies. We have irrevocably elected not to avail ourselves of this exemption from new or revised accounting standards and, therefore, we will be subject to the same new or revised accounting standards as other public companies that are not “emerging growth companies.”

We are currently evaluating and monitoring developments with respect to these rules, and we may not be able to take advantage of all of the benefits from the JOBS Act.

We will incur increased costs as a result of becoming an independent public company, particularly after we are no longer an “emerging growth company.”

As an independent public company, we will incur significant legal, accounting, insurance, and other expenses that we have not incurred as a subsidiary of a public company, including costs associated with public company reporting requirements. As a result of the Separation, we will become obligated to file with the SEC annual and quarterly reports and other reports that are specified in Section 13 and other sections of the Exchange Act. We will also be required to ensure that we have the ability to prepare financial statements that are fully compliant with all SEC reporting requirements on a timely basis. In addition, we will become subject to other reporting and corporate governance requirements, including certain requirements of Nasdaq, and certain provisions of Sarbanes-Oxley and the regulations promulgated thereunder, which will impose significant compliance obligations upon us.

The expenses incurred by public companies generally for reporting and corporate governance purposes have been increasing. We expect these rules and regulations to increase our legal and financial compliance costs and to make some activities more time-consuming and costlier. These laws and regulations could also make it more difficult or costly for us to obtain certain types of insurance, including director and officer liability insurance, and we may be forced to accept reduced policy limits and coverage or incur substantially higher costs to obtain the same or similar coverage. These laws and regulations could also make it more difficult for us to attract and retain qualified persons to serve on our Board of Directors, our board committees, or as our executive officers. Furthermore, if we are unable to satisfy our obligations as a public company, we could be subject to delisting of our common stock, fines, sanctions, and other regulatory action and potentially civil litigation. In addition, if we fail to implement the requirements with respect to our internal accounting and audit functions, our ability to report our operating results on a timely and accurate basis could be impaired. If we do not implement such requirements in a timely manner or with adequate compliance, we might be subject to sanctions or investigation by regulatory authorities, such as the SEC and Nasdaq. Any such action could harm our reputation and the confidence of investors and customers in us and could materially adversely affect our business and cause our share price to fall.

After we are no longer an “emerging growth company,” we expect to incur additional management time and cost to comply with the more stringent reporting requirements applicable to companies that are deemed accelerated filers or large accelerated filers, including complying with the auditor attestation requirements of Section 404 of Sarbanes-Oxley.

We will incur significant costs to create the independent corporate infrastructure necessary to operate as an independent public company.

SWBI currently performs many important corporate functions for us, including internal audit, finance, accounting, tax, human resources, information technology, litigation management, real estate, environmental, and public affairs. The costs of these services have been allocated to us based on direct usage when identifiable or, when not directly identifiable, on the basis of proportional net sales, costs of goods sold, or square footage, as applicable. Following the Separation, SWBI will continue to provide some of these services to us on a transitional basis, for a period of up to two years following the Distribution Date pursuant to a Transition Services Agreement that we will enter into with SWBI. See “The Separation—Agreements with SWBI—Transition Services Agreement.” SWBI may not successfully perform all of these functions during the transition period, and we may have to expend significant efforts or costs materially in excess of those estimated under the Transition Services Agreement. Any interruption in these services could have a material adverse effect on our business, operating results, and financial condition.

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In addition, at the end of this transition period, we will need to perform these functions ourselves or hire third parties to perform these functions on our behalf. The costs associated with performing or outsourcing these functions may exceed the amounts reflected in our historical financial statements that were incurred as a business segment of SWBI. We expect to incur costs immediately following the Separation to establish the necessary infrastructure. A significant increase in the cost of performing or outsourcing these functions could materially and adversely affect our business, operating results, and financial condition.

The obligations associated with being a public company will require significant resources and management attention.

We are not currently subject to the reporting and other requirements of the Exchange Act. Following the effectiveness of the registration statement of which this information statement forms a part, we will be directly subject to such reporting and other obligations under the Exchange Act and the rules of Nasdaq. As an independent public company, we will be required, among other things, to do the following:

 

prepare and distribute annual, quarterly, and periodic reports; proxy statements; press releases; and other stockholder communications in compliance with the federal securities laws and Nasdaq rules;

 

have our own Board of Directors and committees thereof, which comply with federal securities laws and Nasdaq rules;

 

institute our own financial reporting and disclosure compliance functions;

 

establish an investor relations function;

 

establish internal policies, including those relating to trading in our securities and disclosure controls and procedures; and

 

comply with the rules and regulations implemented by the SEC, Sarbanes-Oxley, the Dodd-Frank Act, the Public Company Accounting Oversight Board, and Nasdaq.

These reporting and other obligations will place significant demands on our management and our administrative and operational resources, including accounting resources, and we expect to face increased legal, accounting, administrative, and other costs and expenses relating to these demands that we had not incurred as a business segment of SWBI. Our compliance with existing and evolving regulatory requirements will result in increased administrative expenses and a diversion of management’s time and attention from revenue-generating activities to compliance activities, which could have a material adverse effect on our business, operating results, financial condition, and cash flows.

If we fail to maintain effective internal controls, we may not be able to report our financial results accurately or timely or prevent or detect fraud, which would have a material adverse effect on our business or the market price of our securities.

In accordance with Section 404 of Sarbanes-Oxley, our management will eventually be required to conduct an annual assessment of the effectiveness of our internal control over financial reporting and include a report on these internal controls in the annual reports we will file with the SEC on Form 10-K. Our independent registered public accounting firm will not be required to formally attest to the effectiveness of our internal controls while we remain an emerging growth company. When applicable, this process will require significant documentation of policies, procedures, and systems; review of that documentation by our internal auditing and accounting staff and our outside independent registered public accounting firm; and testing of our internal controls over financial reporting by our internal auditing and accounting staff and our outside independent registered public accounting firm. This process will involve considerable time and attention, may strain our internal resources, and will increase our operating costs. We may experience higher than anticipated operating expenses and outside auditor fees during the implementation of these changes and thereafter. If management or our independent registered public accounting firm determines that our internal control over financial reporting is not effective, investors may lose confidence in the accuracy and completeness of our financial reports, the market price of our common stock could be negatively affected, and we could become subject to investigations by Nasdaq, the SEC, or other regulatory authorities, which could require additional financial and management resources. In addition, if our controls are not effective, our ability to accurately and timely report our financial position could be impaired, which could result in late filings of our annual and quarterly reports under the Exchange Act, restatements of our financial statements, a decline in our stock price, suspension or delisting of our common stock from Nasdaq, and a material adverse effect on our business, operating results, and financial condition.

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While we were a wholly owned subsidiary of SWBI, SWBI identified a material weakness in its control over financial reporting in fiscal 2020 related to the income tax treatment associated with goodwill impairment.  Control activities were not designed or maintained over the preparation and review of the goodwill impairment analysis, including SWBI’s accounting for the related income tax treatment and review of third-party experts’ work product.  A material weakness is defined as a deficiency, or combination of deficiencies in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement in annual or interim financial statements will not be prevented or detected on a timely basis.  As a result of the material weakness, SWBI concluded that its internal control over financial reporting and related disclosure controls and procedures were not effective based on criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission.  The material weakness did not result in any identified misstatements to SWBI’s financial statements, and there were no changes to previously issued financial results.  SWBI has announced that it is actively engaged in developing a remediation plan designed to address this material weakness.  However, SWBI cannot guarantee that these steps have been sufficient or that it will not have a material weakness in the future.  If SWBI’s remedial measures are insufficient to address the material weakness, or if additional material weaknesses in its internal control are discovered or occur in the future, its financial statements may contain material misstatements and it could be required to restate its financial statements.  We cannot guarantee that we will not have a material weakness in our own internal controls in the future.  If we experience any material weakness in our internal controls in the future, our financial statements may contain material misstatements and could be required to restate our financial statements.

Until the Separation occurs, SWBI will have sole discretion to change the terms of the Separation in ways that may be unfavorable to us.

Until the Separation occurs, our outdoor products and accessories business will be a business segment of SWBI. Completion of the Separation remains subject to the satisfaction or waiver of certain conditions, some of which are in the sole and absolute discretion of SWBI, including final approval by the Board of Directors of SWBI. Additionally, SWBI has the sole and absolute discretion to change certain terms of the Separation, including the amount of any cash transfer between us, the amount of our indebtedness, and the allocation of contingent liabilities, which changes could be unfavorable to us. In addition, SWBI may decide at any time prior to the completion of the Separation not to proceed with the Separation.

In connection with the Separation, we and SWBI will indemnify each other for certain liabilities, we may need to divert cash to meet those obligations if we are required to act under these indemnities to SWBI, and SWBI may not be able to satisfy its indemnification obligations to us in the future.

Pursuant to the Separation and Distribution Agreement and other agreements with SWBI, SWBI will agree to indemnify us for certain liabilities and we will agree to indemnify SWBI for certain liabilities, as discussed further in “The Separation—Agreements with SWBI.” Payments that we may be required to provide under indemnities to SWBI are not subject to any cap, may be significant, and could negatively affect our business, particularly under indemnities relating to our actions that could affect the tax-free nature of the Separation. Third parties could also seek to hold us responsible for the liabilities that SWBI has agreed to retain and, under certain circumstances, we may be subject to continuing contingent liabilities of SWBI following the Separation that arise relating to the operations of the outdoor products and accessories business during the time that it was a business segment of SWBI prior to the Separation, such as certain tax liabilities that relate to periods during which taxes of the outdoor products and accessories business were reported as a part of SWBI; liabilities retained by SWBI that relate to contracts or other obligations entered into jointly by the outdoor products and accessories business and SWBI’s firearm business; post-employment liabilities, including unfunded liabilities, that apply to SWBI, including the outdoor products and accessories business; environmental liabilities related to sites at which both SWBI and the outdoor products and accessories business operated; and liabilities arising from third-party claims in respect of contracts in which both SWBI and the outdoor products and accessories business supply goods or provide services.

SWBI has agreed to indemnify us for such contingent liabilities. While we have no reason to expect that SWBI will not be able to support its indemnification obligations to us, we can provide no assurance that SWBI will be able to fully satisfy its indemnification obligations or that such indemnity obligations will be sufficient to cover our liabilities for matters which SWBI has agreed to retain, including such contingent liabilities. Moreover, even if we ultimately succeed in recovering from SWBI any amounts for which we are indemnified, we may be temporarily required to bear these losses ourselves. Each of these risks could have a material adverse effect on our business, operating results, and financial condition.

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After the Separation, we will only have limited access to the insurance policies maintained by SWBI for events occurring prior to the Separation, SWBI’s insurers may deny or attempt to deny coverage to us under such policies, there can be no assurance that we will be able to obtain insurance coverage following the Separation on terms that justify its purchase, and any such insurance may not be adequate to offset costs associated with certain events.

In connection with the Separation, we will enter into agreements with SWBI to address various matters associated with the Separation, including insurance coverage. The Separation and Distribution Agreement will provide that following the Separation, we will no longer have insurance coverage under SWBI insurance policies in connection with events occurring before, as of, or after the Separation, other than coverage for (i) events occurring prior to the Separation and covered by occurrence-based policies of SWBI as in effect as of the Separation and (ii) events or acts occurring prior to the Separation and covered by claims-made policies of SWBI for which a claim was received prior to the Separation. However, after the Separation, SWBI’s insurers may deny or attempt to deny coverage to us for losses associated with occurrences or claims made prior to the Separation. Accordingly, we may be required to temporarily or permanently bear the costs of such lost coverage. In addition, we will have to obtain our own insurance policies after the Separation is complete. Although we expect to have insurance policies in place as of the date of the Separation that cover certain, but not all, hazards that could arise from our operations, we can provide no assurance that we will be able to obtain or maintain such coverage, that the cost of such coverage will be similar to that incurred by SWBI, or that such coverage will be adequate to protect us from costs incurred with certain events. The occurrence of an event that is not insured or not fully insured could have a material adverse effect on our business, operating results, and financial condition. See “The Separation—Agreements with SWBI.”

The transfer or assignment to us of some contracts and other assets may require the consent of a third-party, and we may not be entitled to the benefit of such contracts, investments, and other assets in the future if such consent is not given.

The transfer or assignment of some of the contracts and other assets in connection with the Separation will require the consent of a third party to the transfer or assignment. Similarly, in some circumstances, we are joint beneficiaries of contracts and we will need to enter into a new agreement with the third party to replicate the existing contract or assign the portion of the existing contract related to our business. While we anticipate that most of these contract assignments and new agreements will be obtained prior to the Separation, we may not be able to obtain all required consents or enter into all such new agreements, as applicable, until after the Separation. Some parties may use the requirement of a consent to seek more favorable contractual terms from us, which could include our having to obtain letters of credit or other forms of credit support. If we are unable to obtain such consents or such credit support on commercially reasonable and satisfactory terms, we may be unable to obtain some of the benefits, assets, and contractual commitments that are intended to be allocated to us as part of the Separation. In addition, when we do not intend to obtain consent from third-party counterparties based on our belief that no consent is required, the third-party counterparties may challenge the transaction on the basis that the terms of the applicable commercial arrangements require their consent. We may incur substantial litigation and other costs in connection with any such claims and, if we do not prevail, our ability to use these contracts and other assets could be adversely impacted.

Although we do not believe that any of the contracts or other assets requiring consent to transfer or the contracts requiring a new agreement are individually material to our business, we cannot provide assurance that all such required third-party consents and new agreements will be procured or put in place, as applicable, prior to or after the date of the Separation. Consequently, we may not realize certain of the benefits that are intended to be allocated to us as part of the Separation.

After the Separation, some of our directors and officers may have actual or potential conflicts of interest because of their equity ownership in SWBI.

Because of their current or former positions with SWBI, following the Separation, some of our directors and executive officers may own shares of SWBI common stock or have options or other rights to acquire shares of SWBI common stock, and the individual holdings may be significant for some of these individuals compared to their total assets. This ownership may create, or may create the appearance of, conflicts of interest when these directors and officers are faced with decisions that could have different implications for SWBI or us. For example, potential conflicts of interest could arise in connection with the resolution of any dispute that may arise between SWBI and us regarding the terms of the agreements governing the Separation and the relationship thereafter between the companies.

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The combined post-Separation value of SWBI and AOUT shares may not equal or exceed the pre-Separation value of SWBI shares.

After the Separation, we expect that SWBI common stock will continue to be traded on the Nasdaq Global Select Market. We have applied to list the shares of our common stock on Nasdaq. We cannot assure you that the combined trading prices of SWBI common stock and our common stock after the Separation, as adjusted for any changes in the combined capitalization of both companies, will be equal to or greater than the trading price of SWBI common stock prior to the Separation. Until the market has fully evaluated the business of SWBI without our business and potentially thereafter, the price at which SWBI common stock trades may fluctuate significantly. Similarly, until the market has fully evaluated our business and potentially thereafter, the price at which our common stock trades may fluctuate significantly.

We potentially could have received better terms from unaffiliated third parties than the terms we received in our agreements with SWBI.

The agreements we entered into with SWBI in connection with the Separation were negotiated while we were still part of SWBI’s business. See “The Separation—Agreements with SWBI.” Accordingly, during the period in which the terms of those agreements will have been negotiated, we did not have a Board of Directors or a management team independent of SWBI. The terms of the agreements negotiated in the context of the Separation relate to, among other things, the allocation of assets, license agreements, intellectual property, liabilities, rights, and other obligations between SWBI and us as well as services to be provided to us by SWBI on an interim basis. Arm’s-length negotiations between SWBI and an unaffiliated third-party in another form of transaction, such as a buyer in a sale of a business transaction, may have resulted in more favorable terms to the unaffiliated third-party.

If the Transfer and the Distribution do not qualify as a transaction that is tax-free for U.S. federal income tax purposes, SWBI and/or holders of SWBI common stock could be subject to significant tax liability.

It is intended that the Transfer and the Distribution will qualify as a tax-free transaction under Section 368(a)(1)(D) and Section 355 of the Code. The consummation of the Separation and the related transactions is conditioned upon the receipt of an opinion of Greenberg Traurig, LLP substantially to the effect that such transactions will qualify for this intended tax treatment. The opinion will rely on certain representations, assumptions, and undertakings, including those relating to the past and future conduct of our business, and the opinion would not be valid if such representations, assumptions, and undertakings were incorrect. Despite the opinion, the Internal Revenue Service, or the IRS, could determine that the Transfer or the Distribution should be treated as a taxable transaction for U.S. federal income tax purposes if it determines that any of the representations, assumptions, or undertakings that were relied upon for the opinion are false or have been violated, if it disagrees with the conclusions in the opinion, or for other reasons, including as a result of significant changes in the stock ownership of SWBI or us after the Distribution Date. For more information regarding the opinion see “Material U.S. Federal Income Tax Consequences of the Distribution—Tax Opinion.”

Even if the Transfer and the Distribution otherwise qualify under Section 368(a)(1)(D) and Section 355 of the Code, the Distribution could result in a material U.S. federal income tax liability to SWBI (but not to holders of SWBI common stock) under Section 355(e) of the Code if one or more persons acquire, directly or indirectly, a 50% or greater interest (measured by either vote or value) in the stock of SWBI or in the stock of our company (or any successor corporation) as part of a plan or series of related transactions that includes the Distribution. Any acquisition of the stock of SWBI or our company (or any successor corporation) within two years before or after the Distribution would generally be presumed to be part of a plan that includes the Distribution, although the parties may be able to rebut that presumption under certain circumstances. The process for determining whether an acquisition is part of a plan under these rules is complex, inherently factual in nature, and subject to a comprehensive analysis of the facts and circumstances of the particular case. Notwithstanding the opinion of Greenberg Traurig, LLP described above, SWBI or we might inadvertently cause or permit a prohibited change in ownership of SWBI or us, thereby triggering tax liability to SWBI.

If the Transfer or the Distribution fail to qualify for tax-free treatment for any reason, SWBI and/or holders of SWBI common stock could be subject to substantial U.S. taxes as a result of the Transfer and the Distribution and we could incur significant liabilities under applicable law or as a result of the Tax Matters Agreement. See “Material U.S. Federal Income Tax Consequences of the Distribution.”

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If the Distribution is taxable to SWBI as a result of a breach by us of any covenant or representation made by us in the Tax Matters Agreement, we will generally be required to indemnify SWBI, and the obligation to make a payment on this indemnification obligation could have a material adverse effect on us.

As described above, it is intended that the Transfer and the Distribution will qualify as tax-free transactions to SWBI and to holders of SWBI common stock, except with respect to any cash received in lieu of fractional shares. If the Transfer and/or the Distribution are not so treated or are taxable to SWBI (see “Material U.S. Federal Income Tax Consequences of the Distribution—The Distribution”) due to a breach by us (or any of our subsidiaries) of any covenant or representation made by us in the Tax Matters Agreement, we will generally be required to indemnify SWBI for all tax-related losses suffered by SWBI. In addition, we will not control the resolution of any tax contest relating to taxes suffered by SWBI in connection with the Separation and we may not control the resolution of tax contests relating to any other taxes for which we may ultimately have an indemnity obligation under the Tax Matters Agreement. In the event that SWBI suffers tax-related losses in connection with the Separation that must be indemnified by us under the Tax Matters Agreement, the indemnification liability could have a material adverse effect on our business, operating results, and financial condition.

We will be subject to significant restrictions on our actions following the Separation in order to avoid triggering significant tax-related liabilities.

The Tax Matters Agreement generally will prohibit us from taking certain actions that could cause the Transfer and the Distribution to fail to qualify as tax-free transactions, including the following:

 

during the two-year period following the Distribution Date (or otherwise pursuant to a “plan” within the meaning of Section 355(e) of the Code), we may not cause or permit certain business combinations or transactions to occur;

 

during the two-year period following the Distribution Date, we may not discontinue the active conduct of our business (within the meaning of Section 355(b)(2) of the Code);

 

during the two-year period following the Distribution Date, we may not liquidate or merge, consolidate, or amalgamate with any other person;

 

during the two-year period following the Distribution Date, we may not sell or otherwise dispose of more than 30% of our consolidated gross assets or more than 30% of the gross assets of the outdoor products and accessories business;

 

during the two-year period following the Distribution Date, we may not purchase any of our common stock, other than pursuant to certain open-market repurchases of less than 20% of our common stock (in the aggregate);

 

during the two-year period following the Distribution Date, we may not amend our certificate of incorporation (or other organizational documents) or take any other action affecting the voting rights of our common stock; and

 

more generally, we may not take any action that could reasonably be expected to cause the Transfer and the Distribution to fail to qualify as tax-free transactions for U.S. federal income tax purposes.

If we take any of the actions above and such actions result in tax-related losses to SWBI, we generally will be required to indemnify SWBI for such tax-related losses under the Tax Matters Agreement. See “The Separation—Agreements with SWBI—Tax Matters Agreement.” Due to these restrictions and indemnification obligations under the Tax Matters Agreement, we may be limited in our ability to pursue strategic transactions, equity or convertible debt financings, or other transactions that may otherwise be in our best interests. In addition, our potential indemnity obligation to SWBI might discourage, delay, or prevent a change of control that our stockholders may consider favorable.

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Our accounting and other management systems and resources may not be robust enough to meet the financial reporting and other requirements to which we will be subject following the Separation.

