PERCENTAGESDisaggregated Revenue Information

The following table represent a disaggregation of revenue from customers by segment. We attribute net sales to segments by product types; ammunition and ammunition casings. The Company notes that revenue recognition processes are consistent between product 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 type.

AMMO, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2019Ammunition products are sold through “Big Box” retailers, manufacturers, local ammunition stores, and March 31, 2019

(Unaudited)shooting range operators. We also sell direct to customers online. In contrast, our ammunition casings products are sold to manufacturers.

Advertising Costs

We expense advertising costs as they are incurred. We incurred advertising of $200,805$87,167 and $295,422$94,213 for the three and six months ended SeptemberJune 30, 2020 and 2019, respectively.

Inventories

We state inventories at the lower of cost or market.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.

AMMO, Inc.

NOTES TO 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 seventen years.

Compensated Absences

We accrue a liability for compensated absences in accordance withAccounting Standards Codifications 710 – Compensation – General.

Stock-Based Compensation

We account for stock-based compensation at fair value in accordance with SFAS No. 123 and 123 (R) (ASC 718). There were 315,000180,916 shares of common stock issued to employees, members of the Board of Directors, and members of the Advisory Committee for services during the three monthsquarter ended SeptemberJune 30, 2019.2020.

On MayEffective April 1, 2018,2020, we entered into an employment agreement with Robert D. Wiley, Chief Financial Officer, that included, among other provisions, an equity grant of 100,00033,333 shares of restricted common stock each year for three years that vests at the rate of 33,3338,333 shares annually for three years.per quarter. The $250,000 compensation value is being recognized on a straight-line basis each year over the three-year period covered by the agreement.

From September 2018 through March 2019,2020, we entered into sevensix separate employment agreements that included in total, among other provisions, equity grants of 535,000473,332 shares of restricted common stock that vests annually over the next fourthree years. The total compensation value of $1,376,000 is being recognized on a straight-line basis over the periods covered by each agreement, up to four years.

Concentrations of Credit Risk

Accounts at banks are insured by the Federal Deposit Insurance Corporation (“FDIC”) up to $250,000. As of SeptemberJune 30, 2019,2020, 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. We currently have substantial net operating loss carryforwards. We have recorded a valuation allowance equal to the net deferred tax assets due to the uncertainty of the ultimate realization of the deferred tax assets.

Furthermore, the Coronavirus Aid, Relief and Economic Security Act (“CARES Act”) was signed into law on March 27, 2020. The CARES Act was enacted in response to the COVID-19 pandemic and contains numerous income tax provisions, such as relaxing limitations on the deductibility of interest, technical corrections to tax depreciation methods for qualified improvement property and net operating loss carryback periods. The Company is implementing applicable benefits of the CARES Act, such as deferring employer payroll taxes and evaluating potential employee retention credits.

AMMO, INC.Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2019 and March 31, 2019

(Unaudited)

Contingencies

Certain conditions may exist as of the date the 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 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 controls internal controls, and that the individual was the victim of retaliation and constructive discharge.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 of up 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 matter is currently the subject of administrative investigation by the DOL via the Occupational Safety and Health Administration. The Company filed a timely Position Statement with the DOL in October of 2019 in response to the Complaint. The Company disputes the allegations of wrongdoing and believes the matters raised in the Complaint are without merit and therefore has and will continue to aggressively defend its interests in this matter. On February 4, 2020, the Company filed suit against a former employee for violating merger agreements with SW Kenetics, Inc., employment agreements, and by unlawfully retaining property belonging to the Company following their termination. On March 11, 2020, the former employee filed a counterclaim against the Company citing breach of contract, breach of implied covenant of good faith and fair dealing, unjust enrichment and declaratory judgement. The Company plans to aggressively pursue its offensive claims in order to recover economic damages as a result of its claims while seeking dismissal of the counterclaim. There were no other known contingencies at SeptemberJune 30, 2019.

2020.

In May 2014, FASB issued ASU 2014-09, “Revenue from Contracts with Customers”. This ASU is a comprehensive new revenue recognition model that requires a company to recognize revenue to depict the transfer of goods or services to a customer at an amount that reflects the consideration it expects to receive in exchange for those goods or services. The revised effective date for this ASU is for annual and interim periods beginning on or after December 15, 2017, and early adoption will be permitted, but not earlier than the original effective date of annual and interim periods beginning on or after December 15, 2016, for public entities. We adopted ASU 2014-09 as of January 1, 2018, and it did not have a material impact on the Company’s consolidated results of operations, financial position or cash flows for the period ended September 30, 2019.AMMO, Inc.

Sales are initiated in three ways –

Once a customer’s order is received a sales order is generated by authorized sales or management personnel. Once approved for shipping, the sales order is entered, the inventory control department will pull the purchased items from the inventory or if needed will request the manufacture of a specific product. When the items that were ordered are available for shipment, the merchandise is prepared for shipping and shipped by FedEx or common carrier.

All sales are recorded upon shipment and, depending on credit worthiness of customer, the payment terms will vary from thirty (30) to sixty (60) days. No refunds are allowed on any product shipped.

Each product manufactured by the Company has standard specifications and performance objectives. The Company has an extensive product testing program and, if the Company were given notice of a product defect by a customer, the Company would request the return of the product so that the manufacturing defect could be identified. From inception to March 31, 2019, the Company has had no returned products related to product warranty.

The revenue recognition procedures set forth above have been used by the Company since its inception and are consistent with requirements of ASC 606 “Revenue from Contracts with Customers”.

In February 2016, the FASB issued ASU 2016-02 – “Leases (Topic 842)” Under ASU 2016-02, entities will be required to recognize lease asset and lease liabilities by lessees for those leases classified as operating leases. Among other changes in accounting for leases, a lessee should recognize in the statement of financial position a liability to make lease payments (the lease liability) and a right-of-use asset representing its right to (and a lessor) should include payments to be made in optional periods only if the lessee is reasonably certain to exercise an option to extend the lease or not to exercise an option to terminate the lease. Similarly, optional payments to purchase the underlying asset should be included in the measurement of lease assets and lease liabilities only if the lessee is reasonably certain to exercise that purchase option. The amendments in ASU 2016-02 will become effective for fiscal years beginning after December 15, 2018, including interim periods with those fiscal years for public business entities. We adopted Topic 842 as of April 1, 2019.

