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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 December 31, 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 February 10, 2023, there were 117,844,417 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 December 31, 2022 (Unaudited) and March 31, 2022 3
  Condensed Consolidated Statements of Operations (Unaudited) for the three and nine months ended December 31, 2022, and 2021 4
  Condensed Consolidated Statement of Shareholders’ Equity (Unaudited) for the three and nine months ended December 31, 2022, and 2021 5
  Condensed Consolidated Statements of Cash flow (Unaudited) for the nine months ended December 31, 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 32
ITEM 4: CONTROLS AND PROCEDURES 32
     
PART II  
   
ITEM 1: LEGAL PROCEEDINGS 33
ITEM 1A: RISK FACTORS 33
ITEM 2: UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS 33
ITEM 3: DEFAULTS UPON SENIOR SECURITIES 33
ITEM 4: MINE SAFETY DISCLOSURE 33
ITEM 5: OTHER INFORMATION 34
ITEM 6: EXHIBITS 34
SIGNATURES 35

 

2

 

 

PART I

 

ITEM 1. FINANCIAL STATEMENTS

 

AMMO, Inc.

CONDENSED CONSOLIDATED BALANCE SHEETS

 

   December 31, 2022   March 31, 2022 
   (Unaudited)     
ASSETS          
Current Assets:          
Cash and cash equivalents  $27,093,614   $23,281,475 
Accounts receivable, net   30,419,611    43,955,084 
Due from related parties   -    15,000 
Inventories   67,145,401    59,016,152 
Prepaid expenses   3,838,968    3,423,925 
Current portion of restricted cash   500,000    - 
Total Current Assets   128,997,594    129,691,636 
           
Property and Equipment, net   55,290,328    37,637,806 
           
Other Assets:          
Deposits   9,656,907    11,360,322 
Patents, net   5,156,120    5,526,218 
Other intangible assets, net   126,870,205    136,300,387 
Goodwill   90,870,094    90,870,094 
Right of use assets - operating leases   1,378,711    2,791,850 
TOTAL ASSETS  $418,219,959   $414,178,313 
           
LIABILITIES AND SHAREHOLDERS’ EQUITY          
Current Liabilities:          
Accounts payable  $20,964,686   $26,817,083 
Factoring liability   1,678,450    485,671 
Accrued liabilities   4,298,739    6,178,814 
Inventory credit facility   -    825,675 
Current portion of operating lease liability   518,778    831,429 
Current portion of note payable related party   358,263    684,639 
Current portion of construction note payable   258,430    - 
Insurance premium note payable   119,449    - 
Total Current Liabilities   28,196,795    35,823,311 
           
Long-term Liabilities:          
Contingent consideration payable   158,570    204,142 
Notes payable related party, net of current portion   -    181,132 
Construction note payable, net of unamortized issuance costs   10,967,947    38,330 
Operating lease liability, net of current portion   980,009    2,091,351 
Deferred income tax liability   2,819,962    1,536,481 
Total Liabilities   43,123,283    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 December 31, 2022 and March 31, 2022, respectively   1,400    1,400 
Common stock, $0.001 par value, 200,000,000 shares authorized 118,044,417 and 116,485,747 shares issued and 117,894,417 and 116,485,747 outstanding at December 31, 2022 and March 31, 2022, respectively   117,894    116,487 
Additional paid-in capital   390,501,876    385,426,431 
Accumulated deficit   (15,233,633)   (11,240,752)
Treasury Stock   (290,861)   - 
Total Shareholders’ Equity   375,096,676    374,303,566 
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY  $418,219,959   $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   2022   2021 
   For the Three Months Ended
December 31,
   For the Nine Months Ended
December 31,
 
   2022   2021   2022   2021 
                 
Net Revenues                    
Ammunition sales  $20,250,965   $44,069,473   $90,607,817   $112,629,655 
Marketplace revenue   15,419,202    17,596,769    46,486,842    46,646,051 
Casing sales   3,041,327    3,022,944    10,661,420    10,891,897 
Total Revenues   38,711,494    64,689,186    147,756,079    170,167,603 
                     
Cost of Revenues   26,184,315    42,166,320    104,257,529    102,457,775 
Gross Profit   12,527,179    22,522,866    43,498,550    67,709,828 
                     
Operating Expenses                    
Selling and marketing   1,010,543    1,510,574    3,987,214    4,226,817 
Corporate general and administrative   7,835,201    3,737,455    17,920,197    10,976,288 
Employee salaries and related expenses   4,705,636    2,939,095    11,414,434    7,943,076 
Depreciation and amortization expense   3,309,074    3,725,921    9,950,752    10,044,994 
Total operating expenses   16,860,454    11,913,045    43,272,597    33,191,175 
Income/(Loss) from Operations   (4,333,275)   10,609,821    225,953    34,518,653 
                     
Other Expenses                    
Other income/(expense)   (170,403)   363    28,193    21,788 
Interest expense   (320,439)   (190,319)   (538,191)   (468,404)
Total other expense   (490,842)   (189,956)   (509,998)   (446,616)
                     
Income/(Loss) before Income Taxes   (4,824,117)   10,419,865    (284,045)   34,072,037 
                     
Provision for Income Taxes   (721,125)   1,351,998    1,369,427    1,351,998 
                     
Net Income/(Loss)   (4,102,992)   9,067,867    (1,653,472)   32,720,039 
                     
Preferred Stock Dividend   (782,639)   (782,582)   (2,339,409)   (1,902,966)
                     
Net Income/(Loss) Attributable to Common Stock Shareholders  $(4,885,631)  $8,285,285   $(3,992,881)  $30,817,073 
                     
Net Income/(Loss) per share                    
Basic  $(0.04)  $0.07   $(0.03)  $0.28 
Diluted  $(0.04)  $0.07   $(0.03)  $0.27 
                     
Weighted average number of shares outstanding                    
Basic   117,348,511    114,757,014    116,950,013    111,289,024 
Diluted   117,348,511    116,717,500    116,950,013    113,350,998 

 

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

 

4

 

 

AMMO, Inc.

CONDENSED CONSOLIDATED STATEMENT OF SHAREHOLDERS’ EQUITY

(Unaudited)

 

                                 
   Preferred Stock   Common Shares                 
   Number   Par Value   Number   Par Value   Additional Paid-In Capital   Accumulated (Deficit)   Treasury Stock   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 
                                         
Common stock issued for exercised warrants   -    -    12,121    12    24,230    -    -    24,242 
Employee stock awards   -    -    338,750    339    1,176,036    -    -    1,176,375 
Stock grants   -    -    -    -    43,750    -    -    43,750 
Preferred stock dividend   -    -    -    -    -    (646,595)   -    (646,595)
Dividends accumulated on preferred stock   -    -    -    -    -    (136,044)   -    (136,044)
Net loss   -    -    -    -    -    (803,507)   -    (803,507)
                                         
Balance as of September 30, 2022   1,400,000   $1,400    117,274,755   $117,275   $387,892,917   $(10,348,003)  $-   $377,663,589 
                                         
Common stock issued for exercised warrants   -    -    165,152    165    31,639    -    -    31,804 
Employee stock awards   -    -    604,510    604    2,105,931    -    -    2,106,535 
Stock grants   -    -    -    -    43,750    -    -    43,750 
Warrants issued for services   -    -    -    -    427,639    -    -    427,639 
Preferred stock dividend   -    -    -    -    -    (638,304)   -    (638,304)
Dividends accumulated on preferred stock   -    -    -    -    -    (144,334)   -    (144,334)
Net loss   -    -    -    -    -    (4,102,992)   -    (4,102,992)
Treasury shares purchased   -    -    (150,000)   (150)   -    -    (290,861)   (291,011)
                                         
Balance as of December 31, 2022   1,400,000   $1,400    117,894,417    117,894    390,501,876    (15,233,633 )   (290,861)   375,096,676 

 

   Preferred Stock   Common Shares                 
   Number   Par Value   Number   Par Value   Additional Paid-In Capital   Accumulated (Deficit)   Treasury Stock   Total 
                                 
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    132,626,500    -    -    132,645,000 
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 costs   -    -    -    -    (4,670,422)   -    -    (4,670,422)
Issuance of Series A Preferred Stock, net of issuance costs   1,400,000    1,400    -    -    34,998,600    -    -    35,000,000 
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 
                                         
Acquisition stock issuances   -    -    -    -    (29,500)   -    -    (29,500)
Common stock issued for exercised warrants   -    -    160,998    161    343,684    -    -    343,845 
Common stock issued for cashless warrant exercise   -    -    1,752    2    (2)   -    -    - 
Common stock issued for services and equipment   -    -    21,250    21    127,479    -    -    127,500 
Employee stock awards   -    -    352,250    352    1,153,273    -    -    1,153,625 
Stock grants   -    -    -    -    65,098    -    -    65,098 
Dividends accumulated on preferred stock   -    -    -    -    -    (782,639)   -    (782,639)
Net income   -    -    -    -    -    14,115,512    -    14,115,512 
                                         
Balance as of September 30, 2021   1,400,000   $1,400    113,583,016   $113,583   $369,431,456   $(19,287,751)  $-   $350,258,688 
                                         
Acquisition stock issuances   -    -    1,500,000    1,500    10,753,500    -    -    10,755,000 
Common stock issued for exercised warrants   -    -    50,938    51    122,200    -    -    122,251 
Common stock issued for services and equipment   -    -    1,200    2    4,198    -    -    4,200 
Employee stock awards   -    -    301,250    301    1,044,824    -    -    1,045,125 
Stock grants   -    -    -    -    65,098    -    -    65,098 
Common stock warrant issuance   -    -    -    -    594,034    -    -    594,034 
Preferred stock dividends declared   -    -    -    -    -    (638,021)   -    (638,021)
Dividends accumulated on preferred stock   -    -    -    -    -    (144,561)   -    (144,561)
Net income/(loss)   -    -    -    -    -    9,067,867    -    9,067,867 
                                         
Balance as of December 31, 2021   1,400,000   $1,400    115,436,404   $115,437   $382,015,310   $(11,002,466)  $-   $371,129,681 

 

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 Nine Months Ended
December 31,
 
   2022   2021 
         
Cash flows from operating activities:          
Net Income   (1,653,472)   32,720,039 
Adjustments to reconcile Net Income/(Loss) to Net Cash provided by (used in) operations:          
Depreciation and amortization   12,950,972    12,778,103 
Debt discount amortization   62,440    18,905 
Employee stock awards   4,457,973    2,898,250 
Stock grants   135,344    197,110 
Stock for services   -    4,200 
Warrants issued for services   106,909    148,508 
Contingent consideration payable fair value   (45,572)   (362,753)
Allowance for doubtful accounts   1,327,419    1,097,985 
(Gain) on disposal of assets   -    (12,044)
Reduction in right of use asset   512,063    496,469 
Deferred income taxes   1,283,481    958,019 
Changes in Current Assets and Liabilities          
Accounts receivable   12,208,054    (20,755,245)
Due to (from) related parties   15,000    - 
Inventories   (8,129,249)   (30,599,676)
Prepaid expenses   1,941,206    1,569,928 
Deposits   1,678,415    (13,051,850)
Accounts payable   (5,852,397)   7,538,451 
Accrued liabilities   (2,044,248)   1,310,641 
Operating lease liability   (522,917)   (514,872)
Net cash provided by (used in) operating activities   18,431,421    (3,559,832)
           
Cash flows from investing activities:          
Purchase of equipment   (10,566,182)   (50,517,840)
Gemini acquisition   -    (12,868,156)
Proceeds from disposal of assets   -    59,800 
Net cash used in investing activities   (10,566,182)   (63,326,196)
           
Cash flow from financing activities:          
Payments on inventory facility, net   (825,675)   (896,287)
Proceeds from factoring liability   57,300,000    86,465,962 
Payments on factoring liability   (56,107,221)   (84,210,284)
Payments on note payable - related party   (507,508)   (463,192)
Payments on insurance premium note payment   (1,916,070)   (1,922,651)
Proceeds from construction note payable   1,000,000    - 
Payments on construction note payable   (66,586)   - 
Preferred stock dividends paid   (2,195,075)   (1,758,405)
Common stock repurchase plan   (291,011)     
Common stock issued for exercised warrants   56,046    943,907 
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 issuance costs   -    (3,199,922)
Net cash used in financing activities   (3,553,100)   (24,040,872)
           
Net increase/(decrease) in cash   4,312,139    (90,926,900)
Cash, beginning of period   23,281,475    118,341,471 
Cash and restricted cash, end of period  $27,593,614   $27,414,571 

 

(Continued)

 

6

 

 

AMMO, Inc.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOW

(Unaudited)

 

   For the Nine Months Ended
December 31,
 
   2022   2021 
         
Supplemental cash flow disclosures:          
Cash paid during the period for:          
Interest  $433,761   $474,454 
Income taxes  $1,302,811   $- 
           
Non-cash investing and financing activities:          
Construction note payable  $10,237,032   $- 
Insurance premium note payment  $2,035,519   $2,166,852 
Dividends accumulated on preferred stock  $144,334   $144,561 
Operating lease liability  $901,076   $501,125 
Warrants issued for services  $427,639   $387,968 
Acquisition stock issuances  $-   $143,400,000 
Warrants issued for services  $-   $594,034 

 

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

 

7

 

 

AMMO, Inc.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

December 31, 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 and nine month period ended December 31, 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 and nine month periods ended December 31, 2022 and 2021, (b) the financial position at December 31, 2022, and (c) cash flows for the nine month periods ended December 31, 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.

 

Goodwill

 

We evaluate goodwill for impairment annually or more frequently when an event occurs or circumstances change that would more likely than not reduce the fair value of the reporting unit below its carrying amount. In testing for goodwill impairment, we may elect to utilize a qualitative assessment to evaluate whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If our qualitative assessment indicates that goodwill impairment is more likely than not, we perform a two-step impairment test. We test goodwill for impairment under the two-step impairment test by first comparing the book value of net assets to the fair value of the reporting unit. If the fair value is determined to be less than the book value or qualitative factors indicate that it is more likely than not that goodwill is impaired, a second step is performed to compute the amount of impairment as the difference between the estimated fair value of goodwill and the carrying value. We estimate the fair value of the reporting units using discounted cash flows. Forecasts of future cash flows are based on our best estimate of future net sales and operating expenses, based primarily on expected category expansion, pricing, market segment share, and general economic conditions. Due to the declines in the value of our stock price and market capitalization, we assessed qualitative factors to determine if it is more likely than not that the fair value of the Marketplace segment is less than its carrying amount. Through our analysis we determined our stock price and market capitalization decline it is not indicative of a decrease in the the fair value of our Marketplace segment and a fair value calculation using the discounted cash flows was more appropriate due to the operational performance of the reporting segment. Accordingly, the impairment of Goodwill was not warranted for the three and nine months ended December 31, 2022. As of December 31, 2022, the Company has a goodwill carrying value of $90,870,094, all of which is assigned to the Marketplace segment. However, due to declines in the value of the Company’s common stock and market capitalization, it is possible that the book values of our Marketplace segment could exceed its fair value, which may result in the recognition of a material, noncash impairment of goodwill for the year ending March 31, 2023.

 

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 December 31, 2022 and March 31, 2022, we reserved $4,382,671 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 10. 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 nine months ended December 31, 2022 and 2021, the Company recognized royalty expenses of $89,340 and $18,558, 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 December 31, 2022 and 2021.

 

Revenue Recognition

 

We generate revenue from the production and sale of ammunition, ammunition casings, 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.

 

For Ammunition Sales and Casing Sales, 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 Marketplace revenue, the performance obligation is satisfied, and revenue is recognized as follows:

 

Auction revenue consists of optional listing fees with variable pricing components based on customer options selected from the GunBroker website and final value fees based on a percentage of the final selling price of the listed item. The performance obligation is to process the transactions as initiated by the customer. Revenue is recognized at a point in time when the transaction is processed.

 

Payment processing revenue consists of fees charged to customers on a transactional basis. The performance obligation is to process the transactions as initiated by the customer. The price is set by the GunBroker user agreement on the website based on stand-alone selling prices. Revenue is recognized at a point in time when the transaction is processed.

 

Shipping income consists of fees charged to customers for shipping of sold items listed on the GunBroker website. The performance obligation is to ship the item sold as initiated by the customer. The price is set based on the third-party service provider selected to be used by the customer as well as the speed and location of shipment. Revenue is recognized at a point in time when the shipping label is printed.

 

Banner Advertising Campaign Revenue consists of fees charged to customers for advertisement placement and impressions generated through the GunBroker website. The performance obligation is to generate the number of impressions specified by the customer on banner advertisements on the GunBroker website using the placement selected by the customer. The price is set by the GunBroker user agreement on the website based on standalone selling prices, or by advertising insertion order as negotiated by media broker. If the number of impressions promised is not generated, the customer receives a refund and the refund is applied to the transaction price. Banner advertising campaigns generally run for one month, and revenue is recognized at a point in time at the end of the selected month.

 

Product Sales consists of fees charged for the liquidation of excess inventory for partner distributors. The performance obligation is to sell and ship the inventory item as initiated by the customer. The price depends on whether the inventory is a fixed price item or an auction item. For a fixed price item, the Company performs research to determine the current market rate for such an item, and the item is listed at that price. For an auction item, the price is set by what the buyer is willing to pay. The Company acts as a principal in these transactions due to the extent of control they have over the product prior to the sale. Due to the principal determination, gross revenue is recognized at a point in time when the item has been shipped.

 

Identity Verification consists of fees charged to customers for identity verification in order to gain access to the GunBroker website. The performance obligation is to process the identity verification as initiated by the customer. The price is set by the GunBroker user agreement on the website based on a stand-alone selling price. Revenue is recognized at a point in time when the identity verification is completed.

 

For the three and nine months ended December 31, 2022, the Company’s customers that comprised more than ten percent (10%) of total revenues and accounts receivable were as follows:

 

   Revenues at
December 31, 2022
   Accounts Receivable 
PERCENTAGES  Three Months
Ended
   Nine Months Ended   December 31,
2022
   March 31,
2022
 
                 
Customers:                    
A   12.5%   -    18.4%   11.8%
    12.5%   -    18.4%   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.

 SCHEDULE OF DISAGGREGATED REVENUE FROM CUSTOMERS BY SEGMENT 

                 
   For the Three Months Ended   For the Nine Months Ended 
         
   December 31,
2022
   December 31, 2021   December 31, 2022   December 31, 2021 
Ammunition Sales  $20,250,965   $44,069,473   $90,607,817   $112,629,655 
Marketplace fee revenue   15,419,202    17,596,769    46,486,842    46,646,051 
Ammunition Casings Sales   3,041,327    3,022,944    10,661,420    10,891,897 
Total Sales  $38,711,494   $64,689,186   $147,756,079   $170,167,603 

 

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 $912,959 and $448,367 for the nine months ended December 31, 2022 and 2021, respectively, recognized in selling and marketing expenses and $243,246 and $193,752 of marketplace advertising expenses recognized in cost of revenues for the nine months ended December 31, 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 December 31, 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, amounts due to related parties, factoring liability, and the construction note payable. 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 Codification 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 604,510 and 1,281,635 shares of common stock issued to employees, members of the Board of Directors, and members of our advisory committee for services during the three and nine months ended December 31, 2022

 

Concentrations of Credit Risk

 

Accounts at banks are insured by the Federal Deposit Insurance Corporation (“FDIC”) up to $250,000. As of December 31, 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 nine months ended December 31, 2022 and 2021, we recognized approximately $7.8 million and $10.3 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 did not 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. The putative primer manufacturer settled the two related lawsuits in September 2022 by repaying all deposit monies due AMMO, in addition to payment of principally all fees and costs incurred by the Company in pursuit of the resolution. The principal lawsuit and AMMO’s garnishment action adverse the defendant were dismissed with prejudice. Along with countless other suppliers of Remington Outdoors, AMMO was served with an avoidance claim lawsuit by the bankruptcy trustee. AMMO presented substantial “ordinary course” defense evidence to the Trustee and the case was settled for a nominal sum in September 2022, with the lawsuit dismissed with prejudice. AMMO is defending two contract arbitration cases involving adverse former employees that are presently in discovery, one involving an employee terminated for cause and the second action involving a termination without cause wherein the former employee is seeking contract wages, commissions and allegedly earned common stock. The Company also received notice in October that an OSHA whistleblower complaint had been filed with the US Department of Labor by an employee that had been terminated for cause. The regulatory filing was received after AMMO refused to capitulate to the former employee’s demands. AMMO has produced documents and submitted its position statement to OSHA and the matter is currently pending at the agency level. There were no other known contingencies at December 31, 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 2,781,482 shares of common stock. Due to the net loss attributable to common shareholders for the three and nine months ended December 31, 2022, potentially dilutive securities, which consists of 389,544 and 1,070,694 (536,311 and 150,000 warrants, respectively, for the three and nine months ended December 31, 2022 were excluded as a result of the treasury stock method) common stock purchase warrants and 5,281 and 19,095 equity incentive awards, respectively for the three and nine months ended December 31, 2022, have been excluded from the dilutive EPS calculation as the effect would be antidilutive.

 

 SCHEDULE OF INCOME (LOSS) PER COMMON SHARE

   2022   2021   2022   2021 
   For the Three Months Ended
December 31,
   For the Nine Months Ended
December 31,
 
   2022   2021   2022   2021 
                 
Numerator:                    
Net income/(loss)  $(4,102,992)  $9,067,867   $(1,653,472)  $32,720,039 
Less: Preferred stock dividends   (782,639)   (782,582)   (2,339,409)   (1,902,966)
Net income/(loss) attributable to common stockholders  $(4,885,631)  $8,285,285   $(3,992,881)  $30,817,073 
                     
Denominator:                    
Weighted average shares of common stock – Basic   117,348,511    114,757,014    116,950,013    111,289,024 
Effect of dilutive common stock purchase warrants   -    1,835,395    -    1,934,172 
Effect of dilutive equity incentive awards   -    125,091    -    127,802 
Weighted average shares of common stock - Diluted   117,348,511    116,717,500    116,950,013    113,350,998 
                     
Basic earnings per share:                    
Income/(loss) per share attributable to common stockholders – basic  $(0.04)  $0.07   $(0.03)  $0.28 
                     
Diluted earnings per share:                    
Income/(loss) per share attributable to common stockholders – diluted  $(0.04)  $0.07   $(0.03)  $0.27 

 

  (1) Weighted average of contingently issuable shares measured from the effective date of merger, April 30, 2021

 

NOTE 4 – INVENTORIES

 

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

 

 SCHEDULE OF INVENTORIES

  

December 31,

2022

  

March 31,

2022

 
Finished product  $20,760,747   $6,167,318 
Raw materials   31,387,096    33,924,813 
Work in process   14,997,558    18,924,021 
Inventory net  $67,145,401   $59,016,152 

 

NOTE 5 – PROPERTY AND 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

 

Property and Equipment consisted of the following at December 31, 2022 and March 31, 2022:

 

 SCHEDULE OF PROPERTY AND EQUIPMENT

   December 31, 2022   March 31, 2022 
Building  $28,113,684   $- 
Construction in progress   1,834,688    14,335,371 
Leasehold Improvements   257,009    257,009 
Furniture and Fixtures   368,359    343,014 
Vehicles   153,254    153,254 
Equipment   37,689,716    32,524,850 
Tooling   143,710    143,710 
Total property and equipment  $68,560,420   $47,757,208 
Less accumulated depreciation   (13,270,092)   (10,119,402)
Net property and equipment  $55,290,328   $37,637,806 

 

Depreciation Expense for the three and nine months ended December 31, 2022 totaled $1,089,243, and $3,150,691, respectively. Depreciation Expense for the three and nine months ended December 31, 2021 totaled $1,087,550, and $3,184,976, respectively.

 

NOTE 6 – 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 December 31, 2022, the outstanding balance of the Factoring Liability was $1,678,450. For the three and nine months ended December 31, 2022, interest expense recognized on the Factoring Liability was $42,286 and $111,220 including $37,500 of amortization of the commitment fee and for the three and nine months ended December 31, 2021, interest expense recognized on the Factoring Liability was $103,876 and $216,242, respectively, including $37,500 of amortization of the commitment fee.

 

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

 

NOTE 7 – 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 December 31, 2022, there was no outstanding balance of the Inventory Credit Facility. Interest expense recognized on the Inventory Credit Facility for the nine months ended December 31, 2022 and 2021 was $6,580 and $24,256 (including $8,561 of amortization of the annual fee), respectively.

 

NOTE 8 – LEASES

 

We lease office, manufacturing, and warehouse space in Scottsdale, AZ, Atlanta and Marietta, GA, and Manitowoc, 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. We terminated our lease agreement in our first Manitowoc, WI location during the nine months ended December 31, 2022. Accordingly, we decreased our Right of Use Assets and Operating Lease Liabilities by $901,076.

 

As of December 31, 2022 and March 31, 2022, total Right of Use Assets were $1,378,711 and $2,791,850, respectively. As of December 31, 2022 and March 31, 2022, total Operating Lease Liabilities were $1,498,787 and $2,922,780, respectively. The current portion of our Operating Lease Liability on December 31, 2022 and March 31, 2022 is $518,778 and $831,429 respectively and is reported as a current liability. The remaining $980,009 of the total $1,498,787 for the quarter ended December 31, 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 December 31, 2022 are as follows:

 

 SCHEDULE OF FUTURE MINIMUM LEASE PAYMENTS UNDER NON-CANCELLABLE LEASES

Years Ended March 31,    
2023 (1)  $160,757 
2024   583,768 
2025   387,214 
2026   351,962 
2027   257,508 
Thereafter   43,516 
Total Lease Payments   1,784,725 
Less: Amount Representing Interest   (285,938)
Present value of lease liabilities  $1,498,787 

 

  (1) This amount represents future lease payments for the remaining three months of fiscal year 2023. It does not include any lease payments for the nine months ended December 31, 2022.

 

NOTE 9 – NOTES PAYABLE – RELATED PARTY

 

For the three and nine months ended December 31, 2022, the Company made $173,134 and $507,507 in principal payments, respectively, in connection with the Amended Note B, an amended related party note payable with Jagemann Stamping Company (“JSC”). We entered into the Amended Note B with JSC on November 4, 2020 and the note matures on June 26, 2023. We recognized $12,753 and $41,450 in respective interest expenses for the three and nine months ended December 31, 2022, respectively.

 

17

 

 

AMMO, Inc.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

NOTE 10 – 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 on 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 nine months ended December 31, 2022, approximately $11.2 million of Loan funds were advanced including $1.0 million of cash collateral or restricted cash as security for the Loan. We made $66,585 in principal payments for the three and nine months ended December 31, 2022. 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. During the nine months ended December 31, 2022, $500,000 of restricted cash was released to the Company.

 

NOTE 11 – 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 nine month period ended December 31, 2022, we issued 1,558,670 shares of common stock as follows:

 

  99,762 shares were issued for cashless exercise of 100,000 warrants
  177,273 shares were issued for the exercise of warrants for a total value of $56,046
  1,281,635 shares valued at $4,457,973 were issued to employees, members of the Board of Directors, and members of the Advisory Committee as compensation

 

18

 

 

AMMO, Inc.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

At December 31, 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   150,000    0.01    - 
Exercised   (277,273)   0.21    - 
Forfeited or cancelled   (25,000)   2.00    - 
Outstanding at December 31, 2022   2,781,482   $2.41    1.60 
Exercisable at December 31, 2022   2,781,482   $2.41    1.60 

 

As of December 31, 2022, we had 2,781,482 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 1,769,294 shares of our Common Stock at an exercise price of $2.00 per share consisting of 30% of the warrants until August 2024, and 70% 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.

 

During the three months ended December 31, 2022, the Company issued 150,000 warrants for services to purchase 150,000 shares of Common Stock at an exercise price of $0.01. The total value of the 150,000 warrants was $427,639.

 

19

 

 

AMMO, Inc.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

NOTE 12 – 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 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.

 

Preferred dividends accumulated as of December 31, 2022 were $144,334. On November 18, 2022, the Board of Directors of the Company declared a dividend on the Company’s Series A Preferred Stock for the period beginning September 15, 2022 through and including December 14, 2022 payable on December 15, 2022 to holders of record of Series A Preferred Stock on November 30, 2022 equal to $0.5529514 per share. Dividends totaling $774,132 were paid on December 15, 2022. On August 17, 2022, the Board of Directors of the Company declared a dividend on the Company’s Series A Preferred Stock for the period beginning June 15, 2022 through and including September 14, 2022 payable on September 15, 20221 to holders of record of Series A Preferred Stock on August 31, 2022 equal to $$0.55902778 per share. Dividends totaling $782,639 were paid on September 15, 2022. 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.

 

20

 

 

AMMO, Inc.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

NOTE 13 – 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 consideration transferred   $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 Nine Months
Ended
December 31, 2021
 
     
Net revenues  $178,213,024 
Net income  $37,266,527 

 

21

 

 

AMMO, Inc.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

 

NOTE 14 – 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 and nine months ended December 31, 2022 were $3,266,761 and $9,800,281, respectively. Amortization expenses related to our intangible assets for the three and nine months ended December 31, 2021 were $3,535,805 and $9,593,127.

  

       December 31, 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        -    (1,917,885)   - 
Accumulated amortization – Intangible Assets        -    -    (24,893,412)
        $-   $5,156,120   $126,870,205 

 

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

 

Years Ended March 31,  Estimates for
Fiscal Year
 
2023 (1)  $3,294,934 
2024   13,074,489 
2025   12,664,775 
2026   12,664,775 
2027   12,553,355 
Thereafter   77,773,997 
Annual amortization of intangible assets   $132,026,325 

 

(1) This amount represents future amortization for the remaining nine months of fiscal year 2023. It does not include any amortization for the nine months ended December 31, 2022.

 

22

 

 

AMMO, Inc.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

NOTE 15 – 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
expenses
   Total 
   For the Three Months Ended December 31, 2022 
   Ammunition   Marketplace   Corporate
and other
expenses
   Total 
                 
Net Revenues  $23,292,292   $15,419,202   $-   $38,711,494 
Cost of Revenues   23,865,275    2,319,040    -    26,184,315 
General and administrative expense   4,838,081    1,719,707    6,993,592    13,551,380 
Depreciation and amortization   143,378    3,165,696    -    3,309,074 
Income/(Loss) from Operations  $(5,554,442)  $8,214,759   $(6,993,592)  $(4,333,275)

 

   Ammunition   Marketplace   Corporate
and other
expenses
   Total 
  

 

For the Nine Months Ended December 31, 2022

 
   Ammunition   Marketplace   Corporate
and other
expenses
   Total 
                 
Net Revenues  $101,269,237   $46,486,842   $-   $147,756,079 
Cost of Revenues   97,555,732    6,701,797    -    104,257,529 
General and administrative expense   12,117,828    6,713,561    14,490,456    33,321,845 
Depreciation and amortization   437,694    9,513,058    -    9,950,752 
Income/(Loss) from Operations  $(8,842,017)  $23,558,426   $(14,490,456)  $225,953 

 

   Ammunition   Marketplace  

Corporate

and other

expenses

   Total 
   For the Three Months Ended December 31, 2021 
   Ammunition   Marketplace  

Corporate

and other

expenses

   Total 
                 
Net Revenues  $47,092,417   $17,596,769   $-   $64,689,186 
Cost of Revenues   39,904,811    2,261,509    -    42,166,320 
General and administrative expense   3,941,639    2,251,146    1,994,339    8,187,124 
Depreciation and amortization   420,077    3,305,844    -    3,725,921 
Income/(loss) from Operations  $2,825,890   $9,778,270   $(1,994,339)  $10,609,821 

 

   Ammunition   Marketplace  

Corporate

and other

expenses

   Total 
   For the Nine Months Ended December 31, 2021 
   Ammunition   Marketplace  

Corporate

and other

expenses

   Total 
                 
Net Revenues  $123,521,552   $46,646,051   $-   $170,167,603 
Cost of Revenues   96,203,542    6,254,233    -    102,457,775 
General and administrative expense   10,068,430    5,400,925    7,676,826    23,146,181 
Depreciation and amortization   1,260,064    8,784,930    -    10,044,994 
Income/(Loss) from Operations  $15,989,516   $26,205,963   $(7,676,826)  $34,518,653 

 

23

 

 

AMMO, Inc.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

NOTE 16 – INCOME TAXES

 

The income tax provision effective tax rates were 14.9% and 482.1% for the three and nine months ended December 31, 2022, 13.0% and 4.0% for the three and nine months ended December 31, 2021, respectively. During the three and nine months ended December 31, 2022, the effective tax rate differed from the U.S. federal statutory rate primarily due to state income taxes. For the three and nine months ended December 31, 2021 the effective tax rate differed from the U.S. federal statutory rate due to our valuation. The effective tax rates increased during the three and nine months ended December 31, 2022 compared to the prior year period due to the removal of our valuation allowance.

 

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 17 – RELATED PARTY TRANSACTIONS

 

Through our acquisition of Gemini, a related party relationship was created through one of our Members of the Board of Directors by ownership of entities that transacts with Gemini. Our Accounts Receivable consisted of $182,344 in receivables from these entities at December 31, 2022. We recognized $222,300 in Marketplace Revenue for the nine months ended December 31, 2022 that was attributable to that relationship. We issued 30,000 shares of Common Stock for a total value of $105,000 to this Member of the Board of Directors as consideration for service on the Board.

 

During the nine months ended December 31, 2022, we paid $211,712 in service fees to two independent contractors and 45,000 shares in the aggregate to our advisory committee members for service for a total value of $129,705.

 

Settlement Agreement

 

On November 3, 2022, AMMO, Inc. (the “Company”) entered into a Settlement Agreement (the “Settlement Agreement”) with Steven F. Urvan and Susan T. Lokey (collectively with each of their respective affiliates and associates, the “Urvan Group”).

 

Pursuant to the Settlement Agreement, the Urvan Group has agreed to withdraw its notice of stockholder nomination of its seven director candidates (the “Urvan Candidates”) and its demand to inspect books and records, pursuant to Section 220 of the General Corporation Law of the State of Delaware, and the Company agreed to immediately increase the size of the Board from seven to nine directors and appoint Christos Tsentas and Wayne Walker (each, a “New Director” and the New Directors together with Mr. Urvan, the “Urvan Group Directors”) to the Board to serve as directors with terms expiring at the 2022 annual meeting of stockholders (the “2022 Annual Meeting”). The Company will include the Urvan Group Directors in its director candidates slate for the 2022 Annual Meeting and any subsequent annual meeting of stockholders of the Company occurring prior to the Termination Date (as defined below). The Company has agreed to not increase the size of the Board above nine directors prior to the Termination Date unless the increase is approved by at least seven directors. Mr. Wagenhals will continue to serve as a director and Chairman of the Board.

 

Unless otherwise mutually agreed to in writing by each party, the Settlement Agreement will remain in effect until the date that is the earlier of (i) 30 days prior to the earlier of (A) the deadline set forth in the notice requirements of Federal “Universal Proxy Rules” promulgated under Rule 14a-19(a) and Rule 14a-19(b) under the Securities Exchange Act of 1934, as amended (the “UPR Deadline”) relating to the Company’s 2023 annual meeting of stockholders (the “2023 Annual Meeting”) and (B) any deadline that may be set forth in the Company’s Amended and Restated Certificate of Incorporation (as amended from time to time, the “Certificate”) or Bylaws (the “Bylaws”) following the execution of the Settlement Agreement relating to the nomination of director candidates for election to the Board at the 2023 Annual Meeting, and (ii) 90 days prior to the first anniversary of the 2022 Annual Meeting (such date, the “Termination Date”). However, if the Company notifies Mr. Urvan in writing at least 15 days prior to such Termination Date that the Board irrevocably offers to re-nominate the Urvan Group Directors for election at the 2023 Annual Meeting and Mr. Urvan accepts such offer within 15 days of receipt of such notice, the Termination Date will be automatically extended until the earlier of (i) 30 days prior to the earlier of (A) the UPR Deadline relating to the Company’s 2024 annual meeting of stockholders (the “2024 Annual Meeting”) and (B) any deadline that may be set forth in the Certificate or the Bylaws following execution of the Settlement Agreement relating to the nomination of director candidates for election to the Board at the 2024 Annual Meeting, and (ii) 90 days prior to the first anniversary of the 2023 Annual Meeting. Notwithstanding the foregoing, the “Termination Date” shall not occur prior to 20 days after Mr. Urvan’s departure from the Board.

 

Pursuant to the Settlement Agreement, the Company will suspend the previously announced separation of Company into Action Outdoor Sports, Inc. and Outdoor Online, Inc., pending the further evaluation of strategic options by the Board. The Company paid approximately $500,000 of the Urvan Group’s costs, fees and expenses per the terms of the Settlement Agreement. Additionally, the Company issued 125,000 shares of Common Stock for a total value of $437,500 to an employee and issued 110,000 shares of Common Stock for a total value of $385,000 to an independent contractor as a result of termination without cause per the terms of the Settlement Agreement.

 

The foregoing summary of the Settlement Agreement does not purport to be complete and is subject to, and qualified in its entirety, by reference to the full text of the Settlement Agreement, a copy of which was previously filed as Exhibit 10.1 in the Form 8-K filed with the SEC on November 7, 2022, and incorporated herein by reference.

 

NOTE 18 – SUBSEQUENT EVENTS

 

Common Stock Issuances

 

Subsequent to the December 31, 2022, the Company issued 22,730 shares pursuant the exercise of warrants for a total value of $45,460 and cancelled 25,000 shares previously issued as employee stock awards for a total value of $87,500.

 

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 corporation, and its wholly owned consolidated subsidiaries.

 

Overview

 

AMMO, Inc., owner of the GunBroker.com Marketplace, the largest online marketplace serving the firearms and shooting sports industries, and a vertically integrated producer of high-performance ammunition and premium components began its operations in 2016.

 

Through our GunBroker.com Marketplace segment (acquired in April 2021), we allow third party sellers to list items consisting of firearms, hunting gear, fishing equipment, outdoor gear, collectibles, and much more on our site, while facilitating compliance with federal and state laws that govern the sale of firearms and restricted items. This allows our base of over 7.6 million users to follow ownership policies and regulations through our network of over 35,000 federally licensed firearms dealers as transfer agents. The nature and operation of the Marketplace as an online auction and sales platform also affords our Company a unique view into the total domestic market for the purpose of understanding sales trends at a granular level across all elements of the outdoor sports and shooting space. Our vision is to expand the services on GunBroker.com and to become a peer to those in our industry. In the short term, we will be implementing the following services;

 

● Payment Processing - facilitating payment between parties allowing sellers of all sizes to offer fast and secure electronic payments and allowing buyers to experience the ease of using a single form of payment for all items purchased,

 

● Carting Ability - allowing our buyers to purchase multiple items from multiple sellers at one point in time, and

 

● GunBroker.com Analytics – through the compilation and refinement of vast Marketplace data, we plan to offer domestic market analytics to our industry peers to allow them to better manage their businesses.

 

Through our Ammunition segment, we are tailoring our focus to build a new future for our manufacturing operations focused on premium pistol and rifle ammunition and supporting industry partners for manufactured components. We will continue to leverage our proprietary brands like Streak Visual AmmunitionTM and Stelth subsonic ammunition and extend our product offering with premium rifle lines and brands that complement our technologically innovative heritage. We also continue to ensure dynamic performance under the exacting standards of the US military complex in support of our cutting-edge developmental ammunition programs as we seek out and effectively execute upon new governmental-based opportunities.

 

25

 

 

In September of 2022, we began operating out of our new 185,000 square foot manufacturing facility. This new, state-of-the-art ammunition production facility is part of our commitment to the continuing development of differentiated, cutting-edge technology.

 

Results of Operations

 

Our financial results for the three and nine months ended December 31, 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. We experienced a 13.2% decrease in our Net Revenues for the nine months ended December 31, 2022 compared with the nine months ended December 31, 2021. This was the result of decreased ammunition sales due to changes in market demand.

 

The following table presents summarized financial information taken from our condensed consolidated statements of operations for the three and nine months ended December 31, 2022 compared with the three and nine months ended December 31, 2021:

 

   For the Three Months Ended   For the Nine Months Ended 
   December 31,
2022
   December 31,
2021
   December 31,
2022
   December 31,
2021
 
   (Unaudited)   (Unaudited)   (Unaudited)   (Unaudited) 
Net Sales  $38,711,494   $64,689,186   $147,756,079   $170,167,603 
Cost of Revenues   26,184,315    42,166,320    104,257,529    102,457,775 
Gross Margin   12,527,179    22,522,866    43,498,550    67,709,828 
Sales, General & Administrative Expenses   16,860,454    11,913,045    43,272,597    33,191,175 
Income (loss) from Operations   (4,333,275)   10,609,821    225,953    34,518,653 
Other income (expense)                    
Other income (expense)   (490,842)   (189,956)   (509,998)   (446,616)
Income (loss) before provision for income taxes  $(4,824,117)  $10,419,865   $(284,045)  $34,072,037 
Provision for income taxes   (721,125)   1,351,998    1,369,427    1,351,998 
Net Income (Loss)  $(4,102,992)  $9,067,867   $(1,653,472)  $32,720,039 

 

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   For the Nine Months Ended 
   31-Dec-22   31-Dec -21   31-Dec -22   31-Dec -21 
                 
Reconciliation of GAAP net income to Adjusted EBITDA                    
Net Income (Loss)  $(4,102,992)  $9,067,867   $(1,653,472)  $32,720,039 
Provision for Income Taxes   (721,125)   1,351,998    1,369,427    1,351,998 
Depreciation and amortization   4,356,004    4,623,355    12,950,972    12,778,103 
Interest expense, net   320,439    190,319    538,191    468,404 
Employee stock awards(1)   2,106,535    1,045,125    4,457,973    2,898,250 
Stock grants   43,750    65,098    135,344    197,110 
Stock for services   -    4,200    -    4,200 
Warrant Issuance   106,909    145,508    106,909    145,508 
Other income/(expenses), net   170,403    (363)   (28,193)   (21,788)
Contingent consideration fair value   (20,326)   (359,309)   (45,572)   (362,753)
Proxy contest fees   3,983,254    -    4,724,385    - 
Tax effect(2)   (1,438,439)   (5,476,081)   (5,350,584)   (5,290,304)
Adjusted EBITDA  $4,804,412   $10,657,717   $17,205,380   $44,888,767 

 

  (1) Includes proxy contest fees of $910,000 for Employee Stock Awards issued as a result of the Settlement Agreement as discussed in our Quarterly Report on Form 10-Q.
  (2) Tax effect computed at statutory rates.

 

26

 

 

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, and non-recurring expenses incurred as a result of a proxy contest as these items are not components of our core operations.

 

We have modified our Adjusted EBITDA calculation in the current period to remove the adjustment for Excise Taxes as we believe this is a better representation of our operations. In prior periods, we included an adjustment for Excise Taxes.

 

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 and nine months ended December 31, 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.

 

27

 

 

   For the Three Months Ended   For the Nine Months Ended 
   December 31,
2022
   December 31,
2021
   December 31,
2022
   December 31,
2021
 
Proprietary Ammunition  $2,090,785   $3,784,380   $8,298,711   $6,228,348 
Standard Ammunition   18,160,180    40,285,093    82,309,106    106,401,307 
Ammunition Casings   3,041,327    3,022,944    10,661,420    10,891,897 
Marketplace Revenue   15,419,202    17,596,769    46,486,842    46,646,051 
Total Sales  $38,711,494   $64,689,186   $147,756,079   $170,167,603 

 

Sales for the three and nine months ended December 31, 2022 decreased 40% and 13%, respectively, or approximately $26 million and $22.4 million, over the three and nine months ended December 31, 2021 due to changes in market conditions. The decrease for the three month period was largely the result of a decrease of $22.1 million in sales of bulk pistol and rifle ammunition, a decrease of $1.7 million of sales of Proprietary Ammunition, and a decrease of $2.2 million generated from our marketplace, GunBroker.com, which includes auction revenue, payment processing revenue, and shipping income. The decrease for the nine month period was the result of an increase of approximately $2.0 million of sales of Proprietary Ammunition, a decrease of $24.1 million of sales in bulk pistol and rifle ammunition, and a decrease of approximately and $0.2 million of sales from our casing operations. 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 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. 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 decreased by approximately $16 million and increased $1.8 million from $42.2 million and $102.5 million to $26.2 million and $104.3 million for the three and nine months ended December 31, 2022 compared to the comparable period ended in 2021. This was the result of a significant decrease 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.

 

Gross Margin

 

Our gross margin percentage decreased to 32.4% and 29.4% from 34.8% and 39.8% during the three and nine months ended December 31, 2022, respectively, 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. 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 and nine months ended December 31, 2022, our operating expenses increased by approximately $4.9 million and $10 million over the three and nine months ended December 31, 2021 and increased as a percentage of sales from 18.4% and 19.5% for the three and nine months ended December 31, 2021 to 43.6% and 29.3% for the three and nine months ended December 31, 2022. Our operating expenses include non-cash depreciation and amortization expense of approximately $3.3 million and $9.9 million for the three and nine months ended December 31, 2022, respectively. Our operating expenses consisted of commissions related to our sales, 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 and nine months ended December 31, 2022 included noncash expenses of approximately $6.6 million and $19.0 million, respectively.

 

During the three months ended December 31, 2022, our selling and marketing expenses decreased by approximately $0.5 million, while for the nine months ended December 31, 2022 our selling and marketing expenses decreased by approximately $0.2 million, in comparison to the three and nine months ended December 31, 2021. The decrease was primarily related to decreases in sales commission due to the decrease in the sale of our products resulting of approximately $2.2 million for the nine months ended December 31, 2022.

 

Our corporate general & administrative expenses increased approximately $4.1 million and $7.0 million in the three and nine months ended December 31, 2022 from the comparable prior period due to $3.3 million and $4.0 million of respective legal and professional fees and expenses largely related to our proxy contest in the three and nine months ended December 31, 2022.The increase was also partly due to inclusion of the full nine months of Gemini expenses for the nine month period ended December 31, 2022, as compared to partial inclusion during the period ended December 31, 2021, as a result of the acquisition occurring on April 30, 2021.

 

Employee salaries and related expenses increased approximately $1.8 million and $3.5 million for the three and nine months ended December 31, 2022 compared to the comparable period ended in 2021. The increase for the nine months ended December 31, 2022 when compared to the prior period, was primary related to $1.2 million of additional payroll expenses incurred in the three months ended December 31, 2022 as a result of payments due upon termination without cause as a result of the proxy contest and as well as $1.5 million in additional stock compensation expenses.

 

Depreciation and amortization expenses for the three months ended December 31, 2022 decreased by approximately $0.4 million, and decreased for the nine months ended December 31, 2022 by approximately $0.1 million.

 

Interest and Other Expenses

 

For the three and nine months ended December 31, 2022, interest expense increased by approximately $0.3 million and $0.1 million compared with the comparable three and nine months ended December 31, 2021. The change from the prior periods was mainly due to the repayment of notes during the three and nine months ended December 31, 2022.

 

Income Taxes

 

For the three and nine months ended December 31, 2022, we recorded a provision for federal and state income taxes of approximately ($0.7) million and $1.4 million, respectively. For the three and nine months ended December 31, 2021, we recorded a provision for federal and state income taxes of approximately $1.4 million, respectively.

 

Net Income

 

We ended the three months ended December 31, 2022 with a net loss of approximately $4 million compared with a net income of approximately $9.1 million for the three months ended December 31, 2021. We ended the nine months ended December 31, 2022 with a net loss of approximately $1.6 million compared with a net income of approximately $32.7 million for the nine months ended December 31, 2021.

 

29

 

 

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 December 31, 2022, we had $27,093,614 of cash and cash equivalents, an increase of $3,812,139 from March 31, 2022.

 

Working Capital is summarized and compared as follows:

 

   December 31, 2022   March 31, 2022 
Current assets  $128,997,594   $129,691,636 
Current liabilities   28,196,795    35,823,311 
   $100,800,799   $93,868,325 

 

Changes in cash flows are summarized as follows:

 

Operating Activities

 

For the nine months ended December 31, 2022, net cash provided by operations totaled approximately $18.4 million. This was primarily the result of net loss of approximately $1.7 million, which was offset by decreases in our accounts receivable of approximately $12.2 million, decreases in prepaid expenses of approximately $1.9 million, and decreases in our accounts payable of approximately $5.8 million, increases in our inventories of approximately $8.1 million, and decreases in deposits of approximately $1.7 million. Non-cash expenses for depreciation and amortization totaled approximately $13.0 million and non-cash expenses for employee stock awards totaled $4.5 million.

 

For the nine months ended December 31, 2021, net cash used in operations totaled approximately $3.6 million. This was primarily the result of net income of approximately $32.7 million, which was offset by increases in our inventories of approximately $30.1 million, increases in deposits of approximately $13.1 million, increases in our accounts receivable of approximately $20.7 million, decreases in prepaid expenses of approximately $1.6 million, and increases in our accounts payable and accrued liabilities of $7.5 million and $1.3 million, respectively. Non-cash expenses for depreciation and amortization totaled approximately $12.8 million and non-cash expenses for employee stock awards totaled $2.9 million.

 

Investing Activities

 

During the nine months ended December 31, 2022, we used approximately $10.6 million in net cash for investing activities. Net cash used in investing activities consisted of approximately $9.3 million related to purchases of production equipment and the construction of our new manufacturing facility in Manitowoc, WI.

 

During the nine months ended December 31, 2021, we used approximately $63.3 million in net cash for investing activities. Net cash used in investing activities consisted of approximately $50.5 million used in connection with the merger of Gemini, and approximately $12.9 million related to purchases of production equipment and the construction of our new manufacturing facility in Manitowoc, WI.

 

Financing Activities

 

During the nine months ended December 31, 2022, net cash used in financing activities was approximately $3.6 million. This was the net effect of an approximate $0.8 million reduction in our Inventory Credit Facility, approximately $1.9 million from insurance premium note payments, approximately $2.2 million of Preferred Stock dividends paid, generation of approximately $57.3 million from accounts receivable factoring, which was offset by payments of approximately $56.1 million, and proceeds from our Construction Note Payable of $1.0 million.

 

30

 

 

During the nine months ended December 31, 2021, net cash used in financing activities was approximately $24.0 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 $0.9 million was generated from common stock issued for exercised warrants, the $4.0 million repayment of a note payable, and an approximate $0.9 million reduction in our Inventory Credit Facility. Additionally, approximately $86.5 million was generated from accounts receivable factoring, which was offset by payments of approximately $84.2 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 four locations that are used for our offices, production, and warehousing. As of December 31, 2022, we had $1.8 million of fixed lease payment obligations with $.6 million payable within the next 12 months. Please refer to Note 8– Leases for additional information.

 

Related Party Note Payable

 

As of December 31, 2022, we had an outstanding balance on our Related Party Note Payable of approximately $0.4 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 $0.3 million in principal and interest payments within the next 12 months. The principal balance of the Construction Note will mature on October 14, 2026.

 

Off-Balance Sheet Arrangements

 

As of December 31, 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, stock-based compensation, and warrant-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 and nine months ended December 31, 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.

 

Goodwill

 

We evaluate goodwill for impairment annually or more frequently when an event occurs or circumstances change that would more likely than not reduce the fair value of the reporting unit below its carrying amount. In testing for goodwill impairment, we may elect to utilize a qualitative assessment to evaluate whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If our qualitative assessment indicates that goodwill impairment is more likely than not, we perform a two-step impairment test. We test goodwill for impairment under the two-step impairment test by first comparing the book value of net assets to the fair value of the reporting unit. If the fair value is determined to be less than the book value or qualitative factors indicate that it is more likely than not that goodwill is impaired, a second step is performed to compute the amount of impairment as the difference between the estimated fair value of goodwill and the carrying value. We estimate the fair value of the reporting units using discounted cash flows. Forecasts of future cash flows are based on our best estimate of future net sales and operating expenses, based primarily on expected category expansion, pricing, market segment share, and general economic conditions. Due to the declines in the value of our stock price and market capitalization, we assessed qualitative factors to determine if it is more likely than not that the fair value of the Marketplace segment is less than its carrying amount. Through our analysis we determined our stock price and market capitalization decline it is not indicative of a decrease in the the fair value of our Marketplace segment and a fair value calculation using the discounted cash flows was more appropriate due to the operational performance of the reporting segment. Accordingly, the impairment of Goodwill was not warranted for the three and nine months ended December 31, 2022. As of December 31, 2022, the Company has a goodwill carrying value of $90,870,094, all of which is assigned to the Marketplace segment. However, due to declines in the value of the Company’s common stock and market capitalization, it is possible that the book values of our Marketplace segment could exceed its fair value, which may result in the recognition of a material, noncash impairment of goodwill for the year ending March 31, 2023.

 

31

 

 

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 December 31, 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 December 31, 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 October 1, 2022 to December 31, 2022, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

32

 

 

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

 

Issuances

 

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.

 

During the three months ended December 31, 2022, the Company issued 150,000 warrants to purchase 150,000 shares of common stock at an exercise price of $0.01 for services provided to the Company. The total value of the warrants were $427,639.

 

There were no other unregistered sales of the Company’s equity securities during the quarter ended December 31, 2022 that were not previously reported in a Current Report on Form 8-K.

 

Share Repurchases

 

On February 8, 2022, the Company announced that its Board of Directors approved a share repurchase program (the “Share Repurchase Program”), providing for the repurchase of up to $30 million of the Company’s outstanding shares of common stock. The share repurchase program expires on February 7, 2023.The Share Repurchase Program commenced in December 2022.

 

Under the Share Repurchase Program, the Company is authorized to repurchase shares through open market purchases, privately-negotiated transactions, accelerated share repurchases or otherwise in accordance with applicable federal securities laws, including through Rule 10b5-1 trading plans and under Rule 10b-18 of the Securities Exchange Act of 1934, as amended. The repurchases have no time limit and may be suspended or discontinued completely at any time. The specific timing and amount of repurchases will vary based on available capital resources and other financial and operational performance, market conditions, securities law limitations, and other factors. The repurchases will be made using the Company’s cash resources.

 

The Company made the following purchases of its equity securities in December 2022.

 

Period  Total Number of Shares Purchased   Average Price Paid per Share   Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs   Approximate Dollar Value of Shares that May Yet Be Purchased Under the Programs 
December 1, 2022 to December 31, 2022   150,000   $1.92    150,000   $29,700,000 
                     
Total   150,000         150,000   $29,700,000 

 

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

 

None

 

ITEM 4. MINE SAFETY DISCLOSURES

 

Not applicable

 

33

 

 

ITEM 5. OTHER INFORMATION

 

None

 

ITEM 6. EXHIBITS

 

Exhibit No.   Exhibit
     
10.1*   Exclusive License Agreement between AMMO Technologies Inc. and University of Louisiana at Lafayette, dated November 16, 2017, as amended in 2018 and 2022

10.2

  Settlement Agreement, by and among AMMO, Inc., Steven F. Urvan and Susan T. Lokey, dated November 3, 2022 (incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K filed on November 7, 2022)
10.3   Amendment to Settlement Agreement, by and among AMMO, Inc., Steven F. Urvan and Susan T. Lokey, dated November 21, 2022 (incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K filed on November 22, 2022)
10.4*   Employment Agreement of Jared R. Smith, dated December 15, 2022
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.

 

34

 

 

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: February 14, 2023 By: Fred W. Wagenhals, Chief Executive Officer

 

    /s/ Robert D. Wiley
Dated: February 14, 2023 By: Robert D. Wiley, Chief Financial Officer

 

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