10-Q 1 form10-q.htm
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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C.

 

FORM 10-Q

 

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
   
For the quarterly period ended June 30, 2022
 
OR
   
TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
   
For the transition period from ________ to ________

 

AMMO, Inc.

(Exact Name of Registrant as Specified in its Charter)

 

delaware   001-13101   83-1950534

(State

of incorporation)

 

(Commission

File No.)

 

(I.R.S. Identification

Number)

 

7681 E Gray Road, Scottsdale, AZ 85260

(Address of Principal Executive Offices) (Zip Code)

 

Registrant’s telephone number including area code: (480) 947-0001

 

Title of each class   Trading Symbol(s)   Name of each exchange on which registered
Common Stock, $0.001 par value   POWW  

The Nasdaq Stock Market LLC (Nasdaq

Capital Market)

8.75% Series A Cumulative Redeemable Perpetual Preferred Stock, $0.001 par value   POWWP  

The Nasdaq Stock Market LLC (Nasdaq

Capital Market)

 

Indicate by check mark whether the issuer (1) filed all reports required to be filed by Sections 13 or 15(d) of the Securities Exchange Act of 1934 during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer ☐   Accelerated filer ☐
Non-accelerated filer   Smaller reporting company
Emerging growth company    

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). ☐ Yes ☒ No

 

As of August 12, 2022, there were 116,961,005 shares of $0.001 par value Common Stock outstanding.

 

DOCUMENTS INCORPORATED BY REFERENCE: None.

 

 

 

 
 

 

TABLE OF CONTENTS

 

PART I  
     
ITEM 1: FINANCIAL STATEMENTS 3
  Condensed Consolidated Balance Sheets as of June 30, 2022 (Unaudited) and March 31, 2022 3
  Condensed Consolidated Statements of Operations (Unaudited) for the three months ended June 30, 2022, and 2021 4
  Condensed Consolidated Statement of Shareholders’ Equity (Unaudited) for the three months ended June 30, 2022, and 2021 5
  Condensed Consolidated Statements of Cash flow (Unaudited) for the three months ended June 30, 2022, and 2021 6
  Notes to Condensed Consolidated Financial Statements (Unaudited) 8
ITEM 2: MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION 25
ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK 33
ITEM 4: CONTROLS AND PROCEDURES 33
     
PART II  
ITEM 1: LEGAL PROCEEDINGS 34
ITEM 1A: RISK FACTORS 34
ITEM 2: UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS 34
ITEM 3: DEFAULTS UPON SENIOR SECURITIES 34
ITEM 4: MINE SAFETY DISCLOSURE 34
ITEM 5: OTHER INFORMATION 35
ITEM 6: EXHIBITS 35
SIGNATURES 36

 

2
 

 

PART I

 

ITEM 1. FINANCIAL STATEMENTS

 

AMMO, Inc.

CONDENSED CONSOLIDATED BALANCE SHEETS

 

   June 30, 2022   March 31, 2022 
   (Unaudited)     
ASSETS          
Current Assets:          
Cash and cash equivalents  $20,901,109   $23,281,475 
Accounts receivable, net   38,997,537    43,955,084 
Due from related parties   1,559,000    15,000 
Inventories   64,588,248    59,016,152 
Prepaid expenses   4,576,824    3,423,925 
Current portion of restricted cash   500,000    - 
Total Current Assets   131,122,718    129,691,636 
           
Equipment, net   46,669,664    37,637,806 
           
Other Assets:          
Deposits   11,829,304    11,360,322 
Restricted cash, net of current portion   500,000    - 
Patents, net   5,402,852    5,526,218 
Other intangible assets, net   133,156,993    136,300,387 
Goodwill   90,870,094    90,870,094 
Right of use assets – operating leases   2,583,344    2,791,850 
TOTAL ASSETS  $422,134,969   $414,178,313 
           
LIABILITIES AND SHAREHOLDERS’ EQUITY          
Current Liabilities:          
Accounts payable  $23,807,732   $26,817,083 
Factoring liability   228,026    485,671 
Accrued liabilities   7,012,674    6,178,814 
Inventory credit facility   92,332    825,675 
Current portion of operating lease liability   811,139    831,429 
Current portion of note payable related party   700,507    684,639 

Current portion of construction note 

   

200,133

      
Insurance premium note payable   1,501,846    - 
Total Current Liabilities   34,354,389    35,823,311 
           
Long-term Liabilities:          
Contingent consideration payable   202,840    204,142 
Notes payable related party, net of current portion   -    181,132 
Construction note payable, net of unamortized issuance costs   5,634,368    38,330 
Operating lease liability, net of current portion   1,900,559    2,091,351 
Deferred income tax liability   2,037,445    1,536,481 
Total Liabilities   44,129,601    39,874,747 
           
Shareholders’ Equity:          
Series A cumulative perpetual preferred Stock 8.75%, ($25.00 per share, $0.001 par value) 1,400,000 shares issued and outstanding as of June 30, 2022 and March 31, 2022, respectively   1,400    1,400 
Common stock, $0.001 par value, 200,000,000 shares authorized 116,923,884 and 116,485,747 shares issued and outstanding at June 30, 2022 and March 31, 2022, respectively   116,924    116,487 
Additional paid-in capital   386,648,901    385,426,431 
Accumulated deficit   (8,761,857)   (11,240,752)
Total Shareholders’ Equity   378,005,368    374,303,566 
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY  $422,134,969   $414,178,313 

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

3
 

 

AMMO, Inc.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

 

   2022   2021 
   For the Three Months Ended
June 30,
 
   2022   2021 
         
Net Revenues          
Ammunition sales  $40,969,883   $28,351,780 
Marketplace revenue   16,504,946    12,272,066 
Casing sales   3,281,197    3,852,486 
Total Revenues    60,756,026    44,476,332 
           
Cost of Revenues   42,620,364    25,505,438 
Gross Profit   18,135,662    18,970,894 
           
Operating Expenses          
Selling and marketing   1,908,170    1,165,849 
Corporate general and administrative   5,029,297    3,156,597 
Employee salaries and related expenses   2,785,098    2,356,873 
Depreciation and amortization expense   3,350,356    2,611,061 
Total operating expenses   13,072,921    9,290,380 
Income from Operations   5,062,741    9,680,514 
           
Other Expenses          
Other income   193,498    21,425 
Interest expense   (120,487)   (165,279)
Total other income/(expense)   73,011    (143,854)
           
Income before Income Taxes   5,135,752    9,536,660 
           
Provision for Income Taxes   1,882,725    - 
           
Net Income   3,253,027    9,536,660 
           
Preferred Stock Dividend   (774,132)   (337,745)
           
Net Income Attributable to Common Stock Shareholders  $2,478,895   $9,198,915 
           
Net Income per share          
Basic  $0.02   $0.09 
Diluted  $0.02   $0.08 
           
Weighted average number of shares outstanding          
Basic   116,560,372    105,876,867 
Diluted   117,879,639    109,051,682 

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

4
 

 

AMMO, Inc.

CONDENSED CONSOLIDATED STATEMENT OF SHAREHOLDERS’ EQUITY

For the Three Months Ended June 30, 2022 and 2021

(Unaudited)

 

    Number     Par Value     Number     Par Value     Paid-In Capital     Accumulated (Deficit)     Total  
   Preferred Stock   Common Shares   Additional         
       Par       Par   Paid-In   Accumulated     
   Number   Value   Number   Value   Capital   (Deficit)   Total 
                             
Balance as of March 31, 2022   1,400,000   $1,400    116,485,747   $116,487   $385,426,431   $(11,240,752)  $374,303,566 
                                    
Common stock issued for cashless warrant exercise   -    -    99,762    99    (99)   -    - 
Employee stock awards   -    -    338,375    338    1,174,725    -    1,175,063 
Stock grants   -    -    -    -    47,844    -    47,844 
Preferred stock dividends declared                            (638,071)   (638,071)
Dividends accumulated on preferred stock   -    -    -    -    -    (136,061)   (136,061)
Net income   -    -    -    -    -    3,253,027    3,253,027 
                                    
Balance as of June 30, 2022   1,400,000   $1,400    116,923,884   $116,924   $386,648,901   $(8,761,857)  $378,005,368 
                                    
Balance as of March 31, 2021   -   $-    93,099,967   $93,100   $202,073,968   $(41,819,539)  $160,347,529 
                                    
Acquisition stock issuances   -    -    18,500,000    18,500    131,947,282    -    131,965,782 
Common stock issued for exercised warrants   -    -    219,144    219    477,592    -    477,811 
Common stock issued for cashless warrant exercise   -    -    275,155    275    (275)   -    - 
Common stock issued for services   -    -    750,000    750    1,499,250    -    1,500,000 
Employee stock awards   -    -    202,500    203    699,297    -    699,500 
Stock grants   -    -    -    -    66,914    -    66,914 
Issuance of Series A Preferred Stock, net of issuance costs   1,400,000    1,400    -    -    31,007,396    -    31,008,796 
Dividends accumulated on preferred stock   -    -    -    -    -    (337,745)   (337,745)
Net income   -    -    -    -    -    9,536,660    9,536,660 
                                    
Balance as of June 30, 2021   1,400,000   $1,400    113,046,766   $113,047   $367,771,424   $(32,620,624)  $335,265,247 

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

5
 

 

AMMO, Inc.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOW

(Unaudited)

 

   2022   2021 
  

For the Three Months Ended

June 30,

 
   2022   2021 
         
Cash flows from operating activities:          
Net Income   3,253,027    9,536,660 
Adjustments to reconcile Net Income to Net Cash provided by operations:          
Depreciation and amortization   4,300,123    3,516,851 
Debt discount amortization   20,813    - 
Employee stock awards   1,175,063    699,500 
Stock grants   47,844    66,914 
Contingent consideration payable fair value   (1,302)   (56,638)
Allowance for doubtful accounts   711,372    71,157 
Gain on disposal of assets   -    (12,044)
Reduction in right of use asset   208,506    27,087 
Deferred income taxes   500,964    - 
Changes in Current Assets and Liabilities          
Accounts receivable   4,246,175    2,124,556 
Due from related parties   (1,544,000)   - 
Inventories   (5,572,096)   (12,072,607)
Prepaid expenses   882,620    1,114,473 
Deposits   (493,982)   (3,119,492)
Accounts payable   (3,009,351)   7,021,584 
Accrued liabilities   697,799    (208,131)
Operating lease liability   (211,082)   (39,203)
Net cash provided by operating activities   5,212,493    8,670,667 
           
