10-K 1 form10-k.htm

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C.

 

FORM 10-K

 

[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the fiscal year ended March 31, 2019

 

OR

 

[  ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from _______________ to ______________

 

(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

 

Securities registered pursuant to Section 12(b) of the Act:

 

None   N/A
Title of each class   Name of each exchange on which registered

 

Securities registered pursuant to Section 12(g) of the Act:

 

Common Stock, par value $0.001

(Title of class)

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes  [  ] No [X]

 

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes [  ] No [X]

 

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 [X] 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” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer [  ] Accelerated filer [  ]
Non-accelerated filer [  ] Smaller reporting company [X]
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 [X] No

 

The aggregate market value of the Common Stock of the registrant by non-affiliates as of the last business day of the registrant’s most recently completed second fiscal quarter was $70,697,432.

 

As of June 28, 2019, there were 45,147,408 shares of Common Stock outstanding.

 

DOCUMENTS INCORPORATED BY REFERENCE : None.

 

 

 

 
 

 

TABLE OF CONTENTS

 

PART I  
     
ITEM 1: BUSINESS 4
ITEM 1A RISK FACTORS 10
ITEM 2: PROPERTIES 28
ITEM 3: LEGAL PROCEEDINGS 28
ITEM 4:

MINE SAFETY DISCLOSURE

28
     
PART II    
     
ITEM 5:

MARKET FOR COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND PURCHASES OF EQUITY SECURITIES

29
ITEM 6: SELECTED FINANCIAL DATA 31
ITEM 7:

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION

31
ITEM 8: FINANCIAL STATEMENTS 42
ITEM 9:

CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

66
     
PART III    
     
ITEM 10: DIRECTORS, EXECUTIVE OFFICERS, AND CORPORATE GOVERNANCE 66
ITEM 11: EXECUTIVE COMPENSATION 73
ITEM 12:

SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

74
ITEM 13:

CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE

75
ITEM 14: PRINCIPAL ACCOUNTING FEES AND SERVICES 75
     
PART IV    
     
ITEM 15: EXHIBITS 77
     
SIGNATURES   78

 

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ADDITIONAL INFORMATION

 

Descriptions of agreements or other documents contained in this report are intended as summaries and are not necessarily complete. Please refer to the agreements or other documents filed or incorporated herein by reference as exhibits. Please see the exhibit index at the end of this report for a complete list of those exhibits.

 

SPECIAL NOTE REGARDING 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 include in Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, and Reports filed on Form 8-K.

 

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

 

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PART I

 

ITEM 1. BUSINESS.

 

Introduction

 

We are a designer, producer, and marketer of performance-driven, high-quality ammunition and ammunition component products for sale to a variety of consumers, including sport and recreational shooters, hunters, individuals seeking home or personal protection, manufacturers and law enforcement and military agencies. To enhance the strength of our brands and drive product demand, we emphasize product innovation and technology to improve the performance, quality, and affordability of our products while providing support to our distribution channel and consumers. We seek to sell products at competitive prices that compete with high-end, custom, hand-loaded ammunition at competitive prices. Additionally, through our acquisition of Jagemann Stamping Company’s ammunition casing manufacturing and sales operations (“Jagemann Casings”) we are now able to sell ammunition casings products of various types. We emphasize an American heritage by using predominantly American-made components and raw materials in our products that are produced, inspected, and packaged at our facilities in Payson, Arizona and Manitowoc, Wisconsin.

 

Our production processes focus on safety, consistency, precision, and cleanliness. Each round is developed for a specific purpose with a focus on a proper mix of consistency, velocity, accuracy, and recoil. Each round is chamber gauged and inspected with redundant seven-step quality control processes.

 

Our Growth Strategy

 

Our goal is to enhance our position as a designer, producer, and marketer of ammunition products. Key elements of our strategy to achieve this goal are as follows:

 

Design, Produce, and Market Innovative, Distinctive, Performance-Driven, High-Quality Ammunition and Ammunition Components

 

We are focused on designing, producing, and marketing innovative, distinctive, performance-driven, high-quality products that appeal to retailers, manufacturers, and consumers that will enhance our users’ shooting experiences. Our ongoing research and development activities; our safe, consistent, precision, and clean production processes; and our multi-faceted marketing programs are critical to our success.

 

Continue to Strengthen Relationships with Channel Partners and Retailers.

 

We continue to strive to strengthen our relationships with our current distributors, dealers, manufactures, and mass market and specialty retailers and to attract additional distributors, dealers, retailers, and manufacturers. The success of our efforts depends on the innovation, distinctive features, quality, and performance of our products; the attractiveness of our packaging; the effectiveness of our marketing and merchandising programs; and the effectiveness of our customer support.

 

Emphasis on Customer Satisfaction and Loyalty

 

We plan to continue to emphasize customer satisfaction and loyalty by offering innovative, distinctive, high-quality products on a timely and cost- attractive basis and by offering effective customer service, training, and support. We regard the features, quality, and performance of our products as the most important components of our customer satisfaction and loyalty efforts, but we also rely on customer service and support.

 

Continuously Improving Operations

 

We plan to continue focusing on improving all aspects of our business, including research and development, component sourcing, production processes, marketing programs, and customer support. We are continuing our efforts to enhance our production by increasing daily production quantities through equipment acquisitions, expanded shifts and process improvements, increased operational availability of our equipment, reduced equipment down times, and increased overall efficiency.

 

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Enhance Market Share, Brand Recognition, and Customer Loyalty

 

We strive to enhance our market share, brand recognition, and customer loyalty. Industry sources estimate that 70 to 80 million people in the United States own more than approximately 300 million firearms, creating a large installed base for our ammunition products. We are focusing on the premium segment of the market through the quality, distinctiveness, and performance of our products; the effectiveness of our marketing and merchandising efforts; and the attractiveness of our competitive pricing strategies.

 

Pursue Synergetic Strategic Acquisitions and Relationships

 

We intend to pursue strategic acquisitions and develop strategic relationships designed to enable us to expand our technology and knowhow, expand our product offerings, strengthen and expand our supply chain, enhance our production process, expand our marketing and distribution, and attract new customers.

 

Products

 

We design, produce, and sell ammunition and ammunition components in a variety types, sizes, and calibers for use in handguns and long guns. We ship our ammunition in the form of cartridges (or rounds), and also ammunition casings. A cartridge consists of four components: a case made of brass, steel, or copper that holds together all the other components of the cartridge; the primer, which is an explosive chemical compound that ignites the gunpowder when struck by the firing pin; the gun powder, which is a chemical mixture that burns rapidly and creates an expanding gas when ignited and pushes the bullet out the barrel; and the bullet, or projectile, usually containing lead that is fired through the barrel to strike the target. Some of the bullets we produce for certain applications have a jacket, or outer shell, of brass or copper to improve performance and accuracy. We typically produce centerfire cartridges in which the primer is in the bottom, or center of the cartridge, rather than rimfire cartridges in which the primer is in the rim of the cartridge. Through our recent acquisition of Jagemann Casings we now offer ammunition casings for pistol ammunition through large rifle ammunition,

 

STREAK VISUAL AMMUNITIONTM

 

STREAK VISUAL AMMUNITIONTM enables shooters to see the path of the bullets fired by them. STREAK VISUAL AMMUNITIONTM rounds utilize non-flammable phosphor material that produces a glow by the utilization of the light emitted during the round discharge to make STREAK VISUAL AMMUNITIONTM glow. The luminescent material is applied only to the aft end of the projectile, making it visible only to the shooter and those within a 30-degree viewing window. As a result, the glow of STREAK VISUAL AMMUNITIONTM is not visible to the target unlike conventional tracers, which we believe is important to the military and law enforcement. Unlike conventional tracer ammunition, STREAK VISUAL AMMUNITIONTM rounds are not incendiary and do not utilize burning metals to generate light, thereby eliminating heat generation and making them safer for use in various environments and avoiding serious fire hazards. STREAK VISUAL AMMUNITIONTM comes in 380 auto, 9 mm, 40 S&W, 44 magnum, 45 long colt, and 38 special among other calibers.

 

We hold the exclusive worldwide sales and distribution rights for the patented technology used by our STREAK VISUAL AMMUNITIONTM and pay a royalty based on our product sales incorporating this technology.

 

OPS – One Precise Shot

 

OPS ammunition is designed to meet a wide variety of demanding engagement scenarios experienced by law enforcement personnel in the line of duty. The hollow point lead-free fragile bullet with hard outer casing and frangible copper core transfers 100% of its energy into the target. These bullets penetrate a variety of barriers, such as drywall, plywood, car doors, and auto glass. Upon entering soft tissue, the jacket and core separate with extensive force of impact, resulting in mass force trauma. The light weight projectile reduces recoil and enhances accuracy. OPS ammunition comes in 9 mm, 40 S&W, 45 auto calibers and a 223 rifle round.

 

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Stealth Subsonic Ammunition

 

Stealth Subsonic ammunition is designed specifically for superior performance in suppressed firearms. Stealth ammunition finds applications in which silence is paramount, such as in tactical training, predator night hunts, and clandestine operations. The stealth ammunition is produced to be a clean burning total metal jacket round to slow baffle corrosion and reduce lead emissions that collect in the suppressor body. Stealth pistol ammunition comes in 9mm, 40 S&W, and 45 AC3. It is also available in a 223 rifle round.

 

Jesse James Ammunition

 

Jesse James ammunition is jacketed hollow point projectiles designed for self-defense. The load specific development is designed to ensure accuracy, velocity, and consistency and a low recoil. Jesse James ammunition comes in 9mm, 40 S&W, 10mm, 357, 45 auto calibers.

 

Jeff Rann’s American Hunter and Safari Services

 

Jeff Rann’s ammunition is intended for a complete range of game hunting. This high-end hunting ammunition has been designed by Jeff Rann, a well- known professional hunter and sports channel host and the owner of the well-known 777 Ranch in Texas and three ranches in Africa.

 

TAC-P™

 

Our Global Tactical Defense Division’s line of match grade hard armor piercing incendiary (HAPI) rounds, branded as TAC-P™ precision tactical munitions, are the centerpiece of the Company’s strategy to address the unique needs the armed forces community demands. 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 TAC-P line is also available with our patented one-way luminescent or O.W.L. Technology™. Following AMMO’s acquisition of Jagemann Casings in March, the Company has aligned its manufacturing operations to support the large caliber demand from military personnel, such as the 12.7 mm and .50 caliber BMG configurations.

 

Ammunition Casings – Jagemann Munition Components

 

Through our recently acquired subsidiary, Jagemann Munition Components, we now offer ammunition casings for pistol ammunition through large rifle ammunition. Jagemann™ 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 300 million pieces of brass each year. 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.

 

Marketing

 

We market our products to consumers through distributors, dealers, mass market and specialty retailers, and direct to consumer through e-commerce. We maintain consumer-focused product marketing and promotional campaigns, which include print and digital advertising campaigns; social and electronic media; product demonstrations; point-of-sales materials; in-store training, and in-store retail merchandising. Our use of social media includes Instagram, Facebook, Twitter, and You Tube. We also utilize third-party endorsements, social influencers, and brand ambassadors, such as Jesse James and Jeff Rann.

 

Manufacturing

 

We conduct our ammunition research and development, manufacturing, assembly, inspection, and packaging operations in a 20,000 square foot facility located in Payson, Arizona. The facility currently can produce 36 million rounds of ammunition annually with the capacity to scale to 200 million rounds. Our in-house testing operation at the facility is intended to enhance the performance and reliability of our products.

 

Our ammunition casing research and development, manufacturing, and inspection operations take place in a 45,000 square foot facility located in Manitowoc, Wisconsin. The facility can currently produce 300 million cases annually with ability to scale. Our inspection process is intended to enhance the performance and reliability of our products.

 

Research and Development

 

We conduct research and development activities to enhance existing products and develop new products at our facilities in Payson, Arizona, Scottsdale, Arizona and Manitowoc, Wisconsin, utilizing our personnel and strategic relationships. We have recently expanded our research and development activity at our Scottsdale facility. We expense all costs associated with our research and development efforts through either our cost of goods sold, as they are performed by the same employees who produce our finished product, or through or general and administrative expenses if the product has not been brought to market.

 

Suppliers

 

We purchase certain of the raw materials and components for our ammunition products, including brass, steel, or copper casings; ammunition primers to ignite gun powder; gun powder; and projectiles. We believe we have reliable sources of supply for all our raw material and component needs, but from time to time raw materials and components are subject to shortages and price increases. Most of our suppliers are U.S.-based and provide us the materials and components at competitive rates. We recently secured our supply of ammunition casings through our acquisition of Jagemann Casings. We plan to broaden our supplier base and secure multiple sources for all the raw materials and components we require.

 

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Customers

 

We sell our products through “Big Box” retailers, manufacturers, local ammunition stores, and shooting range operators. We also sell direct to customers online. Our consumers include sport and recreational shooters, hunters, competitive shooters, individuals desiring home and personal protection, manufacturers, and law enforcement and military agencies, and selected international markets. We distribute our products under five primary product lines: Jeff Rann, OPS, Stelth, STREAK VISUAL AMMUNITION™, and Jagemann Munition Components ammunition casings. Three customers accounted for approximately 54% of our sales for the year ended March 31, 2019, three customers account for 62% of our net sales for the three-month period ended March 31, 2018, and one customer accounted for approximately 58% of our net sales for the year ended December 31, 2017. Quarter to quarter comparisons are not uniform, for example for the three month ended March 31, 2018, our largest customer for that period accounted for 35% of our total sales, and, for the year ended March 31, 2019, our largest customer for the period accounted for 25% of our respective total sales.

 

Competition

 

The ammunition and ammunition casing industry is dominated by a small number of companies, a number of which are divisions of large public companies. We compete primarily on the quality, reliability, features, performance, brand awareness, and price of our products. Our primary competitors include Federal Premium Ammunition, Remington Arms, the Winchester Ammunition division of Olin Corporation, and various smaller manufacturers and suppliers, including Black-Hills Ammunition, CBC Group, Fiocchi Ammunition, Hornady Manufacturing Company, PMC, Rio Ammunition, and Wolf.

 

Employees

 

As of June 28, 2019, we had a total of 93 employees, including 5 part-time employees. Of these employees, 71 were engaged in manufacturing, seven in sales and marketing, four in finance and accounting, three in research and development and eighty in various executive and administrative functions. None of our employees are represented by a union in collective bargaining with us. We believe that our employee relations are good.

 

Seasonality

 

Our business has not exhibited a material degree of seasonality to date. Our net sales could be moderately higher in our third and fourth fiscal quarters because of the fall hunting and holiday seasons.

 

Intellectual Property

 

We believe our tradenames, trademarks, and service markets are important factors in distinguishing our products. In addition, we regard our trade secrets, technological resources, knowhow, licensing arrangements, and endorsements as important competitive factors.

 

Included in an acquisition for 600,000 shares of our Common Stock and $200,000 paid in cash to the former license holder, we acquired the exclusive license to produce ammunition using the patented “hybrid luminescence technology” owned by the University of Louisiana at Lafayette. We use that technology in connection with our STREAK VISUAL AMMUNITIONTM.

 

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 licensing agreement grants us the exclusive worldwide rights through October 15, 2021 to Mr. James’ image rights and all trademarks associated with him in connection with the marketing, promotion, advertising, sale, and commercial exploitation of Jesse James Branded Products. In addition, Mr. James agreed to make himself available for certain promotional activities and to promote Jesse James Branded Products through his own social media outlets. 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 also issued 100,000 shares of our Common Stock upon the execution of the license agreement with the potential issuance of up to 75,000 additional shares of Common stock upon achieving certain gross sales with $15 million in gross sales required to earn the entire 75,000 shares.

 

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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 for 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. Mr. Rann agreed to make himself available for certain promotional activities and to promote the Branded Products through his own social media outlets. 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. We also issued 100,000 shares of our Common Stock upon the execution of the license agreement with the potential issuance of 75,000 additional shares of Common Stock upon achieving certain gross sales with $15 million in gross sales required to earn the entire 75,000 shares.

 

Through our acquisition of SW Kenectics, Inc., we acquired the rights to a patent for modular projectiles. This technology is used in connection with our TAC-P line of ammunition. The Company acquired SW Kenectics, Inc. for a total of up to $1,500,000 in cash and issue 1,700,002 restricted shares of the Company’s common stock. The agreement specifies that $1,250,000 of the cash is deferred pending completion of specific milestones and the 1,700,002 shares of common stock are subject to claw back provisions to ensure agreed upon objective are met.

 

Included in the acquisition of Jagemann Stamping Company’s casing division for $7,000,000 in cash, $10,400,000 delivered in the form of a Promissory Note, and 4,750,000 shares of our Common Stock, we acquired customer relationships, intellectual property, and the use of a tradename. These intangible assets are used in the operation and production of our ammunition casing business through our wholly owned subsidiary, Jagemann Munition Components.

 

Backlog

 

We did not have a material amount of backlog of orders as of March 31, 2019 or March 31, 2018. Backlog consists of orders for which purchase orders have been received and which are generally scheduled for shipment within three months. We generally allow orders that have not yet been shipped to be cancelled. Our backlog may not be indicative of future sales.

 

Environmental Matters

 

Our operations are subject to a variety of federal, state, and local laws and regulations relating to environmental protection, including those governing the discharge, treatment, storage, transportation, remediation, and disposal of hazardous materials and wastes; the restoration of damages to the environment; and health and safety matters. We believe that our operations are in material compliance with these laws and regulations. We incur expenses in complying with environmental requirements and could incur higher costs in the future as a result of more stringent requirements that may be enacted in the future.

 

Some environmental laws, such as the U.S. federal Superfund law and similar state laws, can impose liability, without regard to fault, for the entire cost of the cleanup of contaminated sites on current or former site owners and operators or parties who sent wastes to such sites. Based on currently available information, we do not believe that environmental matters will have a material adverse effect on our business, operating results, or financial condition.

 

Regulatory Matters

 

The manufacture, sale, and purchase of ammunition are subject to extensive federal, state, local, and foreign governmental laws. We are also subject to the rules and regulations of the ATF and various state and international agencies that control the manufacture, export, import, distribution and sale of firearms, explosives, and ammunition. Such regulations may adversely affect demand for our products by imposing limitations that increase the costs or limit the availability of our products.

 

Our failure to comply with applicable rules and regulations may result in the limitation of our growth or business activities and could result in the revocation of licenses necessary for our business. Applicable laws and regulations provide for the following:

 

  require the licensing of all persons manufacturing, exporting, importing, or selling ammunition or ammunition components as a business;
     
  require serialization, labeling, and tracking of the acquisition and disposition of certain types of ammunition;
     
  regulate the interstate sale of certain ammunition;
     
  restrict or prohibit the ownership, use, or sale of specified categories of ammunition;

 

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  require registries of so-called “ballistic images” of ammunition fired from new guns;
     
  govern the sale, export, and distribution of ammunition;
     
  regulate the use and storage of gun powder or other energetic materials;
     
  regulate the employment of personnel with certain criminal convictions;
     
  restrict access to ammunition manufacturing facilities for certain individuals from other countries or with criminal convictions; and
     
  require compliance with ITAR.

 

The handling of our technical data and the international sale of our products may also be regulated by the U.S. Department of State and Department of Commerce. These agencies can impose civil and criminal penalties, including denying us from exporting our products, for failure to comply with applicable laws and regulations.

 

In addition, bills have been introduced in Congress to establish, and to consider the feasibility of establishing a nationwide database recording so-called “ballistic images” of ammunition fired from new guns. Should such a mandatory database be established, the cost to us, our distributors, and our customers could be significant, depending on the type of firearms and ballistic information included in the database. Bills have been introduced in Congress in the past several years that would affect the manufacture and sale of ammunition, including bills to regulate the manufacture, importation, and sale.

 

We believe that existing federal, state, and local legislation relating to the regulation of firearms and ammunition have not had a material adverse effect on our sales of these products. However, the regulation of firearms and ammunition may become more restrictive in the future, and any such developments might have a material adverse effect on our business, operating results, financial condition, and cash flows. In addition, regulatory proposals, even if never enacted, may affect firearms or ammunition sales as a result of consumer perceptions.

 

Our History

 

We were formed under the name Retrospettiva, Inc. in November 1990 to manufacture and import textile products, including both finished garments and fabrics, but ceased operations in 2001. We were inactive from 2001 until following a series of events starting in December 2016. On December 15, 2016, our then principal stockholders sold their outstanding Common Stock to Fred W. Wagenhals, who is our Chairman of the Board, President, Chief Executive Officer, and largest stockholder. On the same date, Mr. Wagenhals became the sole officer and director of our company. As of December 30, 2016, we changed our trading symbol to POWW; we changed our state of incorporation from California to Delaware; we engaged in a 1-for-25 reverse stock split; and we commenced our current business as AMMO, Inc.

 

Our principal stockholder, Fred Wagenhals, had organized another company on October 13, 2016, which immediately began to take steps to commence the ammunition business. We combined with that company in March 2017, resulting in our acquisition of all the shares of its common stock for 17,285,800 shares of our Common Stock and our succession to its business.

 

We entered into licensing an endorsement agreement with Jesse James, a well-known motorcycle and gun designer, in October 2016, and a license and endorsement agreement with Jeff Rann, a well- known wild game hunter, guide, and spokesman for the firearm and ammunition industry, in February 2017; received a federal firearms license from the Bureau of Alcohol, Tobacco, and Explosives in February 2017; purchased an ammunition manufacturing facility in Payson, Arizona in March 2017; and built a management team and otherwise prepared ourself to participate in the ammunition industry.

 

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. Under the terms of the Merger, we, the sole shareholder of AMMO Technologies Inc., issued to Hallam, Inc.’s two shareholders, 600,000 shares of our common stock, subject to restrictions, and payment of $200,000. The first payment of $100,000 to the Hallam, Inc. shareholders was paid on September 13, 2017, and the second payment of $100,000 was paid on February 6, 2018.

 

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

 

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

 

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

 

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ITEM 1A. RISK FACTORS

 

Purchasing our Common Stock involves a high degree of risk. You should carefully consider the following risk factors, together with all of the information included in this Form 10-K Report, before you decide to purchase shares of our Common Stock. We believe the risks and uncertainties described below are the most significant we face. Additional risks and uncertainties of which we are unaware, or that we currently deem immaterial, also may become important factors that affect us. If any of the following risks occur, our business, operating results, and financial condition could be materially and adversely affected. In that case, the trading price of our common stock could decline, and you may lose all or part of your investment.

 

We have a limited operating history on which you can evaluate our company.

 

We have a limited operating history on which you can evaluate our company. Although the corporate entity has existed since 1990, we have only operated as an ammunition manufacturer since March 2017. As a result, our business will be subject to many of the problems, expenses, delays, and risks inherent in the establishment of a new business enterprise.

 

Our performance is influenced by a variety of economic, social, and political factors.

 

Our performance is influenced by a variety of economic, social, and political factors. General economic conditions and consumer spending patterns can negatively impact our operating results. Economic uncertainty, unfavorable employment levels, declines in consumer confidence, increases in consumer debt levels, increased commodity prices, and other economic factors may affect consumer spending on discretionary items and adversely affect the demand for our products. In times of economic uncertainty, consumers tend to defer expenditures for discretionary items, which affects demand for our products. Any substantial deterioration in general economic conditions that diminish consumer confidence or discretionary income could reduce our sales and adversely affect our operating results. Economic conditions also affect governmental political and budgetary policies. As a result, economic conditions also can have an effect on the sale of our products to law enforcement, government, and military customers.

 

Political and other factors also can affect our performance. Concerns about presidential, congressional, and state elections and legislature and policy shifts resulting from those elections can affect the demand for our products. In addition, speculation surrounding control of firearms, firearm products, and ammunition at the federal, state, and local level and heightened fears of terrorism and crime can affect consumer demand for our products. Often, such concerns result in an increase in near-term consumer demand and subsequent softening of demand when such concerns subside. Inventory levels in excess of customer demand may negatively impact operating results and cash flow.

 

Federal and state legislatures frequently consider legislation relating to the regulation of firearms, including amendment or repeal of existing legislation. Existing laws may also be affected by future judicial rulings and interpretations firearm products, and ammunition. If such restrictive changes to legislation develop, we could find it difficult, expensive, or even impossible to comply with them, impeding new product development and distribution of existing products.

 

Our success depends upon our ability to introduce new products that match customer preferences.

 

Our success depends upon our ability to introduce new products that match consumer preferences. Our efforts to introduce new products into the market may not be successful, and any new products that we introduce may not result in customer or market acceptance. We develop new products that we believe will match consumer preferences. The development of a new product is a lengthy and costly process and may not result in the development of a successful product. Failure to develop new products that are attractive to consumers could decrease our sales, operating margins, and market share and could adversely affect our business, operating results, and financial condition.

 

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If we are unable to protect our intellectual property, we may lose a competitive advantage or incur substantial litigation costs to protect our rights.

 

Our future success depends upon our proprietary technology. Our protective measures, including patent and trade secret protection, may prove inadequate to protect our proprietary rights. The right to stop others from misusing our trademarks, service marks, and patents in commerce depends to some extent on our ability to show evidence of enforcement of our rights against such misuse in commerce. Our efforts to stop improper use, if insufficient, may lead to loss of trademark and service mark rights, brand loyalty, and notoriety among our customers and prospective customers. The scope of any patent that we have or may obtain may not prevent others from developing and selling competing products. The validity and breadth of claims covered in technology patents involve complex legal and factual questions, and the resolution of such claims may be highly uncertain, and expensive. In addition, our patents may be held invalid upon challenge, or others may claim rights in or ownership of our patents.

 

We may be subject to intellectual property infringement claims, which could cause us to incur litigation costs and divert management attention from our business.

 

Any intellectual property infringement claims against us, with or without merit, could be costly and time-consuming to defend and divert our management’s attention from our business. If our products were found to infringe a third party’s proprietary rights, we could be required to enter into costly royalty or licensing agreements to be able to sell our products. Royalty and licensing agreements, if required, may not be available on terms acceptable to us or at all.

 

Our efforts to avoid the patent, trademark, and copyright rights of others may not provide notice to us of potential infringements in time to avoid investing in product development and promotion that must later be abandoned if suitable license terms cannot be reached.

 

There is no guarantee that our use of conventional technology searching and brand clearance searching will identify all potential rights holders. Rights holders may demand payment for past infringements and/or force us to accept costly license terms or discontinue use of protected technology and/or works of authorship that may include for example photos, videos, and software.

 

We depend on the sale of our ammunition products.

 

We manufacture ammunition and ammunition casings for sale to a wide variety of consumers, including gun enthusiasts, collectors, hunters, sportsmen, competitive shooters, individuals desiring home and personal protection, manufacturers, law enforcement and security agencies and officers in the United States and throughout the world. The sale of ammunition and ammunition components is influenced by the sale and usage of firearms. As noted above, sales of firearms are influenced by a variety of economic, social, and political factors, which may result in volatile sales. Ammunition sales represented substantially all of our net sales for the year ended March 31, 2019 and the three month ended March 31, 2018.

 

Our manufacturing facility is critical to our success.

 

Our Arizona and Wisconsin facilities are critical to our success, as we currently produce all of our products at these facilities. The facilities also houses our principal research, development, engineering, and design functions.

 

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Any event that causes a disruption of the operation of these facilities for even a relatively short period of time would adversely affect our ability to produce and ship our products and to provide service to our customers. We make certain changes in our manufacturing operations from time to time to enhance the facilities and associated equipment and systems and to introduce certain efficiencies in manufacturing and other processes to produce our products in a more efficient and cost-effective manner. We anticipate that we will continue to incur significant capital and other expenditures with respect to these facilities, but we may not be successful in continuing to improve efficiencies.

 

To the extent demand for our products increase, our future success will depend upon our ability to enhance manufacturing production capacity.

 

We intend to continue marketing our ammunition products. To the extent demand for our products increase significantly in future periods, one of our key challenges will be to enhance production capacity to meet sales demand, while maintaining product quality. Our inability to meet any future increase in sales demand or access capital for inventory may hinder growth or increase dilution.

 

Shortages of components and materials may delay or reduce our sales and increase our costs, thereby harming our results of operations.

 

The inability to obtain sufficient quantities of raw materials and components, including primers, gun powder, projectiles, and brass necessary for the production of our products could result in reduced or delayed sales or lost orders. Any delay in or loss of sales or orders could adversely impact our operating results. Many of the materials used in the production of our products are available only from a limited number of suppliers. We do not have long-term supply contracts with any suppliers. As a result, we could be subject to increased costs, supply interruptions, and difficulties in obtaining raw materials and components.

 

Our reliance on third-party suppliers for various raw materials and components for our products exposes us to volatility in the availability, quality, and price of these raw materials and components. Our orders with certain of our suppliers may represent a very small portion of their total orders. As a result, they may not give priority to our business, leading to potential delays in or cancellation of our orders. A disruption in deliveries from our third-party suppliers, capacity constraints, production disruptions, price increases, or decreased availability of raw materials or commodities could have an adverse effect on our ability to meet our commitments to customers or increase our operating costs. Quality issues experienced by third party suppliers can also adversely affect the quality and effectiveness of our products and result in liability and reputational harm.

 

We rely on third-party suppliers for most of our manufacturing equipment.

 

We also rely on third-party suppliers for most of the manufacturing equipment necessary to produce our products. The failure of suppliers to supply manufacturing equipment in a timely manner or on commercially reasonable terms could delay our plans to expand our business and otherwise disrupt our production schedules and increase our manufacturing costs. Our orders with certain of our suppliers may represent a very small portion of their total orders. As a result, they may not give priority to our business, leading to potential delays in or cancellation of our orders. If any single-source supplier were to fail to supply our needs on a timely basis or cease providing us manufacturing equipment or components, we would be required to locate and contract with substitute suppliers. We may have difficulty identifying a substitute supplier in a timely manner and on commercially reasonable terms. If this were to occur, our business would be harmed.

 

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We do not have long-term purchase commitments from our customers, and their ability to cancel, reduce, or delay orders could reduce our revenue and increase our costs.

 

Our customers do not provide us with firm, long-term volume purchase commitments, but issue purchase orders for our products. As a result, customers can cancel purchase orders or reduce or delay orders at any time. The cancellation, delay, or reduction of customer purchase orders could result in reduced sales, excess inventory, unabsorbed overhead, and reduced income from operations.

 

We often schedule internal production levels and place orders for raw materials and components with third party suppliers before receiving firm orders from our customers. Therefore, if we fail to accurately forecast customer demand, we may experience excess inventory levels or a shortage of products to deliver to our customers. Factors that could affect our ability to accurately forecast demand for our products include the following:

 

  an increase or decrease in consumer demand for our products or for the products of our competitors;
     
  our failure to accurately forecast consumer acceptance of new products;
     
  new product introductions by us or our competitors;
     
  changes in our relationships within our distribution channels;
     
  changes in general market conditions or other factors, which may result in cancellations of orders or a reduction or increase in the rate of reorders placed by retailers;
     
  changes in laws and regulations governing the activities for which we sell products, such as hunting and shooting sports;
     
  weak economic conditions or consumer confidence, which could reduce demand for discretionary items, such as our products; and
     
  the domestic political environment, including debate over the regulation of firearms, ammunition, and related products.

 

Inventory levels in excess of consumer demand may result in inventory write-downs and the sale of excess inventory at discounted prices, which could have an adverse effect on our business, operating results, and financial condition. If we underestimate demand for our products, our manufacturing facility or third-party suppliers may not be able to react quickly enough to meet consumer demand, resulting in delays in the shipment of products and lost revenue, and damage to our reputation and customer and consumer relationships. We may not be able to manage inventory levels successfully to meet future order and reorder requirements.

 

Our revenue depends primarily on sales by various retailers and distributors, some of which account for a significant portion of our sales.

 

Our revenue depends on our sales through various leading national and regional retailers, local specialty firearms stores, and online merchants. The U.S. retail industry serving the outdoor recreation market has become relatively concentrated. Our sales could become increasingly dependent on purchases by several large retail customers. Consolidation in the retail industry could also adversely affect our business. If our sales were to become increasingly dependent on business with several large retailers, we could be adversely affected by the loss or a significant decline in sales to one or more of these customers. In addition, our dependence on a smaller group of retailers could result in their increased bargaining position and pressures on the prices we charge.

 

The loss of any one or more of our retail customers or significant or numerous cancellations, reductions, delays in purchases or changes in business practices by our retail customers could have an adverse effect on our business, operating results, and financial condition.

 

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These sales channels involve a number of special risks, including the following:

 

  we may be unable to secure and maintain favorable relationships with retailers and distributors;
     
  we may be unable to control the timing of delivery of our products to end-user consumers;
     
  our retailers and distributors are not subject to minimum sales requirements or any obligation to market our products to their customers;
     
  our retailers and distributors may terminate their relationships with us at any time; and
     
  our retailers and distributors market and distribute competing products.

 

We have three customers that accounted for approximately 54% for the year ended March 31, 2019 and three customers that accounted for approximately 68% of our net sales for the three-month period ended March 31, 2018. At December 31, 2017, 58% of our net sales resulted from one customer. Although we intend to expand our customer base, our revenue would likely decline if we lost any major customers or if one of these sizable customers were to significantly reduce its orders for any reason. Because our sales are made by means of standard purchase orders rather than long-term contracts, we cannot assure you that our customers will continue to purchase our products at current levels, or at all.

 

In addition, periods of sluggish economies and consumer uncertainty regarding future economic prospects in our key markets can have an adverse effect on the financial health of our customers, which may in turn have a material adverse effect on our business, operating results, and financial condition.

 

We extend credit to our customers for periods of varying duration based on an assessment of the customer’s financial condition, generally without requiring collateral, which increases our exposure to the risk of uncollectable receivables. In addition, we face increased risk of order reduction or cancellation when dealing with financially ailing retailers or retailers struggling with economic uncertainty. We may reduce our level of business with customers and distributors experiencing financial difficulties and may not be able to replace that business with other customers, which could have a material adverse effect on our business, operating results, and financial condition.

 

An inability to expand our E-commerce business could reduce our future growth.

 

Consumers are increasingly purchasing online. We operate direct-to-consumer e-commerce stores to maintain an online presence with our end users. The future success of our online operations depends on our ability to use our marketing resources to communicate with existing and potential customers. We face competitive pressure to offer promotional discounts, which could impact our gross margin and increase our marketing expenses. We are limited, however, in our ability to fully respond to competitor price discounting because we cannot market our products at prices that may produce adverse relationships with our customers that operate brick and mortar locations as they may perceive themselves to be at a disadvantage based on lower e-commerce pricing to end consumers. There is no assurance that we will be able to successfully expand our e-commerce business to respond to shifting consumer traffic patterns and direct-to-consumer buying trends.

 

In addition, e-commerce and direct-to-consumer operations are subject to numerous risks, including implementing and maintaining appropriate technology to support business strategies; reliance on third-party computer hardware/software and service providers; data breaches; violations of state, federal or international laws, including those relating to online privacy; credit card fraud; telecommunication failures; electronic break-ins and similar disruptions; and disruption of Internet service. Our inability to adequately respond to these risks and uncertainties or to successfully maintain and expand our direct-to-consumer business may have an adverse impact on our business and operating results.

 

Our gross margins depend upon our sales mix.

 

Our gross margin is higher when our sales mix is skewed toward our higher-margin proprietary product lines versus a lower contribution from mid-market ammunition that we also manufacture. If our actual sales mix results in a lower overall percentage from our proprietary lines, our gross margins will be reduced, affecting our results of operations.

 

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We may have difficulty collecting amounts owed to us.

 

Certain of our customers may experience business challenges and credit-related issues. We perform ongoing credit evaluations of customers, but these evaluations may not be completely effective. We grant payment terms to most customers ranging from 30 to 90 days and do not generally require collateral. Should more customers than we anticipate experience liquidity issues, or if payments are not received on a timely basis, we may have difficulty collecting amounts owed to us by such customers and our business, operating results, and financial condition could be adversely impacted. Retail consolidation could result in more concentrated credit-related risks.

 

We face intense competition that could result in our losing or failing to gain market share and suffering reduced sales.

 

We operate in intensely competitive markets that are characterized by price erosion and competition from major domestic and international companies. Competition in the markets in which we operate is based on a number of factors, including price, quality, product innovation, performance, reliability, styling, product features, and warranties, and sales and marketing programs. This intense competition could result in pricing pressures, lower sales, reduced margins, and lower market share.

 

Our competitors include Federal Premium Ammunition, Remington Arms, the Winchester Ammunition Division of Olin Corporation, and various smaller manufacturers and importers, including Black Hills Ammunition, CBC Group, Fiocchi Ammunition, Hornady, PMC, Rio Ammunition, and Wolf. Most of our competitors have greater market recognition, larger customer bases, long-term government contracts, and substantially greater financial, technical, marketing, distribution, and other resources than we possess and that afford them competitive advantages. As a result, they may be able to devote greater resources to the promotion and sale of products, to invest more funds in intellectual property and product development, to negotiate lower prices for raw materials and components, to deliver competitive products at lower prices, and to introduce new products and respond to consumer requirements more quickly than we can.

 

Our competitors could introduce products with superior features at lower prices than our products and could also bundle existing or new products with other more established products to compete with us. Certain of our competitors may be willing to reduce prices and accept lower profit margins to compete with us. Our competitors could also gain market share by acquiring or forming strategic alliances with other competitors.

 

Finally, we may face additional sources of competition in the future because new distribution methods offered by the Internet and electronic commerce have removed many of the barriers to entry historically faced by start-up companies. Retailers also demand that suppliers reduce their prices on products, which could lead to lower margins. Any of the foregoing effects could cause our sales to decline, which would harm our financial position and results of operations.

 

Our ability to compete successfully depends on a number of factors, both within and outside our control. These factors include the following:

 

  our success in developing, producing, marketing, and successfully selling new products;
     
  our ability to address the needs of our consumer customers;
     
  the pricing, quality, performance, and reliability of our products;

 

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  the quality of our customer service;
     
  the efficiency of our production; and
     
  product or technology introductions by our competitors.

 

Because we believe technological and functional distinctions among competing products in our markets are perceived by many end-user consumers to be relatively modest, effectiveness in marketing and manufacturing are particularly important competitive factors in our business.

 

Seasonality and weather conditions may cause our operating results to vary from quarter to quarter.

 

Because many of our products are used for seasonal outdoor sporting activities, our operating results may be significantly impacted by unseasonable weather conditions. Accordingly, our operating results could suffer when weather patterns do not conform to seasonal norms.

 

Shipments of ammunition for hunting are highest during the months of June through September to meet consumer demand for the fall hunting season and holidays. The seasonality of our sales may change in the future. Seasonal variations in our operating results may reduce our cash on hand, increase our inventory levels, and extend our accounts receivable collection periods. This in turn may cause us to increase our debt levels and interest expense to fund our working capital requirements.

 

We manufacture and sell products that create exposure to potential product liability, warranty liability, or personal injury claims and litigation.

 

Our products are used in activities and situations that involve risk of personal injury and death. Our products expose us to potential product liability, warranty liability, and personal injury claims and litigation relating to the use or misuse of our products, including allegations of defects in manufacturing, defects in design, a failure to warn of dangers inherent in the product or activities associated with the product, negligence, and strict liability. If successful, any such claims could have a material adverse effect on our business, operating results, and financial condition. Defects in our products may result in a loss of sales, recall expenses, delay in market acceptance, and damage to our reputation and increased warranty costs, which could have a material adverse effect on our business, operating results, and financial condition. Although we maintain product liability insurance in amounts that we believe are reasonable, we may not be able to maintain such insurance on acceptable terms, if at all, in the future and product liability claims may exceed the amount of insurance coverage. In addition, our reputation may be adversely affected by such claims, whether or not successful, including potential negative publicity about our products.

 

The failure to manage our growth could adversely affect our operations.

 

The failure to manage our growth could adversely affect our operations. To continue to expand our business and enhance our competitive position, we must make significant investments in equipment, facilities, systems, and personnel. In addition, we must commit significant funds to enhance our sales, marketing, information technology, and research and development efforts. As a result of the increase in fixed costs and operating expenses, our failure to increase our sales sufficiently to offset these increased costs could adversely affect our business, operating results, and financial condition.

 

Managing our planned growth effectively will require us to take a number of steps, including the following:

 

  enhance our operational, financial, and management systems;
     
  enhance our facilities and purchase additional equipment; and
     
  successfully hire, train, and retain additional employees, including additional personnel for our technological, sales, and marketing efforts.

 

The expansion of our products and customer base may result in increases in our overhead and selling expenses. We may be required to increase staffing and other expenses and our expenditures on capital equipment and leasehold improvements to meet the demand for our products. Any increase in expenditures in anticipation of future sales that do not materialize would adversely affect our profitability.

 

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Our business is highly dependent upon our brand recognition and reputation, and the failure to maintain or enhance our brand recognition or reputation would likely have a material adverse effect on our business.

 

Our brand recognition and reputation are critical aspects of our business. We believe that maintaining and further enhancing our brands, particularly our STREAK VISUAL AMMUNITION™, and our reputation are critical to retaining existing customers and attracting new customers. We also believe that the importance of our brand recognition and reputation will continue to increase as competition in our markets continues to develop.

 

We anticipate that our advertising, marketing, and promotional efforts will increase in the foreseeable future as we continue to seek to enhance our brands and consumer demand for our products. Historically, we have relied on print and electronic media advertising to increase consumer awareness of our brands to increase purchasing intent and conversation. We anticipate that we will increasingly rely on other forms of media advertising, including social media and e-marketing. Our future growth and profitability will depend in large part upon the effectiveness and efficiency of our advertising, promotion, public relations, and marketing programs. These brand promotion activities may not yield increased revenue and the efficacy of these activities will depend on a number of factors, including our ability to do the following:

 

  determine the appropriate creative message and media mix for advertising, marketing, and promotional expenditures;
     
  select the right markets, media, and specific media vehicles in which to advertise;
     
  identify the most effective and efficient level of spending in each market, media, and specific media vehicle; and
     
  effectively manage marketing costs, including creative and media expenses, to maintain acceptable customer acquisition costs.

 

In addition, certain of our current or future products may benefit from endorsements and support from particular sportsmen, athletes, or other celebrities, and those products and brands may become personally associated with those individuals. As a result, sales of the endorsed products could be materially and adversely affected if any of those individuals’ images, reputations, or popularity were to be negatively impacted.

 

Increases in the pricing of one or more of our marketing and advertising channels could increase our marketing and advertising expenses or cause us to choose less expensive but possibly less effective marketing and advertising channels. If we implement new marketing and advertising strategies, we may incur significantly higher costs than our current channels, which in turn could adversely affect our operating results. Implementing new marketing and advertising strategies also could increase the risk of devoting significant capital and other resources to endeavors that do not prove to be cost effective. We also may incur marketing and advertising expenses significantly in advance of the time we anticipate recognizing revenue associated with such expenses and our marketing and advertising expenditures may not generate sufficient levels of brand awareness and conversation or result in increased revenue. Even if our marketing and advertising expenses result in increased sales, the increase might not offset our related expenditures. If we are unable to maintain our marketing and advertising channels on cost-effective terms or replace or supplement existing marketing and advertising channels with similarly or more effective channels, our marketing and advertising expenses could increase substantially, our customer base could be adversely affected, and our business, operating results, financial condition, and reputation could suffer.

 

Our operating results may experience significant fluctuations.

 

Many factors contribute to significant periodic and seasonal quarterly fluctuations in our results of operations. These factors include the following:

 

  the cyclicality of the markets we serve;
     
  the timing and size of new orders;
     
  the cancellation of existing orders;
     
  the volume of orders relative to our capacity;
     
  product introductions and market acceptance of new products or new generations of products;
     
  timing of expenses in anticipation of future orders;
     
  changes in product mix;
     
  availability of production capacity;
     
  changes in cost and availability of labor and raw materials;
     
  timely delivery of products to customers;
     
  pricing and availability of competitive products;
     
  new product introduction costs;

 

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  changes in the amount or timing of operating expenses;
     
  introduction of new technologies into the markets we serve;
     
  pressures on reducing selling prices;
     
  our success in serving new markets;
     
  adverse publicity regarding the safety, performance, and use of our products;
     
  the institution and outcome of any litigation;
     
  political, economic, or regulatory developments; and
     
  changes in economic conditions.

 

As a result of these and other factors, we believe that period-to-period comparisons of our results of operations may not be meaningful in the short term, and our performance in a particular period may not be indicative of our performance in any future period.

 

The failure to attract and retain key personnel could have an adverse effect on our operating results.

 

Our success depends substantially on the efforts and abilities of our senior management and key personnel. The competition for qualified management and key personnel is intense. Although we maintain noncompetition and nondisclosure covenants with many of our key personnel, we do not have employment agreements with most of them. The loss of services of one or more of our key employees or the inability to hire, train, and retain additional key personnel could delay the development and sale of our products, disrupt our business, and interfere with our ability to execute our business plan.

 

In addition, our ability to maintain our competitive position is dependent to a large degree on the efforts and skills of our senior management team, including Fred Wagenhals, our President and Chief Executive Officer. The loss of the services of one or more of our key personnel could materially and adversely affect our operations.

 

We may not be able to secure additional financing on favorable terms, or at all, to meet our future capital needs.

 

In the future, we may require additional capital to fund the planned expansion of our business and to respond to business opportunities, challenges, potential acquisitions, or unforeseen circumstances. We could encounter unforeseen difficulties that may deplete our capital resources rapidly, which could require us to seek additional financing in the near future. The timing and amount of any additional financing that is required to continue the expansion of our business and the marketing of our products will depend on our ability to improve our operating results and other factors. We may not be able to secure additional debt or equity financing in a timely basis or on favorable terms, or at all. Such financing could result in substantial dilution of the equity interests of existing stockholders. We have no commitments for any additional financing should the need arise. If we are unable to secure any necessary additional financing, we may need to delay expansion plans, conserve cash, and reduce operating expenses. There is no assurance that any additional financing will be sufficient, that the financing will be available on terms favorable to us or to existing stockholders and at such times as required, or that we will be able to obtain the additional financing required for the continued operation and growth of our business. Any debt financing obtained by us in the future could involve restrictive covenants relating to our capital raising activities and other financial and operational matters, which may make it more difficult for us to obtain additional capital and to pursue business opportunities. If we raise additional funds through further issuances of equity, convertible debt securities, or other securities convertible into equity, our existing stockholders could suffer significant dilution in their percentage ownership of our company, and any new equity securities we issue could have rights, preferences, and privileges senior to those of holders of our Common Stock. If we are unable to obtain adequate financing or financing on terms satisfactory to us, when we require it, our ability to grow or support our business and to respond to business challenges could be significantly limited.

 

Potential strategic alliances may not achieve their objectives, which could impede our growth.

 

We anticipate that we will enter into strategic alliances in the future. We continue to explore strategic alliances designed to expand our product offerings, enter new markets, and improve our distribution channels. Strategic alliances may not achieve their intended objectives, and parties to our strategic alliances may not perform as contemplated. The failure of these alliances may impede our ability to introduce new products and enter new markets.

 

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Any acquisitions that we undertake will involve significant risks, and any acquisitions that we undertake in the future could disrupt our business, dilute stockholder value, and harm our operating results.

 

We have a strategy to expand our operations through strategic acquisitions to enhance existing products and offer new products, enter new markets and businesses, strengthen and avoid interruption from our supply chain, and enhance our position in current markets and businesses. Acquisitions involve significant risks and uncertainties. We cannot accurately predict the timing, size, and success of any future acquisitions. We may be unable to identify suitable acquisition candidates or to complete the acquisitions of candidates that we identify. Increased competition for acquisition candidates or increased asking prices by acquisition candidates may increase purchase prices for acquisitions to levels beyond our financial capability or to levels that would not result in the returns required by our acquisition criteria. Unforeseen expenses, difficulties, and delays frequently encountered in connection with expansion through acquisitions could inhibit our growth and negatively impact our operating results.

 

Our ability to complete acquisitions that we desire to make will depend upon various factors, including the following:

 

  the availability of suitable acquisition candidates at attractive purchase prices;
     
  the ability to compete effectively for available acquisition opportunities;
     
  the availability of cash resources, borrowing capacity, or stock at favorable price levels to provide required purchase prices in acquisitions;
     
  the ability of management to devote sufficient attention to acquisition efforts; and
     
  the ability to obtain any requisite governmental or other approvals.

 

We may have little or no experience with certain acquired businesses, which could involve significantly different supply chains, production techniques, customers, and competitive factors than our current business. This lack of experience would require us to rely to a great extent on the management teams of these acquired businesses. These acquisitions also could require us to make significant investments in systems, equipment, facilities, and personnel in anticipation of growth. These costs could be essential to implement our growth strategy in supporting our expanded activities and resulting corporate structure changes. We may be unable to achieve some or all of the benefits that we expect to achieve as we expand into these new markets within the time frames we expect, if at all. If we fail to achieve some or all of the benefits that we expect to achieve as we expand into these new markets, or do not achieve them within the time frames we expect, our business, financial condition, and results of operations could be adversely affected.

 

As a part of any potential acquisition, we may engage in discussions with various acquisition candidates. In connection with these discussions, we and each potential acquisition candidate may exchange confidential operational and financial information, conduct due diligence inquiries, and consider the structure, terms, and conditions of the potential acquisition. In certain cases, the prospective acquisition candidate agrees not to discuss a potential acquisition with any other party for a specific period of time and agrees to take other actions designed to enhance the possibility of the acquisition, such as preparing audited financial information. Potential acquisition discussions frequently take place over a long period of time and involve difficult business integration and other issues. As a result of these and other factors, a number of potential acquisitions that from time-to-time appear likely to occur do not result in binding legal agreements and are not consummated, but may result in increased legal, consulting, and other costs.

 

Unforeseen expenses, difficulties, and delays frequently encountered in connection with future acquisitions could inhibit our growth and negatively impact our profitability. Any future acquisitions may not meet our strategic objectives or perform as anticipated. In addition, the size, timing, and success of any future acquisitions may cause substantial fluctuations in our operating results from quarter to quarter. These interim fluctuations could adversely affect the market price of our Common Stock.

 

If we finance any future acquisitions in whole or in part through the issuance of Common Stock or securities convertible into or exercisable for Common Stock, existing stockholders will experience dilution in the voting power of their Common Stock and earnings per share could be negatively impacted. The extent to which we will be able or willing to use our Common Stock for acquisitions will depend on the market price of our Common Stock from time-to-time and the willingness of potential acquisition candidates to accept our Common Stock as full or partial consideration for the sale of their businesses. Our inability to use our Common Stock as consideration, to generate cash from operations, or to obtain additional funding through debt or equity financings to pursue an acquisition could limit our growth.

 

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Any acquisitions that we undertake could be difficult to integrate, disrupt our business, and harm our operations.

 

We may be unable to effectively complete an integration of the management, operations, facilities, and accounting and information systems of acquired businesses with our own; to implement effective controls to mitigate legal and business risks with which we have no prior experience; to manage efficiently the combined operations of the acquired businesses with our operations; to achieve our operating, growth, and performance goals for acquired businesses; to achieve additional sales as a result of our expanded operations; or to achieve operating efficiencies or otherwise realize cost savings as a result of anticipated acquisition synergies. The integration of acquired businesses involves numerous risks and uncertainties, including the following:

 

  the potential disruption of our core businesses;
     
  risks associated with entering markets and businesses in which we have little or no prior experience;
     
  diversion of management’s attention from our core businesses;
     
  adverse effects on existing business relationships with suppliers and customers;
     
  risks associated with increased regulatory or compliance matters;
     
  failure to retain key customers, suppliers, or personnel of acquired businesses;
     
  the potential strain on our financial and managerial controls and reporting systems and procedures;
     
  greater than anticipated costs and expenses related to the integration of the acquired business with our business;
     
  potential unknown liabilities associated with the acquired company;
     
  risks associated with weak internal controls over information technology systems and associated cyber security risks;
     
  meeting the challenges inherent in effectively managing an increased number of employees in diverse locations;
     
  failure of acquired businesses to achieve expected results;
     
  the risk of impairment charges related to potential write-downs of acquired assets in future acquisitions; and
     
  the challenge of creating uniform standards, controls, procedures, policies, and information systems.

 

Breaches of our information systems could adversely affect our reputation, disrupt our operations, and result in increased costs and loss sales.

 

There have been an increasing number of cyber security incidents affecting companies around the world, which have caused operational failures or compromised sensitive corporate data. Although we do not believe our systems are at a greater risk of cyber security incidents than other similar organizations, such cyber security incidents may result in the loss or compromise of customer, financial, or operational data; disruption of billing, collections, or normal operating activities; disruption of electronic monitoring and control of operational systems; and delays in financial reporting and other management functions. Possible impacts associated with a cyber security incident may include among others, remediation costs related to lost, stolen, or compromised data; repairs to data processing systems; increased cyber security protection costs; reputational damage; and adverse effects on our compliance with applicable privacy and other laws and regulations.

 

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A failure of our information technology systems, or an interruption in their operation due to internal or external factors including cyber-attacks, could have a material adverse effect on our business, financial condition or results of operations

 

Our operations depend on our ability to protect our information systems, computer equipment, and information databases from systems failures. We rely on our information technology systems generally to manage the day-to-day operations of our business, operate elements of our manufacturing facility, manage relationships with our customers, fulfill customer orders, and maintain our financial and accounting records. Failure of our information technology systems could be caused by internal or external events, such as incursions by intruders or hackers, computer viruses, cyber-attacks, failures in hardware or software, or power or telecommunication fluctuations or failures. The failure of our information technology systems to perform as anticipated for any reason or any significant breach of security could disrupt our business and result in numerous adverse consequences, including reduced effectiveness and efficiency of operations, increased costs, or loss of important information, any of which could have a material adverse effect on our business, operating results, and financial condition. Any technology and information security processes and disaster recovery plans we use to mitigate our risk to these vulnerabilities may not be adequate to ensure that our operations will not be disrupted should such an event occur.

 

We are subject to extensive regulation and could incur fines, penalties and other costs and liabilities under such requirements

 

Like many other manufacturers and distributors of consumer products, we are required to comply with a wide variety of laws, rules, and regulations, including those relating to labor, employment, the environment, the export and import of our products, and taxation. These laws, rules, and regulations currently impose significant compliance requirements on our business, and more restrictive laws, rules and regulations may be adopted in the future.

 

Our operations are subject to a variety of laws and regulations relating to environmental protection, including those governing the discharge, treatment, storage, transportation, remediation, and disposal of certain materials and wastes, and restoration of damages to the environment, and health and safety matters. We could incur substantial costs, including remediation costs, resource restoration costs, fines, penalties, and third-party property damage or personal injury claims as a result of liabilities under or violations of such laws and regulations or the permits required thereunder. While environmental laws and regulations have not had a material adverse effect on our business, operating results, financial condition, the ultimate cost of environmental liabilities is difficult to accurately predict and we could incur material additional costs as a result of requirements or obligations imposed or liabilities identified in the future.

 

As a manufacturer and distributor of consumer products, we are subject to the Consumer Products Safety Act, which empowers the Consumer Products Safety Commission to exclude from the market products that are found to be unsafe or hazardous. Under certain circumstances, the Consumer Products Safety Commission could require us to repurchase or recall one or more of our products. In addition, laws regulating certain consumer products exist in some cities and states, and in other countries in which we sell our products, and more restrictive laws and regulations may be adopted in the future. Any repurchase or recall of our products could be costly to us and could damage our reputation. If we were required to remove, or we voluntarily removed, our products from the market, our reputation could be tarnished and we could have large quantities of finished products that we are unable to sell. We are also subject to the rules and regulations of the Bureau of Alcohol, Tobacco, Firearms and Explosives, or the ATF. If we fail to comply with ATF rules and regulations, the ATF may limit our growth or business activities, levy fines against or revoke our license to do business. Our business, and the business of all producers and marketers of ammunition and firearms, is also subject to numerous federal, state, local, and foreign laws, regulations, and protocols. Applicable laws have the following effects:

 

  ●  require the licensing of all persons manufacturing, exporting, importing, or selling firearms and ammunition as a business;
     
  require background checks for purchasers of firearms;
     
  impose waiting periods between the purchase of a firearm and the delivery of a firearm;
     
  ●  prohibit the sale of firearms to certain persons, such as those below a certain age and persons with criminal records;
     
  ●  regulate the use and storage of gun powder or other energetic materials;
     
  ●  regulate our employment of personnel with criminal convictions; and
     
  ●  restrict access to firearm manufacturing facilities for individuals from other countries or with criminal convictions.

 

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Also, the export of our products is controlled by International Traffic in Arms Regulations, or ITAR, and Export Administration Regulations, or EAR. The ITAR implements the provisions of the Arms Export Control Act and is enforced by the U.S. Department of State. The EAR implements the provisions of the Export Administration Act and is enforced by the U.S. Department of Commerce. Among their many provisions, the ITAR and the EAR require a license application for the export of many of our products. In addition, the ITAR requires congressional approval for any firearms export application with a total value of $1 million or higher. Further, because our manufacturing process includes certain toxic, flammable and explosive chemicals, we are subject to the Chemical Facility Anti-Terrorism Standards, as administered by the U.S. Department of Homeland Security, which require that we take additional reporting and security measures related to our manufacturing process.

 

Several states currently have laws in effect that are similar to, and, in certain cases, more restrictive than, these federal laws. Compliance with all of these regulations is costly and time-consuming. Inadvertent violation of any of these regulations could cause us to incur fines and penalties and may also lead to restrictions on our ability to manufacture and sell our products and services and to import or export the products we sell.

 

Changes in government policies and firearms legislation could adversely affect our financial results

 

The sale, purchase, ownership, and use of firearms are subject to numerous and varied federal, state, and local governmental regulations. Federal laws governing firearms include the National Firearms Act, the Federal Firearms Act, the Arms Export Control Act, and the Gun Control Act of 1968. These laws generally govern the manufacture, import, export, sale, and possession of firearms and ammunition. We hold all necessary licenses to legally sell ammunition in the United States.

 

Currently, the federal legislature and several state legislatures are considering additional legislation relating to the regulation of firearms and ammunition. These proposed bills are extremely varied. If enacted, such legislation could effectively ban or severely limit the sale of affected firearms and ammunition. In addition, if such restrictions are enacted and are incongruent, we could find it difficult, expensive, or even practically impossible to comply with them, which could impede new product development and the distribution of existing products. We cannot assure you that the regulation of our business activities will not become more restrictive in the future and that any such restriction will not have a material adverse effect on our business.

 

Any change to the Second Amendment would dramatically impact our ability to conduct business.

 

Failure to comply with the U.S. Foreign Corrupt Practices Act or other applicable anti-corruption legislation, and export controls and trade sanctions, could result in fines or criminal penalties if we expand our business abroad

 

The expansion of our business internationally would expose us to trade sanctions and other restrictions imposed by the United States and other governments. The U.S. Departments of Justice, Commerce, Treasury and other agencies and authorities have a broad range of civil and criminal penalties they may seek to impose against companies for violations of export controls, the Foreign Corrupt Practices Act, anti-boycott provisions and other federal statutes, sanctions and regulations and, increasingly, similar or more restrictive foreign laws, rules and regulations, which may also apply to us. By virtue of these laws and regulations, and under laws and regulations in other jurisdictions, we may be obliged to limit our business activities, we may incur costs for compliance programs and we may be subject to enforcement actions or penalties for noncompliance. In recent years, U.S. and foreign governments have increased their oversight and enforcement activities with respect to these laws and we expect the relevant agencies to continue to increase these activities. A violation of these laws, sanctions or regulations could result in restrictions on our exports, civil and criminal fines or penalties and could adversely impact our business, operating results, and financial condition.

 

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Our directors and officers will have the ability to control our company

 

Our current directors and officers and people affiliated with them own a majority of the issued and outstanding shares of our Common Stock (assuming no exercise of any outstanding options or warrants). Accordingly, the current directors and officers will be able to exert substantial influence over our company and control matters requiring approval by our stockholders, including electing all our directors, approving any amendments to our certificate of incorporation, increasing our authorized capital stock, effecting a merger or sale of our assets, and determining the number of shares available for issuance under our equity-based plans. As a result, no change of control of our company can occur without their consent.

 

This voting control may discourage transactions involving a change of control of our company, including transactions in which stockholders might otherwise receive a premium for their shares over the then current market price. The directors and officers are not prohibited from selling a controlling interest in our company to a third party and may do so without stockholder approval and without providing for a purchase of the shares of Common Stock held by others. Accordingly, shares of Common Stock may be worth less than they would be absent such concentrated voting power.

 

Our charter documents and Delaware law could make it more difficult for a third party to acquire us and discourage a takeover

 

Our Certificate of Incorporation, Bylaws, and Delaware law contain certain provisions that may have the effect of deterring or discouraging, among other things, a non-negotiated tender or exchange offer for shares of Common Stock, a proxy contest for control of our company, the assumption of control of our company by a holder of a large block of Common Stock, and the removal of the management of our company. Such provisions also may have the effect of deterring or discouraging a transaction which might otherwise be beneficial to stockholders. Our certificate of incorporation also may authorize our board of directors, without stockholder approval, to issue one or more series of preferred stock, which could have voting and conversion rights that adversely affect or dilute the voting power of the holders of Common Stock. Delaware law also imposes conditions on certain business combination transactions with “interested stockholders.” Our certificate of incorporation authorizes our Board of Directors to fill vacancies or newly created directorships. A majority of the directors then in office may elect a successor to fill any vacancies or newly created directorships. Such provisions could limit the price that investors might be willing to pay in the future for shares of our Common Stock and impede the ability of the stockholders to replace management.

 

The elimination of monetary liability against our directors, officers, and employees under Delaware law and the existence of indemnification rights to our directors, officers, and employees may result in substantial expenditures by us and may discourage lawsuits against our directors, officers, and employees. We also may have entered into contractual indemnification obligations under employment agreements with our executive officers. The foregoing indemnification obligations could result in our incurring substantial expenditures to cover the cost of settlement or damage awards against directors and officers, which we may be unable to recoup. These provisions and resultant costs may also discourage us from bringing a lawsuit against our directors and officers for breaches of their fiduciary duties and may similarly discourage the filing of derivative litigation by our stockholders against our directors and officers even though such actions, if successful, might otherwise benefit our company and our stockholders.

 

Our results of operations could be impacted by unanticipated changes in tax provisions or exposure to additional income tax liabilities

 

Our business operates in many locations under government jurisdictions that impose income taxes. Changes in domestic or foreign income tax laws and regulations, or their interpretation, could result in higher or lower income tax rates assessed or changes in the taxability of certain revenues or the deductibility of certain expenses, and higher excise taxes thereby affecting our income tax expense and profitability. In addition, audits by income tax authorities could result in unanticipated increases in our income tax expense.

 

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Limited or No Public Market for our securities

 

There has been a limited public market for our Common Stock and no public market for our outstanding stock options and warrants. Our Common Stock is currently quoted on the OTCQB Market. The daily trading volume of our Common Stock has been limited.

 

We cannot predict the extent to which investor interest in our company will lead to the development of an active trading market or how liquid that market might become. The lack of an active market may reduce the value of shares of our Common Stock and impair the ability of our stockholders to sell their shares at the time or price at which they wish to sell them. An inactive market may also impair our ability to raise capital by selling our Common Stock and may impair our ability to acquire or invest in other companies, products, or technologies by using our Common Stock as consideration.

 

We may be unable to list our stock on a national exchange, such as NASDAQ

 

There has been a limited public market for our Common Stock. Although it is our intention to qualify for the trading of our Common Stock on a national exchange, we may not meet or maintain certain qualifying requirements. If we are unable to meet these requirements, we may be limited to trading conducted on the OTCQB Market.

 

The market price of our Common Stock may be volatile and could decline

 

The market price of our Common Stock has fluctuated substantially in the past and is likely to continue to be highly volatile and subject to wide fluctuations in the future. A number of factors could cause the market price of our Common Stock to decline, many of which we cannot control, including the following:

 

  ●  our ability to execute our business plan;
     
  actual or anticipated changed in our operating results;
     
  ●  variations in our quarterly results;
     
  ●  changes in expectations relating to our products, plans, and strategic position or those of our competitors or customers;
     
  ●  announcements or introduction of technological innovations or new products by us or our competitors;
     
  ●  market conditions within our market;
     
  ●  the sale of even small blocks of Common Stock by stockholders;
     
  ●  price and volume fluctuations in the overall stock market from time to time;
     
  ●  significant volatility in the market price and trading volume of public companies in general and small emerging companies in particular;
     
  ●  changes in investor perceptions;
     
  ●  the level and quality of any research analyst coverage of our Common Stock, changes in earnings estimates or investment recommendations by securities analysis, or our failure to meet such estimates;
     
  ●  any financial guidance we may provide to the public, any changes in such guidance, or our failure to meet such guidance;

 

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  various market factors or perceived market factors, including rumors, whether or not correct, involving us, our customers, or our competitors;
     
  future sales of our Common Stock;
     
  Introductions of new products or new pricing policies by us or by our competitors;
     
  regulatory or environmental laws that restrict the sale of ammunition containing lead;
     
  acquisitions or strategic alliances by us or by our competitors;
     
  litigation involving us, our competitors, or our industry;
     
  regulatory, legislative, political, and other developments that may affect us, our customers, and the purchasers of our products;
     
  the gain or loss of significant customers;
     
  the volume and timing of customers’ orders;
     
  recruitment or departure of key personnel;
     
  developments with respect to intellectual property rights;
     
  our international acceptance;
     
  market conditions in our industry, the business success of our customers, and economy as a whole; and
     
  general global economic and political instability.

 

In addition, the market prices of small emerging companies have experienced significant price and volume fluctuations that often have been unrelated or disproportionate to their operating performance. In the past, companies that have experienced volatility in the market price of their securities have been the subject of securities class action litigation. If we were the object of a securities class action litigation, it could result in substantial losses and divert management’s attention and resources form other matters.

 

Sales of large numbers of shares could adversely affect the price of our Common Stock

 

Most of our Common Stock shares currently outstanding are restricted securities as that term is defined in Rule 144 under the Securities Act of 1933, as amended, or the Securities Act. All outstanding shares of Common Stock are or will be eligible for resale in the public markets at various times within the next six months, subject to compliance with the volume and manner of sale requirements of Rule 144 under the Securities Act of 1933, as amended, with respect to all restricted securities held by affiliates.

 

In general, under Rule 144 as currently in effect, any person (or persons whose shares are aggregated for purposes of Rule 144) who beneficially owns restricted securities with respect to which at least six months has elapsed since the later of the date the shares were acquired from us, or from an affiliate of ours, is entitled to sell within any three-month period a number of shares that does not exceed the greater of 1% of the then outstanding shares of our Common Stock or the average weekly trading volume in our Common Stock during the four calendar weeks preceding such sale. Sales under Rule 144 also are subject to certain manner-of-sale provisions and notice requirements and to the availability of current public information about us. A person who is not an affiliate, who has not been an affiliate within three months prior to sale, and who beneficially owns restricted securities with respect to which at least six months has elapsed since the later of the date the shares were acquired from us, or from an affiliate of ours, is entitled to sell such shares under Rule 144 without regard to any of the volume limitations or other requirements described above. Sales of substantial amounts of Common Stock in the public market could adversely affect prevailing market prices.

 

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In accordance with our recent offering of Units, consisting of Common Stock and warrants to purchase Common Stock, we filed a registration statement with the SEC registering 13,242,186 shares of Common Stock, including the shares that may be issued upon the exercise of the warrants that are part of Units. We agreed to file an additional registration statements for approximately 11,783,853 shares of Common Stock, including the shares that may be issued upon the exercise of the warrants contained in Units. Once the registrations are effective, the holders of such Common Stock, including the Common Stock issuable upon the exercise of the warrants will be able to freely sell their shares, which could have a negative effect on the prevailing market prices.

 

Conversion of warrants, and issuance of incentive stock grants may have a dilutive effective on our stock, and negatively impact the price of our Common Stock.

 

As of March 31, 2019, we had 8,143,115 warrants outstanding. Each warrant provides the holder the right to purchase up to one share of our Common Stock at a predetermined exercise price. The outstanding warrants consist of (1) warrants to purchase an aggregate of 349,060 shares of Common Stock at an average price of $2.50 per share until September 2020; (2) warrants to purchase 966,494 shares of Common Stock at an exercise price of $1.65 per share until April 2025; (3) warrants to purchase 4,547,813 shares of our Common Stock of an exercise price of $2.00 per share until over the next five years, and (4) warrants to purchase 2,279,748 shares of Common Stock at an exercise price of $2.40 until March 2024.

 

In November of 2017, the Board of Directors approved the 2017 Equity Incentive Plan (“the Plan”). Under the Plan, 485,000 shares of the common stock were reserved and authorized to be issued. As of December 31, 2017, 200,000 shares of common stock were approved and issued under the Plan, and we recognized approximately $250,000 of related consulting expense. On January 10, 2018, 200,000 shares were awarded, and we recognized $330,000 of compensation expense. There are 85,000 shares remaining to be issued under the Plan.

 

We plan to adopt an Incentive Stock Plan designed to assist us in attracting, motivating, retaining, and rewarding high-quality executives, directors, officers, employees, and individual consultants by enabling such persons to acquire or increase a proprietary interest in our company to strengthen the mutuality of interests between such persons and our stockholders and providing such persons with performance incentives to expand their maximum efforts in the creation of stockholder value under the plan. We will be able to grant stock options, restricted stock, restricted stock units, stock appreciation rights, bonus stocks, and performance awards under the plan.

 

To the extent that any of the outstanding warrants and options described above are exercised, dilution, to the interests of our stockholders may occur. For the life of such warrants and options, the holders will have the opportunity to profit from a rise in the price of the Common Stock with a resulting dilution in the interest of the other holders of Common Stock. The existence of such warrants and options may adversely affect the market price of our Common Stock and the terms on which we can obtain additional financing, and the holders of such warrants and options can be expected to exercise them at a time when we would, in all likelihood, be able to obtain additional capital by an offering of our unissued capital stock on terms more favorable to us than those provided by such warrants and options.

 

Effect of Issuance of Preferred Stock

 

Our Certificate of Incorporation allows us to issue Preferred Stock with voting, liquidation, and dividend rights senior to those of the Common Stock without the approval of our stockholders. The issuance of Preferred Stock could have the effect of making it more difficult for a third party to acquire a majority of the outstanding stock of our company and result in the dilution of the value of the then current stockholders’ Common Stock. We have no current plans to issue shares of Preferred Stock.

 

Resale of Common Stock

 

All of our outstanding shares of Common Stock and shares of our Common Stock that may be issued upon the exercise of our outstanding options and warrants may only be resold if they are registered pursuant to an effective registration statement under the Securities Act of 1933 or are resold pursuant to an applicable exemption and are qualified or exempt under the securities laws of the applicable states. We filed a registration statement under the Securities Act covering the resale of shares of Common Stock issued or underlying warrants sold by a private placement that closed in April 2018. We agreed to file registration statements for our Convertible Promissory Note offering ending January 2019 and our current placement agent agreement. In the absence of these registration statements, such sale of such shares of our Common Stock could only be made under Rule 144.

 

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We do not expect to pay any dividends for the foreseeable future

 

We do not anticipate paying any dividends to our stockholders for the foreseeable future. Accordingly, stockholders may have to sell some or all of their Common Stock to generate cash flow from their investment. Stockholders may not receive a gain on their investment when they sell our Common Stock and may lose some or all of the amount of their investment. Any determination to pay dividends in the future will be made at the discretion of our board of directors and will depend on our results of operations, financial conditions, contractual restrictions, restrictions imposed by applicable law, and other factors our board of directors deems relevant.

 

Failure to achieve and maintain effective internal controls in accordance with Section 404 of the Sarbanes-Oxley Act could have a material adverse effect on our ability to produce accurate financial statements and on our stock price

 

Under SEC regulations adopted pursuant to Section 404 of the Sarbanes-Oxley Act of 2002, in the future, we will be required to furnish a report by our management on our internal control over financial reporting with our Form 10-K. We have not been subject to these requirements in the past. The internal control report must contain (1) a statement of management’s responsibility for establishing and maintaining adequate internal control over financial reporting, (2) a statement identifying the framework used by management to conduct the required evaluation of the effectiveness of our internal control over financial reporting, (3) management’s assessment of the effectiveness of our internal control over financial reporting as of the end of our most recent fiscal year, including a statement as to whether or not internal control over financial reporting is effective, and (4) a statement that our independent auditors have issued an attestation report on management’s assessment of internal control over financial reporting.

 

To achieve compliance with the applicable SEC regulations within the prescribed future period, we would be required to engage in a process to document and evaluate our internal control over financial reporting, which is both costly and challenging. Despite our efforts, we can provide no assurance as to our or our independent auditors’ conclusions with respect to the effectiveness of our internal control over financial reporting. There is a risk that neither we nor our independent auditors will be able to conclude that our internal controls over financial reporting are effective, as has been the case with a significant number of companies attempting to comply with these regulations for the first time. This could result in an adverse reaction in the financial markets resulting from a loss of confidence in the reliability of our financial statements.

 

If we fail to comply in a timely manner with the requirements of Section 404 of the Sarbanes-Oxley Act of 2002 regarding internal control over financial reporting or to remedy any material weaknesses in our internal controls that we may identify, such failure could result in material misstatements in our financial statements, cause investors to lose confidence in our reported financial information, limit our ability to raise needed capital, and have a negative effect on the trading price of our Common Stock.

 

Penny stock regulations are applicable to investments in share of our Common Stock, and they can reduce the level of trading activity in our Common Stock

 

Our Common Stock may be deemed to be a “penny stock” under the Securities Exchange Act of 1934. The Financial Industry Regulatory Authority, or FINRA has adopted rules that relate to the application of the SEC’s penny stock rules. Broker-dealer practices in connection with transactions in “penny stocks” are regulated by certain penny stock rules adopted by the SEC. Penny stocks generally are equity securities with a price of less than $5.00 (other than securities registered on certain national securities exchanges, provided that current prices and volume information with respect to transactions in such securities are provided by the exchange or system) or that have tangible net worth of less than $5.0 million ($2.0 million if the company has been operating for three or more years). Penny stock rules require a broker-dealer, prior to a transaction in a penny stock not otherwise exempt from the rules, to deliver a standardized risk disclosure document that provides information about penny stocks and the risks in the penny stock market. The broker-dealer also must provide the customer with current bid and offer quotations for the penny stock, the compensation of the broker-dealer and its salesperson in the transaction, and monthly account statements showing the market value of each penny stock held in the customer’s account. In addition, penny stock rules generally require that prior to a transaction in a penny stock, the broker-dealer make a special written determination that the penny stock is a suitable investment for the purchaser and receive the purchaser’s written agreement to the transaction.

 

Under interpretations of these rules, FINRA believes that there is a high probability that speculative, low priced securities will not be suitable for at least some customers. The FINRA requirements make it more difficult for broker/dealers to recommend that their customers buy our Common Stock, which may have the effect of reducing the level of trading activity and liquidity of our Common Stock. Further, many brokers charge higher transactional fees for penny stock transactions. As a result, fewer broker/dealers may be willing to make a market in our Common Stock, reducing a stockholder’s ability to resell shares of our Common Stock.

