UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C.

 

FORM 10-Q

 

[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
   
For the quarterly period ended December 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

 

Title of each class   Trading Symbol(s)   Name of each exchange on which registered
None   None   None

 

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 and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 and post 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 [  ] Smaller reporting company [X]
Emerging growth company [  ]  

 

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

 

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

 

As of February 5, 2021, there were 68,665,629 shares of $0.001 par value Common Stock outstanding.

 

DOCUMENTS INCORPORATED BY REFERENCE: None.

 

 

 

 
 

 

TABLE OF CONTENTS

 

PART I  
     
ITEM 1: FINANCIAL STATEMENTS 3
  Condensed Consolidated Balance Sheets as of December 31, 2020 (Unaudited) and March 31, 2020 3
  Condensed Consolidated Statements of Operations (Unaudited) for the three and nine months ended December 31, 2020 and 2019 4
  Condensed Consolidated Statement of Shareholders’ Equity (Unaudited) for the three and nine months ended December 31, 2020 and 2019 5
  Condensed Consolidated Statements of Cash flow (Unaudited) for the nine months ended December 31, 2020 and 2019 6
  Notes to Condensed Consolidated Financial Statements (Unaudited) 8
ITEM 2: MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION 24
ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK 33
ITEM 4: CONTROLS AND PROCEDURES 33
     
PART II  
ITEM 1: LEGAL PROCEEDINGS 34
ITEM 1A: RISK FACTORS 34
ITEM 2: UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS 34
ITEM 3: DEFAULTS UPON SENIOR SECURITIES 34
ITEM 4: MINE SAFETY DISCLOSURE 34
ITEM 5: OTHER INFORMATION 35
ITEM 6: EXHIBITS 35
SIGNATURES 36

 

  2  
 

 

PART I

 

ITEM 1. FINANCIAL STATEMENTS

 

AMMO, Inc.

CONDENSED CONSOLIDATED BALANCE SHEETS

 

 

    December 31, 2020     March 31, 2020  
    (Unaudited)        
             
ASSETS                
Current Assets:                
Cash   $ 19,007,893     $ 884,274  
Accounts receivable, net of allowance for doubtful account of $117,094 at December 31, 2020 and $62,248 at March 31, 2020     6,877,047       3,004,839  
Due from related parties     15,657       15,807  
Inventories, at lower cost or net realizable value, principally average cost method     9,548,591       4,408,073  
Prepaid expenses     1,053,671       844,117  
Total Current Assets     36,502,859       9,157,110  
                 
Equipment, net of accumulated depreciation of $5,100,920 at December 31, 2020 and $3,060,681 at March 31, 2020     19,403,855       18,046,329  
                 
Other Assets:                
Deposits     52,183       216,571  
Licensing agreements, net of accumulated amortization of $195,833 at December 31, 2020 and $158,833 at March 31, 2020     54,167       91,667  
Patents, net of accumulated amortization of $931,102 at December 31, 2020 and $561,096 at March 31, 2019     6,142,903       6,512,909  
Other Intangible Assets, net of accumulated amortization of $2,568,168 at December 31, 2020 and $1,496,833 at March 31, 2020     2,578,069       3,649,404  
Right of Use Assets - Operating Leases     2,371,096       3,431,746  
TOTAL ASSETS   $ 67,105,132     $ 41,105,736  
                 
LIABILITIES AND SHAREHOLDERS’ EQUITY                
Current Liabilities:                
Accounts payable   $ 4,404,029     $ 5,197,354  
Factoring liability     2,290,598       2,005,979  
Accrued liabilities     3,952,438       1,619,619  
Inventory credit facility     2,250,000       -  
Current portion of operating lease liability     510,103       375,813  
Current portion of note payable related party    

611,290

         
Insurance premium note payable     103,792       329,724  
Note payable related party     -       434,731  
Total Current Liabilities     14,122,250       9,963,220  
                 
Long-term Liabilities:                
Contingent consideration payable     621,517       709,623  
Convertible promissory notes, net of note issuance cost of $121,325 at December 31, 2020 and $237,611 at March 31, 2020     817,675       2,262,389  
Notes payable related party     2,427,726       5,803,800  
Note payable     4,000,000       -  
Paycheck protection program notes     427,385       -  
Operating Lease Liability, net of current portion     1,913,904       3,107,911  
Total Liabilities     24,330,457       21,846,943  
                 
Shareholders’ Equity:                
Common stock, $0.001 par value, 200,000,000 shares authorized 63,498,045 at December 31, 2020 and 46,204,139 shares issued and outstanding at March 31, 2020, respectively     63,498       46,204  
Additional paid-in capital     84,732,248       53,219,834  
Stock subscription receivable     (664,975 )     -  
Accumulated deficit     (41,356,096 )     (34,007,245 )
Total Shareholders’ Equity     42,774,675       19,258,793  
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY   $ 67,105,132     $ 41,105,736  

 

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

 

  3  
 

 

AMMO, Inc.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

 

    For the Three Months Ended December 31,     For the Nine Months Ended December 31,  
    2020     2019     2020     2019  
                         
Net Sales                                
Ammunition sales   $ 12,834,490     $ 1,246,414     $ 27,987,438     $ 3,703,669  
Casing sales     3,785,754       1,525,595       10,305,648       6,321,475  
      16,620,244       2,772,009       38,293,086       10,025,144  
Cost of Goods Sold, for the three and nine months ended December 31, 2020 and 2019 includes depreciation and amortization of $807,505, $771,463, $2,346,157, and $2,108,269 respectively, and federal excise taxes of $1,201,841, $138,529, $2,707,534, and $374,132, respectively     13,278,338       3,662,196       32,590,149       12,286,591  
Gross Margin     3,341,906       (890,187 )     5,702,937       (2,261,447 )
                                 
Operating Expenses                                
Selling and marketing     542,271       238,439       1,244,323       748,014  
Corporate general and administrative     1,639,052       730,991       3,805,230       2,784,984  
Employee salaries and related expenses     1,172,765       846,724       3,329,511       2,898,932  
Depreciation and amortization expense     416,625       (56,247 )     1,242,809       848,995  
Loss on purchase     -       -       1,000,000       -  
Total operating expenses     3,770,713       1,759,907       10,621,873       7,280,925  
Loss from Operations     (428,807 )     (2,650,094 )     (4,918,936 )     (9,542,372 )
                                 
Other Expenses                                
Other income/(expense)     461,000       -       274,400       -  
Interest income/(expense)     (1,938,630 )     (214,328 )     (2,704,315 )     (607,710 )
Total other expenses     (1,477,630 )     (214,328 )     (2,429,915 )     (607,710 )
                                 
Loss before Income Taxes     (1,906,437 )     (2,864,422 )     (7,348,851 )     (10,150,082 )
                                 
Provision for Income Taxes     -       -       -       -  
                                 
Net Loss   $ (1,906,437 )   $ (2,864,422 )   $ (7,348,851 )   $ (10,150,082 )
                                 
Loss per share                                
Basic and fully diluted:                                
Weighted average number of shares outstanding     53,816,157       45,767,635       49,295,682       45,267,036  
Loss per share   $ (0.04 )   $ (0.06 )   $ (0.15 )   $ (0.22 )

 

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

 

  4  
 

 

AMMO, Inc.

CONDENSED CONSOLIDATED STATEMENT OF SHAREHOLDERS’ EQUITY

For the Three Months Ended December 31, 2020 and 2019

(Unaudited)

 

    Common Shares     Additional Paid-In     Stock Subscription     Accumulated        
    Number     Par Value     Capital     Receivable     (Deficit)     Total  
                                     
Balance as of September 30, 2020     48,324,347     $ 48,323     $ 56,895,422     $ -     $ (39,449,659 )   $ 17,494,086  
                                                 
Common stock issued for cash     9,872,928       9,873       20,720,875       -       -       20,730,748  
Common stock issued for convertible notes     2,667,358       2,667       3,872,292       -       -       3,874,959  
Common stock issued for exercised warrants     975,726       977       2,045,476       -       -       2,046,453  
Stock subscription receivable for exercised warrants     309,775       310       664,665       (664,975 )     -       -  
Common stock issued for debt conversion     1,000,000       1,000       2,099,000       -       -       2,100,000  
Common stock issued for cashless warrant exercise     159,995       160       (160 )     -       -       -  
Common stock issuance costs    

-

      -       (3,274,436 )     -       -       (3,274,436 )
Common stock issued for services     50,000       50       87,450       -       -       87,500  
Employee stock awards     137,916       138       240,715       -       -       240,853  
Stock grants     -       -       65,455       -       -       65,455  
Issuance of warrants for convertible notes     -       -       1,315,494       -       -       1,315,494  
Net loss     -       -       -       -       (1,906,437 )     (1,906,437 )
                                                 
Balance as of December 31, 2020     63,498,045     $ 63,498     $ 84,732,248     $ (664,975 )   $ (41,356,096 )   $ 42,774,675  

 

 

    Common Shares     Additional Paid-In     Stock Subscription     Accumulated      
    Number     Par Value     Capital     Receivable     (Deficit)     Total  
                                     
Balance as of September 30, 2019     45,751,628     $ 45,751     $ 52,517,726     $        -     $ (26,736,227 )   $ 25,827,250  
                                                 
Common stock issued for cash     -       -       -       -       -       -  
Common stock issued for convertible notes     -       -       -       -       -       -  
Common stock issuance costs     -       -       -       -       -       -  
Common stock issued for services     62,449       63       71,937       -       -       72,000  
Employee stock awards     92,000       92       182,158       -       -       182,250  
Stock grants     -       -       168,364       -       -       168,364  
Net loss     -       -       -       -       (2,864,420 )     (2,864,420 )
                                                 
Balance as of December 31, 2019     45,906,077     $ 45,906     $ 52,940,185     $ -     $ (29,600,647 )   $ 23,385,444  

 

For the Nine Months Ended December 31, 2020 and 2019

(Unaudited)

 

    Common Shares     Additional Paid-In     Stock Subscription     Accumulated        
    Number     Par Value     Capital     Receivable     (Deficit)     Total  
                                     
Balance as of March 31, 2020     46,204,139     $ 46,204     $ 53,219,834     $ -     $ (34,007,245 )   $ 19,258,793  
                                                 
Common stock issued for cash     11,536,143       11,537       23,601,082       -       -       23,612,619  
Common stock issued for convertible notes     2,667,358       2,667       3,872,292       -       -       3,874,959  
Common stock issued for exercised warrants     1,096,939       1,097       2,287,781       -       -       2,288,878  
Stock subscription receivable for exercised warrants     309,775       310       664,665       (664,975 )     -       -  
Common stock issued for debt conversion - related party     1,000,000       1,000       2,099,000       -       -       2,100,000  
Common stock issued for cashless warrant exercise     160,274       160       (160 )     -       -       -  
Common stock issuance costs     -       -       (3,344,436 )     -       -       (3,344,436 )
Common stock issued for services     58,336       58       87,442       -       -       87,500  
Employee stock awards     465,081       465       716,124       -       -       716,589  
Stock grants     -       -       213,130       -       -       213,130  
Issuance of warrants for convertible notes     -       -       1,315,494       -       -       1,315,494  
Net loss     -       -       -       -       (7,348,851 )     (7,348,851 )
                                                 
Balance as of December 31, 2020     63,498,045     $ 63,498     $ 84,732,248     $ (664,975 )   $ (41,356,096 )   $ 42,774,675  

 

    Common Shares     Additional Paid-In     Stock Subscription     Accumulated        
    Number     Par Value     Capital     Receivable     (Deficit)     Total  
                                     
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     125,941       126       271,874       -       -       272,000  
Employee stock awards     407,000       407       688,343       -       -       688,750  
Stock grants     -       -       548,058       -       -       548,058  
Net loss     -       -       -       -       (10,150,082 )     (10,150,082 )
                                                 
Balance as of December 31, 2019     45,906,077     $ 45,906     $ 52,940,185     $ -     $ (29,600,647 )   $ 23,385,444  

 

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

 

  5  
 

 

AMMO, Inc.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOW

(Unaudited)

 

    For the Nine Months Ended December 31,  
    2020     2019  
Cash flows from operating activities:                
Net Loss   $ (7,348,851 )   $ (10,150,082 )
Adjustments to reconcile Net Loss to Net Cash used by operations:                
Depreciation and amortization     3,588,966       2,957,337  
Debt discount amortization     325,141       24,144  
Employee stock awards     716,589       688,750  
Stock grants     213,130       548,058  
Stock for services     87,500       272,000  
Contingent consideration payable fair value     (88,106 )     -  
Interest on convertible promissory notes     146,104       -  
Allowance for doubtful accounts     54,846       (124,313 )
Reduction in right of use asset     322,970       -  
Paycheck protection program note forgiveness    

(624,600

)     -  
Loss on disposal of assets    

25,400

         

Stock issued in lieu of cash payments

    48,000     -  
Loss on Jagemann Munition Components     1,000,000       -  
Stock and warrants for note conversion     1,315,494       -  
Changes in Current Assets and Liabilities                
Accounts receivable     (3,927,054 )     91,995  
Due to (from) related parties     150       2,858  
Inventories     (5,140,518 )     (250,383 )
Prepaid expenses     16,985       301,241  
Deposits     164,388       (93,830 )
Accounts payable     1,842,472       2,357,708  
Accrued liabilities     2,332,819       271,063  
Operating lease liability     (322,037 )     -  
Net cash used in operating activities     (5,250,212 )     (3,103,454 )
                 
Cash flows from investing activities                
Purchase of equipment     (4,493,051 )     (356,022 )
Net cash used in investing activities     (4,493,051 )     (356,022 )
                 
Cash flow from financing activities                
Proceeds from inventory facility     2,250,000       -  
Proceeds from factoring liability     26,079,000       936,750  
Payments on factoring liability     (25,794,381 )     -  
Proceeds from paycheck protection program notes     1,051,985       -  
Proceeds from note payable related party issued     3,500,000       415,000  
Payments on note payable - related party     (7,235,312 )     (1,500,000 )
Payments on insurance premium note payment     (452,471 )     (322,209 )
Proceeds from note payable     4,000,000       -  
Proceeds from convertible promissory notes     1,959,000       -  

 

(Continued)

 

  6  
 

 

AMMO, Inc.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOW

(Unaudited)

 

   

For the Nine Months Ended

December 31,

 
    2020     2019  
             
Sale of common stock     23,564,619       2,465,540  
Common stock issued for exercised warrants     2,288,878       -  
Common stock issuance costs     (3,344,436 )     (285,981 )
Contingent consideration payment     -       (300,000 )
Net cash provided by financing activities     27,866,882       1,409,100  
                 
Net increase/(decrease) in cash     18,123,619       (2,050,376 )
Cash, beginning of period     884,274       2,181,246  
Cash, end of period   $ 19,007,893     $ 130,870  
      -          
Supplemental cash flow disclosures                
Cash paid during the period for -                
Interest   $ 923,454     $ 346,800  
Income taxes   $ -     $ -  
                 
Non-cash investing and financing activities:                
Accounts payable     (2,635,797 )     -  
Note payable related party     2,635,797       -  
Right of use assets - operating leases     (737,680 )     (4,168,771 )
Operating lease liability     737,680       4,168,771  
Insurance premium note payment     226,539       165,120  
Prepaid expenses     (226,539 )     (165,120 )
Convertible promissory note     (3,520,000 )     -  
Note issuance costs     (208,855 )     -  
Convertible promissory note conversion     3,728,855       318,226  
Convertible promissory note and accrued interest     -       (318,226 )
Note payable related party conversion     2,100,000       -  
Note payable related party     (2,100,000 )     (2,596,200 )
Other intangible assets     -       2,312,609  
Deposits     -       (109,250 )
Equipment     -       392,841  
Stock subscription receivable     (664,975 )     -  
Common stock     310       -  
Additional paid-in capital     664,665       -  
    $ -     $ -  

 

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

 

  7  
 

 

AMMO, Inc.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2020 and March 31, 2020

(Unaudited)

 

NOTE 1 – ORGANIZATION AND BUSINESS ACTIVITY

 

We were formed under the name Retrospettiva, Inc. in November 1990 to manufacture and import textile products, including both finished garments and fabrics. We were inactive until the following series of events in December 2016 and March 2017.

 

On December 15, 2016, the Company’s majority shareholders sold 475,681 (11,891,976 pre-split) of their outstanding shares to Mr. Fred W. Wagenhals (“Mr. Wagenhals”) resulting in a change in control of the Company. Mr. Wagenhals was appointed as sole officer and the sole member of the Company’s Board of Directors.

 

The Company also approved (i) doing business in the name AMMO, Inc., (ii) a change to the Company’s OTC trading symbol to POWW, (iii) an agreement and plan of merger to re-domicile and change the Company’s state of incorporation from California to Delaware, and (iv) a 1-for-25 reverse stock split (“Reverse Split”) of the issued and outstanding shares of the common stock of the Company. As a result of the reverse split, the previous issued and outstanding shares of common stock became 580,052 shares; no shareholder was reversed below 100 shares, and all fractional shares resulting from the reverse split were rounded up to the next whole share. All references to the outstanding stock have been retrospectively adjusted to reflect this split. These transactions were effective as of December 30, 2016.

 

On March 17, 2017, the Company entered into a definitive agreement with AMMO, Inc. a Delaware Corporation (PRIVCO) under which the Company acquired all of the outstanding shares of common stock of (PRIVCO). Under the terms of the Agreement, the Company issued 17,285,800 newly issued shares of common stock of the Company. In connection with this transaction the Company retired 475,681 shares of common stock and issued 500,000 shares of common stock to satisfy an issuance commitment. The acquisition was considered to be a capital transaction. The transaction was the equivalent to the issuance by PRIVCO of 604,371 shares to the Company’s shareholders accompanied by a recapitalization. The weighted average number of outstanding shares has been adjusted for this transaction. (PRIVCO) subsequently changes its name to AMMO Munitions, Inc.

 

  8  
 

 

AMMO, Inc.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

Accounting Basis

 

The accompanying unaudited condensed consolidated financial statements and related disclosures included in this Quarterly Report on Form 10-Q have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) and reflect all adjustments, which consist solely of normal recurring adjustments, needed to fairly present the financial results for these periods. Additionally, these condensed consolidated financial statements and related disclosures are presented pursuant to the rules and regulations of the Securities Exchange Commission (“SEC”).

 

The accompanying condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and related disclosures contained in the Company’s Annual Report filed with the SEC on Form 10-K for the year ended March 31, 2020. The results for the three and nine month period ended December 31, 2020 are not necessarily indicative of the results that may be expected for the entire fiscal year. Accordingly, certain information and note disclosures normally included in financial statements prepared in accordance with U.S. GAAP have been omitted pursuant to the rules and regulations of the SEC. In the opinion of management, all adjustments have been made, which consist only of normal recurring adjustments necessary for a fair statement of (a) the results of operations for the three and nine month periods ended December 31, 2020 and 2019, (b) the financial position at December 31, 2020, and (c) cash flows for the nine month period ended December 31, 2020 and 2019.

 

We use the accrual basis of accounting and accounting principles generally accepted in the United States of America (“GAAP”) and all amounts are expressed in U.S. dollars. The Company has a fiscal year-end of March 31st.

 

Unless the context otherwise requires, all references to “Ammo”, “we”, “us”, “our,” or the “Company” are to AMMO, Inc., a Delaware corporation.

 

Principles of Consolidation

 

The condensed 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 condensed consolidated financial statements include the valuation of allowances for doubtful accounts, valuation of deferred tax assets, inventories, useful lives of assets, intangible assets, and stock-based compensation.

 

  9  
 

 

AMMO, Inc.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

Accounts Receivable and Allowance for Doubtful Accounts

 

Our accounts receivable represents amounts due from customers for products sold and include an allowance for uncollectible accounts which is estimated based on the aging of the accounts receivable and specific identification of uncollectible accounts. At December 31, 2020 and March 31, 2020, we reserved $117,094 and $62,248, respectively, of allowance for doubtful accounts.

 

License Agreements

 

We are a party to a license agreement with Jesse James, a well-known motorcycle designer, and Jesse James Firearms, LLC, a Texas limited liability company, or JJF. The license agreement grants us the exclusive worldwide rights through October 15, 2021 to Mr. James’ image rights and trademarks associated with him in connection with the marketing, promotion, advertising, sale, and commercial exploitation of Jesse James Branded Products. We agreed to pay Mr. James royalty fees on the sale of ammunition and non-ammunition Branded Products and to reimburse him for any out-of-pocket expenses and reasonable travel expenses.

 

We are a party to a license agreement with Jeff Rann, a well-known wild game hunter and spokesman for the firearm and ammunition industries. The license agreement grants us through February 2022 the exclusive worldwide rights to Mr. Rann’s image rights and trademarks associated with him in connection with the marketing, promotion, advertising, sale, and commercial exploitation of all Jeff Rann Branded Products. We agreed to pay Mr. Rann royalty fees on the sale of ammunition and non-ammunition Branded Products and to reimburse him for any out-of-pocket expenses and reasonable travel expenses.

 

Amortization expense for the license agreements for the three and nine months ended December 31, 2020 and 2019 was $12,500 and $37,500, respectively.

 

Patents

 

On September 28, 2017, AMMO Technologies Inc. (“ATI”), an Arizona corporation, which is 100% owned by us, merged with Hallam, Inc, a Texas corporation, with ATI being the survivor. The primary asset of Hallam, Inc. was an exclusive license to produce projectiles and ammunition using the Hybrid Luminescence Ammunition Technology under patent U.S. 8,402,896 B1 with a publication date of March 26, 2013 owned by University of Louisiana at Lafayette. The license was formally amended and assigned to AMMO Technologies Inc. pursuant to an Assignment and First Amendment to Exclusive License Agreement. Assumption Agreement dated to be effective as of August 22, 2017, the Merger closing date. This asset will be amortized from September 2017, the first full month of the acquired rights, through October 29, 2028. Patent amortization expense for the three months ended December 31, 2020 and 2019 was $21,269 and $21,268, respectively, and $63,806 for the nine months ended December 31, 2020 and 2019.

 

Under the terms of the Exclusive License Agreement, the Company is obligated to pay a quarterly royalty to the patent holder, based on a $0.01 per unit basis for each round of ammunition sold that incorporates this patented technology through October 29, 2028. For the nine months ended December 31, 2020 and 2019, the Company recognized royalty expenses of $70,793 and $20,261, respectively under this agreement.

 

  10  
 

 

AMMO, Inc.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

On October 5, 2018, we completed the acquisition of SW Kenetics Inc. ATI succeeded all of the assets of SW Kenetics, Inc. and assumed all of the liabilities.

 

The primary asset of SW Kenetics Inc. was a pending patent for modular projectiles. All rights to patent pending application were assigned and transferred to AMMO Technologies, Inc. pursuant to Intellectual Property Rights Agreement on September 27, 2018. Patent amortization expense for the three months ended December 31, 2020 and 2019 was $102,067, respectively, and $306,200 and $239,253, respectively for the nine months ended December 31, 2020 and 2019.

 

We intend to continue building our patent portfolio to protect our proprietary technologies and processes, and will file new applications where appropriate to preserve our rights to manufacture and sell our branded lines of ammunition.

 

Other Intangible Assets

 

On March 15, 2019, Enlight Group II, LLC d/b/a Jagemann Munition Components, a wholly owned subsidiary of AMMO, Inc., completed its acquisition of assets of Jagemann Stamping Company’s ammunition casing manufacturing and sales operations pursuant to the terms of the Amended and Restated Asset Purchase Agreement. The intangible assets acquired include a tradename, customer relationships, and intellectual property. For the three months ended December 31, 2020 and 2019, amortization of the other intangibles assets was $357,111 and $249,794, respectively, and $1,071,335 and $729,131, respectively for the nine months ended December 31, 2020 and 2019 and 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 three and nine months ended December 31, 2020 and 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

 

  11  
 

 

AMMO, Inc.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

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 three and nine months ended December 31, 2020, the Company’s customers that comprised more than ten percent (10%) of total revenues and accounts receivable were as follows:

 

     

Revenues at

December 31, 2020

    Accounts Receivable  
PERCENTAGES     Three Months Ended     Nine Months Ended     December 31,
2020
    March 31,
2020
 
                           
Customers:                                  
A       15.9 %     15.0 %     - %     26.5 %
B       -       -       14.6 %     -  
        15.9 %     15.0 %     14.6 %     26.5 %

 

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 Three Months Ended     For the Nine Months Ended  
    December 31, 2020     December 31, 2019     December 31, 2020     December 31, 2019  
Ammunition Sales   $ 12,834,490     $ 1,246,414     $ 27,987,438     $ 3,703,669  
Ammunition Casings Sales     3,785,754       1,525,595       10,305,648       6,321,475  
Total Sales   $ 16,620,244     $ 2,772,009     $ 38,293,086     $ 10,025,144  

 

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.

 

Advertising Costs

 

We expense advertising costs as they are incurred in selling and marketing expenses of operating expenses. We incurred advertising of $51,700 and $190,277 for the three and nine months ended December 31, 2020, respectively and we incurred advertising expenses of $128,709 and $422,948 for the three and nine months ended December 31, 2019, respectively.

 

Inventories

 

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

 

  12  
 

 

AMMO, Inc.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

Property and Equipment

 

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

 

Compensated Absences

 

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

 

Stock-Based Compensation

 

We account for stock-based compensation at fair value in accordance with ASC 718. There were 137,916 shares of common stock issued to employees, members of the Board of Directors, and members of the Advisory Committee for services during the quarter ended December 31, 2020.

 

Effective April 1, 2020, we entered into an employment agreement with Robert D. Wiley, Chief Financial Officer, that included, among other provisions, an equity grant of 33,333 shares of restricted common stock each year for three years that vests at the rate of 8,333 shares per quarter. The compensation value is being recognized on a straight-line basis each year over the three-year period covered by the agreement.

 

Effective June 18, 2020, we entered into an employment agreement with Steve Hilko, Chief Operating Officer, that included, among other provisions, an equity grant of 33,333 shares of restricted common stock each year for three years that vests at the rate of 8,333 shares per quarter. The compensation value is being recognized on a straight-line basis each year over the three-year period covered by the agreement.

 

From September 2018 through December 2020, we entered into eight separate employment agreements that included in total, among other provisions, equity grants of 540,382 shares of restricted common stock that vests annually over the next three years. The total compensation value 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 December 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.

 

  13  
 

 

AMMO, Inc.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

Contingencies

 

Certain conditions may exist as of the date the condensed consolidated financial statements are issued that may result in a loss to us but will only be resolved when one or more future events occur or fail to occur. We assess such contingent liabilities, and such assessment inherently involves an exercise of judgment. In assessing loss contingencies related to legal proceedings that are pending against us or unasserted claims that may result in such proceedings, we evaluate the perceived merits of any legal proceedings or unasserted claims and the perceived merits of the amount of relief sought or expected to be sought therein.

 

If the assessment of a contingency indicates that it is probable that a material loss has been incurred and the amount of the liability is reasonably estimated, the estimated liability would be accrued in our condensed consolidated financial statements. If the assessment indicates that a potentially material loss contingency is not probable but is reasonably possible, or is probable but cannot be estimated, then the nature of the contingent liability, together with an estimate of range of possible loss if determinable and material, would be disclosed. On September 24, 2019, the Company received notice that a former employee that had voluntarily terminated filed a complaint against the Company, and certain individuals, with the U.S. Department of Labor (“DOL”). The Complaint in alleges that the individual reported potential violations of SEC rules and regulations by management and that as a result of such disclosures, the individual experienced a hostile work environment; that the Company lacks sufficient controls internal controls, and that the individual was the victim of retaliation and constructive discharge after being removed as a director by majority vote of the shareholders. The claims were investigated by a newly appointed Special Investigative Committee made of up independent directors represented by special independent legal counsel. The Special Investigative Committee and legal counsel found the material claims were unsubstantiated, including those concerning alleged SEC violations, and recommended enhancements to certain corporate governance charter documents and processes which the Company promptly implemented. The matter is currently the subject of administrative investigation by the DOL via the Occupational Safety and Health Administration. The Company filed a timely Position Statement with the DOL in October of 2019 in response to the Complaint. The Company disputes the allegations of wrongdoing and believes the matters raised in the Complaint are without merit and therefore has and will continue to aggressively defend its interests in this matter. On February 4, 2020, the Company filed suit against a former employee for violating merger agreements with SW Kenetics, Inc., employment agreements, and by unlawfully retaining property belonging to the Company following their termination. On March 11, 2020, the former employee filed a counterclaim against the Company citing breach of contract, breach of implied covenant of good faith and fair dealing, unjust enrichment, and declaratory judgement. The Company plans to aggressively pursue its offensive claims in order to recover economic damages as a result of its claims while seeking dismissal of the counterclaim. There were no other known contingencies at December 31, 2020.

 

  14  
 

 

AMMO, Inc.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

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 8,910,205 shares of common stock. All weighted average numbers were adjusted for the reverse stock split and merger transaction. Due to the loss from operations in the three and nine months ended December 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 8,910,205 and 8,629,432 for the nine months ended December 31, 2020 and 2019, respectively, from the weighted average diluted common shares outstanding because their inclusion would have been antidilutive.

 

NOTE 4 – INVENTORIES

 

At December 31, 2020 and March 31, 2020, the inventory balances are composed of:

 

    December 31, 2020     March 31, 2020  
Finished product   $ 351,171     $ 1,916,417  
Raw materials     7,010,713       1,771,006  
Work in process     2,186,707       720,650  
                 
    $ 9,548,591     $ 4,408,073  

 

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.

 

  15  
 

 

AMMO, Inc.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

Property and equipment consisted of the following at December 31, 2020 and March 31, 2020:

 

    December 31, 2020     March 31, 2020  
Leasehold Improvements   $ 126,558     $ 118,222  
Furniture and Fixtures     87,790       87,790  
Vehicles     103,511       103,511  
Equipment     23,411,433       19,578,035  
Tooling     126,190       126,190  
Construction in Progress     649,293       1,093,262  
Total property and equipment   $ 24,504,775     $ 21,107,010  
Less accumulated depreciation     (5,100,920 )     (3,060,681 )
Net property and equipment     19,403,855       18,046,329  

 

Depreciation Expense for the three and nine months ended December 31, 2020 and 2019 totaled $731,183, $677,407, $2,110,125, and $1,887,573, respectively.

 

NOTE 6 – FACTORING LIABILITY

 

On July 1, 2019, we entered into a Factoring and Security Agreement with Factors Southwest, LLC (“FSW”). FSW may purchase from time to time the Company’s Accounts Receivables with recourse on an account by account basis. The twenty-four month agreement contains a maximum advance amount of $5,000,000 on 85% of eligible accounts and has an annualized interest rate of the Prime Rate published from time to time by the Wall Street Journal plus 4.5%. The agreement contains fee of 3% ($150,000) of the Maximum Facility assessed to the Company. Our obligations under this agreement are secured by present and future accounts receivables and related assets, inventory, and equipment. The Company has the right to terminate the agreement, with 30 days written notice, upon obtaining a non-factoring credit facility. This agreement provides the Company with the ability to convert our account receivables into cash. As of December 31, 2020, the outstanding balance of the Factoring Liability was $2,290,598. Interest expense recognized on the Factoring Liability was $313,747, including $50,000 of amortization of the commitment fee. Interest expense for the comparable period ending December 31, 2019 was $116,196, including $62,500 of amortization of the commitment fee.

 

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

 

NOTE 7 – INVENTORY CREDIT FACILITY

 

On June 17, 2020, we entered into a Revolving Inventory Loan and Security Agreement with FSW. FSW will establish a revolving credit line, and make loans from time to time to the Company for the purpose of providing capital. The twenty-four month agreement secured by our inventory, among other assets, contains a maximum loan amount of $1,750,000 on eligible inventory and has an annualized interest rate of the greater of the three-month LIBOR rate plus 3.09% or 8%. The agreement contains a fee of 2% of the maximum loan amount ($35,000) assessed to the Company. On July 31, 2020, the Company amended its Revolving Loan and Security Agreement to increase the maximum inventory loan amount to $2,250,000. As of December 31, 2020, the outstanding balance of the Inventory Credit Facility was $2,250,000. Interest expense recognized on the Inventory Credit Facility was $118,202, including $24,962 of amortization of the annual fee. There was no interest expense for the comparable period ending December 31, 2019 as this transaction was not yet consummated.

 

NOTE 8 – LEASES

 

We lease office, manufacturing, and warehouse space in Scottsdale and Payson, AZ and Manitowoc, WI under contracts we classify as operating leases. None of our leases are financing leases. The Payson lease has an option to renew for five years. As of December 31, 2020, we are fairly certain that we will exercise the renewal option, and we have included such renewal option in the lease liabilities and the disclosures herein. The Scottsdale lease does not include a renewal option. As of June 26, 2020, the Company entered into an amended agreement that modified the Manitowoc lease to monthly payments of $34,071 and decrease the term to March 2025. The agreement does not contain a renewal option. Accordingly, we modified our Right of Use Assets and Operating Lease Liabilities by $737,680 at June 30, 2020.

 

As of December 31, 2020, the total Right of Use Assets and Operating Lease Liabilities on the Balance Sheet were $2,371,096 and $1,913,304, respectively. As of March 31, 2020, the total Right of Use Assets and Operating Lease Liabilities on the Balance Sheet were $3,431,746 and $3,107,911, respectively. The Operating Lease Liabilities were net of current portions of $510,103 at December 31, 2020 and $375,813 at March 31, 2020.

 

Consolidated lease expense for the three and nine months ended December 2020 was $217,140 and $609,250, respectively, including $179,487 and $534,781 of respective operating lease expense and $37,653 and $74,468 of respective other lease associated expenses such as association dues, taxes, utilities, and other month to month rentals.

 

  16  
 

 

AMMO, Inc.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

The weighted average remaining lease term and weighted average discount rate for operating leases were 4.2 years and 10.0%, respectively.

 

Futures minimum lease payments under non-cancellable leases as of December 31, 2020 are as follows:

 

Years Ended March 31,      
2021 (1)   $ 181,987  
2022     732,111  
2023     742,108  
2024     684,836  
2025     495,528  
Thereafter     144,460  
      2,981,030  
Less: Amount Representing Interest     (557,023 )
    $ 2,424,007  

 

  (1) This amount represents future lease payments for the remaining three months of fiscal year 2021. It does not include any lease payments for the nine months ended December 31, 2020.

 

NOTE 9 – CONVERTIBLE PROMISSORY NOTES

 

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.

 

  17  
 

 

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 the maturity date a Qualified Financing had not occurred and the Note is not yet convertible under the Voluntary Conversion Option.

 

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.

 

From October 8, 2020 to October 26, 2020, the Company received notices for voluntary conversion for the total outstanding principal ($2,500,000) and interest ($146,104) of the Convertible Promissory Notes and issued 2,157,358 shares of our Common Stock as a result of the conversion. The principal and interest related to the Initial Closing and Final Closing were converted at a conversion prices of $1.21 and $1.26, respectively. Additionally, the Company issued a total of 1,019,121 warrants to purchase shares of our Common Stock at exercise prices ranging from $2.19 to $2.67. The Company recognized $1,198,983 in interest expense as a result of the issuance of warrants. Subsequent to the issuance of the warrants, the exercise prices of the warrants were adjusted to $2.00. As a result the Company recognized $116,511 in interest expense for the change in the valuation of the warrants.

 

Additionally, pursuant to the Subscription Agreements, the Company issued 152,868 warrants to purchase shares of our Common Stock to Joseph Gunnar & Co. LLC with exercise prices ranging from $1.51 to $1.58. The Company has no further obligation with respect to the Convertible Promissory Notes.

 

On November 5, 2020 to November 25, 2020, the Company entered into Convertible Promissory Notes with four (4) accredited investors (the “Investors”), for an aggregate purchase price of $1,959,000 (each a “8% Note,” collectively, the “8% Notes”). The 8% Notes accrue interest at a rate of 8% per annum and mature from November 5, 2022 to November 25, 2022. Additionally, the 8% Notes contain a voluntary conversion mechanism whereby any principal and accrued interest on the 8% Notes, may be converted in holder’s discretion into shares of the Company’s Common Stock at a conversion price of $2.00 per share (“Conversion Price”). If not previously paid in full or converted, on the 180th day following the Maturity Date, the principal and interest due under the 8% Notes shall automatically be converted to common stock shares at the Conversion Price The 8% Notes contain customary events of default (each an “Event of Default”). If an Event of Default occurs, the outstanding principal amount of the 8% Notes, plus accrued but unpaid interest, and other amounts owing with respect to the 8% Notes will become, at the 8% Note holder’s election, due and payable in cash. The Company performed analysis at the 8% Notes respective commitment dates and determined the 8% Notes contained beneficial conversion features. The Company recorded the $208,855 beneficial conversion feature as a note issuance cost. The Company recognized $17,000 in interest expense related to the convertible promissory notes in the current period.

 

On December 5, 2020, $1,020,000 of the 8% Notes were converted into 510,000 shares of common stock. There were $939,000 in 8% Notes remaining as of December 31, 2020. The Company recognized $73,313 in interest expense for the unamortized issuance costs upon conversion.

 

Subsequent to December 31, 2020, the remaining $939,000 in principal balance and $17,247 in accrued interest were converted into 478,123 shares of common stock at a conversion price of $2.00 per share.

 

  18  
 

 

AMMO, Inc.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

NOTE 10 – NOTES PAYABLE – RELATED PARTY

 

In connection with the acquisition of the casing division of Jagemann Stamping Company, a $10,400,000 promissory note was executed. The promissory note, under which $500,000 was paid on March 25, 2019 using funds raised for the acquisition, had a remaining balance at March 31, 2019 of $9,900,000. On April 30, 2019, the original due date of the note was subsequently extended to April 1, 2020. The note bears interest per annum at approximately 4.6% payable in arrears monthly. In May of 2019, the Company paid $1,500,000 on the balance of the note. The note was secured by all the equipment purchased from Jagemann Stamping Company.

 

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

 

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

 

As a result of the Settlement Agreement, the Company agreed to not receive $1,000,000 in Construction in Progress that the parties had previously agreed to exchange. As a result, the Company recognized a loss in operating expenses for the nine months ended December 31, 2020.

 

On November 5, 2020, the Company paid $6,000,000 to JSC allocated as follows: (i) payment in full of Note A, representing the balance due from the Company to JSC relating to the acquisition of Jagemann Munition Components in March 2019 and (ii) $592,982 remitted in partial payment of Note B, resulting in the parties’ execution of Amended Note B which has a starting principal balance of $1,687,664 (“Amended Note B”). The Amended Note B principal balance carries a 9% per annum interest rate and is amortized equally over the thirty six (36) month term. As a result of the payment in full of Note A JSC shall release the accompanying security interest in Company assets which secured Note A. Concurrently, upon entry into Amended Note B, JSC and the Company entered into the First Amendment to General Business Security Agreement to reflect a revised list of collateral in which JSC has a security interest.

 

  19  
 

 

AMMO, Inc.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

The total interest expense recognized on Note A was $84,248 and $216,160, respectively for the three and nine months ended December 31, 2020. The total interest expense recognized on the original Note B was $32,413 and $62,876, respectively, for the three and nine months ended December 31, 2020

 

The Company’s balance of Amended Note B was $1,639,016 at December 31, 2020. The accompany recognized $16,455 in interest expense on Amended Note B for the three and nine months ended December 31, 2020.

 

Subsequent to December 31, 2020, the Company repurchased 1,000,000 shares of the Company’s common stock issued to JSC at a price of $1.50 per share pursuant to the Amended APA.

 

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 June 30, 2020 was $260,000. 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 $18,195 in principal payments during the nine months ended December, 2020 and the Note was paid in full in July of 2020. We recognized $10,327 of interest expenses related to the note during the nine months ended December 31, 2020.

 

In December of 2019, the Company entered into a Promissory Note of $90,000 with Fred Wagenhals, the Company’s Chief Executive Officer and Chairman of the Board of Directors. The Note originally matured on June 12, 2020 and had an interest rate at the applicable LIBOR Rate. The promissory note has since been amended and the balance at June 30, 2020 was $131,536 and the amended maturity date is September 18, 2020. The Company made $25,000 in principal payments during the nine months ended December 31, 2020 and the Note was paid in full in July of 2020. The amended note bears interest at 1.25% per month. We recognized $5,350 of interest expense on the note for the nine months ended December 31, 2020.

 

On September 23, 2020, the Company and Enlight entered into a promissory note (the “Forest Street Note”) with Forest Street, LLC (“Lender”), an Arizona limited liability company wholly owned by our current Chief Executive Officer, Fred Wagenhals, for the principal sum of Three Million Five Hundred Thousand & 00/100 Dollars ($3,500,000.00), which accrues interest at 12% per annum. The Note has a maturity date of September 23, 2022.

 

Pursuant to the terms of the Forest Street Note, the Company and Enlight (collectively, the borrower pursuant to the note) shall pay Lender; (i) on a monthly basis, beginning October 23, 2020, all accrued interest (only), (ii) on a quarterly basis, a monitoring fee of 1% of the principal amount and then accrued interest; and (iii) on the maturity date, the remaining outstanding principal balance of the Loan, together with all unpaid accrued interest thereon.

 

On December 14, 2020, the Company entered into a Debt Conversion Agreement with the Lender Pursuant to the Agreement, the Company and Forest Street agreed to convert $2,100,000.00 of the Note’s principal into one million (1,000,000) shares of the Company’s common stock. The share issuance occurred on December 15, 2020. As a result of the Debt Conversion Agreement the outstanding balance on December 31, 2020 was $1,400,000. The Company recognized $137,666 in interest expense related to the Forest Street Note for the nine months ended December 31, 2020.

 

Subsequent to December 31, 2020, the Company paid the remaining $1,400,000 in principal and accrued interest of the Forest Street Note.

 

  20  
 

 

AMMO, Inc.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

NOTE 11 – PAYCHECK PROTECTION NOTES PAYABLE

 

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 Paycheck Protection Notes provide for an interest rate of 1.00% per year and matures two years after the issuance date. Principal and accrued interest are payable monthly in equal installments commencing on the date that is six months after the date funds are first disbursed on the loan and continuing through the maturity date, unless the Paycheck Protection Notes are forgiven. To be available for loan forgiveness, the Paycheck Protection Note may only be used for payroll costs, costs related to certain group health care benefits and insurance premiums, rent payments, utility payments, mortgage interest payments and interest payments on any other debt obligation that existed before February 15, 2020.

 

On November 11, 2020, the Company applied for forgiveness of the $1.0 million Paycheck Protection Program Notes as these funds were used for qualified expenses. No assurance can be given that the Company will be granted forgiveness of these Paycheck Protection Program Notes.

 

On November 23, 2020, the Company received forgiveness in full on the Paycheck Protection Note Payable from Western State Bank. The Company has recognized the forgiven amount in Other Income.

 

Subsequent to December 31, 2020, the Company received forgiveness in full on the Paycheck Protection Note Payable from BMO Harris.

 

NOTE 12 – CAPITAL STOCK

 

During the nine month period ended December 31, 2020, we issued 17,293,906 shares of common stock as follows:

 

  11,512,143 shares were sold to investors for $23,564,619
  2,667,358 shares were issued for the conversion of convertible promissory notes for $3,874,959
  1,096,939 shares were issued to investors for exercised warrants valued for $2,288,878
  160,274 shares were issued for cashless exercise of 287,657 warrants
  1,000,000 shares were issued pursuant to a debt conversion agreement for $2,100,000
  58,336 shares were issued for services provided to the Company value at $87,500
  465,081 shares valued at $716,589 were issued to employees, members of the Board of Directors, and members of the Advisory Committee as compensation
  24,000 shares were issued to investors for $48,000 in liquidation damage fees
  309,775 shares were recorded as a stock subscription receivable for exercised warrants for $664,975

 

On November 30, 2020, the Company entered into an underwriting agreement (the “Underwriting Agreement”) with Alexander Capital, L.P. (“Alexander Capital”), as representative of the underwriters listed therein (the “Underwriters”), pursuant to which the Company agreed to sell to the Underwriters in a firm commitment underwritten public offering (the “Offering”) an aggregate of 8,564,285 shares of the Company’s common stock, par value $0.001 per share (the “Common Stock”), at a public offering price of $2.10 per share. In addition, the Underwriters were granted an over-allotment option (the “Over-allotment Option”) for a period of 45 days to purchase up to an additional 1,284,643 shares of Common Stock. The Offering closed on December 3, 2020.

 

  21  
 

 

AMMO, Inc.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

The Company conducted the Offering pursuant to a Registration Statement on Form S-1, as amended, which was declared effective by the United States Securities and Exchange Commission on November 30, 2020 (the “Registration Statement”).

 

The net proceeds to the Company from the Offering, after deducting the underwriting discount, the underwriters’ fees and expenses and the Company’s estimated Offering expenses, were $15,850,448.

 

On December 11, 2020, the Company completed the closing of the Over-allotment Option. The Underwriters purchases 1,284,643 shares of the Company’s common stock at the public offering price of $2.10 per share. The net proceeds to the Company from the Offering, after deducting the underwriting discount, were $2,467,799.

 

The Underwriting Agreement contains customary representations, warranties and agreements by the Company, customary conditions to closing, indemnification obligations of the Company and the Underwriters, including for liabilities under the Securities Act of 1933, as amended, other obligations of the parties and termination provisions. In addition, pursuant to the terms of the Underwriting Agreement and related “lock-up” agreements, the Company (for a period of one year after the date of the Underwriting Agreement), and each director and executive officer of the Company (for a period of six months after the date of the final prospectus relating to the Public Offering), have agreed, subject to customary exceptions, not to sell, transfer or otherwise dispose of securities of the Company, without the prior written consent of Alexander Capital.

 

On December 3, 2020, pursuant to the Underwriting Agreement, the Company entered into an Underwriter’s warrant agreement (the “Underwriters’ Warrant Agreement”) with the Underwriters and certain affiliates of the Underwriters. Pursuant to the Underwriters’ Warrant Agreement, the Company provided the Underwriters and certain affiliates of the Underwriters with a warrant to purchase 428,215 shares of Common Stock in the aggregate. Such warrant may be exercised beginning on May 29, 2021 (the date that is 180 days after the date on which the Registration Statement became effective) until November 30, 2025 (the date that is five years after the date on which the Registration Statement became effective). The initial exercise price of the Underwriters’ Warrant Agreement is $2.63 per share.

 

Pursuant to subscription agreements with certain investors, the Company agreed to file a registration statement for shares purchased by investors on or before the 75th day following closing. The Company was unable to meet this obligation and is required to pay a liquidated damage fee to investors on a monthly basis to avoid default until such registration statement is filed. Accordingly, the Company paid $245,500 in the current period, of which $48,000 was paid by the issuance of 24,000 share of common stock at a price per share of $2.00, and accrued $84,300 for fees payable subsequent to December 31, 2020. The Company recorded these fees as issuance costs in Other Expenses.

 

At December 31, 2020, 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, 2020     8,504,372     $ 2.10       3.60  
Granted     2,100,204       2.09       4.90  
Exercised     (1,694,371 )     2.01       -  
Forfeited or cancelled     -       -       -  
Outstanding at December 31, 2020     8,910,205     $ 2.11       3.14  
Exercisable at December 31, 2020     8,481,990     $ 2.09       3.05  

 

As of December 31, 2020, we had 8,910,205 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 838,590 shares of Common Stock at an exercise price of $1.65 per share until April 2025; (2) warrants to purchase 5,098,329 shares of our Common Stock at an exercise price of $2.00 per share consisting of 71% of the warrants until April 2023, 8% until August 2024, and 21% until December 2025; (3) warrants to purchase 2,545,071 shares of Common Stock at an exercise price of $2.40 until September 2024; and (4) warrants to purchase 428,215 shares of Common Stock at an exercise price of $2.63 until November 2025, but not exercisable before May 29, 2021.

 

  22  
 

 

AMMO, Inc.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

NOTE 13 – INCOME TAXES

 

As of December 31, 2020, we had net operating loss carryforwards of approximately $33 million which will expire beginning at the end of 2036. A valuation allowance has been provided for the deferred tax asset as it is uncertain whether the Company will have future taxable income.

 

The Company’s effective tax rates were 0% and 0% for the three and nine months ended December 31, 2020 and 2019, respectively. During the nine months ended December 31, 2020 and 2019, the effective tax rate differed from the U.S. federal statutory rate primarily due to the change in the valuation allowance.

 

The Company has never had an Internal Revenue Service audit; therefore, the tax periods ended December 31, 2016, December 31, 2017, and March 31, 2018, 2019, and 2020 are subject to audit.

 

NOTE 14 – SUBSEQUENT EVENTS

 

From January 1, 2021 to February 5, 2021, the Company issued shares of its Common Stock for the exercise of warrants. There were 4,194,623 shares of Common Stock issued for warrants exercised at per share prices ranging from $2.00 to $2.40 for an aggregate value of $9,014,006. Additionally, there were 543,589 shares of Common Stock issued pursuant to cashless exercises of 974,076 warrants with exercise prices ranging from $1.65 to $2.00.

 

On January 1, 2021, The Company issued 70,000 shares of Common Stock to employees as compensation for a total value of $122,500 or $1.75 per share. Subsequent to December 31, 2020, the Company issued 881,250 shares of Common Stock for services at per share prices ranging from $1.75 to $2.00 for a total value of $1,612,500.

 

On February 4, 2020, the Company entered into a Settlement Agreement and Release with a third party. Per the terms of the agreement, the Company issued 150,000 warrants with an exercise price of $6.72 and paid $125,000. The agreement releases both the Company and the third party from all claims or disputes that have arisen surrounding previous agreements.

 

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

 

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

 

FORWARD-LOOKING STATEMENTS

 

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

 

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

 

  24  
 

 

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. As of December 31, 2020, the Company has made $350,000 in payments to SW Kenetics, Inc. in connection with the completion of a milestone. As of December 31, 2020, 1,550,134 shares remain subject to clawback provisions.

 

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

 

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

 

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

 

  25  
 

 

Our History

 

Our ammunition manufacturing business has been fully operational for three 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 three and nine months ended December 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. We continue to focus on growing our top line revenue, and streamlining our operations, we did experience an increase in our gross profit margin for the three and nine months ended December 31, 2020. This was the result of a significant increase in sales allowing us to cover a greater percentage of our fixed manufacturing costs, which include our non-cash amortization and depreciation expense.

 

The following table presents summarized financial information taken from our condensed consolidated statements of operations for the three and nine months ended December 31, 2020 compared with the three and nine months ended December 31, 2019:

 

    For the Three Months Ending     For the Nine Months Ending  
    December 31, 2020     December 31, 2019     December 31, 2020     December 31, 2019  
    (Unaudited)     (Unaudited)     (Unaudited)     (Unaudited)  
Net Sales   $ 16,620,244     $ 2,772,009     $ 38,293,086     $ 10,025,144  
Cost of Products Sold     13,278,338       3,662,196       32,590,149       12,286,591  
Gross Margin     3,341,906       (890,187 )     5,702,937       (2,261,447 )
Sales, General & Administrative Expenses     3,770,713       1,759,907       10,621,873       7,280,925  
Loss from Operations     (428,807 )     (2,650,094 )     (4,918,936 )     (9,542,372 )
Other income (expense)                                
Other income (expense)     (1,477,630 )     (214,328 )     (2,429,915 )     (607,710 )
Loss before provision for income taxes   $ (1,906,437 )   $ (2,864,422 )   $ (7,348,851 )   $ (10,150,082 )
Provision for income taxes     -       -       -       -  
Net Loss   $ (1,906,437 )   $ (2,864,422 )   $ (7,348,851 )   $ (10,150,082 )

 

Non-GAAP Financial Measures

 

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

 

Adjusted EBITDA

 

    For the Three Months Ended     For the Nine Months Ended  
      31-Dec-20       31-Dec-19       31-Dec-20       31-Dec-19  
                                 
Reconciliation of GAAP net income to Adjusted EBITDA                                
Net Loss   $ (1,906,437 )   $ (2,864,422 )   $ (7,348,851 )   $ (10,150,082 )
Depreciation and amortization     1,224,130       883,692       3,588,966       2,957,337  
Loss on Jagemann Munition Components     -       -       1,000,000       -  
Excise Taxes     1,201,841       138,529       2,707,534       374,132  
Interest expense, net     1,938,630       214,326       2,704,315       607,710  
Employee stock awards     240,853       182,250       716,589       688,750  
Stock grants     65,455       168,363       213,130       548,057  
Stock for services     87,500       72,000       87,500       272,000  
Other income, net     (461,000 )     -       (274,400 )     -  
Contingent consideration fair value     (30,748 )     -       (88,106 )     -  
Adjusted EBITDA   $ 2,360,224     $ (1,205,262 )   $ 3,306,677     $ (4,702,096 )

 

  26  
 

 

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

 

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

 

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

 

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

 

  Employee stock awards and stock grants expense has been, and will continue to be for the foreseeable future, a significant recurring expense in the Company and an important part of our compensation strategy;
  the assets being depreciated or amortized may have to be replaced in the future, and the non-GAAP financial measures do not reflect cash capital expenditure requirements for such replacements or for new capital expenditures or other capital commitments; and
  non-GAAP measures do not reflect changes in, or cash requirements for, our working capital needs
  other companies, including companies in our industry, may calculate the non-GAAP financial measures differently or not at all, which reduces their usefulness as comparative measures

 

Because of these limitations, you should consider the non-GAAP financial measures alongside other financial performance measures, including our net loss and our other financial results presented in accordance with GAAP.

 

Net Sales

 

The following table shows our net sales by proprietary ammunition versus standard ammunition for the three and nine months ended December 31, 2020 and 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.

 

  27  
 

 

    For the Three Months Ending     For the Nine Months Ending  
    December 31, 2020     December 31, 2019     December 31, 2020     December 31, 2019  
Proprietary Ammunition   $ 1,464,202     $ 536,595     $ 4,973,857     $ 1,410,444  
Standard Ammunition     11,370,288       709,819       23,013,581       2,293,225  
Ammunition Casings     3,785,754       1,525,595       10,305,648       6,321,475  
Total Sales   $ 16,620,244     $ 2,772,009     $ 38,293,086     $ 10,025,144  

 

Sales for the three and nine months ended December 31, 2020 increased 500% and 282% or approximately $13.8 million and $28.3 million, over the three and nine months ended December 31, 2019. This increase was the result of approximately $10.7 million and $20.7 million of respective increased sales in bulk pistol and rifle ammunition, an increase of approximately $920,000 and $3.6 million of respective sales of Proprietary Ammunition and an increase of approximately $2.3 million and $4.0 million of sales from our recently acquired casing operations. Management expects the sales of Proprietary Ammunition to outpace the sales of our Standard Ammunition.

 

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

 

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

 

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 July 21, 2020, we renewed our annual registration with the International Traffic in Arms Regulations (ITAR), which remains valid through the report date. This permits the Company to export and broker ammunition and other controlled items covered under ITAR.

 

Cost of Goods Sold

 

Cost of goods sold increased by approximately $9.6 million and $20.3 million from $3.7 million and $12.3 million to $13.3 million and $32.6 million, respectively for the three and nine months ended December 31, 2020 compared comparable periods ended in 2019. This was the result of a significant increase in net sales as well increases 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. As a percentage of sales, cost of goods sold decreased by 39.5% and 30.6% when comparing the three and nine months ended December 31, 2020 to the three and nine months ended December 31, 2019.

 

Gross Margin

 

Our gross margin percentage increased to 20.1% and 14.9% from -32.1% and -22.6% during the three and nine months ended December 31, 2020 as compared to the same period in 2019. This was a result of increased sales allowing us to cover a greater percentage of our fixed manufacturing costs, which include our non-cash amortization and depreciation expense.

 

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We believe as we continue to grow sales through new markets and expanded distribution that our gross margins will also increase, 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 three and nine months ended December 31, 2020, our operating expenses increased by approximately $2.0 million and $3.3 million over the three and nine months ended December 31, 2019, and decreased as a percentage of sales from 63.5% and 72.6% for the three and nine months ended December 31, 2019 to 22.7% and 27.7% for the three and nine months ended December 31, 2020. The increase was related to a non-cash adjustment to recognize a loss on $1,000,000 of Construction in Progress that the Company had previously agreed to exchange with Jagemann Stamping Company, as well as increases in Operating Expenses from our increases in Net Sales and from our efforts to uplist to Nasdaq. Our operating expenses included of non-cash depreciation and amortization expense of approximately $417,000 and $1.2 million for the three and nine months ended December 31, 2020. Our operating expenses consisted of cost for the expansion our sales and support team, stock compensation expense associated with issuance of our Common Stock in lieu of cash compensation for employees, board members, and key consultants for the organization during the period, and trade show and marketing costs associated with introducing our lines of ammunition. Operating expenses for the nine months ended December 31, 2020 and 2019 periods included noncash expenses of approximately $3.2 million and $2.2 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 Nasdaq. We expect to see administrative expenditures to continue to decrease as a percentage of sales in the 2021 fiscal year, as we leverage our work force and expand our sales opportunities.

 

During the three months and nine months ended December 31, 2020, our selling and marketing expenses increased by approximately $304,000 and $496,000. The increase was primarily related to commission on the increases in the sale of our products resulting of approximately $446,000 and $922,000 of increase in commissions and a reduction in our advertising expenses of $77,000 and $232,000 for the three and nine months ended December 31, 2020 in comparison to the comparable prior periods.

 

Our corporate general & administrative expenses increased approximately $908,000 and $1,020,000 in the three and nine months ended December 31, 2020 from the comparable prior period mainly due to increased general corporate expenses and increased professional and legal fees of $516,000 and $461,000 for the three and nine months ended December 31, 2020 in comparison to the prior period due to the increase in sales activity and our successful efforts of uplisting the Company to Nasdaq concurrent with a public equity offering.

 

Employee salaries and related expenses increased approximately $326,000 and $431,000 for the three and nine months ended December 31, 2020 compared to the comparable period ended in 2019. The increase for the three and nine months ended December 31, 2020, when compared to the prior period, was primary related to an increase in salaries and wages of approximately $280,000 and $660,000 due to our expanded work force and a decrease of stock compensation of $39,000 and $307,000.

 

Depreciation and amortization expenses for the three and nine months ended December 31, 2020 increased by approximately $473,000 and $394,000 from the comparable prior periods due to reduced amortization expenses in connection with the adjusted purchase price of our newly acquired subsidiary, Jagemann Munition Components.

 

Interest and Other Expenses

 

For the three and nine months ended December 31, 2020, interest expense increased by approximately $1.7 million and $2.1 million compared with the comparable three and nine months ended December 31, 2019. The change from the prior periods was mainly due to approximately $1.3 million of non-cash interest expense recognized on the issuance of warrants to purchase common stock as well as increases in interest expense and debt discount amortization related to Note Payables Related Party, Note Payable, and Convertible Promissory Notes. For the three and nine months ended December 31, 2020, the Company recorded approximately $461,000 and $274,000 of other income primarily related the forgiveness of the company Paycheck Protection Note and for liquidation damage fees for being unable to meet agreed upon registration statement timing obligations. There were no other expenses in the comparable prior periods.

 

Net Loss

 

As a result of higher production, selling, and payroll expenses, the loss on Jagemann Munition Components, and non-cash interest expense recognized on the issuance of warrants to purchase common stock, we ended the three and nine months ended December 31, 2020 with a net loss of approximately $1.9 million and $7.3 million compared with a net loss of approximately $2.9 million and $10.2 million for the three and nine months ended December 31, 2019.

 

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

 

Liquidity and Capital Resources

 

As of December 31, 2020, we had $19,007,893 of cash and cash equivalents, an increase of $18,123,619 from March 31, 2020.

 

Working Capital is summarized and compared as follows:

 

    December 31,
2020
    March 31,
2020
 
Current assets   $ 36,502,859     $ 9,157,110  
Current liabilities     14,122,250       12,225,609  
    $ 22,380,609     $ (3,068,499 )

 

Changes in cash flows are summarized as follows:

 

Operating Activities

 

For the nine months ended December 31, 2020, net cash used in operations totaled $5,250,212. This was primarily the result of a net loss of $7,348,851, increases in our period end inventories and accounts receivable of $5,140,518 and $3,927,054, respectively, increases in accounts payable and accrued liabilities of $1,842,472 and $2,332,819, respectively, and a loss on Jagemann Munition Components of $1,000,000. The cash used in operations were partially offset by the benefit of non-cash expenses for depreciation and amortization of $3,588,966, non-cash interest expensed recognized for the issuance of warrants of $1,315,494, employee stock compensation of $716,589, and stock grants totaling $213,130.

 

For the nine months ended December 31, 2019, net cash used in operations totaled $3,103,454. This was primarily the result of a net loss of $10,150,082, increases in our period end accounts payables and inventories of $2,357,708 and $250,383, respectively, and increases accrued liabilities of $271,063. The cash used in operations were partially offset by the benefit of non-cash expenses for depreciation and amortization of $2,957,337, employee stock compensation of $688,750, stock issued for services of $272,000, and stock grants totaling $548,058.

 

Investing Activities

 

During the nine months ended December 31, 2020, we used $4,493,051 in net cash for investing activities to purchase fixed assets such as new production equipment.

 

During the three months ended December 31, 2019, we used $356,022 in net cash for investing activities to purchase fixed assets such as new production equipment and to acquire end cap displays for the sale of our product at retailers.

 

Financing Activities

 

During the nine months ended December 31, 2020, net cash provided by financing activities was $27,866,882. This was the net effect of $23,564,619 of proceeds from the sale of common stock net of $3,344,436 of issuance costs, $3,500,000 of proceeds from a related party note, $4,000,000 of proceeds from a note payable, $2,250,000 generated from our Inventory Credit Facility, $2,288,878 was generated from common stock issued for exercised warrants, $1,959,000 from the issuance of convertible promissory notes, and $1,051,985 proceeds from our paycheck protection program notes payable. Additionally, $26,079,000 was generated from accounts receivable factoring, which was offset by payments of $25,794,381. $7,235,312 of cash was used for payments on related party notes payable, and $452,471 toward our insurance premium notes payable.

 

  30  
 

 

We financed our operations primarily from the issuance of equity instruments. During the nine months ended December 31, 2019, net cash provided by financing activities was $1,409,100. 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. Additionally, $936,750 was generated from accounts receivable factoring and $415,000 of cash was generated from the issuance of a related party note payable. These increases to our financing activities were offset by payment of $1,500,000 on the related party notes payable, $322,209 toward our insurance premium note payable and a $300,000 payment of our Contingent Consideration Payable.

 

Liquidity and Capital Resources

 

Existing working capital, cash used in operations, bank borrowings, and sales of equity and debt securities are expected to be adequate to fund our operations over the next year. Generally, we have financed operations to date through the proceeds of stock sales, bank financings, and related-party notes.

 

We believe financing will be available, both through conventional financing relationships and through the continued sales of our Common Stock. However, there is no assurance that such funding will be available on terms acceptable to us or at all. We believe that our current cash on hand, coupled with alternative sources of funding, will be sufficient to satisfy intended capital expenditures, potential acquisitions and general liquidity requirements through at least the next twelve months.

 

Off-Balance Sheet Arrangements

 

As of December 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.

 

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 condensed consolidated financial statements include the valuation of allowances for doubtful accounts, valuation of deferred tax assets, inventories, useful lives of assets, intangible assets, and stock-based compensation.

 

  31  
 

 

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 December 31, 2020, and March 31, 2020, 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 deferred 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 three months ended December 31, 2020 and 2019, we recognized $1,201,841 and $138,529 respectively, in excise taxes. During the nine months ended December 31, 2020 and 2019, we recognized $2,707,534 and $374,132, 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 December 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.

 

  32  
 

 

Income Taxes

 

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

 

Stock-Based Compensation

 

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

 

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

 

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

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

 

ITEM 4. CONTROLS AND PROCEDURES

 

Evaluation of Disclosure Controls and Procedures

 

We maintain disclosure controls and procedures, as defined in Rule 13a-15(e) promulgated under the Securities Exchange Act of 1934 (the “Exchange Act”), that are designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms and that such information is accumulated and communicated to our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure. We carried out an evaluation, under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures as of December 31, 2020. Based on the evaluation of these disclosure controls and procedures, our Chief Executive Officer and Chief Financial Officer concluded our disclosure controls and procedures not effective. Our controls were ineffective due to the size of the Company and available resources, there are limited personnel to assist with the accounting and financial reporting function, which results in: (i) a lack of segregation of duties (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. Despite the existence of material weaknesses, The Company believes the financial information presented herein is materially correct and fairly presents the financial position and operating results of the three and nine months ended December 31, 2020, in accordance with U.S. GAAP.

 

Changes in internal controls

 

There were no changes in our internal control over financial reporting, as defined in Rule 13a-15(f) promulgated under the Exchange Act, during the Quarterly period from April 1, 2020 to December 31, 2020, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

  33  
 

 

PART II - OTHER INFORMATION

 

ITEM 1. LEGAL PROCEEDINGS

 

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

 

Please reference the Contingencies section of Note 3 of our Financial Statements for additional disclosure.

 

ITEM 1A. RISK FACTORS

 

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

 

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

 

The authorized capital of the Company is 200,000,000 shares of Common Stock with a par value of $0.001 per share and 10,000,000 shares of Preferred Stock with a $0.001 par value per share. During the Quarterly period from October 1, 2020 to December 31, 2020, The Company issued 50,000 shares of Common Stock for services for $87,500 or $1.75 per share. The Company issued 510,000 shares of Common Stock for the conversion of convertible promissory notes for a total value of $1,020,000.

 

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

 

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

 

None

 

ITEM 4. MINE SAFETY DISCLOSURES

 

Not applicable

 

  34  
 

 

ITEM 5. OTHER INFORMATION

 

None

 

ITEM 6. EXHIBITS

 

Exhibit

Number

  Exhibit
     
2.1   Agreement and Plan of Merger to Redomicile dated December 30, 2016 (Corrected Version) changing our status to Delaware (1)
2.2   Articles of Merger dated December 30, 2016 filed with the California Secretary of State (2)
2.3   Certificate of Merger dated December 21, 2016 filed with the California Secretary of State (2)
2.4   Share Exchange Agreement dated March 17, 2017 (3)
2.5   Agreement and Plan of Merger with SW KENETICS INC. (4)
2.6   Amended and Restated Asset Purchase Agreement dated March 14, 2019 (5)
3.1(a)   Certificate of Incorporation (Amended and Restated) filed with the Delaware Secretary of State on October 24, 2018 (6)
3.2   Bylaws (2)
4.1   Promissory Note with Linda Kay dated November 5, 2020
4.2   Form of Convertible Promissory Note dated November 5, 2020
4.3   Compilation of JSC Agreements dated November 4, 2020
14.0   Code of Business Ethic (7)
14.1   Code of Conduct (7)
31.1   Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 for Fred W. Wagenhals.
31.2   Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 for Rob Wiley.
32.1   Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 for Fred W. Wagenhals.
32.2   Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 for Rob Wiley.

 

101.INS*   XBRL Instance Document
101.SCH*   XBRL Taxonomy Extension Schema Document
101.CAL*   XBRL Taxonomy Extension Calculation Linkbase Document
101.LAB*   XBRL Taxonomy Extension Labels Linkbase Document
101.PRE*   XBRL Taxonomy Extension Presentation Linkbase Document
101.DEF*   XBRL Taxonomy Extension Definition Linkbase Document

 

*Filed Herewith.

 

(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 S-1 filed with the Commission on July 6, 2018.

 

  35  
 

 

SIGNATURES

 

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

 

  AMMO, INC.
     
    /s/ Fred W. Wagenhals
Dated: February 12, 2021 By: Fred W. Wagenhals, Chief Executive Officer

 

    /s/ Rob Wiley
Dated: February 12, 2021 By: Rob Wiley, Chief Financial Officer

 

  36