Docoh
Loading...

POWW AMMO

Filed: 16 Aug 21, 4:16pm

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C.

 

FORM 10-Q

 

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
  
For the quarterly period ended June 30, 2021
 
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 filerSmaller reporting company
Emerging growth company  

 

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

 

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

 

As of August 13, 2021, there were 113,153,460 shares of $0.001 par value Common Stock outstanding.

 

DOCUMENTS INCORPORATED BY REFERENCE: None.

 

 

 

 

 

 

TABLE OF CONTENTS

 

PART I 
   
ITEM 1:FINANCIAL STATEMENTS3
 Condensed Consolidated Balance Sheets as of June 30, 2021 (Unaudited) and March 31, 20213
 Condensed Consolidated Statements of Operations (Unaudited) for the three months ended June 30, 2021 and 20204
 Condensed Consolidated Statement of Shareholders’ Equity (Unaudited) for the three months ended June 30, 2021 and 20205
 Condensed Consolidated Statements of Cash flow (Unaudited) for the three months ended June 30, 2021 and 20206
 Notes to Condensed Consolidated Financial Statements (Unaudited)8
ITEM 2:MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION25
ITEM 3:QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK34
ITEM 4:CONTROLS AND PROCEDURES34
   
PART II 
ITEM 1:LEGAL PROCEEDINGS35
ITEM 1A:RISK FACTORS35
ITEM 2:UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS35
ITEM 3:DEFAULTS UPON SENIOR SECURITIES35
ITEM 4:MINE SAFETY DISCLOSURE35
ITEM 5:OTHER INFORMATION36
ITEM 6:EXHIBITS36
SIGNATURES37

 

2
 

 

PART I

 

ITEM 1. FINANCIAL STATEMENTS

 

AMMO, Inc.

CONDENSED CONSOLIDATED BALANCE SHEETS

 

  June 30, 2021  March 31, 2021 
  (Unaudited)    
ASSETS        
Current Assets:        
Cash and cash equivalents $50,972,447  $118,341,471 
Accounts receivable, net  23,800,569   8,993,920 
Due from related parties  18,657   15,657 
Inventories, at lower of cost or net realizable value, principally average cost method  27,939,525   15,866,918 
Prepaid expenses  3,460,619   2,402,366 
Total Current Assets  106,191,817   145,620,332 
         
Equipment, net  23,173,432   21,553,226 
         
Other Assets:        
Deposits  5,653,310   1,833,429 
Licensing agreements, net  29,167   41,667 
Patents, net  5,896,233   6,019,567 
Other intangible assets, net  146,452,655   2,220,958 
Goodwill  90,999,208   - 
Right of use assets - operating leases  2,675,803   2,090,162 
TOTAL ASSETS $381,071,625  $179,379,341 
         
LIABILITIES AND SHAREHOLDERS’ EQUITY        
Current Liabilities:        
Accounts payable $23,906,989  $4,371,974 
Factoring liability  1,095,989   1,842,188 
Accrued liabilities  3,789,179   3,462,785 
Inventory credit facility  258,955   1,091,098 
Current portion of contingent consideration payable  10,755,000   - 
Current portion of operating lease liability  948,894   663,784 
Current portion of note payable related party  639,636   625,147 
Insurance premium note payable  1,320,278   41,517 
Total Current Liabilities  42,714,920   12,098,493 
         
Long-term Liabilities:        
Contingent consideration payable, net of current portion  533,254   589,892 
Notes payable related part, net of current portion  700,507   865,771 
Note payable  -   4,000,000 
Operating lease liability, net of current portion  1,857,697   1,477,656 
Total Liabilities  45,806,378   19,031,812 
         
Shareholders’ Equity:        
Series A Cumulative Perpetual Preferred Stock 7.25%, ($25.00 per share, $0.001 par value) 1,400,000 shares issued and outstanding as of June 30, 2021  1,400   - 
Common stock, $0.001 par value, 200,000,000 shares authorized 113,046,766 and 93,099,067 shares issued and outstanding  at June 30, 2021 and March 31, 2021, respectively  113,047   93,100 
Additional paid-in capital  367,771,424   202,073,968 
Accumulated deficit  (32,620,624)  (41,819,539)
Total Shareholders’ Equity  335,265,247   160,347,529 
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY $381,071,625  $179,379,341 

 

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

 

3
 

 

AMMO, Inc.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

 

  2021  2020 
  For the Three Months Ended
June 30,
 
  2021  2020 
       
Net Revenues        
Ammunition sales $28,351,780  $6,411,668 
Marketplace revenue  12,272,066   - 
Casing sales  3,852,486   3,248,302 
Total Net Revenues  44,476,332   9,659,970 
Cost of Revenues, for the three months ended June 30, 2021 and 2020 includes depreciation and amortization of $905,790 and $758,502, respectively, and federal excise taxes of $2,397,771 and $641,123, respectively  25,505,438   8,588,565 
Gross Profit  18,970,894   1,071,405 
         
Operating Expenses        
Selling and marketing  1,165,849   369,622 
Corporate general and administrative  3,156,597   1,088,984 
Employee salaries and related expenses  2,356,873   982,489 
Depreciation and amortization expense  2,611,061   410,499 
Loss on purchase  -   1,000,000 
Total operating expenses  9,290,380   3,851,594 
Income/(Loss) from Operations  9,680,514   (2,780,189)
         
Other Expenses        
Other income  21,425   - 
Interest expense  (165,279)  (323,600)
Total other expenses  (143,854)  (323,600)
         
Income (Loss) before Income Taxes  9,536,660   (3,103,789)
         
Provision for Income Taxes  -   - 
         
Net Income/(Loss)  9,536,660   (3,103,789)
         
Preferred Stock Dividend  (337,745)  - 
         
Net Income/(Loss) Attributable to Common Stock Shareholders $9,198,915  $(3,103,789)
         
Net Income/(Loss) per share        
Basic $0.09  $(0.07)
Diluted $0.08  $(0.07)
         
Weighted average number of shares outstanding        
Basic  105,876,867   46,247,654 
Diluted  109,051,682   46,247,654 

 

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

 

4
 

 

AMMO, Inc.

CONDENSED CONSOLIDATED STATEMENT OF SHAREHOLDERS’ EQUITY

For the Three Months Ended June 30, 2021 and 2020

(Unaudited)

 

  Number  Par Value  Number  Par Value  Capital  (Deficit)  Total 
  Preferred Stock  Common Shares  Additional Paid-In  Accumulated    
  Number  Par Value  Number  Par Value  Capital  (Deficit)  Total 
                      
Balance as of March 31, 2021  -  $                 -   93,099,967  $        93,100  $202,073,968  $(41,819,539) $160,347,529 
                             
Acquisition stock issuances, net of issuance costs  -   -   18,500,000   18,500   131,947,282   -   131,965,782 
Common stock issued for exercised warrants  -   -   219,144   219   477,592   -   477,811 
Common stock issued for cashless warrant exercise  -   -   275,155   275   (275)  -   - 
Common stock issued for services  -   -   750,000   750   

1,499,250

  -   1,500,000 
Employee stock awards  -   -   202,500   203   699,297   -   699,500 
Stock grants  -   -   -   -   66,914   -   66,914 
Issuance of Series A Preferred Stock, net of issuance costs  1,400,000   1,400   -   -   31,007,396   -   31,008,796 
Dividends accumulated on preferred stock  -   -   -   -   -   (337,745)  (337,745)
Net income/(loss)  -   -   -   -   -   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 
                             
Balance as of March 31, 2020  -  $-   46,204,139  $46,204  $53,219,834  $(34,007,245) $19,258,793 
                             
Common stock issued for cash  -   -   1,000,000   1,000   1,749,000   -   1,750,000 
Common stock issued for exercised warrants  -   -   60,607   60   121,154       121,214 
Common stock issued for cashless warrant exercise  -   -   279   -   -       - 
Common stock issued for services  -   -   8,336   8   (8)  -   - 
Employee stock awards  -   -   180,916   181   255,119   -   255,300 
Stock grants  -   -   -   -   76,766   -   76,766 
Net income/(loss)  -   -   -   -   -   (3,103,789)  (3,103,789)
                             
Balance as of June 30, 2020  -  $-   47,454,277  $47,453  $55,421,865  $(37,111,034) $18,358,284 

 

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

 

5
 

 

AMMO, Inc.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOW

(Unaudited)

 

  2021  2020 
  For the Three Months Ended
June 30,
 
  2021  2020 
Cash flows from operating activities:        
Net Income/(Loss) $9,536,660  $(3,103,789)
Adjustments to reconcile Net Loss to Net Cash provided by/(used in) operations:        
Depreciation and amortization  3,516,851   1,169,001 
Debt discount amortization  -   109,667 
Employee stock awards  699,500   255,300 
Stock grants  66,914   76,766 
Contingent consideration payable fair value  (56,638)  (27,968)
Allowance for doubtful accounts  71,157   15,906 
Gain on disposal of assets  (12,044)  - 
Reduction in right of use asset  27,087   90,321 
Loss on Jagemann Munition Components  -   1,000,000 
Changes in Current Assets and Liabilities        
Accounts receivable  2,124,556   (1,145,584)
Due to (from) related parties  -   150 
Inventories  (12,072,607)  (2,110,684)
Prepaid expenses  1,114,473   214,014 
Deposits  (3,119,492)  (156,184)
Accounts payable  7,021,584   1,095,093 
Accrued liabilities  (208,131)  847,466 
Operating lease liability  (39,203)  (89,455)
Net cash provided by/(used in) operating activities  8,670,667   (1,759,980)
         
Cash flows from investing activities        
GDI acquisition  (50,651,444)  - 
Purchase of equipment  

(1,611,316

)  

(471,882

)
Proceeds from disposal of assets  

59,800

  -
Net cash used in investing activities  (52,202,960)  (471,882)
         
Cash flow from financing activities        
Payments on inventor facility  (832,143)  - 
Proceeds from factoring liability  

23,651,000

   

6,952,000

 
Payments on factoring liability  

(24,397,199

)  

(7,050,191

)

Payments on assumed debt from GDI  

(50,000,000

)  -
Proceeds from inventory facility  -   

1,758,003

 
Proceeds from paycheck protection program notes  -   1,051,985 
Payments on note payable - related party  (150,775)  (247,490)
Payments on insurance premium note payment  (415,003)  (129,510)
Payments on note payable  (4,000,000)  - 

 

(Continued)

 

6
 

 

AMMO, Inc.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOW

(Unaudited)

 

  For the Three Months Ended
June 30,
 
  2021  2020 
       
Common stock issued for exercised warrants  477,811   30,304 
Common stock issuance costs  (3,170,422)  - 
Sale of preferred stock  35,000,000   - 
Net cash provided by/(used in) financing activities  (23,836,731)  2,365,101 
         
Net increase/(decrease) in cash  (67,369,024)  133,239 
Cash, beginning of period  118,341,471   884,274 
Cash, end of period $50,972,447  $1,017,513 
         
Supplemental cash flow disclosures        
Cash paid during the period for -        
Interest $189,116  $160,195 
Income taxes $-  $- 
         
Non-cash investing and financing activities:        
Acquisition stock issuances $132,645,000  $- 
Insurance premium note payment $1,693,764  $- 
Dividends accumulated on preferred stock $

337,745

 $- 
Operating lease liability $-  $737,680 
Note payable related party $-  $2,635,797 
Stock subscription receivable $-  $1,840,910 

 

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

 

7
 

 

AMMO, Inc.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2021 and March 31, 2021

(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 475,681 (11,891,976 pre-split) of their outstanding shares 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 (“Reverse Split”) of the issued and outstanding shares of the common stock of the Company. As a result of the reverse split, the previous issued and outstanding shares of common stock became 580,052 shares; no shareholder was reversed below 100 shares, and all fractional shares resulting from the reverse split were rounded up to the next whole share. All references to the outstanding stock have been retrospectively adjusted to reflect this split. 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). Under the terms of the Agreement, the Company issued 17,285,800 newly issued shares of common stock of the Company. In connection with this transaction the Company retired 475,681 shares of common stock and issued 500,000 shares of common stock to satisfy an issuance commitment. The acquisition was considered to be a capital transaction. The transaction was the equivalent to the issuance by PRIVCO of 604,371 shares to the Company’s shareholders accompanied by a recapitalization. The weighted average number of outstanding shares has been adjusted for this transaction. (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, 2021. The results for the three month period ended March 31, 2021 are not necessarily indicative of the results that may be expected for the entire fiscal year. Accordingly, certain information and note disclosures normally included in financial statements prepared in accordance with U.S. GAAP have been omitted pursuant to the rules and regulations of the SEC. In the opinion of management, all adjustments have been made, which consist only of normal recurring adjustments necessary for a fair statement of (a) the results of operations for the three month periods ended June 30, 2021 and 2020, (b) the financial position at June 30, 2021, and (c) cash flows for the three month period ended June 30, 2021 and 2020.

 

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, intangible assets, and stock-based compensation.

 

9
 

 

AMMO, Inc.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

Accounts Receivable and Allowance for Doubtful Accounts

 

Our accounts receivable represents amounts due from customers for products sold and include an allowance for uncollectible accounts which is estimated based on the aging of the accounts receivable and specific identification of uncollectible accounts. At June 30, 2021 and March 31, 2021, we reserved $1,514,872 and $148,540, respectively, of allowance for doubtful accounts.

 

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, or JJF. The license agreement grants us the exclusive worldwide rights through October 15, 2021 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.

 

We are a party to a license agreement with Jeff Rann, a well-known wild game hunter and spokesman for the firearm and ammunition industries. The license agreement grants us through February 2022 the exclusive worldwide rights to Mr. Rann’s image rights and trademarks associated with him in connection with the marketing, promotion, advertising, sale, and commercial exploitation of all Jeff Rann Branded Products. We agreed to pay Mr. Rann 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 University of Louisiana at Lafayette. The license was formally amended and assigned to AMMO Technologies Inc. pursuant to an Assignment and First Amendment to Exclusive License Agreement. Assumption Agreement dated to be effective as of August 22, 2017, the Merger closing date. This asset will be amortized from September 2017, the first full month of the acquired rights, through October 29, 2028.

 

Under the terms of the Exclusive License Agreement, the Company is obligated to pay a quarterly royalty to the patent holder, based on a $0.01 per unit basis for each round of ammunition sold that incorporates this patented technology through October 29, 2028. For the three months ended June 30, 2021 and 2020, the Company recognized royalty expenses of $3,404 and $24,759, 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. NaN impairment expense was recognized for the three ended June 30, 2021 and 2020.

 

Revenue Recognition

 

We generate revenue from the production and sale of ammunition, and marketplace fee revenue, which includes auction revenue, payment processing revenue, and shipping income. We recognize revenue according to 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 determines those that are performance obligations, and assesses whether each promised good or service is distinct. Our contracts contain a single performance obligation and the entire transaction price is allocated to the single performance obligation. We recognize as revenues the amount of the transaction price that is allocated to the respective performance obligation when the performance obligation is satisfied or as it is satisfied. Accordingly, we recognize revenues (net) when the customer obtains control of our product, which typically occurs upon shipment of the product or the performance of the service. In the year ended March 31, 2021, we began accepting contract liabilities or deferred revenue. We included Deferred Revenue in our Accrued Liabilities. We will recognize revenue when the performance obligation is met.

 

For the three months ended June 30, 2021 the Company’s customers that comprised more than ten percent (10%) of total revenues and accounts receivable were as follows:

 SCHEDULE OF CONCENTRATION OF RISKS

  

Revenues at

June 30, 2021

  Accounts Receivable 
PERCENTAGES Three Months Ended  June 30,
2021
  March 31,
2021
 
          
Customers:            
A  19.8%  -   - 
B  11.3%  -   11.9%
C  -   -   23.3%
D  -   -   10.6%
   31.1%  -  45.8%

 

Disaggregated Revenue Information

 

The following table represent a disaggregation of revenue from customers by segment. We attribute net sales to segments by product or services types; ammunition, ammunition casings, and marketplace fees. The Company notes 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 
  June 30, 2021  June 30, 2020 
Ammunition sales $28,351,780  $6,411,668 
Marketplace fee revenue  12,272,066   - 
Ammunition casings sales  3,852,486   3,248,302 
Total Revenues $44,476,332  $9,659,970 

 

Ammunition products are sold through “Big Box” retailers, manufacturers, local ammunition stores, and shooting range operators. We also sell direct 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 of $116,433 and $87,167 for the three months ended June 30, 2021 and 2020, respectively, recognized in selling expenses and $19,000 of advertising expenses recognized in cost of revenues for the three months ended June 30, 2021.

 

Inventories

 

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

 

12
 

 

AMMO, Inc.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

Property and Equipment

 

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

 

Compensated Absences

 

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

 

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 202,500 shares of common stock issued to employees, members of the Board of Directors, and members of our advisory committee for services during the three months ended June 30, 2021.

 

Concentrations of Credit Risk

 

Accounts at banks are insured by the Federal Deposit Insurance Corporation (“FDIC”) up to $250,000. As of June 30, 2021, 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.

 

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 controls 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 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 0 other known contingencies at June 30, 2021.

 

14
 

 

AMMO, Inc.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

NOTE 3 – INCOME/(LOSS) PER COMMON SHARE

 

We calculate basic income/(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. We use the treasury stock method, in the determination of dilutive shares outstanding during each reporting period. We have issued warrants to purchase 3,047,960 shares of common stock and contingently issuable shares of common stock of 1,500,000. All weighted average numbers were adjusted for the reverse stock split and merger transaction. Due to the loss from operations in the three months ended June 30, 2020, there are no common shares added to calculate the dilutive loss per share for that period as the effect would be antidilutive. The Company excluded warrants of 8,441,798 for the three months ended June 30, 2020, from the weighted average diluted common shares outstanding because their inclusion would have been antidilutive.

 SCHEDULE OF INCOME/(LOSS) PER COMMON SHARE

  Net income/(loss) attributable to common stock holders  Weighted average shares  Net income/(loss) attributable to common stock holders per share 
  2021  2020  2021  2020  2021  2020 
                   
Basic income/(loss) per share $9,198,915  $(3,103,789)  105,876,867   46,247,654  $        0.09  $     (0.07)
Effect of dilutive common stock purchase warrants  -   -   2,024,037   -   (0.01)  - 
Effect of dilutive contingently issuable common stock (1)  -   -   1,010,869   -   -   - 
Effect of dilutive equity incentive awards  -   -   139,909   -   -   - 
Diluted income/(loss) per share $9,198,915  $(3,103,789)  109,051,682   46,247,654  $0.08  $(0.07)

 

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

 

NOTE 4 – INVENTORIES

 

At June 30, 2021 and March 31, 2021, the inventory balances are composed of:

SCHEDULE OF INVENTORY 

  June 30, 2021  March 31, 2021 
Finished product $3,207,574  $899,266 
Raw materials  18,109,674   12,440,548 
Work in process  6,622,277   2,527,104 
Inventory, net $27,939,525  $15,866,918 

 

NOTE 5 – EQUIPMENT

 

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

 

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

 

15
 

 

AMMO, Inc.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

Equipment consisted of the following at June 30, 2021 and March 31, 2021:

SCHEDULE OF EQUIPMENT 

  June 30, 2021  March 31, 2021 
Building $955,810  $- 
Leasehold Improvements  250,887   126,558 
Furniture and Fixtures  331,490   87,790 
Vehicles  152,101   142,691 
Equipment  27,305,838   26,425,221 
Tooling  143,710   121,790 
Construction in Progress  882,310   544,939 
Total property and equipment $30,022,146  $27,448,989 
Less accumulated depreciation  (6,848,714)  (5,895,763)
Net equipment $23,173,432  $21,553,226 

 

Depreciation Expense for the three months ended June 30, 2021 and 2020 totaled $995,334, and $676,053, 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 June 30, 2021, the outstanding balance of the Factoring Liability was $1,095,989. For the three months ending June 30, 2021, interest expense recognized on the Factoring Liability was $41,579 and for the three months ending June 30, 2020 was $114,060, including $37,500 of amortization of the commitment fee.

 

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

 

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 June 30, 2021, the outstanding balance of the Inventory Credit Facility was $258,955. Interest expense recognized on the Inventory Credit Facility was $17,659, including $8,561 of amortization of the annual fee for the three months ended June 30, 2021 and $7,490, including $2,917 of amortization of the annual fee for the three months ended June 30, 2020.

 

NOTE 8 – LEASES

 

We lease office, manufacturing, and warehouse space in Scottsdale and Payson, AZ, Atlanta and Marietta, GA, and Manitowoc and Two Rivers, WI under contracts we classify as operating leases. None of our leases are financing leases. The Payson lease has an option to renew for five years. As of June 30, 2021, we are fairly certain we will not exercise the renewal option. 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 at June 30, 2020.

 

Consolidated lease expense for the three months ended June 30, 2021 and 2020 was $273,296 and $184,769, respectively, including $263,197 and $176,673 of respective operating lease expense and $10,099 and $8,096 of respective other lease associated expenses such as association dues, taxes, utilities, and other month to month rentals.

 

16
 

 

AMMO, Inc.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

The weighted average remaining lease term and weighted average discount rate for operating leases were 3.0 years and 10.0%, respectively.

 

Futures minimum lease payments under non-cancellable leases as of June 30, 2021 are as follows:

 SCHEDULE OF FUTURE MINIMUM LEASE PAYMENTS UNDER NON-CANCELLABLE LEASES

Years Ended March 31,   
2022 (1) $905,641 
2023  1,018,689 
2024  873,420 
2025  472,306 
2026  - 
Thereafter  - 
Total lease payments  3,270,056 
Less: Amount Representing Interest  (463,465)
Present value of lease liabilities $2,806,591 

 

 (1)This amount represents future lease payments for the remaining nine months of fiscal year 2022. It does not include any lease payments for the three months ended June 30, 2021.

 

17
 

 

AMMO, Inc.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

NOTE 9NOTES PAYABLE – RELATED PARTY

 

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

 

18
 

 

AMMO, Inc.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

NOTE 10CAPITAL STOCK

 

During the three month period ended June 30, 2021, we issued 19,946,799 shares of common stock as follows:

 

 18,500,000 shares were issued in connection with our merger of Gemini Direct Investments, LLC valued at $132,645,000
 219,144 shares were issued to investors for exercised warrants valued for $477,811
 275,155 shares were issued for cashless exercise of 340,841 warrants
 750,000 shares valued at $1,500,000 were issued for services provided to the Company
 202,500 shares valued at $699,500 were issued to employees, members of the Board of Directors, and members of the Advisory Committee as compensation

 

19
 

 

AMMO, Inc.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

At June 30, 2021, outstanding and exercisable stock purchase warrants consisted of the following:

 SCHEDULE OF OUTSTANDING AND EXERCISABLE STOCK PURCHASE WARRANTS

  

Number of

Shares

  Weighted Averaged
Exercise Price
  

Weighted

Average Life

Remaining
(Years)

 
Outstanding at March 31, 2021  3,607,945  $2.31   3.24 
Granted  -   -   - 
Exercised  (559,985)  1.91   - 
Forfeited or cancelled  -   -   - 
Outstanding at June 30, 2021  3,047,960  $2.39   2.92 
Exercisable at June 30, 2021  3,047,960  $2.39   2.92 

 

As of June 30, 2021, we had 3,047,960 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 2,730 shares of Common Stock at an exercise price of $1.65 per share until April 2025; (2) warrants to purchase 1,934,414 shares of our Common Stock at an exercise price of $2.00 per share consisting of 71% of the warrants until April 2023, 31% until August 2024, and 69% until February 2026; (3) warrants to purchase 564,029 shares of Common Stock at an exercise price of $2.40 until September 2024; (4) warrants to purchase 396,787 shares of Common Stock at an exercise price of $2.63 until November 2025, and (5) warrants to purchase 150,000 shares of Common Stock at an exercise price of $6.72 until February 2024.