On June 20, 2018, the FASB expanded the scope of Accounting Standards Codification (ASC) 718, Compensation – Stock Compensation, to include share-based payments to nonemployees for goods and services. The accounting board said the amendments in Accounting Standards Update (ASU) No. 2018-07, Compensation – Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting, align the guidance for stock compensation to employees and nonemployees. The amended guidance replaces ASC 505-50, Equity – Equity-Based Payments to Non-Employees. We anticipate that this ASC will not have a material effect on the Company’s financial statements.

The amendments in ASU No. 2018-07 apply “to all share-based payment transactions in which a grantor acquires goods or services to be used or consumed in a grantor’s own operations by issuing share-based payment awards,” the FASB said. But the amended guidance does not cover stock compensation that is used to provide financing to the company that issued the shares or stock awards tied to a sale of goods or services as part of a contract accounted for according to ASC 606, Revenue From Contracts With Customers.

The amendments are effective for public companies for fiscal years that begin after December 15, 2018, and the quarterly and other interim periods in those years, the FASB said the amended guidance can be applied before it becomes effective, but businesses are not permitted to use the guidance in ASU No. 2018-07 before they have implemented ASC 606. We have evaluated the effect of the adoption of ASU 2018-07 will have on our consolidated results of operations, financial position or cash flows and determine the effects will not be material to the Company’s financial statements.

Management does not believe that any other recently issued, but not yet effective, accounting standards could have a material effect on the accompanying financial statements. As new accounting pronouncements are issued, we will adopt those that are applicable under the circumstances.

AMMO, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2019 and March 31, 2019

(Unaudited)

Loss Per Common Share

We calculate basic loss 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, using various methods, such as the treasury stock or modified treasury stock method, in the determination of dilutive shares outstanding during each reporting period. We have issued warrants to purchase 8,853,4328,441,798 shares of common stock. All weighted average numbers were adjusted for the reverse stock split and merger transaction. Due to the loss from operations in the three and six months ended SeptemberJune 30, 20192020 and 2018,2019, there are no common shares added to calculate the dilutive EPS for those periods as the effect would be antidilutive. The Company excluded warrants of 8,441,798 and 8,646,216 for the three months ended June 30, 2020 and 2019, respectively, from the weighted average diluted common shares outstanding because their inclusion would have been antidilutive.

NOTE 34 – INVENTORIES

At SeptemberJune 30, 20192020 and March 31, 2019,2020, the inventory balances are composed of:

NOTE 45 – PROPERTY AND EQUIPMENT

We state property and 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 seventen 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 selling, general, and administrative expenses. 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.

AMMO, INC.Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2019 and March 31, 2019

(Unaudited)

Property and equipment consisted of the following at SeptemberJune 30, 20192020 and March 31, 2019:2020:

Depreciation Expense for the three and six months ended SeptemberJune 30, 2020 and 2019 totaled $676,053 and 2018 totaled $627,492, $81,412, $1,210,166 and $136,335,$582,674, respectively.

NOTE 56 – 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 SeptemberJune 30, 2019,2020, the outstanding balance of the Factoring Liability was $1,036,273.$1,907,788. Interest expense recognized on the Factoring Liability was $40,846,$114,060, including $25,000$37,500 of amortization of the commitment fee. There was no interest expense for the three month period ending June 30, 2019 as this transaction was not yet consummated.

On June 17, 2020, this agreement was amended which extended the maturity date to June 17, 2022.

NOTE 67 – 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. As of June 30, 2020, the outstanding balance of the Inventory Credit Facility was $1,758,003. Interest expense recognized on the Inventory Credit Facility was $7,490, including $2,917 of amortization of the annual fee. There was no interest expense for the three month period ending June 30, 2019 as this transaction was not yet consummated.

NOTE 8 – LEASES

We lease office, manufacturing, and warehouse space in Scottsdale and Payson, AZ and Manitowoc, WI under contracts we classify as operating leases. None of our leases are financing leases. The Payson lease has an option to renew for five years, and the Manitowoc lease has an option to renew for the three years. As of SeptemberJune 30, 2019,2020, we are fairly certain that we will exercise the renewal options on both leases,option, and we have included such renewal optionsoption in the lease liabilities and the disclosures herein. The Scottsdale lease does not include a renewal option. As of June 26, 2020, the Company entered into an amended agreement that modified the Manitowoc lease to monthly payments of $34,071 and decrease the term to March 2025. The agreement does not contain a renewal option. Accordingly, we modified our Right of Use Assets and Operating Lease Liabilities by $737,680.

As of SeptemberJune 30, 2019,2020, the total Right of Use Assets and Operating Lease Liabilities on the Balance Sheet were $2,603,745 and $2,656,589, respectively. The Operating Lease Liabilities were net of current portionportions of our operating lease liability was $489,946 and is reported as a current liability.$480,470 at June 30, 2020.

Consolidated lease expense for the sixthree months ended SeptemberJune 30, 20192020 was $285,815$184,769 including $117,243$176,673 of operating lease expense and $168,542$8,095 of other lease associated expenses such as association dues, taxes, utilities, and other month to month rentals.

AMMO, Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The weighted average remaining lease term and weighted average discount rate for operating leases were 4.7 years and 10.0%, respectively.

Futures minimum lease payments under non-cancellable leases as of SeptemberJune 30, 20192020 are as follows:

Right of Use Assets and Operating Lease Liabilities on the Balance Sheet:

NOTE 79 – CONVERTIBLE PROMISSORY NOTES

On January 9, 2019, we completed15, 2020, the issuancecompany consummated the initial closing of 10%a private placement offering whereby pursuant to the Subscription Agreements entered into by the Company with five (5) accredited investors, the Company issued certain Convertible Promissory Notes infor an aggregate purchase price of $1,650,000 and five (5) year warrants to purchase shares of the principal amountCompany’s common stock, par value $0.001 per share (“Common Stock”).