 

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ITEM 2. PROPERTIES

 

Our executive offices are located in Scottsdale, Arizona where we lease approximately 21,000 square feet under a month-to-month triple net lease for $17,702 per month. This space houses our principal executive, administration, and marketing functions.

 

We lease a 20,000 square foot facility located in Payson, Arizona for approximately $10,000 per month under a lease expiring in November 2021. We utilize the facility for our principal ammunition manufacturing, testing, research and development, packaging, and shipping activities. We believe that this facility will be adequate to meet our needs in the near future.

 

We lease a 50,000 square foot facility located in Manitowoc, Wisconsin for approximately $33,000 per month. We utilize this facility for our ammunition casing manufacturing, research and development, packing and shipping activities, We believe this facility will be adequate to meet our needs in the near future.

 

ITEM 3. LEGAL PROCEEDINGS

 

We are not currently subject to any legal proceedings, the results of which would have a material impact on our results of operation or financial condition. Nor, to the best of our knowledge, are any of our officers or directors involved in any legal proceedings in which we are an adverse party.

 

ITEM 4. MINE SAFETY DISCLOSURE

 

None.

 

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PART II

 

ITEM 5. MARKET FOR COMMON EQUITY. RELATED STOCKHOLDER MATTERS AND PURCHASES OF EQUITY SECURITIES

 

Market Information

 

Information about our Common Stock is reported by OTC Markets Group, Inc. at www.otcmarkets.com. OTC Markets Group, Inc. is a provider of trading systems, pricing, and financial information for over the counter, or OTC, markets. OTC Markets Group, Inc. provides broker-dealers, market data providers, issuers and investors with software and information services that improve the transparency and efficiency of the OTC markets. Currently, our Common Stock trades under the symbol POWW. The table below sets forth the high and low prices of our Common Stock as reflected by OTC Markets Group, Inc. for the period from January 1, 2017 to March 31, 2019. Quotations represent prices between dealers, do not include retail markups, markdowns or commissions, and do not necessarily represent prices at which actual transactions were affected.

 

Fiscal Year Ended  High   Low 
December 31, 2017        
First Quarter  $3.60   $3.60 
Second Quarter  $3.00   $3.00 
Third Quarter  $2.30   $2.30 
Fourth Quarter  $3.20   $3.08 
           
Transition Period          
January 1, 2018 – March 31, 2018  $4.75   $2.95 
           
March 31, 2019          
First Quarter  $7.95   $4.75 
Second Quarter  $6.09   $2.98 
Third Quarter  $4.00   $1.50 
Fourth Quarter  $4.26   $2.70 

 

On June 28, 2019, the “best bid” and “best ask” quotations by OTC Markets Group, Inc. were $2.08 and $2.25, respectively, and an average daily volume of 14,340 shares of Common Stock was reported for the past 30 days.

 

Holders

 

As of June 28, 2019, a total of 45,147,408 shares of our Common Stock were outstanding and there were approximately 540 holders of record.

 

Penny Stock Rules

 

Due to the price of our common stock, and the fact that we are not listed on Nasdaq or a national securities exchange, our stock is characterized as a “penny stock” under applicable securities regulations. Our stock will therefore be subject to rules adopted by the Securities and Exchange Commission, or SEC, regulating broker-dealer practices in connection with transactions in penny stocks. The broker or dealer proposing to effect a transaction in a penny stock must furnish his customer a document containing information prescribed by the SEC and obtain from the customer an executed acknowledgment of receipt of that document. The broker or dealer must also provide the customer with pricing information regarding the security prior to the transaction and with the written confirmation of the transaction. The broker or dealer must also disclose the aggregate amount of any compensation received or receivable by him in connection with such transaction prior to consummating the transaction and with the written confirmation of the trade. The broker or dealer must also send an account statement to each customer for which he has executed a transaction in a penny stock each month in which such security is held for the customer’s account. The existence of these rules may have an effect on the price of our stock, and the willingness of certain brokers to effect transactions in our stock.

 

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Transfer Agent

 

We have appointed Action Stock Transfer Corporation (“AST”) as the transfer agent for our common stock. The principal office of AST is located at 2469 E. Fort Union Blvd, Suite 214, Salt Lake City, UT 84121, and its telephone number is (801) 274-1088.

 

Dividend Policy

 

We have never declared or paid dividends on our common stock. Payment of future dividends, if any, will be at the discretion of our Board of Directors after taking into account various factors, including the terms of any credit arrangements, our financial condition, operating results, current and anticipated cash needs and plans for expansion. At the present time, we intend to retain any earnings in our business, and therefore do not anticipate paying dividends in the foreseeable future.

 

Recent Sales of Unregistered Securities; Use of Proceeds from Unregistered Securities

 

The following securities were issued in reliance on the exemptions from registration under the Securities Act in Section 4(a)(2) of the Securities Act and Regulation D thereunder. The sale of these securities; did not involve any solicitation or advertisement, were for investment purposes only and not for resale, and did not include more than 35 non-accredited investors. The securities were issued with restrictions on the resale of the securities. From October 13, 2016 (Inception) through March 31, 2019, we issued and sold the following unregistered securities:

 

  15,034,000 shares of common stock were issued to the company’s founders from October 13, 2016 through February 1, 2017.
     
  4,770,120 shares of common stock were issued to investors through our private friends and family offering at a price per share of $1.25, for an aggregate purchase price of $5,962,650 and these investors were also issued warrants to purchase an additional 4,770,120 shares of common stock. There shares were issued from October 14, 2016 to December 19, 2017. Additionally, 1,865,300 warrants to purchase 1,865,300 shares of common stock were exercised at a price per share of $2.50, for an aggregate purchase price of approximately $4,663,250 from May 25, 2018 through July 6, 2018.
     
  6,208,912 shares of common stock were issued to investors through a private placement offering by Paulson Investment Company, the placement agent. The shares were issued from December 19, 2017 to March 27, 2018 at a price per share of $1.65 for an aggregate value of $10,244,704. In addition, these investors received warrants to purchase a total of 3,104,456 shares of common stock with their purchase. We paid the placement agent a 12% cash commission of $1,254,961 based on the cash raised and a fee payable in warrants of 744,969 equaling 12% of the total units sold. The warrants were issued on June 9, 2018.
     
  1,967,886 shares of common stock were issued to investors through a private placement offering by Paulson Investment Company, the placement agent. The shares were issued from April 3, 2018 to April 20, 2018 at a price per share of $1.65 for an aggregate value of $3,247,030. In addition, these investors were received warrants to purchase 983,943 shares of common stock with their purchase. We paid the placement agent a 12% cash commission of $389,644 based on the cash raised and a fee payable in warrants of 236,244 equaling 12% of the total units sold. The warrants were issued on June 9, 2018.
     
  100,000 shares of common stock valued at $125,000 were issued for licensing agreements with Jesse James on October 13, 2016.
     
  2,920 shares of common stock were issued to existing shareholders in connection with a reverse stock split effective December 30, 2016.
     
  100,000 shares of common stock valued at $125,000 were issued for licensing agreements with Jeff Rann on February 15, 2017.
     
  20,000 shares were issued on June 30, 2017 to an individual who furnished organization fees and this individual was also issued warrants to purchase 20,000 shares of common stock for their compensation.
     
  600,000 shares were issued to acquire use of a patent at a price per share of $1.25 totaling $750,000 on September 28, 2017.
     
  10,495 shares were issued on June 20, 2018 through a cashless exercise of 14,719 warrants previously issued to Paulson Investment Company, LLC.
     
  1,120,000 shares of common stock were issued to employees as compensation with values per share ranging from $1.00 to $2.50 for an aggregate compensation expense of approximately $2,024,236 from July 1, 2017 through March 31, 2019. Additionally, employees received warrants to purchase 125,000 shares of common stock on March 31, 2018.
     
  544,600 shares of common stock were issued for professional services at a price per share of $1.25 totaling $678,625 from January 31, 2017 through December 31, 2017. In addition, the service providers received warrants to purchase 381,500 shares of common stock from September 30, 2017 to November 11, 2017. There were 107,500 warrants to purchase 107,500 shares of common stock were exercised from June 6, 2018 through June 15, 2018 at a price per share ranging from $0.50 to $2.50, for an aggregate purchase price of $104,375.
     
  1,700,002 shares were issued to the shareholders of SW Kenetics, Inc. on October 5, 2018 at a price per share of $2.72 for the acquisition of SW Kenetics Inc. for a valuation of $4,624,005. These shares are subject to clawback provisions.
     
  On December 20, 2018, 49,600 shares valued at $2.50 per share totaling $124,000 were repurchased by the Company and subsequently retired. The shares were originally issued as compensation for legal fees.

 

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  3,828,450 shares of common stock were issued to investors through a private placement offering by Paulson Investment Company, the placement agent. The shares were issued from December 27, 2018 to March 31, 2019 at a price per share of $2.00 for an aggregate value of $7,656,900. In addition, these investors were received warrants to purchase 1,914,225 shares of common stock with their purchase. The placement agent collected a 12% cash commission of $918,828 based on the cash raised and a fee payable in warrants of 459,414 equaling 12% of the total units sold.
     
  On March 14, 2019, the Company issued 4,750,000 shares of its Common Stock to Jagemann Stamping Company through our subsidiary Enlight Group II, LLC (d/b/a Jagemann Munition Components) in connection with the acquisition of the casing division of Jagemann Stamping Company. The shares were valued at a price per share of $2.47 each, the weighted average share price of our Common Stock that was publicly traded and sold in private placements during the current fiscal year.
     
  On February 28, 2019, the Company notified the holders of Convertible Promissory Notes of an offer to convert their Notes and Accrued Interest into Common Stock at a conversion price of $2.00 per share and receive one-half warrant exercisable at $2.40 per share for five years in conjunction with each converted share. On March 29, 2019, the Company converted $1,410,000 of Convertible Promissory Notes and $52,065 of Accrued Interest into 731,039 shares of Common Stock and Warrants to purchase 365,523 shares of Common Stock. The Company accrued $42,300 for a 3% cash conversion fee on the principal converted payable to the placement agent, Paulson Investment Company.

 

ITEM 6. SELECTED FINANCIAL DATA

 

Not required.

 

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

 

The following discussion and analysis of our financial condition and results of operations should be read together with our consolidated financial statements and accompanying notes appearing elsewhere in this Annual Report on Form 10-K. This discussion contains forward-looking statements, based upon our current expectations and related to future events and our future financial performance, that involve risks and uncertainties. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of various factors, including those set forth under “Risk Factors,” “Forward-Looking Statements,” and elsewhere in this Annual Report on Form 10-K.

 

Overview

 

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

 

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

 

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

 

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

 

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

 

During the summer of 2018, we also began conversations to acquire a small technology company named SW Kenetics Inc. SW Kenetics Inc. developed an innovative line of modular projectiles primarily geared toward tactical military operations. On July 6, 2018 we signed a letter of intent to purchase their company, as we believe their designs, coupled with our STREAK or O.W.L. Technology will position us to more aptly complete for military contracts. On September 27, 2018, we entered into a definitive agreement and plan of merger to acquire SW Kenetics Inc. for a total of up to $1,500,000 in cash and issue 1,700,002 restricted shares of the Company’s common stock. The agreement specifies that $1,250,000 of the cash is deferred pending completion of specific milestones and the 1,700,002 shares of common stock are subject to claw back provisions to ensure agreed upon objective are met. The acquisition was completed on October 5, 2018. (See Note 10).

 

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

 

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

 

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

 

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

 

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

 

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

 

Our History

 

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

 

Unaudited Supplement Pro Forma Financial Information

 

The pro forma condensed combined statements of operations for the year ended March 31, 2019 for AMMO, Inc. and the twelve months ended December 31, 2018 for Jagemann Casings reflects the acquisition as if it occurred on April 1, 2018. We believe it is a better reflection of the Company’s future performance.

 

The unaudited pro forma financial information reflects the potential realization of synergies from reduction or elimination of costs. Additionally, it does not reflect any costs related to company integration. The unaudited pro forma condensed combined financial information is presented for illustrative purposes only and is not necessarily indicative of the results of operations and financial position that would have been achieved had the acquisition been completed and taken place on April 1, 2018 or the future consolidated results of the Company.

 

Pro forma condensed combined statements of operation has limitations as a financial measure, should be considered as supplemental in nature, and is not meant as a substitute for the related financial information prepared in accordance with GAAP.

 

Because of these limitations, you should consider the pro forma condensed combined statements of operations alongside other financial performance measures, including total net revenue and our financial results presented in accordance with GAAP.

 

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The following table presents a reconciliation of Statement of Operations to the pro forma condensed combined statements of operations:

 

   AMMO, Inc.   Jagemann Casings       Pro Forma 
   For the Year Ended
March 31, 2019
   For the Year ended
December 31, 2018
  

Pro Forma

Adjustments

  

Condensed

Combined

 
                 
Net Sales                    
Ammunition Sales  $3,985,574   $-   $-   $3,985,574 
Casing Sales   580,078    15,417,735    (1,188,813)(1)   14,809,000 
Cost of Goods Sold   4,795,346    17,242,451    (1,188,813)(1)     
              (2,544,747)(2)   18,304,237 
Gross Margin   (229,694)   (1,824,716)   2,544,747    490,337 
                     
Operating Expenses                    
Selling and marketing   1,414,399    -    -    1,414,399 
Corporate general and administrative   3,385,096    454,110    -    3,839,206 
Employee salaries and related expenses   3,855,167    -    -    3,855,167 
Depreciation and amortization expense   96,302    -    -    96,302 
Total operating expenses   8,750,964    454,110    -    9,205,074 
Loss from Operations   (8,980,658)   (2,278,826)   2,544,747    (8,714,737)
                     
Other (Expenses)                    
Loss on Purchase   (2,118,154)   -    -    (2,118,154)
Interest expense   (610,600)   (399,270)   -    (1,009,870)
                     
(Loss) before Income Taxes   (11,709,412)   (2,678,096)   2,544,747    (11,842,761)
                     
Provision for Income Taxes   -    -    -    - 
                     
Net (Loss)  $(11,709,412)  $(2,678,096)  $2,544,747   $(11,842,761)
                     
(Loss) per share                    
Basic and fully diluted:                    
Weighted average number of shares outstanding   33,601,569    -    4,750,000    38,351,569 
(Loss) per share  $(0.35)   -    -   $(0.31)

 

The unaudited supplemental pro forma financial data has been calculated after applying our accounting policies and adjusting the historical results of Jagemann Casings with pro forma adjustments, that assume the acquisition occurred on April 1, 2018. Significant pro forma adjustments include the following:

 

  1. The elimination of intercompany sales and costs of sales between the company and Jagemann Casings.
     
  2. To record the reduction of overhead costs that will not be included in the operations acquired division moving forward due to cost savings synergies of the acquisition.

 

The unaudited pro forma financial information does not reflect any costs related to company integration. The unaudited pro forma condensed combined financial information is presented for illustrative purposes only and is not necessarily indicative of the results of operations and financial position that would have been achieved had the acquisition been completed and taken place on April 1, 2018 or the future consolidated results of the Company.

 

Non-GAAP Financial Measures

 

We analyze operational and financial data to evaluate our business, allocate our resources, and assess our performance. In addition to total net sales, net income (loss), and other results under generally accepted accounting principles (GAAP), the following information includes key operating metrics and non-GAAP financial measures we use to evaluate our business. We believe these measures are useful for period-to-period comparisons of the Company. We have included these non-GAAP financial measures in this Annual Report on Form 10-K 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.

 

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Adjusted EBITDA

 

   AMMO, Inc.   Jagemann Casings       Pro Forma 
   For the Year Ended
March 31, 2019
   For the Year Ended
December 31, 2018
  

Pro Forma

Adjustments

  

Condensed

Combined

 
                 
Reconciliation of GAAP net income to Adjusted EBITDA                    
Net (Loss)  $(11,709,412)  $(2,678,096)  $2,544,747   $(11,842,761)
Loss on purchase   2,118,154    -    -    2,118,154 
Employee stock awards   1,172,974    -    -    1,172,974 
Stock grants   703,030    -    -    703,030 
Depreciation and amortization   599,863    1,390,117    -    1,989,980 
Interest expense, net   610,600    399,270    -    1,009,870 
Adjusted EBITDA  $(6,504,791)  $(888,709)  $2,544,747   $(4,848,753)

 

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

 

We have excluded the following non-cash expenses from our non-GAAP financial measures: depreciation and amortization, loss on purchase and share-based compensation expenses. We believe it is useful to exclude these non-cash expenses because the amount of such expenses in any specific period may not directly correlate to the underlying performance of our business operations.

 

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

 

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

 

  ●  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.

 

Results of Operations

 

Comparison of the year ended March 31, 2019 compared to the twelve months ended March 31, 2018

 

The Company changed its fiscal year end from December 31 to March 31, effective March 31, 2018. Accordingly, the following presentation and discussion of the audited result of operations for the year ended March 31, 2019, compares the unaudited results of operations for the year ended March 31, 2018 to allow comparable analysis and discussion of results of operations from year to year.

 

Our financial results for the year ended March 31, 2019 reflect our newly positioned organization. We believe that we have hired a strong team of professionals, developed innovative products, and continue to raise capital sufficient to establish our presence as a high-quality ammunition provider. Although we continue to focus on growing our top line revenue, and streamlining our operations, we did experience a decline in our gross profit margin for the year ended March 31, 2019. This was the result of expenses related to new equipment installations, as well as increases to costs of raw materials and overhead.

 

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The following table presents summarized financial information taken from our consolidated statements of operations for the year ended March 31, 2019 compared with the year ended March 31, 2018.

 

   For the Year Ended   Increase (Decrease) 
   March 31, 2019   March 31, 2018   Amount 
       (Unaudited)     
Net Sales               
Ammunition Sales  $3,985,574   $2,601,765   $1,383,809 
Casing Sales   580,078    -    580,078 
Cost of Products Sold   4,795,346    2,504,767    2,290,579 
Gross Margin   (229,694)   96,998    (326,692)
Sales, General & Administrative Expenses   8,750,964    5,199,290    3,551,674 
Loss from Operations   (8,980,658)   (5,102,292)   (3,878,366)
Other income (expense)               
Other income (expense)   (2,728,754)   (1,386,407)   (1,342,347)
Loss before provision for income taxes  $(11,709,412)  $(6,488,699)  $(5,220,713)
Provision for income taxes   -    -      
Net Loss  $(11,709,412)  $(6,488,699)  $(5,220,713)

 

Net Sales

 

The following table shows our net sales by proprietary ammunition versus standard ammunition for the year ended March 31, 2019 and March 31, 2018, respectively. “Proprietary Ammunition” include those lines of ammunition manufactured by our facilities that are sold under the brand names: STREAK VISUAL AMMUNITION™, One Precise Shot (OPS), Night Ops, Jeff Rann, and Stelth. We define “Standard Ammunition” as non-proprietary ammunition that directly competes with other brand manufacturers. The majority of our “Standard Ammunition” is manufactured within our facility but may also include completed ammunition that has been acquired in the open market for sale to others. Also included in this category is low cost target pistol and rifle ammunition, as well as bulk packaged ammunition manufactured by us using reprocessed brass casings. Ammunition within this product line typically carries much lower gross margins. “Ammunition Casings” includes our brass casings that are sold under our Jagemann Munition Components subsidiary. Our ammunition casings range from pistol ammunition casings to large rifle ammunition casings.

 

The following table details our gross sales by product line for the periods ended:

 

   For the Year Ended 
   March 31, 2019   March 31, 2018 
       (Unaudited) 
Proprietary Ammunition  $2,585,768   $817,347 
Standard Ammunition   1,399,806    1,784,418 
Ammunition Casings   580,078    - 
Total Sales  $4,565,652   $2,601,765 

 

Sales for the year ended March 31, 2019 increased 75% or $1,963,887 over the year ended March 31, 2018. This increase was the result of $1,768,421 in additional sales of our proprietary lines of ammunition through retail and online sales programs, coupled with the addition of our Ammunition Casing sales of $580,078, a decrease of $384,612 in sales in bulk pistol and rifle ammunition, summarized in Standard Ammunition above and a full year of operations. Management expects the sales of line of proprietary ammunition to continue to outpace the sales from the standard line of ammunition.

 

The increase in our proprietary line was primarily associated with sales of the STREAK VISUAL AMMUNITION™ suite of products, as well as our One Precise Shot (OPS) line of ammunition. Our standard ammunition decreased as a result of the increase in sale of our proprietary ammunition.

 

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

 

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

 

We also created through our acquisition of SWK, a new line of tactical precision ammunition, TAC-PTM, to meet the lethality requirements of both the US and foreign military customers. This line was formally launched at SHOT Show in Vegas, where our Global Tactical Defense Group demonstrated or presented the capability to more than 15 countries around the world.

 

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. Our Global Tactical Defense Division is currently working to establish distribution, both in the United States and abroad. To date, we have signed three U.S. distributors, covering 15 states, a sales representative to assist with U.S. Military sales, and are working to establish exclusive distribution in several countries approved by the U.S. State Department.

 

Sales outside of the United States require licenses and approval from the U.S. State Department, which could take six months to a year for processing. On April 16, 2019, we received renewal for our registration with the International Traffic in Arms Regulations (ITAR). This permits the Company to manufacture, broker, and export ammunition and other items covered under ITAR. Each transaction will be reviewed on a per order basis to comply with ITAR.

 

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Cost of Goods Sold

 

Cost of goods sold increased by approximately $2.3 million for the year ended March 31, 2019 compared with the year ended March 31, 2018. This was the result of higher sales for the period and the expensing of increased labor, overhead, raw materials used to produce finished product during the period, and the addition of our ammunition casing operations through our recent acquisition. This increase is also the result of a full year of operation in 2019 compared with the year ended March 31, 2018 when our operations were beginning. Although sales increased, when comparing the year ended March 31, 2019 to the year ended March 31, 2018, they did not meet management’s expectations and did not allow us to cover a greater percentage of our fixed manufacturing costs, which include our non-cash amortization and depreciation expense. As a percentage of sales, cost of goods sold increased by 9.1% from 96.3% for the three months ended March 31, 2018 to 105.0% for the year ended March 31, 2019.

 

Gross Margin

 

Our gross margin percentage was -5.0% during the year ended March 31, 2019 compared with 3.7% for the year ended March 31, 2018. Although sales increased, when comparing the years ended March 31, 2019 to 2018, they did not meet management’s expectations and did not allow us to cover a greater percentage of our fixed manufacturing costs, which include our non-cash amortization and depreciation expense.

 

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

 

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

 

  Increased product sales, specifically of proprietary lines of ammunition, like the STREAK VISUAL AMMUNITION™, OPS, Stelth and now our TAC-P line, all of which carry higher margins as a percentage of their selling price;
     
  Introduction of new lines of ammunition that historically carry higher margins in the consumer and government sectors;
     
  Reduced component costs through acquisition our recent casing operation acquisition expansion of strategic relationships with component providers;
     
  And, better leverage of our fixed costs through expanded production to support the sales objectives.

 

Sales, General, and Administrative Expenses

 

During the year ended March 31, 2019, our sales, general, and administrative expenses increased by approximately $3.5 million over the year ended March 31, 2018. This increase was the result of a full year of accelerated operations, increased payroll expense as we expanded our sales and support team, stock compensation expense associated with issuance of our Common Stock in lieu of cash compensation for employees, newly appointed board members, and key consultants for the organization during the period, and trade show and marketing costs associated with introducing our new lines of ammunition. Sales, general and administrative expenses for 2019 included noncash stock compensation of approximately $1.9 million. We also experienced increases as a result of new investor and public relations programs, and professional fees associated with our acquisition activity, our public filings, and our efforts to uplist the Company from the OTC to a national exchange. We expect to see administrative expenditures decrease as a percentage of sales in the 2020 fiscal year, as we leverage our work force and expand our sales opportunities.

 

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Interest and other Expenses

 

For the year ended period ended March 31, 2019, interest and other expenses increased by $1,342,347 compared with the year ended March 31, 2018. This increase was mostly due to a write down of the consideration in connection with the recent acquisition of Jagemann Casings of $2,118,154, debt discount amortization of $151,856, and noncash interest expense of $424,091 related to the Convertible Promissory Notes.

 

Net Loss

 

As a result of higher production, selling, and payroll expenses, we ended the year ended March 31, 2019 with a net loss of approximately $11.7 million compared with a net loss of $6.5 million for the year ended March 31, 2018.

 

Our goal is to continue to improve our operating results as we focus on increasing sales and controlling our operating expenses. We also expect to see reductions in our materials costs as we now control our supply of brass casings. Additionally, we expect to reduce our direct labor expense by reducing handling and manual inspection operations as continue to automate our manufacturing process.

 

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Liquidity and Capital Resources

 

As of March 31, 2019, we had $2,181,246 of cash and cash equivalents, a decrease of $4,381,643 from March 31, 2018.

 

Working Capital is summarized and compared as follows:

 

    March 31,     March 31,  
    2019     2018  
Current assets   $ 8,626,870     $ 8,323,045  
Current liabilities     4,482,375       1,120,582  
    $ 4,144,495     $ 7,202,463  

 

Changes in cash flows are summarized as follows:

 

   For the Year Ended
March 31,
   For the Year Ended
March 31,
 
   2019   2018 
       (Unaudited) 
         
Cash flows from operating activities   (7,294,207)   (4,792,639)
Cash flows from investing activities   (9,541,907)   (975,352)
Cash flows from financing activities   14,635,717    10,049,499 
           
Net increase in cash   (2,200,397)   4,281,508 
Cash, beginning of period   4,381,643    100,135 
Cash, end of period   2,181,246    4,381,643 

 

For the year ended March 31, 2019, net cash used in operations totaled $7,294,207 This was the result of a net loss of $11,709,412 and increases in our inventory of $2,367,591 and accounts receivable of $131,113.

 

The cash used in operations was partially offset by non-cash items and changes in operating assets and liabilities, which included, a loss recorded on the purchase of Jagemann Casings of $2,118,154 stock issued for compensation of $1,172,974, stock grants of $703,030, a $1,483,168 increase in accounts payable and accrued liabilities, a $215,489 increase in our prepaid expenses, a $106,320 increase in allowance for doubtful accounts, depreciation and amortization of $599,863, and warrants for the conversion of promissory notes valued at $358,800.

 

For the comparable year ended March 31, 2018, net cash used in operations totaled $4,792,639. This was the result of a net loss of $6,488,699 and increases in our accounts receivable of $1,207,743, and inventory of $776,135.

 

The cash used in operations was partially offset by non-cash items and changes in operating assets and liabilities, which included a loss on vendor notes receivable foreclosure of $1,279,921, stock issued for services of $330,625, stock issued for compensation of $642,624, stock grants of $106,563, a $556,527 increase in accounts payable and accrued liabilities, a $274,368 increase in our prepaid expenses, and depreciation and amortization of $209,775.

 

38
 

 

Investing Activities

 

During the year ended March 31, 2019, we used $9,541,907 in net cash for investing activities. Of the total cash used for investing activities, $7,000,000 was used in connection with the acquisition of the ammunition casing division of Jagemann Stamping Company, $2,291,906 was used to purchase fixed assets such as new production equipment and leasehold improvements to expand production at our Payson, Arizona manufacturing facility and Scottsdale, Arizona corporate offices, and to acquire end cap displays for the sale of our product at retailers. The remaining $250,000 was used as consideration for acquiring SW Kenetics Inc.

 

During the comparable year ended March 31, 2018, we used $975,352 in net cash for investing activities. Of this total, $200,000 was used to purchase an exclusive worldwide license to manufacture and sell our STREAK VISUAL AMMUNITION™ technology. This patented technology, trade named “STREAK VISUAL AMMUNITION”, uses a non-flammable phosphor material that produces a glow by the use of light emitted during the round discharge. We believe this technology, applicable to all calibers of ammunition, will be a game changer for the industry moving forward. Additionally, we used $775,352 to purchase equipment to increase production at our Payson Arizona manufacturing facility.

 

Financing Activities

 

We finance our operations primarily from the issuance of equity and debt instruments. During the year ended March 31, 2019, net cash provided by financing activities was $14,635,717. This was the net effect of $10,903,930 generated from the sale of Common Stock, $4,767,625 from the exercise of warrants, $1,534,000 from the issuance of Convertible Promissory notes, net of cash payments of $1,704,653 in conjunction with the unit and debt offerings, and a payment $500,000 on the Promissory Note in connection with the acquisition of the casing division of Jagemann Stamping Company. These sales of our securities were offset by payment of $191,275 toward our insurance premium note payable, $124,000 for the purchase of Common Stock and a $50,000 payment of our Contingent Consideration Payable.

 

During the comparable year ended March 31, 2018, net cash provided by financing activities was $10,049,499. This was the net effect of $13,951,449 generated from the sale of Common Stock included in Units coupled with the collection of a prior year subscription receivable of $172,500, offset by the reduction of notes payable totaling $1,575,000, cash payments of $1,299,961 made to our investment banker in conjunction with the unit offering, the issuance of shares of Common Stock to our founders totaling $99,355, and the payment of $202,134 toward our insurance premium note payable.

 

Liquidity and Capital Resources

 

Existing working capital, cash flow from operations, bank borrowings, and sales of equity and debt securities are expected to be adequate to fund our operations over the next 12 months. 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 our currently anticipated cash requirements, including capital expenditures, working capital requirements, potential acquisitions and other liquidity requirements through at least the next 12 months.

 

39
 

 

 

Contractual Obligations

 

As part of the acquisition of our business, we assumed a triple-net operating lease for our 20,000 square foot manufacturing facility located in Payson, Arizona. The terms of the lease provide for a monthly payment of approximately $10,000, which includes an estimate for utilities, taxes, and repairs. This lease expires in November 2021.

 

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

 

The following table outlines our future contractual financial obligations associated with this lease by period in which payment is expected, as of March 31, 2019:

 

   2020   2021   2022   Total 
Payson Lease  $120,000   $120,000   $80,000   $320,000 

 

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

 

The following table outlines our future contractual financial obligations associated with this lease by fiscal period in which payment is expected, as of March 31, 2019:

 

   2020   2021   2022   2023   2024   Total 
Scottsdale Lease  $216,591   $226,587   $236,583   $246,580   $147,240   $1,073,581 

 

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

 

The following table outlines our future contractual financial obligations associated with this lease by fiscal period in which payment is expected, as of March 31, 2019:

 

   2020   2021   2022   2023   2024   2025   2026   Total 
Manitowoc Lease  $394,128   $394,128   $394,128   $394,128   $394,128   $394,128   $394,128   $2,758,896 

 

Off-Balance Sheet Arrangements

 

As of March 31, 2019, March 31, 2018, and December 31, 2017, we did not have any off-balance sheet arrangements that have or are reasonably likely to have a current or future material effect on our financial condition, net sales, expenses, results of operations, liquidity capital expenditures, or capital resources.

 

Critical Accounting Policies

 

Our discussion and analysis of our financial condition and results of operation are based upon our financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounted of assets, liabilities, revenues, and expenses. We have identified several accounting principles that we believe are key to the understanding of our financial statements. These important accounting policies require our most difficult subjective judgements.

 

Use of Estimates

 

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America 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.

 

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 March 31, 2019, March 31, 2018, and December 31, 2017, 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.

 

40
 

 

Revenue Recognition

 

We generate revenue from the production and sale of ammunition. 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. The Company applies 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

 

The Company only applies the five-step model when it is probable that the Company will collect the consideration it is 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 the Company’s product, which typically occurs upon shipment of the product.

 

Excise Tax

 

As a result of regulations imposed by the Federal Government for sales of ammunition to non-government entities, we must charge and collect an 11% excise tax for all products sold into these channels. During the year ended March 31, 2019, the three months ended March 31, 2018, and the year ended December 31, 2017 we collected and remitted $406,255, $194,003, and $132,294 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 liability 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 March 31, 2019, March 31, 2018, and December 31, 2017. 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.

 

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.

 

Expected purchase or sale of plant and significant equipment

 

We anticipate investing significant resources in the purchase of plant and equipment in the coming months as we begin to scale production operations throughout fiscal 2020. This equipment will be funded through working capital and bank financing. We believe these additions will significantly improve our plant capacities and reduce our cost per unit sold.

 

41
 

 

Item 8. Financial Statements and Supplementary Data

 

Index to Consolidated Financial Statements  
   
Report of Independent Registered Public Accounting Firm 43
Consolidated Balance Sheets as of March 31, 2019, March 31, 2018, and December 31, 2017 44
Consolidated Statements of Operations for the year ended March 31, 2019, the three months ended March 31, 2018, and the year ended December 31, 2017 45
Consolidated Statements of Stockholders’ Equity for the year ended March 31, 2019, the three months ended March 31, 2018, and the year ended December 31, 2017 46
Consolidated Statements of Cash Flows for the year ended March 31, 2019, the three months ended March 31, 2018 and the year ended December 31, 2017 47
Notes to Consolidated Financial Statements 49

 

42
 

 

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 

To the Board of Directors and Stockholders of

Ammo, Inc. Scottsdale, Arizona 85260

 

Opinion on the consolidated financial statements

 

We have audited the accompanying consolidated balance sheets of Ammo, Inc. (the Company) as of March 31, 2019 and 2018 and December 31, 2017, and the related consolidated statements of operations, stockholders’ equity, and cash flows for the year ended March 31, 2019, the three month period ended March 31, 2018, the year ended December 31, 2017, and the related notes (collectively referred to as the consolidated financial statements). In our opinion, the consolidated financial statements present fairly, in all material respects, the consolidated financial position of the Company as of March 31, 2019 and 2018 and December 31, 2017, and the consolidated results of its operations and its cash flows for the year ended March 31, 2019, the three month period ended March 31, 2018, and the year ended December 31, 2017, in conformity with accounting principles generally accepted in the United States of America.

 

Basis for opinion

 

These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s consolidated financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities law and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

 

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, and audit of its internal control over financial reporting. As part of our audits, we are required to obtain an understanding of internal control over financial reporting, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.

 

Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.

 

/s/ KWCO , PC  
KWCO, PC  

 

We have served as the Company’s auditor since 2016.

 

Odessa, Texas

 

June 28, 2019

 

43
 

 

AMMO, Inc.

CONSOLIDATED BALANCE SHEETS

 

   March 31, 2019   March 31, 2018   December 31, 2017 
ASSETS               
Current Assets:               
Cash  $2,181,246   $4,381,643   $786,823 
Accounts receivable, net of allowance for doubtful account of $129,365 at March 31, 2019, $23,046 at March 31, 2018, and $26,046 at December 31, 2017   1,225,911    1,201,117    166,731 
Due from related parties   19,565    14,204    18,461 
Inventories, at lower of cost or market, principally average cost method   4,772,597    2,405,007    1,792,314 
Prepaid expenses   427,551    321,074    254,732 
Total Current Assets   8,626,870    8,323,045    3,019,061 
Equipment, net of accumulated depreciation of $516,144 at March 31, 2019 and $113,158 at March 31, 2018, and $77,861 at December 31, 2017   21,999,787    1,241,326    769,442 
Other Assets:               
Deposits   29,034    16,300    - 
Licensing agreements, net of accumulated amortization of $108,833 at March 31, 2019, $58,333 at March 31, 2018, and $45,833 at December 31, 2017   141,667    191,667    204,167 
Patents, net of accumulated amortization of $134,701 at March 31, 2019, $49,627 at March 31, 2018 and $25,166 at December 31, 2017   6,939,304    900,373    924,834 
Other intangible assets, net of accumulated amortization of $61,803 at March 31, 2019   5,850,502    -    - 
TOTAL ASSETS  $43,587,164   $10,672,711   $4,917,504 
                
LIABILITIES AND SHAREHOLDERS’ EQUITY               
Current Liabilities:               
Accounts payable  $1,920,344   $479,465   $476,893 
Accrued liabilities   531,434    541,210    254,774 
Convertible note payable   -    -    1,575,000 
Note payable related party   -    -    100,000 
Insurance premium note payable   230,597    99,907    6,880 
Current portion of note payable related party   1,500,000    -    - 
Contingent consideration payable   300,000    -    - 
Total Current Liabilities   4,482,375    1,120,582    2,413,547 
Long-term Liabilities:               
Convertible promissory notes, net of $24,144 of note issuance costs   275,856    -    - 
Contingent consideration payable   900,000    -    - 
Note payable related party   8,400,000    -    - 
Total Liabilities   14,058,231    1,120,582    2,413,547 
Shareholders’ Equity:               
Common stock, $0.001 par value, 200,000,000 shares authorized 44,013,075, 28,394,503, and 22,487,793 shares issued and outstanding at March 31, 2019 and March 31, 2018, and December 31, 2017 respectively   44,013    28,394    22,488 
Additional paid-in capital   48,935,485    17,264,888    8,430,394 
Stock subscription receivable   -    -    (5,000)
Accumulated (Deficit)   (19,450,565)   (7,741,153)   (5,943,925)
Total Shareholders’ Equity   29,528,933    9,552,129    2,503,957 
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY  $43,587,164   $10,672,711   $4,917,504 

 

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

 

44
 

 

AMMO, Inc.

CONSOLIDATED STATEMENTS OF OPERATIONS

 

  

For the

Year Ended
March 31, 2019

   For the
Three Months
Ended
March 31, 2018
   For the Year
Ended
December 31, 2017
 
             
Net Sales               
Ammunition Sales  $3,985,574   $1,960,688   $1,294,861 
Casing Sales   580,078    -    - 
    4,565,652    1,960,688    1,294,861 
Cost of Goods Sold, includes depreciation and amortization of $506,159 $66,405 and $141,575, respectively, and federal excise taxes of $406,255, $194,003, and $132,294, respectively   4,795,346    1,667,614    1,303,586 
Gross Margin   (229,694)   293,074    (8,725)
                
Operating Expenses               
Selling and marketing   1,414,399    585,294    759,053 
Corporate general and administrative   3,385,096    589,983    2,154,498 
Employee salaries and related expenses   3,855,167    914,258    1,046,667 
Depreciation and amortization expense   96,302    5,853    7,285 
Total operating expenses   8,750,964    2,095,388    3,967,503 
Loss from Operations   (8,980,658)   (1,802,314)   (3,976,228)
                
Other Income/(Expenses)               
Loss on purchase   (2,118,154)   -    - 
Loss on vendor notes receivable foreclosure   -    -    (1,279,921)
Interest expense   (610,600)   5,086    (532,752)
                
(Loss) before Income Taxes   (11,709,412)   (1,797,228)   (5,788,901)
                
Provision for Income Taxes   -    -    - 
                
Net (Loss)  $(11,709,412)  $(1,797,228)  $(5,788,901)
                
(Loss) per share               
Basic and fully diluted:               
Weighted average number of shares outstanding   33,601,569    26,045,890    19,279,601 
(Loss) per share  $(0.35)  $(0.07)  $(0.30)

 

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

 

45
 

 

AMMO, Inc.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

For the Year ended March 31, 2019, For the Three Months Ended March 31, 2018, and
For the Year Ended December 31, 2017

 

   Common Shares  

Additional

Paid-In

   Subscription   Accumulated    
   Number   Par Value   Capital   Receivable   (Deficit)   Total 
                         
Balance as of December 31, 2016   15,754,000   $15,754   $799,180   $(167,500)  $(155,024)  $492,410 
                               
Reverse merger and recapitalization   604,371    604    (604)   -    -    - 
Subscriptions collected   -    -    -    167,500    -    167,500 
Common stock issued to founders   500,000    500    145    -    -    645 
Founder shares repurchased   (400,000)   (400)   (99,600)   -    -    (100,000)
Common stock issued for cash   4,640,822    4,641    6,034,259    -    -    6,038,900 
Common stock issued for payment of legal fees   49,600    50    123,950    -    -    124,000 
Subscription receivable   4,000    4    4,996    (5,000)   -    - 
Organizational and fundraising cost   20,000    20    (179,770)   -    -    (179,750)
Common stock issued for licensing agreement   100,000    100    124,900    -    -    125,000 
Legal, advisory and consulting fees   495,000    495    554,130    -    -    554,625 
Employee stock awards   120,000    120    159,880    -    -    160,000 
Shares issued for patents   600,000    600    749,400    -    -    750,000 
Imputed interest on related party note   -    -    46,340    -    -    46,340 
Issuance of warrants for interest   -    -    46,188    -    -    46,188 
Issuance of warrants for services   -    -    67,000    -    -    67,000 
Net loss for year ended December 31, 2017   -    -    -    -    (5,788,901)   (5,788,901)
                               
Balance as of December 31, 2017   22,487,793    22,488    8,430,394    (5,000)   (5,943,925)   2,503,957 
                               
Subscription collected   -    -    -    5,000    -    5,000 
Common stock issued for cash   5,614,210    5,614    9,257,810    -    -    9,263,424 
Organizational and fundraising cost   -    -    (1,137,211)   -    -    (1,137,211)
Employee stock awards   292,500    292    482,332    -    -    482,624 
Stock grant expense             106,563         -    106,563 
Issuance of warrants for services   -    -    125,000    -    -    125,000 
Net loss for period ended March 31, 2018   -    -    -    -    (1,797,228)   (1,797,228)
                               
Balance as of March 31, 2018   28,394,503    28,394    17,264,888    -    (7,741,153)   9,552,129 
                               
Common stock issued for cash   5,796,336    5,797    10,898,133    -    -    10,903,930 
Common stock issued for exercised warrants   1,972,800    1,973    4,765,652    -    -    4,767,625 
Common stock issued for cashless warrant exercise   10,495    11    (11)   -    -    - 
Organizational and fundraising cost   -    -    (1,704,563)   -    -    (1,704,563)
Common stock issued for services   5,000    5    22,345    -    -    22,350 
Employee stock awards   702,500    702    1,172,272    -    -    1,172,974 
Stock grants   -    -    703,030    -    -    703,030 
Acquisition stock issuances   6,450,002    6,450    14,117,555    -    -    14,124,005 
Legal, advisory and consulting fees   (49,600)   (50)   (123,950)   -    -    (124,000)
Common stock issued for convertible notes   731,039    731    1,820,134    -    -    1,820,865 
Net loss for year ended March 31, 2019   -    -    -    -    (11,709,412)   (11,709,412)
                               
Balance as of March 31, 2019   44,013,075   $44,013   $48,935,485   $-   $(19,450,565)  $29,528,933 

 

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

 

46
 

 

AMMO, Inc.

CONSOLIDATED STATEMENTS OF CASH FLOW

 

   For the Year
Ended
March 31, 2019
   For the Three
Months Ended
March 31, 2018
   For the Year
Ended
December 31, 2017
 
          
Cash flows from operating activities:               
Net (Loss)  $(11,709,412)  $(1,797,228)  $(5,788,901)
Adjustments to reconcile Net (Loss) to Net Cash provided by operations:               
Depreciation and amortization   599,863    72,258    148,860 
Loss on vendor notes receivable foreclosure   -    -    1,279,921 
Imputed interest   -    -    46,340 
Debt discount amortization   151,856    -    356,250 
Stock grants   703,030    106,563    - 
Stock for services   22,350    -    454,625 
Employee stock awards   1,172,974    482,624    160,000 
Warrants for services and interest   -    125,000    113,188 
Stock and warrants for promissory note conversion   358,800    -    - 
Loss on purchase   2,118,154    -    - 
Changes in Current Assets and Liabilities               
Vendor advances receivable   -    -    186,486 
Accounts receivable   (131,113)   (1,031,385)   (171,812)
Allowance for doubtful accounts   106,320    (3,000)   26,046 
Due to (from) related parties   (5,361)   4,257    (18,461)
Inventories   (2,367,591)   (612,693)   (928,762)
Prepaid expenses   215,489    101,114    183,181 
Deposits   (12,734)   (16,300)   - 
Accounts payable   1,440,879    2,572    418,898 
Accrued liabilities   42,289    286,435    254,774 
Net cash used in operating activities   (7,294,207)   (2,279,783)   (3,279,367)
                
Cash flows from investing activities               
Purchase of equipment   (2,291,907)   (507,181)   (304,188)
Jagemann Acquisition   (7,000,000)   -    - 
Purchase of patent   (250,000)   (100,000)   (100,000)
Net cash used in investing activities   (9,541,907)   (607,181)   (404,188)
                
Cash flow from financing activities               
Convertible note payment   -    -    (300,000)
Note payment - related party   (500,000)   -    (960,000)
Insurance premium note payment   (191,275)   (74,429)   (207,033)
Contingent consideration payment   (50,000)   -    - 
Convertible promissory note   1,534,000    (1,575,000)   - 
Sale of common stock   10,903,930    9,263,424    6,038,900 

 

(Continued)

 

47
 

 

AMMO, Inc.

CONSOLIDATED STATEMENTS OF CASH FLOW

 

   For the Year
Ended
March 31, 2019
  

For the Three

Months Ended March 31, 2018

   For the Year Ended
December 31, 2017
 
             
Purchase of common stock   (124,000)   -    - 
Common stock issued for exercised warrants   4,767,625    -    - 
Collection of stock subscription   -    5,000    167,500 
Common stock activity - founders shares   -    -    (99,355)
Organizational and fundraising costs   (1,704,563)   (1,137,211)   (179,750)
Net cash provided by financing activities   14,635,717    6,481,784    4,460,262 
                
Net increase/(decrease) in cash   (2,200,397)   3,594,820