 

20
 

 

AMMO, Inc.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

NOTE 11PREFERRED STOCK

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

Preferred dividends accumulated as of June 30, 2021 were $337,745.

 

21
 

 

AMMO, Inc.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

NOTE 12 - 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.

 

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

 SCHEDULE OF FAIR VALUE OF CONSIDERATION TRANSFERRED

     
Cash $48,649,954 
Estimated working capital adjustment  2,000,000 
Contingent consideration  10,755,000 
Common stock  132,645,000 
Assumed debt  50,000,000 
     
Fair Value of Patent $244,049,954 

 

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

 SCHEDULE OF ALLOCATION FOR CONSIDERATION

     
Accounts receivable, net $17,002,362 
Prepaid expenses  478,963 
Equipment  1,051,980 
Deposits  703,389 
Intangible assets  

146,617,380

 
Goodwill  

90,999,208

 
Right of use assets - operating leases  612,727 
Accounts payable  (12,514,919)
Accrued expenses  (196,780)
Operating lease liability  

(704,356

)
     
Total Consideration $244,049,954 

 

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

 

22
 

 

AMMO, Inc.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

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

 

The purchase price allocation is preliminary. The preliminary estimated fair value recorded for the acquired assets and liabilities assumed with excess consideration recorded as goodwill represent management’s estimate of fair value and are subject to change when additional information, such as post-close working capital adjustments and valuations become available. The purchase price allocation will continue to be preliminary until the Company is able to finalize the allocation. The Company expects to finalize the purchase price allocation within the measurement period, but not more than one year following the closing date of the Merger. The final amounts from the valuation may significantly and materially differ from the preliminary allocation herein.

 

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.

SCHEDULE OF UNAUDITED PRO FORMA RESULTS OF OPERATIONS

 

  2021 
INCOME STATEMENT DATA 

For the Three Months Ended

June 30, 2021

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

 

NOTE 13 – GOODWILL AND INTANGIBLE ASSETS

 

In the current period, we recorded $90,999,208 of Goodwill generated from our Merger with Gemini. 

 

Amortization expenses related to our intangible assets for the three months ended June 30, 2021 and 2020 were $2,521,517 and $492,948, respectively.

SCHEDULE OF INTANGIBLE ASSETS

     June 30, 2021 
  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      (220,833)  -   - 
Accumulated amortization – Patents      -   (1,177,772)  - 
Accumulated amortization – Intangible Assets      -   -   (5,310,962)
      $29,167  $5,896,233  $146,452,655 

 

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

SCHEDULE OF ANNUAL AMORTIZATION OF INTANGIBLE ASSETS

Years Ended March 31, Estimates for
Fiscal Year
 
2022 (1) $10,659,051 
2023  13,095,215 
2024  12,966,879 
2025  12,664,775 
2026  12,674,904 
Thereafter  90,317,231 
Annual amortization of intangible assets $157,378,055 

 

(1)This amount represents future amortization for the remaining nine months of fiscal year 2022. It does not include any amortization for the three months ended June 30, 2021.

 

23
 

 

NOTE 14SEGMENTS

 

On April 30, 2021, the Company entered into an agreement and plan of merger with SpeedLight Group I, LLC, which, along with its subsidiaries, engages primarily in the operation of an online marketplace dedicated to firearms, hunting, shooting and related products. As a result, at June 30, 2021, our chief operating decision maker, our Chief Executive Officer, reviews financial performance based on 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.

 

Ammunition generated approximately 72% of our revenue in the three months ended June 30, 2021, while Marketplace generated approximately 77% of our operating income in the three months ended June 30, 2021.The following tables set forth certain financial information utilized by management to evaluate our operating segments for the interim period presented:

 SCHEDULE OF OPERATING SEGMENTS

  Ammunition  Marketplace  Total 
  For the Three Months Ended June 30, 2021 
  Ammunition  Marketplace  Total 
          
Net Revenues $32,204,266  $12,272,066  $44,476,332 
Cost of Revenues  23,848,248   1,657,190   25,505,438 
General and administrative expense  5,676,755   1,002,564   6,679,319 
Depreciation and amortization  420,242   2,190,819   2,611,061 
Operating Income $2,259,021  $7,421,493  $9,680,514 

 

NOTE 15INCOME TAXES

 

As of June 30, 2021, we had net operating loss carryforwards of approximately $22 million 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, 2021 and 2020, respectively. During the three months ended June 30, 2021 and 2020, 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, 2020, and 2021 are subject to audit.

 

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.

 

NOTE 16SUBSEQUENT EVENTS

 

From July 1, 2021 to August 13, 2021, we issued 57,692 shares of Common Stock pursuant to warrant exercises at per share prices ranging from $2.40 to $2.63 for an aggregate value of $137,234. Additionally, 1,752 shares of Common Stock were issued pursuant to the cashless exercise of 2,269 warrants.

 

Subsequent to June 30, 2021, the Company issued 47,250 shares of Common Stock to employees for a total value of $165,375.

 

24
 

 

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

 

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

 

FORWARD-LOOKING STATEMENTS

 

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

 

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

 

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

 

Overview

 

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

 

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

 

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

 

25
 

 

On April 30, 2021, we acquired Gemini Direct Investments, LLC (“Gemini”) and nine of its subsidiaries, all of which are related to Gemini’s ownership of the Gunbroker.com marketplace.