On January 30, 2020, the Company consummated the final closing of $1,710,000 to accredited investors through a private placement in exchange for cash in an equal amount. The principal amounts were raised fromwhereby pursuant to the period of October 23, 2018 to December 28, 2018. As a result ofSubscription Agreements entered into by the issuance ofCompany with five (5) accredited investors, the Company issued certain Convertible Promissory Notes the placement agent receivedfor an aggregate commissionpurchase price of $171,000,$850,000 and $5,000 in escrow fees were paid, totaling $176,000five (5) year warrants to purchase shares of Note Issuance Costs. As of March 31, 2019, we recorded $151,856 of interest expense related to the Note Issuance Costs.Company’s common stock, par value $0.001 per share.

The Maturity DateNotes accrue interest at a rate of 8% per annum and mature on October 15, 2020 and October 30, 2020. Additionally, the Notes contain a mandatory conversion mechanism whereby any principal and accrued interest on the Notes, upon the closing of a Qualified Financing (as defined in the Notes), converts into shares of the notes is the two year anniversary from the date of issuance. The holders have the option to convert the entire principal of the Convertible Promissory Note into Common Stock at a conversion price equal to $2.50 per share at any time until the Maturity Date, subject to “Qualified Financing.” Qualified Financing means the next equity round of financing of the Company that raises not less than $10,000,000 gross proceeds from institutional(s) or commercial lender(s) in the aggregate with any combination of Common Stock (valued at the close of the Trading Day on the date of the closing for the financing) or debt. In the event of Qualified Financing, the Convertible Promissory Notes will automatically convert 100% of the principal amount into Common Stock at a conversion price equal to $2.50 per share. As of March 31, 2019, we accrued $65,291 of interest expense related to the Convertible Promissory Notes.

On February 28, 2019, the company notified the holders of an offer to convert Convertible Promissory Notes and Accrued Interest intoCompany’s Common Stock at a conversion price of $2.0066.7% of the per share and receive one-half warrant exercisable at $2.40 per share for five yearspurchase price of shares or other units in conjunction with each converted share On March 29, 2019, the Company converted $1,410,000 of Convertible PromissoryQualified Financing. If a Qualified Financing has not occurred on or before the Maturity Date, the Notes and $52,065 of Accrued Interest into 731,039 shares of Common Stock and issued Warrants to purchase 365,523 shares of Common Stock. The offer ended on March 29, 2019 at 11:59 PM. As a result of the conversion of the Convertible Promissory Notes, the Company accrued $42,300 for a 3% cash conversion fee on the principal converted payable to the placement agent, Paulson Investment Company. Additionally, $118,351 of Unamortized Note Issuance Costs were amortized and $358,800 of Interest Expenses related to the reduction in conversion price were recognized as result of the conversions.

The holders that did not elect to convert their notes during this period have the option to convert their entire principal of the Convertible Promissory Note into Common Stock per the terms of the original agreement.

As of March 31, 2019, there was $300,000 in principal remaining and $23,145 of Unamortized Note Issuance Costs.

On June 5, 2019, the remaining $300,000 of Convertible Promissory Notes were mandatorily convertedshall become convertible into shares of our common stock pursuant to the terms of the Note. The Company converted $300,000 of Convertible Promissory Notes and $18,226 of Accrued Interest were converted into 127,291 shares ofCompany’s Common Stock at a conversion price that is equal to 50.0% of $2.50. the arithmetic mean of the VWAP in the ten consecutive Trading Days immediately preceding the Maturity Date. The Notes contain customary events of default. If an Event of Default occurs, interest under the Notes will accrue at a rate of fifteen percent (15%) per annum and the outstanding principal amount of the Notes, plus accrued but unpaid interest, liquidated damages and other amounts owing with respect to the Notes will become, at the Note holder’s election, immediately due and payable in cash.

The Company accrued $9,000analyzed embedded conversion options of the convertible notes at issuance to determine whether the embedded conversion options should be bifurcated and accounted for as derivative liabilities or if the embedded conversion options contain a beneficial conversion feature. The Company notes that this determination must be performed at each balance sheet date and makes it possible for certain instruments to be reclassified between debt and equity at different points in their life. The Company determined that it will defer recognition of its accounting until such notes become convertible. Additionally, the Company determined that the embedded conversion options do not require bifurcation and treatment as derivative liabilities, but they included contingent beneficial conversion features that are indeterminable on the commitment date. The Company notes the embedded conversion options will be accounted for and recognized, if necessary, when the contingencies are resolved (the date of a Qualified Financing or during the 10 days prior to the Maturity Date). Through June 30, 2020, a Qualified Financing had not occurred and the Note is not yet convertible under the Voluntary Conversion Option and, as a result, the contingencies have not been resolved, such that the Company concluded that no measurement or recognition of the beneficial conversion feature was required as of June 30, 2020.

Pursuant to the Subscription Agreements, each Investor will receive the number of Warrants to purchase shares of Common Stock equal to the quotient obtained by dividing 50% of the principal amount of the Note by the Conversion Price of the Note. The Warrants are exercisable at the per share purchase price of shares or other units in the Qualified Financing. If a Qualified Financing has not occurred on or before the Maturity Date, the warrants shall become exercisable at a price per share that is equal to the closing ten-day VWAP in the ten trading days immediately preceding the Maturity Date (the “Exercise Price”). The Warrants contain an anti-dilution protection feature, to adjust the Exercise Price if shares are sold or issued for a 3% cash conversion fee onconsideration per share less than the principal converted payable to theexercise price then in effect.

Joseph Gunnar & Co., LLC acted as placement agent Paulson Investment Company.for the Offering. The Placement Agent received cash compensation of $200,000 and is scheduled to be issued five (5) year warrants to purchase such number of shares of Common Stock equal to five percent (5%) of the shares underlying the Notes and the Warrants, at an exercise price equal to 125% of the Conversion Price of the Notes, which price shall not be known until the earlier of the Maturity Date or the closing of the Qualified Financing.

As of June 30, 2020, the key terms of the investor and placement agent warrants are still unknown such that there is still no grant of the warrants for accounting purposes. The Company will determine the fair value of the warrants at the time the key terms of the Warrants become known and the Warrants are issued.