Cash flows from investing activities:          
Purchase of equipment   (5,264,863)   (1,611,316)
Gemini acquisition   -    (50,651,444)
Proceeds from disposal of assets   -    59,800 
Net cash used in investing activities   (5,264,863)   (52,202,960)
           
Cash flow from financing activities:          
Payments on inventory facility, net   (733,343)   (832,143)
Proceeds from factoring liability   24,700,000    23,651,000 
Payments on factoring liability   (24,957,645)   (24,397,199)
Payments on note payable – related party   (165,264)   (150,775)
Payments on insurance premium note payment   (533,673)   (415,003)
Proceeds from construction note payable   1,000,000      
Preferred stock dividends paid   (638,071)   - 
Payments on assumed debt from Gemini   -    (50,000,000)
Payments on note payable   -    (4,000,000)
Sale of preferred stock   -    35,000,000 
Common stock issued for exercised warrants   -    477,811 
Common stock issuance costs   -    (3,170,422)
Net cash used in financing activities   (1,327,996)   (23,836,731)
           
Net decrease in cash   (1,380,366)   (67,369,024)
Cash, beginning of period   23,281,475    118,341,471 
Cash and restricted cash, end of period  $21,901,109   $50,972,447 

 

(Continued) 

 

6
 

 

AMMO, Inc.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOW

(Unaudited)

 

  

For the Three Months Ended

June 30,

 
   2022   2021 
         
Supplemental cash flow disclosures:          
Cash paid during the period for:          
Interest  $100,876   $189,116 
Income taxes  $-   $- 
           
Non-cash investing and financing activities:          
Construction note payable  $4,800,358   $- 
Insurance premium note payment  $2,035,519   $1,693,764 
Dividends accumulated on preferred stock  $136,061   $337,745 
Acquisition stock issuances  $-   $132,645,000 

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

7
 

 

AMMO, Inc.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2022 and March 31, 2022

(Unaudited)

 

NOTE 1 – ORGANIZATION AND BUSINESS ACTIVITY

 

We were formed under the name Retrospettiva, Inc. in November 1990 to manufacture and import textile products, including both finished garments and fabrics. We were inactive until the following series of events in December 2016 and March 2017.

 

On December 15, 2016, the Company’s majority shareholders sold their common stock to Mr. Fred W. Wagenhals (“Mr. Wagenhals”) resulting in a change in control of the Company. Mr. Wagenhals was appointed as sole officer and the sole member of the Company’s Board of Directors.

 

The Company also approved (i) doing business in the name AMMO, Inc., (ii) a change to the Company’s OTC trading symbol to POWW, (iii) an agreement and plan of merger to re-domicile and change the Company’s state of incorporation from California to Delaware, and (iv) a 1-for-25 reverse stock split of the issued and outstanding shares of the common stock of the Company. These transactions were effective as of December 30, 2016.

 

On March 17, 2017, the Company entered into a definitive agreement with AMMO, Inc. a Delaware Corporation (PRIVCO) under which the Company acquired all of the outstanding shares of common stock of (PRIVCO). (PRIVCO) subsequently changes its name to AMMO Munitions, Inc.

 

8
 

 

AMMO, Inc.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

Accounting Basis

 

The accompanying unaudited condensed consolidated financial statements and related disclosures included in this Quarterly Report on Form 10-Q have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) and reflect all adjustments, which consist solely of normal recurring adjustments, needed to fairly present the financial results for these periods. Additionally, these condensed consolidated financial statements and related disclosures are presented pursuant to the rules and regulations of the Securities Exchange Commission (“SEC”).

 

The accompanying condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and related disclosures contained in the Company’s Annual Report filed with the SEC on Form 10-K for the year ended March 31, 2022. The results for the three month period ended June 30, 2022 are not necessarily indicative of the results that may be expected for the entire fiscal year. Accordingly, certain information and note disclosures normally included in financial statements prepared in accordance with U.S. GAAP have been omitted pursuant to the rules and regulations of the SEC. In the opinion of management, all adjustments have been made, which consist only of normal recurring adjustments necessary for a fair statement of (a) the results of operations for the three month periods ended June 30, 2022 and 2021, (b) the financial position at June 30, 2022, and (c) cash flows for the three month periods ended June 30, 2022 and 2021.

 

We use the accrual basis of accounting and U.S. GAAP and all amounts are expressed in U.S. dollars. The Company has a fiscal year-end of March 31st.

 

Unless the context otherwise requires, all references to “Ammo”, “we”, “us”, “our,” or the “Company” are to AMMO, Inc., a Delaware corporation, and its consolidated subsidiaries.

 

Principles of Consolidation

 

The condensed consolidated financial statements include the accounts of AMMO, Inc. and its wholly owned subsidiaries. All significant intercompany accounts and transactions are eliminated in consolidation.

 

Use of Estimates

 

The preparation of financial statements in conformity with U.S. GAAP requires us to make estimates and assumptions that affect the amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the balance sheet and reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates. Significant estimates made in preparing the condensed consolidated financial statements include the valuation of allowances for doubtful accounts, valuation of deferred tax assets, inventories, useful lives of assets, goodwill, intangible assets, stock-based compensation and warrant-based compensation.

 

9
 

 

AMMO, Inc.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

Accounts Receivable and Allowance for Doubtful Accounts

 

Our accounts receivable represents amounts due from customers for products sold and include an allowance for uncollectible accounts which is estimated based on the aging of the accounts receivable and specific identification of uncollectible accounts. At June 30, 2022 and March 31, 2022, we reserved $3,766,624 and $3,055,252, respectively, of allowance for doubtful accounts.

 

Restricted Cash

 

We consider cash to be restricted when withdrawal or general use is legally restricted. Our restricted cash balance is comprised of cash on deposit with banks to secure the Construction Note Payable as discussed in Note 11. We report restricted cash in the Consolidated Balance Sheets as current or non-current classification based on the expected duration of the restriction.

 

License Agreements

 

We are a party to a license agreement with Jesse James, a well-known motorcycle designer, and Jesse James Firearms, LLC, a Texas limited liability company. The license agreement grants us the exclusive worldwide rights through April 12, 2026 to Mr. James’ image rights and trademarks associated with him in connection with the marketing, promotion, advertising, sale, and commercial exploitation of Jesse James Branded Products. We agreed to pay Mr. James royalty fees on the sale of ammunition and non-ammunition Branded Products and to reimburse him for any out-of-pocket expenses and reasonable travel expenses.

 

Patents

 

On September 28, 2017, AMMO Technologies Inc. (“ATI”), an Arizona corporation, which is 100% owned by us, merged with Hallam, Inc, a Texas corporation, with ATI being the survivor. The primary asset of Hallam, Inc. was an exclusive license to produce projectiles and ammunition using the Hybrid Luminescence Ammunition Technology under patent U.S. 8,402,896 B1 with a publication date of March 26, 2013 owned by the University of Louisiana at Lafayette. The license was formally amended and assigned to AMMO Technologies Inc. pursuant to an Assignment and First Amendment to Exclusive License Agreement. Assumption Agreement dated to be effective as of August 22, 2017, the Merger closing date. This asset will be amortized from September 2017, the first full month of the acquired rights, through October 29, 2028.

 

Under the terms of the Exclusive License Agreement, the Company is obligated to pay a quarterly royalty to the patent holder, based on a $0.01 per unit basis for each round of ammunition sold that incorporates this patented technology through October 29, 2028. For the three months ended June 30, 2022 and 2021, the Company recognized royalty expenses of $44,044 and $3,404, respectively under this agreement.

 

10
 

 

AMMO, Inc.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

On October 5, 2018, we completed the acquisition of SW Kenetics Inc. ATI succeeded all of the assets of SW Kenetics, Inc. and assumed all of the liabilities.

 

The primary asset of SW Kenetics Inc. was a pending patent for modular projectiles. All rights to patent pending application were assigned and transferred to AMMO Technologies, Inc. pursuant to Intellectual Property Rights Agreement on September 27, 2018.

 

We intend to continue building our patent portfolio to protect our proprietary technologies and processes, and will file new applications where appropriate to preserve our rights to manufacture and sell our branded lines of ammunition.

 

Other Intangible Assets

 

On March 15, 2019, Enlight Group II, LLC d/b/a Jagemann Munition Components, a wholly owned subsidiary of AMMO, Inc., completed its acquisition of assets of Jagemann Stamping Company’s ammunition casing manufacturing and sales operations pursuant to the terms of the Amended and Restated Asset Purchase Agreement. The intangible assets acquired include a tradename, customer relationships, and intellectual property.

 

On April 30, 2021, we entered into an agreement and plan of merger (the “Merger Agreement”), by and among the Company, SpeedLight Group I, LLC, a Delaware limited liability company and a wholly owned subsidiary of the Company and Gemini Direct Investments, LLC, a Nevada limited liability company. Whereby SpeedLight Group I, LLC merged with and into Gemini Direct Investments, LLC, with SpeedLight Group I, LLC surviving the merger as a wholly owned subsidiary of the Company. At the time of the Merger, Gemini Direct Investments, LLC had nine (9) subsidiaries, all of which are related to Gemini’s ownership of GunBroker.com, an online auction marketplace dedicated to firearms, hunting, shooting, and related products. The intangible assets acquired include a tradename, customer relationships, intellectual property, software and domain names.

 

Impairment of Long-Lived Assets

 

We continually monitor events and changes in circumstances that could indicate carrying amounts of long-lived assets may not be recoverable. When such events or changes in circumstances are present, we assess the recoverability of long-lived assets by determining whether the carrying value of such assets will be recovered through undiscounted expected future cash flows. If the total of the future cash flows is less than the carrying amount of those assets, we recognize an impairment loss based on the excess of the carrying amount over the fair value of the assets. Assets to be disposed of are reported at the lower of the carrying amount or the fair value less costs to sell. No impairment expense was recognized for the three and nine months ended June 30, 2022 and 2021.

 

Revenue Recognition

 

We generate revenue from the production and sale of ammunition, and marketplace fee revenue, which includes auction revenue, payment processing revenue, and shipping income. We recognize revenue according to Accounting Standard Codification - Revenue from Contract with Customers (“ASC 606”). When the customer obtains control over the promised goods or services, we record revenue in the amount of consideration that we can expect to receive in exchange for those goods and services. We apply the following five-step model to determine revenue recognition:

 

  Identification of a contract with a customer
  Identification of the performance obligations in the contact
  Determination of the transaction price
  Allocation of the transaction price to the separate performance allocation
  Recognition of revenue when performance obligations are satisfied

 

11
 

 

AMMO, Inc.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

We only apply the five-step model when it is probable that we will collect the consideration we are entitled to in exchange for the goods or services it transfers to the customer. At contract inception and once the contract is determined to be within the scope of ASC 606, we assess the goods or services promised within each contract and determine those that are performance obligations, and assess whether each promised good or service is distinct. Our contracts contain a single performance obligation and the entire transaction price is allocated to the single performance obligation. We recognize as revenues the amount of the transaction price that is allocated to the respective performance obligation when the performance obligation is satisfied or as it is satisfied. Accordingly, we recognize revenues (net) when the customer obtains control of our product, which typically occurs upon shipment of the product or the performance of the service. In the year ended March 31, 2021, we began accepting contract liabilities or deferred revenue. We included Deferred Revenue in our Accrued Liabilities. We will recognize revenue when the performance obligation is met.

 

For the three months ended June 30, 2022, the Company’s customers that comprised more than ten percent (10%) of total revenues and accounts receivable were as follows:

 

   

Revenues at

June 30, 2022

   Accounts Receivable 
PERCENTAGES  

Three Months

Ended

   June 30,
2022
   March 31,
2022
 
              
Customers:                
A    10.6%   -    11.8%
B    -    14.5%   - 
     10.6%   14.5%   11.8%

 

Disaggregated Revenue Information

 

The following table represent a disaggregation of revenue from customers by category. We attribute net sales to categories by product or services types; ammunition, ammunition casings, and marketplace fees. We note that revenue recognition processes are consistent between product and service type, however, the amount, timing and uncertainty of revenue and cash flows may vary by each product type due to the customers of each product and service type.

  

   March 31, 2022   March 31, 2021 
   For the Three Months Ended 
   June 30, 2022   June 30, 2021 
Ammunition sales  $40,969,883   $28,351,780 
Marketplace fee revenue   16,504,946    12,272,066 
Ammunition casings sales   3,281,197    3,852,486 
Total Revenues  $60,756,026   $44,476,332 

 

Ammunition products are sold through “Big Box” retailers, manufacturers, local ammunition stores, and shooting range operators. We also sell directly to customers online. In contrast, our ammunition casings products are sold to manufacturers. Marketplace fees are generated through our GunBroker.com online auction marketplace.

 

Advertising Costs

 

We expense advertising costs as they are incurred in selling and marketing expenses of operating expenses. Marketplace advertising costs are expenses as they are incurred in cost of revenues. We incurred advertising expenses of $550,447 and $116,433 for the three months ended June 30, 2022 and 2021, respectively, recognized in selling and marketing expenses and $182,104 and $19,000 of marketplace advertising expenses recognized in cost of revenues for the three months ended June 30, 2022 and 2021, respectively.

 

Fair Value of Financial Instruments

 

Fair value estimates discussed herein are based upon certain market assumptions and pertinent information available to us as of June 30, 2022. The respective carrying value of certain on-balance-sheet financial instruments approximated their fair value. These financial instruments include cash, accounts receivable, accounts payable, and amounts due to related parties. Fair values were assumed to approximate carrying values because they are short term in nature and their carrying amounts approximate fair values or they are payable on demand.

 

Inventories

 

We state inventories at the lower of cost or net realizable value. We determine cost using the average cost method. Our inventory consists of raw materials, work in progress, and finished goods. Cost of inventory includes cost of parts, labor, quality control, and all other costs incurred to bring our inventories to condition ready to be sold. We periodically evaluate and adjust inventories for obsolescence.

 

12
 

 

AMMO, Inc.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

Property and Equipment

 

We state property and equipment at cost, less accumulated depreciation. We capitalize major renewals and improvements, while we charge minor replacements, maintenance, and repairs to current operations. We compute depreciation by applying the straight-line method over estimated useful lives, which are generally five to ten years.

 

Compensated Absences

 

We accrue a liability for compensated absences in accordance with Accounting Standards Codifications 710 – Compensation – General (“ASC 710”).

 

Research and Development

 

To date, we have expensed all costs associated with developing our product specifications, manufacturing procedures, and products through our cost of products sold, as this work was done by the same employees who produced the finished product. We anticipate that it may become necessary to reclassify research and development costs into our operating expenditures for reporting purposes as we begin to develop new technologies and lines of ammunition.

 

Stock-Based Compensation

 

We account for stock-based compensation at fair value in accordance with Accounting Standards Codification 718 – Compensation – Stock Compensation (“ASC 718”). which requires the measurement and recognition of compensation expense for all share-based payment awards to employees and directors. Stock-based compensation is recognized on a straight line basis over the vesting periods and forfeitures are recognized in the periods they occur. There were 338,375 and 202,500 shares of common stock issued to employees, members of the Board of Directors, and members of our advisory committee for services during the three months ended June 30, 2022 and 2021, respectively.

 

Concentrations of Credit Risk

 

Accounts at banks are insured by the Federal Deposit Insurance Corporation (“FDIC”) up to $250,000. As of June 30, 2022, our bank account balances exceeded federally insured limits.

 

Income Taxes

 

We file federal and state income tax returns in accordance with the applicable rules of each jurisdiction. We account for income taxes under the asset and liability method in accordance with Accounting Standards Codification 740 - Income Taxes (“ASC 740”). The provision for income taxes includes federal, state, and local income taxes currently payable, and deferred taxes. We recognize deferred tax assets and liabilities for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax basis. We measure deferred tax assets and liabilities using enacted tax rates expected to apply to taxable amounts in years in which those temporary differences are expected to be recovered or settled. If it is more likely than not that some portion or all of a deferred tax asset will not be realized, a valuation allowance is recognized. In accordance with ASC 740, we recognize the effect of income tax positions only if those positions are more likely than not of being sustained. We measure recognized income tax positions at the largest amount that is greater than 50% likely of being realized. We reflect changes in recognition or measurement in the period in which the change in judgment occurs.

 

Excise Tax

 

As a result of regulations imposed by the Federal Government for sales of ammunition to non-government U.S. entities, we charge and collect an 11% excise tax for all products sold into these channels. During the three months ended June 30, 2022 and 2021, we recognized approximately $3.7 million and $2.4 million respectively, in excise taxes. For ease in selling to commercial markets, excise tax is included in our unit price for the products sold. We record this through net sales and expense the offsetting tax expense to cost of goods sold.

 

13
 

 

AMMO, Inc.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

Contingencies

 

Certain conditions may exist as of the date the condensed consolidated financial statements are issued that may result in a loss to us but will only be resolved when one or more future events occur or fail to occur. We assess such contingent liabilities, and such assessment inherently involves an exercise of judgment. In assessing loss contingencies related to legal proceedings that are pending against us or unasserted claims that may result in such proceedings, we evaluate the perceived merits of any legal proceedings or unasserted claims and the perceived merits of the amount of relief sought or expected to be sought therein.

 

If the assessment of a contingency indicates that it is probable that a material loss has been incurred and the amount of the liability is reasonably estimated, the estimated liability would be accrued in our condensed consolidated financial statements. If the assessment indicates that a potentially material loss contingency is not probable but is reasonably possible, or is probable but cannot be estimated, then the nature of the contingent liability, together with an estimate of range of possible loss if determinable and material, would be disclosed. On September 24, 2019, the Company received notice that a former employee that had voluntarily terminated filed a complaint against the Company, and certain individuals, with the U.S. Department of Labor (“DOL”). The Complaint in alleges that the individual reported potential violations of SEC rules and regulations by management and that as a result of such disclosures, the individual experienced a hostile work environment; that the Company lacks sufficient internal controls, and that the individual was the victim of retaliation and constructive discharge after being removed as a director by majority vote of the shareholders. The claims were investigated by a newly appointed Special Investigative Committee made up of independent directors represented by special independent legal counsel. The Special Investigative Committee and legal counsel found the material claims were unsubstantiated, including those concerning alleged SEC violations, and recommended enhancements to certain corporate governance charter documents and processes which the Company promptly implemented. The Parties participated in a successful mediation at the end of June 2022 and all matters relating to this former employee/claimant were confidentially resolved with the lawsuit dismissed with prejudice (Order pending). The settlement was covered by our Employment Practices Liability Policy and didn’t amount to a material amount. On February 10, 2022, AMMO filed a Texas state court complaint against Expansion Industries pursing eight (8) claims in pursuit of recovery of AMMO’s in primer acquisition deposit monies (i.e. Breach of Contract, Common Law Fraud, Violations of Texas Theft Liability Act, Conversion, Negligent Misrepresentation, Unjust Enrichment, Money Had and Received and Constructive Trust). AMMO has since moved aggressively to further the process, including successfully garnishing a portion of the deposit monies in Expansion bank accounts, filing a Motion for Summary Judgement, continuing to pursue written discovery, and amending the Complaint to add Expansion principal as an individual party. Discovery continues at this date while the Company awaits the ruling on its Motion for Summary Judgment. AMMO will continue to move forward aggressively with the claims to recover the deposit monies. There were no other known contingencies at June 30, 2022.

 

14
 

 

AMMO, Inc.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

NOTE 3 – INCOME PER COMMON SHARE

 

We calculate basic income per share using the weighted-average number of shares of common stock outstanding during each reporting period. Diluted loss per share includes potentially dilutive securities, such as outstanding options and warrants. We use the treasury stock method, in the determination of dilutive shares outstanding during each reporting period. We have issued warrants to purchase 2,833,755 shares of common stock. The Company excluded warrants of 150,000 for the three months ended June 30, 2022, from the weighted average diluted common shares outstanding because their inclusion would have been antidilutive.

 

   2022   2021 
   For the Three Months Ended
June 30,
 
   2022   2021 
         
Numerator:          
Net income  $3,253,027   $9,536,660 
Less: Preferred stock dividends   (774,132)   (337,745)
Net income attributable to common stockholders  $2,478,895   $9,198,915 
           
Denominator:          
Weighted average shares of common stock - basic   116,560,372    105,876,867 
Effect of dilutive common stock purchase warrants   1,287,280    2,024,037 
Effect of dilutive equity incentive awards   31,987    139,909 
Effect of dilutive contingently issuable common stock   -    1,010,869 
Weighted average shares of common stock - Diluted   117,879,639    109,051,682 
           
Basic earnings per share:          
Income/(loss) per share attributable to common stockholders - basic  $0.02   $0.09 
           
Diluted earnings per share:          
Income/(loss) per share attributable to common stockholders - diluted  $0.02   $0.08 

 

NOTE 4 – INVENTORIES

 

At June 30, 2022 and March 31, 2022, the inventory balances are composed of:

  

   June 30, 2022   March 31, 2022 
Finished product  $11,906,050   $6,167,318 
Raw materials   32,918,290    33,924,813 
Work in process   19,763,908    18,924,021 
Inventory net  $64,588,248   $59,016,152 

 

NOTE 5 – EQUIPMENT

 

We state equipment at historical cost less accumulated depreciation. We compute depreciation using the straight-line method at rates intended to depreciate the cost of assets over their estimated useful lives, which are generally five to ten years. Upon retirement or sale of property and equipment, we remove the cost of the disposed assets and related accumulated depreciation from the accounts and any resulting gain or loss is credited or charged to other income. We charge expenditures for normal repairs and maintenance to expense as incurred.

 

We capitalize additions and expenditures for improving or rebuilding existing assets that extend the useful life. Leasehold improvements made either at the inception of the lease or during the lease term are amortized over the shorter of their economic lives or the lease term including any renewals that are reasonably assured.

 

15
 

 

AMMO, Inc.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

Equipment consisted of the following at June 30, 2022 and March 31, 2022:

 

   June 30, 2022   March 31, 2022 
Construction in progress  $22,564,493   $14,335,371 
Leasehold Improvements   257,009    257,009 
Furniture and Fixtures   343,014    343,014 
Vehicles   153,254    153,254 
Equipment   34,360,949    32,524,850 
Tooling   143,710    143,710 
Total property and equipment  $57,822,429   $47,757,208 
Less accumulated depreciation   (11,152,765)   (10,119,402)
Net equipment  $46,669,664   $37,637,806 

 

Depreciation Expense for the three months ended June 30, 2022 and 2021 totaled $1,033,363 and $995,334, respectively. Of these totals, $826,401 and $769,956 were included in cost of goods sold for the three months ending June 30, 2022 and 2021. Additionally, $206,962 and $225,378 were included in depreciation and amortization expenses in operating expenses.

 

NOTE 6 – DUE FROM RELATED PARTIES

 

On June 30, 2022, we posted a bond of approximately $1.6 million related to a judgement assessed to GunBroker.com. Per the terms of the Merger Agreement, the Seller is required to pay or be liable for these losses (capitalized terms are defined in Note 14). Accordingly, on August 1, 2022, we received these funds.

 

NOTE 7 – FACTORING LIABILITY

 

On July 1, 2019, we entered into a Factoring and Security Agreement with Factors Southwest, LLC (“FSW”). FSW may purchase from time to time the Company’s Accounts Receivables with recourse on an account by account basis. The twenty-four month agreement contains a maximum advance amount of $5,000,000 on 85% of eligible accounts and has an annualized interest rate of the Prime Rate published from time to time by the Wall Street Journal plus 4.5%. The agreement contains fee of 3% ($150,000) of the Maximum Facility assessed to the Company. Our obligations under this agreement are secured by present and future accounts receivables and related assets, inventory, and equipment. The Company has the right to terminate the agreement, with 30 days written notice, upon obtaining a non-factoring credit facility. This agreement provides the Company with the ability to convert our account receivables into cash. As of June 30, 2022, the outstanding balance of the Factoring Liability was $228,026. For the three months ended June 30, 2022, interest expense recognized on the Factoring Liability was $59,816 including $37,500 of amortization of the commitment fee and for the three months ended June 30, 2021 was $41,579.

 

On June 17, 2021, this agreement was amended which extended the maturity date to June 17, 2023.

 

NOTE 8 – INVENTORY CREDIT FACILITY

 

On June 17, 2020, we entered into a Revolving Inventory Loan and Security Agreement with FSW. FSW will establish a revolving credit line, and make loans from time to time to the Company for the purpose of providing capital. The twenty-four month agreement secured by our inventory, among other assets, contains a maximum loan amount of $1,750,000 on eligible inventory and has an annualized interest rate of the greater of the three-month LIBOR rate plus 3.09% or 8%. The agreement contains a fee of 2% of the maximum loan amount ($35,000) assessed to the Company. On July 31, 2020, the Company amended its Revolving Loan and Security Agreement to increase the maximum inventory loan amount to $2,250,000. As of June 30, 2022, the outstanding balance of the Inventory Credit Facility was $92,332. Interest expense recognized on the Inventory Credit Facility was $5,142 for the three months ended June 30, 2022 and $17,659, including $8,561 of amortization of the annual fee for the three months ended June 30, 2021.

 

NOTE 9 – LEASES

 

We lease office, manufacturing, and warehouse space in Scottsdale, AZ, Atlanta and Marietta, GA, and Manitowoc and Two Rivers, WI under contracts we classify as operating leases. None of our leases are financing leases. The Scottsdale lease does not include a renewal option. In August of 2021 we extended the lease of our Atlanta offices through May of 2027, accordingly we increased our Right of Use Assets and Operating Lease Liabilities by $501,125 at September 30, 2021. In January of 2022, we extended the lease of our second Manitowoc, WI location and increased our Right of Use Assets and Operating Lease Liabilities by $308,326.

 

As of June 30, 2022 and March 31, 2022, total Right of Use Assets were $2,583,344 and $2,791,850, respectively. As of June 30, 2022 and March 31, 2022, total Operating Lease Liabilities were $2,711,698 and $2,922,780, respectively. The current portion of our Operating Lease Liability on June 30, 2022 and March 31, 2022 is $811,139 and $831,429 respectively and is reported as a current liability. The remaining $1,900,559 of the total $2,711,698 for the quarter ended June 30, 2022 and the $2,091,351 of the total $2,922,780 for the year ended March 31, 2022 of the Operating Lease Liability is presented as a long-term liability net of the current portion.

 

16
 

 

AMMO, Inc.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

The weighted average remaining lease term and weighted average discount rate for operating leases were 3.4 years and 10.0%, respectively.

 

Future minimum lease payments under non-cancellable leases as of June 30, 2022 are as follows:

  

Years Ended March 31,      
2022 (1)  $782,069 
2023   992,620 
2024   796,066 
2025   351,962 
2026   257,508 
Thereafter   43,660 
Total Lease Payments    3,223,885 
Less: Amount Representing Interest   (512,187)
 Present Value Of Lease Liabilities  $2,711,698 

 

  (1) This amount represents future lease payments for the remaining nine months of fiscal year 2023. It does not include any lease payments for the three months ended June 30, 2022.

 

17
 

 

AMMO, Inc.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

NOTE 10 – NOTES PAYABLE – RELATED PARTY

 

For the three months ended June 30, 2022 and 2021, the Company made $165,264 and $150,755 in principal payments, respectively, in connection with the Amended Note B, an amended related party note payable with Jagemann Stamping Company (“JSC”). We entered to the Amended Note B with JSC on November 4, 2020 and the note matures on June 26, 2023. We recognized $18,652 and $33,141 in interest expenses for the three months ended June 30, 2022 and 2021, respectively.

 

18
 

 

AMMO, Inc.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

NOTE 11 – CONSTRUCTION NOTE PAYABLE

 

On October 14, 2021, we entered into a Construction Loan Agreement (the “Loan Agreement”) with Hiawatha National Bank (“Hiawatha”). The Loan Agreement specifies that Hiawatha may lend up to $11,625,000 to the Borrower to pay a portion of the construction costs of an approximately 160,000 square foot manufacturing facility to be constructed our property (the “Loan”). The first advance of Loan funds by Hiawatha was made on October 14, 2021 in the amount of $329,843. We expect to receive further advances of Loan funds approximately every month as our “owner’s equity” is fully funded into the ongoing new plant construction project. The Loan is an advancing term loan and not a revolving loan so any portion of the principal repaid cannot be reborrowed.

 

Additionally, on October 14, 2021, we issued a Promissory Note in favor of Hiawatha (the “Note”) in the amount of up to $11,625,000 with an interest rate of four and one-half percent (4.5%). The maturity date of the Note is October 14, 2026

 

We can prepay the Note in whole or in part starting in July 2022 with a prepayment premium of one percent (1%) of the principal being prepaid.

 

The Loan Agreement contains customary events of default including, but not limited to, a failure to make any payments pursuant to the Loan Agreement or Note, a failure to complete construction of the project, a lien of $100,000 or more against the property, or a transfer of the property without Hiawatha’s consent. Upon the occurrence of an event of default, among other remedies, the amounts due pursuant to the Loan can be accelerated, Hiawatha can foreclose on the property pursuant to the mortgage, and a late charge of five percent (5%) of the amount due will be owed with all amounts then owed pursuant to the Note bearing interest at an increased rate.

 

For the three months ended June 30, 2022, approximately $5.8 million of Loan funds were advanced including $1.0 million of cash collateral or restricted cash as security for the Loan. The restricted cash can be released per the terms documented in the Loan Agreement filed with the Commission on Form 10-Q on February 14, 2022.

 

NOTE 12 – CAPITAL STOCK

 

Our authorized capital consists of 200,000,000 shares of common stock with a par value of $0.001 per share.

 

During the three month period ended June 30, 2022, we issued 438,137 shares of common stock as follows:

 

  99,762 shares were issued for cashless exercise of 100,000 warrants
  338,375 shares valued at $1,175,063 were issued to employees, members of the Board of Directors, and members of the Advisory Committee as compensation

 

19
 

 

AMMO, Inc.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

At June 30, 2022, outstanding and exercisable stock purchase warrants consisted of the following:

   

  

Number of
Shares

   Weighted
Average
Exercise Price
  

Weighted

Average Life

Remaining
(Years)

 
Outstanding at March 31, 2022   2,933,755   $2.32    2.29 
Granted   -    -    - 
Exercised   (100,000)   0.01    4.44 
Forfeited or cancelled   -    -    - 
Outstanding at June 30, 2022   2,833,755   $2.40    2.01 
Exercisable at June 30, 2022   2,833,755   $2.40    2.01 

 

As of June 30, 2022, we had 2,833,755 warrants outstanding. Each warrant provides the holder the right to purchase up to one share of our Common Stock at a predetermined exercise price. The outstanding warrants consist of (1) warrants to purchase 911 shares of Common Stock at an exercise price of $1.65 per share until April 2025; (2) warrants to purchase 1,821,567 shares of our Common Stock at an exercise price of $2.00 per share consisting of 32% of the warrants until August 2024, and 68% until February 2026; (3) warrants to purchase 474,966 shares of Common Stock at an exercise price of $2.40 until September 2024; (4) warrants to purchase 386,311 shares of Common Stock at an exercise price of $2.63 until November 2025, and (5) warrants to purchase 150,000 shares of Common Stock at an exercise price of $6.72 until February 2024.

 

20
 

 

AMMO, Inc.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

NOTE 13 – PREFERRED STOCK

 

On May 18, 2021, the Company filed a Certificate of Designations (the “Certificate of Designations”) with the Secretary of State of the State of Delaware to establish the preferences, voting powers, limitations as to dividends or other distributions, qualifications, terms and conditions of redemption and other terms and conditions of the Series A Preferred Stock.

 

The Series A Cumulative Redeemable Perpetual Preferred Stock (“Series A Preferred Stock”), as to dividend rights and rights as to the distribution of assets upon the Company’s liquidation, dissolution or winding-up, ranks: (1) senior to all classes or series of Common Stock and to all other capital stock issued by the Company expressly designated as ranking junior to the Series A Preferred Stock; (2) on parity with any future class or series of the Company’s capital stock expressly designated as ranking on parity with the Series A Preferred Stock; (3) junior to any future class or series of the Company’s capital stock expressly designated as ranking senior to the Series A Preferred Stock; and (4) junior to all the Company’s existing and future indebtedness.

 

The Series A Preferred Stock has no stated maturity and is not subject to mandatory redemption or any sinking fund. In the event of the voluntary or involuntary liquidation, dissolution or winding up of the affairs of the Company, the holders of shares for the Series A Preferred Stock are entitled to be paid out of the Company’s assets legally available for distribution to its stockholders (i.e., after satisfaction of all the Company’s liabilities to creditors, if any) an amount equal to $25.00 per share of the Series A Preferred Stock, plus any amount equal to any accumulated and unpaid dividends to the date of payment before any distribution or payment may be made to holders of shares of Common Stock or any other class of or series of the Corporation’s capital stock ranking, as to rights to the distribution of assets upon any voluntary or involuntary liquidation, dissolution or winding up, junior to the Series A Preferred Stock.

 

The Company will pay cumulative cash dividends on the Series A Preferred Stock when, as and if declared by its board of directors (or a duly authorized committee of its board of directors), only out of funds legally available for payment of dividends. Dividends on the Series A Preferred Stock will accrue on the stated amount of $25.00 per share of the Series A Preferred Stock at a rate per annum equal to 8.75% (equivalent to $2.1875 per year), payable quarterly in arrears. Dividends on the Series A Preferred Stock declared by our board of directors (or a duly authorized committee of our board of directors) will be payable quarterly in arrears on March 15, June 15, September 15 and December 15.

 

Generally, the Series A Preferred Stock is not redeemable by the Company prior to May 18, 2026. However, upon a change of control or delisting event (each as defined in the Certificate of Designations), the Company will have a special option to redeem the Series A Preferred Stock for a limited period of time.

 

On May 19, 2021, we entered into an underwriting agreement (the “Underwriting Agreement”) with Alexander Capital, L.P., as representative of several underwriters (collectively, the “Underwriters”), relating to a firm commitment public offering of 1,097,200 newly issued shares of our 8.75% Series A Preferred Stock at a public offering price of $25.00 per share. Under the terms of the Underwriting Agreement, we granted the Underwriters a 45-day option to purchase up to an additional 164,580 shares of Series A Preferred Stock from us. The gross proceeds to us from the sale of 1,097,200 shares of Series A Preferred Stock, before deducting underwriting discounts and commissions and estimated offering expenses payable by us, was $27,430,000. The closing of the offering took place on May 21, 2021.

 

On May 25, 2021, we entered into an additional underwriting agreement with Alexander Capital, L.P. relating to a firm commitment public offering of 138,220 newly issued shares of our Series A Preferred Stock at a public offering price of $25.00 per share. The closing of the offering took place on May 27, 2021. The gross proceeds to us from the sale of 138,220 shares of Series A Preferred Stock, before deducting underwriting discounts and commissions and estimated offering expenses payable by us, were $3,455,500. Additionally, the Underwriters exercised its previously announced over-allotment option to purchase 164,580 shares of Series A Preferred Stock pursuant to that certain Underwriting Agreement dated May 19, 2021, by and between us and Alexander Capital, L.P., as representative of the several underwriters identified therein. We closed the exercise of the over-allotment option on May 27, 2021. The gross proceeds from the exercise of the over-allotment option were $4,114,500, before deducting underwriting discounts and commissions.

 

We accumulated $136,061 and $337,745 of Preferred Dividends as of June 30, 2022 and 2021, respectively.

 

On May 12, 2022, the Board of Directors of the Company declared a dividend on the Company’s Series A Preferred Stock for the period beginning March 15, 2022 through and including June 14, 2022 payable on June 15, 2022 to holders of record of Series A Preferred Stock on May 31, 2022 equal to $0.559027777777778 per share. Dividends totaling $782,639 were paid on June 15, 2022.

 

21
 

 

AMMO, Inc.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

NOTE 14 - ACQUISITION

 

Gemini Direct Investments, LLC

 

On April 30, 2021 (the “Effective Date”) we entered into an agreement and plan of merger (the “Merger Agreement”), by and among the Company, SpeedLight Group I, LLC, a Delaware limited liability company and a wholly owned subsidiary of the Company (“Sub”), Gemini Direct Investments, LLC, a Nevada limited liability company (“Gemini”), and Steven F. Urvan, an individual (the “Seller”), whereby Sub merged with and into Gemini, with Sub surviving the merger as a wholly owned subsidiary of the Company (the “Merger”). At the time of the Merger, Gemini had nine (9) subsidiaries, all of which are related to Gemini’s ownership of the GunBroker.com business. GunBroker.com is an on-line auction marketplace dedicated to firearms, hunting, shooting, and related products. The Merger was completed on the Effective Date.

 

In consideration of the Merger, on the terms and subject to the conditions set forth in the Merger Agreement, on the Effective Date, (i) the Company assumed and repaid an aggregate amount of indebtedness of Gemini and its subsidiaries equal to $50,000,000 (the “Assumed Indebtedness”); and, (ii) the issued and outstanding membership interests in Gemini (the “Membership Interests”), held by the Seller, automatically converted into the right to receive (A) $50,000,000 (the “Cash Consideration”), and (B) 20,000,000 shares of common stock of the Company, $0.001 par value per share (the “Stock Consideration”).

 

In connection with the Merger Agreement, the Company and the Seller agreed that the Stock Consideration consisted of: (a) 14,500,000 shares issued without being held in escrow or requiring prior stockholder approval; (b) 4,000,000 shares issued subject to the Pledge and Escrow Agreement; and (c) 1,500,000 shares that will not be issued prior to the Company obtaining stockholder approval for the issuance (the “Additional Securities”).

 

The total estimated consideration consisted of cash payment of $50,000,000 less $1,350,046 of acquired cash, a working capital adjustment of $2,000,000, debt assumption and repayment upon closing of $50,000,000, contingent consideration of $10,755,000 for 1,500,000 Additional Securities, and 18,500,000 shares of AMMO Inc. Common Stock. The shares were valued at $7.17 per share, the five-day average closing price of the Company’s Common Stock immediately preceding the signing of the binding agreement.

 

Pursuant to the Merger Agreement, the Company completed a Post-Closing Adjustment following the close of the Merger equal to the Closing Working Capital minus the Estimated Working Capital at closing of the Merger. Accordingly, the Company received a cash payment of $129,114 and adjusted the $2,000,000 Estimated Working Capital Adjustment in the fair value of the consideration transferred to $1,870,886.

 

In accordance with the acquisition method of accounting for business combinations, the assets acquired, and the liabilities assumed have been recorded at their respective fair values. The consideration in excess of the fair values of assets acquired, and liabilities assumed are recorded as goodwill.

 

The fair value of the consideration transferred was valued as of the date of the acquisition as follows:

   

      
Cash  $48,649,954 
Working capital adjustment   1,870,886 
Contingent consideration   10,755,000 
Common stock   132,645,000 
Assumed debt   50,000,000 
      
Fair value of Patent   $243,920,840 

 

The allocation for the consideration recorded for the acquisition is as follows:

   

      
Accounts receivable, net  $17,002,362 
Prepaid expenses   478,963 
Equipment   1,051,980 
Deposits   703,389 
Other Intangible assets(1)   146,617,380 
Goodwill(1)   90,870,094 
Right of use assets - operating leases   612,727 
Accounts payable   (12,514,919)
Accrued expenses   (196,780)
Operating lease liability   (704,356)
      
Total Consideration  $243,920,840 

 

(1) Other intangible assets consist of Tradenames, Customer Relationships, Intellectual Property, and other tangible assets related to the acquired business.

 

Unaudited Pro Forma Results of Operations

 

This pro forma results of operations gives effect to the acquisition as if it had occurred April 1, 2021. Material pro forma adjustments include the removal of approximately $1.8 million of interest expenses and debt discount amortization and the addition of approximately $0.9 million depreciation and amortization expenses.

INCOME STATEMENT DATA 

For the Three Months Ended

June 30, 2021

 
     
Net revenues  $52,521,753 
Net income  $14,083,148 

 

22
 

 

AMMO, Inc.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

We recorded approximately $1.3 million in transaction costs during the three months ended June 30, 2021.

