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, 2020
OR
| [ ] |
TRANSITION
REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For
the transition period from ________ to ________
AMMO,
Inc.
(Exact
Name of Registrant as Specified in its Charter)
| DELAWARE |
|
001-13101 |
|
83-1950534 |
(State
of
incorporation) |
|
(Commission
File
No.) |
|
(I.R.S.
Identification
Number) |
7681
E Gray Road, Scottsdale, AZ 85260
(Address
of Principal Executive Offices) (Zip Code)
Registrant’s
telephone number including area code: (480) 947-0001
Securities
registered pursuant to Section 12(b) of the Act: None
Securities
registered pursuant to Section 12(g) of the Act: Common Stock, par value $0.001
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 has submitted electronically every Interactive Data File required to be submitted pursuant
to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that
the registrant was required to submit such files). Yes [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 [X] |
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 has filed a report on and attestation to its management’s assessment of the effectiveness
of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered
public accounting firm that prepared or issued its audit report. [ ]
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 $59,413,840.
As of August 14, 2020, there were
47,622,920 shares of $0.001 par value Common Stock outstanding.
DOCUMENTS
INCORPORATED BY REFERENCE: None.
On March 4, 2020,
the U.S. Securities and Exchange Commission (the “SEC”) issued an order (Release No. 34-88318) under Section 36 of
the Securities Exchange Act of 1934, as amended (the “Exchange Act”), granting exemptions from specified provisions
of the Exchange Act and certain rules thereunder. On March 25, 2020, the order was modified and superseded by a new SEC order
(Release No. 34-88465) (the “SEC Order”), which provides conditional relief to public companies that are unable to
timely comply with their filing obligations as a result of the novel coronavirus (“COVID-19”) outbreak.
On June 29, 2020,
AMMO, Inc. (“Ammo,” “we,” or “our”) filed a Form 8-K announcing its reliance on the SEC Order
with respect to the filing of this Form 10-K for the year ended March 31, 2020 (the “Annual Report”) due to circumstances
related to the COVID-19 outbreak. The Company has relied on the SEC Order to extend the filing date of our Annual Report. In particular,
COVID-19 and related precautionary responses have made it more difficult as the Company’s receipt of information from certain
third parties related to the completion of its financials has been delayed and therefore it has taken us more time, to finish
our analysis and compile certain information necessary to make key assessments and estimates.
Pursuant to a Current Report on Form 8-K
filed with the Securities and Exchange Commission on June 29, 2020, the Company disclosed that the due date for the filing of
the Annual Report had been extended to August 13, 2020. Pursuant to Rule12b-25 under the Exchange Act and Question 135.13 of the
Exchange Act Rules Compliance and Disclosure Interpretations, the Company filed Form 12b-25 on August 13, 2020 further extending
the due date for the filing of the Annual Report to August 28, 2020. The Company believes this Annual Report has been within its
prescribed extension deadline and thus it shall be deemed timely filed by the SEC.
TABLE
OF CONTENTS
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.
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.
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 Ammunition
STREAK
VISUAL AMMUNITION™ enables shooters to see the path of the bullets fired by them. STREAK VISUAL AMMUNITION™ 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 AMMUNITION™ 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 AMMUNITION™
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 AMMUNITION™ 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 AMMUNITION™ 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 AMMUNITION™
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.
Stelth
Subsonic Ammunition
Stelth
Subsonic ammunition is designed specifically for superior performance in suppressed firearms. Stelth ammunition finds applications
in which silence is paramount, such as in tactical training, predator night hunts, and clandestine operations. The Stelth 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. Stelth 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.
AP
and HAPI Ammunition
Our
innovative line of match grade armor piercing (AP) and hard armor piercing incendiary (HAPI) tactical rounds are the centerpiece
of the Company’s strategy to address the unique needs 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 AP and HAPI 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 research and development, manufacturing, assembly, inspection, and packaging operations in a 20,000 square foot facility
located in Payson, Arizona. The facility currently produces 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, and Manitowoc, Wisconsin, utilizing our personnel and strategic relationships. 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.
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. Two customers accounted for approximately 32% of our sales for the year ended
March 31, 2020 in comparison to year ended March 31, 2019 in which three customers accounted for approximately 54% of our sales.
Quarter to quarter comparisons are not uniform, for example for the three months ended March 31, 2020, three customers for that
period accounted for 44% of our total sales, and, for the three months ended March 31, 2019, three customers for that period accounted
for 60% of our 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 August 14, 2020, we had a total of 126 employees. Of these employees, 93 were engaged in manufacturing,
18 in sales and marketing, four in finance and accounting, two in research and development and nine 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 through October 29, 2028. We use that technology in connection with our STREAK VISUAL AMMUNITION™.
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.
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 AP and HAPI lines of ammunition. The Company acquired SW Kenectics, Inc. for a total of up to $1,500,000 in
cash and issued 1,700,002 restricted shares of the 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 patent will be amortized over 15 years.
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, which will be amortized over 3 years, 3 years and 5 years, respectively. These intangible assets are used
in the operation and production of our ammunition casing business through our wholly owned subsidiary, Jagemann Munition Components.
Backlog
At
March 31, 2020, we had approximately $12.7 million in backlog. The Company expects to fill these orders within the next
fiscal year ending March 31, 2021. We did not have a material amount of backlog of orders as of March 31, 2019. 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 sale.
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 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; |
| |
● |
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 International Traffic in Arms Regulations. |
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 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 selected 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.
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.
Failure
to comply with applicable laws and changing legal and regulatory requirements could harm our business and financial results.
Our
policies and procedures are designed to comply with all applicable laws, accounting and reporting requirements, tax rules and
other regulations and requirements, including those imposed by the SEC, and foreign countries, as well as applicable trade, labor,
safety, environmental, labeling, anti-bribery and corruption laws. The complexity of the regulatory environment in which we operate
and the related cost of compliance are both increasing due to additional or changing legal and regulatory requirements, our ongoing
expansion into new markets and new channels, and the fact that foreign laws occasionally conflict with domestic laws. In addition
to potential damage to our reputation and brand, failure by us or our business partners to comply with the various applicable
laws and regulations, as well as changes in laws and regulations or the manner in which they are interpreted or applied, may result
in litigation, civil and criminal liability, damages, fines and penalties, increased cost of regulatory compliance and restatements
of our financial statements and have an adverse impact on our business and financial results.
War, terrorism, other acts of violence
or natural or manmade disasters such as a global pandemic may affect the markets in which the Company operates, the Company’s
customers, the Company’s delivery of products and customer service, and could have a material adverse impact on our business,
results of operations, or financial condition.
The Company’s
business and supply chain may be adversely affected by instability, disruption or destruction in a geographic region in which
it operates, regardless of cause, including war, terrorism, riot, civil insurrection or social unrest, and natural or manmade
disasters, including famine, food, fire, earthquake, storm or pandemic events and spread of disease (including the recent outbreak
of the coronavirus commonly referred to as “COVID- 19”).
Such events may cause
customers to suspend their decisions on using the Company’s products and services, make it impossible to access some of
our inventory, and give rise to sudden significant changes in regional and global economic conditions and cycles that could interfere
with purchases of goods or services and commitments to develop new products and services. These events also pose significant risks
to the Company’s personnel and to physical facilities, transportation and operations, which could materially adversely affect
the Company’s financial results.
Any significant disruption
to communications and travel, including travel restrictions and other potential protective quarantine measures against COVID-19
by governmental agencies, could make it difficult for the Company to deliver goods services to its customers. War, riots, or other
disasters may increase the need for our products and demand by government and military may make it difficult for use to provide
products to customers. Further, travel restrictions and protective measures against COVID-19 could cause the Company to incur
additional unexpected labor costs and expenses or could restrain the Company’s ability to retain the highly skilled personnel
the Company needs for its operations. The extent to which COVID-19 impacts the Company’s business, sales and results of
operations will depend on future developments, which are highly uncertain and cannot be predicted.
We believe COVID-19
has not yet negatively affected our corporate operations but could at any time and without notice in the foreseeable future. As
a result of COVID-19, at any time we may be subject to increased costs, supply interruptions, and difficulties in obtaining raw
materials and components.COVID-19 has resulted in restrictions, postponements and cancelations and the impact, extent and duration
of the government imposed restrictions on travel and public gatherings as well as the overall effect of the COVID-19 virus is
currently unknown.
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.
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
are engaged in legal proceedings that could cause us to incur unforeseen expenses and could occupy a significant amount of our
management's time and attention.
On
September 24, 2019, the Company received notice that a former employee that had voluntarily terminated filed a complaint against
the Company, and certain individuals, with the U.S. Department of Labor (“DOL”). The Complaint in alleges that the
individual reported potential violations of SEC rules and regulations by management and that as a result of such disclosures,
the individual experienced a hostile work environment; that the company lacks sufficient controls internal controls, and that
the individual was the victim of retaliation and constructive discharge after being removed as a director by majority vote of
the shareholders. The claims were investigated by a newly appointed Special Committee made of up independent directors represented
by special independent legal counsel. The Special Committee and legal counsel found the claims were unsubstantiated and while
there were not SEC violations included in the various matters about which the individual was complaining. The matter is currently
the subject of administrative investigation by the DOL via the Occupational Safety and Health Administration. The Company filed
a timely Position Statement with the DOL in October of 2019 in response to the Complaint. The Company disputes the allegations
of wrongdoing and believes the matters raised in the Complaint are without merit and therefore has and will continue to aggressively
defend its interests in this matter.
The
claims made to the DOL, and such other litigation or claims that may be made from time to time, could negatively affect our business
operations and financial position. As we grow, we will likely see a rise in the number of litigation matters against us. These
matters may include employment and labor claims, product liability, and other claims related to our products, as well as consumer
and securities class actions, each of which are typically expensive to defend. Litigation disputes could cause us to incur unforeseen
expenses, result in content unavailability, service disruptions and otherwise occupy a significant amount of our management's
time and attention, any of which could negatively affect our business operations and financial position.
If
we are unable to settle outstanding pre-litigation claims, we may be subject to litigation which will have a negative impact on
our financials.
If
we pursue litigation with respect to outstanding or future legal claims regardless of merit and chances of success, prosecuting
and defending such litigation may be lengthy and costly, strain our resources and divert management’s attention from their
core responsibilities, which would have a negative impact on our business.
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 a substantial amount of our net sales
for the year ended March 31, 2020 and March 31, 2019.
Our
manufacturing facilities are critical to our success.
Our
Arizona and Wisconsin manufacturing facilities are critical to our success, as we currently produce all of our products at these
facilities. The facilities also house our principal research, development, engineering, and design functions.
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 in
connection with financing activities conducted to meet any such increase in sales demand.
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 casings, 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.
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 instead issue purchase orders for our products
as needed. 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 facilities 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.
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 two customers that accounted for approximately 32% of our
net sales for the year ended March 31, 2020, in comparison to three customers that accounted for approximately 54% of our net sales
for the year ended March 31, 2019. 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 products 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.
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; |
| |
|
|
| |
● |
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. The hunting for our next fiscal year season may
be affected by travel restrictions and other limitations imposed as a result of Covid-19 that are unpredictable and may not be
indicative of prior or future seasons. 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.
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™ brands, 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; |
| |
|
|
| |
● |
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 adverse outcome of any litigation; |
| |
|
|
| |
● |
political,
economic, or regulatory developments; and |
| |
|
|
| |
● |
changes
in economic conditions. |
| |
|
|
| |
● |
COVID-19,
or other pandemics.
|
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 many 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.
We need to continue as a going concern
if our business is to succeed.
Because of our recurring
losses and limited capital resources, the audit report of our independent registered public accountants on our consolidated financial
statements for the year ended March 31, 2020 contains an explanatory paragraph stating that there is substantial doubt about our
ability to continue as a going concern. Factors identified in the report include our historical net losses, and the need
for additional financing to continue our business plan and service our debt repayments. If we are not able to attain profitability
in the near future our financial condition could deteriorate further, which would have a material adverse impact on our business
and prospects and result in a significant or complete loss of your investment. Further, we may be unable to pay our debt obligations
as they become due, which include obligations to secured creditors. If we are unable to continue as a going concern, we might
have to liquidate our assets and the values we receive for our assets in liquidation or dissolution could be significantly lower
than the values reflected in our financial statements. Additionally, we are subject to customary operational covenants,
including limitations on our ability to incur liens or additional debt, pay dividends, redeem stock, make specified investments
and engage in merger, consolidation or asset sale transactions, among other restrictions. In addition, the inclusion of an explanatory
paragraph regarding substantial doubt about our ability to continue as a going concern and our lack of cash resources may materially
adversely affect our share price and our ability to raise new capital or to enter into critical contractual relations with third
parties.
We may not be able to utilize our net
operating loss carry forwards.
At March 31, 2020, we had Federal net operating loss carry forwards
(“NOLs”) for income tax purposes of $29,459,502. There were $5,144,926 of NOLs generated prior to
2018 will begin to expire in 2036. The Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) signed in to
law on March 27, 2020 provided that NOLs generated in a taxable year beginning in 2018, 2019, or 2020, may now be carried back
five years and forward indefinitely. In addition, the 80% taxable income limitation is temporarily removed, allowing NOLs to fully
offset net taxable income. However, we do not know if or when we will have any earnings and capital gains against which we could
apply these carry forwards. Furthermore, as a result of changes in the ownership of our common stock, our ability to use our federal
NOLs will be limited under Internal Revenue Code Section 382. State NOLs are subject to similar limitations in many cases. As a
result, our substantial NOLs may not have any value to us.
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.
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.
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.
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. |
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 interpretations 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.
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.
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; |
| |
|
|
| |
● |
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 with respect to affiliates, subject to compliance with the volume and
manner of sale requirements of Rule 144 under the Securities Act of 1933, as amended, and 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.
As
a former shell company, resales of shares of our restricted common stock in reliance on Rule 144 of the Securities Act are subject
to the requirements of Rule 144(i).
We
previously were a “shell company” and, as such, sales of our securities pursuant to Rule 144 under the Securities
Act, cannot be made unless, among other things, at the time of a proposed sale, we are subject to the reporting requirements of
Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, or the Exchange Act, and have filed all reports and other
materials required to be filed by Section 13 or 15(d) of the Exchange Act, as applicable, during the preceding 12 months, other
than Form 8-K reports. Because, as a former shell company, the reporting requirements of Rule 144(i) will apply regardless of
holding period, restrictive legends on certificates for shares of our common stock cannot be removed except in connection with
an actual sale that is subject to an effective registration statement under, or an applicable exemption from the registration
requirements of, the Securities Act. Because our unregistered securities cannot be sold pursuant to Rule 144 unless we continue
to meet such requirements, any unregistered securities we issue will have limited liquidity unless we continue to comply with
such requirements.
Exercise
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, 2020, we had 8,504,372 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 966,494 shares
of Common Stock at an exercise price of $1.65 per share until April 2025; (2) warrants to purchase 4,641,745 shares of our Common
Stock at an exercise price of $2.00 per share over the next three to five years; and (3) warrants to purchase 2,896,133 shares
of Common Stock at an exercise price of $2.40 over the next five years.
As
documented in Note 8 of the financial statements, the Company is to issue warrants to the holders of the convertible notes and
placement agent. As of March 31, 2020, the key
terms of the investor and placement agent warrants are still unknown such that there is still no grant of the warrants for accounting
purposes. The Company will determine the fair value of the warrants at the time the key terms of the Warrants become known and
the Warrants are issued.
In
November 2017, the Board of Directors approved the 2017 Equity Incentive Plan, or (“the Plan”). Under the Plan, 485,000
shares of 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. During the year ended March 31, 2020 there were
no shares were awarded. 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. This registration statement was declared effective by the Securities
and Exchange Commission in September 2019. We agreed to file registration statements for our Convertible Promissory Note offering
ending January 2019, our private placement offering ending in August 2019, and our Convertible Promissory Note offering ending
January 2020. We filed a registration statement to register the Offerings ending August 2019 and January 2020 in March 2020 which
was declared effective by the Securities and Exchange Commission on March 19, 2020. In the absence of this registration statement,
such sale of such shares of our Common Stock could only be made under Rule 144.
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.
Our management has concluded that we
have material weaknesses in our internal controls over financial reporting and that our disclosure controls and procedures are
not effective.
A material weakness
is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable
possibility that a material misstatement of a company’s annual or interim financial statements will not be prevented or detected
on a timely basis. During the audit of our financial statements for the year ended March 31, 2020, our management identified material
weaknesses in our internal control over financial reporting. If these weaknesses continue, investors could lose confidence in
the accuracy and completeness of our financial reports and other disclosures.
In addition, our management has concluded
that our disclosure controls and procedures were not effective due to the lack of segregation of duties. These material weaknesses,
if not remediated, create an increased risk of misstatement of the Company’s financial results, which, if material, may
require future restatement thereof. A failure to implement improved internal controls, or difficulties encountered in their implementation
or execution, could cause future delays in our reporting obligations and could have a negative effect on us and the trading price
of our common stock.
If
we fail to develop or maintain an effective system of internal controls, we may not be able to accurately report our financial
results or prevent financial fraud. As a result, current and potential stockholders could lose confidence in our financial reporting.
We
currently have deficiencies in our internal control structure
that they consider to be “significant deficiencies” and may not be able to cure the deficiencies anytime in the
near future. A “significant deficiency” is defined as a deficiency, or a combination of deficiencies, in internal
controls over financial reporting such that there is more than a remote likelihood that a material misstatement of the entity’s
financial statements will not be prevented or detected by the entity’s internal controls.
Effective
internal controls are necessary for us to provide reliable financial reports and effectively prevent fraud. If we cannot provide
reliable financial reports or prevent fraud, we could be subject to regulatory action or other litigation and our operating results
could be harmed. We are required to document and test our internal control procedures to satisfy the requirements of Section 404
of the Sarbanes-Oxley Act of 2002 (the “Sarbanes-Oxley Act” or “SOX”), which requires our management to
annually assess the effectiveness of our internal control over financial reporting.
We
currently are not an “accelerated filer” as defined in Rule 12b-2 under the Securities Exchange Act of 1934, as amended.
Section 404 of the Sarbanes-Oxley Act of 2002 (“Section 404”) requires us to include an internal control report with
our Annual Report on Form 10-K. That report must include management’s assessment of the effectiveness of our internal control
over financial reporting as of the end of the fiscal year. This report must also include disclosure of any material weaknesses
in internal control over financial reporting that we have identified. As of March 31, 2020, the management of the Company assessed
the effectiveness of the Company’s internal control over financial reporting based on the criteria for effective internal
control over financial reporting established in Internal Control - Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (“COSO”) and SEC guidance on conducting such assessments. Management concluded,
during the fiscal year ended March 31, 2020, that the Company’s internal controls and procedures were not effective to detect
the inappropriate application of U.S. GAAP rules. Management realized there were deficiencies in the design or operation of the
Company’s internal control that adversely affected the Company’s internal controls which management considers to be
material weaknesses. A material weakness in the effectiveness of our internal controls over financial reporting could result in
an increased chance of fraud and the loss of customers, reduce our ability to obtain financing and require additional expenditures
to comply with these requirements, each of which could have a material adverse effect on our business, results of operations and
financial condition. For additional information, see Item 9A – Controls and Procedures.
Our
intended business, operations and accounting are expected to be substantially more complex than they have been in the past. It
may be time consuming, difficult and costly for us to develop and implement the internal controls and reporting procedures required
by the Sarbanes-Oxley Act. We may need to hire additional financial reporting, internal controls and other finance personnel in
order to develop and implement appropriate internal controls and reporting procedures. If we are unable to comply with the internal
controls requirements of the Sarbanes-Oxley Act, then we may not be able to obtain the independent accountant certifications required
by such act, which may preclude us from keeping our filings with the SEC current.
If
we are unable to maintain the adequacy of our internal controls, as those standards are modified, supplemented, or amended from
time to time, we may not be able to ensure that we can conclude on an ongoing basis that we have effective internal control over
financial reporting in accordance with Section 404. Failure to achieve and maintain an effective internal control environment
could cause us to face regulatory action and cause investors to lose confidence in our reported financial information, either
of which could adversely affect the value of our common stock.
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, we are required to furnish a report by our
management on our internal control over financial reporting with our Form 10-K. 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, and (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.
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 conclusions with respect to the effectiveness of our internal control over
financial reporting. There is a risk that we 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.
Although
our Common Stock is not currently a penny stock, it has been a penny stock in the past and may be considered a penny stock in
the future.
The
SEC has adopted a number of rules to regulate “penny stocks” that restricts transactions involving stock which is
deemed to be penny stock. Such rules include Rules 3a51-1, 15g-1, 15g-2, 15g-3, 15g-4, 15g-5, 15g-6, 15g-7, and 15g-9 under the
Securities and Exchange Act of 1934, as amended. These rules may have the effect of reducing the liquidity of penny stocks. “Penny
stocks” generally are equity securities with a price of less than $5.00 per share, other than securities: (i) registered
on certain national securities exchanges if current price and volume information with respect to transactions in such securities
is provided by the exchange; (ii) quoted on the Nasdaq Stock Market if current price and volume information with respect to transactions
in such securities is provided by the system; (iii) issued by an issuer that has net tangible assets (i.e., total assets less
intangible assets and liabilities) in excess of $2,000,000, if the issuer has been in continuous operation for at least three
years, or $5,000,000, if the issuer has been in continuous operation for less than three years; or (iv) issued by an issuer that
has average revenue of at least $6,000,000 for the last three years. As of the date of our most recent audited financial statements
reported on by an independent public accountant, we have net tangible assets in excess of $5,000,000. As such, our Common Stock
is not a penny stock. Nonetheless, our Common Stock has in the past constituted, and may again in the future constitute, “penny
stock” within the meaning of the rules. The additional sales practice and disclosure requirements imposed upon U.S. broker-dealers
may discourage such broker-dealers from effecting transactions in shares of our Common Stock, which could severely limit the market
liquidity of such shares and impede their sale in the secondary market.
A
U.S. broker-dealer selling penny stock to anyone other than an established customer or “accredited investor” (generally,
an individual with net worth in excess of $1,000,000 or an annual income exceeding $200,000, or $300,000 together with his or
her spouse) must make a special suitability determination for the purchaser and must receive the purchaser’s written consent
to the transaction prior to sale, unless the broker-dealer or the transaction is otherwise exempt. In addition, the “penny
stock” regulations require the U.S. broker-dealer to deliver, prior to any transaction involving a “penny stock”,
a disclosure schedule prepared in accordance with SEC standards relating to the “penny stock” market, unless the broker-dealer
or the transaction is otherwise exempt. A U.S. broker-dealer is also required to disclose commissions payable to the U.S. broker-dealer
and the registered representative and current quotations for the securities. Finally, a U.S. broker-dealer is required to submit
monthly statements disclosing recent price information with respect to the “penny stock” held in a customer’s
account and information with respect to the limited market in “penny stocks”.
Stockholders
should be aware that, according to the SEC, the market for “penny stocks” has suffered in recent years from patterns
of fraud and abuse. Such patterns include (i) control of the market for the security by one or a few broker-dealers that are often
related to the promoter or issuer; (ii) manipulation of prices through prearranged matching of purchases and sales and false and
misleading press releases; (iii) “boiler room” practices involving high-pressure sales tactics and unrealistic price
projections by inexperienced sales persons; (iv) excessive and undisclosed bid-ask differentials and markups by selling broker-dealers;
and (v) the wholesale dumping of the same securities by promoters and broker-dealers after prices have been manipulated to a desired
level, resulting in investor losses. Our management is aware of the abuses that have occurred historically in the penny stock
market. Although we do not expect to be in a position to dictate the behavior of the market or of broker-dealers who participate
in the market, management will strive within the confines of practical limitations to prevent the described patterns from being
established with respect to our securities.
Although
our Common Stock is not currently a penny stock, no assurance can be given that our Common Stock will ever be listed on The Nasdaq
Stock Market or any other exchange, or that our net tangible assets will continue to exceed $5,000,000 for the next year of operations
or that our net tangible assets will exceed $2,000,000 thereafter such that our common stock will remain a non-penny stock.
Our
certification of incorporation designates the Court of Chancery in the State of Delaware as the sole and exclusive forum for actions
or proceedings that may be initiated by our stockholders, which could discourage claims or limit shareholders’ ability to
make a claim against the Company, our directors, officers, and employees.
Our
Amended and Restated Certificate of Incorporation states that unless the Corporation consents in writing to the selection of an
alternative forum, the Court of Chancery in the State of Delaware shall be the sole and exclusive forum for any stockholder (including
a beneficial) to bring (i) any derivative action or proceeding brought on behalf of the Corporation, (ii) an action asserting
a claim of break of fiduciary duty owed by any direction, officer, or other employee of the Corporation to the Corporation or
the Corporation’s stockholders, (iii) any action asserting a claim against the Corporation, its directors, officers, or
employees arising pursuant to any provision of the Delaware General Corporation Law or the Corporation’s certificate of
incorporation or bylaws, or (iv) any action asserting a claim against the Corporation, its directors, officers, or employees governed
by the internal affairs doctrine, except for, as to each of (i) through (iv) above, any claim as to which the Court of Chancery
determines that there is an indispensable party not subject to the jurisdiction of the Court of Chancery (and the indispensable
party does not consent to the personal jurisdiction of the Court of Chancery within ten days following such determination), which
is vested in the exclusive jurisdiction of a court or forum other than the Court of Chancery, or for which the Court of Chancery
does not have subject matter jurisdiction.
These
exclusive forum provisions do not apply to claims under the Securities Act or the Exchange Act. The exclusive forum provision
may discourage claims or limit shareholders’ ability to submit claims in a judicial forum that they find favorable and may
create additional costs as a result. If a court were to determine the exclusive forum provision to be inapplicable and unenforceable
in an action, we may incur additional costs in conjunction with our efforts to resolve the dispute in an alternative jurisdiction,
which could have a negative impact on our results of operations.
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 approximately $18,000 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 involved in or subject to, or may become involved in or subject to, routine litigation, claims, disputes, proceedings and
investigations in the ordinary course of business. While the outcome of lawsuits and other proceedings against us cannot be predicted
with certainty, in the opinion of management, individually or in the aggregate, no such lawsuits are expected to have a material
effect on our financial position, results of operations or cash flows. We record accruals for contingencies when it is probable
that a liability will be incurred and the amount of loss can be reasonably estimated.
Please
reference the Contingencies section of Note 3 of our Financial Statements for additional disclosure.
ITEM
4. MINE SAFETY DISCLOSURE
None.
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 April 1, 2018 to March 31, 2020. 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. Prior to December 11, 2018, our common stock was traded on the OTC Pink Sheets Open Market
which is not considered to be an established trading market. After December 11, 2018, our common stock has traded on the
OTCQB Market.
| Fiscal Year Ended | |
High | | |
Low | |
| | |
| | |
| |
| 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 | |
| | |
| | | |
| | |
| March 31, 2020 | |
| | |
| |
| First Quarter | |
$ | 3.10 | | |
$ | 1.90 | |
| Second Quarter | |
$ | 2.14 | | |
$ | 1.55 | |
| Third Quarter | |
$ | 1.68 | | |
$ | 0.99 | |
| Fourth Quarter | |
$ | 1.95 | | |
$ | 1.05 | |
On
August 14, 2020, the closing stock price reported by OTC Markets
Group, Inc. was $2.89, and an average daily volume of 72,990 shares of Common Stock was reported for the past 30 days.
(a)
Common Stock
Prior
to December 11, 2018, our Common Stock (“POWW”) was traded on the OTC Pink Sheets Open Market which is not considered
to be an established trading market. After December 11, 2018, our common stock has traded on the OTCQB Market, under the symbol
(“POWW”). There is currently no market for our warrants, and we cannot guarantee that a market for the warrants will
develop.
The
ability of individual stockholders to trade their shares in a particular state may be subject to various rules and regulations
of that state. A number of states require that an issuer’s securities be registered in their state or appropriately exempted
from registration before the securities are permitted to trade in that state. Presently, we have no plans to register our securities
in any particular state.
(b)
Holders of Common Equity
As of August 14,
2020, a total of 47,622,920 shares of our Common Stock were outstanding and there were approximately 465 holders of record.
(c)
Dividend Information
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.
(d)
Securities Authorized for Issuance under Equity Compensation Plans
Equity
Incentive Plan
In
November 2017, the Board of Directors approved the 2017 Equity Incentive Plan, or the Plan. Under the Plan, 485,000 shares of
the Common stock was reserved and authorized to be issued. At December 31, 2017, 200,000 shares of Common Stock were approved
and issued under the Plan, and we recognized approximately $250,000 of related compensation expenses. On January 10, 2018, 200,000
shares were awarded, and we recognized $330,000 of compensation expense. There are 85,000 remaining to be issued.
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.
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.
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, 2020, 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. |
| |
|
|
| |
● |
1,780,499
shares of common stock were issued to employees as compensation with values per share ranging from $1.00 to $3.28 for
an aggregate compensation expense of $3,122,262 from July 1, 2017 through March 31, 2020. Additionally,
employees received warrants to purchase 125,000 shares of common stock on March 31, 2018.
|
| |
|
|
| |
● |
715,104
shares of common stock were issued for professional services at a price per share ranging from $1.00 to $3.15 totaling $830,925
from January 31, 2017 through March 31, 2020. 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. |
| |
|
|
| |
● |
49,600
shares valued at $2.50 per share totaling $124,000 were repurchased by the Company and subsequently retired on December 20,
2018. The shares were originally issued as compensation for legal fees. |
| |
● |
5,061,220
shares of common stock were issued to investors through a private placement offering with Paulson serving as placement agent.
The shares were issued from December 27, 2018 to August 30, 2019 at a price per share of $2.00 for an aggregate value of $10,122,440.
In addition, these investors received five-year warrants to purchase 2,530,610 shares of common stock at an exercise price
of $2.40 per share (the “Paulson Investor Warrants”). Paulson agent collected a 12% cash commission of $1,1,63,608
based on the cash raised and a fee payable in warrants of 553,346 (the “Placement Agent Warrants”) equaling 12%
of the total units sold. The Placement Agent Warrants are five-year warrants to purchase 553,610 shares of common stock at
an exercise price of $2.00 per share and were issued from December 27, 2018 to August 30, 2019. |
| |
|
|
| |
● |
4,750,000
shares of the Common Stock was issued 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 on March 14, 2019.
The shares were valued at a price per share of $2.00 each. |
| |
|
|
| |
● |
731,039
shares of Common Stock and Warrants to purchase 365,523 shares of Common Stock were issued to holders for the conversion of
Convertible Promissory Notes of $1,410,000 and Accrued interest of $52,065 on March 29, 2019. Previously, 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. Additionally, on June 5, 2019, 127,291 shares of Common Stock were issued
to the remaining holders for the conversion of their Convertible Promissory Notes of $300,000 and accrued interest of $18,226.
The Company accrued $42,300 for a 3% cash conversion fee on the principal converted payable to the placement agent, Paulson
Investment Company. |
Subsequent to March 31, 2020, the Company issued 180,916 shares
of Common Stock to employees as compensation with values per share ranging from $1.56 to $2.50 for a total value of $339,132. The
Company sold 11,500 shares to employee for a total value of $14,375 or $1.25 per share. The Company issued 8,336 shares for services
provided to the Company totaling $13,171 or $1.58 per share. Additionally, the Company issued 1,157,143 shares of its Common Stock
for Cash to investors at $1.75 per share totaling $2,025,000.
ITEM
6. SELECTED FINANCIAL DATA
Not
required.
ITEM
7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
This
document contains certain “forward-looking statements”. All statements other than statements of historical fact are
“forward-looking statements” for purposes of federal and state securities laws, including, but not limited to, any
projections of earnings, revenue or other financial items; any statements of the plans, strategies, goals and objectives of management
for future operations; any statements concerning proposed new products and services or developments thereof; any statements regarding
future economic conditions or performance; any statements or belief; and any statements of assumptions underlying any of the foregoing.
Forward
looking statements may include the words “may,” “could,” “estimate,” “intend,”
“continue,” “believe,” “expect,” or “anticipate,” or other similar words, or the
negative thereof. These forward-looking statements present our estimates and assumptions only as of the date of this report. Accordingly,
readers are cautioned not to place undue reliance on forward-looking statements, which speak only as of the dates on which they
are made. We do not undertake to update forward-looking statements to reflect the impact of circumstances or events that arise
after the dates they are made. You should, however, consult further disclosures and risk factors we included in the section titled
Risk Factors contained herein.
In
our filings with the Securities and Exchange Commission, references to “AMMO, Inc.”, “AMMO”, “the
Company”, “we,” “us,” “our” and similar terms refer to AMMO, Inc. and its wholly owned
operating subsidiaries AMMO Munitions, Inc., Enlight Group II, LLC d/b/a Jagemann Munition Components (“Jagemann Munition
Components”), SNI, LLC and AMMO Technologies, Inc. (inactive).
Overview
Our
vision is to modernize the ammunition industry by bringing new technologies to market. We intend to do that through acquisition
and application of intellectual property that is unique to the industry and through investing in manufacturing equipment and processes
that enable us to compete globally.
When
we began our operations in early 2017, our focus was to sell the inventory of ammunition we acquired through an asset purchase
of a private company located in northern Arizona. The inventory consisted primarily of standard pistol and rifle rounds and two
proprietary lines that had not received much traction in the market. We sold the remaining inventory at a discount during 2017
to help fund the development of our manufacturing operations. This accounted for the majority of our sales through the end of
the third quarter of the calendar year of 2017.
With
the prior inventory successfully sold and new products being produced, our next objective for the calendar year ending December
31, 2017 was to identify ammunition technologies unique to the industry that could be quickly implemented by our manufacturing
team. We met with several organizations and projectile manufacturers looking for innovative products that could be used to establish
us as a niche or high-end manufacturer for the recreational shooter, the American hunter, law enforcement, and military forces.
Among the first of these technologies to meet our requirements was STREAK VISUAL AMMUNITION™, a one-way luminescent or OWL
Technology application. We believe our STREAK VISUAL AMMUNITION™ line is the only non-incendiary tracer round in the ammunition
market today. We secured the exclusive license to manufacture and sell the STREAK VISUAL AMMUNITION™ line of ammunition
in 2017. We have filed for and received Trademark Protection for the STREAK VISUAL AMMUNITION™ product name from the United
States Patent and Trademark Office (USPTO) on July 17, 2018 Additionally, we filed for Trademark Protection for the O.W.L. 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.
On
March 15, 2019, Enlight Group II, LLC, a wholly owned subsidiary of AMMO, Inc., completed its acquisition of 100% of the assets
of Jagemann Stamping Company’s ammunition casing, projectile manufacturing and sales operations pursuant to the terms of
the Amended and Restated Asset Purchase Agreement dated March 14, 2019. In accordance with the terms of the Amended APA, Enlight
Group II, LLC paid Jagemann Stamping Company a combination of $7,000,000 in cash, $10,400,000 delivered in the form of a Promissory
Note, and 4,750,000 shares of AMMO, Inc. common stock.
This
acquisition was a critical element in the Company’s long-term strategy as it secures its supply chain for these important
components and creates a more competitive pricing structure that it can leverage across all its targeted markets. This also greatly
enhances the Company’s plant capacity and technical expertise required for the further development of military grade projectiles.
The
Company’s innovative line of match grade armor piercing (AP) and hard armor piercing incendiary (HAPI) tactical rounds,
are the centerpiece of the Company’s strategy to address the unique needs the armed forces community demands are met by
their equipment. Following AMMO’s acquisition of Jagemann Casings in March, the Company has aligned its manufacturing operations
to support the large caliber demand from military personnel, such as the 12.7mm and .50 caliber BMG configurations.
The
focus for our 2021 fiscal year is to continue to expand our brand presence into the markets identified above and to continue
to grow our sales within our targeted markets. We intend to do this through establishing key strategic relationships, enrolling
in government procurement programs, establishing relationships with leading law enforcement associations and programs, expanding
distributor channels, and revitalized marketing campaigns.
We
also intend to increase our product offerings through potential acquisitions that bring new technologies that provide solutions
for United States Military requirements. Our first step in this process is the addition of equipment to support the manufacture
of 50 caliber ammunition. Not only is there an increasing demand for quality ammunition in this category for military applications,
it also has a growing demand from commercial markets, and gun enthusiasts.
Our
addressable market includes the 2.6 million law enforcement officers around the world (800,000 domestically and 1.8 million internationally)
who annually recertify with their firearms; 1.3 million enlisted personnel in the U.S. Armed Forces, and more than 30 million
handgun owning households in the United States with later expansion to international markets for civilian purchasers which, based
on industry statistics, represents addressable revenue of billions of dollars annually. Each of these markets has unique challenges
or barriers to entry. We believe with the strategies we are developing; we will be well positioned to grow our future market share
based on our commitment to innovation and meeting the changing needs and demographics of ammunition buyers.
Our
History
Our
ammunition manufacturing business has been fully operational for just over two years. Although our corporate entity commenced
in 1990 as a textile manufacturer and importer, then called Retrospettiva, our manufacturing operations formally began in March
of 2017 when we acquired our ammunition business.
Results
of Operations
Our
financial results for the year ended March 31, 2020 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, 2020. This was the result of a significant
increase in depreciation and amortization expenses related to the addition of assets from the acquisition of Jagemann Stamping
Company’s ammunition casing, projectile manufacturing, and sales operations (“Jagemann Casings”), sales of products
that carry lower margins, as well as increases to costs of raw materials and overhead.
The
following table presents summarized financial information taken from our consolidated statements of operations for the year ended
March 31, 2020 compared with the year ended March 31, 2019:
| |
|
For
the Year Ended |
|
| |
|
March
31, 2020 |
|
|
March
31, 2019 |
|
| |
|
|
|
|
|
|
| Net Sales |
|
$ |
14,780,365 |
|
|
$ |
4,565,652 |
|
| Cost of Products Sold |
|
|
18,455,904 |
|
|
|
4,795,346 |
|
| Gross Margin |
|
|
(3,675,539 |
) |
|
|
(229,694 |
) |
| Sales, General & Administrative Expenses |
|
|
10,161,954 |
|
|
|
8,750,964 |
|
| Loss
from Operations |
|
|
(13,837,493 |
) |
|
|
(8,980,658 |
) |
| Other income (expense) |
|
|
|
|
|
|
|
|
| Other income (expense) |
|
|
(719,187 |
) |
|
|
(2,728,754 |
) |
| Loss before provision
for income taxes |
|
$ |
(14,556,680 |
) |
|
$ |
(11,709,412 |
) |
| Provision for income taxes |
|
|
|
|
|
|
- |
|
| Net Loss |
|
$ |
(14,556,680 |
) |
|
$ |
(11,709,412 |
) |
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.
Adjusted
EBITDA
| | |
For the | | |
For the | |
| | |
Year Ended | | |
Year Ended | |
| | |
March 31, 2020 | | |
March 31, 2019 | |
| | |
| | |
| |
| Reconciliation of GAAP net income to Adjusted EBITDA | |
| | | |
| | |
| Net (Loss) | |
$ | (14,556,680 | ) | |
$ | (11,709,412 | ) |
| Depreciation and amortization | |
| 4,455,962 | | |
| 599,863 | |
| Interest expense, net | |
| 719,187 | | |
| 610,600 | |
| Employee stock awards | |
| 901,526 | | |
| 1,172,974 | |
| Stock grants | |
| 534,929 | | |
| 703,030 | |
| Stock for services | |
| 352,300 | | |
| 22,350 | |
| Contingent consideration fair value | |
| (190,377 | ) | |
| - | |
| Stock and warrants for promissory note conversion | |
| - | | |
| 358,000 | |
| Purchase of Jagemann Munition Components | |
| - | | |
| 2,118,154 | |
| Adjusted EBITDA | |
$ | (7,783,153 | ) | |
$ | (6,124,441 | ) |
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, 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, and contingent consideration fair
value adjustments, 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.
Net
Sales
The
following table shows our net sales by proprietary ammunition versus standard ammunition for the periods ended March 31, 2020
and March 31, 2019. “Proprietary Ammunition” include those lines of ammunition manufactured by our facilities that
are sold under the brand names: STREAK VISUAL AMMUNITION™, One Precise Shot (OPS), Night Ops, Jeff Rann, and Stelth. We
define “Standard Ammunition” as non-proprietary ammunition that directly competes with other brand manufacturers.
Our “Standard Ammunition” is manufactured within our facility and may also include completed ammunition that has been
acquired in the open market for sale to others. Also included in this category is low cost target pistol and rifle ammunition,
as well as bulk packaged ammunition manufactured by us using reprocessed brass casings. Ammunition within this product line typically
carries much lower gross margins.
| | |
For the Year Ended | |
| | |
March 31, 2020 | | |
March 31, 2019 | |
| Proprietary Ammunition | |
$ | 3,029,911 | | |
$ | 2,585,768 | |
| Standard Ammunition | |
| 3,561,285 | | |
| 1,399,806 | |
| Ammunition Casings | |
| 8,189,169 | | |
| 580,078 | |
| Total Sales | |
$ | 14,780,365 | | |
$ | 4,565,652 | |
Sales
for the year ended March 31, 2020 increased 224% or $10,214,713, over the year ended March 31, 2019. This increase was the result
of $7,609,091 of sales from our recently acquired casing operations, coupled with $2,161,479 of respective increased sales
in bulk pistol and rifle ammunition, summarized in Standard Ammunition above and an increase of $444,143 of respective sales of
Proprietary Ammunition. Management expects the sales of Proprietary Ammunition to outpace the sales of our Standard Ammunition.
We
are focused on continuing to grow top line revenue quarter-over-quarter as we continue to further expand distribution into commercial
markets, introduce new product lines, and initiate sales to U.S. law enforcement, military, and international markets.
We
added ammunition casings to our product offerings at March 15, 2019 and expect the ammunition casing sales to continue to be a
significant part of our sales moving forward.
Through
our acquisition of SWK, the Company has developed and deployed a new line of tactical armor piercing (AP) and hard armor piercing
incendiary (HAPI) precision ammunition to meet the lethality requirements of both the US and foreign military customers. This
line was formally launched at SHOT Show in Las Vegas, where our team demonstrated or presented the capability to more than 15
countries around the world. We continue to demonstrate our AP and HAPI ammunition to military personnel at scheduled and invite
only events, resulting in increased interest and procurement discussions.
It
is important to note that, although U.S. law enforcement, military and international markets represent significant opportunities
for our company, they also have a long sales cycle. The Company’s sales team has been effective in establishing sales and
distribution channels, both in the United States and abroad, which are reasonably anticipated to drive sustained sales opportunity
in the military, law enforcement, and commercial markets.
Sales
outside of the United States require licenses and approval from either the U.S. Department of Commerce or the U.S. State Department,
which typically takes approximately 30 days to receive. On April 16, 2019, we received renewal for our registration with the International
Traffic in Arms Regulations (ITAR), which remains valid through the report date. This permits the Company to export and broker
ammunition and other controlled items covered under ITAR.
Cost
of Goods Sold
Cost of goods sold
increased by approximately $13.7 million from $4.8 million to $18.5 million, respectively for the year ended March 31,
2020 compared with the year ended March 31, 2019. This was the result of a significant increase to non-cash depreciation related
to our newly acquired casing operations, expensing of increased labor, overhead, and raw materials used to produce finished product
during 2020 as compared to 2019. Although sales increased, when comparing the year ended March 31, 2020 to the year ended March
31, 2019, 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 18.9% when comparing the year ended March 31, 2020 to the year ended March 31, 2019.
Gross
Margin
Our gross margin percentage
decreased to -24.9% from -5.0% during the year ended March 31, 2020 as compared to the same period in 2019. This was a
result of the increased non-cash depreciation related to our recently acquired casing operations and a level of sales that 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 tactical Armor Piercing (AP) and Hard Armor Piercing Incendiary (HAPI) precision ammunition, all of which
carry higher margins as a percentage of their selling price;
|
| |
● |
Introduction
of new lines of ammunition that historically carry higher margins in the consumer and government sectors; |
| |
|
|
| |
● |
Reduced
component costs through acquisition our recent casing operation acquisition expansion of strategic relationships with component
providers; |
| |
|
|
| |
● |
Expanded
use of automation equipment that reduces the total labor required to assemble finished products |
| |
|
|
| |
● |
And,
better leverage of our fixed costs through expanded production to support the sales objectives. |
Operating Expenses
Overall, for the year ended March 31, 2020, our operating expenses increased by approximately $1.4 million over the year ended March 31, 2019, but decreased as a percentage
of sales from 191.7% for the year ended March 31, 2019 to 68.8% for the year ended March 31, 2020. This increase in expenses was
the result of non-cash amortization expense of $1.6 million for the year ended March 31, 2020. Additionally, the increase was related
to the expansion our sales and support team, stock compensation expense associated with issuance of our Common Stock in lieu of
cash compensation for employees, board members, and key consultants for the organization during the period, and trade show and
marketing costs associated with introducing our new lines of ammunition. Operating expenses for the years
ended March 31, 2020 and 2019 periods included noncash stock compensation of approximately $1.6 million and $1.9 million, respectively.
We also experienced increases as a result of new investor and public relations programs, and professional fees associated with
our acquisition activity, our public filings, and our efforts to uplist the Company from the OTC to a national exchange. We expect
to see administrative expenditures decrease as a percentage of sales in the 2021 fiscal year, as we leverage our work force and
expand our sales opportunities.
During the year ended
March 31, 2020, our selling and marketing expenses decreased by approximately $250,000. The decrease was related to efficiencies
in our marketing expenses.
Our corporate general
& administrative expenses increased approximately $258,000 in the current period from the prior year mainly due to increased
professional and legal fees, which included noncash stock compensation of $352,000 and a decrease related to a noncash fair value
adjustment to Contingent Consideration of approximately $190,000.
Employee salaries and
related expenses decreased approximately $243,000 for the year ended March 31, 2020 compared to the comparable period ended in
2019. This was a result of decreased expenses related to employee stock compensation of approximately $440,000, which was offset
with an increase other payroll related expenses of $197,000.
Depreciation and amortization
expenses increased approximately $1.0 million from the period due to amortization expenses in connection with our newly acquired
subsidiary, Jagemann Munition Components.
Interest
and Other Expenses
For
the year ended March 31, 2020, interest expenses increased by approximately $109,000 compared with the comparable year
ended March 31, 2019. The change from the prior period was mainly due to approximately $352,000 of accrued to
interest expense in connection with related party note payables for the year ended March 31, 2020, approximately $179,000
of interest expense recognized for our Factoring Liability, and a decrease of interest expense and debt discount
amortization related to Convertible Promissory notes of approximately $455,000. Interest expense for the year ended March
31, 2020 included $121,000 of non-cash debt discount amortization related to the Convertible Promissory Notes in
comparison to debt discount amortization of $151,856 and noncash interest expense of $424,091 for the year ended March 31,
2019.
We
recognized a loss on the purchase of Jagemann Munition Components
of $2,118,154 for the year ending March 31, 2019.
Net
Loss
As
a result of higher production, selling, and payroll expenses, we ended the year ended March 31, 2020 with respective net losses
of approximately $14.6 million compared with respective net losses of approximately $11.7 million for the year ended March
31, 2019.
Our
goal is to continue to improve our operating results as we focus on increasing sales and controlling our operating expenses.
Liquidity
and Capital Resources
As of March 31, 2020,
we had $884,274 of cash and cash equivalents, a decrease of $1,296,972 from March 31, 2019.
Working
Capital is summarized and compared as follows:
| |
|
March
31, 2020 |
|
|
March
31, 2019 |
|
| Current assets |
|
$ |
9,157,110 |
|
|
$ |
8,626,870 |
|
| Current liabilities |
|
|
12,225,609 |
|
|
|
4,482,375 |
|
| |
|
$ |
(3,068,499 |
) |
|
$ |
4,144,495 |
|
Changes
in cash flows are summarized as follows:
Operating
Activities
For the year ended
March 31, 2020, net cash used in operations totaled $5,359,435. This was primarily the result of a net loss of $14,556,680, increases in our period end accounts receivable of $1,679,887, which
was offset by increases in accounts payable and accrued liabilities of $3,277,010 and $1,106,411. The cash used in operations were partially offset by the benefit of non-cash expenses for depreciation
and amortization of $4,455,962, employee stock compensation of $901,526, stock issued for services of $352,200, stock grants totaling
$534,929, and an increase related to an adjustment to the fair value of contingent consideration of $190,377.
For
the year ended March 31, 2019, net cash used in operations totaled $7,294,007 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.
Investing
Activities
During
the year ended March 31, 2020, we used $462,385 in net cash for investing activities compared with $9,541,907 for the comparable
period in 2019. The $462,385 of cash used to purchase fixed assets such as new production equipment and to acquire end cap displays
for the sale of our product at retailers.
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.
Financing
Activities
We
financed our operations primarily from the issuance of equity instruments. During the year ended March 31, 2020, net cash provided
by financing activities was $4,524,848. This was the net effect of $2,465,540 generated from the sale of Common Stock,
net of cash payments of $285,981 in conjunction with the Unit offerings. We issued $2,500,000 in Convertible Promissory Notes,
net of $329,000 of issuance costs. Additionally, $9,747,281 was generated from accounts receivable factoring, which
was offset by payments of $7,741,302. There was $819,731 of cash was generated from the issuance of a related party note
payable, These increases to our financing activities were offset by payment of $1,885,000 on the related party notes payable,
$466,421 toward our insurance premium note payable and a $300,000 payment of our Contingent Consideration Payable.
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.
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 year. Generally, we have financed operations to date through the proceeds of stock sales,
bank financings, and related-party notes.
We
adopted the Financial Accounting Standards Board’s (“FASB”) Accounting Standard Codification (“ASC”)
Topic 205-40, Presentation of Financial Statements – Going Concern, which requires that management evaluate whether there
are relevant conditions and events that, in the aggregate, raise substantial doubt about the entity’s ability to continue
as a going concern and to meet its obligations as they become due within one year after the date that the financial statements
are issued. Accordingly, management has concluded that we do not have sufficient funds to support operations within one year after
the date the financial statements are issued and, therefore, we concluded there was substantial doubt about the Company’s
ability to continue as a going concern.
To
fund further operations, we will need to raise additional capital. We may obtain additional financing in the future through conventional
financing relationships and through the continued sales of our Common Stock. Our ability to continue as a going concern or meet
the minimum liquidity requirements in the future is dependent on its ability to raise significant additional capital, of which
there can be no assurance. If the necessary financing is not obtained or achieved, we will likely be required to reduce its planned
expenditures, which could have an adverse impact on the results of operations, financial condition and our ability to achieve
its strategic objective. There can be no assurance that financing will be available on acceptable terms, or at all.
Contractual
Obligations
The
Company’s contractual obligations by maturity as of March 31, 2020 are as follows:
| | |
Total | | |
Less than 1 Year | | |
2-3 Years | | |
4-5 Years | | |
More than 5 years | |
| Operating Leases | |
$ | 3,421,758 | | |
$ | 740,715 | | |
$ | 1,351,419 | | |
$ | 935,496 | | |
$ | 394,128 | |
| Related Party Note Payable (1) | |
| 6,420,005 | | |
| 1,230,719 | | |
| 5,189,286 | | |
| - | | |
| - | |
| Contingent Consideration Payable (2) | |
| 900,000 | | |
| - | | |
| 900,000 | | |
| - | | |
| - | |
| | |
$ | 10,741,763 | | |
$ | 1,971,434 | | |
$ | 7,440,705 | | |
$ | 935,496 | | |
$ | 394,128 | |
(1) Related Party Note Payable includes
interest expenses of approximately $616,265.
(2) Contingent consideration is to be paid
upon achievement of specific milestones. The date of payment included herein is based upon management estimates.
Off-Balance
Sheet Arrangements
As
of March 31, 2020, 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. Significant estimates made in preparing the consolidated financial statements
include the valuation of allowances for doubtful accounts, valuation of deferred tax assets, inventories, useful lives
of assets, intangible assets, and stock-based compensation.
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, 2020, and March 31, 2019, we conducted a full analysis of inventory on hand and expensed all inventory
not currently in use, or for which there was no future demand.
Research
and Development
To
date, we have expensed all costs associated with developing our product specifications, manufacturing procedures, and products
through our cost of products sold, as this work was done by the same employees who produced the finished product. We anticipate
that it may become necessary to reclassify research and development costs into our operating expenditures for reporting purposes
as we begin to develop new technologies and lines of ammunition.
Revenue
Recognition
We
generate revenue from the production and sale of ammunition. 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. If a contract contains a single performance
obligation, the entire transaction price is allocated to the single performance obligation. Our contracts contain a single performance
obligation and the entire transaction price is allocated to the single performance obligation. We recognize as revenues the amount
of the transaction price that is allocated to the respective performance obligation when the performance obligation is satisfied
or as it is satisfied. Accordingly, we recognize revenues (net) when the customer obtains control of the Company’s product,
which typically occurs upon shipment of the product. In the current period, the Company
began accepting contract liabilities or Unearned Revenue. We included Unearned Revenue
in our accrued liabilities. The Company will recognize revenue when the performance obligation is met.
Excise
Tax
As
a result of regulations imposed by the Federal Government for sales of ammunition to non-government U.S. entities, we charge and
collect an 11% excise tax for all products sold into these channels. During the year ended March 31, 2020 and 2019, we recognized
$643,735 and $327,497, respectively, in excise taxes. For ease in selling to commercial markets, excise tax is included
in our unit price for the products sold. We record this through net sales and expense the offsetting tax expense to cost of goods
sold.
Fair
Value of Financial Instruments
Fair
value estimates discussed herein are based upon certain market assumptions and pertinent information available to us as of March
31, 2020. The respective carrying value of certain on-balance-sheet financial instruments approximated their fair value. These
financial instruments include cash, accounts payable, and amounts due to related parties. Fair values were assumed to approximate
carrying values because they are short term in nature and their carrying amounts approximate fair values or they are payable on
demand.
Income
Taxes
We
follow ASC subtopic 740-10, “Accounting for Income Taxes” for recording the provision for income taxes. ASC 740-10
requires the use of the asset and liability method of accounting for income taxes. Under the asset and liability method, deferred
tax assets and liabilities are computed based upon the difference between the financial statement and income tax basis of assets
and liabilities using the enacted marginal tax rate applicable when the related asset or liability is expected to be realized
or settled. Deferred income tax expenses or benefits are based on the changes in the asset or liability each period. If available
evidence suggest that is more likely than not that some portion or all of the deferred tax assets will not be realized, a valuation
allowance is required to reduce the deferred tax assets to the amount that is more likely than not to be realized. Future changes
in such valuation allowance are included in the provision for deferred income taxes in the period of change.
Stock-Based
Compensation
We
grant stock-based compensation to key employees and directors as a means of attracting and retaining highly qualified personnel.
We also grant stock in lieu of cash compensation for key consultants and service providers. We recognize expense related to stock-based
payment transactions in which we receive employee or non-employee services in exchange for equity. We measure stock compensation
based on the closing fair market value of our Common Stock on the date of grant.
In
addition to our base of employees, we also use the services of several contract personnel and other professionals on an “as
needed basis”. We plan to continue to use consultants, legal and patent attorneys, engineers and accountants as necessary.
We may also expand our staff to support the market roll-out of our products to both the commercial and government related organizations.
A portion of any key employee compensation likely would include direct stock grants, which would dilute the ownership interest
of holders of existing shares of our Common Stock.
ITEM
8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The
consolidated financials are submitted as a separate section of this Annual Report on Form 10-K beginning on page F-1.
ITEM
9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
Effective
April 22, 2020, AMMO, Inc. (the “Company”) dismissed KWCO, PC (“KWCO”) as the Company’s independent
registered public accounting firm. The decision to change accountants was approved by the Company’s Audit Committee and
Board of Directors.
KWCO
reports on the Company’s consolidated financial statements for the past two fiscal periods did not contain an adverse opinion
or a disclaimer of opinion and were not qualified or modified as to uncertainty, audit scope or accounting principles.
During
the Company’s two most recent fiscal periods and through April 22, 2020, there were (i) no disagreements on any matter of
accounting principles or practices, financial statement disclosures, or auditing scope or procedures, which disagreements if not
resolved to their satisfaction would have caused them to make reference to the subject matter of the disagreements in connection
with its reports on the Company’s consolidated financial statements for such periods, and (ii) no “reportable events”
within the meaning of Item 304(a)(1)(v) of Regulation S-K.
The
Company provided KWCO with a copy of the disclosures it is making in this Form 8-K and requested that KWCO furnish a letter addressed
to the Securities and Exchange Commission stating whether or not it agrees with the statements made herein. A copy of KWCO’s
letter dated April 28, 2020, was filed as Exhibit 16.1 to our Form 8-K on April 28, 2020.
Effective
April 22, 2020, the Company, upon approval of the Audit Committee and Board of Directors, engaged Marcum LLP (“Marcum”)
as the Company’s new independent registered public accounting firm. The decision to change accountants was approved by the
Company’s Audit Committee and Board of Directors.
Prior
to April 22, 2020, the Company did not consult with Marcum regarding (i) the application of accounting principles to specified
transactions, the type of audit opinion that might be rendered on the Company’s financial statements, and neither written
or oral advice was provided that would be an important factor considered by the Company in reaching a decision as to an accounting,
auditing or financial reporting issues, or (ii) any matter that was the subject of a disagreement between the Company and its
predecessor auditor as described in Item 304(a)(1)(iv) or a reportable event as described in Item 304(a)(1)(v) of Regulation S-K.
ITEM
9A. CONTROLS AND PROCEDURES
As
of March 31, 2020, our Chief Executive Officer and Chief Financial Officer, conducted an evaluation of the effectiveness of the
design and operation of our disclosure controls and procedures, as required by Exchange Act Rule 13a-15.Based on that evaluation,
our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were not effective
as of the end of the period covered by this report. Disclosure controls and procedures are controls and other procedures that
are designed to ensure that information required to be disclosed in our reports filed or submitted under the Exchange Act is recorded,
processed, summarized and reported, within the time periods specified in the SEC’s rules and forms. Disclosure controls
and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed
in our reports filed under the Exchange Act is accumulated and communicated to management, including our Chief Executive Officer
and our Chief Financial Officer, to allow timely decisions regarding required disclosure.
a)
Evaluation of Disclosure Controls and Procedures
Our
management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rules
13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934. Our internal control over financial reporting is a process
designed by, or under the supervision of, our chief executive officer and chief financial officer, or persons performing similar
functions, and effected by our board of directors, management and other personnel, to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial statements for external purposes in accordance with accounting
principles generally accepted in the United States of America (GAAP). Our internal control over financial reporting includes those
policies and procedures that: (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect
the transactions and disposition of the assets of the Company; (ii) provide reasonable assurance that transactions are recorded
as necessary to permit preparation of financial statements in accordance with GAAP and that receipts and expenditures of the Company
are being made only in accordance with authorization of management and directors of the Company; and (iii) provide reasonable
assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the Company’s assets
that could have a material effect on the financial statements.
Management
assessed the effectiveness of the Company’s internal control over financial reporting as of March 31, 2020. In making this
assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission in
the 2013 Internal Control-Integrated Framework. Based on its evaluation, management has concluded that the Company’s
internal control over financial reporting was not effective as of March 31, 2020.
During
the year ended March 31, 2020, management identified the following weaknesses, which were deemed to be material weaknesses in
internal control over financial reporting. Due to the size of the Company and available resources, there are limited personnel to assist with the
accounting and financial reporting function, which results in: (i) a lack of segregation of duties (ii) ineffective corporative governance controls (iii) controls
that may not be adequately designed or operating effectively and (iv) ineffective or delayed communication of certain contracts
entered into in the ordinary course of business, whether written or oral.
Pursuant
to Regulation S-K Item 308(b), this Annual Report on Form 10-K does not include an attestation report of our company’s registered
public accounting firm regarding internal control over financial reporting.
Because
of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections
of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes
in conditions or that the degree of compliance with the policies or procedures may deteriorate. A control system, no matter how
well designed and operated can provide only reasonable, but not absolute, assurance that the control system’s objectives
will be met. The design of a control system must reflect the fact that there are resource constraints, and the benefits of controls
must be considered relative to their cost.
b)
Changes in Internal Control over Financial Reporting
During
the quarter ended March 31, 2020, there were no changes in our internal controls over financial reporting, which were identified
in connection with our management’s evaluation required by paragraph (d) of rules 13a-15 and 15d-15 under the Exchange Act,
that materially affected, or is reasonably likely to have a materially affect, on our internal control over financial reporting.
ITEM
9B. OTHER INFORMATION
There
were no disclosures of any information required to be filed on Form 8-K during the three months ended March 31, 2020 that were
not filed.
PART
III
ITEM
10. DIRECTORS AND EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
Identification
of Directors and Executive Officers and Term of Office
The
following table sets forth the names and ages of our current directors and executive officers. Our Board of Directors appoints
our executive officers. Each director of the Company serves for a term of one year or until the successor is elected at the Company’s
annual shareholders’ meeting and is qualified, subject to removal by the Company’s shareholders. Each officer serves,
at the pleasure of the Board of Directors.
| Name | |
Age | | |
Position |
Fred W. Wagenhals
7681 E. Gray Road
Scottsdale, AZ 85260 | |
| 79 | | |
Chairman of the Board, Chief Executive Officer and President |
| | |
| | | |
|
| Robert D. Wiley | |
| 28 | | |
Chief Financial Officer |
| 7681 E. Gray Road | |
| | | |
|
| Scottsdale, AZ 85260 | |
| | | |
|
| | |
| | | |
|
| Steve Hilko | |
| 65 | | |
Chief Operating Officer |
| 7681 E. Gray Road | |
| | | |
|
| Scottsdale, AZ 85260 | |
| | | |
|
| | |
| | | |
|
| Randy Luth | |
| 66 | | |
Director |
| 7681 E. Gray Road | |
| | | |
|
| Scottsdale, AZ 85260 | |
| | | |
|
| | |
| | | |
|
| Harry S. Markley | |
| 57 | | |
Director |
| 7681 E. Gray Road | |
| | | |
|
| Scottsdale, AZ 85260 | |
| | | |
|
| | |
| | | |
|
| Russell William Wallace, Jr. | |
| 63 | | |
Director |
| 7681 E. Gray Road | |
| | | |
|
| Scottsdale, AZ 85260 | |
| | | |
|
| | |
| | | |
|
| Robert J. Goodmanson | |
| 65 | | |
Director |
| 7681 E. Gray Road | |
| | | |
|
| Scottsdale, AZ 85260 | |
| | | |
|
Fred
Wagenhals has been the Chairman of the Board, President, and Chief Executive Officer of our company since December 2016.
Mr. Wagenhals was a private investor from August 2005 until December 2016. Mr. Wagenhals served as Chairman, President, and Chief
Executive Officer of Action Performance Companies, Inc., a Nasdaq-listed marketer and distributor of licensed motorsports merchandise,
from November 1993; Chairman of the Board and Chief Executive Officer from May 1992 until September 1993; and President from July
1993 until September 1993. Action-Performance Companies, Inc. was sold in August 2005 to International Speedway Corp. and Speedway
Motorsports. Mr. Wagenhals is a member of the Die-Cast hall of Fame; was named an Entrepreneur of the Year for the Retail/Wholesale
category by the Center for Entrepreneurial leadership Inc.; and received the Anheuser-Bush Entrepreneur in Residence Award at
the University of Arizona College of Business and Public Administration.
Robert
D. Wiley has been the Chief Financial Officer of our company since January 2019. Mr. Wiley has served as the Controller
of the Company since May 2018 and was responsible for our accounting department, including external financing reporting, compliance,
accounting policy, and tax accounting. Previously, Mr. Wiley was a Certified Public Accountant at Moss Adams, LLP from June 2015
through April 2018. Mr. Wiley earned his Master of Taxation at Arizona State University. Mr. Wiley also received a Bachelor of
Science degree in Accounting from Arizona State University. Mr. Wiley is a Certified Public Accountant licensed in the state of
Arizona.
Steve
Hilko has been the Chief Operating Officer of our company since March 2017. Mr. Hilko was Vice President of Development
and Logistics for Action International Marketing, a sports and entertainment license product company from May, 2014 until December,
2016; a principal of the Concept Consortium, an international consulting firm from May, 2008 until May 2014, and Vice President
of Design and Production of Lionel, a consumer goods company, from May of 2006 until May, 2008; and Vice President of Research,
Development and Operations of Action Performance Companies, Inc. from August,1998 until May of 2006.
Robert
J. Goodmanson has been a Director of our company since May 2019. Mr. Goodmanson has more than 30 years’ experience in
the investment industry. He is currently employed at Tealwood Asset Management, a fully Registered Investment Advisor in Minneapolis.
He founded and was CEO of Maxwell Simon, Inc. a FINRA registered full service Broker-Dealer and a licensed registered Investment
Advisory firm. Maxwell Simon’s focus was on institutional fixed income, advisory, private and public equity transactions.
Prior, Rob held senior positions at Tucker Anthony and Robert W Baird where he was a Divisional Director. For three years he served
on the FINRA Board of Governors for District 4 in Kanas City.
Randy
Luth has been a director of our company since November 2017. Mr. Luth founded and has served as the president of Luth-AR-LLC,
a producer of products for the AR-15 Market, since 2013. Mr. Luth was the Chief Executive Officer of DPMS Panther Arms, a producer
of AR-15 firearms and firearm components, from 1986 until its sale in December 2007 to the Freedom Group.
Harry
S. Markley has been a director of our company since March 2018. Mr. Markley served with the Phoenix Police Department
for more than 30 years, most recently as Assistant Chief of the Patrol Division from 2013 through 2017 and Commander of the Family
Investigations Bureau from 2002 to 2013. Mr. Markley currently serves as the Law Enforcement Senior Advisor for the United States
of America Department of Commerce.
Russell
William “Rusty” Wallace, Jr. has been a director of our company since June 2017. Mr. Wallace is the principal
shareholder of the Rusty Wallace Automotive Group, a group of eight automotive dealerships located in Eastern Tennessee, and owns
Rusty Wallace Racing, which has fielded entrees in the NASCAR Cup Series. Mr. Wallace competed in NASCAR races for more than 16
years and had 55 victories prior to his retirement in 2005. Mr. Wallace serves as an analyst for ABC and ESPN. He is a member
of the NASCAR Hall of Fame, the International Motorsports, Hall of Fame, the Motorsports Press Association Hall of Fame, and the
Motorsports Hall of Fame of America.
Family
Relationships
There are no family
relationships among our directors and executive officers. The Company’s Executive Vice President is the son of our Chief
Executive Officer, Fred Wagenhals.
Director
Independence and Corporate Governance Matters
Our
Board of Directors will periodically review relationships that directors have with the Company to determine whether the directors
are independent. Directors are considered “independent” as long as they do not accept any consulting, advisory or
other compensatory fee (other than director fees) from the Company, are not an affiliated person of the Company or its subsidiaries
(e.g., an officer or a greater-than-ten-percent stockholder) and are independent within the meaning of applicable laws, regulations
and the Nasdaq listing rules. In this latter regard, the Board of Directors will use the Nasdaq listing rules (specifically, Section
5605(a)(2) of such rules) as a benchmark for determining which, if any, of its directors are independent, solely in order to comply
with applicable SEC disclosure rules. However, this is for disclosure purposes only. It should be understood that, as a corporation
whose shares are not listed for trading on any securities exchange, our Company is not required to have any independent directors
at all on its Board of Directors, or any independent directors serving on any particular committees of the Board of Directors.
Our
Board of Directors has determined, after considering all the relevant facts and circumstances, that Robert J. Goodmanson, Randy
Luth, Harry S. Markley, and Russell W. Wallace Jr. are independent directors, as “independence” is defined by the
listing standards of the Nasdaq Stock Exchange, or Nasdaq, and by the Securities and Exchange Commission, or SEC, because they
have no relationship with us that would interfere with their exercise of independent judgment in carrying out their responsibilities
as a director. Fred Wagenhals is not “independent” as defined by the listing standards, as he are employed by us
and serves as an employee director.
Board
Committees
Our
bylaws authorize our Board of Directors to appoint from among its members one or more committees consisting of one or more directors.
On April 24, 2018, our Board of Directors established an Audit Committee, a Compensation Committee, and a Nominations and Corporate
Governance Committee, each consisting entirely of independent directors as “independence” is defined by the SEC.
Committee
Charters, Corporate Governance Guidelines, and Codes of Conduct and Ethics
Our
Board of Directors has adopted charters for the Audit, Compensation, and Nominations and Corporate Governance Committees describing
the authority and responsibilities delegated to each committee by our Board of Directors. Our Board of Directors has also adopted
Corporate Governance Guidelines, a Code of Conduct, and a Code of Ethics for the CEO and Senior Financial Officers. We post on
our website, at www.ammo-inc.com, the charters of our Audit, Compensation, and Nominations and Corporate Governance Committees;
our Corporate Governance Guidelines, Code of Conduct, and Code of Ethics for the CEO and Senior Financial Officers, and any amendments
or waivers thereto; and any other corporate governance materials specified by SEC regulations. These documents are also available
in print to any stockholder requesting a copy in writing from our Secretary at the address of our executive offices.
The
Audit Committee
The
purpose of the Audit Committee includes overseeing the accounting and financial reporting processes of our company and audits
of the financial statements of our company and providing assistance to our Board of Directors with respect to its oversight of
the integrity of our company’s financial statements, our company’s compliance with legal and regulatory requirements,
the independent registered public accountant’s qualifications and independence, and the performance of our company’s
independent registered public accountant. The primary responsibilities of the Audit Committee are set forth in its charter and
include various matters with respect to the oversight of our company’s accounting and financial reporting process and audits
of the financial statements of our company on behalf of our Board of Directors. The Audit Committee also selects the independent
registered public accountant to conduct the annual audit of the financial statements of our company; reviews the proposed scope
of such audit; approves the fees for services provided by the independent registered public accountant, reviews accounting and
financial controls of our company with the independent registered public accountant and our financial accounting staff; and reviews
and approves any transactions between us and our directors, officers, and their affiliates.
The
Audit Committee currently consists of Robert J. Goodmanson, Randy Luth, and Russell W. Wallace Jr. Robert J. Goodmanson, whose
background is detailed in the director biographies on the prior page, qualifies as the “audit committee financial expert”
in accordance with applicable rules and regulations of the SEC. Mr. Goodmanson serves as Chair of the Audit Committee.
The
Compensation Committee
The
purpose of the Compensation Committee includes determining, or when appropriate, recommending to our Board of Directors for determination,
the compensation of the Chief Executive Officer and other executive officers of our company and discharging the responsibilities
of our Board of Directors relating to compensation programs of our company in light of the goals and objectives of our compensation
program for that year. As part of its responsibilities, the Compensation Committee evaluates the performance of our Chief Executive
Officer and, together with our Chief Executive Officer, assesses the performance of our other executive officers. The Compensation
Committee is entitled to delegate its responsibilities to a subcommittee of the Compensation Committee, which complies with the
applicable rules and regulations of the Nasdaq Stock Market, the SEC, and other regulatory bodies. From time to time, the Compensation
Committee may retain the services of independent compensation consultants to review a wide variety of factors relevant to executive
compensation, trends in executive compensation, and the identification of relevant peer companies. The Compensation Committee
makes all determinations regarding the engagement, fees, and services of its compensation consultants, and its compensation consultants
report directly to the Compensation Committee.
The
Compensation Committee currently consists of Russell W. Wallace Jr. and Harry Marley.
The
Nominations and Corporate Governance Committee
The
purpose of the Nominations and Corporate Governance Committee includes the selection or recommendation to our Board of Directors
of nominees to stand for election as directors at each election of directors, the oversight of the selection and composition of
committees of our Board of Directors, the oversight of the evaluations of our Board of Directors and management, and the development
and recommendation to our Board of Directors of a set of corporate governance principles applicable to our company.
The
Nominations and Corporate Governance Committee will consider persons recommended by stockholders for inclusion as nominees for
election to our Board of Directors if the information required by our bylaws is submitted in writing in. timely manner addressed
and delivered to our Secretary at the address of our executive offices. The Nominations and Corporate Governance Committee identifies
and evaluates nominees for our Board of Directors, including nominees recommended by stockholders, based on numerous factors it
considers appropriate, some of which may include strength of character, mature judgment, career specialization, relevant technical
skills, diversity, and the extent to which the nominee would fill a present need on our Board of Directors.
The
Nomination and Corporate Governance Committee currently consists of Randy Luth and Harry Markley.
Executive
Sessions
We
regularly schedule executive sessions in which independent directors meet without the presences or participation of management.
The chairs of various committees of our Board of Directors serve as the presiding director of such executive sessions on a rotating
basis.
Risk
Assessment of Compensation Policies and Practices
We
have assessed the compensation policies and practices with respect to our employees, including our executive officers, and have
concluded that they do not create risks that are reasonably likely to have a material adverse effect on our company.
Board’s
Role in Risk Oversight
Risk
is inherent in every business. As is the case in virtually all businesses, we face a number of risks, including operational, economic,
financial, legal, regulatory, and competitive risks. Our management is responsible for the day-to-day management of the risks
we face. Our Board of Directors, as a whole and through its committees, has responsibility for the oversight of risk management.
In
its oversight role, our Board of Directors’ involvement in our business strategy and strategic plans plays a key role in
its oversight of risk management, its assessment of management’s risk appetite, and its determination of the appropriate
level of enterprise risk. Our Board of Directors receives updates at least quarterly from senior management and periodically from
outside advisors regarding the various risks we face, including operational, economic, financial, legal, regulatory, and competitive
risks. Our Board of Directors also reviews the various risks we identify in our filings with the SEC and risks relating to various
specific developments, such as acquisitions, debt and equity placements, and new service offerings.
Our
board committees assist our Board of Directors in fulfilling its oversight role in certain areas of risk. Pursuant to its charter,
the Audit Committee oversees the financial and reporting processes of our company and the audit of the financial statements of
our company and provides assistance to our Board of Directors with respect to the oversight and integrity of the financial statements
of our company, our company’s compliance with legal and regulatory requirements, the independent registered public accountant’s
qualification and independence, and the performance of our independent registered public accountant. The Compensation Committee
considers the risk of our compensation policies and practices and endeavors to assure that it is not reasonably likely that our
compensation plans and policies would have a material adverse effect on our company. Our Nominations and Corporate Governance
Committee oversees governance related risk, such as board independence, conflicts of interests, and management and succession
planning.
Board
Diversity
We
seek diversity in experience, viewpoint, education, skill, and other individual qualities and attributes to be represented on
our Board of Directors. We believe directors should have various qualifications, including individual character and integrity;
business experience; leadership ability; strategic planning skills, ability, and experience; requisite knowledge of our industry
and finance, accounting, and legal matters; communications and interpersonal skills; and the ability and willingness to devote
time to our company. We also believe the skill sets, backgrounds, and qualifications of our directors, taken as a whole, should
provide a significant mix of diversity in personal and professional experience, background, viewpoints, perspectives, knowledge,
and abilities. Nominees are not to be discriminated against on the basis of race, religion, national origin, sex, sexual orientation,
disability, or any other basis proscribed by law. The assessment of prospective directors is made in the context of the perceived
needs of our Board of Directors from time to time.
All
of our directors have held high-level positions in business or professional service firms and have experience in dealing with
complex issues. We believe that all of our directors are individuals of high character and integrity, are able to work well with
others, and have committed to devote sufficient time to the business and affairs of our company. In addition to these attributes,
the description of each director’s background set forth above indicates the specific qualifications, skills, perspectives,
and experience necessary to conclude that each individual should continue to serve as a director of our company.
Board
Leadership Structure
We
believe that effective board leadership structure can depend on the experience, skills, and personal interaction between persons
in leadership roles and the needs of our company at any point in time. Our Corporate Governance Guidelines support flexibility
in the structure the Board by not requiring the separation of the roles of Chairman of the Board and Chief Executive Officer.
Our
Board of Directors currently believes that it is in the best interests of our company to have our Chief Executive Officer also
serve as the Chairman of the Board. We believe that our Chairman and Chief Executive Officer provides strong, clear, and unified
leadership that is critical in our relationships with our stockholders, employees, customers, suppliers, and other stakeholders.
The extensive knowledge of the Chief Executive Officer regarding our operations and industries and the markets in which we compete
uniquely positions him to identify strategies and prioritize matters for board review and deliberation. Additionally, we believe
the combined role of Chairman and Chief Executive Officer facilitates centralized board leadership in one person, so there is
no ambiguity about accountability. The Chief Executive Officer serves as a bridge between management and the Board, ensuring that
both groups act with a common purpose. This structure also eliminates conflict between two leaders and minimizes the possibility
of two spokespersons sending difference messages.
The
Board does not believe that combining the position creates significant risks, including any risk that the Chairman and Chief Executive
Officer will have excessive or undue influence over the agenda or deliberations of the Board. We believe we have effective and
active oversight by experienced independent directors and independent committee chairs, and the independent directors meet together
in executive session at virtually every Board meeting.
The
Chairman of the Board provides guidance to the Board; facilitates an appropriate schedule for Board meetings; sets the agenda
for Board meetings; presides over meetings of the Board; and facilitates the quality, quantity, and timeliness of the flow of
information from management that is necessary for the board to effectively and responsibly perform its duties.
The
Chief Executive Officer is responsible for the day-to-day leadership of our company and setting our company’s strategic
direction.
Director
and Officer Hedging and Pledging
We
have a policy prohibiting directors and officers from purchasing financial instruments (including prepaid forward contracts, equity
swaps, collars, and exchange funds) designed to hedge or offset decreases in the market value of compensatory awards of our equity
securities directly or indirectly held by them. Additionally, we have a policy prohibiting directors and officers from pledging
of shares.
Stock
Ownership Guidelines
Our
Board of Directors believes that the alignment of directors’ interests with those of our stockholders is strengthened when
board members are also stockholders. Therefore, our Board of Directors is adopting minimum stock ownership guidelines under which
non-employee directors are expected to acquire shares of our Common Stock with a value, at least equal to the annual retainer
paid for serving on the Board. Non-employee directors will be expected to satisfy at least the minimum guidelines beginning on
the later of five years following (i) the date the guidelines were adopted or (ii) the date the individual becomes a non-employee
director. This program is designed to ensure that directors acquire a meaningful ownership interest in our company during their
tenure on the Board.
Clawback
Policy
We
have adopted a clawback policy. In the event we are required to prepare an accounting restatement of our financial results as
a result of a material noncompliance by us with any financial reporting requirement under the federal securities laws, we will
have the right to use reasonable efforts to recover from any current or former executive officers who received incentive compensation
(whether cash or equity) from us during the three-year period preceding the date on which we were required to prepare the accounting
restatement, any excess incentive compensation awarded as a result of the misstatement. This policy is administered by the Compensation
Committee of our Board of Directors. The policy is effective for financial statements for periods beginning on or after April
1, 2018. Once final rules are adopted by the SEC regarding the clawback requirements under the Dodd-Frank Wall Street Reform and
Consumer Protection Act, we will review this policy and make any amendments necessary to comply with the new rules.
Board
and Committee Meetings
Our
Board of Directors held six formal boarding meetings and three formal Audit Committee meetings during year ended March 31, 2020.
Our Board of Directors held four formal Board of Directors meetings and four formal Audit Committee meetings, and no other formal
Committee Meetings during the year ended March 31, 2019.
Annual
Meeting Attendance
We
encourage each of our directors to attend annual meetings of stockholders. To that end, and to the extent reasonably practicable,
we will schedule a meeting of our Board of Directors on the same day as our annual meeting of stockholders.
Communications
with Directors
Stockholders
and other interested parties may communicate with our Board of Directors or specific members of our Board of Directors, including
our independent directors and the members of our various board committees, by submitting a letter addressed to the Board of Directors
of our company in care of any specified individual director or directors at the address of our executive offices. Any such letters
are sent to the indicated directors.
Compliance
with Section 16(a) of Exchange Act
Section
16(a) of the Exchange Act requires the Company’s directors, executive officers and persons who beneficially own 10% or more
of a class of securities registered under Section 12 of the Exchange Act to file reports of beneficial ownership and changes in
beneficial ownership with the SEC. Directors, executive officers and greater than 10% stockholders are required by the rules and
regulations of the SEC to furnish the Company with copies of all reports filed by them in compliance with Section 16(a). To the
Company’s knowledge, based solely on a review of reports furnished to it, all of the Company’s officers, directors
and ten percent holders have made the required filings.
Legal
Proceedings
During
the past ten years, none of our current directors or executive officers has been:
| ● |
the
subject of any bankruptcy petition filed by or against any business of which such person was a general partner or executive
officer either at the time of the bankruptcy or within two years prior to that time; |
| |
|
| ● |
convicted
in a criminal proceeding or is subject to a pending criminal proceeding (excluding traffic violations and other minor offenses); |
| |
|
| ● |
subject
to any order, judgment or decree, not subsequently reversed, suspended or vacated, of any court of competent jurisdiction,
permanently or temporarily enjoining, barring, suspending or otherwise limiting his involvement in any type of business, securities
or banking activities; |
| |
|
| ● |
found
by a court of competent jurisdiction (in a civil action), the SEC or the Commodity Futures Trading Commission to have violated
a federal or state securities or commodities law, that has not been reversed, suspended, or vacated; |
| |
|
| ● |
subject
of, or a party to, any order, judgment, decree or finding, not subsequently reversed, suspended or vacated, relating to an
alleged violation of a federal or state securities or commodities law or regulation, law or regulation respecting financial
institutions or insurance companies, law or regulation prohibiting mail or wire fraud or fraud in connection with any business
entity; or |
| |
|
| ● |
subject
of, or a party to, any sanction or order, not subsequently reversed, suspended or vacated, of any self-regulatory organization,
any registered entity or any equivalent exchange, association, entity or organization that has disciplinary authority over
its members or persons associated with a member. |
None
of our directors, officers or affiliates, or any beneficial owner of 5% or more of our common stock, or any associate of such
persons, is an adverse party in any material proceeding to, or has a material interest adverse to, us or any of our subsidiaries.
ITEM
11 EXECUTIVE COMPENSATION
Summary
Compensation Table
The
following table sets forth for the year ended March 31, 2020, and March 31, 2019, information with respect to compensation for
services in all capacities to us and our subsidiaries earned by the Company’s Chief Executive Officer and all other executive
officers of the Company and any employee of the Company whose cash compensation exceeded $100,000. We refer to these executive
officers as our “named executive officers.”
| Name and Principal Position | |
Period Ended | | |
Salary (1) | | |
Bonus (1) | | |
Stock Awards
(2) | | |
Option Awards
(2) | | |
Nonequity incentive plan
compensation | | |
Nonqualified deferred compensation
earnings | | |
All
other compensation (3) | | |
Total | |
| Fred W. Wagenhals | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
| President, Chief Executive Officer, | |
| 3/31/2020
| | |
$ | 120,000 | | |
$ | 0 | | |
$ | 180,000 | | |
$ | 0 | | |
$ | 0 | | |
$ | 0 | | |
$ | 0 | | |
$ | 300,000 | |
| and Director | |
| 3/31/2019
| | |
$ | 120,000 | | |
$ | 0 | | |
$ | 156,375 | | |
$ | 0 | | |
$ | 0 | | |
$ | 0 | | |
$ | 0 | | |
$ | 276,375 | |
| | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
| Steve Hilko (4) | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
| Chief Operating Officer | |
| 3/31/2020
| | |
$ | 120,000 | | |
$ | 0 | | |
$ | 0 | | |
$ | 0 | | |
$ | 0 | | |
$ | 0 | | |
$ | 0 | | |
$ | 120,000 | |
| | |
| 3/31/2019
| | |
$ | 120,000 | | |
$ | 0 | | |
$ | 0 | | |
$ | 0 | | |
$ | 0 | | |
$ | 0 | | |
$ | 0 | | |
$ | 120,000 | |
| | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
| Robert D. Wiley(5) | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
| Chief Financial Officer | |
| 3/31/2020 | | |
$ | 103,333 | | |
$ | 0 | | |
$ | 86,794 | | |
$ | 0 | | |
$ | 0 | | |
$ | 0 | | |
$ | 0 | | |
$ | 190,127 | |
| | |
| 3/31/2019
| | |
$ | 77,917 | | |
$ | 0 | | |
$ | 76,395 | | |
$ | 0 | | |
$ | 0 | | |
$ | 0 | | |
$ | 0 | | |
$ | 154,312 | |
(1)
The amounts in this column reflect the amounts earned during the fiscal year, whether or not actually paid during such year.
(2)
The amounts in this column reflect the aggregate grant date fair value of options awards granted to our named executive officers
during the transition period or fiscal year, as applicable, calculated in accordance with FASB ASC Topic 718. Stock Compensation
. The valuation assumptions used in determining such amounts are described in the footnotes to our audited consolidated financial
statements included in this Annual Report on Form 10-K. The amounts reported in this column reflect our accounting expense for
these awards and do not correspond to the actual economic value that may be received by our named executive officers from their
option awards.
(3)
The named executive officers participate in certain group life, health, disability insurance, and medical reimbursement plans
not disclosed in the Summary Compensation Table that are generally available to salaried employees and do not discriminate in
scope, terms, and operation.
(4)
Mr. Hilko assumed his position in March 2017.
(5)
Mr. Wiley assumed his position in January 2019.
Consulting
Agreements, Employment Agreements and Other Arrangements
As
of March 31, 2020, other than the foregoing as set forth in the Notes to Summary Compensation Table, the Company has no agreement
that provides for payment to executive officers at, following, or in connection with the resignation, retirement or other termination,
or a change in control of Company or a change in any executive officer’s responsibilities following a change in control.
Director
Compensation
The
following table sets forth, for the year ended March 31, 2020, information with respect to compensation for services in all capacities
to us and our subsidiaries earned by our directors, who are not officers, who served during the year ended March 31, 2020.
| Name and Principal Position | |
Fees
Earned or
Paid In Cash
(1) | | |
Stock Awards (2) | | |
Option Awards (2) | | |
Nonequity incentive plan
compensation | | |
Nonqualified deferred compensation
earnings | | |
All other compensation
(3) | | |
Total | |
| Robert J. Goodmanson (4) | |
$ | 0 | | |
$ | 80,000 | | |
$ | 0 | | |
$ | 0 | | |
$ | 0 | | |
$ | 0 | | |
$ | 80,000 | |
| Russell William Wallace Jr. | |
$ | 0 | | |
$ | 80,000 | | |
$ | 0 | | |
$ | 0 | | |
$ | 0 | | |
$ | 0 | | |
$ | 80,000 | |
| Randy Luth | |
$ | 0 | | |
$ | 80,000 | | |
$ | 0 | | |
$ | 0 | | |
$ | 0 | | |
$ | 0 | | |
$ | 80,000 | |
| Harry Markley | |
$ | 0 | | |
$ | 80,000 | | |
$ | 0 | | |
$ | 0 | | |
$ | 0 | | |
$ | 0 | | |
$ | 80,000 | |
| Dan O’Connor (5) | |
$ | 0 | | |
$ | 90,000 | | |
$ | 0 | | |
$ | 0 | | |
$ | 0 | | |
$ | 0 | | |
$ | 90,000 | |
| Tom Jagemann (6) | |
$ | 0 | | |
$ | 20,000 | | |
$ | 0 | | |
$ | 0 | | |
$ | 0 | | |
$ | 0 | | |
$ | 20,000 | |
| Kathy Hanrahan (7) | |
$ | 0 | | |
$ | 0 | | |
$ | 0 | | |
$ | 0 | | |
$ | 0 | | |
$ | 0 | | |
$ | 0 | |
(1)
The amounts in this column reflect the amounts earned during the fiscal year, whether or not actually paid during such year.
(2)
The amounts in this column reflect the aggregate grant date fair value of options awards granted to our directors during the transition
period or fiscal year, as applicable, calculated in accordance with FASB ASC Topic 718. Stock Compensation. The valuation
assumptions used in determining such amounts are described in the footnotes to our audited consolidated financial statements included
in our Transition Report on Form 10-K for the transition period ended December 31, 2017. The amounts reported in this column reflect
our accounting expense for these awards and do not correspond to the actual economic value that may be received by our named executive
officers from their option awards.
(3)
We do not currently pay cash compensation for services of our directors. Instead we make an annual grant to each director of 40,000
shares of our Common Stock. We reimburse all officers and directors for reasonable and necessary expenses incurred in their capacities
as such. The named directors do not participate in certain group life, health, disability insurance, and medical reimbursement
plans not disclosed in the Summary Compensation Table that are generally available to salaried employees and do not discriminate
in scope, terms, and operation.
(4)
Mr. Goodmanson was appointed as a member of the Board of Directors in through an action by written consent of shareholders on
May 23, 2019.
(5)
Mr. O’Connor resigned as a member of the Board of Directors on November 10, 2019.
(6)
Mr. Jagemann resigned as a member of the Board of Directors on September 19, 2019.
(7)
Ms. Hanrahan was removed as a member of the Board of Directors in through an action by written consent of shareholders on May
23, 2019.
Outstanding
Equity Awards at Fiscal Year-end
As
of March 31, 2020 and March 31, 2019, there were no outstanding stock options or restricted stock units. During the years ended
March 31, 2020 and March 31, 2019, we did not grant any restricted stock units or stock options but granted restricted stock to
directors, officers, and others who provided services to our company.
ITEM
12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
The
following table sets forth, as of August 14, 2020, the number of shares of common stock owned of record and beneficially by our
executive officers, directors and persons who hold 5% or more of the outstanding shares of common stock of the Company.
The
amounts and percentages of our common stock beneficially owned are reported on the basis of SEC rules governing the determination
of beneficial ownership of securities. Under the SEC rules, a person is deemed to be a “beneficial owner” of a security
if that person has or shares “voting power,” which includes the power to vote or to direct the voting of such security,
or “investment power,” which includes the power to dispose of or to direct the disposition of such security. A person
is also deemed to be a beneficial owner of any securities of which that person has the right to acquire beneficial ownership within
60 days through the exercise of any stock option, warrant or other right. Under these rules, more than one person may be deemed
a beneficial owner of the same securities and a person may be deemed to be a beneficial owner of securities as to which such person
has no economic interest. Unless otherwise indicated, each of the shareholders named in the table below, or his or her family
members, has sole voting and investment power with respect to such shares of our common stock. Except as otherwise indicated,
the address of each of the shareholders listed below is: c/o AMMO, Inc., 7681 East Gray Road, Scottsdale, Arizona 85260.
Applicable percentage
ownership is based on 47,622,920 shares of Common Stock outstanding as of August 14, 2020. In computing the number of shares of
Common Stock beneficially owned by a person and the percentage ownership of that person, we deemed to be outstanding all shares
of Common Stock as held by that person or entity that are currently exercisable or that will become exercisable within 60 days
of August 14, 2020.
| Name and Address of Beneficial Owner | |
Common
Stock Owned Beneficially | | |
Percent
of Class (1) | |
| Named Executive Officers and Directors | |
| | | |
| | |
| Fred W. Wagenhals (2) | |
| 7,459,200 | | |
| 15.66 | % |
| Robert D. Wiley | |
| — | | |
| — | |
| Steve Hilko | |
| 250,000 | | |
| * | |
| Randy Luth (3) | |
| 425,000 | | |
| * | |
| Harry S. Markley | |
| 90,000 | | |
| * | |
| Russell William Wallace, Jr. | |
| 310,000 | | |
| * | |
| Robert J. Goodmanson | |
| 50,000 | | |
| * | |
| All directors and officers as a group (9 persons) | |
| | | |
| | |
| 5% or greater shareholders | |
| 8,584,200 | | |
| 18.03 | % |
| Jagemann Stamping Company | |
| | | |
| | |
| 5757 W. Custer St., Manitowoc, WI 54220 | |
| 4,750,000 | | |
| 9.97 | % |
| Total | |
| 13,334,200 | | |
| 28.00 | % |
* Less than 1%
(1) Based on 47,622,920 shares of Common Stock outstanding as of
August 14, 2020.
(2) Mr. Wagenhals owns a total of 7,459,200
shares of common stock, 7,009,200 shares are held directly and 450,000 indirectly as follows:150,000 by the Fred W. Wagenhals
Trust and 300,000 by spouse
(3) Mr. Luth owns 250,000 shares directly
and 175,000 indirectly through the Randy E Luth Revocable Trust
Changes
in Control
Our principal stockholder
owns 7,459,200 shares, or 15.66% of our outstanding Common Stock. The principal stockholder serves as an officer and director.
They exercise significance influence over the control of our Company and may be able to cause or prevent a change in control.
Equity
Incentive Plan
In
November 2017, the Board of Directors approved the 2017 Equity Incentive Plan, or the Plan. Under the Plan, 485,000 shares of
our company’s Common Stock was reserved and authorized to be issued. At December 31, 2017, 200,000 shares of Common Stock
were approved and issued under the Plan, and we recognized approximately $250,000 of related compensation expenses. 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 at March 31, 2020.
ITEM
13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
Director
Independence
For
purposes of determining director independence, we have applied the definitions set out in NASDAQ Rule 5605(a)(2). The OTCBB on
which shares of common stock are quoted does not have any director independence requirements. The NASDAQ definition of “Independent
Director” means a person other than an Executive Officer or employee of the Company or any other individual having a relationship
which, in the opinion of the Company’s Board of Directors, would interfere with the exercise of independent judgment in
carrying out the responsibilities of a director.
According
to the NASDAQ definition, Fred Wagenhals is not an independent director because he is also an executive officer of the Company.
According to the NASDAQ definition, Randy Luth, Harry Markley, Robert Goodmanson, and Russell William Wallace Jr. are each independent
directors. All current directors are or may become in the future shareholders of the Company.
Related
Party Transactions
From
October 2016 through December 2018, our executive offices were located in Scottsdale, Arizona where we leased approximately 5,000
square feet under a month-to-month triple net lease for $3,800 per month. This space housed our principal executive, administration,
and marketing functions. Our Chairman, President, and Chief Executive Officer owned the building in which these offices are currently
leased. For the year ended March 31, 2020 and 2019, the Company paid $21,800 and $53,013, respectively in rent for
these offices.
During
the year ended March 31, 2020, we paid $184,575 in service fees to an independent contractor, $6,500 in
consulting fees to our Previous Chief Financial Officer, and 60,000 shares in the aggregate to its Advisory Committee members
for service for a total value of $113,000. Additionally, at March 31, 2020, the Company had a receivable of approximately, $14,700 from its previous Chief
Financial Officer. During the year ended March 31, 2019, we paid approximately $168,000 in consulting fees.
In
connection with the acquisition of the casing division of Jagemann Stamping Company, a promissory note was executed. The promissory
note, under which $500,000 was paid on March 25, 2019 using funds raised for the acquisition, had a remaining balance at March
31, 2019 of $9,900,000. On April 30, 2019, the original due date of the note was subsequently extended to April 1, 2020. The note
bears interest per annum at approximately 4.6% payable in arrears monthly until October 1, 2019 when the interest rate increases
to 9% per annum payable monthly until principal and accrued interest are paid in full. In May of 2019, the Company paid $1,500,000
on the balance of the note. As of March 31, 2020 and March 31, 2019, we accrued interest of $352,157 and $22,196, respectively,
related to the note.
In October of 2019,
it was made apparent that certain equipment that was agreed to be delivered free and clear by the Seller was not achievable as
Seller was not able to purchase equipment that Seller had leased. Accordingly, the remaining value of the promissory note was
reduced by $2,596,200. As a result of the change to the purchase price of the transaction, the Company reduced Equipment for a
net value of $1,871,306, decreased Other Intangible Assets by $766,068, increased Accounts Receivable by $31,924, and recorded
an increase to Deposits for $9,250 worth of equipment that the Company agreed to transfer back to Seller. Consequently, accumulated
amortization has decreased by $159,530. Additionally, the Company entered into a lease to gain possession of the assets that were
originally to be transferred. Subsequent to March 31, 2020, the Company, Enlight and JSC entered into a Settlement Agreement pursuant
to which the parties mutually agreed to settle all disputes and mutually release each other from liabilities related to the Amended
APA occurring prior to June 26, 2020. Pursuant to the Settlement Agreement, the Company shall pay JSC $1,269,977 and shall provide
JSC with: (i) two new promissory notes, a note of $5,803,800 related to the Seller Note and note of $2,635,797 for inventory and
services, both with a maturity date of August 15, 2021, (ii) general business security agreements granting JSC a security interest
in all personal property of the Company. Pursuant to the Notes, the Company is obligated to make monthly payments totaling $204,295
to JSC. In addition, the Notes have a mandatory prepayment provision that comes into effect if the Company conducts a publicly
registered offering. Pursuant to such provision, the Company: (a) upon the closing of an Offering of less than $10,000,000 would
be obligated to pay the lesser of ninety percent (90%) of the Offering proceeds or seventy (70%) of the then aggregate outstanding
balance of the Notes; and (b) upon the closing of an Offering of more than $10,000,000 would be obligated to pay one hundred percent
(100%) of the then aggregate outstanding balance of the Notes. The Company was granted an option to repurchase up to 1,000,000
of the shares of the Company’s common stock issued to JSC under the Amended APA at a price of $1.50 per share through April
1, 2021 so long as there are no defaults under the Settlement Agreement.
Through
the Administrative and Management Services Agreement the Company with Jagemann Stamping Company, the Company purchased approximately
$1.9M in Inventory, incurred $394,128 of rent expenses, and incurred $153,604 of expenses related to support costs such as engineering
and maintenance, among others, for the year ended March 31, 2020.
On May 3, 2019, the
Company entered into a promissory note of $375,000 with a shareholder of the Company. The original interest rate was the applicable
LIBOR Rate. The promissory note has since been amended and the balance at March 31, 2020 was $278,195. The note’s original
a maturity date of August 3, 2019 was extended to September 18, 2020. The amended note bears interest at 1.25% per month. The
Company made $315,000 in principal payments in the year ended March 31, 2020. We have accrued interest on the note of $9,080.
Subsequent to March 31, 2020, the related party note and accrued interest was paid in full.
In December of 2019,
the Company entered into a Promissory Note of $90,000 with Fred Wagenhals, the Company’s Chief Executive Officer and Chairman
of the Board of Directors. The Note originally matured on June 12, 2020 and had an interest rate at the applicable LIBOR Rate.
The promissory note has since been amended and the balance at March 31, 2020 was $156,536 and the amended maturity date is September
18, 2020. The Company made $70,000 in principal payments in the year ended March 31, 2020. The amended note bears interest at
1.25% per month. We have accrued interest on the note of $1,287. Subsequent to March 31, 2020, the related party note and accrued
interest was paid in full.
Other than the foregoing,
none of the directors or executive officers of the Company, nor any person who owned of record or was known to own beneficially
more than 5% of the Company’s outstanding shares of its Common Stock, nor any associate or affiliate of such persons or
companies, has any material interest, direct or indirect, in any transaction that has occurred during the past fiscal year, or
in any proposed transaction, which has materially affected or will affect the Company.
With regard to
any future related party transaction, we plan to fully disclose any and all related party transactions in the following manner:
| |
● |
Disclosing
such transactions in reports where required; |
| |
● |
Disclosing
in any and all filings with the SEC, where required; |
| |
● |
Obtaining
disinterested directors consent; and |
| |
● |
Obtaining
shareholder consent where required. |
Review,
Approval or Ratification of Transactions with Related Persons
We
are a smaller reporting company as defined by Rule 12b-2 of the Securities Exchange Act of 1934 and are not required to provide
the information under this item.
ITEM
14. PRINCIPAL ACCOUNTING FEES AND SERVICES
On
April 22, 2020, the Audit Committee engaged Marcum LLP to complete an annual audit of the Company’s financial statements
for the fiscal year ended March 31, 2020. Marcum did not perform any services prior to April 22, 2020. The Company’s previous
auditor KWCO, PC who perform an annual audit of the Company’s financial statements for the fiscal year ended March 31, 2019,
three months ended March 31, 2018 and the years ended December 31, 2017, was dismissed on April 22, 2020. The following is the
breakdown of aggregate fees for the last two fiscal years. The following is the breakdown of aggregate fees paid for the last
two fiscal years:
The
following table sets forth fees billed by our principal accounting firm Marcum LLP for year ended March 31, 2020, and by former
auditor KWCO, PC in the year ended March 31, 2019:
| |
|
2020 |
|
|
2019 |
|
| Audit Fees |
|
$ |
216,422 |
|
|
$ |
133,292 |
|
| Audit Related Fees |
|
|
- |
|
|
|
- |
|
| Tax Fees |
|
|
- |
|
|
|
- |
|
| All Other Fees |
|
|
- |
|
|
|
- |
|
| |
|
$ |
216,422 |
|
|
$ |
133,292 |
|
It
is our policy to engage the principal accounting firm to conduct the financial audit for our company and to confirm prior to such
engagement, that such principal accounting firm is independent of our company when required by SEC rules and regulations. All
services of the principal accounting firm reflected above were approved by the Board of Directors.
-
“Audit Fees” are fees paid for professional services for the audit of our financial statements.
-
“Audit-Related fees” are fees paid for professional services not included in the first two categories, specifically,
SAS 100 reviews, SEC filings and consents, and accounting consultations on matters addressed during the audit or interim reviews,
and review work related to quarterly filings.
-
“Tax Fees” are fees primarily for tax compliance in connection with filing US income tax returns.
-
“All other fees” related to the reviews of Registration Statements on Form S-1
Audit
Committee Pre-Approval Policies
The
charter of our Audit Committee provides that the duties and responsibilities of our Audit Committee include the pre-approval of
all audit, audit- related, tax, and other services permitted by law or applicable SEC regulations (including fee and cost ranges)
to be performed by our independent registered public accountant. Any pre-approved services that will involve fees or costs exceeding
pre-approved levels will also require specific pre-approval by the Audit Committee. Unless otherwise specified by the Audit Committee
in pre-approving a service, the pre-approval will be effective for the 12-month period following pre-approval. The Audit Committee
will not approve any non-audit services prohibited by applicable SEC regulations or any services in connection with a transaction
initially recommended by the independent registered public accountant, the purpose of which may be tax avoidance and the tax treatment
of which may not be supported by the Code and related regulations.
To
the extent deemed appropriate, the Audit Committee may delegate pre-approval authority to the Chairman of the Audit Committee
or any one or more other members of the Audit Committee provided that any member of the Audit Committee who has exercised any
such delegation must report any such pre-approval decision to the Audit Committee at its next scheduled meeting. The Audit Committee
will not delegate the pre-approval of services to be performed by the independent registered public accountant to management.
Our
Audit Committee requires that the independent registered public accountant, in conjunction with our Chief Financial Officer, be
responsible for seeking pre-approval for providing services to us and that any request for pre-approval must inform the Audit
Committee about each service to be provided and must provide detail as to the particular service to be provided.
All
of the services provided above under the caption “Audit-Related Fees” were approved by our Board of Directors or by
our Audit Committee pursuant to our Audit Committee’s pre-approval policies.
PART
IV
ITEM
15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
| |
(a) |
Financial
Statements and Financial Statement Schedules are set forth under Part II, Item 8 of this report. |
| |
|
|
| |
(b) |
Exhibits |
Other
Schedules are committed because they are not applicable, not required, or because the required information is included in the
Consolidated Financial Statements or notes thereto.
|
|
|
|
Reference |
|
Filed
or Furnished |
Exhibit
Number |
|
Exhibit Description |
|
Form |
|
Exhibit |
|
Filing
Date |
|
Herewith |
| 2.1 |
|
Agreement
and Plan of Merger to Redomicile dated December 30, 2016 (Corrected Version) changing our status to Delaware |
|
S-1/A |
|
2.1 |
|
12/14/2018 |
|
|
| 2.2 |
|
Articles
of Merger dated December 30, 2016 filed with the California Secretary of State |
|
8-K |
|
3.01 |
|
02/09/2017 |
|
|
| 2.3 |
|
Certificate
of Merger dated December 21, 2016 filed with the California Secretary of State |
|
8-K |
|
3.02 |
|
02/09/2017 |
|
|
| 2.4 |
|
Share
Exchange Agreement dated March 17, 2017 |
|
8-K |
|
10.1 |
|
03/23/2017 |
|
|
| 2.5 |
|
Agreement
and Plan of Merger with SW KENETICS INC. |
|
8-K |
|
2.1 |
|
10/04/2018 |
|
|
| 2.6 |
|
Amended
and Restated Asset Purchase Agreement dated March 14, 2019 |
|
8-K |
|
2.1 |
|
03/18/2019 |
|
|
| 3.1 |
|
Certificate
of Incorporation (Amended and Restated) filed with the Delaware Secretary of State on October 24, 2018 |
|
8-K |
|
3.1 |
|
10/26/2018 |
|
|
| 3.2 |
|
Bylaws |
|
8-K |
|
3.03 |
|
02/09/2017 |
|
|
| 4.1 |
|
Form
of Warrant dated January 25, 2017 |
|
S-1 |
|
4.1 |
|
07/06/2018 |
|
|
| 4.2 |
|
Form
of Warrant dated January 3, 2018 |
|
S-1 |
|
4.2 |
|
07/06/2018 |
|
|
| 4.3 |
|
Form
of Purchase Warrant with Paulson Investment Company, LLC dated April 20, 2018 |
|
S-1 |
|
4.3 |
|
07/06/2018 |
|
|
| 4.4 |
|
Form
of Warrant dated December 28, 2018 |
|
10-K |
|
4.4 |
|
07/01/2019 |
|
|
| 4.5 |
|
Form
of Certificate of Common Stock |
|
S-1/A |
|
4.4 |
|
10/16/2018 |
|
|
| 4.6 |
|
Form
of Gunnar Convertible Promissory Note, issued January 2020 |
|
10-Q |
|
10.2 |
|
02/13/2020 |
|
|
| 4.7 |
|
Form
of Gunnar Investor Warrant, issued January 2020 |
|
10-Q |
|
10.3 |
|
02/13/2020 |
|
|
| 10.1 |
|
License
Agreement with Jesse James |
|
S-1 |
|
10.1 |
|
07/06/2018 |
|
|
| 10.2 |
|
License
Agreement with Jeff Rann |
|
S-1 |
|
10.2 |
|
07/06/2018 |
|
|
| 10.3 |
|
License
Agreement with University of Louisiana at Lafayette |
|
S-1/A |
|
10.3 |
|
10/16/2018 |
|
|
| 10.4 |
|
Note
Purchase and Sale Agreement with Western Alliance Bank |
|
S-1/A |
|
10.4 |
|
10/16/2018 |
|
|
| 10.5 |
|
Note
Purchase and Sale Agreement with Mansfield, LLC |
|
S-1/A |
|
10.5 |
|
10/16/2018 |
|
|
| 10.6 |
|
Form
of Subscription Agreement for Gunnar Offering |
|
10-Q |
|
10.1 |
|
02/13/2020 |
|
|
10.7 |
|
Compilation of Settlement Agreement and Promissory Notes with Jagemann Stamping Company dated June 26, 2020 |
|
|
|
|
|
|
|
X |
| 14.1 |
|
Code
of Business Ethics |
|
S-1/A |
|
14.0 |
|
10/16/2018 |
|
|
| 14.2 |
|
Code
of Conduct |
|
S-1/A |
|
14.1 |
|
10/16/2018 |
|
|
| 23.1 |
|
Consent
of Marcum, LLP Independent Registered Account Firm Relating to Consolidated Financial Statements of the Company for the year
ended March 31, 2020 |
|
|
|
|
|
|
|
X |
| 23.2 |
|
Consent
of KWCO, PC Independent Registered Account Firm Relating to Consolidated Financial Statements of the Company for the year
ended March 31, 2019 |
|
|
|
|
|
|
|
X |
| 101.INS* |
|
XBRL Instance Document |
| 101.SCH* |
|
XBRL Taxonomy Extension Schema Document |
| 101.CAL* |
|
XBRL Taxonomy Extension Calculation Linkbase Document |
| 101.LAB* |
|
XBRL Taxonomy Extension Labels Linkbase Document |
| 101.PRE* |
|
XBRL Taxonomy Extension Presentation Linkbase Document |
| 101.DEF* |
|
XBRL Taxonomy Extension Definition Linkbase Document |
*Filed
Herewith. Pursuant to Regulation S-T, this interactive data file is deemed not filed or part of a registration statement or prospectus
for purposes of Sections 11 or 12 of the Securities Act of 1933, is deemed not filed for purposes of Section 18 of the Securities
Exchange Act of 1934, and otherwise is not subject to liability under these sections.
| (1) |
Incorporated
by reference to Form S-1A filed with the Commission on December 14, 2018 |
| (2) |
Filed
as an exhibit to Form 8-K filed with the Commission on February 9, 2017 |
| (3) |
Filed
as an exhibit to Form 8-K filed with the Commission on March 23, 2017 |
| (4) |
Filed
as an exhibit to Form 8-K filed with the Commission on October 4, 2018 |
| (5) |
Filed
as an exhibit to Form 8-K filed with the Commission on March 18, 2019 |
| (6) |
Filed
as an exhibit to Form 8-K filed with the Commission on October 26, 2018 |
| (7) |
Incorporated
by reference to Form 10-KT filed with the commission on May 24, 2018 |
| (8) |
Incorporated
by reference to Form S-1 filed with the commission on July 6, 2018 |
SIGNATURES
In
accordance with Section 13 or 15(d) of the Exchange Act of 1934, the registrant caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized.
| |
AMMO,
INC. |
| |
|
| |
|
/s/
Fred W. Wagenhals |
| Dated:
August 19, 2020 |
By: |
Fred
W. Wagenhals, Chief Executive Officer |
In
accordance with the Exchange Act, this Report has been signed below by the following persons on behalf of the Company and in the
capacities and on the dates indicated.
| |
AMMO,
INC. |
| |
|
|
| |
|
/s/
Robert D. Wiley |
| Dated:
August 19, 2020 |
By: |
Robert
D. Wiley, Chief Financial Officer |
Pursuant
to the requirements of the Securities Exchange Act of 1934, the following persons on behalf of the Registrant and in the capacities
and on the dates indicated have signed this report below.
| Name |
|
Title |
|
Date |
| |
|
|
|
|
| /s/
Fred W. Wagenhals |
|
Chief
Executive Officer, Director |
|
August
19, 2020
|
| Fred
W. Wagenhals |
|
|
|
|
| |
|
|
|
|
| /s/
Robert J. Goodmanson |
|
Director |
|
August
19, 2020
|
| Robert
J. Goodmanson |
|
|
|
|
| |
|
|
|
|
| /s/
Rusty Wallace Jr. |
|
Director |
|
August
19, 2020
|
| Rusty
Wallace |
|
|
|
|
| |
|
|
|
|
| /s/
Randy Luth |
|
Director |
|
August
19, 2020
|
| Randy
Luth |
|
|
|
|
| |
|
|
|
|
| /s/
Harry Markley |
|
Director |
|
August
19, 2020
|
| Harry
Markley |
|
|
|
|
| Index
to Consolidated Financial Statements |
|
| |
|
| Report
of Marcum, LLP |
F-2 |
Report of KWCO, PC
|
F-3 |
| Consolidated
Balance Sheets as of March 31, 2020 and March 31, 2019 |
F-4 |
| Consolidated
Statements of Operations for the year ended March 31, 2020 and March 31, 2019 |
F-5 |
| Consolidated
Statements of Stockholders’ Equity for the year ended March 31, 2020, and March 31, 2019 |
F-6 |
| Consolidated
Statements of Cash Flows for the year ended March 31, 2020 and March 31, 2019 |
F-7 |
| Notes
to Consolidated Financial Statements |
F-9 |
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Shareholders and Board of Directors
of
AMMO, Inc.
Opinion on the Financial Statements
We have audited the accompanying consolidated
balance sheets of AMMO, Inc. and Subsidiaries (the “Company”) as of March 31, 2020, the related consolidated
statements of operations, stockholders’ equity and cash flows for the year ended March 31, 2020, and the related notes (collectively
referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material
respects, the financial position of the Company as of March 31, 2020, and the results of its operations and its cash flows for
the year ended March 31, 2020, in conformity with accounting principles generally accepted in the United States of America.
Explanatory Paragraph – Going Concern
The accompanying consolidated financial
statements have been prepared assuming that the Company will continue as a going concern. As more fully described in Note 2, the
Company has incurred significant losses and needs to raise additional funds to meet its obligations and sustain its operations.
These conditions raise substantial doubt about the Company's ability to continue as a going concern. Management's plans in regard
to these matters are also described in Note 2. The consolidated financial statements do not include any adjustments that might
result from the outcome of this uncertainty.
Basis for Opinion
These financial statements are the responsibility
of the Company's management. Our responsibility is to express an opinion on the Company's financial statements based on our audit.
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 laws and the applicable
rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit 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 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, an audit of its internal control over financial reporting. As part of our audit 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 audit included performing procedures
to assess the risks of material misstatement of the 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 financial statements. Our audit also included evaluating the accounting principles used and significant estimates made
by management, as well as evaluating the overall presentation of the financial statements. We believe that our audit provides
a reasonable basis for our opinion.
Adoption of New Accounting Standards
ASU No. 2016-02
As discussed in Note 3 to the consolidated
financial statements, the Company changed its method of accounting for leases in 2019 due to the adoption of ASU No. 2016-02, Leases
(Topic 842), as amended, effective January 1, 2019, using the modified retrospective approach.
| /s/ Marcum llp |
|
| Marcum llp |
|
We have served as the Company’s auditor since 2020.
New York, NY
August 19, 2020
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 sheet of Ammo, Inc. (the Company) as of March 31, 2019, and the related consolidated statements
of operations, stockholders’ equity, and cash flows for the year ended March 31, 2019, 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 the consolidated results of
its operations and its cash flows for the year ended March 31, 2019, 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, an 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 audit 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 audit 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 audit provides a reasonable basis for our opinion.
We have served
as the Company’s auditor since 2016.
Odessa, Texas
June 28, 2019
Ammo,
Inc.
CONSOLIDATED
BALANCE SHEETS
| | |
March 31, 2020 | | |
March 31, 2019 | |
| | |
| | |
| |
| ASSETS | |
| | | |
| | |
| Current Assets: | |
| | | |
| | |
| Cash | |
$ | 884,274 | | |
$ | 2,181,246 | |
| Accounts receivable, net of allowance for doubtful account of $62,248 at March 31, 2020
and $129,365 at March 31, 2019 | |
| 3,004,839 | | |
| 1,225,911 | |
| Due from related parties | |
| 15,807 | | |
| 19,565 | |
| Inventories,
at lower of cost or net realizable value, principally average cost method | |
| 4,408,073 | | |
| 4,772,597 | |
| Prepaid expenses | |
| 844,117 | | |
| 427,551 | |
| Total Current Assets | |
| 9,157,110 | | |
| 8,626,870 | |
| | |
| | | |
| | |
| Equipment, net of accumulated depreciation of $3,060,681 at March 31, 2020 and $516,144 at March 31, 2019 | |
| 18,046,329 | | |
| 21,999,787 | |
| | |
| | | |
| | |
| Other Assets: | |
| | | |
| | |
| Deposits | |
| 216,571 | | |
| 29,034 | |
| Licensing agreements, net of accumulated amortization of $158,333 at March 31, 2020 and
$108,833 at March 31, 2019 | |
| 91,667 | | |
| 141,667 | |
| Patents, net of accumulated amortization of $561,096 at March 31, 2020 and $134,701 at March
31, 2019 | |
| 6,512,909 | | |
| 6,939,304 | |
| Other Intangible Assets, net of accumulated amortization of $1,496,833 at March 31, 2020
and $61,803 at March 31, 2019 | |
| 3,649,404 | | |
| 5,850,502 | |
| Right of Use Assets - Operating Leases | |
| 3,431,746 | | |
| - | |
| TOTAL ASSETS | |
$ | 41,105,736 | | |
$ | 43,587,164 | |
| | |
| | | |
| | |
| LIABILITIES AND SHAREHOLDERS’ EQUITY | |
| | | |
| | |
| Current Liabilities: | |
| | | |
| | |
| Accounts payable | |
$ | 5,197,354 | | |
$ | 1,920,344 | |
| Factoring liability | |
| 2,005,979 | | |
| - | |
| Accrued liabilities | |
| 1,619,619 | | |
| 531,434 | |
| Note payable related party | |
| 434,731 | | |
| - | |
| Insurance premium note payable | |
| 329,724 | | |
| 230,597 | |
| Current
portion of operating lease liability | |
| 375,813 | | |
| - | |
| Convertible promissory notes, net of $237,611 of note issuance cost at
March 31, 2020 | |
| 2,262,389 | | |
| | |
| Current portion of note payable related party | |
| - | | |
| 1,500,000 | |
| Current portion of contingent consideration
payable | |
| - | | |
| 300,000 | |
| Total Current Liabilities | |
| 12,225,609 | | |
| 4,482,375 | |
| | |
| | | |
| | |
| Long-term Liabilities: | |
| | | |
| | |
| Convertible promissory notes, net of $24,144 of note issuance costs at March 31, 2019 | |
| - | | |
| 275,856 | |
| Contingent consideration payable, net of current portion | |
| 709,623 | | |
| 900,000 | |
| Note payable related party | |
| 5,803,800 | | |
| 8,400,000 | |
| Operating Lease Liability, net of current portion | |
| 3,107,911 | | |
| - | |
| Total Liabilities | |
| 21,846,943 | | |
| 14,058,231 | |
| | |
| | | |
| | |
| Shareholders’ Equity: | |
| | | |
| | |
| Common stock, $0.001 par value, 200,000,000 shares authorized 46,204,139
at March 31, 2020 and 44,013,075 shares issued and outstanding at March 31, 2019, respectively | |
| 46,204 | | |
| 44,013 | |
| Additional paid-in capital | |
| 53,219,834 | | |
| 48,935,485 | |
| Accumulated Deficit | |
| (34,007,245 | ) | |
| (19,450,565 | ) |
| Total Shareholders’ Equity | |
| 19,258,793 | | |
| 29,528,933 | |
| TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY | |
$ | 41,105,736 | | |
$ | 43,587,164 | |
The
accompanying notes are an integral part of these consolidated financial statements.
Ammo,
Inc.
CONSOLIDATED
STATEMENTS OF OPERATIONS
| | |
For
the Year Ended March
31, | |
| | |
2020 | | |
2019 | |
| | |
| | |
| |
| Net Sales | |
| | | |
| | |
| Ammunition Sales | |
$ | 6,591,196 | | |
$ | 3,985,574 | |
| Casing Sales | |
| 8,189,169 | | |
| 580,078 | |
| | |
| 14,780,365 | | |
| 4,565,652 | |
| Cost of Goods Sold, for the years
ended March 31, 2020 and 2019 includes depreciation and amortization of $2,856,471, and $506,159, respectively, and federal
excise taxes of $643,735, and $406,255, respectively | |
| 18,455,904 | | |
| 4,795,346 | |
| Gross Margin | |
| (3,675,539 | ) | |
| (229,694 | ) |
| | |
| | | |
| | |
| Operating Expenses | |
| | | |
| | |
| Selling and marketing | |
| 1,192,010 | | |
| 1,414,399 | |
| Corporate general and administrative | |
| 3,731,913 | | |
| 3,385,096 | |
| Employee salaries and related expenses | |
| 3,638,540 | | |
| 3,855,167 | |
| Depreciation and amortization
expense | |
| 1,599,491 | | |
| 96,302 | |
| Total operating expenses | |
| 10,161,954 | | |
| 8,750,964 | |
| Loss from Operations | |
| (13,837,493 | ) | |
| (8,980,658 | ) |
| | |
| | | |
| | |
| Other Expenses | |
| | | |
| | |
| Purchase of Jagemann Munition Components | |
| - | | |
| (2,118,154 | ) |
| Interest income/(expense) | |
| (719,187 | ) | |
| (610,600 | ) |
| Total other expenses | |
| (719,187 | ) | |
| (2,728,754 | ) |
| | |
| | | |
| | |
| Loss before Income Taxes | |
| (14,556,680 | ) | |
| (11,709,412 | ) |
| | |
| | | |
| | |
| Provision for Income Taxes | |
| - | | |
| - | |
| | |
| | | |
| | |
| Net Loss | |
$ | (14,556,680 | ) | |
$ | (11,709,412 | ) |
| | |
| | | |
| | |
| Loss per share | |
| | | |
| | |
| Basic and fully diluted: | |
| | | |
| | |
| Weighted average number of shares outstanding | |
| 45,607,937 | | |
| 33,601,569 | |
| Loss per share | |
$ | (0.32 | ) | |
$ | (0.35 | ) |
The
accompanying notes are an integral part of these consolidated financial statements.
Ammo,
Inc.
CONSOLIDATED
STATEMENTS OF STOCKHOLDERS’ EQUITY
| | |
Common Shares | | |
Additional
Paid-In | | |
Accumulated | | |
| |
| | |
Number | | |
Par Value | | |
Capital | | |
(Deficit) | | |
Total | |
| | |
| | |
| | |
| | |
| | |
| |
| 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 | ) | |
| - | | |
| - | |
| Common stock issuance costs | |
| - | | |
| - | | |
| (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 | |
| - | | |
| - | | |
| - | | |
| (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 | |
| | |
| | | |
| | | |
| | | |
| | | |
| | |
| Common stock issued for cash | |
| 1,232,770 | | |
| 1,233 | | |
| 2,464,307 | | |
| - | | |
| 2,465,540 | |
| Common stock issued for convertible notes | |
| 127,291 | | |
| 127 | | |
| 318,099 | | |
| | | |
| 318,226 | |
| Common stock issuance costs | |
| - | | |
| - | | |
| (285,981 | ) | |
| - | | |
| (285,981 | ) |
| Common stock issued for services | |
| 170,504 | | |
| 170 | | |
| 352,130 | | |
| - | | |
| 352,300 | |
| Employee stock awards | |
| 660,499 | | |
| 661 | | |
| 900,865 | | |
| - | | |
| 901,526 | |
| Stock grants | |
| - | | |
| - | | |
| 534,929 | | |
| - | | |
| 534,929 | |
| Net loss | |
| - | | |
| - | | |
| - | | |
| (14,556,680 | ) | |
| (14,556,680 | ) |
| | |
| | | |
| | | |
| | | |
| | | |
| | |
| Balance as of March 31, 2020 | |
| 46,204,139 | | |
$ | 46,204 | | |
$ | 53,219,834 | | |
$ | (34,007,245 | ) | |
$ | 19,258,793
| |
The
accompanying notes are an integral part of these consolidated financial statements.
Ammo,
Inc.
CONSOLIDATED
STATEMENTS OF CASH FLOW
| | |
For the Year Ended
March 31, | |
| | |
2020 | | |
2019 | |
| Cash flows from operating activities: | |
| | | |
| | |
| Net Loss | |
$ | (14,556,680 | ) | |
$ | (11,709,412 | ) |
| Adjustments to reconcile Net Loss to Net Cash used in operations: | |
| | | |
| | |
| Depreciation and amortization | |
| 4,455,962 | | |
| 599,863 | |
| Debt discount amortization | |
| 115,533 | | |
| 151,856 | |
| Stock grants | |
| 534,929 | | |
| 703,030 | |
| Stock for services | |
| 352,300 | | |
| 22,350 | |
| Contingent consideration fair value | |
| (190,377 | ) | |
| - | |
| Employee stock awards | |
| 901,526 | | |
| 1,172,974 | |
| Reduction to right of use asset | |
| 381,140 | | |
| - | |
| Allowance for doubtful accounts | |
| (67,117 | ) | |
| 106,320 | |
| Stock and warrants for promissory note conversion | |
| - | | |
| 358,000 | |
| Loss on purchase | |
| - | | |
| 2,118,154 | |
| Changes in Current Assets and Liabilities | |
| | | |
| | |
| Accounts receivable | |
| (1,679,887 | ) | |
| (131,113 | ) |
| Due to (from) related parties | |
| 3,758 | | |
| (5,361 | ) |
| Inventories | |
| 364,524 | | |
| (2,367,591 | ) |
| Prepaid expenses | |
| 148,982 | | |
| 215,489 | |
| Deposits | |
| (178,287 | ) | |
| (12,734 | ) |
| Accounts payable | |
| 3,277,010 | | |
| 1,440,879 | |
| Accrued liabilities | |
| 1,106,411 | | |
| 42,289 | |
| Operating lease liability | |
| (329,162 | ) | |
| - | |
| Net cash used in operating activities | |
| (5,359,435 | ) | |
| (7,295,007 | ) |
| | |
| | | |
| | |
| Cash flows from investing activities | |
| | | |
| | |
| Purchase of equipment | |
| (462,385 | ) | |
| (2,291,907 | ) |
| Jagemann acquisition | |
| - | | |
| (7,000,000 | ) |
| Acquisition deposit | |
| - | | |
| (250,000 | ) |
| Net cash used in investing activities | |
| (462,385 | ) | |
| (9,541,907 | ) |
| | |
| | | |
| | |
| Cash flow from financing activities | |
| | | |
| | |
| Proceeds from note payable related party issued | |
| 819,731 | | |
| - | |
| Payments on note payable related party | |
| (1,885,000 | ) | |
| (500,000 | ) |
| Payments on insurance premium note payment | |
| (466,421 | ) | |
| (191,275 | ) |
| Contingent consideration payment | |
| (300,000 | ) | |
| (50,000 | ) |
| Proceeds from convertible promissory note | |
| 2,171,000 | | |
| 1,534,000 | |
| Sale of common stock | |
| 2,465,540 | | |
| 10,903,930 | |
(Continued)
Ammo,
Inc.
CONSOLIDATED
STATEMENTS OF CASH FLOW
| | |
For
the Year Ended
March 31, | |
| | |
2020 | | |
2019 | |
| | |
| | |
| |
| Purchase
of common stock | |
| - | | |
| (124,000 | ) |
| Proceeds
from factoring liability | |
| 9,747,281 | | |
| - | |
| Payments
on factoring liability | |
| (7,741,302 | ) | |
| | |
| Common
stock issued for exercised warrants | |
| - | | |
| 4,767,625 | |
| Common
stock issuance costs | |
| (285,981 | ) | |
| (1,704,563 | ) |
| Net
cash provided by financing activities | |
| 4,524,848 | | |
| 14,635,717 | |
| | |
| | | |
| | |
| Net
decrease in cash | |
| (1,296,972 | ) | |
| (2,200,397 | ) |
| Cash,
beginning of period | |
| 2,181,246 | | |
| 4,381,643 | |
| Cash,
end of period | |
$ | 884,274 | | |
$ | 2,181,246 | |
| | |
| | | |
| | |
| Supplemental
cash flow disclosures | |
| | | |
| | |
| Cash
paid during the period for - | |
| | | |
| | |
| Interest | |
$ | 531,274 | | |
$ | 240,523 | |
| Income
taxes | |
$ | - | | |
$ | - | |
| | |
| | | |
| | |
| Non-cash
investing and financing activities: | |
| | | |
| | |
| Convertible
promissory note | |
| (318,226 | ) | |
| - | |
| Convertible
promissory note conversion | |
| 318,226 | | |
| - | |
| Insurance
premium note payment | |
| 565,548 | | |
| 321,966 | |
| Prepaid
expenses | |
| (565,548 | ) | |
| (321,966 | ) |
| Right
of use assets - operating leases | |
| (3,771,873 | ) | |
| - | |
| Rent
expense | |
| (41,013 | ) | |
| - | |
| Operating
lease liability | |
| 3,812,886 | | |
| - | |
| Notes
payable related party | |
| (2,596,200 | ) | |
| - | |
| Accounts
receivable | |
| (31,924 | ) | |
| | |
| Deposits | |
| (9,250 | ) | |
| - | |
| Equipment | |
| 1,871,306 | | |
| | |
| Other
Intangible Assets | |
| 766,068 | | |
| - | |
| Additional
paid-in-capital | |
| - | | |
| (11 | ) |
| Common
stock | |
| - | | |
| 11 | |
| Issuance
of common stock | |
| - | | |
| 4,624,005 | |
| Contingent
consideration payable | |
| - | | |
| 1,250,000 | |
| Patent
acquisition | |
| - | | |
| (5,874,005 | ) |
| Issuance
of common stock | |
| - | | |
| 7,381,846 | |
| Note
payable - related party | |
| - | | |
| 10,400,000 | |
| Acquired
Intangible Assets | |
| - | | |
| (5,912,305 | ) |
| Acquired
Equipment | |
| - | | |
| (11,869,541 | ) |
| Convertible
promissory note | |
| - | | |
| (1,410,000 | ) |
| Accrued
Liabilities | |
| - | | |
| (52,065 | ) |
| Convertible
promissory note conversion | |
| - | | |
| 1,462,065 | |
| | |
$ | - | | |
$ | - | |
The
accompanying notes are an integral part of these consolidated financial statements.
AMMO,
INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
March
31, 2020 and March 31, 2019
NOTE
1 – ORGANIZATION AND BUSINESS ACTIVITY
We
were formed under the name Retrospettiva, Inc. in November 1990 to manufacture and import textile products, including both finished
garments and fabrics. We were inactive until the following series of events in December 2016 and March 2017.
On
December 15, 2016, the Company’s majority shareholders sold 475,681 (11,891,976 pre-split) of their outstanding shares to
Mr. Fred W. Wagenhals (“Mr. Wagenhals”) resulting in a change in control of the Company. Mr. Wagenhals was appointed
as sole officer and the sole member of the Company’s Board of Directors.
The
Company also approved (i) doing business in the name AMMO, Inc., (ii) a change to the Company’s OTC trading symbol to POWW,
(iii) an agreement and plan of merger to re-domicile and change the Company’s state of incorporation from California to
Delaware, and (iv) a 1-for-25 reverse stock split (“Reverse Split”) of the issued and outstanding shares of the common
stock of the Company. As a result of the reverse split, the previous issued and outstanding shares of common stock became 580,052
shares; no shareholder was reversed below 100 shares, and all fractional shares resulting from the reverse split were rounded
up to the next whole share. All references to the outstanding stock have been retrospectively adjusted to reflect this split.
These transactions were effective as of December 30, 2016.
On
March 17, 2017, the Company entered into a definitive agreement with AMMO, Inc. a Delaware Corporation (PRIVCO) under which the
Company acquired all of the outstanding shares of common stock of (PRIVCO). Under the terms of the Agreement, the Company issued
17,285,800 newly issued shares of common stock of the Company. In connection with this transaction the Company retired 475,681
shares of common stock and issued 500,000 shares of common stock to satisfy an issuance commitment. The acquisition was considered
to be a capital transaction. The transaction was the equivalent to the issuance by PRIVCO of 604,371 shares to the Company’s
shareholders accompanied by a recapitalization. The weighted average number of outstanding shares has been adjusted for this transaction.
(PRIVCO) subsequently changes its name to AMMO Munitions, Inc.
NOTE 2 – GOING CONCERN
The accompanying
financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the satisfaction
of liabilities in the normal course of business. The Company incurred net losses of $14,556,680 and $11,709,412 for the
years ended March 31, 2020 and 2019, respectively. Net cash used in operating activities was $5,359,435 and $7,295,007 for
the years ended March 31, 2020 and 2019, respectively.
The Company
anticipates that it will record losses from operations for the foreseeable future. As of March 31, 2020, the Company’s
accumulated deficit was $34,007,245. The Company has limited capital resources, and operations to date have been funded
with the proceeds from equity and debt financings. These conditions raise substantial doubt about our ability to continue as
a going concern for the period ended a year from the date the financial statements are issued.
The Company needs additional financing to implement
our business plan and to service our ongoing operations and pay our current debts. There can be no assurance that we will be able
to secure any needed funding, or that if such funding is available, the terms or conditions would be acceptable to us. If we are
unable to obtain additional financing when it is needed, we will need to restructure our operations, and divest all or a portion
of our business. We may seek additional capital through a combination of equity offerings, and debt financings. Debt financing,
if obtained, may involve agreements that include covenants limiting or restricting our ability to take specific actions, such
as incurring additional debt, and could increase our expenses and require that our assets secure such debt. Equity financing,
if obtained, could result in dilution to the Company’s then-existing stockholders and/or require such stockholders to waive
certain rights and preferences. If such financing is not available on satisfactory terms, or is not available at all, the Company
may be required to delay, scale back, eliminate the development of business opportunities or file for bankruptcy and our operations
and financial condition may be materially adversely affected. See Note 16 for additional equity and debt proceeds received subsequent to March 31,
2020.
NOTE
3 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles
of Consolidation
The
consolidated financial statements include the accounts of AMMO, Inc. and its wholly owned subsidiaries, Enlight Group II, LLC
(d/b/a Jagemann Munition Components), SNI, LLC, AMMO Munitions, Inc. and AMMO Technologies, Inc. (inactive). All significant intercompany
accounts and transactions are eliminated in consolidation
Use
of Estimates
The
preparation of financial statements in conformity with accounting principles generally accepted in the United States requires
us to make estimates and assumptions that affect the amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the balance sheet and reported amounts of revenue and expenses during the reporting period. Actual
results could differ from those estimates. Significant estimates made in preparing the consolidated financial statements include
the valuation of allowances for doubtful accounts, valuation of deferred tax assets, inventories, useful lives of assets, intangible
assets, and stock-based compensation.
Cash
and Cash Equivalents
For
purposes of the statement of cash flows, we consider highly liquid financial instruments purchased with a maturity of three months
or less to be cash equivalents.
AMMO,
INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
March
31, 2020 and March 31, 2019
Accounts
Receivable and Allowance for Doubtful Accounts
Our
accounts receivable represents amounts due from customers for products sold and include an allowance for uncollectible accounts
which is estimated based on the aging of the accounts receivable and specific identification of uncollectible accounts. At March
31, 2020 and March 31, 2019, we reserved $62,248 and $129,365, respectively, of allowance for doubtful accounts.
License
Agreements
We
are a party to a license agreement with Jesse James, a well-known motorcycle designer, and Jesse James Firearms, LLC, a Texas
limited liability company, or JJF. The license agreement grants us the exclusive worldwide rights through October 15, 2021 to
Mr. James’ image rights and trademarks associated with him in connection with the marketing, promotion, advertising, sale,
and commercial exploitation of Jesse James Branded Products. 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.
We
are a party to a license agreement with Jeff Rann, a well-known wild game hunter and spokesman for the firearm and ammunition
industries. The license agreement grants us through February 2022 the exclusive worldwide rights to Mr. Rann’s image rights
and trademarks associated with him in connection with the marketing, promotion, advertising, sale, and commercial exploitation
of all Jeff Rann Branded Products. 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.
Amortization
expense for the license agreements for the years ended March 31, 2020 and 2019 was $50,000.
Patents
On
September 28, 2017, AMMO Technologies Inc. (“ATI”), an Arizona corporation, which is 100% owned by us, merged with
Hallam, Inc, a Texas corporation, with ATI being the survivor. Under the terms of the Merger, we 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.
The
shares were valued at $1.25 and the aggregate value of $950,000 was recorded as a patent asset. This asset will be amortized from
September 2017, the first full month of the acquired rights, through October 29, 2028. Patent amortization expense for the years
ended March 31, 2020 and 2019 were $85,075 and $85,074, respectively.
Under
the terms of the Merger, ATI succeeded to all of the assets of Hallam, Inc. and assumed the liabilities of Hallam, Inc., which
were none. The primary asset of Hallam, Inc. was an exclusive license to produce projectiles and ammunition using the Hybrid Luminescence
Ammunition Technology under patent U.S. 8,402,896 B1 with a publication date of March 26, 2013 owned by University of Louisiana
at Lafayette. The license was formally amended and assigned to AMMO Technologies Inc. pursuant to an Assignment and First Amendment
to Exclusive License Agreement. Assumption Agreement dated to be effective as of August 22, 2017, the Merger closing date. Under
the terms of the Exclusive License Agreement, the Company is obligated to pay a royalty to the patent holder, based on a $0.01
per unit basis for each round of ammunition sold that incorporates this patented technology through October 29, 2028. For the
years ended March 31, 2020 and 2019, the Company accrued $43,222 and $33,920 respectively under this agreement.
AMMO, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2020 and
March 31, 2019
In
August 2018, we applied for additional patent coverage for the manufacturing methods or application of the Hybrid Luminescence
Ammunition Technology on a variety of projectile and ammunition types. The costs of filing this patent were expensed.
On
October 5, 2018, we completed the acquisition of SW Kenetics Inc. ATI succeeded all of the assets of SW Kenetics, Inc. and assumed
all of the liabilities. Under the terms of the agreement, we issued to SW Kenetics Inc.’s three shareholders, 1,700,002
restricted shares of our common stock, payment of $250,000, and a payment obligation of $1,250,000 subject to completion of specific
milestones that we have recorded as Contingent Consideration Payable. Additionally, the 1,700,002 shares of common stock were
issued with claw back provisions to ensure agreed upon objectives are met. The Company has made four payments totaling $350,000
for the completion of specific milestones to the shareholders of SW Kenetics, Inc.
The
primary asset of SW Kenetics Inc. was a pending patent for modular projectiles. All rights to patent pending application were
assigned and transferred to AMMO Technologies, Inc. pursuant to Intellectual Property Rights Agreement on September 27, 2018.
Patent amortization expense for the years ended March 31, 2020 was $341,320. There was no amortization expense for the patent
in the year ended March 31, 2019 as the patent had not been placed in service.
We
intend to continue building our patent portfolio to protect our proprietary technologies and processes, and will file new applications
where appropriate to preserve our rights to manufacture and sell our branded lines of ammunition.
Other
Intangible Assets
On
March 15, 2019, Enlight Group II, LLC d/b/a Jagemann Munition Components, a wholly owned subsidiary of AMMO, Inc., completed its
acquisition of assets of Jagemann Stamping Company’s ammunition casing manufacturing and sales operations pursuant to the
terms of the Amended and Restated Asset Purchase Agreement (See Note 11). The intangible assets acquired include a tradename,
customer relationships, and intellectual property. For the years ended March 31, 2020 and 2019, amortization of the other intangibles
assets was $1,435,030 and $61,803, respectively recognized in depreciation and amortization expense.
Impairment
of Long-Lived Assets
We
continually monitor events and changes in circumstances that could indicate carrying amounts of long-lived assets may not be recoverable.
When such events or changes in circumstances are present, we assess the recoverability of long-lived assets by determining whether
the carrying value of such assets will be recovered through undiscounted expected future cash flows. If the total of the future
cash flows is less than the carrying amount of those assets, we recognize an impairment loss based on the excess of the carrying
amount over the fair value of the assets. Assets to be disposed of are reported at the lower of the carrying amount or the fair
value less costs to sell. No impairment expense was recognized for the years ended March 31, 2020 and March 31, 2019.
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 |
AMMO, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2020 and March 31, 2019
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. In the current period, the Company began accepting contract liabilities
or deferred revenue. We included Deferred Revenue in our Accrued Liabilities. The Company will recognize revenue when the performance
obligation is met.
For
the years ended March 31, 2020 and 2019, the Company’s customers that comprised more than ten percent (10%) of total revenues
and accounts receivable were as follows :
| | | |
For
the Year Ended
March 31, 2020 | | |
For
the Year Ended
March 31, 2019 | |
| PERCENTAGES
| | |
| Revenues
| | |
| Accounts
Receivable | | |
| Revenues
| | |
| Accounts
Receivable | |
| | | |
| | | |
| | | |
| | | |
| | |
| Customers:
| | |
| | | |
| | | |
| | | |
| | |
| A
| | |
| 19.1 | % | |
| 26.5 | % | |
| 10.0 | % | |
| - | |
| B
| | |
| 13.3 | % | |
| - | | |
| - | | |
| 19.0 | % |
| C
| | |
| - | | |
| - | | |
| 24.6 | % | |
| 29.4 | % |
| D
| | |
| - | | |
| - | | |
| 19.1 | % | |
| - | |
| | | |
| 32.4 | % | |
| 26.5 | % | |
| 53.7 | % | |
| 48.4 | % |
Disaggregated Revenue Information
The
following table represent a disaggregation of revenue from customers by segment. We attribute net sales to segments by product
types; ammunition and ammunition casings. The Company notes that revenue recognition processes are consistent between product
type, however, the amount, timing and uncertainty of revenue and cash flows may vary by each product type due to the customers
of each product type.
| |
|
For
the Year Ended |
|
| |
|
March
31, 2020 |
|
|
March
31, 2019 |
|
| Ammunition Sales |
|
$ |
6,591,196 |
|
|
$ |
3,985,574 |
|
| Ammunition
Casings Sales |
|
|
8,189,169 |
|
|
|
580,078 |
|
| Total Sales |
|
$ |
14,780,365 |
|
|
$ |
4,565,652 |
|
Ammunition
products are sold through “Big Box” retailers, manufacturers, local ammunition stores, and shooting range operators.
We also sell direct to customers online. In contrast, our ammunition casings products are sold to manufacturers.
In
May 2014, FASB issued ASU 2014-09, “Revenue from Contracts with Customers”. This ASU is a comprehensive new revenue
recognition model that requires a company to recognize revenue to depict the transfer of goods or services to a customer at an
amount that reflects the consideration it expects to receive in exchange for those goods or services. The revised effective date
for this ASU is for annual and interim periods beginning on or after December 15, 2017, and early adoption will be permitted,
but not earlier than the original effective date of annual and interim periods beginning on or after December 15, 2016, for public
entities. We adopted ASU 2014-09 as of April 1, 2018, and it did not have a material impact on the Company’s consolidated
results of operations, financial position or cash flows for the period ended March 31, 2020.
Sales
are initiated in three ways –
| |
● |
third party sales
representative obtains signed purchase order from a customer |
| |
● |
direct contact
by in-house sales representatives who obtains signed purchase order |
| |
● |
electronic purchase
order from a customer (usually the very large customers) |
Once
a customer’s order is received a sales order is generated by authorized sales or management personnel. Once approved for
shipping, the sales order is entered, the inventory control department will pull the purchased items from the inventory or if
needed will request the manufacture of a specific product. When the items that were ordered are available for shipment, the merchandise
is prepared for shipping and shipped by FedEx or common carrier.
All
sales are recorded upon shipment and, depending on credit worthiness of customer, the payment terms will vary from thirty (30)
to sixty (60) days. No refunds are allowed on any product shipped.
Each
product manufactured by the Company has standard specifications and performance objectives. The Company has an extensive product
testing program and, if the Company were given notice of a product defect by a customer, the Company would request the return
of the product so that the manufacturing defect could be identified. From inception to March 31, 2020, the Company has had no
returned products related to product warranty.
The
revenue recognition procedures set forth above have been used by the Company since its inception and are consistent with requirements
of ASC 606 “Revenue from Contracts with Customers”.
Advertising
Costs
We
expense advertising costs as they are incurred. We incurred advertising of $563,968 and $554,266 for the years ended March 31,
2020 and 2019, respectively.
Fair
Value of Financial Instruments
We
measure options and warrants at fair value in accordance with Accounting Standards Codification 820 – Fair Value Measurement
(“ASC 820”). The objective of ASC 820 is to increase consistency and comparability in fair value measurements and
to expand disclosures about fair value measurements. ASC 820 defines fair value, establishes a framework for measuring fair value
in generally accepted accounting principles, and expands disclosures about fair value measurements. ASC 820 specifies a valuation
hierarchy based on whether the inputs to those valuation techniques are observable or unobservable.
Observable
inputs reflect market data obtained from independent sources, while unobservable inputs reflect the Company’s own assumptions.
These two types of inputs have created the following fair value hierarchy:
Level
1 – Quoted prices for identical instruments in active markets;
AMMO, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2020 and March 31, 2019
Level
2 – Quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets
that are not active, and model-derived valuations in which all significant inputs and significant value drivers are observable
in active markets; and
Level
3 – Valuations derived from valuation techniques in which one or more significant inputs or significant value drivers are
unobservable.
This
hierarchy requires us to minimize the use of unobservable inputs and to use observable market data, if available, when estimating
fair value.
We
value all common stock issued for services on the date of the agreements, using the price at which shares were being sold to private
investors or at the value of the services performed.
We
valued warrants issued for the reduction in conversion price for the conversion of Convertible Promissory Notes at the grant date
of March 31, 2019 using valuation methods and assumptions that consider, among other factors, the fair value of the underlying
stock, risk free interest rate, volatility, and expected life.
| | |
March 31, 2020 | | |
March 31, 2019 | |
| | |
| | |
| |
| Risk free interest rate | |
| - | | |
| 2.39 | % |
| Expected volatility | |
| - | | |
| 45 | % |
| Expected term | |
| - | | |
| 2.5 years | |
| Expected dividend yield | |
| 0 | % | |
| 0 | % |
Equipment
acquired in the March 15, 2019 acquisition of the Jagemann Casings was valued at fair value on the acquisition date by using
the cost and market valuation approaches.
| | |
Quoted
Active
Markets
for
Identified
Assets | | |
Significant
Other
Observable
Inputs | | |
Significant
Unobservable
Inputs | | |
Total | |
| | |
(Level 1) | | |
(Level 2) | | |
(Level 3) | | |
| |
| March 31, 2019 | |
| | | |
| | | |
| | | |
| | |
| Warrants issued for convertible promissory notes | |
$ | - | | |
$ | 358,800 | | |
$ | - | | |
$ | 358,800 | |
Inventories
We
state inventories at the lower of cost or net realizable value. We determine cost using the average cost method. Our inventory
consists of raw materials, work in progress, and finished goods. Cost of inventory includes cost of parts, labor, quality control,
and all other costs incurred to bring our inventories to condition ready to be sold. We periodically evaluate and adjust inventories
for obsolescence.
AMMO, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2020 and March 31, 2019
Property
and Equipment
We
state property and equipment at cost, less accumulated depreciation. We capitalize major renewals and improvements, while we charge
minor replacements, maintenance, and repairs to current operations. We compute depreciation by applying the straight-line method
over estimated useful lives, which are generally five to ten years.
Compensated
Absences
We
accrue a liability for compensated absences in accordance with Accounting Standards Codifications 710 – Compensation
– General.
Stock-Based
Compensation
We
account for stock-based compensation at fair value in accordance with ASC 718. There were 660,499 shares
of common stock issued to employees, members of the Board of Directors, and members of the Advisory Committee for services during
the year ended March 31, 2020.
On
May 1, 2018, we entered into an employment agreement with Robert D. Wiley, Chief Financial Officer, that included, among other
provisions, an equity grant of 100,000 shares of restricted common stock that vests at the rate of 33,333 shares annually for
three years. The $250,000 compensation value is being recognized on a straight-line basis over the three-year period covered by
the agreement.
From
September 2018 through March 2019, we entered into four separate employment agreements that included in total, among other provisions,
equity grants of 325,000 shares of restricted common stock that vests annually over the next four years. The total compensation
value of $752,000 is being recognized on a straight-line basis over the periods covered by each agreement, up to four years.
Concentrations
of Credit Risk
Accounts at banks are insured by the Federal Deposit Insurance Corporation
(“FDIC”) up to $250,000. As of March 31, 2020, our bank account balances exceeded federally insured limits.
Income
Taxes
We
file federal and state income tax returns in accordance with the applicable rules of each jurisdiction. We account for income
taxes under the asset and liability method in accordance with Accounting Standards Codification 740 - Income Taxes (“ASC
740”). The provision for income taxes includes federal, state, and local income taxes currently payable, and deferred taxes.
We recognize deferred tax assets and liabilities for the future tax consequences attributable to differences between the financial
statement carrying amounts of existing assets and liabilities and their respective tax basis. We measure deferred tax assets and
liabilities using enacted tax rates expected to apply to taxable amounts in years in which those temporary differences are expected
to be recovered or settled. If it is more likely than not that some portion or all of a deferred tax asset will not be realized,
a valuation allowance is recognized. In accordance with ASC 740, we recognize the effect of income tax positions only if those
positions are more likely than not of being sustained. We measure recognized income tax positions at the largest amount that is
greater than 50% likely of being realized. We reflect changes in recognition or measurement in the period in which the change
in judgment occurs. We currently have substantial net operating loss carryforwards. We have recorded a valuation allowance equal
to the net deferred tax assets due to the uncertainty of the ultimate realization of the deferred tax assets.
Furthermore,
the Coronavirus Aid, Relief and Economic Security Act (“CARES Act”) was signed into law on March 27, 2020. The CARES
Act was enacted in response to the COVID-19 pandemic and contains numerous income tax provisions, such as relaxing limitations
on the deductibility of interest, technical corrections to tax depreciation methods for qualified improvement property and net
operating loss carryback periods. The Company is implementing applicable benefits of the CARES Act, such as deferring employer
payroll taxes and evaluating potential employee retention credits.
AMMO,
INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
March
31, 2020 and March 31, 2019
Contingencies
Certain
conditions may exist as of the date the consolidated financial statements are issued that may result in a loss to us but will
only be resolved when one or more future events occur or fail to occur. We assess such contingent liabilities, and such assessment
inherently involves an exercise of judgment. In assessing loss contingencies related to legal proceedings that are pending against
us or unasserted claims that may result in such proceedings, we evaluate the perceived merits of any legal proceedings or unasserted
claims and the perceived merits of the amount of relief sought or expected to be sought therein.
If
the assessment of a contingency indicates that it is probable that a material loss has been incurred and the amount of the liability
is reasonably estimated, the estimated liability would be accrued in our consolidated financial statements. If the assessment
indicates that a potentially material loss contingency is not probable but is reasonably possible, or is probable but cannot be
estimated, then the nature of the contingent liability, together with an estimate of range of possible loss if determinable and
material, would be disclosed. On September 24, 2019, the Company received notice that a former employee that had voluntarily terminated
filed a complaint against the Company, and certain individuals, with the U.S. Department of Labor (“DOL”). The
Complaint in alleges that the individual reported potential violations of SEC rules and regulations by management and that as
a result of such disclosures, the individual experienced a hostile work environment; that the Company lacks sufficient controls
internal controls, and that the individual was the victim of retaliation and constructive discharge after being removed as a director
by majority vote of the shareholders. The claims were investigated by a newly appointed Special Investigative
Committee made of up independent directors represented by special independent legal counsel. The Special Investigative Committee
and legal counsel found the material claims were unsubstantiated, including those concerning alleged SEC violations, and recommended
enhancements to certain corporate governance charter documents and processes which the Company promptly implemented. The matter
is currently the subject of administrative investigation by the DOL via the Occupational Safety and Health Administration. The
Company filed a timely Position Statement with the DOL in October of 2019 in response to the Complaint. The Company disputes the
allegations of wrongdoing and believes the matters raised in the Complaint are without merit and therefore has and will continue
to aggressively defend its interests in this matter. On February 4, 2020, the Company filed suit against a former employee
for violating merger agreements with SW Kenetics, Inc., employment agreements, and by unlawfully retaining property belonging
to the Company following their termination. On March 11, 2020, the former employee filed a counterclaim against the Company citing
breach of contract, breach of implied covenant of good faith and fair dealing, unjust enrichment and declaratory judgement. The
Company plans to aggressively pursue its offensive claims in order to recover economic damages as a result of its claims while
seeking dismissal of the counterclaim. There were no other known contingencies at March 31, 2020. There were no known contingencies
at March 31, 2019.
AMMO, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2020 and March 31, 2019
Recent Accounting
Pronouncements
In
February 2016, the FASB issued ASU 2016-02 – “Leases (Topic 842)” Under ASU 2016-02, entities will be required
to recognize lease asset and lease liabilities by lessees for those leases classified as operating leases. Among other changes
in accounting for leases, a lessee should recognize in the statement of financial position a liability to make lease payments
(the lease liability) and a right-of-use asset representing its right to (and a lessor) should include payments to be made in
optional periods only if the lessee is reasonably certain to exercise an option to extend the lease or not to exercise an option
to terminate the lease. Similarly, optional payments to purchase the underlying asset should be included in the measurement of
lease assets and lease liabilities only if the lessee is reasonably certain to exercise that purchase option. The amendments in
ASU 2016-02 will become effective for fiscal years beginning after December 15, 2018, including interim periods with those fiscal
years for public business entities. We adopted Topic 842 as of April 1, 2019 and this resulted in an increase in assets and
liabilities on our consolidated balance sheets related to recording a Right of Use Asset of $3,771,873 and corresponding Operating
Lease Liability of $3,812,886. As a result of the adoption there was no material impact to our Consolidated Statement of Operations.
See Note 7 for more information.
On
June 20, 2018, the FASB expanded the scope of Accounting Standards Codification (ASC) 718, Compensation – Stock Compensation,
to include share-based payments to nonemployees for goods and services. The accounting board said the amendments in Accounting
Standards Update (ASU) No. 2018-07, Compensation – Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based
Payment Accounting, align the guidance for stock compensation to employees and nonemployees. The amended guidance replaces ASC
505-50, Equity – Equity-Based Payments to Non-Employees. We anticipate that this ASC will not have a material effect on
the Company’s financial statements.
The
amendments in ASU No. 2018-07 apply “to all share-based payment transactions in which a grantor acquires goods or services
to be used or consumed in a grantor’s own operations by issuing share-based payment awards,” the FASB said. But the
amended guidance does not cover stock compensation that is used to provide financing to the company that issued the shares or
stock awards tied to a sale of goods or services as part of a contract accounted for according to ASC 606, Revenue From Contracts
With Customers.
The
amendments are effective for public companies for fiscal years that begin after December 15, 2018, and the quarterly and other
interim periods in those years, the FASB said the amended guidance can be applied before it becomes effective, but businesses
are not permitted to use the guidance in ASU No. 2018-07 before they have implemented ASC 606. We have evaluated the effect of
the adoption of ASU 2018-07 will have on our consolidated results of operations, financial position or cash flows and determine
the effects will not be material to the Company’s financial statements.
In June 2016,
the FASB issued ASU No. 2016-13, “Financial Instruments-Credit Losses (Topic 326),” which replaces the current incurred
loss impairment methodology for most financial assets with the current expected credit loss (“CECL”) methodology. The
series of new guidance amends the impairment model by requiring entities to use a forward-looking approach based on expected losses
rather than incurred losses to estimate credit losses on certain types of financial instruments, including trade receivables.
he guidance should be applied on either a prospective transition or modified-retrospective approach depending on the subtopic.
The guidance is effective for annual periods beginning after December 15, 2022, including interim periods within those fiscal
years, with early adoption permitted. The Company is currently evaluating the impact that the new guidance will have on its
consolidated financial statements.
In December 2019,
the FASB issued ASU No. 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes. The new guidance is intended
to enhance and simplify various aspects of the accounting for income taxes. The new guidance eliminates certain exceptions to
the general approach to the income tax accounting model, and adds new guidance to reduce the complexity in accounting for income
taxes. The guidance will be effective for fiscal years beginning after December 15, 2020 and interim periods within those fiscal
years. Early adoption of the amendments is permitted, including adoption in any interim period for public business entities for
periods for which financial statements have not yet been issued. The Company is currently evaluating the impact that the new guidance
will have on the consolidated financial statements.
Management
does not believe that any other recently issued, but not yet effective, accounting standards could have a material effect on the
accompanying financial statements. As new accounting pronouncements are issued, we will adopt those that are applicable under
the circumstances.
Loss
Per Common Share
We
calculate basic loss per share using the weighted-average number of shares of common stock outstanding during each reporting period.
Diluted loss per share includes potentially dilutive securities, such as outstanding options and warrants, using various methods,
such as the treasury stock or modified treasury stock method, in the determination of dilutive shares outstanding during each
reporting period. We have issued warrants to purchase 8,504,372 shares of common stock. All weighted average numbers were adjusted
for the reverse stock split and merger transaction. Due to the loss from operations in the years ended March 31, 2020 and 2019,
there are no common shares added to calculate the dilutive EPS for those periods as the effect would be antidilutive. The Company
excluded warrants of 8,504,372 and 8,143,115 for the years ended March 31, 2020 and 2019, respectively, from the weighted average
diluted common shares outstanding because their inclusion would have been antidilutive.
AMMO, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2020 and March 31, 2019
NOTE
4 – INVENTORIES
At
March 31, 2020 and March 31, 2019, the inventory balances are composed of:
| |
|
March
31, 2020 |
|
|
March
31, 2019 |
|
| Finished product |
|
$ |
1,916,417 |
|
|
$ |
2,628,241 |
|
| Raw materials |
|
|
1,771,006 |
|
|
|
1,635,130 |
|
| Work in process |
|
|
720,650 |
|
|
|
509,226 |
|
| |
|
|
|
|
|
|
|
|
| |
|
$ |
4,408,073 |
|
|
$ |
4,772,597 |
|
NOTE
5 – PROPERTY AND EQUIPMENT
We
state property and equipment at historical cost less accumulated depreciation. We compute depreciation using the
straight-line method at rates intended to depreciate the cost of assets over their estimated useful lives, which are
generally five to ten years. Upon retirement or sale of property and equipment, we remove the cost of the disposed
assets and related accumulated depreciation from the accounts and any resulting gain or loss is credited or charged to
selling, general, and administrative expenses. We charge expenditures for normal repairs and maintenance to expense as
incurred.
We
capitalize additions and expenditures for improving or rebuilding existing assets that extend the useful life. Leasehold improvements
made either at the inception of the lease or during the lease term are amortized over the shorter of their economic lives or the
lease term including any renewals that are reasonably assured.
Property
and equipment consisted of the following at March 31, 2020 and March 31, 2019:
| |
|
March
31, 2020 |
|
|
March
31, 2019 |
|
| Leasehold
Improvements |
|
$ |
118,222 |
|
|
$ |
98,444 |
|
| Furniture and
Fixtures |
|
|
87,790 |
|
|
|
154,777 |
|
| Vehicles |
|
|
103,511 |
|
|
|
103,511 |
|
| Equipment |
|
|
19,578,035 |
|
|
|
18,689,140 |
|
| Tooling |
|
|
126,190 |
|
|
|
117,390 |
|
| Construction
in Progress |
|
|
1,903,262 |
|
|
|
3,352,669 |
|
| Total property and equipment |
|
$ |
21,107,010 |
|
|
$ |
22,515,931 |
|
| Less accumulated depreciation |
|
|
(3,060,681 |
) |
|
|
(516,144 |
) |
| Net property and equipment |
|
|
18,046,329 |
|
|
|
21,999,787 |
|
Depreciation Expense
for the years ended March 31, 2020 and 2019 totaled $2,544,537 and $402,986, respectively. Of these totals $2,380,076 and $386,589
were included in cost of goods sold for the years ending March 31, 2020 and 2019. Additionally, $164,461 and $96,302 were included
in depreciation and amortization expenses in operating expenses.
AMMO, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2020 and March 31, 2019
NOTE
6 – FACTORING LIABILITY
On
July 1, 2019, we entered into a Factoring and Security Agreement with Factors Southwest, LLC (“FSW”). FSW may
purchase from time to time the Company’s Accounts Receivables with recourse on an account by account basis. The twenty-four
month agreement contains a maximum advance amount of $5,000,000 on 85% of eligible accounts and has an annualized interest rate
of the Prime Rate published from time to time by the Wall Street Journal plus 4.5%. The agreement contains fee of 3% ($150,000)
of the Maximum Facility assessed to the Company. Our obligations under this agreement are secured by present and future accounts
receivables and related assets, inventory, and equipment. The Company has the right to terminate the agreement, with 30 days written
notice, upon obtaining a non-factoring credit facility. This agreement provides the Company with the ability to convert our account
receivables into cash. As of March 31, 2020, the outstanding balance of the Factoring Liability was $2,005,979. Interest
expense recognized on the Factoring Liability was $153,663, including $75,000 of amortization of the commitment fee. Subsequent
to March 31, 2020, this agreement was amended and restated extending the term of this facility to June 17, 2022.
NOTE
7 – LEASES
We
lease office, manufacturing, and warehouse space in Scottsdale and Payson, AZ and Manitowoc, WI under contracts we classify as
operating leases. None of our leases are financing leases. The Payson lease has an option to renew for five years, and the Manitowoc
lease has an option to renew for the three years. As of March 31, 2020, we are fairly certain that we will exercise the renewal
options on both leases, and we have included such renewal options in the lease liabilities and the disclosures herein. The Scottsdale
lease does not include a renewal option.
As of March
31, 2020, total Right of Use Assets and Operating Lease Liabilities on the Balance Sheet were $3,431,746 and $3,483,724,
respectively. The current portion of our Operating Lease Liability is $375,813 and is reported as a current liability. The
remaining $3,107,911 of the total $3,483,724 Operating Lease Liability is presented as a long-term liability net of the current
portion.
Consolidated
lease expense for the year ended March 31, 2020 was $836,665 including $706,692 of operating lease expense and $129,973 of other
lease associated expenses such as association dues, taxes, utilities, and other month to month rentals. Total lease and rent expense
for the year ended March 31, 2019 was $272,700.
The weighted average
remaining lease term and weighted average discount rate for operating leases were 7.8 years and 10.0%, respectively.
Future
minimum lease payments under non-cancellable leases as of March
31, 2020 are as follows:
| Years
Ended March 31, |
|
|
|
| 2021 |
|
|
707,391
|
|
| 2022 |
|
|
717,387
|
|
| 2023 |
|
|
727,384
|
|
| 2024 |
|
|
670,112
|
|
| Thereafter |
|
|
2,168,932
|
|
| |
|
|
4,991,206 |
|
| Less:
Amount Representing Interest |
|
|
(1,507,482 |
) |
| |
|
$ |
3,483,724 |
|
We are obligated under
a triple-net operating lease for our 20,000 square foot manufacturing facility located in Payson, Arizona. The terms of the lease
require a payment of approximately $10,000 per month, which includes an estimate for utilities, taxes, and repairs. This lease
expires in November of 2021.
We believe this facility
will be adequate to meet our needs in the near future. However, we are making plans to expand our building footprint to accommodate
additional automation equipment. We intend to pay for these improvements using 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 fiscal year in which payment is expected,
as of March 31, 2020:
| | |
2021 | | |
2022 | | |
Total | |
| Payson Lease | |
$ | 120,000 | | |
$ | 80,000 | | |
$ | 200,000 | |
Our executive offices
are located in Scottsdale, Arizona where we lease 21,000 square feet of office and warehouse space for $17,702, which will increase
by approximately 4.4% each year. This space houses our principal executive, administration, marketing, and research and development
functions. The lease expires in December of 2023.
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, 2020:
| | |
2021 | | |
2022 | | |
2023 | | |
2024 | | |
Total | |
| Scottsdale Lease | |
$ | 226,587 | | |
$ | 236,583 | | |
$ | 246,580 | | |
$ | 147,240 | | |
$ | 856,990 | |
Our ammunition casing
operations are located in Manitowoc, Wisconsin where we lease approximately 50,000 square feet. 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, 2020:
| | |
2021 | | |
2022 | | |
2023 | | |
2024 | | |
2025 | | |
2026 | | |
Total | |
| Manitowoc Lease | |
$ | 394,128 | | |
$ | 394,128 | | |
$ | 394,128 | | |
$ | 394,128 | | |
$ | 394,128 | | |
$ | 394,128 | | |
$ | 2,364,768 | |
Additional offices
were located in Scottsdale, Arizona where we leased approximately 5,000 square feet under a month-to-month triple net lease for
$3,800 per month. This office building was owned by a related party.
NOTE
8 – CONVERTIBLE PROMISSORY NOTES
On
January 9, 2019, we completed the issuance of 10% Convertible Promissory Notes in the principal amount of $1,710,000 to accredited
investors through a private placement in exchange for cash in an equal amount. The principal amounts were raised from the period
of October 23, 2018 to December 28, 2018. As a result of the issuance of the Convertible Promissory Notes, the placement agent
received an aggregate commission of $171,000, and $5,000 in escrow fees were paid, totaling $176,000 of Note Issuance Costs.
AMMO, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2020 and March 31, 2019
The
Maturity Date of the notes is the two year anniversary from the date of issuance. The holders have the option to convert the entire
principal of the Convertible Promissory Note into Common Stock at a conversion price equal to $2.50 per share at any time until
the Maturity Date, subject to “Qualified Financing.” Qualified Financing means the next equity round of financing
of the Company that raises not less than $10,000,000 gross proceeds from institutional(s) or commercial lender(s) in the aggregate
with any combination of Common Stock (valued at the close of the Trading Day on the date of the closing for the financing) or
debt. In the event of Qualified Financing, the Convertible Promissory Notes will automatically convert 100% of the principal amount
into Common Stock at a conversion price equal to $2.50 per share. As of March 31, 2019, we accrued $65,291 of interest expense
related to the Convertible Promissory Notes.
On
February 28, 2019, the company notified the holders of an offer to convert Convertible Promissory Notes and Accrued Interest 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 issued Warrants to purchase 365,523 shares of Common Stock.
The offer ended on March 29, 2019 at 11:59 PM. As a result of the conversion of the Convertible Promissory Notes, the Company
accrued $42,300 for a 3% cash conversion fee on the principal converted payable to the placement agent, Paulson Investment Company.
Additionally, $118,351 of Unamortized Note Issuance Costs were amortized and $358,800 of Interest Expenses related to the reduction
in conversion price were recognized as result of the conversions.
The
holders that did not elect to convert their notes during this period have the option to convert their entire principal of the
Convertible Promissory Note into Common Stock per the terms of the original agreement.
As
of March 31, 2019, there was $300,000 in principal remaining and $24,144 of Unamortized Note Issuance Costs.
On
June 5, 2019, the remaining $300,000 of Convertible Promissory Notes were mandatorily converted into shares of our common stock
pursuant to the terms of the Note. The Company converted $300,000 of Convertible Promissory Notes and $18,226 of Accrued Interest
were converted into 127,291 shares of Common Stock at a conversion price of $2.50. The Company accrued $9,000 for a 3% cash conversion
fee on the principal converted payable to the placement agent, Paulson Investment Company.
On
January 15, 2020, the Company consummated the initial closing of a private placement offering whereby pursuant to the Subscription
Agreements entered into by the Company with five (5) accredited investors, the Company issued certain Convertible Promissory Notes
for an aggregate purchase price of $1,650,000 and five (5) year warrants to purchase shares of the Company’s common stock,
par value $0.001 per share (“Common Stock”).
On
January 30, 2020, the Company consummated the final closing of a private placement whereby pursuant to the Subscription Agreements
entered into by the Company with five (5) accredited investors, the Company issued certain Convertible Promissory Notes for an
aggregate purchase price of $850,000 and five (5) year warrants to purchase shares of the Company’s common stock, par value
$0.001 per share.
The
Notes accrue interest at a rate of 8% per annum and mature on October 15, 2020 and October 30, 2020. Additionally, the Notes contain
a mandatory conversion mechanism whereby any principal and accrued interest on the Notes, upon the closing of a Qualified Financing
(as defined in the Notes), converts into shares of the Company’s Common Stock at a conversion price of 66.7% of the per
share purchase price of shares or other units in the Qualified Financing. If a Qualified Financing has not occurred on or before
the Maturity Date, the Notes shall become convertible into shares of the Company’s Common Stock at a conversion price that
is equal to 50.0% of the arithmetic mean of the VWAP in the ten consecutive Trading Days immediately preceding the Maturity Date.
The Notes contain customary events of default. If an Event of Default occurs, interest under the Notes will accrue at a rate of
fifteen percent (15%) per annum and the outstanding principal amount of the Notes, plus accrued but unpaid interest, liquidated
damages and other amounts owing with respect to the Notes will become, at the Note holder’s election, immediately due and
payable in cash.
The Company analyzed
embedded conversion options of the convertible notes at issuance to determine whether the embedded conversion options should be
bifurcated and accounted for as derivative liabilities or if the embedded conversion options contain a beneficial conversion feature.
The Company notes that this determination must be performed at each balance sheet date and makes it possible for certain instruments
to be reclassified between debt and equity at different points in their life. The Company determined that it will defer recognition
of its accounting until such notes become convertible. Additionally, the Company determined that the embedded conversion options
do not require bifurcation and treatment as derivative liabilities, but they included contingent beneficial conversion features
that are indeterminable on the commitment date. The Company notes the embedded conversion options will be accounted for and recognized,
if necessary, when the contingencies are resolved (the date of a Qualified Financing or during the 10 days prior to the Maturity
Date). Through March 31, 2020, a Qualified Financing had not occurred and the Note is not yet convertible under the Voluntary
Conversion Option and, as a result, the contingencies have not been resolved, such that the Company concluded that no measurement
or recognition of the beneficial conversion feature was required as of March 31, 2020.
Pursuant
to the Subscription Agreements, each Investor will receive the number of Warrants to purchase shares of Common Stock equal to
the quotient obtained by dividing 50% of the principal amount of the Note by the Conversion Price of the Note. The Warrants are
exercisable at the per share purchase price of shares or other units in the Qualified Financing. If a Qualified Financing has
not occurred on or before the Maturity Date, the warrants shall become exercisable at a price per share that is equal to the closing
ten-day VWAP in the ten trading days immediately preceding the Maturity Date (the “Exercise Price”). The Warrants
contain an anti-dilution protection feature, to adjust the Exercise Price if shares are sold or issued for a consideration per
share less than the exercise price then in effect.
Joseph
Gunnar & Co., LLC acted as placement agent for the Offering. The Placement Agent received cash compensation of $200,000 and
is scheduled to be issued five (5) year warrants to purchase such number of shares of Common Stock equal to five percent (5%)
of the shares underlying the Notes and the Warrants, at an exercise price equal to 125% of the Conversion Price of the Notes,
which price shall not be known until the earlier of the Maturity Date or the closing of the Qualified Financing.
As
of March 31, 2020, the key terms of the investor and placement agent warrants are still unknown such that there is still no grant
of the warrants for accounting purposes. The Company will determine the fair value of the warrants at the time the key terms of
the Warrants become known and the Warrants are issued.
AMMO, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2020 and March 31, 2019
NOTE
9 – NOTES PAYABLE – RELATED PARTY
In
connection with the acquisition of the casing division of Jagemann Stamping Company, a $10,400,000 promissory note was executed
on March 14, 2020. The promissory note, under which $500,000 was paid on March 25, 2019 using funds raised for the acquisition,
had a remaining balance at March 31, 2019 of $9,900,000. On April 30, 2019, the original due date of the note was subsequently
extended to April 1, 2020. The note bears interest per annum at approximately 4.6% payable in arrears monthly. In May of 2019,
the Company paid $1,500,000 on the balance of the note. As of March 31, 2020, we recognized interest of $352,157 related to the
note. The note is secured by all the equipment purchased from Jagemann Stamping Company.
Post-closing of the
transaction, it was made apparent that certain equipment that was agreed to be delivered free and clear by the Seller was not
achievable as Seller was not able to purchase equipment that Seller had leased. Accordingly, the remaining value of the promissory
note was reduced by $2,596,200. As a result of the change to the purchase price of the transaction, the Company reduced Equipment
for a net value of $1,871,306, decreased Other Intangible Assets by $766,068, increased Accounts Receivable by $31,924, and recorded
an increase to Deposits for $9,250 worth of equipment that the Company agreed to transfer back to Seller. Consequently, accumulated
amortization has decreased by $159,530. Additionally, the Company entered into a lease to gain possession of the assets that
were originally to be transferred.
Subsequent
to March 31, 2020, the Company, Enlight and JSC entered into a Settlement Agreement pursuant to which the parties mutually agreed
to settle all disputes and mutually release each other from liabilities related to the Amended APA occurring prior to June 26,
2020. Pursuant to the Settlement Agreement, the Company shall pay JSC $1,269,977 and shall provide JSC with: (i) two new promissory
notes, a note of $5,803,800 related to the Seller Note and note of $2,635,797 for inventory and services, both with a maturity
date of August 15, 2021, (ii) general business security agreements granting JSC a security interest in all personal property of
the Company. Pursuant to the Notes, the Company is obligated to make monthly payments totaling $204,295 to JSC. In addition, the
Notes have a mandatory prepayment provision that comes into effect if the Company conducts a publicly registered offering. Pursuant
to such provision, the Company: (a) upon the closing of an Offering of less than $10,000,000 would be obligated to pay the lesser
of ninety percent (90%) of the Offering proceeds or seventy (70%) of the then aggregate outstanding balance of the Notes; and
(b) upon the closing of an Offering of more than $10,000,000 would be obligated to pay one hundred percent (100%) of the then
aggregate outstanding balance of the Notes. The Company was granted an option to repurchase up to 1,000,000 of the shares of the
Company’s common stock issued to JSC under the Amended APA at a price of $1.50 per share through April 1, 2021 so long as
there are no defaults under the Settlement Agreement.
On May 3, 2019, the
Company entered into a promissory note of $375,000 with a shareholder of the Company. The original interest rate was the applicable
LIBOR Rate. The promissory note has since been amended and the balance at March 31, 2020 was $278,195. The note’s original
a maturity date of August 3, 2019 was extended to September 18, 2020. The amended note bears interest at 1.25% per month.
The Company made $315,000 in principal payments in the year ended March 31, 2020. We have accrued interest on the note of $9,080.
Subsequent to March 31, 2020, the related party note and accrued interest was paid in full.
In
December of 2019, the Company entered into a Promissory Note of $90,000 with Fred Wagenhals, the Company’s Chief Executive
Officer and Chairman of the Board of Directors. The Note originally matured on June 12, 2020 and had an interest rate at the applicable
LIBOR Rate. The promissory note has since been amended and the balance at March 31, 2020 was $156,536 and the amended maturity
date is September 18, 2020. The Company made $70,000 in principal payments in the year ended March 31, 2020. The amended note
bears interest at 1.25% per month. We have accrued interest on the note of $1,287. Subsequent to March 31, 2020, the related
party note and accrued interest was paid in full.
NOTE
10 – CAPITAL STOCK
Our
authorized capital consists of 200,000,000 shares of common stock with a par value of $0.001 per share.
During
the year ended March 31, 2019, we issued 15,618,572 shares of common stock as follows:
| |
● |
5,796,336
shares were sold to investors for $10,903,930 |
| |
|
|
| |
● |
1,972,800
shares were issued through exercised warrants of $4,767,625 |
| |
|
|
| |
● |
10,495
shares were issued through a cashless exercise of 14,719 warrants |
AMMO, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2020 and March 31, 2019
| |
● |
702,500
shares valued at $1,172,974 were issued to employees, members of the Board of Directors, and members of the Advisory Committee
as compensation |
| |
|
|
| |
● |
5,000
shares were issued for services valued at $22,350 |
| |
|
|
| |
● |
1,700,002
shares were issued to the shareholders of SW Kenetics, Inc. (subject to claw back provisions) valued $4,624,005 in connection
with the acquisition |
| |
|
|
| |
● |
4,750,000
shares were issued to Jagemann Stamping Company valued at $9,500,000 in connection with the acquisition of Jagemann Casings |
| |
|
|
| |
● |
731,039
shares were issued for the conversion of Convertible Promissory Notes valued at $1,820,865 |
| |
|
|
| |
● |
49,600
shares were purchased by the Company for a price of $124,000 |
During
the year ended March 31, 2020, we issued 1,893,502 shares of common stock as follows:
| |
● |
1,232,770
shares were sold to investors for $2,465,540 |
| |
|
|
| |
● |
127,291
shares were issued for the conversion of Convertible Promissory Notes valued at $318,226 |
| |
|
|
| |
● |
170,504
shares were issued for services valued at $352,300 |
| |
|
|
| |
● |
660,499
shares valued at $901,526 were issued to employees, members of the Board of Directors, and members of the Advisory Committee
as compensation |
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 for the transition period ended March 31, 2018.
There are 85,000 shares remaining to be issued under the Plan.
In March 2018, we
entered into a second placement agent agreement for up to an additional $3,500,000. The offering consisted of Units priced at
$1.65, which included one share of common stock and one five-year warrant to purchase an additional half-share of common stock
for an exercise price of $2.00 per share. Effectively, every two units purchased provided the investor with a five-year warrant
at an exercise price of $2.00 per share. For services provided under the placement agreements, the placement agent collected
a 12% cash fee on the sale of every Unit and a fee payable in warrants equaling 12% of the total Units sold. These warrants have
a term of seven years and an exercise price of $1.65 per share.
In
April of 2018, our second placement agreement to secure equity capital from qualified investors to provide funds to our operations
ended. Units sold under this agreement during the year ended March 31, 2019 totaled 1,967,886 shares of common stock and 983,943
warrants for $3,247,030. The cash fee totaled $389,644 for the year ended March 31, 2019, including reimbursed expenses. We authorized
an additional 236,145 warrants to the placement agent under the terms of the agreement and issued a total of 981,213 warrants
to the placement agent for the two placement agent agreements.
In
December of 2019, we entered into a placement agreement to secure equity capital from qualified investors to provide funds
to our operations. The offering consisted of Units priced at $2.00, which included one share of common stock and one five-year
warrant to purchase an additional half-share of common stock for an exercise price of $2.40 per share. Effectively, every two
units purchased provided the investor with a five-year warrant at an exercise price of $2.40 per share. Units sold under this
agreement totaled 1,232,770 shares of common stock and 616,385 warrants for $2,465,540 for the year ended March 31, 2020.
For services provided
under the placement agreements, the placement agent collected a 12% cash fee on the sale of every Unit and a fee payable in warrants
equaling 12% of the total Units sold. The warrants totaling 553,346 have a term of five years and an exercise price
of $2.00 per share. The cash fee totaled $285,981 for the year ended March 31, 2020, including reimbursed expenses.
AMMO, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2020 and March 31, 2019
At
March 31, 2020 and March 31, 2019, outstanding and exercisable stock purchase warrants consisted of the following:
| | |
Number of
Shares | | |
Weighted
Averaged
Exercise Price | | |
Weighted
Average Life
Remaining (Years) | |
| Outstanding at March 31, 2018 | |
| 8,872,160 | | |
$ | 2.23 | | |
| 2.97 | |
| Granted | |
| 4,233,274 | | |
| 2.23 | | |
| 4.62 | |
| Exercised | |
| (1,987,519 | ) | |
| 2.41 | | |
| - | |
| Forfeited or cancelled | |
| (2,974,800 | ) | |
| 2.47 | | |
| - | |
| Outstanding at March 31, 2019 | |
| 8,143,115 | | |
$ | 2.09 | | |
| 4.35 | |
| Exercisable at March 31, 2019 | |
| 8,143,115 | | |
$ | 2.09 | | |
| 4.35 | |
| |
|
Number
of
Shares |
|
|
Weighted
Averaged
Exercise
Price |
|
|
Weighted
Average
Life
Remaining
(Years) |
|
| Outstanding
at March 31, 2019 |
|
|
8,143,115 |
|
|
$ |
2.09 |
|
|
|
4.35 |
|
| Granted |
|
|
710,317 |
|
|
|
2.35 |
|
|
|
4.18 |
|
| Exercised |
|
|
- |
|
|
|
- |
|
|
|
- |
|
| Forfeited
or cancelled |
|
|
(349,060 |
) |
|
|
2.50 |
|
|
|
- |
|
| Outstanding
at March 31, 2020 |
|
|
8,504,372 |
|
|
$ |
2.10 |
|
|
|
3.60 |
|
| Exercisable
at March 31, 2020 |
|
|
8,504,372 |
|
|
$ |
2.10 |
|
|
|
3.60 |
|
As
of March 31, 2020, we had 8,504,372 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 966,494 shares
of Common Stock at an exercise price of $1.65 per share until April 2025; (2) warrants to purchase 4,641,745 shares of our Common
Stock at an exercise price of $2.00 per share over the next three to five years; and (3) warrants to purchase 2,896,133 shares
of Common Stock at an exercise price of $2.40 over the next five years.
As
documented in Note 8, the Company is to issue warrants to the holders of the convertible notes and placement agent. As
of March 31, 2020, the key terms of the investor and placement agent warrants are still unknown such that there is still no grant
of the warrants for accounting purposes. The Company will determine the fair value of the warrants at the time the key terms of
the Warrants become known and the Warrants are issued.
On
May 31, 2018, per the terms of the private offering dated January 25, 2017, we called for the exercise of warrants to purchase
a total of 4,947,600 shares of our Common Stock. According to the terms of the Warrant Purchase Agreement, the warrants could
be called when the average price of our common stock traded at $5.00 per share or higher, for a consecutive 30 day period. This
call provision was met on May 21, 2018. As a result, we issued formal notice to all warrant holders on May 31, 2018, advising
them that they had until July 6, 2018, to exercise their warrants, or they would become null and void. The total number of warrants
included in the January 25, 2017 offering were 4,947,600 and were priced as follows: 4,790,100 warrants at an exercise price of
$2.50, 67,500 warrants at an exercise price of $1.25 and 90,000 warrants at an exercise price of $0.50.
As
of July 6, 2018, a total of 1,972,800 warrants were exercised to purchase an equivalent 1,972,800 shares of common stock at an
average price of $2.42 and 2,974,800 warrants to purchase shares of Common Stock were cancelled. On July 12, 2018, the company
filed a Form 8-K to report the activity of this event.
Additionally,
there was a cashless exercise of 14,719 warrants resulting in the issuance of 10,495 shares of Common Stock unrelated to the call
for the exercise of warrants.
AMMO, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2020 and March 31, 2019
NOTE
11 – ACQUISITIONS
SW
Kenetics, Inc.
On
September 27, 2018, AMMO Technologies, Inc. (“ATI”) entered into a definitive Agreement and Plan of Merger with SW
Kenetics Inc. (“SWK”), an Arizona corporation and completed the merger on October 5, 2018. Pursuant to the agreement
SWK merged with and into AMMO Technologies, Inc., with ATI being the survivor. Under the terms of the agreement, we issued to
SW Kenetics Inc.’s three shareholders, 1,700,002 restricted shares of our common stock, payment of $250,000, and a payment
obligation of $1,250,000 subject to completion of specific milestones that we have recorded as Contingent Consideration Payable.
Additionally, the 1,700,002 shares of common stock were issued with claw back provisions to ensure agreed upon objectives are
met. Included among the list of milestones or events that must be completed are significant revenue goals incorporating the product
technology of SWK. The initial payment of $250,000 was made on August 20, 2018. The shares were each valued at $2.72, the weighted
average share price of our Common Stock that was publicly traded and sold through private placement. We recorded the total purchase
consideration to patents as follows:
| Cash | |
$ | 250,000 | |
| Contingent Consideration Payable | |
| 1,250,000 | |
| Common Stock | |
| 1,700 | |
| Additional Paid-in Capital | |
| 4,622,305 | |
| Fair Value of Patent | |
$ | 6,124,005 | |
The preliminary
fair value of the patent at the date of acquisition was $7,723,166 and resulted in the recognition of gain on bargain purchase
of $1,599,161. The estimated fair value was determined using the relief from royalty approach. The valuation firm relied
on estimates of future sales and profitability provided by the Company. Subsequently, the Company determined the existing facts
and circumstances did not support the original fair value due to delays in obtaining tooling and manufacturing equipment. As a
result, at March 31, 2019, the Company adjusted the fair value of the patents from $7,723,166 to $6,124,005, with the difference
reducing the previously recognized gain on bargain purchase of $1,599,161.
SWK
is a research and development firm located in Arizona that has designed a new portfolio of modular projectiles that the Company
believes will advance the force capability of the United States military, as well as NATO member countries. SWK filed a patent
for their technology, which is now pending with the United States Patent and Trademark Office.
As of March 31, 2020,
the Company has made $350,000 in payments to SW Kenetics, Inc. in connection with the completion of a milestone. The $350,000
payment reduced the Contingent Consideration Payable.
At March 31, 2020, The Company reviewed the fair value of contingent
consideration using a scenario based method with probability included and determined the fair value was $709,623. An adjustment
of $190,377 was recognized in corporate general and administrative expenses.
Jagemann
Stamping Company’s Ammunition Casing Division
On
March 15, 2019, Enlight Group II, LLC (hereinafter referred to as the “Buyer”), a wholly owned subsidiary of AMMO,
Inc., completed its acquisition of selected assets of Jagemann Stamping Company’s (“Seller”) ammunition casing,
projectile manufacturing, and sales operations (“Jagemann Casings”) pursuant to the terms of the Amended and Restated
Asset Purchase Agreement (“Amended APA”) dated March 14, 2019.
In
accordance with the terms of the Amended APA, Buyer paid Seller 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 valued at $2.00 per share.
The
fair value of the consideration transferred was valued as of the date of the acquisition as follows:
| Cash | |
$ | 7,000,000 | |
| Note Payable | |
| 10,400,000 | |
| Common Stock | |
| 4,750 | |
| Additional Paid-in Capital | |
| 9,495,250 | |
| Total Consideration | |
$ | 26,900,000 | |
Total
allocation for the consideration recorded for the acquisition is as follows:
| Equipment | |
$ | 18,869,541 | |
| Intellectual property | |
| 1,773,436 | |
| Customer relationships | |
| 1,666,774 | |
| Tradename | |
| 2,472,095 | |
| Loss on Purchase | |
| 2,118,154 | |
| Total Consideration | |
$ | 26,900,000 | |
The
fair value of the tangible was determined by cost and market approaches for tangible assets. The fair value of intangible assets
were determined using the relief from royalty and residual income approaches. The acquired intangible assets, have remaining useful
lives ranging from three to five years.
AMMO, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2020 and March 31, 2019
Seller
is engaged exclusively in the business of full-service stamping involving, among other things, the manufacture and sale of deep
drawn stampings for use in the ammunition casing and projectile industries. Pursuant to the Amended APA, Buyer acquired the Seller’s
munition and casing division assets (including equipment and intellectual property), and is transitioning the associated employees
to its direct workforce to continue the operations at Seller’s Wisconsin facilities.
In October of 2019,
it was made apparent that certain equipment that was agreed to be delivered free and clear by the Seller was not achievable as
Seller was not able to purchase equipment that Seller had leased. Accordingly, the remaining value of the promissory note was
reduced by $2,596,200. As a result of the change to the purchase price of the transaction, the Company reduced Equipment for a
net value of $1,871,306, decreased Other Intangible Assets by $766,068, increased Accounts Receivable by $31,924, and recorded
an increase to Deposits for $9,250 worth of equipment that the Company agreed to transfer back to Seller. Consequently, accumulated
amortization has decreased by $159,530. Additionally, the Company entered into a lease to gain possession of the assets that were
originally to be transferred.
In addition to the
Amended APA, the Company entered into an Administrative and Management Services Agreement with Seller on March 15, 2019. The Seller
agreed to provide the Company with services including, but not limited to, inventory, rent, maintenance, engineering, and information
systems. Through this agreement the Company purchased approximately $1.9M in Inventory, incurred $394,128 of rent expenses, and
incurred $153,604 of expenses related to support costs such as engineering and maintenance, among others, for the year ended March
31, 2020.
Subsequent to March 31, 2020, the Company, Enlight and JSC entered
into a Settlement Agreement pursuant to which the parties mutually agreed to settle all disputes and mutually release each other
from liabilities related to the Amended APA occurring prior to June 26, 2020. Pursuant to the Settlement Agreement, the Company
shall pay JSC $1,269,977 and shall provide JSC with: (i) two new promissory notes, a note of $5,803,800 related to the Seller Note
and note of $2,635,797 for inventory and services, both with a maturity date of August 15, 2021, (ii) general business security
agreements granting JSC a security interest in all personal property of the Company. Pursuant to the Notes, the Company is obligated
to make monthly payments totaling $204,295 to JSC. In addition, the Notes have a mandatory prepayment provision that comes into
effect if the Company conducts a publicly registered offering. Pursuant to such provision, the Company: (a) upon the closing of
an Offering of less than $10,000,000 would be obligated to pay the lesser of ninety percent (90%) of the Offering proceeds or seventy
(70%) of the then aggregate outstanding balance of the Notes; and (b) upon the closing of an Offering of more than $10,000,000
would be obligated to pay one hundred percent (100%) of the then aggregate outstanding balance of the Notes. The Company was granted
an option to repurchase up to 1,000,000 of the shares of the Company’s common stock issued to JSC under the Amended APA at
a price of $1.50 per share through April 1, 2021 so long as there are no defaults under the Settlement Agreement.
NOTE
12 – ACCRUED LIABILITIES
At
March 31, 2020 and March 31, 2019, accrued liabilities were as follows:
| | |
March 31, 2020 | | |
March 31, 2019 | |
| Deferred revenue | |
$ | 493,553 | | |
$ | - | |
| Accrued FAET | |
| 353,061 | | |
| 145,460 | |
| Accrued interest | |
| 197,342 | | |
| 35,422 | |
| Accrued payroll | |
| 289,603
| | |
| 248,027 | |
| Accrued professional fees | |
| 131,300 | | |
| 74,300 | |
| Other accruals | |
| 154,760
| | |
| 28,225 | |
| | |
$ | 1,619,619 | | |
$ | 531,434 | |
NOTE
13 – RELATED PARTY TRANSACATIONS
From October 2016
through December 2018, our executive offices were located in Scottsdale, Arizona where we leased approximately 5,000 square feet
under a month-to-month triple net lease for $3,800 per month. This space housed our principal executive, administration, and marketing
functions. Our Chairman, President, and Chief Executive Officer owned the building in which these offices are currently leased.
For the year ended March 31, 2020 and 2019, the Company paid $21,800 and $53,013, respectively in rent for these
offices.
During the year
ended March 31, 2020, we paid $184,575 in service fees to an independent contractor, $6,500 in consulting fees
to our Previous Chief Financial Officer, and 60,000 shares in the aggregate to its Advisory Committee members
for service for a total value of $113,000. Additionally, at March 31, 2020, the Company had a receivable of approximately, $14,700
from its previous Chief Financial Officer. During the year ended March 31, 2019, we paid approximately $168,000 in consulting
fees.
In
connection with the acquisition of the casing division of Jagemann Stamping Company, a promissory note was executed. The promissory
note, under which $500,000 was paid on March 25, 2019 using funds raised for the acquisition, had a remaining balance at March
31, 2019 of $9,900,000. On April 30, 2019, the original due date of the note was subsequently extended to April 1, 2020. The note
bears interest per annum at approximately 4.6% payable in arrears monthly. In May of 2019, the Company paid $1,500,000 on the
balance of the note. As of March 31, 2020 and March 31, 2019, we accrued interest of $352,157 and $22,196, respectively, related
to the note. Subsequent to March 31, 2020, the Company extended the promissory note until August 15, 2021.
In October of 2019,
it was made apparent that certain equipment that was agreed to be delivered free and clear by the Seller was not achievable as
Seller was not able to purchase equipment that Seller had leased. Accordingly, the remaining value of the promissory note was
reduced by $2,596,200. As a result of the change to the purchase price of the transaction, the Company reduced Equipment for
a net value of $1,871,306, decreased Other Intangible Assets by $766,068, increased Accounts Receivable by $31,924, and recorded
an increase to Deposits for $9,250 worth of equipment that the Company agreed to transfer back to Seller. Consequently, accumulated
amortization has decreased by $159,530. Additionally, the Company entered into a lease to gain possession of the assets that
were originally to be transferred.
Through the Administrative
and Management Services Agreement the Company with Jagemann Stamping Company, the Company purchased approximately $1.9M in Inventory,
incurred $394,128 of rent expenses, and incurred $153,604 of expenses related to support costs such as engineering and maintenance,
among others for the year ended March 31, 2020.
Subsequent
to March 31, 2020, the Company, Enlight and JSC entered into a Settlement Agreement pursuant to which the parties mutually agreed
to settle all disputes and mutually release each other from liabilities related to the Amended APA occurring prior to June 26,
2020. Pursuant to the Settlement Agreement, the Company shall pay JSC $1,269,977 and shall provide JSC with: (i) two new promissory
notes, a note of $5,803,800 related to the Seller Note and note of $2,635,797 for inventory and services, both with a maturity
date of August 15, 2021, (ii) general business security agreements granting JSC a security interest in all personal property of
the Company. Pursuant to the Notes, the Company is obligated to make monthly payments totaling $204,295 to JSC. In addition, the
Notes have a mandatory prepayment provision that comes into effect if the Company conducts a publicly registered offering. Pursuant
to such provision, the Company: (a) upon the closing of an Offering of less than $10,000,000 would be obligated to pay the lesser
of ninety percent (90%) of the Offering proceeds or seventy (70%) of the then aggregate outstanding balance of the Notes; and
(b) upon the closing of an Offering of more than $10,000,000 would be obligated to pay one hundred percent (100%) of the then
aggregate outstanding balance of the Notes. The Company was granted an option to repurchase up to 1,000,000 of the shares of the
Company’s common stock issued to JSC under the Amended APA at a price of $1.50 per share through April 1, 2021 so long as
there are no defaults under the Settlement Agreement.
AMMO, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2020 and March 31, 2019
On
May 3, 2019, the Company entered into a promissory note of $375,000 with a shareholder of the Company. The original interest rate
was the applicable LIBOR Rate. The promissory note has since been amended and the balance at March 31, 2020 was $278,195. The
note’s original a maturity date of August 3, 2019 was extended to September 18, 2020. The amended note bears interest
at 1.25% per month. The Company made $315,000 in principal payments in the year ended March 31, 2020. We have accrued interest
on the note of $9,080. Subsequent to March 31, 2020, the related party note and accrued interest was paid in full.
In
December of 2019, the Company entered into a Promissory Note of $90,000 with Fred Wagenhals, the Company’s Chief Executive
Officer and Chairman of the Board of Directors. The Note originally matured on June 12, 2020 and had an interest rate at the applicable
LIBOR Rate. The promissory note has since been amended and the balance at March 31, 2020 was $156,536 and the amended maturity
date is September 18, 2020. The Company made $70,000 in principal payments in the year ended March 31, 2020. The amended note
bears interest at 1.25% per month. We have accrued interest on the note of $1,287. Subsequent to March 31, 2020, the related
party note and accrued interest was paid in full.
AMMO, INC.
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
March 31, 2020
and March 31, 2019
NOTE 14 – INCOME TAXES
The income tax (provision) benefit for the periods shown consist
of the following:
| |
|
2020 |
|
|
2019 |
|
| Current |
|
|
|
|
|
|
|
|
| US Federal |
|
$ |
- |
|
|
$ |
- |
|
| US
State |
|
|
- |
|
|
|
- |
|
| Total current provision |
|
|
- |
|
|
|
- |
|
| Deferred |
|
|
|
|
|
|
|
|
| US
Federal |
|
|
2,678,176 |
|
|
|
1,965,258 |
|
| US
State |
|
|
630,916 |
|
|
|
462,969 |
|
| Total deferred benefit |
|
|
3,309,092 |
|
|
|
2,428,227 |
|
| Change in valuation allowance |
|
|
(3,309,092 |
) |
|
|
(2,428,227 |
) |
| Income tax
(provision) benefit |
|
$ |
- |
|
|
$ |
- |
|
The reconciliation of income tax expense computed at the U.S. federal
statutory rate of 21% to the income tax provision for the years ended March 31, 2020 and 2020 is as follows:
| |
|
2020 |
|
|
2019 |
|
| Computed
tax expense |
|
$ |
(3,056,903) |
|
|
$
|
(2,458,977) |
|
| State taxes,
net of Federal income tax benefit |
|
|
(684,164) |
|
|
|
(550,342) |
|
| Change in valuation
allowance |
|
|
3,309,092
|
|
|
|
2,428,227
|
|
| Employee stock
awards |
|
|
231,692
|
|
|
|
301,454
|
|
| Stock grants |
|
|
137,477
|
|
|
|
180,679
|
|
| Stock for services |
|
|
90,541
|
|
|
|
5,744
|
|
| Rent expense |
|
|
13,358 |
|
|
|
- |
|
| Non-deductible
meals & entertainment |
|
|
7,833
|
|
|
|
1,003
|
|
| Stock
and warrants on note conversion |
|
|
- |
|
|
|
92,212
|
|
| Contingent
consideration fair value |
|
|
(48,926) |
|
|
|
- |
|
| Total
provision for income taxes |
|
$ |
- |
|
|
$ |
- |
|
The Company’s
effective tax rates were 0% and 0% for the years ended March 31, 2020 and 2019, respectively. During the year ended March 31,
2020, the effective tax rate differed from the U.S. federal statutory rate primarily due to the change in the valuation allowance.
AMMO, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2020 and March 31, 2019
Significant components
of the Company’s deferred tax liabilities and assets at March 31, 2020 and March 31, 2019 are as follows:
| |
|
2020 |
|
|
2019 |
|
| Deferred tax assets |
|
|
|
|
|
|
|
|
| Net operating loss
carryforward |
|
$ |
7,571,092 |
|
|
$ |
3,950,078 |
|
| Loss on purchase |
|
|
544,366 |
|
|
|
544,366 |
|
| Other |
|
|
211,158 |
|
|
|
2,629 |
|
| Total
deferred tax assets |
|
$ |
8,326,616 |
|
|
$ |
4,497,073 |
|
| |
|
|
|
|
|
|
|
|
| Deferred tax liabilities |
|
|
|
|
|
|
|
|
| Depreciation expense |
|
$ |
(1,059,771 |
) |
|
$ |
(512,945 |
) |
| Other |
|
|
- |
|
|
|
(26,376 |
) |
| Total
deferred tax liabilities |
|
$ |
(1,059,771 |
) |
|
$ |
(539,321 |
) |
| Net deferred tax assets |
|
$ |
7,266,845 |
|
|
$ |
3,957,752 |
|
| Valuation allowance |
|
|
(7,266,845 |
) |
|
|
(3,957,752 |
) |
| |
|
$ |
- |
|
|
$ |
- |
|
In assessing the realization
of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets
will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income
during the periods in which temporary differences representing net future deductible amounts become deductible. The Company considers
the scheduled reversal of deferred tax assets, projected future taxable income and tax planning strategies in making this assessment.
After consideration of all of the information available and due to the last years significant losses there is substantial doubt
related to the Company’s ability to utilize its deferred tax assets, the Company recorded a full valuation allowance of
the deferred tax asset. For the year ended March 31, 2020, the valuation allowance has increased by $3,309,092.
At March 31, 2020,
the Company had Federal net operating loss carry forwards (“NOLs”) for income tax purposes of $29,459,502. A
valuation allowance has been provided for the deferred tax asset as it is uncertain whether the Company will have future
taxable income. There were $5,144,926 of NOLs generated prior to 2018 will begin to expire in 2036. The Coronavirus Aid,
Relief, and Economic Security Act (“CARES Act”) signed in to law on March 27, 2020, provided that NOLs generated
in a taxable year beginning in 2018, 2019, or 2020, may now be carried back five years and forward indefinitely. In addition,
the 80% taxable income limitation is temporarily removed, allowing NOLs to fully offset net taxable income. In accordance
with Section 382 of the Internal Revenue Code, the future utilization of the Company’s net operating loss to offset
future taxable income may be subject to an annual limitation as a result of ownership changes that may have occurred
previously or that could occur in the future. The Company does not believe that such an ownership change has occurred to
date.
The Company accounts
for uncertain tax positions in accordance with ASC No. 740-10-25. ASC No. 740-10-25 addresses the determination of whether tax
benefits claimed or expected to be claimed on a tax return should be recorded in the financial statements. Under ASC No. 740-10-25,
the Company may recognize the tax benefit from an uncertain tax position only if it is more likely than not that the tax position
will be sustained on examination by the taxing authorities, based on the technical merits of the position. The tax benefit to
be recognized is measured as the largest amount of benefit that is greater than fifty percent likely of being realized upon ultimate
settlement. To the extent that the final tax outcome of these matters is different than the amount recorded, such differences
impact income tax expense in the period in which such determination is made. Interest and penalties, if any, related to accrued
liabilities for potential tax assessments are included in income tax expense. ASC No. 740-10-25 also requires management to evaluate
tax positions taken by the Company and recognize a liability if the Company has taken uncertain tax positions that more likely
than not would not be sustained upon examination by applicable taxing authorities. The Company has evaluated tax positions taken
by the Company and has concluded that as of March 31, 2020 and 2019, there are no uncertain tax positions taken, or expected to
be taken, that would require recognition of a liability that would require disclosure in the financial statements.
The Company has never
had an Internal Revenue Service audit; therefore, the tax periods ended December 31, 2016, December 31, 2017 and March 31, 2018,
2019, and 2020 are subject to audit.
AMMO, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2020 and March 31, 2019
NOTE
15 – INTANGIBLE ASSETS
Intangible
assets consisted of the following:
| | |
| | |
March 31, 2020 | |
| | |
Life | | |
Licenses | | |
Patent | | |
Other Intangible Assets | |
| Licensing Agreement – Jesse James | |
| 5 | | |
$ | 125,000 | | |
$ | - | | |
$ | - | |
| Licensing Agreement – Jeff Rann | |
| 5 | | |
| 125,000 | | |
| - | | |
| - | |
| Streak Visual Ammunition patent | |
| 11.2 | | |
| - | | |
| 950,000 | | |
| - | |
| SWK patent acquisition | |
| 15 | | |
| - | | |
| 6,124,005 | | |
| - | |
| Jagemann Munition Components: | |
| | | |
| | | |
| | | |
| | |
| Customer Relationships | |
| 3 | | |
| - | | |
| - | | |
| 1,450,613 | |
| Intellectual Property | |
| 3 | | |
| - | | |
| - | | |
| 1,543,548 | |
| Tradename | |
| 5 | | |
| - | | |
| - | | |
| 2,125,076 | |
| | |
| | | |
| 250,000 | | |
| 7,074,005 | | |
| 5,146,237 | |
| | |
| | | |
| | | |
| | | |
| | |
| Accumulated amortization – Licensing Agreements | |
| | | |
| (158,333 | ) | |
| - | | |
| - | |
| Accumulated amortization – Patents | |
| | | |
| - | | |
| (561,096 | ) | |
| - | |
| Accumulated amortization – Intangible Assets | |
| | | |
| - | | |
| - | | |
| (1,435,030 | ) |
| | |
| | | |
$ | 91,667 | | |
$ | 6,512,909 | | |
$ | 3,649,404 | |
| | |
| | |
March 31, 2019 | |
| | |
Life | | |
Licenses | | |
Patent | | |
Other Intangible Assets | |
| Licensing Agreement – Jesse James | |
| 5 | | |
$ | 125,000 | | |
$ | - | | |
$ | - | |
| Licensing Agreement – Jeff Rann | |
| 5 | | |
| 125,000 | | |
| - | | |
| - | |
| Streak Visual Ammunition patent | |
| 11.2 | | |
| - | | |
| 950,000 | | |
| - | |
| SWK patent acquisition | |
| 15 | | |
| - | | |
| 6,124,005 | | |
| - | |
| Jagemann Munition Components: | |
| | | |
| | | |
| | | |
| | |
| Customer Relationships | |
| 3 | | |
| - | | |
| - | | |
| 1,666,774 | |
| Intellectual Property | |
| 3 | | |
| - | | |
| - | | |
| 1,773,436 | |
| Tradename | |
| 5 | | |
| - | | |
| - | | |
| 2,472,095 | |
| | |
| | | |
| 250,000 | | |
| 7,074,005 | | |
| 5,912,305 | |
| | |
| | | |
| | | |
| | | |
| | |
| Accumulated amortization – Licensing Agreements | |
| | | |
| (108,333 | ) | |
| - | | |
| - | |
| Accumulated amortization – Patents | |
| | | |
| - | | |
| (134,701 | ) | |
| - | |
| Accumulated amortization – Intangible Assets | |
| | | |
| - | | |
| - | | |
| (61,803 | ) |
| | |
| | | |
$ | 141,667 | | |
$ | 6,939,304 | | |
$ | 5,850,502 | |
Annual
amortization of intangible assets for the next five years are as follows:
| Years
Ended March 31, |
|
Estimates
for Fiscal Year |
|
| 2021 |
|
|
1,971,803
|
|
| 2022 |
|
|
1,915,690
|
|
| 2023 |
|
|
923,791
|
|
| 2024 |
|
|
903,190
|
|
| 2025 |
|
|
493,351
|
|
| Thereafter |
|
|
4,046,155
|
|
| |
|
$ |
10,253,980 |
|
NOTE
16 - SUBSEQUENT EVENTS
In
April of 2020, the Company determined it was necessary to obtain additional funds as a result of the foregoing uncertainty cause
by COVID-19. The Company received approximately $1.0 million in funds through itself and its wholly owned subsidiary Jagemann
Munition Components, which was established under the federal Coronavirus Aid, Relief, and Economic Security Act and is administered
by the U.S. Small Business Administration. The Company received approximately $600,000 from Western State Bank and its wholly
owned subsidiary, Jagemann Munition Components, received approximately $400,000 from BMO Harris. The Payroll Protection Notes
provide for an interest rate of 1.00% per year and matures two years after the issuance date. Accordingly, the Company has recorded these notes as long term liabilities
subsequent to March 31, 2020. Principal and accrued interest are
payable monthly in equal installments commencing on the date that is six months after the date funds are first disbursed on the
loan and continuing through the maturity date, unless the Payroll Protection Notes are forgiven. To be available for loan forgiveness,
the PPP Note may only be used for payroll costs, costs related to certain group health care benefits and insurance premiums, rent
payments, utility payments, mortgage interest payments and interest payments on any other debt obligation that existed before
February 15, 2020.
On June 17, 2020, the Company entered into a revolving inventory
loan and security agreement with FSW Funding, LLC. The facility is for up to $1,750,000 on the lesser of 50% of inventory cost
or the maximum loan amount and has an annualized interest rate of to the greater of (i) the three-month LIBOR rate plus 3.09% or
(ii) 8%. A loan fee of 2% will be assessed to the Company at each anniversary. Additionally, the Company extended its Factoring
and Security Agreement with FSW Funding until June 17, 2022 (See Note 6).
Subsequent to March 31, 2020, the Company issued 180,916 shares
of Common Stock to employees as compensation with values per share ranging from $1.56 to $2.50 for a total value of $339,132. The
Company sold 11,500 shares to employees for a total value of $14,375 or $1.25 per share. Additionally, the Company issued 8,336
shares for services provided to the Company totaling $13,171 or $1.58 per share. There were 279 shares of Common Stock were issued
a result of a cashless exercise of 1,967 warrants. Holders of Warrants of our Common Stock exercised there warrants and received
60,607 shares of Common Stock for a value of $121,214 or $2.00 per share. Additionally, the Company issued 1,157,143 shares of
its Common Stock to investors for Cash at $1.75 per share totaling $2,025,000.
As reported on the Form 8-K filed July 2, 2020, On June 26, 2020,
the Company, its wholly owned subsidiary Enlight Group II LLC (d/b/a Jagemann Munition Components) and Jagemann Stamping Company
(“JSC”) entered into a Settlement Agreement pursuant to which the parties mutually agreed to settle all disputes and
mutually release each other from liabilities related to the Amended APA occurring prior to June 26, 2020 (the “Settlement
Agreement”). Pursuant to the Settlement Agreement, the Company shall pay JSC $1,269,977 and shall provide JSC with: (i) two
new promissory notes, a note of $5,803,800 related to the Seller Note and note of $2,635,797 for inventory and services, both with
a maturity date of August 15, 2021 (“Notes”), (ii) general business security agreements granting JSC a security interest
in all personal property of the Company. Pursuant to the Notes, the Company is obligated to make monthly payments totaling $204,295
to JSC. In addition, the Notes have a mandatory prepayment provision that comes into effect if the Company conducts a publicly
registered offering (an “Offering”). Pursuant to such provision, the Company: (a) upon the closing of an Offering of
less than $10,000,000 would be obligated to pay the lesser of ninety percent (90%) of the Offering proceeds or seventy (70%) of
the then aggregate outstanding balance of the Notes; and (b) upon the closing of an Offering of more than $10,000,000 would be
obligated to pay one hundred percent (100%) of the then aggregate outstanding balance of the Notes. The Company was granted an
option to repurchase up to 1,000,000 of the shares of the Company’s common stock issued to JSC under the Amended APA at a
price of $1.50 per share through April 1, 2021 so long as there are no defaults under the Settlement Agreement. The Settlement
Agreement and Notes are attached as exhibits to this filing.
We
evaluated subsequent events through the date the financial statements were issued, and determined that there are not any other
items to disclose.