 

GunBroker.com is a large online marketplace dedicated to firearms, hunting, shooting and related products. Aside from merchandise bearing its logo, GunBroker.com currently sells none of the items listed on its website. Third-party sellers list items on the site and federal and state laws govern the sale of firearms and other restricted items. Ownership policies and regulations are followed using licensed firearms dealers as transfer agents.

 

With our recent addition of the Gunbroker.com marketplace, we aim to further enhance our vision of bringing technologies to the industry. Gunbroker.com is a marketplace that connects millions of buyers and sellers allowing our users to access a daily average of over one million unique items.

 

The focus for our 2022 fiscal year is to continue to expand our brand presence into the markets identified above and to continue to grow our sales within our targeted markets. We intend to do this through establishing key strategic relationships, enrolling in government procurement programs, establishing relationships with leading law enforcement associations and programs, expanding distributor channels, and revitalized marketing campaigns.

 

26
 

 

Results of Operations

 

Our financial results for the three months ended June 30, 2021 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 and marketplace. We continue to focus on growing our top line revenue, and streamlining our operations, and as a result, we experienced an increase in our gross profit margin for the three months ended June 30, 2021. This was the result of a significant increase in sales allowing us to cover a greater percentage of our fixed manufacturing costs, which include our non-cash amortization and depreciation expense as well as the addition of our new marketplace, Gunbroker.com

 

The following table presents summarized financial information taken from our condensed consolidated statements of operations for the three months ended June 30, 2021 compared with the three months ended June 30, 2020:

 

  For the Three Months Ending 
  June 30, 2021  June 30, 2020 
  (Unaudited)  (Unaudited) 
Net Sales $44,476,332  $9,659,970 
Cost of Revenues  25,505,438   8,588,565 
Gross Profit  18,970,894   1,071,405
Sales, General & Administrative Expenses  9,290,380   3,851,594 
Income (loss) from Operations  9,680,514  (2,780,189)
Other income (expense)        
Other income (expense)  (143,854)  (323,600)
Income (loss) before provision for income taxes $9,536,660  $(3,103,789)
Provision for income taxes  -   - 
Net Income (Loss) $9,536,660  $(3,103,789)

 

Non-GAAP Financial Measures

 

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

 

Adjusted EBITDA

 

  For the Three Months Ended 
  June 30, 2021  June 30, 2020 
       
Reconciliation of GAAP net income to Adjusted EBITDA        
Net Income (Loss) $9,536,660  $(3,103,789)
Depreciation and amortization  3,516,851   1,169,001 
Loss on purchase  -   1,000,000 
Excise taxes  2,397,771   - 
Interest expense, net  165,279   323,600 
Employee stock awards  699,500   255,300 
Stock grants  66,914   76,766 
Other income, net  (21,425)  - 
Contingent consideration fair value  (56,638)  (27,968)
Adjusted EBITDA $16,304,912  $(307,090)

 

27
 

 

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

 

Adjusted EBITDA as a non-GAAP financial measure also excludes other cash interest income and expense, as these items are not components of our core operations. We have not included adjustment for any provision or benefit for income taxes as we currently record a valuation allowance and we have included 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 months ended June 30, 2021 and 2020. “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.

 

28
 

 

  For the Three Months Ending 
  June 30, 2021  June 30, 2020 
Proprietary Ammunition $1,110,621  $1,895,141 
Standard Ammunition  27,241,159   4,516,527 
Ammunition Casings  3,852,486   3,248,302 
Marketplace Revenue  12,272,066   - 
Total Sales $44,476,332  $9,659,970 

 

Sales for the three months ended June 30, 2021 increased 360% or approximately $34.8 million, over the three months ended June 30, 2020. This increase was the result of approximately $22.7 million of increased sales in bulk pistol and rifle ammunition, a decrease of approximately $0.7 million of sales of Proprietary Ammunition, an increase of approximately $0.6 million of sales from our casing operations, and $12.2 million in revenue generated from our recently acquired marketplace, Gunbroker.com, which includes auction revenue, payment processing revenue, and shipping income. 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.

 

Through our acquisition of SWK, the Company has developed and deployed a new line of tactical armor piercing (AP) and hard armor piercing incendiary (HAPI) precision ammunition to meet the lethality requirements of both the US and foreign military customers. 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 July 21, 2020, 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.

 

On June 23, 2021, we announced that we were awarded a U.S. Department of Defense contract for the development and manufacture of ballistically matched multi-purpose rounds to design and manufacture multiple Ballistically Matched Multi-Purpose Rounds (BM-MPR) in support of U.S. military operations.

 

Cost of Revenues

 

Cost of Revenues increased by approximately $16.9 million from $8.6 million to $25.5 million for the three months ended June 30, 2021 compared to the comparable period ended in 2020. This was the result of a significant increase in net sales as well increases to non-cash depreciation related to increases in production equipment, expensing of increased labor, overhead, and raw materials used to produce finished product during 2021 as compared to 2020, and additional cost of revenues from our recent acquisition of our marketplace, Gunbroker.com. As a percentage of sales, cost of goods sold decreased by 35.5% when comparing the three months ended June 30, 2021 and 2020.

 

Gross Margin

 

Our gross margin percentage increased to 42.7% from 11.1% during the three months ended June 30, 2021 as compared to the same period in 2020. This was a result of increased sales allowing us to cover a greater percentage of our fixed manufacturing costs, which include our non-cash amortization and depreciation expense, and the inclusion of our newly acquired marketplace, Gunbroker.com which, by nature has significantly higher margins than our manufactured products.

 

29
 

 

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:

 

 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;
   
 Leverage of our newly acquired marketplace, Gunbroker.com, through the introduction of additional services and product offerings;
   
 Expanded use of automation equipment that reduces the total labor required to assemble finished products;
   
 And, better leverage of our fixed costs through expanded production to support the sales objectives.

 

Operating Expenses

 

Overall, for the three months ended June 30, 2021, our operating expenses increased by approximately $5.4 million over the three months ended June 30, 2020, and decreased as a percentage of sales from 39.9% for the three months ended June 30, 2020 to 20.1% for the three months ended June 30, 2021. The increase was primarily related to approximately $3.2 million of additional operating expenses following our merger with Gemini, including $2.2 million of depreciation and amortization expenses. Our operating expenses include non-cash depreciation and amortization expense of approximately $2.6 million for the three months ended June 30, 2021. Our operating expenses consisted of commissions related to our sales increases, stock compensation expense associated with issuance of our Common Stock in lieu of cash compensation for employees, and board members, and key consultants for the organization during the period. Operating expenses for the three months ended June 30, 2021 and 2020 periods included noncash expenses of approximately $3.3 million and $1.7 million, respectively. We expect to see administrative expenditures to continue to decrease as a percentage of sales in the 2022 fiscal year, as we leverage our work force and expand our sales opportunities.

 

During the three months ended June 30, 2021, our selling and marketing expenses increased by approximately $0.8 million in comparison to the three months ended June 30, 2020. The increase was primarily related to commission on the increases in the sale of our products resulting of approximately $0.7 million for the three months ended June 30, 2021 in comparison to the comparable prior period.

 

Our corporate general & administrative expenses increased approximately $2.2 million in the three months ended June 30, 2021 from the comparable prior period mainly due to increased general corporate expenses related to the addition of Gemini of approximately $0.5 million and increased professional and legal fees of $0.5 million due to our acquisition of Gemini.

 

Employee salaries and related expenses increased approximately $1.4 million for the three months ended June 30, 2021 compared to the comparable period ended in 2020. The increase for the three months ended June 30, 2021 when compared to the prior period, was primary related to an increase in salaries and wages of approximately $0.9 million including employees added from the Gemini merger and an increase of stock compensation of approximately $0.4 million.

 

Depreciation and amortization expenses for the three ended June 30, 2021 increased by approximately $2.2 million from the comparable prior periods due to depreciation and amortization expenses in connection with the acquisition of Gemini.

 

Interest and Other Expenses

 

For the three months ended June 30, 2021, interest expense decreased by approximately $0.2 million compared with the comparable three months ended June 30, 2020. The change from the prior periods was mainly due to the repayment of notes and conversion of convertible promissory notes in current and prior periods.

 

Net Income

 

As a result of increases in revenues from increased production as well as our acquisition of Gemini, we ended the three months ended June 30, 2021 with a net income of approximately $9.5 million compared with a net loss of approximately $3.1 million for the three months ended June 30, 2020.

 

30
 

 

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

 

Liquidity and Capital Resources

 

As of June 30, 2021, we had $50,972,447 of cash and cash equivalents, a decrease of $67,369,024 from March 31, 2021.

 

Working Capital is summarized and compared as follows:

 

  June 30,
2021
  March 31,
2021
 
Current assets $106,191,817  $145,620,332 
Current liabilities  42,714,920   12,098,493 
  $63,476,897  $133,521,839 

 

Changes in cash flows are summarized as follows:

 

Operating Activities

 

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

 

For the three months ended June 30, 2020, net cash used in operations totaled approximately $1.8 million. This was primarily the result of a net loss of approximately $3.1 million, increases in our period end inventories and accounts receivable of approximately $2.1 million and $1.1 million, respectively, increases in accounts payable and accrued liabilities of approximately $1.1 million and $0.8 million, respectively, and a loss on Jagemann Munition Components of $1.0 million. The cash used in operations were partially offset by the benefit of non-cash expenses for depreciation and amortization of approximately $1.2 million, employee stock compensation of approximately $0.3 million, and stock grants of approximately $0.1 million.

 

Investing Activities

 

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

 

During the three months ended June 30, 2020, we used approximately $0.5 million in net cash for investing activities to purchase fixed assets such as new production equipment.

 

Financing Activities

 

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

 

31
 

 

During the three months ended June 30, 2020, net cash provided by financing activities was approximately $2.4 million. This was the net effect of approximately $1.8 million generated from our Inventory Credit Facility, and proceeds from our note payable. Additionally, $7.0 approximately was generated from accounts receivable factoring, which was offset by payments of approximately $7.1 million. Approximately $0.2 million of cash was use for payments on related party notes payable, and approximately $0.1 million toward our insurance premium note payable.

 

Liquidity and Capital Resources

 

Existing working capital, cash used in 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.

 

We believe financing will be available, both through conventional financing relationships and through the continued sales of our Common Stock. However, there is no assurance that such funding will be available on terms acceptable to us 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.

 

Off-Balance Sheet Arrangements

 

As of June 30, 2021, 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.

 

Use of Estimates

 

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, intangible assets, and stock-based compensation.

 

32
 

 

Inventory

 

We state inventories at the lower of cost and net realizable value. We determine cost by using the weighted-average cost of raw materials method, which approximates the first-in, first-out method and includes allocations of manufacturing labor and overhead. We make provisions when necessary, to reduce excess, potential damaged or obsolete inventories. These provisions are based on our best estimates. At June 30, 2021, and March 31, 2021, we conducted a full analysis of inventory on hand and expensed all inventory not currently in use, or for which there was no future demand.

 

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.

 

Revenue Recognition

 

We generate revenue from the production and sale of ammunition, and marketplace fee revenue, which includes auction revenue, payment processing revenue, and shipping income. We recognize revenue according to 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

 

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 determines those that are performance obligations, and assesses whether each promised good or service is distinct. If a contract contains a single performance obligation, the entire transaction price is allocated to the single performance obligation. 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. In the year ended March 31, 2021, we began accepting contract liabilities or deferred revenue. We included Unearned Revenue in our accrued liabilities. We will recognize revenue when the performance obligation is met.

 

Excise Tax

 

As a result of regulations imposed by the Federal Government for sales of ammunition to non-government U.S. entities, we charge and collect an 11% excise tax for all products sold into these channels. During the three months ended June 30, 2021 and 2020, we recognized approximately $2.4 million and $0.6 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.

 

Fair Value of Financial Instruments

 

Fair value estimates discussed herein are based upon certain market assumptions and pertinent information available to us as of June 30, 2021. The respective carrying value of certain on-balance-sheet financial instruments approximated their fair value. These financial instruments include cash, accounts payable, and amounts due to related parties. Fair values were assumed to approximate carrying values because they are short term in nature and their carrying amounts approximate fair values or they are payable on demand.

 

33
 

 

Income Taxes

 

We follow ASC subtopic 740-10, “Accounting for Income Taxes” for recording the provision for income taxes. ASC 740-10 requires the use of the asset and liability method of accounting for income taxes. Under the asset and liability method, deferred tax assets and liabilities are computed based upon the difference between the financial statement and income tax basis of assets and liabilities using the enacted marginal tax rate applicable when the related asset or liability is expected to be realized or settled. Deferred income tax expenses or benefits are based on the changes in the asset or liability each period. If available evidence suggest that is more likely than not that some portion or all of the deferred tax assets will not be realized, a valuation allowance is required to reduce the deferred tax assets to the amount that is more likely than not to be realized. Future changes in such valuation allowance are included in the provision for deferred income taxes in the period of change.

 

Stock-Based Compensation

 

We grant stock-based compensation to key employees and directors as a means of attracting and retaining highly qualified personnel. We also grant stock in lieu of cash compensation for key consultants and service providers. We recognize expense related to stock-based payment transactions in which we receive employee or non-employee services in exchange for equity. We measure stock compensation based on the closing fair market value of our Common Stock on the date of grant.

 

In addition to our base of employees, we also use the services of several contract personnel and other professionals on an “as needed basis”. We plan to continue to use consultants, legal and patent attorneys, engineers, and accountants, as necessary. We may also expand our staff to support the market roll-out of our products to both the commercial and government related organizations. A portion of any key employee compensation likely would include direct stock grants, which would dilute the ownership interest of holders of existing shares of our Common Stock.

 

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

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

 

ITEM 4. CONTROLS AND PROCEDURES

 

Evaluation of Disclosure Controls and Procedures

 

We maintain disclosure controls and procedures, as defined in Rule 13a-15(e) promulgated under the Securities Exchange Act of 1934 (the “Exchange Act”), that are designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms and that such information is accumulated and communicated to our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure. We carried out an evaluation, under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures as of June 30, 2021. Based on the evaluation of these disclosure controls and procedures, our Chief Executive Officer and Chief Financial Officer concluded our disclosure controls and procedures not effective. Our controls were ineffective due to the size of the Company and available resources, there are limited personnel to assist with the accounting and financial reporting function, which results in: (i) a lack of segregation of duties and (ii) controls that may not be adequately designed or operating effectively. Despite the existence of material weaknesses, The Company believes the financial information presented herein is materially correct and fairly presents the financial position and operating results of the three months ended June 30, 2021, in accordance with GAAP.

 

Changes in internal controls

 

There were no changes in our internal control over financial reporting, as defined in Rule 13a-15(f) promulgated under the Exchange Act, during the Quarterly period from April 1, 2021 to June 30, 2021, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

34
 

 

PART II - OTHER INFORMATION

 

ITEM 1. LEGAL PROCEEDINGS

 

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

 

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

 

ITEM 1A. RISK FACTORS

 

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

 

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

 

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

 

There were no unregistered sales of the Company’s equity securities during the quarter ended June 30, 2021 that were not previously reported in a Current Report on Form 8-K except as follows:

 

During the Quarterly period from April 1, 2020 to June 30, 2021, the Company issued 750,000 shares of Common Stock for services for $1,500,000 or $2.00 per share.

 

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

 

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

 

None

 

ITEM 4. MINE SAFETY DISCLOSURES

 

Not applicable

 

35
 

 

ITEM 5. OTHER INFORMATION

 

None

 

ITEM 6. EXHIBITS

 

Exhibit No. Exhibit
   
2.1# Agreement and Plan of Merger, dated April 30, 2021, by and among Ammo, Inc., SpeedLight Group I, LLC, Gemini Direct Investments, LLC and Steven F. Urvan (1)
3.1 Certificate of Designations with respect to the 8.75% Series A Cumulative Redeemable Perpetual Preferred Stock, par value $0.001 per share, dated May 18, 2021. (2)
10.1 Lock-Up Agreement, dated April 30, 2021, by and between Ammo, Inc. and Steven F. Urvan (1)
10.2 Voting Rights Agreement, dated April 30, 2021, by and between Ammo, Inc. and Steven F. Urvan (1)
10.3 Standstill Agreement, dated April 30, 2021, by and between Ammo, Inc. and Steven F. Urvan (1)
10.4 Investor Rights Agreement, dated April 30, 2021, by and between Ammo, Inc. and Steven F. Urvan (1)
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* XBRL Instance Document
101.SCH* XBRL Taxonomy Extension Schema Document
101.CAL* XBRL Taxonomy Extension Calculation Linkbase Document
101.LAB* XBRL Taxonomy Extension Labels Linkbase Document
101.PRE* XBRL Taxonomy Extension Presentation Linkbase Document
101.DEF* XBRL Taxonomy Extension Definition Linkbase Document

 

*Filed Herewith.

 

# Certain schedules and exhibits have been omitted pursuant to Item 601(a)(5) of Regulation S-K. The Company will furnish supplementally copies of omitted schedules and exhibits to the Securities and Exchange Commission or its staff upon its request.

 

(1)Incorporated by reference to Form 8-K filed with the Securities and Exchange Commission (the “Commission”) on May 6, 2021.
  
(2)Filed as an exhibit to Form 8-A filed with the Commission on May 20, 2021.

 

36
 

 

SIGNATURES

 

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

 

 AMMO, INC.
   
  /s/ Fred W. Wagenhals
Dated: August 16, 2021By:Fred W. Wagenhals, Chief Executive Officer

 

  /s/ Robert D. Wiley
Dated: August 16, 2021By:Robert D. Wiley, Chief Financial Officer

 

37