AMMO, INC.Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2019 and March 31, 2019

(Unaudited)

NOTE 810 – NOTES PAYABLE – RELATED PARTY

In connection with the acquisition of the casing division of Jagemann Stamping Company, a $10,400,000 promissory note was executed. The promissory note, under which $500,000 was paid on March 25, 2019 using funds raised for the acquisition, had a remaining balance at March 31, 2019 of $9,900,000. On April 30, 2019, the original due date of the note was subsequently extended to April 1, 2020. The note bears interest per annum at approximately 4.6% payable in arrears monthly until October 1, 2019 when the interest rate increases to 9% per annum payable monthly until principal and accrued interest are paid in full.monthly. In May of 2019, the Company paid $1,500,000 on the balance of the note. As of SeptemberJune 30, 2019,2020, we recognized interest of $203,820$25,949 related to the note. The note is secured by all the equipment purchased from Jagemann Stamping Company.

Post-closing of the transaction, it was made apparent that certain equipment that was agreed to be delivered free and clear by the Seller was not achievable as Seller was not able to purchase equipment that Seller had leased. Accordingly, the remaining value of the promissory note was reduced by $2,596,200. As a result of the change to the purchase price of the transaction, the Company reduced Equipment for a net value of $1,871,306, decreased Other Intangible Assets by $766,068, increased Accounts Receivable by $31,924, and recorded an increase to Deposits for $9,250 worth of equipment that the Company agreed to transfer back to Seller. Consequently, accumulated amortization has decreased by $159,530. Additionally, the Company entered into a lease to gain possession of the assets that were originally to be transferred.

On June 26, 2020, the Company, Enlight Group II, LLC (“Enlight”), the Company’s wholly owned subsidiary and Jagemann Stamping Company’s (“JSC”) entered into a Settlement Agreement pursuant to which the parties mutually agreed to settle all disputes and mutually release each other from liabilities related to the Amended APA occurring prior to June 26, 2020. Pursuant to the Settlement Agreement, the Company shall pay JSC $1,269,977 and shall provide JSC with: (i) two new promissory notes, a note of $5,803,800 related to the Seller Note and note of $2,635,797 for inventory and services, which was valuedreclassed from accounts payable, both with a maturity date of August 15, 2021, (ii) general business security agreements granting JSC a security interest in all personal property of the Company. Pursuant to the Notes, the Company is obligated to make monthly payments totaling $204,295 to JSC. In addition, the Notes have a mandatory prepayment provision that comes into effect if the Company conducts a publicly registered offering. Pursuant to such provision, the Company: (a) upon the closing of an Offering of less than $10,000,000 would be obligated to pay the lesser of ninety percent (90%) of the Offering proceeds or seventy (70%) of the then aggregate outstanding balance of the Notes; and (b) upon the closing of an Offering of more than $10,000,000 would be obligated to pay one hundred percent (100%) of the then aggregate outstanding balance of the Notes. The Company was granted an option to repurchase up to 1,000,000 of the shares of the Company’s common stock issued to JSC under the Amended APA at $18,869,541a price of $1.50 per share through April 1, 2021 so long as there are no defaults under the Settlement Agreement. The total balance of the two Notes due to JSC as of June 30, 2020 is $8,235,302.

As a result of the Settlement Agreement, the Company agreed to not receive $1,000,000 in Construction in Progress that the accompanying financial statements.

parties had previously agreed to exchange. As a result, the Company recognized a loss in operating expenses for the three months ended June 30, 2020.

On May 3, 2019, the Company entered into a promissory note of $375,000 with a shareholder of the Company. The original interest rate was the applicable LIBOR Rate. The promissory note bears interesthas since been amended and the balance at a per annum of 2.56%.June 30, 2020 was $260,000. The note’s original a maturity date of August 3, 2019 was extended to October 31, 2019.September 18, 2020. The amended note bears interest at 1.25% per month. The Company made $18,195 in principal payments in the three months ended June 30, 2020. We haverecognized $10,002 of interest expenses related to the note during the three months ended June 30, 2020. Subsequent to June 30, 2020, the related party note and accrued interest was paid in full.

In December of 2019, the Company entered into a Promissory Note of $90,000 with Fred Wagenhals, the Company’s Chief Executive Officer and Chairman of the Board of Directors. The Note originally matured on June 12, 2020 and had an interest rate at the applicable LIBOR Rate. The promissory note has since been amended and the balance at June 30, 2020 was $131,536 and the amended maturity date is September 18, 2020. The Company made $25,000 in principal payments in the three months ended June 30, 2020. The amended note bears interest at 1.25% per month. We recognized $5,185 of interest expense on the note for the three months ended June 30, 2020. Subsequent to June 30, 2020, the related party note and accrued interest was paid in full.

AMMO, Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 11 – PAYCHECK PROTECTION NOTES PAYABLE

In April of $4,375.2020, the Company determined it was necessary to obtain additional funds as a result of the foregoing uncertainty cause by COVID-19. The Company received approximately $1.0 million in funds through itself and its wholly owned subsidiary Jagemann Munition Components, which was established under the federal Coronavirus Aid, Relief, and Economic Security Act and is administered by the U.S. Small Business Administration. The Company received approximately $600,000 from Western State Bank and its wholly owned subsidiary, Jagemann Munition Components, received approximately $400,000 from BMO Harris. The Paycheck Protection Notes provide for an interest rate of 1.00% per year and matures two years after the issuance date. Principal and accrued interest are payable monthly in equal installments commencing on the date that is six months after the date funds are first disbursed on the loan and continuing through the maturity date, unless the Paycheck Protection Notes are forgiven. To be available for loan forgiveness, the Paycheck Protection Note may only be used for payroll costs, costs related to certain group health care benefits and insurance premiums, rent payments, utility payments, mortgage interest payments and interest payments on any other debt obligation that existed before February 15, 2020.

NOTE 912 – CAPITAL STOCK

During the sixthree month period ended SeptemberJune 30, 2019,2020, we issued 1,738,5331,204,683 shares of common stock as follows:

In December of 2018, we entered into a placement agreement to secure equity capital from qualified investors to provide funds to our operations.The offering consisted of Units priced at $2.00, which included one share of common stock and one five-year warrant to purchase an additional half-share of common stock for an exercise price of $2.40 per share. Effectively, every two units purchased provided the investor with a five-year warrant at an exercise price of $2.40 per share. Units sold under this agreement totaled 1,232,770 shares of common stock and 616,385 warrants for $2,465,540 for the six month period ended September 30, 2019.

For services provided under the placement agreements, the placement agent collected a 12% cash fee on the sale of every Unit and a fee payable in warrants equaling 12% of the total Units sold. These warrants have a term of five years and an exercise price of $2.00 per share. The cash fee totaled $285,981 for the six month period ended September 30, 2019, including reimbursed expenses.

At SeptemberJune 30, 2019,2020, we recorded a stock subscription receivable of $1,840,910 for 1,000,000 shares of Common Stock sold to an Investor for $1,750,000 or $1.75 per share and 45,455 shares issued to investors for exercised warrants at $2.00 per share for $90,910.

At June 30, 2020, outstanding and exercisable stock purchase warrants consisted of the following:

As of SeptemberJune 30, 2019,2020, we had 8,853,4328,441,798 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 an aggregate of 349,060 shares of Common Stock at an average price of $2.50 per share until March 2020; (2) warrants to purchase 966,494 shares of Common Stock at an exercise price of $1.65 per share until April 2025; (3)(2) warrants to purchase 4,641,7454,579,171 shares of our Common Stock at an exercise price of $2.00 per share over the next three to five years; and (4)(3) warrants to purchase 2,896,133 shares of Common Stock at an exercise price of $2.40 over the next five years.

NOTE 13 – INCOME TAXES

As of June 30, 2020, we had net operating loss carryforwards of approximately $31,116,173, which will expire beginning at the end of 2036. A valuation allowance has been provided for the deferred tax asset as it is uncertain whether the Company will have future taxable income.

The Company’s effective tax rates were 0% and 0% for the three months ended June 30, 2020 and 2019, respectively. During the three months ended June 30, 2020 and 2019, the effective tax rate differed from the U.S. federal statutory rate primarily due to the change in the 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, and 2020 are subject to audit.

NOTE 10 -14 – SUBSEQUENT EVENTS

As of October 8, 2019, the Company was issued a patent for its previously pending patent for modular projectiles.

Subsequent to SeptemberJune 30, 2019,2020, the Company issued 14,500, valued at $29,00011,500 shares of Common Stock to employees for employee stock compensation.$14,375 or $1.25 per share. Additionally, the Company issued 157,143 shares of Common Stock to an investor for $275,000 or $1.75 per share.

On July 31, 2020, the Company amended its Revolving Loan and Security Agreement to increase the maximum inventory loan amount to $2,250,000.

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, Selected 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 includeincluded in Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, and Reports filed on Form 8-K.the section titled Risk Factors contained herein.

In our Form 10-K, Form 10-Q, and Form 8-K filings with the Securities and Exchange Commission, references to “AMMO, Inc.”, “AMMO”, “the Company”, “we,” “us,” “our” and similar terms refer to AMMO, Inc. and its wholly owned operating subsidiaries AMMO Munitions, Inc., Enlight Group II, LLC d/b/a Jagemann Munition Components (“Jagemann Munition Components”), SNI, LLC and AMMO Technologies, Inc. (inactive).

Overview

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

When we began our operations in early 2017, our focus was to sell the inventory of ammunition we acquired through an asset purchase of a private company located in northern Arizona. The inventory consisted primarily of standard pistol and rifle rounds and two proprietary lines that had not received much traction in the market. We sold the remaining inventory at a discount during 2017 to help fund the development of our manufacturing operations. This accounted for the majority of our sales through the end of the third quarter of the calendar year of 2017.

With the prior inventory successfully sold and new products being produced, our next objective for the calendar year ending December 31, 2017 was to identify ammunition technologies unique to the industry that could be quickly implemented by our manufacturing team. We met with several organizations and projectile manufacturers looking for innovative products that could be used to establish us as a niche or high-end manufacturer for the recreational shooter, the American hunter, law enforcement, and military forces. Among the first of these technologies to meet our requirements was STREAK VISUAL AMMUNITION™, a one-way luminescent or OWL Technology application. We believe our STREAK VISUAL AMMUNITION™ line is the only non-incendiary tracer round in the ammunition market today. We secured the exclusive license to manufacture and sell the STREAK VISUAL AMMUNITION™ line of ammunition in 2017. We have filed for and received Trademark Protection for the STREAK VISUAL AMMUNITION™ product name from the United States Patent and Trademark Office (USPTO) on July 17, 2018 Additionally, we filed for Trademark Protection for the O.W.L. Technology^TMproduct name on June 6, 2018.

We formally introduced the STREAK VISUAL AMMUNITION™ portfolio of calibers, along with our rebranded One Precise Shot (OPS) and Stelth subsonic line of suppression ammunition, to the general public at the SHOT Show in Las Vegas held in January 2018. This product introduction resulted in the opening of major retail outlets across the United States and attracted the attention of distributors in the international community. We believe this was a critical milestone in establishing us as a significant player in technology-based ammunition.

To help promote our new products, we hired new sales and marketing personnel in late 2017, and early 2018. We also augmented our Board of Directors to include professionals who could provide guidance for our teams through their prior experience in the industries we have targeted: commercial retail – focused on the gun or hunting enthusiast; US Law Enforcement; the US Military; and international markets for both military and law enforcement. Together this team has worked to open sales channels and distribution networks and capitalize on industry relationships to introduce our products to the influencers required to grow our sales.

During the summer of 2018, we also began conversations to acquire a small technology company named SW Kenetics Inc. SW Kenetics Inc. developed an innovative line of modular projectiles primarily geared toward tactical military operations. On July 6, 2018 we signed a letter of intent to purchase their company, as we believe their designs, coupled with our STREAK or O.W.L. Technology will position us to more aptly complete for military contracts. On September 27, 2018, we entered into a definitive agreement and plan of merger to acquire SW Kenetics Inc. for a total of up to $1,500,000 in cash and issue 1,700,002 restricted shares of the Company’s common stock. The agreement specifies that $1,250,000 of the cash is deferred pending completion of specific milestones and the 1,700,002 shares of common stock are subject to claw back provisions to ensure agreed upon objective are met. The acquisition was completed on October 5, 2018.