Prior to the Separation, our financial results were included within the consolidated results of SWBI, and we were not directly subject to reporting and other requirements of the Exchange Act. These and other obligations will place significant demands on our management, administrative, and operational resources, including accounting and information technology resources. To comply with these requirements, we anticipate that we will need to duplicate information technology infrastructure; implement additional financial and management controls, reporting systems, and procedures; and hire additional accounting, finance, tax, treasury, and information technology staff. If we are unable to do this in a timely and effective fashion, our ability to comply with our financial reporting requirements and other rules that apply to independent public companies could be impaired and our business could be harmed.

Risks Related to Our Common Stock

Because there has not been any public market for our common stock, the market price and trading volume of our common stock may be volatile and you may not be able to resell your shares at or above the initial market price of our common stock following the Separation.

Prior to the Separation, there will not have been a trading market for shares of our common stock. An active trading market may not develop or be sustained for our common stock after the Separation, and we cannot predict the prices at which our common stock will trade after the Separation. The market price of our common stock could fluctuate significantly as a result of a number of factors, many of which are beyond our control, including the following:

 

fluctuations in our quarterly or annual earnings results or those of other companies in our industry;

 

failures of our operating results to meet the estimates of securities analysts or the expectations of our stockholders;

 

changes by securities analysts in their estimates of our future earnings;

 

changes in market valuations or earnings of other companies in our industry;

 

introductions of new products by us or our competitors;

 

announcements by us or our customers, suppliers, or competitors;

 

factors relating to our suppliers, customers, or competitors;

 

consumer spending patterns;

 

changes in laws or regulations that adversely or are perceived to adversely affect our industry or us;

 

general economic, social, political, industry, and stock market conditions;

 

future significant sales of our common stock by our stockholders or the perception in the market of such sales;

 

government policies and recommendations, including tariffs;

 

future issuances of our common stock by us;

 

the size of the public float of our common stock; and

 

the other factors described in these “Risk Factors” and elsewhere in this information statement.

These and other factors may cause the market price and demand for our common stock to fluctuate substantially, which may limit or prevent investors from readily selling their shares of common stock and may otherwise negatively affect the liquidity of our common stock. In addition, in the past, when the market price of a stock has been volatile, holders of that stock have instituted securities class action litigation against the company that issued the stock. If any of our stockholders brought such a lawsuit against us, we could incur substantial costs defending the lawsuit. Such a lawsuit could also divert the time and attention of our management from our business.

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The trading market for our common stock may also be influenced by the research and reports that industry or securities analysts publish about us or our business. If one or more of these analysts cease coverage of our company or fail to publish reports on us regularly, we could lose visibility in the financial markets, which in turn could cause our stock price or trading volume to decline. Moreover, if one or more of the analysts who cover us downgrade our stock, or if our operating results do not meet their expectations, our stock price could decline.

A large number of our shares are or will be eligible for future sale, which may cause the market price of our common stock to decline.

Upon completion of the Separation, we estimate that we will have outstanding an aggregate of approximately 13,882,620 shares of our common stock (based on shares of SWBI common stock outstanding on June 22, 2020). All of those shares (other than those held by our “affiliates”) will be freely tradable without restriction or registration under the Securities Act of 1933, or the Securities Act. Shares held by our affiliates, which include our directors and executive officers, can be sold subject to volume, manner of sale, and notice provisions of Rule 144 under the Securities Act. We believe that our directors and executive officers, who may be considered “affiliates” for purposes of Rule 144, will beneficially own approximately 68,995 shares of our common stock immediately following the Separation. We are unable to predict whether large amounts of our common stock will be sold in the open market following the Separation. We are also unable to predict whether a sufficient number of buyers will be in the market for our shares at that time. As discussed in the immediately following risk factor, certain index funds will likely be required to sell shares of our common stock that they receive in the Separation. In addition, other SWBI stockholders may sell the shares of our common stock they receive in the Separation for various reasons. For example, such stockholders may not believe that our business profile or level of market capitalization as an independent company fits their investment objectives.

Because our common stock may not be included in stock indices, significant amounts of our common stock will likely need to be sold in the open market where there may not be offsetting demand.

A portion of SWBI’s outstanding common stock is held by passive index funds tied to the various stock indices. Based on a review of publicly available information as of June 22, 2020, we believe approximately 21.9% of SWBI’s outstanding common stock is held by passive index funds. Because our common stock may not be included in any stock index and it may not be included in other stock indices at the time of the Separation, index funds currently holding shares of SWBI common stock will likely be required to sell the shares of our common stock that they receive in the Separation. There may not be sufficient buying interest to offset sales by those index funds. Accordingly, our common stock could experience a high level of volatility immediately following the Separation and, as a result, the price of our common stock could be adversely affected.

Provisions of our Amended and Restated Certificate of Incorporation, our Amended and Restated Bylaws, and Delaware law may prevent or delay an acquisition of our company, which could decrease the trading price of our common stock.

Several provisions of our Amended and Restated Certificate of Incorporation, Amended and Restated Bylaws, and Delaware law may discourage, delay, or prevent a merger or acquisition of our company that our stockholders may consider favorable. These include provisions that provide for the following:

 

the ability of our Board of Directors to create and issue, without stockholder approval, one or more series of preferred stock having such powers, preferences, and rights, if any, and such qualifications, limitations, and restrictions, if any, as established our Board of Directors;

 

the ability of our Board of Directors to issue a large number of shares of our common stock that are authorized by our Amended and Restated Certificate of Incorporation, but that are not yet issued;

 

the directors elected by the holders of our common stock to be classified;

 

the removal of directors elected by holders of our common stock solely for cause;

 

the removal of any director elected by holders of our common stock solely by 66 2/3% of the voting power of such holders;

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the filling of vacancies resulting from the death, resignation, disqualification, removal, or other cause of directors elected by the holders of our common stock and newly created directorships created from an increase in the number of such directors solely by our Board of Directors;

 

the amendment of our Amended and Restated Bylaws by our Board of Directors;

 

the amendment of our Amended and Restated Bylaws by our stockholders solely by a vote of 66 2/3% of the voting power thereof;

 

the calling of special meetings of our holders of common stock solely by the Chairperson of our Board of Directors, our President, or our Board of Directors;

 

the taking of action by the holders of our common stock solely at a duly called annual or special meeting of such holders;

 

the amendment of the provisions of our Amended and Restated Certificate of Incorporation providing for (i) the directors elected by the holders of our common stock to be classified (and therefore for the removal of such directors solely for cause), (ii) the removal of directors elected by the holders of our common stock solely by 66 2/3% of the voting power of such holders, (iii) the filling of vacancies with respect to directors elected by the holders of our common stock and newly created directorships created from an increase in the number of such directors solely by our Board of Directors, (iv) the amendment of our Amended and Restated Bylaws by 66 2/3% of the voting power of our stockholders, (v) the calling of special meetings solely by the Chairperson of our Board of Directors, our President, or our Board of Directors, and (vi) the prohibition on the ability of holders of our common stock to act by written consent in lieu of a meeting, in each case, by a vote of 66 2/3% of the voting power of our stockholders;

 

advance notice and other requirements for nominations of candidates for election to our Board of Directors by the holders of our common stock or for proposing matters that can be acted on at annual meetings of the holders of our common stock; and

 

limit our ability to enter into business combinations with interested stockholders, subject to certain exceptions enumerated by Delaware law.

We believe these provisions will protect our stockholders from coercive or otherwise unfair takeover tactics by requiring potential acquirers to negotiate with our Board of Directors and by providing our Board of Directors with more time to assess any acquisition proposal. These provisions are not intended to make us immune from takeovers. However, these provisions apply even if a takeover offer may be considered beneficial by some stockholders and could delay or prevent an acquisition that our Board of Directors determines is not in our stockholders’ best interests. See “Description of Capital Stock.” These and other provisions of our Amended and Restated Certificate of Incorporation, Amended and Restated Bylaws, and Delaware law may, however, discourage, delay, or prevent certain types of transactions involving an actual or a threatened acquisition or change in control of us, including unsolicited takeover attempts, even though the transaction may offer our stockholders the opportunity to sell their shares of our common stock at a price above the prevailing market price.

We do not anticipate paying dividends on our common stock in the foreseeable future.

We currently intend to retain all available funds and any future earnings, if any, to fund the development and expansion of our business rather than to pay cash dividends on our common stock. The declaration and payment of dividends on our common stock, if any, will always be subject to the discretion of our Board of Directors. The timing and amount of any dividends declared on our common stock will depend upon, among other things, applicable laws, our results of operations, financial condition, future prospects, the terms of our outstanding indebtedness, and any other factors deemed relevant by our Board of Directors. We may incur expenses or liabilities or be subject to other circumstances in the future that reduce or eliminate the amount of cash that we have available for distribution of dividends on our common stock, including as a result of the risks described herein.

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Our Amended and Restated Bylaws designate Delaware as the exclusive forum for certain litigation, which may limit our stockholders’ ability to choose a judicial forum for disputes with us.

Pursuant to our Amended and Restated Bylaws, as will be in effect upon the completion of the Separation, unless we consent in writing to the selection of an alternative forum, the Court of Chancery of the state of Delaware will be the sole and exclusive forum for (a) any derivative action or proceeding brought on our behalf; (b) any action asserting a claim of breach of a fiduciary duty owed by any of our directors, officers, or employees or our stockholders; (c) any civil action to interpret, apply, or enforce any provision of the General Corporation Law of the state of Delaware, or the DGCL; (d) any civil action to interpret, apply, enforce, or determine the validity of the provisions of our Amended and Restated Certificate of Incorporation or Amended and Restated Bylaws; or (e) any action asserting a claim governed by the internal affairs doctrine. However, if the Court of Chancery of the state of Delaware lacks jurisdiction over such action, our Amended and Restated Bylaws, provide that the sole and exclusive forum for such action will be another state or federal court located within the state of Delaware, in all cases, subject to such court having personal jurisdiction over the indispensable parties named as defendants. Our Amended and Restated Bylaws also provide that any person purchasing or otherwise acquiring any interest in our stock will be deemed to have notice of and consented to the foregoing Delaware exclusive forum provisions. Our Amended and Restated Bylaws provide that the foregoing Delaware exclusive forum provisions do not apply to any action asserting claims under the Exchange Act or the Securities Act. The Delaware exclusive forum provisions will require our stockholders to bring certain types of actions or proceedings relating to Delaware law in the Court of Chancery of the state of Delaware or another state or federal court in the state of Delaware and therefore may prevent our stockholders from bringing such actions or proceedings in another court that a stockholder may view as more convenient, cost-effective, or advantageous to the stockholder or the claims made in such action or proceeding, and may discourage the actions or proceedings covered by the Delaware exclusive forum provisions.  See “Description of Capital Stock—Exclusive Forum.”

Your percentage ownership in our company may be diluted in the future.

In the future, your percentage ownership in our company may be diluted because of equity issuances for acquisitions, strategic investments, capital market transactions, or otherwise, including equity compensation awards that we grant to our directors, officers and employees. Our Compensation Committee can be expected to grant additional equity compensation awards to our employees after the Separation. These awards would have a dilutive effect on our earnings per share, which could adversely affect the market price of our common stock. From time to time, we may issue additional equity compensation awards to our employees under our employee benefits plans.

In addition, our Amended and Restated Certificate of Incorporation authorizes our Board of Directors to create and issue, without the approval of our stockholders, one or more series of preferred stock having such powers, preferences, and rights, if any, and such qualifications, limitations, and restrictions, if any, as established by our Board of Directors. The terms of one or more series of preferred stock that is so created and issued by our Board of Directors may dilute the voting power or reduce the value of our common stock. For example, our Board of Directors could create and issue one or more series of preferred stock having the right to elect one or more of our directors (in all events or on the happening of specified events) and/or the right to veto specified transactions. Similarly, the repurchase or redemption rights or dividend, distribution, or liquidation rights of a series of preferred stock created and issued by our Board of Directors could affect the residual value of the common stock. See “Description of Capital Stock—Preferred Stock.”

Our common stock is and will be subordinate to all of our future indebtedness and any series of preferred stock, and effectively subordinated to all indebtedness and preferred equity claims against our subsidiaries.

Shares of our common stock are common equity interests in us and, as such, will rank junior to all of our future indebtedness and other liabilities. Additionally, holders of our common stock may become subject to the prior dividend and liquidation rights of holders of any series of preferred stock that our Board of Directors may designate and issue without any action on the part of the holders of our common stock. Furthermore, our right to participate in a distribution of assets upon any of our subsidiaries’ liquidation or reorganization is subject to the prior claims of that subsidiary’s creditors.

 

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THE SEPARATION

General

On November 13, 2019, SWBI announced that it was proceeding with a plan to spin-off its outdoor products and accessories business. We are currently a wholly owned subsidiary of SWBI and, as a result of the Separation, we will hold, directly or indirectly through our subsidiaries, all of the assets and legal entities, subject to any related liabilities, associated with SWBI’s outdoor products and accessories business. The Separation will be achieved through the transfer of all the assets and legal entities, subject to any related liabilities, associated with the outdoor products and accessories business of SWBI to our company or our subsidiaries, which we refer to as the Transfer, and the distribution of 100% of our outstanding capital stock to holders of SWBI common stock as of the close of business on the Record Date, which we refer to as the Distribution. In connection with the Distribution, SWBI stockholders will receive one share of our common stock for every four shares of SWBI common stock held as of the close of business on the Record Date. The Separation is expected to be completed on [], 2020. Following the Separation, SWBI stockholders as of the close of business on the Record Date will own 100% of the outstanding shares of our common stock; we will be an independent, publicly traded company; and SWBI will retain no ownership interest in our company.

In connection with the Separation, we will enter into a Separation and Distribution Agreement and several other agreements with SWBI to effect the Separation and provide a framework for our relationship with SWBI after the Separation. These agreements will provide for the allocation between us and our subsidiaries, on the one hand, and SWBI and its subsidiaries, on the other hand, of the assets, liabilities, legal entities, and obligations associated with the outdoor products and accessories business, on the one hand, and the firearm business, on the other hand, and will govern the relationship between our company and our subsidiaries, on the one hand, and SWBI and its subsidiaries, on the other hand, subsequent to the Separation. In addition to the Separation and Distribution Agreement, the other principal agreements to be entered into with SWBI include a Tax Matters Agreement, a Transition Services Agreement, an Employee Matters Agreement, a Trademark License Agreement, a Sublease, and certain commercial agreements.

The Separation as described in this information statement is subject to the satisfaction or waiver of certain conditions. For a more detailed description of these conditions, see “—Conditions to the Distribution.” We cannot provide any assurances that SWBI will complete the Separation.

Reasons for the Separation

The SWBI Board of Directors and its various committees have met regularly; engaged in an extensive evaluation and analysis of the firearm business and the outdoor products and accessories business; explored opportunities to drive enhanced performance and stockholder value; consulted with financial, legal, tax, and accounting advisors; and engaged in a strategic review of the growth prospects, enterprise value, end-markets, customers, financial market considerations, credit and insurance factors, and business operations in the current market for each business.

Following a strategic review, it was determined that separating SWBI’s outdoor products and accessories business from SWBI’s firearm business would be in the best interests of SWBI and its stockholders and that the Separation would create two industry-leading companies with attributes that best position each company for long-term success, including the following:

 

Distinct Focus. Each company will benefit from a distinct strategic and management focus on its specific operational and growth priorities.

 

Differentiated Investment Theses. Each company will offer differentiated and compelling investment opportunities based on its particular operating and financial model, allowing it to more closely align with its natural investor type.

 

Optimized Balance Sheet and Capital Allocation Priorities. Each company will operate with a capital structure and capital deployment strategy tailored to its specific business model and growth strategies without having to compete with the other for investment capital.

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Direct Access to Capital Markets. Each company will have its own equity structure that will afford it direct access to the capital markets and allow it to capitalize on its unique growth opportunities appropriate to its business.

 

Alignment of Incentives with Performance Objectives. Each company will be able to offer incentive compensation arrangements for employees that are more directly tied to the performance of its business and may enhance employee hiring and retention by, among other things, improving the alignment of management and employee incentives with performance and growth objectives.

 

Incremental Stockholder Value. Each company will benefit from the investment community’s ability to value its businesses independently within the context of its particular industry with the anticipation that, over time, the aggregate market value of the companies will be higher, on a fully distributed basis and assuming the same market conditions, than if SWBI were to remain under its current configuration.

While a number of potentially negative factors were also considered, including, among others, risks relating to the creation of a new public company, such as increased costs from operating as a separate public company, potential disruptions to each business, the loss of synergies and joint purchasing power, increased administrative costs, one-time separation costs, the fact that each company will be less diversified following the Separation, and the potential inability to realize the anticipated benefits of the Separation, it was nevertheless determined that the potential benefits of the Separation outweighed the potential negative factors in connection therewith. However, neither we nor SWBI can assure you that, following the Separation, any of the benefits described above or otherwise will be realized to the extent anticipated or at all. For more information see “Risk Factors.”

The Number of Shares You Will Receive

For every four shares of SWBI common stock you own as of the close of business on the Record Date, you will receive one share of our common stock on the Distribution Date.

Treatment of Fractional Shares

Issuer Direct Corporation, acting as the Distribution Agent, will not distribute any fractional shares of our common stock to SWBI stockholders. As soon as practicable on or after the Distribution Date, the Distribution Agent will, instead, aggregate fractional shares into whole shares, sell the whole shares in the open market at prevailing prices, and distribute the net cash proceeds from the sales, net of brokerage fees and commissions, transfer taxes, and other costs, and after making appropriate deductions of the amounts required to be withheld for U.S. federal income tax purposes, if any, pro rata to each stockholder that would otherwise have been entitled to receive a fractional share in connection with the Distribution. The Distribution Agent will determine when, how, through which broker-dealers, and at what prices to sell the aggregated fractional shares. Recipients of cash in lieu of fractional shares will not be entitled to any minimum sale price for the fractional shares or to any interest on the amounts of payments made in lieu of fractional shares. The receipt of cash in lieu of fractional shares generally will be taxable to the recipient stockholders for U.S. federal income tax purposes as described under “Material U.S. Federal Income Tax Consequences of the Distribution—The Distribution.”

When and How You Will Receive the Distribution of AOUT Shares

SWBI will distribute the shares of our common stock on [], 2020 to holders of record as of the close of business on the Record Date. The Distribution is expected to be completed following the Nasdaq market closing on the Distribution Date. SWBI’s transfer agent and registrar, Issuer Direct Corporation, will serve as transfer agent and registrar for our common stock and as Distribution Agent in connection with the Distribution.

If you own SWBI common stock as of the close of business on the Record Date, the shares of our common stock that you are entitled to receive in connection with the Distribution will be issued electronically, as of the Distribution Date, to your account as follows:

 

Registered Stockholders. If you own your shares of SWBI stock directly, either in book-entry form through an account at Issuer Direct Corporation and/or if you hold paper stock certificates, you will receive your shares of our common stock by way of direct registration in book-entry form. Registration in book-entry form is a method of recording stock ownership when no physical paper share certificates are distributed to stockholders, as is the case in connection with the Distribution.

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On or shortly following the Distribution Date, the Distribution Agent will mail to you a direct registration account statement that reflects the number of shares of our common stock that have been registered in book-entry form in your name. Stockholders having any questions concerning the mechanics of having shares of our common stock registered in book-entry form may contact Issuer Direct Corporation at the address set forth under “Questions and Answers About the Separation” in this information statement.

 

Beneficial Stockholders. Many SWBI stockholders hold their shares of SWBI common stock beneficially through a bank or brokerage firm. In such cases, the bank or brokerage firm would be said to hold the stock in “street name” and ownership would be recorded on the bank or brokerage firm’s books. If you hold your SWBI common stock through a bank or brokerage firm, your bank or brokerage firm will credit your account with the shares of our common stock that you are entitled to receive in connection with the Distribution. If you have any questions concerning the mechanics of having shares of common stock held in “street name,” we encourage you to contact your bank or brokerage firm.

Treatment of Outstanding Equity Compensation Awards

The Employee Matters Agreement will provide that outstanding SWBI equity compensation awards, specifically stock options, or Options, restricted stock units, or RSUs, and performance-based restricted stock units, or PSUs (with such Options, RSUs, and PSUs being collectively referred to herein as the SWBI awards), will be equitably adjusted simultaneously with the consummation of the Distribution. These equitable adjustments are intended to maintain, immediately following the consummation of the Distribution, the intrinsic value of the SWBI award immediately prior to consummation of the Distribution. Depending upon the type of award, the holder’s position or title with SWBI, and the holder’s post-Separation employer, the outstanding SWBI awards will be adjusted via one of the following generally recognized methods:

Stockholder Method

Under the “stockholder method,” holders of SWBI awards will be treated similarly to stockholders of SWBI such that their existing SWBI awards will be converted into awards with respect to both equity interests in SWBI and equity interests in our company, subject to certain adjustments necessary to reflect the Separation. Specifically, each holder of an SWBI award will (i) continue to hold the existing SWBI award for the same number of shares of SWBI common stock that were subject to such SWBI award prior to the Distribution, and (ii) will receive an identical award with respect to one share of our common stock for each four shares of SWBI common stock underlying the SWBI award, such that the resulting SWBI award and AOUT award, collectively the “new awards,” will have a combined intrinsic value immediately following the consummation of the Distribution equal to the intrinsic value of the existing SWBI award immediately prior to the consummation of the Distribution, taking into account any necessary adjustments to the exercise price of the new awards, if applicable, to maintain such intrinsic value. To the extent the existing SWBI award is subject to vesting based upon continued service with SWBI, the new awards will also remain subject to the same vesting conditions based upon continued employment with the holder’s post-Separation employer. In addition, to the extent the existing SWBI award is subject to the achievement of certain company performance-based target goals, appropriate adjustments will be made to such target goals and incorporated into the new awards to reflect the changes to the businesses of each of SWBI and our company as a result of the Separation.

Employer Method

Under the “employer method,” holders of SWBI awards will only hold awards with respect to equity of their post-Separation employer.  Specifically, each holder of an SWBI award that will remain with SWBI post-Separation will continue to hold the existing SWBI award, whereas each holder of an SWBI award that will be employed with and/or provide services to us post-Separation will have their existing SWBI award converted into an identical award with respect to shares of our common stock. However, the number of shares of common stock underlying such awards, and/or the exercise price of such awards, if applicable, will be adjusted so that the continued or converted awards, whichever applicable, have the same intrinsic value immediately following the consummation of the Distribution as the intrinsic value of the existing SWBI award immediately prior to the consummation of the Distribution. It should be noted that to the extent the existing SWBI award is subject to vesting based upon continued service with SWBI, the continued or converted award, whichever applicable, will also remain subject to the same vesting conditions based upon continued employment with such individual’s post-Separation employer. In addition, to the extent the existing SWBI award is subject to the achievement of certain company performance-based target goals, appropriate adjustments will be made to such target goals and incorporated into the new awards to reflect the changes to the businesses of each of SWBI and our company as a result of the Separation.

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Regardless of the equity conversion method utilized, whether the stockholder method or employer method, the intrinsic value of each type of award as determined immediately prior to the Distribution will be equal to the intrinsic value of the “converted award” (in the case of the employer method) or “converted awards” as determined in the aggregate (in the case of the stockholder method) immediately following the Distribution.  Following the Distribution, such intrinsic values may diverge in the future depending on the growth of SWBI and/or us, but initially they will be the same immediately following the Distribution.

Fractional Interests

To the extent any adjustments to be made to outstanding SWBI awards result in fractional share interests, the fractional interests will be rounded down to the nearest whole share and we or SWBI, as the case may be, will make a cash payment to our respective employees and/or directors in lieu of such fractional interests.

Proposed Treatment

After careful consideration and in light of the ongoing intercompany agreements and commitments between SWBI and us after the Separation, we determined that those individuals who are members of the board of directors of SWBI or us, as applicable, as well as those individuals who are top-level executives, which we refer to as the Designated Executives, of SWBI or us, as applicable, would receive stockholder method treatment with respect to all of their outstanding awards to facilitate cooperation between SWBI and us through the transition period, which such directors and Designated Executives will be integral in ensuring operates smoothly and efficiently.  For all other employees, which we refer to as the Other Employees, we determined that they will receive the employer method treatment with respect to all of their outstanding awards since they will have minimal or no involvement with the other company post-Separation and, therefore, the focus will be solely on their current employer and the value added to that company post-Separation.  In addition, the amount of shares subject to outstanding awards held by the Other Employees is relatively small and splitting such small share amounts would diminish their value and be administratively complex.  There are no other classes of individuals that would be impacted by this conversion methodology.

The following table shows the expected treatment of each type of SWBI award outstanding immediately prior to the Distribution. As a result of the adjustments to be made to such SWBI awards in connection with the Distribution, the precise number of awards, number of shares, and/or exercise prices resulting from the conversion of such awards will not be known until following the Distribution Date.

 

Type of Award

 

Directors

 

Designated Executives (1)

 

Other Employees (1)

Options

 

Stockholder Method

 

N/A

 

N/A

RSUs

 

Stockholder Method

 

Stockholder Method

 

Employer Method

Deferred RSUs

 

Stockholder Method

 

N/A

 

N/A

PSUs

 

N/A

 

Stockholder Method

 

N/A

 

(1)

As defined in the Employee Matters Agreement.

 

Results of the Separation

After the Separation, we will be an independent, publicly traded company that directly or indirectly holds the assets and legal entities, subject to any related liabilities, associated with the outdoor products and accessories business previously conducted by SWBI. Immediately following the Separation, we expect to have approximately 813 stockholders of record, based on the number of registered stockholders of SWBI common stock on June 22, 2020, applying a distribution ratio of one share of our common stock for every four shares of SWBI common stock. We expect to have approximately 13,882,620 shares of our common stock outstanding following the Separation. The actual number of shares to be distributed will be determined on the Record Date.

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Incurrence of Debt

On June 11, 2020, we received a commitment letter for a new financing arrangement in anticipation of the Separation consisting of a $50 million revolving line of credit secured by substantially all the assets of our company, maturing five years from the closing date, with available borrowings determined by a borrowing base calculation. The revolving line will also include an option to increase the credit commitment for an additional $15.0 million, subject to certain conditions. The revolving line is expected to bear interest at a fluctuating rate equal to the Base Rate or LIBOR, at our option, plus the applicable margin. This revolving line of credit will have no borrowings as of the Distribution Date and will be used for general corporate purposes.  In addition to the revolving line of credit, we have entered into a long-term sublease of our corporate offices from SWBI that will be recorded as an operating Right-of-Use lease asset and liability in the amount of approximately $25.0 million.

Regulatory Approvals

We must complete the necessary registration under the federal securities laws of our common stock to be issued in connection with the Distribution. We must also complete the applicable listing requirements on Nasdaq for such shares. Other than these requirements, we do not believe that any other material governmental or regulatory filings or approvals will be necessary to consummate the Distribution.

Appraisal Rights

No SWBI stockholder will have any appraisal rights in connection with the Separation.

Listing and Trading of Our Common Stock

As of the date of this information statement, there is no public market for our common stock. We have applied to have our common stock listed on Nasdaq under the ticker symbol “AOUT.”

Trading Between Record Date and Distribution Date

Beginning on the Record Date and continuing up to and including the Distribution Date, we expect that there will be two markets in SWBI common stock: a “regular-way” market and an “ex-distribution” market. Shares of SWBI common stock that trade on the “regular-way” market will trade with an entitlement to receive shares of our common stock in connection with the Distribution. Shares of SWBI common stock that trade on the “ex-distribution” market will trade without an entitlement to receive shares of our common stock in the Distribution. Therefore, if you sell shares of SWBI common stock on the “regular-way” market after the close of business on the Record Date and up to and including through the Distribution Date, you will be selling your right to receive shares of our common stock in connection with the Distribution. If you own shares of SWBI common stock as of the close of business on the Record Date and sell those shares on the “ex-distribution” market, up to and including through the Distribution Date, you will still receive the shares of our common stock that you would be entitled to receive in respect of your ownership, as of the Record Date, of the shares of SWBI common stock that you sold.

Furthermore, beginning on [], 2020 and continuing up to and including the Distribution Date, we expect there will be a “when-issued” market in our common stock. “When-issued” trading refers to a sale or purchase made conditionally because the security has been authorized but not yet issued. The “when-issued” trading market will be a market for shares of our common stock that will be distributed to SWBI stockholders on the Distribution Date. If you own shares of SWBI common stock as of the close of business on the Record Date, you would be entitled to receive shares of our common stock in connection with the Distribution. You may trade this entitlement to receive shares of our common stock, without trading the shares of SWBI common stock you own, in the “when-issued” market. On the first trading day following the Distribution Date, we expect “when-issued” trading with respect to our common stock will end and “regular-way” trading in our common stock will begin.

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Conditions to the Distribution

We expect the Distribution will be effective on [], 2020, the Distribution Date, provided that, among other conditions described in the Separation and Distribution Agreement, the following conditions will have been satisfied or waived by SWBI in its sole discretion:

 

the Transfer will have been consummated;

 

the proposed new AOUT line of credit contemplated by the Separation and Distribution Agreement will have been consummated;

 

the Distribution will be made in a manner that does not cause SWBI to be unable to pay its debts as they become due in the usual course of its business or cause the total assets of SWBI to be less than the sum of its total liabilities plus the amount that would be needed, if SWBI were to be dissolved immediately after the effective time of the Distribution, to satisfy the preferential rights upon such dissolution of stockholders whose preferential rights are superior to those receiving the Distribution, if any, in each case in accordance with Section 78.288 of the Nevada Revised Statutes;

 

the SWBI Board of Directors will have approved the Distribution and will not have abandoned the Distribution or terminated the Separation and Distribution Agreement at any time prior to the consummation of the Distribution;

 

the SEC will have declared effective our registration statement on Form 10, of which this information statement is a part, under the Exchange Act; no stop order suspending the effectiveness of our registration statement on Form 10 will be in effect; no proceedings for such purpose will be pending before or threatened by the SEC; and this information statement, or a notice of Internet availability thereof, will have been mailed to the holders of SWBI common stock as of the Record Date;

 

all actions and filings necessary or appropriate under applicable federal, state “blue sky,” or foreign securities laws and the rules and regulations thereunder will have been taken and, when applicable, become effective or been accepted;

 

our common stock to be delivered in connection with the Distribution will have been approved for listing on Nasdaq, subject to official notice of issuance;

 

our Board of Directors, as named in this information statement, will have been duly elected, and our Amended and Restated Certificate of Incorporation and Amended and Restated Bylaws, each in substantially the form attached as exhibits to the registration statement on Form 10 of which this information statement is a part, will be in effect;

 

each of the ancillary agreements contemplated by the Separation and Distribution Agreement will have been duly executed and delivered by the parties thereto;

 

SWBI will have received the Tax Opinion, substantially to the effect that, among other things, the Transfer and the Distribution will qualify as a tax-free transaction under Sections 355 and Section 368(a)(1)(D) of the Code, for U.S. federal income tax purposes;

 

no applicable law will have been adopted, promulgated, or issued, and be in effect, that prohibits the consummation of the Distribution or any of the transactions contemplated by the Separation and Distribution Agreement;

 

any material governmental approvals and consents and any material permits, registrations, and consents from third parties, in each case, necessary to effect the Distribution and to permit the operation of the outdoor products and accessories business after the Distribution Date substantially as conducted as of the date of the Separation and Distribution Agreement will have been obtained; and

 

no event or development will have occurred or exist that, in the judgment of the SWBI Board of Directors, in its sole discretion, makes it inadvisable to effect the Distribution or other transactions contemplated by the Separation and Distribution Agreement.

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The fulfillment of these conditions will not create any obligations on SWBI’s part to effect the Separation, and the SWBI Board of Directors has reserved the right, in its sole discretion, to abandon, modify, or change the terms of the Separation, including by accelerating or delaying the timing of the consummation of all or part of the Distribution, at any time prior to the Distribution Date.

Agreements with SWBI

In connection with the Separation, we will enter into a Separation and Distribution Agreement and several other agreements with SWBI to effect the Separation and provide a framework for our relationship with SWBI after the Separation. These agreements will provide for the allocation between us and our subsidiaries, on the one hand, and SWBI and its subsidiaries, on the other hand, of the assets, liabilities, legal entities, and obligations associated with the outdoor products and accessories business, on the one hand, and the firearm business, on the other hand, and will govern the relationship between our company and our subsidiaries, on the one hand, and SWBI and its subsidiaries, on the other hand, subsequent to the Separation (including with respect to transition services, employee matters, intellectual property matters, tax matters, and certain other commercial relationships).

In addition to the Separation and Distribution Agreement (which will contain many of the key provisions related to our Separation from SWBI and the distribution of our shares of common stock to SWBI stockholders), we will also enter into a Tax Matters Agreement, a Transition Services Agreement, an Employee Matters Agreement, a Trademark License Agreement, a Sublease, and certain commercial agreements.

The forms of the principal agreements described below have been filed as exhibits to the registration statement of which this information statement forms a part. The following descriptions of these agreements are summaries of the material terms of these agreements.

Separation and Distribution Agreement

The Separation and Distribution Agreement will govern the overall terms of the Separation. Generally, the Separation and Distribution Agreement will include SWBI’s and our agreements relating to the internal restructuring steps to be taken to complete the Separation, including the assets, legal entities, and rights to be transferred, liabilities to be assumed, and related matters.

Subject to the receipt of required governmental and other consents and approvals and the satisfaction of other closing conditions, in order to accomplish the Separation, the Separation and Distribution Agreement will provide, as applicable, for SWBI and us to transfer specified assets between the companies that will operate the outdoor products and accessories business, on the one hand, and SWBI’s firearm business, on the other hand, after the Distribution Date. The determination of the assets to be transferred between the companies will be made by SWBI in its sole discretion. The Separation and Distribution Agreement will require SWBI and us to use reasonable efforts to obtain consents, approvals, and amendments required to assign the assets, legal entities, and liabilities that are to be transferred pursuant to the Separation and Distribution Agreement.

Unless otherwise provided in the Separation and Distribution Agreement or any of the related ancillary agreements, all assets will be transferred on an “as is, where is” basis. Generally, if the transfer of any assets or any claim or right or benefit arising thereunder requires a consent that will not be obtained before the Distribution, or if the transfer or assignment of any such asset or such claim or right or benefit arising thereunder would be ineffective or would adversely affect the rights of the transferor thereunder so that the intended transferee would not in fact receive all such rights, the party retaining any asset that otherwise would have been transferred will hold such asset in trust for the use and benefit of the party entitled thereto and retain such liability for the account of the party by whom such liability is to be assumed, and take such other action as may be reasonably requested by the party to which such asset is to be transferred, or by whom such liability is to be assumed, as the case may be, in order to place such party, insofar as reasonably possible, in the same position as would have existed had such asset or liability been transferred prior to the consummation of the Distribution.

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The Separation and Distribution Agreement will specify those conditions that must be satisfied or waived by SWBI prior to the completion of the Separation, which are described further in “—Conditions to the Distribution.” In addition, SWBI will have the right to determine the date and terms of the Separation and will have the right, at any time until completion of the Distribution, to determine to abandon or modify the Distribution and to terminate the Separation and Distribution Agreement.

In addition, the Separation and Distribution Agreement will govern the treatment of indemnification, insurance, and litigation responsibility and management of the outdoor products and accessories business, on the one hand, and SWBI’s firearm business, on the other hand, after the Distribution Date. Generally, the Separation and Distribution Agreement will provide for uncapped cross-indemnities primarily designed to place financial responsibility for the obligations and liabilities of our business with us and financial responsibility for the obligations and liabilities of SWBI’s firearm business with SWBI, in either case after applicable insurance coverage (which generally are occurrence policies) intended to cover such obligations and liabilities and whether incurred prior to, on, or after the Distribution Date.  We and SWBI have each agreed to indemnify the other for any liabilities caused by a material misstatement or omission in materials supplied by one of us to the other for inclusion in this information statement regarding the business, operations, financial results, stockholder communications, risks, management, management compensation levels, and stock ownership of the applicable company. The Separation and Distribution Agreement will also establish procedures for handling claims subject to indemnification and related matters.

Tax Matters Agreement

In connection with the Separation, we and SWBI will enter into a Tax Matters Agreement that will govern the parties’ respective rights, responsibilities, and obligations with respect to taxes, including taxes arising in the ordinary course of business and taxes, if any, incurred as a result of the failure of the Transfer and the Distribution to qualify for tax-free treatment for U.S. federal income tax purposes. The Tax Matters Agreement will also set forth the respective obligations of the parties with respect to the filing of tax returns, the administration of tax contests, and assistance and cooperation on tax matters.

In general, the Tax Matters Agreement will govern the rights and obligations that we and SWBI will have after the Separation with respect to taxes for both pre- and post-closing periods. Under the Tax Matters Agreement, we generally will be responsible for (i) any of our taxes for all periods prior to and after the Distribution and (ii) any taxes of the SWBI group for periods prior to the Distribution to the extent attributable to the outdoor products and accessories business. SWBI generally will be responsible for any of the taxes of the SWBI group other than taxes for which we are responsible.

The Tax Matters Agreement will further provide as follows:

 

without duplication of our obligations described in the prior paragraph, we will generally indemnify SWBI against (i) taxes arising in the ordinary course of business for which we are responsible under the Tax Matters Agreement (as described above), (ii) any liability or damage resulting from a breach by us or any of our affiliates of a covenant or representation made in the Tax Matters Agreement, and (iii) any event (or series of events) involving our capital stock that, in either case, would result in the failure of the Transfer and the Distribution to qualify for tax-free treatment for U.S. federal income tax purposes; and

 

SWBI will indemnify us against any taxes of the SWBI group other than taxes for which we are responsible.

In addition to the indemnification obligations described above, the indemnifying party will generally be required to indemnify the indemnified party against any interest, penalties, additions to tax, losses, assessments, settlements, or judgments arising out of or incident to the event giving rise to the indemnification obligation, along with costs incurred in any related contest or proceeding.

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The Tax Matters Agreement also generally will prohibit us and our affiliates from taking certain actions that could cause the Transfer and the Distribution to fail to qualify for their intended tax treatment, including the following:

 

during the two-year period following the Distribution Date (or otherwise pursuant to a “plan” within the meaning of Section 355(e) of the Code), we may not cause or permit certain business combinations or transactions to occur;

 

during the two-year period following the Distribution Date, we may not discontinue the active conduct of our business (within the meaning of Section 355(b)(2) of the Code);

 

during the two-year period following the Distribution Date, we may not liquidate or merge, consolidate, or amalgamate with any other person;

 

during the two-year period following the Distribution Date, we may not sell or otherwise dispose of more than 30% of our consolidated gross assets or more than 30% of the gross assets of the outdoor products and accessories business;

 

during the two-year period following the Distribution Date, we may not purchase any of our common stock, other than pursuant to certain open-market repurchases of less than 20% of our common stock (in the aggregate);

 

during the two-year period following the Distribution Date, we may not amend our certificate of incorporation (or other organizational documents) or take any other action affecting the voting rights of our common stock; and

 

more generally, we may not take any action that could reasonably be expected to cause the Transfer and the Distribution and to fail to qualify as tax-free transactions for U.S. federal income tax purposes.

In the event that the Transfer and the Distribution fail to qualify for their intended tax treatment, in whole or in part, and SWBI is subject to tax as a result of such failure, the Tax Matters Agreement will determine whether SWBI must be indemnified for any such tax by us. As a general matter, under the terms of the Tax Matters Agreement (as described above), we are required to indemnify SWBI for any tax-related losses in connection with the Transfer and the Distribution as a result of any action by us or any of our subsidiaries following the Separation. Therefore, in the event that the Transfer or the Distribution fails to qualify for its intended tax treatment due to any action by us or any of our subsidiaries (including the prohibited actions described above), we will generally be required to indemnify SWBI for the resulting taxes.

Transition Services Agreement

The Transition Services Agreement will set forth the terms on which SWBI will provide to us and we will provide to SWBI on a transitional basis, certain services or functions that the companies historically have shared. Transition services will include various information technology, finance, human resources, compliance, legal, security, and other support services. The Transition Services Agreement will provide for the provision of the specified transition services, generally for a period of up to two years following the Distribution Date. Compensation for transition services will be determined using an internal cost allocation methodology based on fully burdened cost such that the party providing the services will have neither a profit nor a loss from the provision of such services as calculated under GAAP; provided, however, that for a two-year transition period, during which the parties will work together to refine the warehouse configuration of warehouse space subleased by SWBI to AOUT to improve operating efficiencies, AOUT will receive a credit against the cost of any services provided by SWBI to AOUT under the Transition Services Agreement to offset the higher fixed operating expenses AOUT will incur until the warehouse re-configuration is complete.

Employee Matters Agreement

We intend to enter into an Employee Matters Agreement with SWBI prior to the Separation that will govern each company’s respective compensation and employee benefit obligations with respect to current and former employees, directors, and consultants. The Employee Matters Agreement will set forth general principles relating to employee matters in connection with the Separation, including the assignment of employees and consultants, the sharing of employee and consultant information, the assumption and retention of employment related assets and liabilities, expense reimbursements, workers’ compensation coverage and liabilities, leaves of absence, the provision of comparable employee benefits, the duplication and/or acceleration of certain employee benefits, and employee service credit (including those relating to time of service, salary, benefits, vacations, and sick leaves).

57


 

The Employee Matters Agreement generally will allocate liabilities and responsibilities relating to compensation and employee benefit plans and programs with SWBI retaining liabilities (both pre- and post-Distribution) and responsibilities with respect to SWBI employees, directors, and consultants who will remain with SWBI and our company assuming liabilities (both pre- and post-Distribution) and responsibilities with respect to participants who will transfer to our company in connection with the Separation. The Employee Matters Agreement will require us to adopt various plans and programs that cover our employees in substitution of coverage they have had under SWBI plans and programs, including an equity incentive plan, a 401(k) plan, a group welfare plan, and a disability plan.

The Employee Matters Agreement will also provide that (i) the Distribution does not constitute a change in control under SWBI’s employee benefit plans, programs, agreements, or arrangements and (ii) the Distribution and the assignment, transfer, or continuation of the employment or service of employees, directors, and/or consultants with another entity will not constitute a severance event under applicable SWBI employee benefit plans, programs, agreements, or arrangements.

Trademark License Agreement

We intend to enter into a Trademark License Agreement with SWBI that will provide us with a limited, non-transferable, exclusive license (other than with respect to Gemtech, which will be a non-exclusive license) to use SWBI trademarks for the sale of accessories, tools, and cutlery, which license allows us to continue selling all SWBI branded products that we are currently selling on an exclusive basis. In order to maintain brand identity, SWBI will have the right to approve any new products in the authorized product categories. SWBI will give us the right of first refusal, if SWBI desires to license its trademarks for any product in a category in which we do not sell as of the Separation. In such cases, SWBI will be required to first notify us and, if within 14 days after such notification we notify SWBI that we are interested in such a license opportunity, we have the next 30 days to negotiate a license agreement with SWBI.

The Trademark License Agreement will require us to pay to SWBI on a calendar quarterly basis a 5% ongoing aggregate royalty based on net sales of products utilizing the SWBI license with a minimum guaranteed royalty of $150,000 per calendar quarter. The term of the Trademark License Agreement will be five years with termination for cause if the other party breaches the agreement and fails to cure within the applicable cure period, and the Trademark License Agreement will automatically renew for a subsequent five-year term, provided that if we fail to meet the performance metric, a compound annual growth rate of 4% for year five, SWBI will have the right to give us notice of non-renewal, in which case the agreement will not renew for the subsequent five-year term but will instead continue for a period of 12 months from the last day of the initial five-year term.   Following the tenth year of the Trademark License Agreement, the parties may agree to one or more five-year renewal terms, but if the parties are unable to agree to any such continuation, the agreement will continue on a month-to-month basis with either party having a right to terminate upon 12 months prior written notice.

If either party wishes to modify the 5% royalty rate on or after year 10, the Trademark License Agreement will require the parties to engage in good faith discussions regarding the new royalty rate no later than six months prior to the expiration of the second five-year term or of any subsequent five-year renewal term. The Trademark License Agreement will require us and SWBI to engage an independent third party to set the new royalty rate based off the industry average if we are unable to agree with SWBI on any new royalty rate. If either party does not agree with the royalty rate determined by the independent third party, such party may elect not to extend the agreement, and the agreement will not renew for such five-year renewal term but will instead continue for a period of 12 months from the last day of the preceding renewal term at the same royalty rate as the preceding renewal term.

Despite the foregoing, the Trademark License Agreement will permit SWBI to terminate the Trademark License Agreement and purchase the assets of the business line selling licensed products at any time commencing three years after the effective date by paying to us a purchase price of two times our net revenue from our sales of the licensed products for the 12-month period preceding such termination date with a net working capital adjustment.

The Trademark License Agreement will require us and SWBI to indemnify each other for inaccuracies of representations.

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Sublease

We intend to enter into a Sublease Agreement with SWBI that will set forth the terms for our sublease from SWBI of office and warehouse space located at 1800 North Route Z, Columbia, Missouri. We will have the exclusive right to utilize approximately 361,000 square feet of the approximately 613,000 rentable square feet in the facility, as well as access to the facility’s common areas. The initial term of the lease will be the remainder of SWBI’s lease with its landlord, which is expected to be a little more than 18 years as of the Distribution Date. Our monthly rent to be paid to SWBI under the Sublease will be calculated by allocating to the subleased premises a portion of the monthly rent SWBI pays under its lease for the entire facility, taking into consideration the differing market rates applicable to office space, warehouse space, and common areas.  We will pay an agreed upon allocated percentage of the property taxes, insurance, electricity and lighting, heating and air conditioning, hot and cold water, clearing trash removal, landscape maintenance, security, and other operating expenses applicable to the facility based upon our percentage use of the office, warehouse, and other space in the facility.

Commercial Arrangements

Laser Supply Agreement

We intend to enter into a Supply Agreement with SWBI that will provide (i) the terms for SWBI’s purchase of lasers from us and (ii) SWBI with a royalty-free, non-transferable, non-sublicensable, worldwide, non-exclusive license to use certain of our trademarks, service marks, and trade dress in connection with the subsequent sales of such products integrated with SWBI firearms following the Separation.

The Supply Agreement will cover a worldwide territory, subject to intellectual property registration by us in the applicable territory. Except for any Supplier MOQ (as described in the Supply Agreement), but only to the extent of the Supplier MOQ, SWBI will not be obligated to order or purchase a minimum volume of products, except that, during the term of the Supply Agreement, SWBI will be required to purchase such products exclusively from us. We will provide products to SWBI and its affiliates on the most favorable prices to any third-party purchaser. The Supply Agreement will give us a right-of-first proposal to supply any aiming assistance devices to be used on SWBI products and any products that are similar to the products already covered by the Supply Agreement but that are materially different in a manner that justifies a price change, such as significant size differences, co-branding, and material construction or quality differences, as reasonably determined by us and SWBI; except, that such right-of-first proposal will not apply to any product that is manufactured for SWBI by a third party as of the effective date of the Supply Agreement.

The Supply Agreement will require us and SWBI to indemnify each other against losses incurred from breach of representations, warranties, covenants, or negligent or willful acts or omissions; however, we will indemnify SWBI for the failure of any product to comply with applicable law, or SWBI’s direct costs of any product recall. In addition, we will indemnify SWBI against third-party claims alleging intellectual property infringement of any product sold to SWBI, except for claims made against use of SWBI’s trademarks or our compliance with any specifications or design supplied by SWBI.

The term of the Supply Agreement will be two years with termination for cause only, and SWBI and we will agree to use our best efforts to negotiate an extension (with modifications if necessary) of the Supply Agreement at least six months prior to its expiration.

Accessories Supply Agreement

We intend to enter into a Supply Agreement with SWBI that will provide the terms for SWBI’s purchase of virtually all of our accessories products and to be used by SWBI in connection with production, bundling, and marketing activities.

The Supply Agreement will cover a worldwide territory, subject to intellectual property registration by us in the applicable territory. SWBI will not be obligated to order or purchase a minimum volume of products, except that, during the term of the Supply Agreement, SWBI will be required to purchase such products exclusively from us. In addition, with respect to any product licensed by SWBI from us, as of the Separation, we will sell such product to SWBI and its affiliates after the Separation on the most favorable terms and conditions offered by us to any third-

59


 

party purchaser. The Supply Agreement will give us a right-of-first refusal to supply any products that are similar to the products already covered by the Supply Agreement, but that are materially different in a manner that justifies a price change, such as significant size differences, co-branding, and material construction or quality differences, as reasonably determined by us and SWBI, except, that such right-of-first refusal will not apply to any product that is manufactured for SWBI by a third party as of the effective date of the Supply Agreement.

The Supply Agreement will require us and SWBI to indemnify each other against losses incurred from breach of representations, warranties, covenants, or negligent or willful acts or omissions; however, we will indemnify SWBI for the failure of any product to comply with applicable law, or SWBI’s direct costs of any product recall. In addition, we will indemnify SWBI against third-party claims alleging intellectual property infringement of any product sold to SWBI, except for claims made against use of SWBI’s trademarks or our compliance with any specifications or design supplied by SWBI.

The term of the Supply Agreement will be two years with termination for cause only, and SWBI and we will agree to use our best efforts to negotiate an extension (with modifications if necessary) of the Supply Agreement at least six months prior to its expiration.

Transferability of Shares of Our Common Stock

The shares of our common stock that you will receive in connection with the Distribution will be freely transferable, unless you are considered an “affiliate” of ours pursuant to Rule 144 under the Securities Act. Persons that can be considered our affiliates after the Separation generally include individuals or entities that directly, or indirectly through one or more intermediaries, control, are controlled by, or are under common control with us, and may include certain of our officers and directors. In addition, individuals who are affiliates of SWBI on the Distribution Date may be deemed to be affiliates of ours. We estimate that our directors and executive officers, who may be considered “affiliates” for purposes of Rule 144, will beneficially own approximately 68,995 shares of our common stock immediately following the Separation. See “Security Ownership of Certain Beneficial Owners and Management” included elsewhere in this information statement. Our affiliates may sell shares of our common stock received in connection with the Distribution only:

 

under a registration statement that the SEC has declared effective under the Securities Act; or

 

under an exemption from registration under the Securities Act, such as the exemption afforded by Rule 144.

In general, under Rule 144 as currently in effect, an affiliate will be entitled to sell, within any three-month period, a number of shares of our common stock that does not exceed the greater of the following:

 

one percent of our common stock then outstanding; or

 

the average weekly trading volume of our common stock during the four calendar weeks preceding the filing of a notice on Form 144 for the sale.

Rule 144 also includes notice requirements and restrictions governing the manner of sale for sales by our affiliates. Sales may not be made under Rule 144 unless certain information about us is publicly available.

Reason for Furnishing this Information Statement

This information statement is being furnished solely to provide information to SWBI stockholders who are entitled to receive shares of our common stock in connection with the Distribution. The information statement is not, and is not to be construed as, an inducement or encouragement to buy, hold, or sell any of our securities. We believe the information contained in this information statement is accurate as of the date set forth on the cover. Changes may occur after that date and neither SWBI nor we undertake any obligation to update such information except in the normal course of our respective public disclosure obligations.

 

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DIVIDEND POLICY

We currently intend to retain all available funds and future earnings, if any, to fund the development and expansion of our business, and we do not anticipate paying any cash dividends on our common stock in the foreseeable future. Any future determination to pay dividends on our common stock will be made at the discretion of our Board of Directors and will depend on various factors, including applicable laws, our results of operations, financial condition, future prospects, the terms of our outstanding indebtedness, and any other factors deemed relevant by our Board of Directors.

 

 

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CAPITALIZATION

The following table sets forth our cash and equivalents and our capitalization as of April 30, 2020 on a historical and pro forma basis to give effect to the Separation as discussed in “The Separation.”

The pro forma adjustments are based upon available information and assumptions that we believe are reasonable; however, such adjustments are subject to change based on the finalization of the terms of the Separation and the agreements that define our relationship with SWBI after the completion of the Separation. In addition, such adjustments are estimates and may not prove to be accurate.

You should read the information in the following table together with “Selected Historical Combined Financial Data,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” “Unaudited Pro Forma Combined Financial Statements,” and our historical combined financial statements and the related notes included elsewhere in this information statement.

We are providing the capitalization table for information purposes only. The capitalization table below may not reflect the capitalization or financial condition that would have resulted had we been operating as an independent, publicly traded company on April 30, 2020 and is not necessarily indicative of our future capitalization or financial condition.

 

 

 

As of April 30, 2020

 

 

 

Actual

 

 

Pro Forma

(Adjusted)

 

 

(In thousands, except per share data)

 

Cash and cash equivalents

 

$

234

 

 

$

25,234

 

 

 

 

 

 

 

 

 

 

Capitalization:

 

 

 

 

 

 

 

 

Indebtedness:

 

 

 

 

 

 

 

 

Lease liabilities, net of current portion

 

 

2,830

 

 

 

25,844

 

 

 

 

 

 

 

 

 

 

Equity:

 

 

 

 

 

 

 

 

Common stock, $0.001 par value; 100,000,000 shares authorized, 13,882,620 shares issued and outstanding, pro forma

 

 

 

 

 

14

 

Additional paid-in-capital

 

 

 

 

 

 

252,298

 

Parent company investment

 

 

224,098

 

 

 

 

Total equity

 

$

224,098

 

 

$

252,312

 

Total capitalization

 

$

226,928

 

 

$

278,156

 

 

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UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS

The unaudited pro forma combined financial statements consist of an unaudited pro forma combined statement of income for the year ended April 30, 2020 and an unaudited pro forma combined balance sheet as of April 30, 2020. The unaudited pro forma combined statement of income has been prepared to give effect to the Pro Forma Transactions (as defined below) as if the Pro Forma Transactions had occurred or became effective as of May 1, 2019. The unaudited pro forma combined balance sheet has been prepared to give effect to the Pro Forma Transactions as though the Pro Forma Transactions had occurred as of April 30, 2020.

The unaudited pro forma combined financial statements should be read in conjunction with our historical audited combined financial statements and the related notes and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included elsewhere in this information statement. The unaudited pro forma combined financial statements constitute forward-looking information and are subject to certain risks and uncertainties that could cause actual results to differ materially from those anticipated. See “Special Note Regarding Forward-Looking Statements.”

The unaudited pro forma combined financial statements presented below have been derived from our historical audited combined financial statements included elsewhere in this information statement and do not purport to represent what our financial position or results of operations would have been had the Separation occurred on the dates indicated and are not necessarily indicative of our future financial position and future results of operations. In addition, the unaudited pro forma combined financial statements are provided for illustrative and informational purposes only. The pro forma adjustments are based on available information and assumptions we believe are reasonable; however, such adjustments are subject to change.

SWBI did not account for us as, and we were not operated as, an independent, publicly traded company for the periods presented. Our unaudited pro forma combined financial statements have been prepared to reflect adjustments to our historical audited combined financial statements that are (1) directly attributable to the Separation, Distribution, and related transactions; (2) factually supportable; and (3) with respect to the unaudited pro forma combined statement of income, expected to have a continuing impact on our combined results of operations. The unaudited pro forma combined financial statements have been adjusted to give effect to the following, or the Pro Forma Transactions:

 

the contribution by SWBI to us of all the assets, legal entities, and liabilities that comprise the outdoor products and accessories business and the retention by SWBI of certain specified assets and liabilities reflected in our historical combined financial statements, in each case, pursuant to the Separation and Distribution Agreement;

 

the anticipated post-separation capital structure, including (i) funding $25.0 million cash transfer from SWBI, and (ii) the issuance of our common stock to holders of SWBI common stock;

 

the resulting elimination of SWBI’s net investment in us; and

 

the impact of, and transactions contemplated by, the Separation and Distribution Agreement, Tax Matters Agreement, Transition Services Agreement, Employee Matters Agreement, Trademark License Agreement, and other agreements related to the Separation between us and SWBI and the provisions contained therein.

The operating expenses reported in our historical audited combined statements of income/(loss) and comprehensive income/(loss) include allocations of certain SWBI costs. These costs include allocations of SWBI corporate costs, shared services, and other related costs that benefit us.

As an independent, publicly traded company, we expect to incur additional recurring expenses. The significant assumptions involved in determining our estimates of recurring costs of being an independent, publicly traded company include the following:

 

costs to perform financial reporting, accounting, tax, human resources, regulatory compliance, corporate governance, treasury, legal, internal audit, and investor relations activities;

 

compensation, including equity-based awards, and benefits with respect to new and existing positions;

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depreciation and amortization related to information technology infrastructure investments;

 

insurance premiums; and

 

changes in our overall facility costs.

We estimate incremental recurring expenses attributable to these additional activities to be up to $13.0 million before income taxes annually. No pro forma adjustment has been made to the accompanying unaudited pro forma combined statement of income to reflect these additional expenses because they are projected amounts based on estimates and would not be factually supportable.

We currently estimate that we will incur between $10.0 million and $12.0 million in costs and expenses associated with becoming an independent, publicly traded company within 18 to 24 months following the Separation. The accompanying unaudited pro forma combined statement of income has not been adjusted for these estimated costs and expenses as they are not expected to have an ongoing impact on our operating results and are projected amounts based on estimates that are not factually supportable. These costs and expenses are expected to include the following:

 

accounting, tax, and other professional costs pertaining to our separation and establishment as an independent, publicly traded company;

 

recruiting and relocation costs associated with the hiring of key senior management personnel new to our company; and

 

costs to separate and implement information systems.

Subject to the terms of the Separation and Distribution Agreement, SWBI will generally pay all of the non-recurring third-party costs and expenses related to the Separation and incurred prior to the completion of the Separation. These non-recurring amounts are expected to include costs to separate and/or duplicate information technology systems, investment banker fees (other than fees and expenses in connection with the debt financing), third-party legal and accounting fees, and similar costs. After the completion of the Separation, subject to the terms of the Separation and Distribution Agreement, all costs and expenses related to the Separation incurred by either SWBI or us will be borne by the party incurring the costs and expenses.

Our retained cash balance is subject to adjustments prior to and following the completion of the Separation. The following unaudited pro forma combined financial statements do not reflect any impact of such adjustments, as the amount of any such adjustments are not currently determinable and would represent a financial projection.

 

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OUTDOOR PRODUCTS & ACCESSORIES BUSINESS OF SMITH & WESSON BRANDS, INC.

Unaudited Pro Forma Combined Balance Sheet

 

 

 

As of April 30, 2020

 

 

 

Historical

 

 

Pro Forma

Adjustments

 

 

Pro Forma

 

 

 

(In thousands, except par value and share data)

 

ASSETS

 

Current assets:

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

234

 

 

$

25,000

 

(A)

$

25,234

 

Accounts receivable, net of allowance for doubtful accounts of $448 as of April 30, 2020

 

 

35,096

 

 

 

 

 

 

35,096

 

Inventories

 

 

59,999

 

 

 

 

 

 

59,999

 

Prepaid expenses and other current assets

 

 

3,244

 

 

 

 

 

 

3,244

 

Income tax receivable

 

 

104

 

 

 

 

 

 

104

 

Deferred income taxes

 

 

3,580

 

 

 

 

 

 

3,580

 

Total current assets

 

 

102,257

 

 

 

25,000

 

 

 

127,257

 

Property, plant, and equipment, net

 

 

9,677

 

 

 

3,214

 

(G)

 

12,891

 

Intangibles, net

 

 

69,152

 

 

 

 

 

 

69,152

 

Goodwill

 

 

64,315

 

 

 

 

 

 

64,315

 

Right of use assets

 

 

2,772

 

 

 

24,916

 

(D-E)

 

27,688

 

Other assets

 

 

242

 

 

 

 

 

 

242

 

 

 

$

248,415

 

 

$

53,130

 

 

$

301,545

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

Current liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

Accounts payable

 

$

8,936

 

 

$

 

 

$

8,936

 

Accrued expenses

 

 

7,655

 

 

 

 

 

 

7,655

 

Accrued payroll and incentives

 

 

3,249

 

 

 

 

 

 

3,249

 

Accrued income taxes

 

 

 

 

 

 

 

 

 

Lease liabilities, current

 

 

1,324

 

 

 

1,902

 

(D-E)

 

3,226

 

Accrued profit sharing

 

 

217

 

 

 

 

 

 

217

 

Total current liabilities

 

 

21,381

 

 

 

1,902

 

 

 

23,283

 

Deferred income taxes

 

 

 

 

 

 

 

 

 

Lease liabilities, net of current portion

 

 

2,830

 

 

 

23,014

 

(D-E)

 

25,844

 

Other non-current liabilities

 

 

106

 

 

 

 

 

 

106

 

Total liabilities

 

 

24,317

 

 

 

24,916

 

 

 

49,233

 

Commitments and contingencies

 

 

 

 

 

 

 

 

 

 

 

 

Equity:

 

 

 

 

 

 

 

 

 

 

 

 

Preferred stock, $0.001 par value, 20,000,000 shares authorized, no shares

   issued or outstanding

 

 

 

 

 

 

 

 

 

Common stock, $0.001 par value, 100,000,000 shares authorized, 13,882,620 shares issued and outstanding, pro forma

 

 

 

 

 

14

 

(A)

 

14

 

Additional paid-in-capital

 

 

 

 

 

 

252,298

 

(A)

 

252,298

 

Parent company investment

 

 

224,098

 

 

 

(224,098

)

(A)

 

 

Total equity

 

 

224,098

 

 

 

28,214

 

 

 

252,312

 

 

 

$

248,415

 

 

$

53,130

 

 

$

301,545

 

 

 

 

 

 

 

 

 

 

 

 

 

 

See notes to Unaudited Pro Forma Combined Financial Statements.

65


 

OUTDOOR PRODUCTS & ACCESSORIES BUSINESS OF SMITH & WESSON BRANDS, INC.

Unaudited Pro Forma Combined Statement of Income/(Loss) and Comprehensive Income/(Loss)

 

 

 

For the year ended April 30, 2020

 

 

 

Historical

 

 

Pro Forma

Adjustments

 

 

Pro Forma

 

 

 

(In thousands, except per share amounts)

 

Net sales

 

$

167,379

 

 

$

 

 

$

167,379

 

Cost of sales

 

 

96,363

 

 

 

 

 

 

96,363

 

Gross profit

 

 

71,016

 

 

 

 

 

 

71,016

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

Research and development

 

 

4,995

 

 

 

 

 

 

4,995

 

Selling, marketing, and distribution

 

 

38,596

 

 

 

510

 

(D)

 

39,106

 

General and administrative

 

 

41,292

 

 

 

2,217

 

(E-H)

 

43,509

 

Goodwill impairment

 

 

98,929

 

 

 

 

 

 

98,929

 

Total operating expenses

 

 

183,812

 

 

 

2,727

 

 

 

186,539

 

Operating loss

 

 

(112,796

)

 

 

(2,727

)

 

 

(115,523

)

Other (expense)/income, net:

 

 

 

 

 

 

 

 

 

 

 

 

Other income/(expense), net

 

 

(21

)

 

 

 

 

 

(21

)

Related party interest income, net

 

 

4,963

 

 

 

 

 

 

4,963

 

Total other (expense)/income, net

 

 

4,942

 

 

 

 

 

 

4,942

 

Income/(loss) before income taxes

 

 

(107,854

)

 

 

(2,727

)

 

 

(110,581

)

Income tax expense

 

 

(11,653

)

 

 

(654

)

(B)

 

(12,307

)

Net loss/comprehensive loss

 

$

(96,201

)

 

$

(2,073

)

 

$

(98,274

)

Net loss per share: