STURM RUGER & CO INC (RGR) FY 2023 MD&A

ITEM 7— MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Company Overview

Sturm, Ruger & Company, Inc. (the “Company”)
is principally engaged in the design, manufacture, and sale of firearms to domestic customers. Approximately 99% of sales are from firearms.
Export sales represent approximately 6% of total sales. The Company’s design and manufacturing operations are located in the United
States and almost all product content is domestic. The Company’s firearms are sold through a select number of independent wholesale
distributors, principally to the commercial sporting market.

The Company also manufactures investment castings
made from steel alloys and metal injection molding (“MIM”) parts for internal use in its firearms and for sale to unaffiliated,
third-party customers. Less than 1% of sales are from the castings segment.

Orders of many models of firearms from the independent
distributors tend to be stronger in the first quarter of the year and weaker in the third quarter of the year.

Results of Operations - 2023

Product Demand

The estimated sell-through of the Company’s
products from the independent distributors to retailers in 2023 decreased 7% from 2022. For the same period, adjusted NICS decreased 4%.
The greater reduction in the sell-through of the Company’s products relative to adjusted NICS background checks may be attributable
to aggressive promotions, discounts, rebates, and the extension of payment terms offered by the Company’s competitors.

Estimated sell-through from distributors to retailers and total adjusted
NICS background checks:

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The adjusted NICS data presented above
was derived by the NSSF by subtracting NICS checks that are not directly related to the sale of a firearm, including checks used for concealed
carry (“CCW”) permit application checks as well as checks on active CCW permit databases.

Adjusted NICS data can be impacted by
changes in state laws and regulations and any directives and interpretations issued by governmental agencies.

Orders Received and Ending Backlog

The Company uses the estimated unit sell-through
of its products from the independent distributors to retailers, along with inventory levels at the independent distributors and at the
Company, as the key metrics for planning production levels.

The units ordered, value of orders received and ending backlog, net
of Federal Excise Tax, for the trailing three years are as follows (dollars in millions, except average sales price):

Production

The Company reviews the estimated sell-through
from the independent distributors to retailers, as well as inventory levels at the independent distributors and at the Company, to plan
production levels and manage inventories. These reviews resulted in a decrease in total unit production of 19% in 2023 compared to 2022.

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Annual Summary Unit Data

Firearms unit data for orders, production, and
shipments follows:

Inventories

The Company’s finished goods inventory increased
by 30,700 units during 2023.

Distributor
inventories of the Company’s products decreased by 39,100 units during 2023, and approximate a reasonable level to support rapid
fulfillment of retailer demand for most product families.

Inventory data follows:

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Year ended December 31, 2023, as compared to year ended December
31, 2022:

Net Sales, Cost of Products Sold, and Gross
Profit

Net
sales, cost of products sold, and gross profit data for the year ended (dollars in millions):

Firearms sales and unit shipments decreased 9%
and 17%, respectively, in 2023. New products represented $121.7 million or 23% of firearms sales in 2023, an increase from $78.4 million
or 14% of firearms sales in 2022. New product sales include only major new products that were introduced in the past two years. In 2023,
new products included the MAX-9 pistol (during the first quarter only), Security-380 pistol, Super Wrangler revolver, LCP MAX pistol,
Marlin lever-action rifles, LC Carbine, Small-Frame Autoloading Rifle, and American Centerfire Rifle Generation II.

The
decreased gross profit for the year ended December 31, 2023 is attributable to the significant decrease in sales, as well as inflationary
cost increases in materials, commodities, services, wages, energy, fuel and transportation, unfavorable deleveraging of fixed costs resulting
from decreased production, a product mix shift toward products with relatively lower margins that remain in stronger demand, and increased
promotional costs.

The decrease in gross margin for the year ended
December 31, 2023 is attributable to the aforementioned factors, partially offset by increased pricing.

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Selling, General and Administrative

Selling and general and administrative expenses data for the year ended
(dollars in millions):

The increase in selling expenses for the year
ended December 31, 2023 was primarily attributable to increased trade show costs, travel expenditures, and advertising, partially
offset by decreased sales volume.

The increase in general, and administrative expenses
for the year ended December 31, 2023 was primarily attributable to increased professional service costs.

Operating Income

Operating income was $52.1 million or 9.6% of
sales in 2023. This is a decrease of $51.4 million from 2022 operating income of $103.5 million or 17.3% of sales.

Other Operating Income (Expense), Net

Other income data for the year ended (dollars in millions):

The increase in other income
for the year ended December 31, 2023 was the result of increases in interest income due to increased interest rates earned on short-term
investments, partially offset by decreased royalty and other income.

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Income Taxes and Net Income

The
effective income tax rate was 18.0% in 2023 and 18.4% in 2022. The Company's 2023 and 2022 effective tax rate differs from the
statutory federal tax rate due principally to the availability of research and development tax credits, state income taxes, and the nondeductibility
of certain executive compensation. The impact related to research and development tax credits on the effective tax rate is expected to
decline in future years.

As a result of the foregoing factors, consolidated
net income was $48.2 million in 2023. This represents a decrease of $40.1 million from 2022 consolidated net income of $88.3 million.

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Non-GAAP Financial Measure

In an effort to provide investors with additional
information regarding its results, the Company refers to various United States generally accepted accounting principles (“GAAP”)
financial measures and two non-GAAP financial measures, EBITDA and EBITDA margin, which management believes provides useful information
to investors. These non-GAAP measures may not be comparable to similarly titled measures being disclosed by other companies. In addition,
the Company believes that the non-GAAP financial measures should be considered in addition to, and not in lieu of, GAAP financial measures.
The Company believes that EBITDA and EBITDA margin are useful to understanding its operating results and the ongoing performance of its
underlying business, as EBITDA provides information on the Company’s ability to meet its capital expenditure and working capital
requirements, and is also an indicator of profitability. The Company believes that this reporting provides better transparency and comparability
to its operating results. The Company uses both GAAP and non-GAAP financial measures to evaluate its financial performance.

Non-GAAP Reconciliation – EBITDA

EBITDA

(Unaudited, dollars in thousands)

EBITDA is defined as earnings before interest,
taxes, and depreciation and amortization. The Company calculates this by adding the amount of interest expense, income tax expense and
depreciation and amortization expenses that have been deducted from net income back into net income, and subtracting the amount of interest
income that was included in net income from net income to arrive at EBITDA. The Company’s EBITDA calculation also excludes any one-time
non-cash, non-operating expense.

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Quarterly Data

To supplement the summary annual unit data and
discussion above, the same data for the last eight quarters follows:

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(in millions
except average sales price, net of Federal Excise Tax)

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Fourth Quarter Net Sales and Gross Profit Analysis

Net sales, cost of products sold, and gross profit
data for the three months ended (dollars in millions):

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Results of Operations - 2022

Year ended December 31, 2022, as compared to
year ended December 31, 2021:

Annual Summary Unit Data

Firearms unit data for orders, production, shipments and ending inventory,
and castings setups (a measure of foundry production) are as follows:

Orders Received and Ending Backlog

(in millions except average sales price, net of
Federal Excise Tax):

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Product Demand

The estimated sell-through of the
Company’s products from the independent distributors to retailers in 2022 decreased 25% from 2021. For the same period,
adjusted NICS decreased 11%. These decreases are attributable to decreased consumer demand for firearms from the unprecedented
levels of the surge that began in 2020 and remained for most of 2021. The greater reduction in the sell-through of the
Company’s products relative to adjusted NICS background checks may be attributable to the following:

Estimated sell-through from distributors to retailers and total adjusted
NICS background checks:

The adjusted NICS data presented above
was derived by the NSSF by subtracting NICS checks that are not directly related to the sale of a firearm, including checks used for concealed
carry (“CCW”) permit application checks as well as checks on active CCW permit databases.

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Adjusted NICS data can be impacted by
changes in state laws and regulations and any directives and interpretations issued by governmental agencies.

Production

The Company reviews the estimated sell-through
from the independent distributors to retailers, as well as inventory levels at the independent distributors and at the Company, to plan
production levels and manage inventories. These reviews resulted in a decrease in total unit production of 20% in 2022 compared to 2021.

Inventories

The Company’s finished goods inventory increased
by 92,200 units during 2022.

Distributor
inventories of the Company’s products increased by 134,200 units during 2022, and approximate a reasonable level to support rapid
fulfillment of retailer demand for most product families.

Inventory data follows:

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Quarterly Summary Unit Data

To supplement the summary annual unit data and
discussion above, the same data for the last eight quarters follows:

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(in millions
except average sales price, net of Federal Excise Tax)

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Net Sales, Cost of Products Sold, and Gross
Profit

Net
sales, cost of products sold, and gross profit data for the year ended (dollars in millions):

Firearms sales and unit shipments decreased 18.5%
and 23.4%, respectively, in 2022. New products represented $78.4 million or 14% of firearms sales in 2022, compared to $155.5 million
or 22% of firearms sales in 2021. New product sales include only major new products that were introduced in the past two years. In 2022,
new products included the MAX-9 pistol, LCP MAX, Marlin 1895 lever-action rifles, PC Charger, LC Carbine, and Small-Frame Autoloading
Rifle.

The
decreased gross profit for the year ended December 31, 2022 is attributable to the significant decrease in sales, as well as inflationary
cost increases in materials, commodities, services, energy, fuel and transportation, which were partially offset by increased pricing.

The
decrease in gross margin for the year ended December 31, 2022 is attributable to the aforementioned inflationary cost increases and unfavorable
deleveraging of fixed costs resulting from decreased production and sales.

Selling, General and Administrative

Selling,
general and administrative expenses were $76.6 million in 2022, a slight increase of $0.1 million from $76.5 million in 2021, and an increase
from 10.5% of sales in 2021 to 12.9% of sales in 2022. The increase in these expenses was primarily attributable to increased shipping
costs and to the resumption of trade show participation costs, travel expenditures, and advertising that had been deferred during the
height of the COVID-19 restrictions, almost entirely offset by decreased incentive compensation expenses and decreased variable costs,
such as shipping, as a result of the reduced sales volume.

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Other Operating Income (Expense), Net

Other operating income (expense), net was de minimis
in 2022 and an expense of $0.1 million in 2021.

Operating Income

Operating income was $103.5 million or 17.3% of
sales in 2022. This is a decrease of $99.6 million from 2021 operating income of $203.1 million or 27.8% of sales.

Royalty Income

Royalty income was $0.8 million in 2022 and $2.0
million in 2021.

Interest Income

Interest income was $2.6 million in 2022, an increase
from de minimis earnings in 2021, due to significantly increased interest rates earned on short-term investments beginning in the second
quarter of 2022.

Interest Expense

Interest expense was $0.3 million in 2022 and
$0.2 million and 2021.

Other Income, Net

Other income, net was $1.7 million in 2022, an
increase of $0.1 million from $1.6 million in 2021.

Income Taxes and Net Income

The
effective income tax rate was 18.4% in 2022 and 24.5% in 2021. The Company's 2022 and 2021 effective tax rate differs from the
statutory federal tax rate due principally to the availability of research and development tax credits, state income taxes, and the nondeductibility
of certain executive compensation. The decrease in the 2022 effective tax rate was primarily attributable to research and development
tax credits, some of which related to amended prior year income tax returns. The impact related to research and development tax credits
on the effective tax rate is expected to decline in future years.

As a result of the foregoing factors, consolidated
net income was $88.3 million in 2022. This represents a decrease of $67.6 million from 2021 consolidated net income of $155.9 million.

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Non-GAAP Financial Measure

In an effort to provide investors with additional
information regarding its results, the Company refers to various United States generally accepted accounting principles (“GAAP”)
financial measures and two non-GAAP financial measures, EBITDA and EBITDA margin, which management believes provides useful information
to investors. These non-GAAP measures may not be comparable to similarly titled measures being disclosed by other companies. In addition,
the Company believes that the non-GAAP financial measures should be considered in addition to, and not in lieu of, GAAP financial measures.
The Company believes that EBITDA and EBITDA margin are useful to understanding its operating results and the ongoing performance of its
underlying business, as EBITDA provides information on the Company’s ability to meet its capital expenditure and working capital
requirements, and is also an indicator of profitability. The Company believes that this reporting provides better transparency and comparability
to its operating results. The Company uses both GAAP and non-GAAP financial measures to evaluate its financial performance.

Non-GAAP Reconciliation – EBITDA

EBITDA

(Unaudited, dollars in thousands)

EBITDA is defined as earnings before interest,
taxes, and depreciation and amortization. The Company calculates this by adding the amount of interest expense, income tax expense and
depreciation and amortization expenses that have been deducted from net income back into net income, and subtracting the amount of interest
income that was included in net income from net income to arrive at EBITDA. The Company’s EBITDA calculation also excludes any one-time
non-cash, non-operating expense.

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Financial Condition

Liquidity

At
December 31, 2023, the Company had cash and cash equivalents of $15.2 million and $102.5 million in short term investments. The Company’s
pre-LIFO working capital of $272.5 million, less the LIFO reserve of $64.3 million, resulted in working capital of $208.2 million and
a current ratio of 4.3 to 1. The Company’s current ratio is higher than the previous year’s primarily due to the dividends
payable of $88 million related to the $5.00 per share special dividend that was declared on November 30, 2022 and paid on January 5, 2023.
The Company also has access to a $40 million unsecured revolving line of credit that is currently undrawn.

Capital Resources

The Company believes that its cash flow from operations,
current cash position, and access to capital markets will continue to be sufficient to meet its anticipated cash requirements and contractual
obligations, which includes funding the Company’s capital expenditures, acquisitions, dividend payments, and share repurchases.

Operations

Cash provided by operating activities was $33.9
million, $77.2 million, and $172.3 million in 2023, 2022, and 2021, respectively. The decrease in cash provided in 2023 compared to 2022
is primarily attributable to significantly decreased earnings in 2023.

The decrease in cash provided in 2022 compared
to 2021 is primarily attributable to significantly decreased earnings in 2022 and increased inventories and trade receivables in 2022.

Third parties supply the Company with various
raw materials for its firearms and castings, such as fabricated steel components, walnut, birch, beech, maple and laminated lumber for
rifle stocks, wax, ceramic material, metal alloys, various synthetic products and other component parts. There is a limited supply of
these materials in the marketplace at any given time, which can cause the purchase prices to vary based upon numerous market factors.
If market conditions result in a significant prolonged inflation of certain prices or if adequate quantities of raw materials cannot be
obtained, the Company’s manufacturing processes could be interrupted and the Company’s financial condition or results of operations
could be materially adversely affected.

Investing
and Financing

Capital expenditures were $15.8 million, $27.7
million, and $28.8 million in 2023, 2022, and 2021, respectively. In 2024, the Company expects capital expenditures to approximate $15
million, much of which will relate to tooling and fixtures for new product introductions and to upgrade and modernize manufacturing equipment.
Due to market conditions and business circumstances, actual capital expenditures could vary significantly from the budgeted amount. The
Company finances, and intends to continue to finance, all of these activities with funds provided by operations and current cash.

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Included in capital expenditures amount noted
above, on October 3, 2022 the Company purchased a 225,000 square foot facility, which it had previously been leasing, in Mayodan, North
Carolina for $8.3 million for use in its manufacturing and warehousing operations.

As
of December 31, 2023, the Company had $74.7 million of United States Treasury instruments which mature within one year. The Company
also invests available cash in a bank-managed money market fund that invests exclusively in United States Treasury instruments which mature
within one year. At December 31, 2023, the Company’s investment in this money market fund totaled $27.8 million.

In 2023, the Company repurchased
264,062 shares of its common stock for $11.8 million in the open market. The average price per share purchased was $44.71. These purchases
were funded with cash on hand.

In 2022, the Company repurchased
4,440 shares of its common stock for $0.2 million in the open market. The average price per share purchased was $49.87. These purchases
were funded with cash on hand. No shares were repurchased in 2021.

At December 31, 2023, approximately $74.7 million
remained authorized for future share repurchases.

On January 5, 2023, the Company paid a $5.00 per
share special dividend to shareholders of record on December 15, 2022.

Including the $5.00 per share special dividend
paid on January 5, 2023, the Company paid dividends totaling $110.8 million, $42.7 million, and $59.1 million in 2023, 2022, and 2021,
respectively. The quarterly dividend varies every quarter because the Company pays a percentage of earnings rather than a fixed amount
per share. The Company’s practice is to pay a dividend of approximately 40% of net income.

On February 16, 2024, the Company’s Board
of Directors authorized a dividend of 23¢ per share to shareholders of record on March 15, 2024. The payment of future dividends
depends on many factors, including internal estimates of future performance, then-current cash, and the Company’s need for funds.

The Company provides supplemental discretionary
contributions to substantially all employees’ individual 401(k) accounts.

Based on its unencumbered assets, the Company
believes it has the ability to raise cash through issuance of short-term or long-term debt.

Contractual
Obligations

At December 31, 2023, the Company had approximately
$51.3 million in agreements to purchase goods or services that are enforceable and legally binding on the Company, all of which are expected
to be settled in less than one year. Additionally, the Company has approximately $3.6 million in operating lease obligations, which will
be payable through 2034. The Company expects to fund all of these commitments with cash flows from operations and current cash.

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Firearms Legislation
and Litigation

See Item 1A - Risk Factors and Note 20 to the
financial statements which are included in the Annual Report on Form 10-K for a discussion of firearms legislation and litigation.

Other Operational Matters

In the normal course of its manufacturing operations,
the Company is subject to occasional governmental proceedings and orders pertaining to workplace safety, firearms serial number tracking
and control, waste disposal, air emissions and water discharges into the environment. The Company believes that it is generally in compliance
with applicable Bureau of Alcohol, Tobacco, Firearms & Explosives, environmental, and safety regulations and the outcome of any proceedings
or orders will not have a material adverse effect on the financial position or results of operations of the Company. If these regulations
become more stringent in the future and we are not able to comply with them, such noncompliance could have a material adverse impact on
the Company.

Currently, there are 15 domestic distributors.
Additionally, the Company has 44 and 26 distributors servicing the export and law enforcement markets, respectively.

The Company self-insures a significant amount
of its product liability, workers’ compensation, medical, and other insurance. It also carries significant deductible amounts on
various insurance policies.

The global outbreak of the Coronavirus disease
2019 was declared a pandemic by the World Health Organization and a national emergency by the U.S. Government in March 2020. The Company
has taken many proactive steps to maintain the health and safety of its employees and to mitigate the impact on its business. During the
twelve month period ended December 31, 2023, the Company did not experience a significant adverse impact on its business from COVID-19
or related government restrictions. The Company cannot predict the extent to which its business, results of operations, financial condition,
or cash flows will ultimately be impacted by COVID-19.

The Company expects to realize its deferred tax
assets through tax deductions against future taxable income.

Critical Accounting Policies and Estimates

The preparation of financial statements in accordance
with accounting principles generally accepted in the United States requires management to make assumptions and estimates that affect the
reported amounts of assets and liabilities as of the balance sheet date and net sales and expenses recognized and incurred during the
reporting period then ended. The Company bases estimates on prior experience, facts and circumstances, and other assumptions, including
those reviewed with actuarial consultants and independent counsel, when applicable, that are believed to be reasonable. However, actual
results may differ from these estimates.

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The Company believes that the assumptions and judgments involved in the accounting estimates below have the greatest potential impact
on its financial statements, so the Company believes these to be its critical accounting estimates. The methodologies applied for determining
the estimates related to the below critical accounting estimates have not changed from the prior year.

Product Liability Accrual

The Company believes the determination of its
product liability accrual is a critical accounting policy. The Company’s management reviews every lawsuit and claim and is in contact
with independent and corporate counsel on an ongoing basis. The provision for product liability claims is based upon many factors, which
vary for each case. These factors include the type of claim, nature and extent of injuries, historical settlement ranges, jurisdiction
where filed, and advice of counsel. An accrual is established for each lawsuit and claim, when appropriate, based on the nature of each
such lawsuit or claim.

Amounts are charged to product liability expense
in the period in which the Company becomes aware that a claim or, in some instances a threat of a claim, has been made when potential
losses or costs of defense are probable and can be reasonably estimated. Such amounts are determined based on the Company’s experience
in defending similar claims. Occasionally, charges are made for claims made in prior periods because the cumulative actual costs incurred
for that claim, or reasonably expected to be incurred in the future, exceed amounts already provided with respect to such claims. Likewise,
credits may be taken if cumulative actual costs incurred for that claim, or reasonably expected to be incurred in the future, are less
than amounts previously provided.

While it is not possible to forecast the outcome
of litigation or the timing of related costs, in the opinion of management, after consultation with independent and corporate counsel,
there is a remote likelihood that litigation, including punitive damage claims, will have a material adverse effect on the financial position
of the Company, but such litigation may have a material impact on the Company’s financial results and cash flows for a particular
period.

Inventory Valuation and Reserves

The Company believes the valuation of its inventory
and the related excess and obsolescence reserve is also a critical accounting policy. Inventories are carried at the lower of cost, principally
determined by the last-in, first-out (LIFO) method, or market. An actual valuation of inventory under the LIFO method is made at the end
of each year based on the inventory levels and the Company’s estimates of the prevailing costs of the many components of inventory
existing at that time.

The Company determines its excess and obsolescence
reserve by projecting the year in which inventory will be consumed into a finished product. Given ever-changing market conditions, customer
preferences and the anticipated introduction of new products, projecting the future usage of inventory is subjective. As such, it does
not seem prudent to carry inventory at full cost beyond what the Company projects to be needed during the next 36 months.

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Recent Accounting Pronouncements

In November of 2023, the FASB issued ASU 2023-07,
“Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures.” The updated accounting guidance requires
enhanced reportable segment disclosures, primarily related to significant segment expenses which are regularly provided to the chief operating
decision maker. The guidance is effective for fiscal years beginning after December 15, 2023 and interim periods within fiscal years beginning
after December 15, 2024. Retrospective application is required and early adoption is permitted. The Company is currently evaluating the
effect the updated guidance will have on its financial statement disclosures.

In December of 2023, the FASB issued ASU 2023-09,
“Income Taxes (Topic 740): Improvements to Income Tax Disclosures.” The updated accounting guidance requires expanded income
tax disclosures, including the disaggregation of existing disclosures related to the effective tax rate reconciliation and income taxes
paid. The guidance is effective for fiscal years beginning after December 15, 2024. Prospective application is required, with retrospective
application permitted. The Company is currently evaluating the effect the updated guidance will have on its financial statement disclosures.

Forward-Looking Statements and Projections

The Company may, from time to time, make forward-looking
statements and projections concerning future expectations. Such statements are based on current expectations and are subject to certain
qualifying risks and uncertainties, such as market demand, sales levels of firearms, anticipated castings sales and earnings, the need
for external financing for operations or capital expenditures, the results of pending litigation against the Company, the impact of future
firearms control and environmental legislation and accounting estimates, any one or more of which could cause actual results to differ
materially from those projected. Words such as “expect,” “believe,” “anticipate,” “intend,”
“estimate,” “will,” “should,” “could” and other words and terms of similar meaning, typically
identify such forward-looking statements. Readers are cautioned not to place undue reliance on these forward-looking statements, which
speak only as of the date made. The Company undertakes no obligation to publish revised forward-looking statements to reflect events
or circumstances after the date such forward-looking statements are made or to reflect the occurrence of subsequent unanticipated events.