 

NOTE 15 – GOODWILL AND INTANGIBLE ASSETS

 

During our fiscal year ended March 31, 2022, we recorded $90,870,094 of Goodwill generated from our Merger with Gemini.

 

Amortization expenses related to our intangible assets for the three months ended June 30, 2022 and 2021 were $3,266,760 and $2,521,517, respectively.

  

       June 30, 2022 
   Life   Licenses   Patent   Other Intangible Assets 
Licensing Agreement – Jesse James   5   $125,000   $-   $- 
Licensing Agreement – Jeff Rann   5    125,000    -    - 
Streak Visual Ammunition patent   11.2    -    950,000    - 
SWK patent acquisition   15    -    6,124,005    - 
Jagemann Munition Components:                    
Customer Relationships   3    -    -    1,450,613 
Intellectual Property   3    -    -    1,543,548 
Tradename   5    -    -    2,152,076 
GDI Acquisition:                    
Tradename   15    -    -    76,532,389 
Customer List   10    -    -    65,252,802 
Intellectual Property   10    -    -    4,224,442 
Other Intangible Assets   5    -    -    607,747 
         250,000    7,074,005    151,763,617 
                     
Accumulated amortization – Licensing Agreements        (250,000)   -    - 
Accumulated amortization – Patents        -    (1,671,153)   - 
Accumulated amortization – Intangible Assets        -    -    (18,606,624)
        $-   $5,402,852   $133,156,993 

 

Annual amortization of intangible assets for the next five fiscal years are as follows:

  

Years Ended March 31,  Estimates for
Fiscal Year
 
2023 (1)  $9,828,455 
2024   13,074,489 
2025   12,664,775 
2026   12,664,775 
2027   12,553,355 
Thereafter   77,773,996 
Annual amortization of intangible assets   $138,559,845 

 

(1) This amount represents future amortization for the remaining nine months of fiscal year 2023. It does not include any amortization for the three months ended June 30, 2022.

 

23
 

 

AMMO, Inc.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

NOTE 16 – SEGMENTS

 

On April 30, 2021, we entered into an agreement and plan of merger with Gemini, which, along with its subsidiaries, engages primarily in the operation of an online marketplace dedicated to firearms, hunting, shooting and related products, which created a second reportable segment. Our Chief Executive Officer reviews financial performance based on our two operating segments as follows:

 

  Ammunition – which consists of our manufacturing business. The Ammunition segment engages in the design, production and marketing of ammunition and ammunition component products.
  Marketplace – which consists of the GunBroker.com marketplace. In its role as an auction site, GunBroker.com supports the lawful sale of firearms, ammunition and hunting/shooting accessories.

 

In the current period, we began the reporting of the separate allocation of certain corporate general and administrative expenses including non-cash stock compensation expense, as such we have updated the prior period disclosure herein. The following tables set forth certain financial information utilized by management to evaluate our operating segments for the interim period presented:

  

   Ammunition   Marketplace   Corporate
and other
reconciling
items(a)
   Total 
   For the Three Months Ended June 30, 2022 
   Ammunition   Marketplace   Corporate
and other
expenses
   Total 
                 
Net Revenues  $44,251,080   $16,504,946   $-   $60,756,026 
Cost of Revenues   40,337,015    2,283,349    -    42,620,364 
General and administrative expense   3,673,112    2,433,729    3,615,724    9,722,565 
Depreciation and amortization   146,412    3,203,944    -    3,350,356 
Income from Operations  $94,541   $8,583,924   $(3,615,724)  $5,062,741 

 

   Ammunition   Marketplace   Corporate
and other
reconciling
items(a)
   Total 
   For the Three Months Ended June 30, 2021 
   Ammunition   Marketplace   Corporate
and other
expenses
   Total 
                 
Net Revenues  $32,204,266   $12,272,066   $-   $44,476,332 
Cost of Revenues   23,848,248    1,657,190    -    25,505,438 
General and administrative expense   2,877,354    1,002,564    2,799,401    6,679,319 
Depreciation and amortization   420,242    2,190,819    -    2,611,061 
Income from Operations  $5,058,422   $7,421,493   $(2,799,401)  $9,680,514 

 

NOTE 17 – INCOME TAXES

 

The income tax provision effective tax rates were 37.0% and 0.0% for the three months ended June 30, 2022 and 2021, respectively. During the three months ended June 30, 2022 and 2021, the effective tax rate differed from the U.S. federal statutory rate primarily due to state income taxes for the three months ended June 30, 2022 and the change in the valuation allowance for the three months ended June 30, 2021. The effective tax rates increased during the three months ended June 30, 2022 compared to the prior year period due to an increase in income from operations.

 

The Company has never had an Internal Revenue Service audit; therefore, the tax periods ended December 31, 2016, December 31, 2017, and March 31, 2018, 2019, 2020, 2021, and 2022 are subject to audit.

 

NOTE 18 – SUBSEQUENT EVENTS

 

Manufacturing Business Spin-Off

 

On August 15, 2022, we announced that our Board of Directors have unanimously approved the spin-off of our manufacturing business into a separate publicly traded company. We expect that this the transaction will be in the form of a distribution to our shareholders of 100% of the stock of the new independent publicly traded company. The distribution is intended to be tax-free to both companies and their shareholders for U.S. federal income tax purposes The marketplace business will remain a part of the Company, operating under a new name and ticker symbol. As of this date, we reasonably anticipate the transaction will be completed in the 2023 calendar year, subject to final approval by our Board of Directors, a Form 10 registration statement being declared effective by the U.S. Securities and Exchange Commission, regulatory approvals and satisfaction of other standard and necessary terms and conditions. There can be no assurance the transaction will be consummated or as concerns the ultimate timing of the proposed transaction.

 

Common Stock Issuances

 

Subsequent to the June 30, 2022, the Company issued 25,000 shares for employees as compensation for a total value of $87,500 or $3.50 per share. Additionally, 12,121 shares were issued pursuant the exercise of warrants for a total value of $24,242.

 

24
 

 

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

 

Management’s Discussion and Analysis of Financial Condition and Results of Operations is provided to assist the reader in understanding the results of operations, financial condition, and liquidity through the eyes of our management team. This section should be read in conjunction with other sections of this Quarterly Report, specifically, our Consolidated Financial Statements and Supplementary Data.

 

FORWARD-LOOKING STATEMENTS

 

This document contains certain “forward-looking statements”. All statements other than statements of historical fact are “forward-looking statements” for purposes of federal and state securities laws, including, but not limited to, any projections of earnings, revenue or other financial items; any statements of the plans, strategies, goals and objectives of management for future operations; any statements concerning proposed new products and services or developments thereof; any statements regarding future economic conditions or performance; any statements or belief; and any statements of assumptions underlying any of the foregoing.

 

Forward looking statements may include the words “may,” “could,” “estimate,” “intend,” “continue,” “believe,” “expect,” or “anticipate,” or other similar words, or the negative thereof. These forward-looking statements present our estimates and assumptions only as of the date of this report. Accordingly, readers are cautioned not to place undue reliance on forward-looking statements, which speak only as of the dates on which they are made. We do not undertake to update forward-looking statements to reflect the impact of circumstances or events that arise after the dates they are made. You should, however, consult further disclosures and risk factors we included in the section titled Risk Factors contained herein.

 

In our filings with the Securities and Exchange Commission, references to “AMMO, Inc.”, “AMMO”, “the Company”, “we,” “us,” “our” and similar terms refer to AMMO, Inc., a Delaware corporate, and its wholly owned consolidated subsidiaries.

 

Overview

 

Our vision is to modernize the ammunition industry by bringing new technologies to market. We intend to do that through acquisition and application of intellectual property that is unique to the industry and through investing in manufacturing equipment and processes that enable us to compete globally.

 

Our innovative line of match grade armor piercing (“AP”), hard armor piercing incendiary (“HAPI”) tactical and ballistically matched (“BMMPR”) rounds are the centerpiece of the Company’s strategy to address the unique needs of the armed forces community. This ammunition was designed around a match grade portfolio of projectiles, that include a solid copper boat tail and armor piercing configuration. The distinction between these rounds and other sold, is that the manufacturing process was engineered to ensure extremely tight tolerances between each projectile manufactured, ensuring for the end user that the ballistic trajectory remains consistent between rounds without regard to the actual configuration or round fired. The Company has aligned its manufacturing operations to support the large caliber demand from military personnel, such as the 7.62x39, .300NM, .338 Lapua, 12.7 mm and .50 caliber BMG configurations. On February 2, 2021, we announced that we restarted our improved .50 caliber manufacturing line to address increased market demand and fulfill current orders.

 

Through JMC, we offer ammunition casings for pistol ammunition through large rifle ammunition. Jagemann Munitions Components is backed by decades of manufacturing experience that allows the production of high-quality pistol brass and rifle brass components. Borne from the automotive industry and refined over time to deliver durable and consistent sporting components, Jagemann Munition Components™, has become one of the largest brass manufacturers in the country, with the capacity to produce more than 750 million pieces of brass each year with the ability to scale to 1 billion rounds on an annual basis. Proud of its American-made components and capabilities, the Company now has complete control over the manufacturing process. This results in a number of advantages when it comes to the brass that leaves our state-of-the-art facility.

 

25
 

 

On April 30, 2021, we acquired Gemini and nine of its subsidiaries, all of which are related to Gemini’s ownership of the GunBroker.com business.

 

GunBroker.com is a large online marketplace dedicated to firearms, hunting, shooting and related products. Third-party sellers list items on the site and federal and state laws govern the sale of firearms and other restricted items. Ownership policies and regulations are followed using licensed firearms dealers as transfer agents.

 

The focus for our 2023 fiscal year is to continue to expand our brand presence into the markets identified above and to continue to grow our sales within our targeted markets. We intend to do this through establishing key strategic relationships, enrolling in government procurement programs, establishing relationships with leading law enforcement associations and programs, expanding distributor channels, and revitalized marketing campaigns.

 

26
 

 

Results of Operations

 

Our financial results for the three months ended June 30, 2022 reflect our newly positioned organization as we transition into our new manufacturing facility. We believe that we have hired a strong team of professionals, developed innovative products, and continue to raise capital sufficient to establish our presence as a high-quality ammunition provider and marketplace. We continue to focus on growing our top line revenue, and streamlining our operations, and as a result, we experienced a 36.6% increase in our Net Revenues for the three months ended June 30, 2022 compared with the three months ended June 30, 2021. This was the result of production capacity increase, as well as a full quarter of operations for our new marketplace, GunBroker.com, in comparison to the prior year period.

 

The following table presents summarized financial information taken from our condensed consolidated statements of operations for the three ended June 30, 2022 compared with the three months ended June 30, 2021:

 

   For the Three Months Ending 
   June 30, 2022   June 30, 2021 
   (Unaudited)   (Unaudited) 
Net Sales  $60,756,026   $44,476,332 
Cost of Revenues   42,620,364    25,505,438 
Gross Profit   18,135,662    18,970,894 
Sales, General & Administrative Expenses   13,072,921    9,290,380 
Income from Operations   5,062,741    9,680,514 
Other income (expense)          
Other income (expense)   73,011    (143,854)
Income before provision for income taxes  $5,135,752   $9,536,660 
Provision for income taxes   1,882,725    - 
Net Income  $3,253,027   $9,536,660 

 

Non-GAAP Financial Measures

 

We analyze operational and financial data to evaluate our business, allocate our resources, and assess our performance. In addition to total net sales, net loss, and other results under accounting principles generally accepted in the United States (“GAAP”), the following information includes key operating metrics and non-GAAP financial measures we use to evaluate our business. We believe these measures are useful for period-to-period comparisons of the Company. We have included these non-GAAP financial measures in this Quarterly Report on Form 10-Q because they are key measures we use to evaluate our operational performance, produce future strategies for our operations, and make strategic decisions, including those relating to operating expenses and the allocation of our resources. Accordingly, we believe these measures provide useful information to investors and others in understanding and evaluating our operating results in the same manner as our management and board of directors.

 

Adjusted EBITDA

 

   For the Three Months Ended 
   June 30, 2022   June 30, 2021 
         
Reconciliation of GAAP net income to Adjusted EBITDA          
Net Income  $3,253,027   $9,536,660 
Depreciation and amortization   4,300,123    3,516,851 
Provision for income taxes   1,882,725    - 
Excise taxes   3,712,341    2,397,771 
Interest expense, net   120,487    165,279 
Employee stock awards   1,175,063    699,500 
Stock grants   47,844    66,914 
Other income, net   (193,498)   (21,425)
Contingent consideration fair value   (1,302)   (56,638)
Adjusted EBITDA  $14,296,810   $16,304,912 

 

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Adjusted EBITDA is a non-GAAP financial measure that displays our net income (loss), adjusted to eliminate the effect of certain items as described below.

 

We have excluded the following non-cash expenses from our non-GAAP financial measures: provision or benefit for income taxes, depreciation and amortization, share-based or warrant-based compensation expenses, and changes to the contingent consideration fair value. We believe it is useful to exclude these non-cash expenses because the amount of such expenses in any specific period may not directly correlate to the underlying performance of our business operations.

 

Adjusted EBITDA as a non-GAAP financial measure also excludes other cash interest income and expense, as these items are not components of our core operations.

 

Non-GAAP financial measures have limitations, should be considered as supplemental in nature and are not meant as a substitute for the related financial information prepared in accordance with GAAP. These limitations include the following:

 

  Employee stock awards and stock grants expense has been, and will continue to be for the foreseeable future, a significant recurring expense in the Company and an important part of our compensation strategy;
  the assets being depreciated or amortized may have to be replaced in the future, and the non-GAAP financial measures do not reflect cash capital expenditure requirements for such replacements or for new capital expenditures or other capital commitments; and
  non-GAAP measures do not reflect changes in, or cash requirements for, our working capital needs
  other companies, including companies in our industry, may calculate the non-GAAP financial measures differently or not at all, which reduces their usefulness as comparative measures.

 

Because of these limitations, you should consider the non-GAAP financial measures alongside other financial performance measures, including our net loss and our other financial results presented in accordance with GAAP.

 

Net Sales

 

The following table shows our net sales by proprietary ammunition versus standard ammunition for the three months ended June 30, 2022 and 2021. “Proprietary Ammunition” include those lines of ammunition manufactured by our facilities that are sold under the brand names: STREAK VISUAL AMMUNITION™ and Stelth. We define “Standard Ammunition” as non-proprietary ammunition that directly competes with other brand manufacturers. Our “Standard Ammunition” is manufactured within our facility and may also include completed ammunition that has been acquired in the open market for sale to others. Also included in this category is low cost target pistol and rifle ammunition, as well as bulk packaged ammunition manufactured by us using reprocessed brass casings. Ammunition within this product line typically carries lower gross margins.

 

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   For the Three Months Ending 
   June 30, 2022   June 30, 2021 
Proprietary Ammunition  $2,855,934   $1,110,621 
Standard Ammunition   38,113,949    27,241,159 
Ammunition Casings   3,281,197    3,852,486 
Marketplace Revenue   16,504,946    12,272,066 
Total Sales  $60,756,026   $44,476,332 

 

Sales for the three months ended June 30, 2022 increased 36.6% or approximately $16.3 million, over the three months ended June 30, 2021. This increase was the result of approximately $10.9 million of increased sales in bulk pistol and rifle ammunition, an increase of approximately $1.8 million of sales of Proprietary Ammunition, a decrease of approximately $0.6 million of sales from our casing operations, and an increase of approximately $4.2 million of revenue generated from our marketplace, GunBroker.com, which includes auction revenue, payment processing revenue, and shipping income. Management expects the sales growth rate of Proprietary Ammunition to greatly outpace the sales of our Standard Ammunition.

 

We are focused on continuing to grow top line revenue quarter-over-quarter as we continue to further expand distribution into commercial markets, introduce new product lines, and continue to initiate sales to U.S. law enforcement, military, and international markets.

 

Through our acquisition of SWK, the Company has developed and deployed a new line of tactical armor piercing (AP) and hard armor piercing incendiary (HAPI) precision ammunition to meet the lethality requirements of both the US and foreign military customers. This line was formally launched at SHOT Show in Las Vegas, where our team demonstrated or presented the capability to more than 15 countries around the world. We continue to demonstrate our AP and HAPI ammunition to military personnel at scheduled and invite only events, resulting in increased interest and procurement discussions. The Company has since developed the ballistic match (BMMPR) and signature-on-target (SoT) rounds under contract with the U.S. Government in support of US special operations which have been publicly announced pursuant to governmental authorization. Additional work continues in support of the military operations of the U.S. and its ally military components which is not currently subject to disclosure.

 

It is important to note that, although U.S. law enforcement, military and international markets represent significant opportunities for our Company, they also have a long sales cycle. The Company’s sales team has been effective in establishing sales and distribution channels, both in the United States and abroad, which are reasonably anticipated to drive sustained sales opportunity in the military, law enforcement, and commercial markets.

 

Sales outside of the United States require licenses and approval from either the U.S. Department of Commerce or the U.S. State Department, which typically takes approximately 30 days to receive. On June 16, 2022, we renewed our annual registration with the International Traffic in Arms Regulations (“ITAR”), which remains valid through the report date. This permits the Company to export and broker ammunition and other controlled items covered under ITAR.

 

Cost of Revenues

 

Cost of Revenues increased by approximately $17.1 million from $25.5 million to $42.6 million for the three months ended June 30, 2022 compared to the comparable period ended in 2021. This was the result of a significant increase in net sales as well increases to non-cash depreciation related to increases in production equipment, expensing of increased labor, overhead, and raw materials used to produce finished product during 2022 as compared to 2021, and additional cost of revenues related to a full quarter of operations from our marketplace, GunBroker.com, in comparison to the prior year period.

 

Gross Margin

 

Our gross margin percentage decreased to 29.8% from 42.7% during the three months ended June 30, 2022 as compared to the same period in 2021. The decrease in our gross margin was related to increased costs of raw materials, labor, and overhead costs.

 

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We believe as we continue to grow sales through new markets and expanded distribution that our gross margins will also increase by efficiencies added through our new production facility scheduled to come online this fiscal year. Our goal in the next 12 to 24 months is to continue to improve our gross margins. This will be accomplished through the following:

 

  Increased product sales, specifically of proprietary lines of ammunition, like the STREAK VISUAL AMMUNITION™, Stelth and now our tactical Armor Piercing (AP) and Hard Armor Piercing Incendiary (HAPI) precision ammunition, all of which carry higher margins as a percentage of their selling price;
     
  Introduction of new lines of ammunition that historically carry higher margins in the consumer and government sectors;
     
  Reduced component costs through operation of our ammunition segment and expansion of strategic relationships with component providers;
     
  Expanded use of automation equipment that reduces the total labor required to assemble finished products;
     
  And, better leverage of our fixed costs through expanded production to support the sales objectives.

 

Operating Expenses

 

Overall, for the three months ended June 30, 2022, our operating expenses increased by approximately $3.8 million over the three months ended June 30, 2021 and increased as a percentage of sales from 20.1% for the three months ended June 30, 2021 to 21.5% for the three months ended June 30, 2022. Our operating expenses include non-cash depreciation and amortization expense of approximately $3.4 million for the three months ended June 30, 2022. Our operating expenses consisted of commissions related to our sales increases, stock compensation expense associated with issuance of our Common Stock in lieu of cash compensation for employees, board members, and key consultants for the organization during the period. Operating expenses for the three months ended June 30, 2022 included noncash expenses of approximately $4.6 million. We expect to see administrative expenditures decrease as a percentage of sales in the 2023 fiscal year, as we leverage our work force and expand our sales opportunities.

 

During the three months ended June 30, 2022, our selling and marketing expenses increased by approximately $0.7 million in comparison to the three months ended June 30, 2021. The increase was primarily related to commission on the increases in the sale of our products resulting of approximately $0.4 million for the three months ended June 30, 2021 in comparison to the comparable prior period, as well as an increase of approximately $0.5 million in advertising and marketing costs for the same period.

 

Our corporate general & administrative expenses increased approximately $1.9 million in the three months ended June 30, 2022 from the comparable prior period mainly due to inclusion of the full quarter of Gemini expenses for the quarter ended June 30, 2021, as compared to partial inclusion during the quarter ended June 30, 2021, as a result of the acquisition occurring on April 30, 2021.

 

Employee salaries and related expenses increased approximately $0.4 million for the three months ended June 30, 2022 compared to the comparable period ended in 2021. The increase for the three months ended June 30, 2022 when compared to the prior period was primary related to an increase of stock compensation of approximately $0.5 million.

 

Depreciation and amortization expenses for the three ended June 30, 2022 increased by approximately $0.7 million from the comparable prior period due to increases in the carrying value of equipment.

 

Interest and Other Expenses

 

For the three months ended June 30, 2022, interest expense decreased by approximately $0.1 million compared with the comparable three months ended June 30, 2021. The change from the prior periods was mainly due to the repayment of notes during the three months ended June 30, 2021.

 

Income Taxes

 

For the three months ended June 30, 2022, we recorded a provision for federal and state income taxes of approximate $1.9 million. There was no provision for federal and state income taxes during the three months ended June 30, 2021.

 

Net Income

 

We ended the three months ended June 30, 2022 with a net income of approximately $3.2 million compared with a net income of approximately $9.5 million for the three months ended June 30, 2021.

 

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Our goal is to continue to improve our operating results as we focus on increasing sales and controlling our operating expenses.

 

Liquidity and Capital Resources

 

As of June 30, 2022, we had $20,901,109 of cash and cash equivalents, a decrease of $2,380,366 from March 31, 2022.

 

Working Capital is summarized and compared as follows:

 

   June 30, 2022   March 31, 2022 
Current assets  $131,122,718   $129,691,636 
Current liabilities   34,354,389    35,823,311 
   $96,768,329   $93,868,325 

 

Changes in cash flows are summarized as follows:

 

Operating Activities

 

For the three months ended June 30, 2022, net cash provided by operations totaled approximately $5.2 million. This was primarily the result of net income of approximately $3.3 million, which was offset by increases in our inventories of approximately $5.6 million, increases in deposits of approximately $0.5 million, decreases in our accounts receivable of approximately $4.2 million, decreases in prepaid expenses of approximately $0.9 million, and decreases in our accounts payable of $3.0 million. Non-cash expenses for depreciation and amortization totaled approximately $4.3 million and non-cash expenses for employee stock awards totaled $1.2 million.

 

For the three months ended June 30, 2021, net cash provided by operations totaled approximately $8.7 million. This was primarily the result of net income of approximately $9.5 million, increases in our accounts payable of approximately $7.0 million, decreases in prepaid expenses of approximately $1.1 million, non-cash expenses for depreciation and amortization of approximately $3.5 million, employee stock compensation of approximately $0.7 million, and stock grants totaling approximately $0.1 million. The cash provided by operations were partially offset increases in inventories of approximately $12.1 million.

 

Investing Activities

 

During the three months ended June 30, 2022, we used approximately $5.3 million in net cash for investing activities. Net cash used in investing activities consisted of approximately $5.3 million related to purchases of production equipment and the construction of our new manufacturing facility in Manitowoc, WI.

 

During the three months ended June 30, 2021, we used approximately $52.2 million in net cash for investing activities. Net cash used in investing activities consisted of approximately $50.7 million used in connection with the merger of Gemini, and approximately $1.6 million related to purchases of production equipment and the construction of our new manufacturing facility in Manitowoc, WI.

 

Financing Activities

 

During the three months ended June 30, 2022, net cash used in financing activities was approximately $1.3 million. This was the net effect of an approximate $0.7 million reduction in our Inventory Credit Facility, approximately $0.5 million from insurance premium note payments, and generation of approximately $24.7 million from accounts receivable factoring, which was offset by payments of approximately $25.0 million.

 

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During the three months ended June 30, 2021, net cash used in financing activities was approximately $23.8 million. This was the net effect of a $50.0 million payment on debt assumed from Gemini, $35.0 million of proceeds from the sale of our preferred stock net of approximately $3.2 million of issuance costs, approximately $0.5 million was generated from common stock issued for exercised warrants, the $4.0 million repayment of a note payable, and an approximate $0.8 million reduction in our Inventory Credit Facility. Additionally, approximately $23.6 million was generated from accounts receivable factoring, which was offset by payments of approximately $24.4 million.

 

Liquidity

 

Existing working capital, cash flow from operations, bank borrowings, and sales of equity and debt securities are expected to be adequate to fund our operations over the next year. Generally, we have financed operations to date through the proceeds of stock sales, bank financings, and related-party notes. These sources have been adequate to fund our recurring cash expenditures including but not limited to our working capital requirements, capital expenditures to expand our operations, debt repayments, and acquisitions. We intend to continue use the aforementioned sources of funding for capital expenditures, debt repayments, share repurchases and any potential acquisitions.

 

Leases

We lease six locations that are used for our offices, production, and warehousing. As of June 30, 2022, we had $3.2 million of fixed lease payment obligations with $1.0 million payable within the next 12 months. Please refer to Note 9 – Leases for additional information.

 

Related Party Note Payable

 

As of June 30, 2022, we had an outstanding balance on our Related Party Note Payable of approximately $0.7 million, which is due within the next 12 months.

 

Construction Note Payable

 

We will finance a portion of our new production facility with our Construction Note Payable. We expect to make $0.6 million in principal and interest payments within the next 12 months. The total principal balance of the Construction Note is expected to be $11.6 million upon completion of the project and will mature on October 14, 2026.

 

Off-Balance Sheet Arrangements

 

As of June 30, 2022, we did not have any off-balance sheet arrangements that have or are reasonably likely to have a current or future material effect on our financial condition, net sales, expenses, results of operations, liquidity capital expenditures, or capital resources.

 

Critical Accounting Policies

 

The preparation of financial statements in conformity with GAAP requires us to make estimates and assumptions that affected the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates. Significant estimates made in preparing the condensed consolidated financial statements include the valuation of allowances for doubtful accounts, valuation of deferred tax assets, inventories, useful lives of assets, goodwill, intangible assets, and stock-based compensation. A summary of our critical accounting policies is included in our Annual Report on Form 10-K for the year ended March 31, 2022, under “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” There have been no significant changes to these policies during the three months ended June 30, 2022. For disclosure regarding recent accounting pronouncements and the anticipated impact they will have on our operations, please refer to Note 2 to the consolidated financial statements included in our Annual Report on Form 10-K for the year ended March 31, 2022.

 

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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

We are a smaller reporting company as defined by Rule 12b-2 of the Securities Exchange Act of 1934 and are not required to provide the information under this item.

 

ITEM 4. CONTROLS AND PROCEDURES

 

Evaluation of Disclosure Controls and Procedures

 

We maintain disclosure controls and procedures, as defined in Rule 13a-15(e) promulgated under the Securities Exchange Act of 1934 (the “Exchange Act”), that are designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms and that such information is accumulated and communicated to our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure. We carried out an evaluation, under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures as of June 30, 2022. Based on the evaluation of these disclosure controls and procedures, our Chief Executive Officer and Chief Financial Officer concluded our disclosure controls and procedures were not effective. Our controls were ineffective due to the size of the Company and available resources. There are limited personnel to assist with the accounting and financial reporting function, which results in: (i) a lack of segregation of duties and (ii) controls that may not be adequately designed or operating effectively. Despite the existence of material weaknesses, the Company believes the financial information presented herein is materially correct and fairly presents the financial position and operating results of the three months ended June 30, 2022, in accordance with GAAP.

 

Changes in internal controls

 

There were no changes in our internal control over financial reporting, as defined in Rule 13a-15(f) promulgated under the Exchange Act, during the quarterly period from April 1, 2022 to June 30, 2022, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

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PART II - OTHER INFORMATION

 

ITEM 1. LEGAL PROCEEDINGS

 

We are involved in or subject to, or may become involved in or subject to, routine litigation, claims, disputes, proceedings, and investigations in the ordinary course of business. While the outcome of lawsuits and other proceedings against us cannot be predicted with certainty, in the opinion of management, individually or in the aggregate, no such lawsuits are expected to have a material effect on our financial position, results of operations or cash flows. We record accruals for contingencies when it is probable that a liability will be incurred and the amount of loss can be reasonably estimated.

 

Please reference the Contingencies section of Note 2 of our Financial Statements for additional disclosure.

 

ITEM 1A. RISK FACTORS

 

We are a smaller reporting company as defined by Rule 12b-2 of the Securities Exchange Act of 1934 and are not required to provide the information under this item.

 

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

 

The authorized capital of the Company is 200,000,000 shares of Common Stock with a par value of $0.001 per share and 10,000,000 shares of Preferred Stock with a $0.001 par value per share.

 

There were no unregistered sales of the Company’s equity securities during the quarter ended June 30, 2022 that were not previously reported in a Current Report on Form 8-K except as follows:

 

We issued 99,762 shares of our Common Stock issued in accordance with the cashless exercise of a warrant for a total value of $496,043.

 

The previously mentioned securities were issued in reliance on the exemptions from registration under the Securities Act in Section 4(a)(2) of the Securities Act and/or Regulation D thereunder.

 

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

 

None

 

ITEM 4. MINE SAFETY DISCLOSURES

 

Not applicable

 

34
 

 

ITEM 5. OTHER INFORMATION

 

None

 

ITEM 6. EXHIBITS

 

Exhibit No.   Exhibit
     
31.1*   Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 for Fred W. Wagenhals.
31.2*   Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 for Rob Wiley.
32.1**   Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 for Fred W. Wagenhals.
32.2**   Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 for Rob Wiley.

 

101.INS*   Inline XBRL Instance Document
101.SCH*   Inline XBRL Taxonomy Extension Schema Document
101.CAL*   Inline XBRL Taxonomy Extension Calculation Linkbase Document
101.LAB*   Inline XBRL Taxonomy Extension Labels Linkbase Document
101.PRE*   Inline XBRL Taxonomy Extension Presentation Linkbase Document
101.DEF*   Inline XBRL Taxonomy Extension Definition Linkbase Document
104   Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101)

 

*Filed Herewith.

 

** Furnished Herewith.

 

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SIGNATURES

 

In accordance with Section 13 or 15(d) of the Exchange Act of 1934, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

  AMMO, INC.
     
    /s/ Fred W. Wagenhals
Dated: August 15, 2022 By: Fred W. Wagenhals, Chief Executive Officer

 

    /s/ Robert D. Wiley
Dated: August 15, 2022 By: Robert D. Wiley, Chief Financial Officer

 

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