On March 15, 2019, Enlight Group II, LLC, a wholly owned subsidiary of AMMO, Inc., completed its acquisition of 100% of the assets of Jagemann Stamping Company’s ammunition casing, projectile manufacturing and sales operations pursuant to the terms of the Amended and Restated Asset Purchase Agreement dated March 14, 2019. In accordance with the terms of the Amended APA, Enlight Group II, LLC paid Jagemann Stamping Company a combination of $7,000,000 in cash, $10,400,000 delivered in the form of a Promissory Note, and 4,750,000 shares of AMMO, Inc. common stock.

This acquisition was a critical element in the Company’s long-term strategy as it secures its supply chain for these important components and creates a more competitive pricing structure that it can leverage across all its targeted markets. This also greatly enhances the Company’s plant capacity and technical expertise required for the further development of military grade projectiles.

The Company’sinnovativeCompany’s innovative line of match grade armor piercing (AP) and hard armor piercing incendiary (HAPI) tactical rounds, are the centerpiece of the Company’s strategy to address the unique needs the armed forces community demands are met by their equipment. Following AMMO’s acquisition of Jagemann Casings in March, the Company has aligned its manufacturing operations to support the large caliber demand from military personnel, such as the 12.7mm and .50 caliber BMG configurations.

The focus for our 2020 fiscal year is to continue to expand our brand presence into the markets identified above and to continue to grow our sales within our targeted markets. We intend to do this through establishing key strategic relationships, enrolling in government procurement programs, establishing relationships with leading law enforcement associations and programs, expanding distributor channels, and revitalized marketing campaigns.

We also intend to increase our product offerings through potential acquisitions that bring new technologies that provide solutions for United States Military requirements. Our first step in this process is the addition of equipment to support the manufacture of 50 caliber ammunition. Not only is there an increasing demand for quality ammunition in this category for military applications, it also has a growing demand from commercial markets, and gun enthusiasts.

Our addressable market includes the 2.6 million law enforcement officers around the world (800,000 domestically and 1.8 million internationally) who annually recertify with their firearms; 1.3 million enlisted personnel in the U.S. Armed Forces, and more than 30 million handgun owning households in the United States with later expansion to international markets for civilian purchasers which, based on industry statistics, represents addressable revenue of billions of dollars annually. Each of these markets has unique challenges or barriers to entry. We believe with the strategies we are developing; we will be well positioned to grow our future market share based on our commitment to innovation and meeting the changing needs and demographics of ammunition buyers.

Our History

Our ammunition manufacturing business has been fully operational for just over two years. Although our corporate entity commenced in 1990 as a textile manufacturer and importer, then called Retrospettiva, our manufacturing operations formally began in March of 2017 when we acquired our ammunition business.

Results of Operations

Our financial results forFor the three and six months ended SeptemberJune 30, 20192020 reflect our newly positioned organization. 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. Although we continue to focus on growing our top line revenue, and streamlining our operations, we did experience a decline in our gross profit margin forFor the three and six months ended SeptemberJune 30, 2019.2020. This was the result of a significant increase in depreciation and amortization expenses related to the addition of assets from the acquisition of Jagemann Stamping Company’s ammunition casing, projectile manufacturing, and sales operations (“Jagemann Casings”), sales of products that carry lower margins, as well as increases to costs of raw materials and overhead.

The following table presents summarized financial information taken from our consolidated statements of operations for the three and six months ended SeptemberJune 30, 20192020 compared with the three months ended SeptemberJune 30, 2018:2019:

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 income (loss), and other results under generally accepted accounting principles (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

Adjusted EBITDA is a non-GAAP financial measures that displays our net 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: depreciation and amortization, andloss on purchase, share-based compensation expenses.expenses, and changes to the contingent consideration fair value. We believe it is useful to exclude these non-cash expenses because the amount of such expenses in any specific period may not directly correlate to the underlying performance of our business operations.

Adjusted EBITDA as a non-GAAP financial measure also excludes other cash interest income and expense, as these items are not components of our core operations. We have not included adjustment for any provision or benefit for income taxes as we currently record a valuation allowance.

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:

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 periodsthree months ended SeptemberJune 30, 20192020 and SeptemberJune 30, 2018.2019. “Proprietary Ammunition” include those lines of ammunition manufactured by our facilities that are sold under the brand names: STREAK VISUAL AMMUNITION™, One Precise Shot (OPS), Night Ops, Jeff Rann, 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 much lower gross margins.

Sales for the three and six months ended SeptemberJune 30, 20192020 increased 102% and 167%125% or $1,491,696 and $4,540,248,$5,361,390, over the three and six months ended September 30, 2018, respectively.June, 2019. This increase was the result of $1,638,799 and $4,795,880 of sales from our recently acquired casing operations, coupled with $265,178 and $684,268$3,573,324 of respective increased sales in bulk pistol and rifle ammunition, summarized in Standard Ammunition above and a decreasean increase of $412,281 and $939,900$1,696,845 of respective sales of Proprietary Ammunition. Although Proprietary Ammunition and an increase of $91,221 of sales decreased in the current period increased from the comparable periods, managementour recently acquired casing operations. Management expects the sales of Proprietary Ammunition to 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 initiate sales to U.S. law enforcement, military, and international markets.

We added ammunition casings to our product offerings at March 15, 2019 and expect the ammunition casing sales to continue to be a significant part of our sales moving forward.

ThroughourThrough our acquisition of SWK, the Company has developed and deployed a new line of tactical armor piercing (AP) and hard armor piercing incendiary (HAPI) precision ammunition to meet the lethality requirements of both the US and foreign military customers. This line was formally launched at SHOT Show in Las Vegas, where our team demonstrated or presented the capability to more than 15 countries around the world. We continue to demonstrate our AP and HAPI ammunition to military personnel at scheduled and invite only events, resulting in increased interest and procurement discussions.

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 April 16, 2019,July 21, 2020, we received renewal forrenewed our 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 Goods Sold

Cost of goods sold increased by approximately $2.4$3.6 million and $6.2from $5.0 million to $8.6 million, respectively for the three and six months ended SeptemberJune 30, 20192020 compared with the three and six months ended SeptemberJune 30, 2018.2019. This was the result of a significant increase to non-cash depreciation related to our newly acquired casing operations, expensing of increased labor, overhead, and raw materials used to produce finished product during 20192020 as compared to 2018. Although2019. As a percentage of sales, increased,cost of goods sold decreased by 22.8% when comparing the three and six months ended September30, 2019June 30, 2020 to the three and six months ended SeptemberJune 30, 2018, they did not meet management’s expectations and did not allow2019.

Gross Margin

Our gross margin percentage increased to 11.1% from -15.2% during the three months ended June 30, 2020 as compared to the same period in 2019. This was a result of increased sales covering our covering allowing us to cover a greater percentage of our fixed manufacturing costs, which include our non-cash amortization and depreciation expense. As a percentage of sales, cost of goods sold increased by 42.7% and 35.5% from 87.1% and 87.7%, respectively for the three and six months ended September 30, 2019 to 124.3% and 118.9%, respectively for the three and six months ended September 30, 2019.

Gross Margin

Our production facility was designed to manufacture approximately 200 million rounds of ammunition a year, when fully staffed. To date, we are operating at a fraction of that volume, while maintaining equivalent quality systems, regulatory compliance, equipment and facility costs, as well as plant management.

We believe as we continue to grow sales through new markets and expanded distribution that our gross margins will also increase, as evidenced by the improvement over this time last year. Our goal in the next 12 to 24 months is to continue to improve our gross margins. This will be accomplished through the following:

Sales, General, and Administrative Operating Expenses

DuringOverall, for the three and six months ended SeptemberJune 30, 2019,2020, our sales, general, and administrativeoperating expenses increased by approximately $760,000 and $1.8 million, respectively$857,000 over the three and six months ended SeptemberJune 30, 2018, but decrease2019, and decreased as a percentage of sales from 120.8% and 136.1%69.7% for the respective three and six months ended SeptemberJune 30, 20182019 to 85.5% and 76.1%39.9% for the respective three and six months ended SeptemberJune 30, 2019. This2020. The increase was mainly related to a non-cash adjustment to recognize a loss on $1,000,000 of Construction in Progress that the Company had previously agreed to exchange with Jagemann Stamping Company. Our operating expenses was the resultincluded of non-cash amortization expense of $410,289 and $827,158approximately $410,000 for the three and six months ended SeptemberJune 30, 2019 and increased payroll expense from our newly acquired casing operations and due to2020. Our operating expenses consisted of cost for the expansion our sales and support team, 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, and trade show and marketing costs associated with introducing our new lines of ammunition. Sales, general and administrativeOperating expenses for the three months ended June 30, 2020 and six month 2019 periods included noncash stock compensationexpenses of approximately $351,000$1.7 million and $886,000.$1.1 million, respectively. We also experienced increases as a result of new investor and public relations programs, and professional fees associated with our acquisition activity, our public filings, and our efforts to uplist the Company from the OTC to a national exchange. We expect to see administrative expenditures to continue to decrease as a percentage of sales in the 20202021 fiscal year, as we leverage our work force and expand our sales opportunities.

During the three months ended June 30, 2020, our selling and marketing expenses increased by approximately $148,000. The increase was related to commission from on the sale of our products.

Our corporate general & administrative expenses decreased approximately $10,000 in the three months ended June 30, 2020 from the comparable prior period mainly due to decreased professional and legal fees in comparison to the prior period and increased general corporate expenses.

Employee salaries and related expenses decreased approximately $235,000 for the three months ended June 30, 2020 compared to the comparable period ended in 2019. This was a result of decreased expenses related to employee stock compensation of approximately $200,000.

Depreciation and amortization expenses for the three months ended June 30, 2020 decreased by $44,363 from the comparable prior period due to reduced amortization expenses in connection with the adjusted purchase price of our newly acquired subsidiary, Jagemann Munition Components.

Interest and otherOther Expenses

For the three and six months ended SeptemberJune 30, 2019,2020, interest expensesexpense increased by $197,917 and $390,481approximately $130,000 compared with the comparable three and six months in 2018.ended June 30, 2019. The increasechange from the prior period was a resultmainly due to approximately $160,000 of $29,143 of non-cash interest expense and debt discount amortization related to the Convertible Promissory Notes, $54,593 and 110,658 of non-cash interest expense related to the recognition of Right of Use assets and Lease Liabilities, and $101,611 and $253,582 of accrued interest expense in connection with related party note payablesNotes. Additionally, for the three and six months ended June 30, 2020, we recognize a loss on the purchase of Jagemann Munition Components for construction in 2019.progress that will no longer be transferred to the Company.

Net Loss

As a result of higher production, selling, and payroll expenses, and the loss on Jagemann Munition Components, we ended the three and six month periodsmonths ended SeptemberJune 30, 20192020 with respectivea net lossesloss of approximately $3.4 million and $7.3$3.1 million compared with respectivea net lossesloss of approximately $1.8$3.8 million and $3.4 for the three and six month periodsmonths ended SeptemberJune 30, 2018.2019.

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 SeptemberJune 30, 2019,2020, we had $513,738$1,017,513 of cash and cash equivalents, a decreasean increase of $1,667,508$133,239 from March 31, 2019.2020.

Working Capital is summarized and compared as follows:

Changes in cash flows are summarized as follows:

Operating Activities

For the sixthree months ended SeptemberJune 30, 2019,2020, net cash used in operations totaled $2,980,635.$1,759,980. This was primarily the result of a net loss of $7,285,662,$3,103,789, increases in our period end inventories and accounts receivable of $2,110,684 and inventories of $1,189,573 and $256,614,$1,145,584, respectively, and increases to ourin accounts payable and accrued liabilities of $2,390,233.$1,095,093 and $847,466, respectively, and a loss on Jagemann Munition Components of $1,000,000. The cash used in operations were partially offset by the benefit of non-cash expenses for depreciation and amortization of $2,242,048,$1,169,001, employee stock compensation of $506,500, stock issued for services of $200,000,$255,300, and stock grants totaling $379,694.$76,766.

For the six month periodthree months ended SeptemberJune 30, 2018,2019, net cash used in operations totaled $3,498,573.$1,747,481. This was primarily the result of a net loss of $3,361,264,$3,841,402, increases in our period end inventory of $973,399, a $140,706 decrease in accounts receivable and inventories of $1,628,595 and $780,524, respectively, and increases in depositsto our accounts payable and accrued liabilities of $132,163, much of which was used for equipment and marketing endcaps.$2,651,692. The cash used in operations were partially offset by the benefit of non-cash expenses for depreciation and amortization of $203,872,$1,068,431, employee stock compensation of $482,625, stock grants totaling $269,661 and common$333,250, stock issued for services of $200,000, and stock grants totaling $22,350.$201,512.

Investing Activities

During the three months ended SeptemberJune 30, 2019,2020, we used $426,467$471,882 in net cash for investing activities compared with $1,407,915 for the comparable period in 2018. The $426,467 of cash used to purchase fixed assets such as new production equipment and to acquire end cap displays for the sale of our product at retailers.equipment.

During the six month periodthree months ended SeptemberJune 30, 2018,2019, we used $1,407,915$250,449 in net cash for investing activities. Of the total cash used for investing activities $1,157,915 was used to purchase fixed assets such as new production equipment and leasehold improvements to expand production at our Payson, Arizona manufacturing facility, to acquire end cap displays for the sale of our product at retailers. The remaining $250,000 was used as consideration for acquiring SW Kenetics Inc.

Financing Activities

During the three months ended June 30, 2020, net cash provided by financing activities was $2,365,101. This was the net effect of $1,758,003 generated from our Inventory Credit Facility, and proceeds from our note payable. Additionally, $6,952,000 was generated from accounts receivable factoring, which was offset by payments of $7,050,191. Approximately $247,490 of cash was use for payments on related party notes payable, $129,510 toward our insurance premium note payable.

We financed our operations primarily from the issuance of equity instruments. During the sixthree months ended SeptemberJune 30, 2019, net cash provided by financing activities was $1,739,594.$355,667. This was the net effect of $2,465,540$1,797,100 generated from the sale of Common Stock, net of cash payments of $285,981$189,567 in conjunction with the Unit offerings. Additionally, $1,036,273 was generated from accounts receivable factoring and $375,000 of cash was generated from the issuance of a related party note payable, These increases to our financing activities were offset by payment of $1,500,000 on the related party note to Jagemann Stamping Company, $201,238$76,866 toward our insurance premium note payable and a $150,000$50,000 payment of our Contingent Consideration Payable.

We financed our operations primarily from the issuance of equity instruments. During the six month period ended September 30, 2018, net cash provided by financing activities was $7,222,683. This was the net effect of $3,247,030 generated from the sale of Common Stock, $4,767,625 from the exercise of warrants, net of cash payments of $719,974 to our investment banker in conjunction with the Unit offering, as well as a payment of $71,998 toward our insurance premium note payable.

Liquidity and Capital Resources

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 twelve months.year. Generally, we have financed operations to date through the proceeds of stock sales, bank financings, and related-party notes.

We adopted the Financial Accounting Standards Board’s (“FASB”) Accounting Standard Codification (“ASC”) Topic 205-40, Presentation of Financial Statements – Going Concern, which requires that management evaluate whether there are relevant conditions and events that, in the aggregate, raise substantial doubt about the entity’s ability to continue as a going concern and to meet its obligations as they become due within one year after the date that the financial statements are issued. Accordingly, management has concluded that we do not have sufficient funds to support operations within one year after the date the financial statements are issued and, therefore, we concluded there was substantial doubt about the Company’s ability to continue as a going concern.

To fund further operations, we will need to raise additional capital. We believemay obtain additional financing will be available, bothin the future through conventional financing relationships and through the continued sales of our Common Stock. However,Our ability to continue as a going concern or meet the minimum liquidity requirements in the future is dependent on its ability to raise significant additional capital, of which there can be no assurance. If the necessary financing is not obtained or achieved, we will likely be required to reduce its planned expenditures, which could have an adverse impact on the results of operations, financial condition and our ability to achieve its strategic objective. There can be no assurance that such fundingfinancing will be available on terms acceptable to usterms, or at all. We believe that our current cash on hand, coupled with alternative sources of funding, will be sufficient to satisfy intended capital expenditures, potential acquisitions and general liquidity requirements through at least the next twelve months.

Contractual Obligations

As partThe Company’s contractual obligations by maturity as of the acquisition of our business, we assumed a triple-net operating lease for our 20,000 square foot manufacturing facility located in Payson, Arizona. The terms of the lease provide for a monthly paymentJune 30, 2020 are as follows:

(1) Related Party Note Payable includes interest expenses of approximately $10,000, which includes an estimate for utilities, taxes, and repairs. This lease expires in November 2021.$764,450.

We believe this facility will be adequate to meet our needs in the near future. However, we are making plans to expand the building footprint to accommodate additional automation equipment. We intend to pay for these improvements from working capital and will amortize the costs over the remaining lease period.

The following table outlines our future contractual financial obligations associated with this lease by period in which payment is expected, as of September 30, 2019:

On October 16, 2018, we entered into a triple-net operation lease for approximately 21,000 square feet of office and warehousing space located at 7681 East Gray Road, Scottsdale, Arizona. The initial term of the of the Lease expires on December 31, 2023. The terms of the lease provide for a monthly payment of approximately $17,702, which will increase by approximately 4.4% each year.

The following table outlines our future contractual financial obligations associated with this lease by fiscal period in which payment is expected, as of September 30, 2019:

On March 14, 2019, we entered into a lease for our 50,000 square foot ammunition casing manufacturing facility located in Manitowoc, Wisconsin. The terms of the lease provide for a monthly payment of approximately $32,844. The lease expires in March of 2026 and can be renewed every three years thereafter.

The following table outlines our future contractual financial obligations associated with this lease by fiscal period in which payment is expected, as of September 30, 2019: