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, 2019
     
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 13, 2020, there were 45,906,077 shares of $0.001 par value Common Stock outstanding.

 

DOCUMENTS INCORPORATED BY REFERENCE: None.

 

 

 

 
 

 

TABLE OF CONTENTS

 

PART I    
     
ITEM 1: FINANCIAL STATEMENTS 3
  Consolidated Balance Sheets as of December 31, 2019 (Unaudited) and March 31, 2019 3
  Consolidated Statements of Operations (Unaudited) for the three and nine months ended December 31, 2019 and 2018 4
  Consolidated Statement of Shareholders’ Equity (Unaudited) for the nine months ended December 31, 2019 5
  Consolidated Statements of Cash flow (Unaudited) for the nine months ended December 31, 2019 and 2018 6
  Notes to Consolidated Financial Statements (Unaudited) 8
ITEM 2: MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION 16
ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK 27
ITEM 4: CONTROLS AND PROCEDURES 27
     
PART II    
ITEM 1: LEGAL PROCEEDINGS 28
ITEM 1A: RISK FACTORS 28
ITEM 2: UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS 28
ITEM 3: DEFAULTS UPON SENIOR SECURITIES 28
ITEM 4: MINE SAFETY DISCLOSURE 28
ITEM 5: OTHER INFORMATION 28
ITEM 6: EXHIBITS 28
SIGNATURES 29

 

2
 

 

PART I

 

ITEM 1. FINANCIAL STATEMENTS

 

Ammo, Inc.

CONSOLIDATED BALANCE SHEETS

 

    December 31, 2019     March 31, 2019  
    (Unaudited)     (Audited)  
             
ASSETS                
Current Assets:                
Cash   $ 130,870     $ 2,181,246  
Accounts receivable, net of allowance for doubtful account of $5,052 at December 31, 2019 and $129,365 at March 31, 2019     1,258,229       1,225,911  
Due from related parties     16,707       19,565  
Inventories, at lower cost or market, principally average cost method     5,022,980       4,772,597  
Prepaid expenses     291,430       427,551  
Current portion of right of use assets     496,095       -  
Total Current Assets     7,216,311       8,626,870  
                 
Equipment, net of accumulated depreciation of $2,403,717 at December 31, 2019 and $516,144 at March 31, 2019     20,075,395       21,999,787  
                 
Other Assets:                
Deposits     232,114       29,034  
Licensing agreements, net of accumulated amortization of $145,833 at December 31, 2019 and $108,833 at March 31, 2019     104,167       141,667  
Patents, net of accumulated amortization of $437,760 at December 31, 2019 and $134,701 at March 31, 2019     6,636,245       6,939,304  
Other Intangible Assets, net of accumulated amortization of $791,008 at December 31, 2019 and $61,803 at March 31, 2019     2,808,688       5,850,502  
Right of Use Assets - Operating Leases     3,672,676       -  
TOTAL ASSETS   $ 40,745,596     $ 43,587,164  
                 
   LIABILITIES AND SHAREHOLDERS’ EQUITY                
Current Liabilities:                
Accounts payable   $ 4,278,052     $ 1,920,344  
Factoring liability     936,750       -  
Accrued liabilities     784,271       531,434  
Note payable related party     415,000       -  
Current portion of operating lease liability     496,095       -  
Insurance premium note payable     73,508       230,597  
Current portion of note payable related party     5,803,800       1,500,000  
Contingent consideration payable     -       300,000  
Total Current Liabilities     12,787,476       4,482,375  
                 
Long-term Liabilities:                
Convertible promissory notes, net of $24,144 of note issuance costs at March 31, 2019     -       275,856  
Contingent consideration payable     900,000       900,000  
Note payable related party     -       8,400,000  
Operating Lease Liability, net of current portion     3,672,676       -  
Total Liabilities     17,360,152       14,058,231  
                 
Shareholders’ Equity:                
Common stock, $0.001 par value, 200,000,000 shares authorized 45,906,077 at December 31, 2019 and 44,013,075 shares issued and outstanding at March 31, 2019, respectively     45,906       44,013  
Additional paid-in capital     52,940,185       48,935,485  
Accumulated (Deficit)     (29,600,647 )     (19,450,565 )
Total Shareholders’ Equity     23,385,444       29,528,933  
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY   $ 40,745,596     $ 43,587,164  

 

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

 

3
 

 

Ammo, Inc.

CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

 

    For the Three Months Ended December 31,     For the Nine Months Ended
December 31,
 
    2019     2018     2019     2018  
                         
Net Sales                                
Ammunition Sales   $ 1,246,414     $ 489,080     $ 3,703,669     $ 3,201,967  
Casing Sales     1,525,595       -       6,321,475       -  
      2,772,009       489,080       10,025,144       3,201,967  
Cost of Goods Sold, includes depreciation and amortization of $771,463, $97,219 $2,108,269 and $266,321, respectively, and federal excise taxes of $138,529, $44,663, $374,132, and $327,492, respectively     3,662,196       580,166       12,286,591       2,960,262  
Gross Margin     (890,187 )     (91,086 )     (2,261,447 )     241,705  
                                 
Operating Expenses                                
Selling and marketing     238,439       387,660       748,014       967,465  
Corporate general and administrative     730,991       813,723       2,784,984       2,214,560  
Employee salaries and related expenses     846,724       847,729       2,898,932       2,523,468  
Depreciation and amortization expense     (56,247     28,387       848,995       63,157  
Total operating expenses     1,759,907       2,077,499       7,280,925       5,768,650  
Loss from Operations     (2,650,094 )     (2,168,585 )     (9,542,372 )     (5,526,945 )
                                 
Other (Expenses)                                
Gain on bargain purchase     -       1,599,161       -       1,599,161  
Interest (income)/expense     (214,328 )     (43,118 )     (607,710 )     (46,022 )
                                 
(Loss) before Income Taxes     (2,864,422 )     (612,542 )     (10,150,082 )     (3,973,806 )
                                 
Provision for Income Taxes     -       -       -       -  
                                 
Net (Loss)   $ (2,864,422 )   $ (612,542 )   $ (10,150,082 )   $ (3,973,806 )
                                 
(Loss) per share                                
Basic and fully diluted:                                
Weighted average number of shares outstanding     45,767,635       34,247,599       45,267,036       32,372,165  
(Loss) per share   $ (0.06)     $ (0.02 )   $ (0.22 )   $ (0.12 )

 

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

 

4
 

 

Ammo, Inc.

CONSOLIDATED STATEMENT OF SHAREHOLDERS’ EQUITY

For the Nine Months Ended December 31, 2019

(Unaudited)

 

    Common Shares     Additional Paid-In     Accumulated        
    Number     Par Value     Capital     (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  
Fundraising cost     -       -       (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 for period ended December 31, 2019     -       -       -       (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 consolidated financial statements.

 

5
 

 

Ammo, Inc.

CONSOLIDATED STATEMENTS OF CASH FLOW

(Unaudited)

 

    For the Nine Months Ended
December 31,
 
    2019     2018  
Cash flows from operating activities:                
Net (Loss)   $ (10,150,082 )   $ (3,973,806 )
Adjustments to reconcile Net (Loss) to Net Cash provided by operations:                
Depreciation and amortization     2,957,337       329,478  
Debt discount amortization     24,144       11,505  
Stock grants     548,058       496,143  
Stock for services     272,000       22,350  
Employee stock awards     688,750       644,724  
Gain on bargain purchase     -       (1,599,161 )
Changes in Current Assets and Liabilities                
Accounts receivable     91,995       611,740  
Allowance for doubtful accounts     (124,313 )     (9,000 )
Due to (from) related parties     2,858       (11,354 )
Inventories     (250,383 )     (1,546,301 )
Prepaid expenses     301,241       38,213  
Deposits     (93,830 )     (39,115 )
Accounts payable     2,357,708       (113,389 )
Accrued liabilities     271,063       (66,413 )
Net cash used in operating activities     (3,103,454 )     (5,204,386 )
                 
Cash flows from investing activities                
Purchase of equipment     (356,022 )     (1,629,833 )
Acquisition Deposit     -       (250,000 )
Net cash used in investing activities     (356,022 )     (1,879,833 )
                 
Cash flow from financing activities                
Note payable related party     415,000       -  
Note payment - related party     (1,500,000 )     -  
Insurance premium note payment     (322,209 )     (99,907 )
Contingent consideration payment     (300,000 )     (50,000 )
Convertible promissory note     -       1,534,000  
Sale of common stock     2,465,540       3,591,030  

 

(Continued)

 

6
 

 

Ammo, Inc.

CONSOLIDATED STATEMENTS OF CASH FLOW

(Unaudited)

 

    For the Nine Months Ended
December 31,
 
    2019     2018  
             
Purchase of common stock     -       (124,000 )
Factoring liability     936,750       -  
Common stock issued for exercised warrants     -       4,767,625  
Organizational and fundraising costs     (285,981 )     (872,870 )
Net cash provided by financing activities     1,409,100       8,745,878  
                 
Net increase in cash     (2,050,376 )     1,661,659  
Cash, beginning of period     2,181,246       4,381,643  
Cash, end of period   $ 130,870     $ 6,043,302  
                 
Supplemental cash flow disclosures                
Cash paid during the period for -                
Interest   $ 346,800     $ 11,979  
Income taxes   $ -     $ -  
                 
Non-cash investing and financing activities:                
Additional paid-in-capital     -       (11 )
Common stock     -       11  
Issuance of common stock     -       4,624,005  
Contingent consideration payable     -       1,250,000  
Patent acquisition     -       (5,874,005 )
Convertible promissory note and accrued interest     (318,226 )     -  
Convertible promissory note conversion     318,226       -  
Insurance premium note payment     165,120       -  
Prepaid expenses     (165,120 )     -  
Right of use assets - operating leases     (4,168,771 )     -  
Operating lease liability     4,168,771       -  
Other Intangible Assets     2,312,609       -  
Note payable related party     (2,596,200 )     -  
Deposits     (109,250 )     -  
Equipment     392,841          
    $ -     $ -  

 

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

 

7
 

 

AMMO, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2019 and March 31, 2019

(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.

 

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

Accounting Basis

 

The accompanying unaudited 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 consolidated financial statements and related disclosures are presented pursuant to the rules and regulations of the Securities Exchange Commission (“SEC”).

 

The accompanying 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, 2019. The results for the nine month period ended December 31, 2019 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, 2019 and 2018, (b) the financial position at December 31, 2019, and (c) cash flows for the nine month periods ended December 31, 2019 and 2018.

 

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.

 

8
 

 

AMMO, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2019 and March 31, 2019

(Unaudited)

 

Principles of Consolidation

 

The consolidated financial statements include the accounts of AMMO, Inc. and its wholly owned subsidiaries, Enlight Group II, LLC (d/b/a Jagemann Munition Components), SNI, LLC, AMMO Munitions, Inc. and AMMO Technologies, Inc. (inactive). All significant intercompany accounts and transactions are eliminated in consolidation

 

Use of Estimates

 

The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires us to make estimates and assumptions that affect the amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the balance sheet and reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates.

 

Cash and Cash Equivalents

 

For purposes of the statement of cash flows, we consider highly liquid financial instruments purchased with a maturity of three months or less to be cash equivalents.

 

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, 2019 and March 31, 2019, we reserved $5,052 and $129,365, respectively, of allowance for doubtful accounts.

 

License Agreements

 

We are a party to a license agreement with Jesse James, a well-known motorcycle designer, and Jesse James Firearms, LLC, a Texas limited liability company, or JJF. The license agreement grants us the exclusive worldwide rights through October 15, 2021 to Mr. James’ image rights and trademarks associated with him in connection with the marketing, promotion, advertising, sale, and commercial exploitation of Jesse James Branded Products. In addition, Mr. James agreed to make himself available for certain promotional activities and to promote Jesse James Branded Products through his own social media outlets. We agreed to pay Mr. James royalty fees on the sale of ammunition and non-ammunition Branded Products and to reimburse him for any out-of-pocket expenses and reasonable travel expenses. We also issued 100,000 shares of our common stock upon the execution of the license agreement with the potential issuance of up to 75,000 additional shares of common stock upon achieving certain gross sales with $15 million in gross sales required to earn the entire 75,000 shares.

 

We are a party to a license agreement with Jeff Rann, a well-known wild game hunter and spokesman for the firearm and ammunition industries. The license agreement grants us through February 2022 the exclusive worldwide rights to Mr. Rann’s image rights and trademarks associated with him in connection with the marketing, promotion, advertising, sale, and commercial exploitation of all Jeff Rann Branded Products. Mr. Rann agreed to make himself available for certain promotional activities and to promote the Branded Products through his own social media outlets. We agreed to pay Mr. Rann royalty fees on the sale of ammunition and non-ammunition Branded Products and to reimburse him for any out-of-pocket expenses and reasonable travel expenses. We also issued 100,000 shares of our common stock upon the execution of the license agreement with the potential issuance of 75,000 additional shares of common stock upon achieving certain gross sales with $15 million in gross sales required to earn the entire 75,000 shares.

 

Amortization expense for the license agreements for the three and nine months ended December 31, 2019 and 2018 were $12,500, $12,500, $37,500 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. Under the terms of the Merger, we issued to Hallam, Inc.’s two shareholders, 600,000 shares of our common stock, subject to restrictions, and payment of $200,000. The first payment of $100,000 to the Hallam, Inc. shareholders was paid on September 13, 2017, and the second payment of $100,000 was paid on February 6, 2018.

 

The shares were valued at $1.25 and the aggregate value of $950,000 was recorded as a patent asset. This asset will be amortized from September 2017, the first full month of the acquired rights, through October 29, 2028. Patent amortization expense for the three and nine months ended December 31, 2019 and 2018 were $21,268, $21,269, $63,806, and $63,806, respectively.

 

9
 

 

AMMO, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2019 and March 31, 2019

(Unaudited)

 

Under the terms of the Merger, ATI succeeded to all of the assets of Hallam, Inc. and assumed the liabilities of Hallam, Inc., which were none. The primary asset of Hallam, Inc. was an exclusive license to produce projectiles and ammunition using the Hybrid Luminescence Ammunition Technology under patent U.S. 8,402,896 B1 with a publication date of March 26, 2013 owned by University of Louisiana at Lafayette. The license was formally amended and assigned to AMMO Technologies Inc. pursuant to an Assignment and First Amendment to Exclusive License Agreement. Assumption Agreement dated to be effective as of August 22, 2017, the Merger closing date. Under the terms of the Exclusive License Agreement, the Company is obligated to pay a royalty to the patent holder, based on a $0.01 per unit basis for each round of ammunition sold that incorporates this patented technology through October 29, 2028. For the nine months ended December 31, 2019 and 2018, the Company accrued $20,261 and $22,495 respectively under this agreement.

 

In August 2018, we applied for additional patent coverage for the manufacturing methods or application of the Hybrid Luminescence Ammunition Technology on a variety of projectile and ammunition types. The costs of filing this patent were expensed, but may be recapitalized pending the outcome of the USPTO’s review of the application.

 

On October 5, 2018, we completed the acquisition of SW Kenetics Inc. ATI succeeded all of the assets of SW Kenetics, Inc. and assumed all of the liabilities. Under the terms of the agreement, we issued to SW Kenetics Inc.’s three shareholders, 1,700,002 restricted shares of our common stock, payment of $250,000, and a payment obligation of $1,250,000 subject to completion of specific milestones that we have recorded as Contingent Consideration Payable. Additionally, the 1,700,002 shares of common stock were issued with claw back provisions to ensure agreed upon objectives are met. The Company has made four payments totaling $350,000 for the completion of specific milestones to the shareholders of SW Kenetics, Inc.

 

The primary asset of SW Kenetics Inc. was a pending patent for modular projectiles. All rights to patent pending application were assigned and transferred to AMMO Technologies, Inc. pursuant to Intellectual Property Rights Agreement on September 27, 2018. Patent amortization expense for the three and nine months ended December 31, 2019 was $102,067 and $239,253. There was no amortization expense for the patent in the three and nine months ended December 31, 2018 as the patent had not been placed in service.

 

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

 

Other Intangible Assets

 

On March 15, 2019, Enlight Group II, LLC d/b/a Jagemann Munition Components, a wholly owned subsidiary of AMMO, Inc., completed its acquisition of assets of Jagemann Stamping Company’s ammunition casing manufacturing and sales operations pursuant to the terms of the Amended and Restated Asset Purchase Agreement (See Note 10). The intangible assets acquired include a tradename, customer relationships, and intellectual property. For the three and nine months ended December 31, 2019, amortization of the other intangibles assets was $249,794 and $729,131.

 

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 months ended December 31, 2019 and 2018.

 

Revenue Recognition

 

We generate revenue from the production and sale of ammunition. We recognize revenue according to ASC 606. When the customer obtains control over the promised goods or services, we record revenue in the amount of consideration that we can expect to receive in exchange for those goods and services. The Company applies the following five-step model to determine revenue recognition:

 

  Identification of a contract with a customer
  Identification of the performance obligations in the contact
  determination of the transaction price
  allocation of the transaction price to the separate performance allocation
  recognition of revenue when performance obligations are satisfied

 

The Company only applies the five-step model when it is probable that the Company will collect the consideration it is entitled to in exchange for the goods or services it transfers to the customer. At contract inception and once the contract is determined to be within the scope of ASC 606, we assess the goods or services promised within each contract and determines those that are performance obligations, and assesses whether each promised good or service is distinct. Our contracts contain a single performance obligation and the entire transaction price is allocated to the single performance obligation. We recognize as revenues the amount of the transaction price that is allocated to the respective performance obligation when the performance obligation is satisfied or as it is satisfied. Accordingly, we recognize revenues (net) when the customer obtains control of the Company’s product, which typically occurs upon shipment of the product.

 

For the three and nine months ended December 31, 2019, the Company’s customers that comprised more than ten percent (10%) of total revenues and accounts receivable were as follows :

 

PERCENTAGES

 

    Revenues     Accounts Receivable  
For the Three Months Ended December 31, 2019                
Customers:                
A     27.8 %     - %
B     11.2 %     11.9 %
C     10.8 %     10.7 %
D     - %     10.2 %
E     - %     16.7 %
      49.8 %     32.8 %
                 
For the Nine Months Ended December 31, 2019                
Customers:                
A     15.6 %     - %
B     - %     11.9 %
C     15.9 %     10.7 %
D     13.3 %     10.2 %
E     - %     16.7 %
      44.8 %     32.8 %

 

10
 

 

AMMO, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2019 and March 31, 2019

(Unaudited)

 

Advertising Costs

 

We expense advertising costs as they are incurred. We incurred advertising 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 market. 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.

 

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 seven 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 SFAS No. 123 and 123 (R) (ASC 718). There were 407,000 shares of common stock issued to employees, members of the Board of Directors, and members of the Advisory Committee for services during the nine months ended December 31, 2019.

 

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

 

From September 2018 through July 2019, we entered into seven separate employment agreements that included in total, among other provisions, equity grants of 522,500 shares of restricted common stock that vests annually over the next four years. The total compensation value of $1,351,000 is being recognized on a straight-line basis over the periods covered by each agreement, up to four years.

 

Concentrations of Credit Risk

 

Accounts at banks are insured by the Federal Deposit Insurance Corporation (“FDIC”) up to $250,000. As of December 31, 2019, our bank account balances did not 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.

 

11
 

 

AMMO, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2019 and March 31, 2019

(Unaudited)

 

Contingencies

 

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

 

If the assessment of a contingency indicates that it is probable that a material loss has been incurred and the amount of the liability is reasonably estimated, the estimated liability would be accrued in our consolidated financial statements. If the assessment indicates that a potentially material loss contingency is not probable but is reasonably possible, or is probable but cannot be estimated, then the nature of the contingent liability, together with an estimate of range of possible loss if determinable and material, would be disclosed. On September 24, 2019, the Company received notice that a former employee that had voluntarily terminated filed a complaint against the Company, and certain individuals, with the U.S. Department of Labor (“DOL”). The Complaint alleges retaliation and constructive discharge. 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 believes the matters raised in the Complaint are without merit and therefore has and will continue to aggressively defend its interests in this matter. There were no other known contingencies at December 31, 2019.

 

Recent Accounting Pronouncements

 

In May 2014, FASB issued ASU 2014-09, “Revenue from Contracts with Customers”. This ASU is a comprehensive new revenue recognition model that requires a company to recognize revenue to depict the transfer of goods or services to a customer at an amount that reflects the consideration it expects to receive in exchange for those goods or services. The revised effective date for this ASU is for annual and interim periods beginning on or after December 15, 2017, and early adoption will be permitted, but not earlier than the original effective date of annual and interim periods beginning on or after December 15, 2016, for public entities. We adopted ASU 2014-09 as of January 1, 2018, and it did not have a material impact on the Company’s consolidated results of operations, financial position or cash flows for the period ended December 31, 2019.

 

Sales are initiated in three ways –

 

  third party sales representative obtains signed purchase order from a customer
  direct contact by in-house sales representatives who obtains signed purchase order
  electronic purchase order from a customer (usually the very large customers)

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

12
 

 

AMMO, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2019 and March 31, 2019

(Unaudited)

 

Loss Per Common Share

 

We calculate basic loss per share using the weighted-average number of shares of common stock outstanding during each reporting period. Diluted loss per share includes potentially dilutive securities, such as outstanding options and warrants, using various methods, such as the treasury stock or modified treasury stock method, in the determination of dilutive shares outstanding during each reporting period. We have issued warrants to purchase 8,629,432 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, 2019 and 2018, there are no common shares added to calculate the dilutive EPS for those periods as the effect would be antidilutive.

 

NOTE 3 – INVENTORIES

 

At December 31, 2019 and March 31, 2019, the inventory balances are composed of:

 

 

    December 31, 2019     March 31, 2019  
Finished product   $ 2,767,106     $ 2,628,241  
Raw materials     1,661,208       1,635,130  
Work in process     594,666       509,226  
                 
    $ 5,022,980     $ 4,772,597  

 

NOTE 4 – 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 seven 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.

 

13
 

 

AMMO, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2019 and March 31, 2019

(Unaudited)

 

Property and equipment consisted of the following at December 31, 2019 and March 31, 2019:

 

    December 31, 2019     March 31, 2019  
Leasehold Improvements   $ 113,608     $ 98,444  
Furniture and Fixtures     87,791       154,777  
Vehicles     103,511       103,511  
Equipment     19,473,184       18,689,140  
Tooling     126,190       117,390  
Construction in Progress     2,574,828       3,352,669  
Total property and equipment   $ 22,479,112     $ 22,515,931  
Less accumulated depreciation     (2,403,717 )     (516,144 )
Net property and equipment     20,075,395       21,999,787  

 

Depreciation Expense for the three and nine months ended December 31, 2019 and 2018 totaled $677,407, $64,361, $1,887,573 and $228,172, respectively.

 

NOTE 5 – 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, 2019, the outstanding balance of the Factoring Liability was $936,750. Interest expense recognized on the Factoring Liability was $116,196, including $62,500 of amortization of the commitment fee.

 

NOTE 6 – LEASES

 

We lease office, manufacturing, and warehouse space in Scottsdale and Payson, AZ and Manitowoc, WI under contracts we classify as operating leases. None of our leases are financing leases. The Payson lease has an option to renew for five years, and the Manitowoc lease has an option to renew for the three years. As of December 31, 2019, we are fairly certain that we will exercise the renewal options on both leases, and we have included such renewal options in the lease liabilities and the disclosures herein. The Scottsdale lease does not include a renewal option.

 

As of December 31, 2019, the current portion of our operating lease liability was $496,095 and is reported as a current liability.

 

Consolidated lease expense for the nine months ended December 31, 2019 was $375,275 including $117,243 of operating lease expense and $258,482 of other lease associated expenses such as association dues, taxes, utilities, and other month to month rentals.

 

Futures minimum lease payments under non-cancellable leases as of December 31, 2019 are as follows:

 

Years Ended March 31,      
2020   $ 173,307  
2021     693,229  
2022     693,229  
2023     693,229  
2024     640,118  
Thereafter     2,168,932  
      5,062,044  
Less: Interest     (893,273 )
    $ 4,168,771  

 

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

 

    December 31, 2019  
Current portion   $ 496,095  
Long-term, net of current portion     3,672,676  
    $ 4,168,771  

 

NOTE 7 – CONVERTIBLE PROMISSORY NOTES

 

On January 9, 2019, we completed the issuance of 10% Convertible Promissory Notes in the principal amount of $1,710,000 to accredited investors through a private placement in exchange for cash in an equal amount. The principal amounts were raised from the period of October 23, 2018 to December 28, 2018. As a result of the issuance of the Convertible Promissory Notes, the placement agent received an aggregate commission of $171,000, and $5,000 in escrow fees were paid, totaling $176,000 of Note Issuance Costs. As of March 31, 2019, we recorded $151,856 of interest expense related to the Note Issuance Costs.

 

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

 

On February 28, 2019, the company notified the holders of an offer to convert Convertible Promissory Notes and Accrued Interest into Common Stock at a conversion price of $2.00 per share and receive one-half warrant exercisable at $2.40 per share for five years in conjunction with each converted share On March 29, 2019, the Company converted $1,410,000 of Convertible Promissory Notes and $52,065 of Accrued Interest into 731,039 shares of Common Stock and issued Warrants to purchase 365,523 shares of Common Stock. The offer ended on March 29, 2019 at 11:59 PM. As a result of the conversion of the Convertible Promissory Notes, the Company accrued $42,300 for a 3% cash conversion fee on the principal converted payable to the placement agent, Paulson Investment Company. Additionally, $118,351 of Unamortized Note Issuance Costs were amortized and $358,800 of Interest Expenses related to the reduction in conversion price were recognized as result of the conversions.

 

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

 

As of March 31, 2019, there was $300,000 in principal remaining and $24,144 of Unamortized Note Issuance Costs.

 

On June 5, 2019, the remaining $300,000 of Convertible Promissory Notes were mandatorily converted into shares of our common stock pursuant to the terms of the Note. The Company converted $300,000 of Convertible Promissory Notes and $18,226 of Accrued Interest were converted into 127,291 shares of Common Stock at a conversion price of $2.50. The Company accrued $9,000 for a 3% cash conversion fee on the principal converted payable to the placement agent, Paulson Investment Company.

 

14
 

 

AMMO, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2019 and March 31, 2019

(Unaudited)

 

NOTE 8 – NOTES PAYABLE – RELATED PARTY

 

In connection with the acquisition of the casing division of Jagemann Stamping Company, a $10,400,000 promissory note was executed. The promissory note, under which $500,000 was paid on March 25, 2019 using funds raised for the acquisition, had a remaining balance at March 31, 2019 of $9,900,000. On April 30, 2019, the original due date of the note was subsequently extended to April 1, 2020. The note bears interest per annum at approximately 4.6% payable in arrears monthly until October 1, 2019 when the interest rate increases to 9% per annum payable monthly until principal and accrued interest are paid in full. In May of 2019, the Company paid $1,500,000 on the balance of the note. As of December 31, 2019, we recognized interest of $284,512 related to the note. The note is secured by all the equipment purchased from Jagemann Stamping Company and was valued at $18,869,541 in the accompanying financial statements.

 

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 Other Intangible Assets by $2,312,609, decreased Equipment for a net value of $392,841, recorded an increase to Deposits for $109,250 worth of equipment that the Company agreed to transfer back to Seller. Consequently, accumulated amortization has decreased by $508,242. Additionally, the Company entered into a lease to gain possession of the assets that were originally to be transferred.

 

On May 3, 2019, the Company entered into a promissory note of $375,000 with a shareholder of the Company. The note bears interest at a per annum of 2.56%. The note’s original a maturity date of August 3, 2019 was extended to June 15, 2020. On November 15, 2019, the Company remitted $50,000 in principal payment. We have accrued interest on the note of $2,452.

 

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 matures on June 12, 2020 and bears interest at the applicable LIBOR Rate.

 

NOTE 9 – CAPITAL STOCK

 

During the nine month period ended December 31, 2019, we issued 1,893,502 shares of common stock as follows:

 

  1,232,770 shares were sold to investors for $2,465,540
  127,291 shares were issued for the conversion of Convertible Promissory Notes valued at $318,226
 

125,941 shares were issued for services valued at $280,000

  407,000 shares valued at $688,750 were issued to employees, members of the Board of Directors, and members of the Advisory Committee as compensation

 

In December of 2018, we entered into a placement agreement to secure equity capital from qualified investors to provide funds to our operations. The offering consisted of Units priced at $2.00, which included one share of common stock and one five-year warrant to purchase an additional half-share of common stock for an exercise price of $2.40 per share. Effectively, every two units purchased provided the investor with a five-year warrant at an exercise price of $2.40 per share. Units sold under this agreement totaled 1,232,770 shares of common stock and 616,385 warrants for $2,465,540 for the nine month period ended December 31, 2019.

 

For services provided under the placement agreements, the placement agent collected a 12% cash fee on the sale of every Unit and a fee payable in warrants equaling 12% of the total Units sold. These warrants have a term of five years and an exercise price of $2.00 per share. The cash fee totaled $285,981 for the nine month period ended December 31, 2019, including reimbursed expenses.

 

At December 31, 2019, outstanding and exercisable stock purchase warrants consisted of the following:

 

   

Number of

Shares

    Weighted Averaged
Exercise Price
   

Weighted

Average Life

Remaining (Years)

 
Outstanding at March 31, 2019   $ 8,143,115     $ 2.09       4.35  
Granted     710,317       2.35       4.43  
Exercised     -       -       -  
Forfeited or cancelled     224,000       2.50       -  
Outstanding at December 31, 2019     8,629,432     $ 2.10       3.78  
Exercisable at December 31, 2019     8,629,432     $ 2.10       3.78  

 

As of December 31, 2019, we had 8,629,432 warrants outstanding. Each warrant provides the holder the right to purchase up to one share of our Common Stock at a predetermined exercise price. The outstanding warrants consist of (1) warrants to purchase an aggregate of 125,060 shares of Common Stock at an average price of $2.50 per share until March 2020; (2) warrants to purchase 966,494 shares of Common Stock at an exercise price of $1.65 per share until April 2025; (3) warrants to purchase 4,641,745 shares of our Common Stock at an exercise price of $2.00 per share over the next three to five years; and (4) warrants to purchase 2,896,133 shares of Common Stock at an exercise price of $2.40 over the next five years.

 

NOTE 10 - SUBSEQUENT EVENTS

 

Subsequent to December 31, 2019, the Company issued $2,500,000 of certain Convertible Promissory Notes and five year warrants to purchase shares of the Company’s common stock to accredited investors. The Notes accrue interest at a rate of 8% per annum and mature nine months following the issue date Joseph Gunnar & Co., LLC acted as the placement agent and received an 8% cash commission totaling $200,000 and five year warrants to be issued. These events were previously reported by the Company on the Form 8-K’s filed January 22, 2020, and February 4, 2020. The Subscription Agreements, Notes and Warrants are attached as exhibits to this filing.

 

15
 

 

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

 

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

 

Overview

 

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

 

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

 

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

 

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

 

16
 

 

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

 

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

 

On March 15, 2019, Enlight Group II, LLC, a wholly owned subsidiary of AMMO, Inc., completed its acquisition of 100% of the assets of Jagemann Stamping Company’s ammunition casing, projectile manufacturing and sales operations pursuant to the terms of the Amended and Restated Asset Purchase Agreement dated March 14, 2019. In accordance with the terms of the Amended APA, Enlight Group II, LLC paid Jagemann Stamping Company a combination of $7,000,000 in cash, $10,400,000 delivered in the form of a Promissory Note, and 4,750,000 shares of AMMO, Inc. common stock. Post-closing of the acquisition the Company agreed to reduce the Promissory Note by $2,596,200.

 

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.

 

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Our History

 

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

 

Results of Operations

 

Our financial results for the three and nine months ended December 31, 2019 reflect our newly positioned organization. We believe that we have hired a strong team of professionals, developed innovative products, and continue to raise capital sufficient to establish our presence as a high-quality ammunition provider. Although we continue to focus on growing our top line revenue, and streamlining our operations, we did experience a decline in our gross profit margin for the three and nine months ended December 31, 2019. This was the result of a significant increase in depreciation and amortization expenses related to the addition of assets from the acquisition of Jagemann Stamping Company’s ammunition casing, projectile manufacturing, and sales operations (“Jagemann Casings”), sales of products that carry lower margins, as well as increases to costs of raw materials and overhead.

 

The following table presents summarized financial information taken from our consolidated statements of operations for the three and nine months ended December 31, 2019 compared with the three and nine months ended December 31, 2018:

 

    For the Three Months Ending     For the Nine Months Ending  
    December 31, 2019     December 31, 2018     December 31, 2019     December 31, 2018  
    (Unaudited)     (Unaudited)     (Unaudited)     (Unaudited)  
Net Sales   $ 2,772,009     $ 489,080     $ 10,025,144     $ 3,201,967  
Cost of Products Sold     3,662,196       580,166       12,286,591       2,960,262  
Gross Margin     (890,187 )     (91,086 )     (2,261,447 )     241,705  
Sales, General & Administrative Expenses     1,759,907       2,077,499       7,280,925       5,768,650  
Loss from Operations     (2,650,094 )     (2,168,585 )     (9,542,372 )     (5,526,945 )
Other income (expense)                                
Other income (expense)     (214,328 )     1,556,043       (607,710 )     1,553,139  
Loss before provision for income taxes   $ (2,864,422 )   $ (612,542 )   $ (10,150,082 )   $ (3,973,806 )
Provision for income taxes     -       -       -       -  
Net Loss   $ (2,864,422 )   $ (612,542 )   $ (10,150,082 )   $ (3,973,806 )

 

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Non-GAAP Financial Measures

 

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

 

Adjusted EBITDA

 

    For the Three     For the Nine  
    Months Ended     Months Ended  
    December 31, 2019     December 31, 2019  
Reconciliation of GAAP net income to Adjusted EBITDA                
Net (Loss)   $ (2,864,422 )   $ (10,150,082 )
Employee stock awards     182,250       688,750  
Stock grants     168,363       548,057  
Stock for services     72,000       272,000  
Depreciation and amortization     883,692       2,957,337  
Interest expense, net     214,326       607,710  
Adjusted EBITDA   $ (1,343,791 )   $ (5,076,228 )

 

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

 

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

 

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

 

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

 

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

 

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

 

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Net Sales

 

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

 

    For the Three Months Ending     For the Nine Months Ending  
    December 31, 2019     December 31, 2018     December 31, 2019     December 31, 2018  
Proprietary Ammunition   $ 536,595     $ 288,146     $ 1,410,444     $ 2,125,750  
Standard Ammunition     709,819       200,934       2,293,225       1,076,217  
Ammunition Casings     1,525,595       -       6,321,475       -  
Total Sales   $ 2,772,009     $ 489,080     $ 10,025,144     $ 3,201,967  

 

Sales for the three and nine months ended December 31, 2019 increased 467% and 213% or $2,282,929 and $6,823,177, over the three and nine months ended December 31, 2018, respectively. This increase was the result of $1,525,595 and $6,321,475 of sales from our recently acquired casing operations, coupled with $508,885 and $1,217,008 of respective increased sales in bulk pistol and rifle ammunition, summarized in Standard Ammunition above and an increase of $248,449 and a decrease of $715,306 of respective sales of Proprietary Ammunition. Although Proprietary Ammunition sales decreased in the current period increased from the comparable periods, 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 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 the U.S. State Department, which typically takes approximately 30 days to receive. On April 16, 2019, we received renewal for our registration with the International Traffic in Arms Regulations (ITAR). This permits the Company to export and broker ammunition and other controlled items covered under ITAR.

 

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Cost of Goods Sold

 

Cost of goods sold increased by approximately $3.0 million and $9.3 million, respectively for the three and nine months ended December 31, 2019 compared with the three and nine months ended December 31, 2018. This was the result of a significant increase to non-cash depreciation related to our newly acquired casing operations, expensing of increased labor, overhead, and raw materials used to produce finished product during 2019 as compared to 2018. Although sales increased, when comparing the three and nine months ended December 31, 2019 to the three and nine months ended December 31, 2018, they did not meet management’s expectations and did not allow us to cover a greater percentage of our fixed manufacturing costs, which include our non-cash amortization and depreciation expense. As a percentage of sales, cost of goods sold increased by 11.4% and 32.6% from 118.6% and 92.5%, respectively for the three and nine months ended December 31, 2018 to 132.1% and 122.6%, respectively for the three and nine months ended December 31, 2019.

 

Gross Margin

 

Our gross margin percentage decreased to -32.1% and –22.6% from 18.6% and 7.5%, respectively during the three and nine months ended December 31, 2019 as compared to the same period in 2018. This was a result of the increased non-cash depreciation related to our recently acquired casing operations and a level of sales that did not allow us to cover a greater percentage of our fixed manufacturing costs, which include our non-cash amortization and depreciation expense.

 

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

 

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

 

 

Increased product sales, specifically of proprietary lines of ammunition, like the STREAK VISUAL AMMUNITION™, OPS, Stelth and now our tactical Armor Piercing (AP) and Hard Armor Piercing Incendiary (HAPI) precision ammunition, all of which carry higher margins as a percentage of their selling price;

 

  Introduction of new lines of ammunition that historically carry higher margins in the consumer and government sectors;
     
  Reduced component costs through acquisition our recent casing operation acquisition expansion of strategic relationships with component providers;
     
  Expanded use of automation equipment that reduces the total labor required to assemble finished products
     
  And, better leverage of our fixed costs through expanded production to support the sales objectives.

 

Sales, General, and Administrative Expenses

 

During the three and nine months ended December 31, 2019, our sales, general, and administrative expenses decreased by $317,592 and increased by approximately $1.5 million, respectively over the three and nine months ended December 31, 2018, but decrease as a percentage of sales from 424.8% and 180.2% for the respective three and nine months ended December 31, 2018 to 63.5% and 59.6% for the respective three and nine months ended December 31, 2019. This decrease in expenses was the result of an adjustment to non-cash amortization expense for the three month period ended December 31, 2019 and the increase was a result of non-cash amortization expenses of $729,131 for the nine months ended December 31, 2019 and increased payroll expense from our newly acquired casing operations and due to the expansion our sales and support team, stock compensation expense associated with issuance of our Common Stock in lieu of cash compensation for employees, board members, and key consultants for the organization during the period, and trade show and marketing costs associated with introducing our new lines of ammunition. Sales, general and administrative expenses for the three and nine month 2019 periods included noncash stock compensation of approximately $351,000 and $1,237,000. We also experienced increases as a result of new investor and public relations programs, and professional fees associated with our acquisition activity, our public filings, and our efforts to uplist the Company from the OTC to a national exchange. We expect to see administrative expenditures decrease as a percentage of sales in the 2020 fiscal year, as we leverage our work force and expand our sales opportunities.

 

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Interest and other Expenses

 

For the three and nine months ended December 31, 2019, interest expenses increased by $171,210 and $561,688 compared with the comparable three and nine months in 2018. The increase was a result of $29,143 of non-cash interest expense and debt discount amortization related to the Convertible Promissory Notes, $53,103 and 163,761 of non-cash interest expense related to the recognition of Right of Use assets and Lease Liabilities, and $83,144 and $291,339 of accrued interest expense in connection with related party note payables for the three and nine months ended in 2019.

 

Net Loss

 

As a result of higher production, selling, and payroll expenses, we ended the three and nine month periods ended December 31, 2019 with respective net losses of approximately $2.9 million and $10.1 million compared with respective net losses of approximately $612,000 million and $3.9 million for the three and nine month periods ended December 31, 2018.

 

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, 2019, we had $130,870 of cash and cash equivalents, a decrease of $2,050,376 from March 31, 2019.

 

Working Capital is summarized and compared as follows:

 

    December 31, 2019     March 31, 2019  
Current assets   $ 7,216,311     $ 8,626,870  
Current liabilities     12,787,476       4,482,375  
    $ (5,571,165 )   $ 4,144,495  

 

Changes in cash flows are summarized as follows:

 

Operating Activities

 

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.

 

For the nine month period ended December 31, 2018, net cash used in operations totaled $5,204,386. This was primarily the result of a net loss of $3,973,806, a gain of bargain purchase of $1,599,161 increases in our period end inventory of $1,546,301, and cash used to reduce accrued liabilities and increase cash deposits. The cash used in operations were partially offset by the benefit of non-cash expenses for depreciation and amortization of $329,478, employee stock compensation of $644,724, a $611,740 decrease in accounts receivable, stock grants totaling $496,143.

 

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Investing Activities

 

During the three months ended December 31, 2019, we used $356,022 in net cash for investing activities compared with $1,879,833 for the comparable period in 2018. The $356,022 of cash used to purchase fixed assets such as new production equipment and to acquire end cap displays for the sale of our product at retailers.

 

During the nine month period ended December 31, 2018, we used $1,879,833 in net cash for investing activities compared with $368,171 for the comparable period in 2017. Of the total cash used for investing activities, $1,629,833 was used to purchase fixed assets such as new production equipment and leasehold improvements to expand production at our Payson, Arizona manufacturing facility, to acquire end cap displays for the sale of our product at retailers. The remaining $250,000 was used as consideration for acquiring SW Kenetics Inc.

 

Financing Activities

 

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.

 

We financed our operations primarily from the issuance of equity instruments. During the nine month period ended December 31, 2018, net cash provided by financing activities was $8,745,878. This was the net effect of $3,591,030 generated from the sale of Common Stock, $4,767,625 from the exercise of warrants,$1,534,000 from the issuance of Convertible Promissory notes, net of cash payments of $872,870 in conjunction with the Unit and Debt offerings. These sales of our securities were offset by payment of $99,907 toward our insurance premium note payable and a $50,000 payment of our Contingent Consideration Payable.

 

Liquidity and Capital Resources

 

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

 

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

 

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Contractual Obligations

 

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

 

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

 

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

 

    2020     2021     2022     Total  
Payson Lease   $ 30,000     $ 120,000     $ 80,000     $ 230,000  

 

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

 

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

 

    2020     2021     2022     2023     2024     Total  
Scottsdale Lease   $ 55,605     $ 226,587     $ 236,583     $ 246,580     $ 147,240     $ 912,595  

 

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

 

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

 

    2020     2021     2022     2023     2024     2025     2026     Total  
Manitowoc Lease   $ 98,532     $ 394,128     $ 394,128     $ 394,128     $ 394,128     $ 394,128     $ 394,128     $ 2,463,300  

 

In connection with the acquisition of SW Kenectics, Inc. The agreement specifies that $1,250,000 of consideration is deferred pending the completion of specific milestones. Since the acquisition date, the Company has made $100,000 in payment to the shareholder of SW Kenetics, Inc. in connection with the completion of milestones. The $100,000 payment reduced the Contingent Consideration Payable. As a result of the deferral of consideration pending the completion of specific milestones, the Company has estimated the timing of the future obligations.

 

The following table outlines our future contractual financial obligations associated with this contingent consideration payable by fiscal period in which payments is expected as of December 31, 2019:

 

    2020     2021  
Contingent Consideration Payable   $

-

    $ 900,000  

 

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In connection with the acquisition of the casing division of Jagemann Stamping Company, a promissory note was executed. The promissory note, under which $500,000 was paid on March 25, 2019 using funds raised for the acquisition, had a remaining balance at March 31, 2019 of $9,900,000. On April 30, 2019, the original due date of the note was subsequently extended to April 1, 2020. The note bears interest per annum at approximately 4.6% payable in arrears monthly until October 1, 2019 when the interest rate increases to 9% per annum payable monthly until principal and accrued interest are paid in full. In May of 2019, the Company paid $1,500,000 on the balance of the Note. As of December 31, 2019, we accrued interest of $307,451 related to the note.

 

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

 

    2020     2021  
Note Payable Related Party   $ -     $ 5,803,800  

 

Off-Balance Sheet Arrangements

 

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

 

Critical Accounting Policies

 

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

 

Use of Estimates

 

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires us to make estimates and assumptions that affected the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates.

 

Inventory

 

We state inventories at the lower of cost and net realizable value. We determine cost by using the weighted-average cost of raw materials method, which approximates the first-in, first-out method and includes allocations of manufacturing labor and overhead. We make provisions when necessary, to reduce excess, potential damaged or obsolete inventories. These provisions are based on our best estimates. At December 31, 2019, and March 31, 2019, we conducted a full analysis of inventory on hand and expensed all inventory not currently in use, or for which there was no future demand.

 

Research and Development

 

To date, we have expensed all costs associated with developing our product specifications, manufacturing procedures, and products through our cost of products sold, as this work was done by the same employees who produced the finished product. We anticipate that it may become necessary to reclassify research and development costs into our operating expenditures for reporting purposes as we begin to develop new technologies and lines of ammunition.

 

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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.

 

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, 2019 and 2018, we recognized $138,529 and $44,663 respectively, in excise taxes. During the nine months ended December 31, 2019 and 2018, we recognized $374,132 and $327,497, respectively, in excise taxes. For ease in selling to commercial markets, excise tax is included in our unit price for the products sold. We record this through net sales and expense the offsetting tax expense to cost of goods sold.

 

Fair Value of Financial Instruments

 

Fair value estimates discussed herein are based upon certain market assumptions and pertinent information available to us as of December 31, 2019. The respective carrying value of certain on-balance-sheet financial instruments approximated their fair value. These financial instruments include cash, accounts payable, and amounts due to related parties. Fair values were assumed to approximate carrying values because they are short term in nature and their carrying amounts approximate fair values or they are payable on demand.

 

Income Taxes

 

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

 

Stock-Based Compensation

 

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

 

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

 

26
 

 

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, 2019. Based on the evaluation of these disclosure controls and procedures, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures are effective.

 

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, 2019 to December 31, 2019, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

27
 

 

PART II - OTHER INFORMATION

 

ITEM 1. LEGAL PROCEEDINGS

 

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

 

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

 

ITEM 1A. RISK FACTORS

 

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

 

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

 

1. Quarterly Issuances:

 

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, 2019 to December 31, 2019, 92,000 shares of common stock valued at a total of $182,250 or approximately $1.98 per share were issued for employee stock compensation. Additionally, 62,449 shares of our common stock for services produce to the Company for a total value of $72,000 or $1.27 per share.

 

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

 

2. Subsequent Issuances:

 

Subsequent to December 31, 2019, the Company issued $2,500,000 of certain Convertible Promissory Notes and five year warrants to purchase shares of the Company’s common stock to accredited investors. The Notes accrue interest at a rate of 8% per annum and mature nine months following the issue date Joseph Gunnar & Co., LLC acted as the placement agent and received an 8% cash commission totaling $200,000 and five year warrants to be issued. These events were previously reported by the Company on the Form 8-K’s filed January 22, 2020, and February 4, 2020. The Subscription Agreements, Notes and Warrants are attached as exhibits to this filing.

 

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

 

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)
10.1   Form of Subscription Agreement
10.2   Form of Convertible Promissory Note
10.3   Form of Warrant
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. Pursuant to Regulation S-T, this interactive data file is deemed not filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, is deemed not filed for purposes of Section 18 of the Securities Exchange Act of 1934, and otherwise is not subject to liability under these sections.

 

(1) Incorporated by reference to Form S-1A filed with the Commission on December 14, 2018.
   
(2) Filed as an exhibit to Form 8-K filed with the Commission on February 9, 2017.
   
(3) Filed as an exhibit to Form 8-K filed with the Commission on March 23, 2017.
   
(4) Filed as an exhibit to Form 8-K filed with the Commission on October 4, 2018.
   
(5) Filed as an exhibit to Form 8-K filed with the Commission on March 18, 2019.
   
(6) Filed as an exhibit to Form 8-K filed with the Commission on October 26, 2018.
   
(7) Incorporated by reference to Form S-1 filed with the Commission on July 6, 2018.

  

28
 

 

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 14, 2020 By: Fred W. Wagenhals, Chief Executive Officer

 

    /s/ Rob Wiley
Dated: February 14, 2020 By: Rob Wiley, Chief Financial Officer

 

29

 

 

Exhibit 10.1

 

Subscription Documents for AMMO, Inc.

 

UNITS OF CONVERTIBLE PROMISSORY NOTES AND WARRANTS TO PURCHASE

COMMON STOCK

 

PLACEMENT AGENT:

 

JOSEPH GUNNAR & CO., LLC

 

January 2, 2020

 

  i  
     

 

SUBSCRIPTION BOOKLET

 

This Booklet contains the following documents which must be executed and delivered by you if you wish to invest in AMMO, Inc. (“AMMO” or the “Company”):

 

  A. Summary of the Offering and Executive Summary
     
  B. Subscription Agreement;
     
  C. Form of 8% Convertible Promissory Note (the “Notes”);
     
  D. Form of Warrant (the “Warrants”);
     
  E. Confidential Subscriber Questionnaire (Natural Persons);
     
  EE. Confidential Subscriber Questionnaire (Entities);
     
  F. Tax Certification for U.S. Persons and Non-U.S. Persons;
     
  G. Risk Factors;
     
  H. Lock-Up Agreement;
     
  I. SEC Reports; and
     
  J. Investor Presentation

 

Natural person investors must sign and return copies of Items B, E, F, and H.

 

Entity investors must sign and return copies of Items B, EE, F, and H.

 

All investors should submit their executed subscription documents along with a check payable to “Signature Bank, as Escrow Agent for AMMO, Inc.” to Joseph Gunnar & Co., LLC, 30 Broad Street, 11th Floor, New York, NY 10004, Attn:. Documents can also be scanned and delivered by email to or faxed to, attention. Wired funds are preferred to checks and accordingly, investors that desire to wire funds directly to the escrow account should effectuate a wire transfer in the amount of their investment as follows:

 

Name of Bank:

Bank Address:

 

ABA Number:

A/C Name:

 

A/C Number:

Signature Bank

261 Madison Avenue, New York, NY 10016

 

 

Signature Bank as Escrow Agent for

AMMO, Inc.

[

 

  ii  
     

 

All subscription funds will be held in a non-interest bearing escrow account in the Company’s name at Signature Bank, 261 Madison Avenue, New York, NY 10016 pending a closing. Subject to earlier termination by either AMMO, Inc. or Joseph Gunnar & Co., LLC (the “Placement Agent”), the Units will be offered through January 15, 2020, which period may be extended by AMMO, Inc. and the Placement Agent, in our mutual discretion, to a date not later than January 30, 2020. If either the Company or the Placement Agent rejects a subscription, either in whole or in part, the rejected subscription funds or the rejected portion thereof will be returned promptly to the investor without interest or deduction. The minimum subscription is $100,000 per investor but the Company, in its sole discretion, may waive such minimum investment requirement from time to time.

 

Questions regarding completion of these documents should be directed to, Alternative Investment Coordinator at or. All information should be typed or printed in ink. All changes must be initialed by the investor. It is suggested that the investor make and retain copies of the completed subscription documents.

 

NASAA UNIFORM LEGEND:

 

In making an investment decision, investors must rely upon their own examination of the person or entity creating the SECURITIES and the terms of the offering, including the merits and risks involved. THE UNITS CONSISTING OF THE NOTES, WARRANTS, and the shares underlying the NOTES AND warrants have not been recommended by any federal or state securities commissions or regulatory authority. THE UNITS CONSISTING OF THE NOTES, WARRANTS, and the shares underlying the NOTES AND warrants offered hereby have not been registered under the Securities Act OF 1933, AS AMENDED, or the securities laws of any state, and are being offered and sold in reliance upon exemptions from the registration requirements of said act and such laws. Furthermore, the foregoing authorities have not confirmed the accuracy or determined the adequacy of this document. Any representation to the contrary is a criminal offense.

 

  iii  
     

 

ITEM A — SUMMARY OF THE OFFERING AND EXECUTIVE SUMMARY

 

AMMO, INC.

SUMMARY OF THE OFFERING

 

The following summary is qualified in its entirety by the detailed information appearing elsewhere in this Subscription Booklet and related Exhibits. Although this Subscription Booklet may provide potential subscribers with some references to subject headings, the information appearing under those headings is not necessarily a complete or exclusive discussion or description of that subject. References in this Subscription Booklet to the “Company,” “we,” “us” and “our” and words of similar import refer to AMMO, Inc. and its subsidiaries.

 

An investment in the securities offered hereby involves a high degree of risk. Prospective subscribers are urged to read this Subscription Booklet and Exhibits carefully and in their entirety including the risk factors set forth in Exhibit G.

 

The Company:

AMMO, Inc.

 

Offering:

Units (the “Units” and each a “Unit”) consisting of (i) an 8% Convertible Promissory Note in the principal amount of $100,000 (each a “Note” and collectively the “Notes”) of the Company that matures nine months after issuance, and (ii) a five-year warrant (each a “Warrant” and collectively the “Warrants”) to purchase a number of shares of the Company’s Shares of Common Stock, par value $0.001 per share (the “Shares”).

 

Amount of the Offering:

A minimum of $1,000,000 (the “Minimum Amount”) and up to $2,000,000 (the “Maximum Amount”) from accredited investors and/or non-U.S. persons to be identified by the Company, at a purchase price of $100,000 per Unit.

 

Notes:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

The principal balance and unpaid accrued interest on the Notes will automatically convert into the securities issued in the Qualified Financing of the Company upon the closing of a Qualified Financing (as defined below) at a per share conversion price equal to 66.7% of the per share purchase price of shares or other units in the Qualified Financing (the “Conversion Price”). As used herein, “Qualified Financing” means the closing of a firm commitment underwritten public offering of Shares or Units consisting of Shares and warrants to purchase Shares which results in gross proceeds of not less than $7.5 million and the Shares being traded on a national securities exchange. The Notes mature on the nine month anniversary of the Original Issue Date (the “Maturity Date”). If a Qualified Financing has not occurred on or before the Maturity Date, the Conversion Price is 50.0% of the arithmetic mean of the VWAP in the ten consecutive Trading Days immediately preceding the Maturity Date.

 

Warrants: Each investor shall be issued a Warrant to purchase Shares of the Company at a per share exercise price equal to (a) if a Qualified Financing has occurred on or before nine months after the Original Issue Date, at the per share or per unit purchase price in the Qualified Financing or (b) if a Qualified Financing has not occurred on or before nine months after the Original Issue Date, the closing ten day VWAP in the ten trading days immediately preceding the Maturity Date. The number of Shares issuable upon exercise of each Warrant shall be an amount equal to the quotient obtained by dividing 50% of the principal amount of the Notes by the Conversion Price of the Notes which price shall not be known until the Maturity Date. 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 (subject to certain exemptions).

 

  4  
     

 

Lock-Up Agreement:

 

 

 

 

 

 

 

 

As a condition of the offering, each purchaser is required to execute a lock-up agreement. During the applicable lock-up period, purchasers may not offer for sale, contract to sell, sell, distribute, grant any option, right or warrant to purchase, pledge, hypothecate or otherwise dispose of, directly or indirectly, any shares of our common stock issuable upon conversion of the notes or upon exercise of the warrants until the earlier of (i) the Maturity Date of the Notes and (ii) 120 days following the date of the closing of the Qualified Financing.

   
Resale Registration Statement:

The Company will use commercially reasonable best efforts to file a registration statement on Form S-1 within 30 days of the closing of the offering registering for resale the shares issuable upon conversion of the notes and upon exercise of the warrants. The Company shall use commercially reasonable efforts to cause such registration to become effective within 90 days following the closing date (or 120 days in the event of a “full review” by the SEC) and to keep such registration statement effective at all times until no purchaser owns any warrants or warrant shares issuable upon exercise thereof.

 

Minimum Subscription:

The minimum subscription amount per subscriber is $100,000; provided that the Company may accept subscriptions for the Units in lesser amounts in its sole discretion.

 

Placement Agent:

 

 

 

 

 

 

 

 

 

The Units are being offered to U.S. investors on our behalf by Joseph Gunnar & Co., LLC (the “Placement Agent”), and we have agreed to pay a cash fee of eight percent (8%) of the gross proceeds raised from the sale of the Units in the Offering and issue with it five (5)-year warrants to purchase such number of shares 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 Maturity Date.

 

Closings:

The Company may, in its discretion at any time prior to January 15, 2020 which period may be extended by the Company and the Placement Agent, in their mutual discretion and without prior notice to investors, hold an initial closing for the Minimum Amount (“Initial Closing”) and, at any time and from time to time after the Initial Closing, may hold subsequent closings (each such closing, including the Initial Closing, a “Closing,” and the final such Closing, the “Final Closing”), in each case, with respect to any Units for which subscriptions have been accepted prior to such date.

 

Escrow Account:

The subscription amounts will be placed in a non-interest bearing escrow account established by us and the Placement Agent with a third party. Upon, and following, the completion of the Initial Closing and prior to January 15, 2020, which period may be extended by AMMO, Inc. and the Placement Agent, in our mutual discretion, to a date not later than January 30, 2020, the Company will be permitted to access these escrowed funds.

 

 

  5  
     

 

Investors:

Sales of the Units will be made only to “accredited investors,” as defined in Rule 501(a) of the Securities Act of 1933, as amended (the “Securities Act”) in an offering intended to be exempt from registration pursuant to Rule 506 under the Securities Act, or to “non-U.S. persons,” as defined in Regulation S of the Securities Act.

 

Expenses:

The Company and each investor shall be responsible for their own expenses.

 

Subscription Requirements:

An investor must deliver to the Company: (i) a signed Subscription Agreement; (ii) the completed applicable Confidential Subscriber Questionnaire; (iii) the completed Tax Certification for U.S. Persons and Non-U.S. Persons; (iv)the purchase price for the Units to the Company; and (v) the executed Lock-Up Agreement.

 

Use of Proceeds: The proceeds of this bridge financing will be used for working capital and general corporate purposes and to pay a portion of the outstanding Jageman Note, in its discretion.

 

Shares Outstanding:

 

 

As of November 14, 2019, there were 45,766,128 Shares of the Company’s Common Stock outstanding.

 

Confidentiality:

Subject to required disclosure to governmental agencies and other disclosure required as a matter of law, the existence of the Subscription Booklet, the identity of the subscribers, the provisions contained herein, as well as the discussions between the parties hereto and their respective agents, will be held in confidence by the parties hereto and their agents and representatives, and they will provide such information only to those parties with a need to know of the existence of this Summary of the Offering and the provisions herein (such receiving parties to be similarly subject to confidential agreements or duties). The subscribers and the Company further agree they will not use any portion of the information and data provided to such party by the other party for any purpose other than the consummation of the transaction contemplated by the Subscription Booklet.

 

 

  6  
     

 

EXECUTIVE SUMMARY

 

This summary highlights certain information with respect to the Company contained elsewhere in this Subscription Booklet. This summary does not contain all of the information that you should consider before purchasing securities. You should read this entire offering carefully, including the information under the heading “Risk Factors,” before investing in the securities.

 

Corporate History

 

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

 

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

 

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

 

On September 28, 2017, AMMO Technologies Inc. (“ATI”), an Arizona corporation, which is 100% owned by us, merged with Hallam, Inc, a Texas corporation, with ATI being the survivor. Under the terms of the Merger, we, the sole shareholder of AMMO Technologies Inc., issued to Hallam, Inc.’s two shareholders, 600,000 shares of our common stock, subject to restrictions, and payment of $200,000. The first payment of $100,000 to the Hallam, Inc. shareholders was paid on September 13, 2017, and the second payment of $100,000 was paid on February 6, 2018.

 

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

 

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

 

  7  
     

 

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.

 

Corporate Structure

 

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.

 

Overview

 

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

 

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

 

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

 

  8  
     

 

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

 

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

 

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

 

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

 

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

 

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

 

The focus for our 2020 fiscal year is to continue to expand our brand presence into the markets identified above and 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.

 

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

 

Our Business

 

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

 

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

 

Competition

 

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

 

Our Growth Strategy

 

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

 

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

 

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

 

Continue to Strengthen Relationships with Channel Partners and Retailers.

 

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

 

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Emphasis on Customer Satisfaction and Loyalty

 

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

 

Continuously Improving Operations

 

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

 

Enhance Market Share, Brand Recognition, and Customer Loyalty

 

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

 

Pursue Synergetic Strategic Acquisitions and Relationships

 

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

 

Research and Development

 

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

 

Intellectual property

 

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

 

Included in an acquisition for 600,000 shares of our Common Stock and $200,000 paid in cash to the former license holder, we acquired the exclusive license to produce ammunition using the patented “hybrid luminescence technology” owned by the University of Louisiana at Lafayette through October 29, 2028. We use that technology in connection with our STREAK VISUAL AMMUNITION™.

 

We are a party to a license agreement with Jesse James, a well-known motorcycle designer, and Jesse James Firearms, LLC, a Texas limited liability company, or JJF. The licensing agreement grants us the exclusive worldwide rights through October 15, 2021 to Mr. James’ image rights and all trademarks associated with him in connection with the marketing, promotion, advertising, sale, and commercial exploitation of Jesse James Branded Products. In addition, Mr. James agreed to make himself available for certain promotional activities and to promote Jesse James Branded Products through his own social media outlets. We agreed to pay Mr. James royalty fees on the sale of ammunition and non-ammunition Branded Products and to reimburse him for any out-of-pocket expenses and reasonable travel expenses. We also issued 100,000 shares of our Common Stock upon the execution of the license agreement with the potential issuance of up to 75,000 additional shares of Common stock upon achieving certain gross sales with $15 million in gross sales required to earn the entire 75,000 shares.

 

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We are a party to a license agreement with Jeff Rann, a well-known wild game hunter and spokesman for the firearm and ammunition industries. The license agreement grants for us through February 2022 the exclusive worldwide rights to Mr. Rann’s image rights and trademarks associated with him in connection with the marketing, promotion, advertising, sale, and commercial exploitation of all Jeff Rann Branded Products. Mr. Rann agreed to make himself available for certain promotional activities and to promote the Branded Products through his own social media outlets. We agreed to pay Mr. Rann royalty fees on the sale of ammunition and non-ammunition Branded Products and to reimburse him for any out-of-pocket expenses and reasonable travel expenses. We also issued 100,000 shares of our Common Stock upon the execution of the license agreement with the potential issuance of 75,000 additional shares of Common Stock upon achieving certain gross sales with $15 million in gross sales required to earn the entire 75,000 shares.

 

Through our acquisition of SW Kenectics, Inc., we acquired the rights to a patent for modular projectiles. This technology is used in connection with our TAC-P line of ammunition. The Company acquired SW Kenectics, Inc. for a total of up to $1,500,000 in cash and issued 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 patent will be amortized over 15 years.

 

Included in the acquisition of Jagemann Stamping Company’s casing division for $7,000,000 in cash, $10,400,000 delivered in the form of a Promissory Note, and 4,750,000 shares of our Common Stock, we acquired customer relationships, intellectual property, and the use of a tradename, which will be amortized over 3 years, 3 years and 5 years, respectively. These intangible assets are used in the operation and production of our ammunition casing business through our wholly owned subsidiary, Jagemann Munition Components.

 

Description of Properties

 

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

 

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

 

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

 

Employees

 

As of September 18, 2019, we had a total of 81 employees, including three part-time employees. Of these employees, 57 were engaged in manufacturing, eight in sales and marketing, four in finance and accounting, three in research and development and nine in various executive and administrative functions. None of our employees are represented by a union in collective bargaining with us. We believe that our employee relations are good.

 

Government Regulation

 

Regulatory Matters

 

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

 

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

 

  require the licensing of all persons manufacturing, exporting, importing, or selling ammunition as a business;
     
  require serialization, labeling, and tracking of the acquisition and disposition of certain types of ammunition;
     
  regulate the interstate sale of certain ammunition;
     
  restrict or prohibit the ownership, use, or sale of specified categories of ammunition;
     
  require registries of so-called “ballistic images” of ammunition fired from new guns;
     
  govern the sale, export, and distribution of ammunition;
     
  regulate the use and storage of gun powder or other energetic materials;
     
  regulate the employment of personnel with certain criminal convictions;
     
  restrict access to ammunition manufacturing facilities for certain individuals from other countries or with criminal convictions; and
     
  require compliance with ITAR.

 

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

 

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

 

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

 

Suppliers

 

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

 

Marketing

 

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

 

Principal Offices

 

Our principal offices are located at 7681 East Gray Road, Scottsdale, AZ 85260.

 

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ITEM B — SUBSCRIPTION AGREEMENT

 

AMMO, INC.

SUBSCRIPTION AGREEMENT

(January 2, 2020)

AMMO, Inc.

7681 East Gray Road

Scottsdale, AZ 85260

 

Ladies and Gentlemen:

 

The undersigned subscriber or subscribers (hereinafter, the “Subscriber”) has received and carefully read the AMMO, Inc. Executive Overview, dated January 2, 2020, and supplements, if any, thereto and exhibits thereto (collectively, the “Executive Overview”), including, without limitation, the Form of Note (as defined below) and Warrant (as defined below), which describes the terms and conditions by which an investor may participate and invest in AMMO, Inc., a company organized under the laws of Delaware (the “Company”). Capitalized terms used and not defined herein shall have the same meanings as in the Executive Overview.

 

1. Subscription.

 

(a) Subject to the terms and conditions of this subscription agreement (the “Subscription Agreement”), the Subscriber hereby irrevocably subscribes for and agrees to invest the amount indicated on the signature page hereof in the Company and hereby tenders this Subscription Agreement, together with a check or wire transfer in such amount, for the number of units (the “Units”) set forth on the signature page hereof at a purchase price of $100,000 per Unit. The minimum subscription is $100,000 per Subscriber but the Company, in their sole discretion, may waive such minimum investment requirement from time to time. All subscription funds will be held in a non-interest bearing escrow account in the Company’s name at Signature Bank, 261 Madison Avenue, New York, NY 10016 pending a closing, as follows:

 

Name of Bank:

Bank Address:

 

ABA Number:

A/C Name:

 

A/C Number:

Signature Bank

261 Madison Avenue, New York, NY 10016

 

026013576

Signature Bank as Escrow Agent for

AMMO, Inc.

[

 

(b) Subject to earlier termination by either the Company or Joseph Gunnar & Co., LLC (the “Placement Agent”), the Units will be offered through January 15, 2020, which period may be extended by the Company and the Placement Agent, in their mutual discretion, to a date not later than January 30, 2020 (such date, as applicable, the “Termination Date”). The Subscriber agrees that this subscription shall be irrevocable and shall survive the death or disability of the Subscriber if either the Company or the Placement Agent rejects a subscription, either in whole or in part, funds received pursuant hereto will be returned to the Subscriber, without interest accrued thereon or deduction therefrom.

 

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(c) Each Unit consists of (i) a 8% Convertible Promissory Note in the principal amount of $100,000, (each a “Note” and collectively the “Notes”) of the Company, and (ii) a five-year warrant (each a “Warrant” and collectively the “Warrants”) to purchase a number of Shares, par value $0.001 per share (the “Shares”) or units of Shares and Warrants in certain circumstances (each a “Warrant Share” and collectively the “Warrant Shares”) equal to the quotient obtained by dividing 50% of the principal amount of the Note by the Conversion Price of the Notes which price shall not be known until the Maturity Date at a per share exercise price equal to (a) if a Qualified Financing has occurred on or before nine months after the Original Issue Date, at the per share or per unit purchase price in the Qualified Financing or (b) if a Qualified Financing has not occurred on or before nine months after the Original Issue Date, at the closing ten day VWAP in the ten trading days immediately preceding the Maturity Date. This subscription is submitted to you in accordance with and subject to the terms and conditions described in this Subscription Agreement and the Executive Overview relating to the offering (the “Offering”) by the Company of a minimum of 10 Units ($1,000,000) (“Minimum Amount”), and up to a maximum of 20 Units ($2,000,000) (“Maximum Amount”). The Units are being sold in the Offering (as defined below) as more fully described in the Executive Overview. This Subscription Agreement is one in a series of similar subscription agreements (collectively, the “Subscription Agreements”) entered into pursuant to the Offering.

 

2. Acceptance of Subscription. The Company may, in its discretion at any time prior to the Termination Date, hold an initial closing for the Minimum Amount (“Initial Closing”) and, at any time and from time to time after the Initial Closing, may hold subsequent closings (each such closing, including the Initial Closing, a “Closing,” and the final such Closing, the “Final Closing”), in each case, with respect to any Units for which subscriptions have been accepted prior to such date. The Subscriber acknowledges and agrees that the Company, in its sole discretion, has the right to accept or reject this subscription, in whole or in part, for any reason, and that this subscription shall be deemed to be accepted by the Company only when it is signed by an authorized signatory on its behalf. The Subscriber agrees that subscriptions need not be accepted in the order they are received by the Company. Upon rejection of this Subscription Agreement for any reason, including but not limited to if the Initial Closing does not occur prior to the Termination Date or the aggregate subscription amount owed with respect to the Units purchased by the Subscriber pursuant hereto is received after the Final Closing, all funds received with this Subscription Agreement will be returned to the Subscriber without deduction for any fee, commission or expense and without interest with respect to any money received, and this Subscription Agreement shall be deemed to be null and void and of no further force or effect. If this subscription is rejected in part, the funds for the rejected portion of this subscription will be returned without interest or offset, and this Subscription Agreement will continue in full force and effect to the extent this subscription was accepted.

 

3. Representations, Warranties and Covenants of the Subscriber. The Subscriber hereby represents and warrants to and covenants with the Company as follows:

 

(a) The Subscriber is an (i) “accredited investor” as such term is defined in Rule 501 of Regulation D promulgated under the Securities Act of 1933, as amended (the “Securities Act”), and (ii) Confidential Subscriber Questionnaire (Entities) (collectively each a “Confidential Subscriber Questionnaire”), as annexed hereto as Items E and EE, is complete, accurate and true in all respects;

 

(b) Prior to executing this Subscription Agreement, the Subscriber acknowledges that he (i) has received, read and is familiar with the Executive Overview and recognizes that the Company has a limited operating history and that an investment in the Company involves a high degree of risk and (ii) has carefully read and considered the matters set forth under the caption “Risk Factors” in the Executive Overview, and, in particular, acknowledges that the Company engages in a highly competitive business, is a development stage company with no significant operating history to date and has limited assets;

 

(c) The Subscriber has been advised that there will be no market for the investment made in the Company and it may not be possible to readily liquidate this investment. The Subscriber’s overall commitment to investments which are not readily marketable is not disproportionate to his net worth; his investment in the Company will not cause such overall commitment to become excessive; and he can afford to bear the loss of his entire investment in the Company;

 

  15  
     

 

(d) The Subscriber has adequate means of providing for his current needs and personal contingencies and has no need for liquidity in his investment in the securities comprising the Units for an indefinite period of time;

 

(e) The Subscriber satisfies any special suitability or other applicable requirements of his state of residence and/or the state in which the transaction by which the Units are purchased occurs;

 

(f) The Subscriber has such knowledge and experience in financial, tax and business matters that he is capable of evaluating the merits and risks of an investment in the Company and to make an informed investment decision with respect thereto, or the Subscriber has employed the services of an investment advisor, attorney or accountant to read all of the documents furnished or made available by the Company both to him and all other prospective investors in the Units and to evaluate the merits and risks of such an investment on the Subscriber’s behalf;

 

(g) The Subscriber confirms that the Company has made available to Subscriber the opportunity to ask questions of, and receive answers from, a person or persons acting on behalf of the Company concerning the Offering of the Units, the Company and the Company’s business, as described in the Executive Overview, and otherwise to obtain any additional information, to the extent that the Company possess such information or could acquire it without unreasonable effort or expense, necessary to verify the accuracy of the information contained in the Executive Overview. In considering its investment in the Company, the Subscriber has not relied upon any representations made by, or other information (whether oral or written) furnished by or on behalf of, the Company, the Placement Agent, or any director, officer, stockholder, partner, employee, agent, member, or counsel, or any representative or affiliate of any of the foregoing, other than as expressly set forth in the Executive Overview and this Subscription Agreement;

 

(h) If the Subscriber is an entity: (i) such entity was not formed for the specific purpose of acquiring the Units, (ii) such entity is duly organized, validly existing and in good standing under the laws of the state of its organization, (iii) its decision to invest in the Company was made in a centralized fashion (e.g. by a board of directors, general partner, manager, trustee, investment committee or similar governing or managing body); (iv) it is not managed to facilitate the investment decisions of its beneficial owners regarding investments (including an investment in the Company); and (vi) its shareholders, partners, members or beneficiaries, as applicable, did not and will not (x) contribute additional capital for the purpose of acquiring the Units (y) have any discretion to determine whether or how much of the Subscriber’s assets are being invested in any investment made by the Subscriber (including the Subscriber’s investment in the Company), or (z) have the ability to individually elect whether or to what extent such shareholder, partner, member or beneficiary, as applicable, will participate in the Subscriber’s investment in the Company;

 

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(i) The Subscriber hereby acknowledges that the Subscriber has been advised that this offering has not been registered with, or reviewed by, the Securities and Exchange Commission (“SEC”) because this offering is intended to be a non-public offering pursuant to Section 4(a)(2) of the Securities Act and Regulation D as promulgated thereunder. The Subscriber represents that the Subscriber’s Units are being purchased for the Subscriber’s own account, for investment purposes only and not with a view for distribution or resale to others. The Subscriber agrees that the Subscriber will not sell or otherwise transfer the securities comprising the Units or the Shares issuable upon conversion of the Notes and exercise of the Warrants (collectively, the “Note and Warrant Shares”) unless they are registered under the Securities Act or unless in the opinion of counsel satisfactory to the Company an exemption from such registration is available. The Subscriber understands that the securities comprising the Units and the Note and Warrant Shares have not been registered under the Securities Act by reason of a claimed exemption under the provisions of the Securities Act which depends, in part, upon the Subscriber’s investment intention and the Subscriber’s representations, warranties and agreements contained herein. In this connection, the Subscriber understands that it is the position of the SEC that the statutory basis for such exemption would not be present if the Subscriber’s representation merely meant that the Subscriber’s present intention was to hold such Units for a short period, such as the capital gains period of tax statutes, for a deferred sale or for any other fixed period. The Subscriber realizes that the SEC might regard a purchase with an intent inconsistent with the Subscriber’s representation to the Company, and a sale or disposition thereof, as a deferred sale to which the exemption is not available;

 

(j) The Subscriber understands that neither the SEC nor the securities administrator of any state has made any finding or determination relating to the fairness of this investment and that neither the SEC nor the securities administrator of any state has recommended or endorsed, or will recommend or endorse, the offering of the Units, nor have any of them reviewed or passed upon the accuracy or adequacy of the Executive Overview;

 

(k) The execution, delivery and performance by the Subscriber of the Subscription Agreement are within the powers of the Subscriber, have been duly authorized and will not constitute or result in a breach or default under, or conflict with, any order, ruling or regulation of any court or other tribunal or of any governmental commission or agency, or any agreement or other undertaking, to which the Subscriber is a party or by which the Subscriber is bound; and, if the Subscriber is not an individual, will not violate any provision of the charter documents, by-laws, indenture of trust, operating agreement or partnership agreement, as applicable, of the Subscriber. The signatures on the Subscription Agreement are genuine; and the signatory, if the Subscriber is an individual, has legal competence and capacity to execute the same, or, if the Subscriber is not an individual, the signatory has been duly authorized to execute the same; and the Subscription Agreement constitutes the legal, valid and binding obligations of the Subscriber, enforceable in accordance with its terms;

 

(l) The Subscriber is unaware of, is in no way relying on, and did not become aware of the Offering of the Units through or as a result of, any form of general solicitation or general advertising including, without limitation, any article, notice, advertisement or other communication published in any newspaper, magazine or similar media or broadcast over television, radio or the Internet (including, without limitation, internet “blogs,” bulletin boards, discussion groups and social networking sites) in connection with the Offering and sale of the Units and is not subscribing for the Units and did not become aware of the Offering of the Units through or as a result of any seminar or meeting to which the Subscriber was invited by, or any solicitation of a subscription by, a person not previously known to the Subscriber in connection with investments in securities generally.

 

(m) The Subscriber has relied solely upon the advice of his own tax and legal advisors with respect to the tax and other legal aspects of this investment;

 

(n) The Subscriber understands that the Company will review this Subscription Agreement and the Subscriber’s Confidential Subscriber Questionnaire and the Company is hereby given authority by the Subscriber to call the Subscriber’s bank or place of employment or otherwise investigate or review the financial standing of the Subscriber; and it is further agreed that the Company reserves the unrestricted right to reject or limit any subscription and to terminate the offer at any time;

 

  17  
     

 

(o) The Subscriber understands that by reason of the Company’s obligation to pay certain fees and expenses of the Offering, as described in the Executive Overview not all of the gross proceeds of the Offering will be available for use by the Company;

 

(p) The Subscriber is not (i) a retirement plan subject to the Employee Retirement Income Security Act of 1974, as amended (“ERISA”) or Section 4975 of the Internal Revenue Code of 1986, as amended, another plan that is not subject to ERISA or any participant and beneficiary of any of the foregoing, (ii) an individual retirement account or its beneficial owner, or (iii) a fiduciary of any of the foregoing plans or individual retirement accounts.

 

(q) The Subscriber is not aware that any person, and has been advised that no person (other than the Placement Agent), will receive from the Company any compensation as a broker, finder, adviser or in any other capacity in connection with the purchase of Units and the Subscriber has taken no action that would give rise to any claim by any person for brokerage commissions, finders’ fees or the like relating to this Subscription Agreement or the transactions contemplated hereby (other than commissions to be paid by the Company to the Placement Agent or as otherwise described in the Executive Overview);

 

(r) By executing and delivering this Subscription Agreement, the Subscriber covenants to the Company that, except with the prior written permission of the Company, he shall at all times keep confidential and not divulge, furnish or make accessible to anyone any information contained in the Executive Overview, including the exhibits and attachments thereto. The provisions of this Paragraph 3(q) shall be in addition to, and not in substitution for, the provisions of any separate nondisclosure agreement executed by the parties hereto with respect to the transactions contemplated hereby;

 

(s) The Subscriber acknowledges that Signature Bank is acting solely as Escrow Agent in connection with the offering of the Units and makes no recommendation with respect thereto. Signature Bank has made no investigation regarding the Offering, the Company or any other person or entity involved in the Offering;

 

(t) The Subscriber acknowledges that any estimates or forward-looking statements or projections included in the Executive Overview were prepared by the Company in good faith but that the attainment of any such projections, estimates or forward-looking statements cannot be guaranteed by the Company and should not be relied upon;

 

(u) The Subscriber’s substantive relationship with the Placement Agent or subagent through which the Subscriber is subscribing for Units predates the Placement Agents or such subagents contact with the Subscriber regarding an investment in Units;

 

(v) SUBSCRIBER ACKNOWLEDGES THAT THE SECURITIES OFFERED HEREBY HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT, OR THE SECURITIES LAWS OF ANY STATES AND ARE BEING OFFERED AND SOLD IN RELIANCE UPON EXEMPTIONS FROM THE REGISTRATION REQUIREMENTS OF SAID ACT AND SUCH LAWS. THE SECURITIES ARE SUBJECT TO RESTRICTIONS ON TRANSFERABILITY AND RESALE AND MAY NOT BE TRANSFERRED OR RESOLD EXCEPT AS PERMITTED UNDER SAID ACT AND SUCH LAWS PURSUANT TO REGISTRATION OR EXEMPTION THEREFROM. THE SECURITIES HAVE NOT BEEN APPROVED, DISAPPROVED OR RECOMMENDED BY THE SECURITIES AND EXCHANGE COMMISSION, ANY STATE SECURITIES COMMISSION OR ANY OTHER REGULATORY AUTHORITY, NOR HAVE ANY OF THE FOREGOING AUTHORITIES PASSED UPON OR ENDORSED THE MERITS OF THIS OFFERING OR THE ACCURACY OR ADEQUACY OF THE EXECUTIVE OVERVIEW. ANY REPRESENTATION TO THE CONTRARY IS UNLAWFUL;

 

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(w) The Subscriber should check the Office of Foreign Assets Control (“OFAC”) website at <http://www.treas.gov/ofac> before making the following representations. The Subscriber represents that the amounts invested by it in the Company were not and are not directly or indirectly derived from activities that contravene U.S. Federal, state or international laws and regulations, including anti-money laundering laws and regulations. U.S. Federal regulations and Executive Orders administered by OFAC prohibit, among other things, the engagement in transactions with, and the provision of services to, certain foreign countries, territories, entities and individuals.1 The lists of OFAC prohibited countries, territories, persons and entities can be found on the OFAC website at <http://www.treas.gov/ofac>. In addition, the programs administered by OFAC (the “OFAC Programs”) prohibit dealing with individuals or entities in certain countries regardless of whether such individuals or entities appear on the OFAC lists;

 

(x) The Subscriber represents and warrants that, to the best of its knowledge, none of: (1) the Subscriber; (2) any person controlling or controlled by the Subscriber; (3) if the Subscriber is a privately-held entity, any person having a beneficial interest in the Subscriber; or (4) any person for whom the Subscriber is acting as agent or nominee in connection with this investment is a country, territory, individual or entity named on an OFAC list, or a person or entity prohibited under the OFAC Programs. Please be advised that the Company may not accept any amounts from a prospective investor if such investor cannot make the representation set forth in the preceding paragraph. The Subscriber agrees to promptly notify the Company should the Subscriber become aware of any change in the information set forth in these representations. The Subscriber is advised that, by law, the Company may be obligated to “freeze the account” of the Subscriber, either by prohibiting additional subscriptions from the Subscriber, declining any redemption requests and/or segregating the assets in the account in compliance with governmental regulations, and the Company may also be required to report such action and to disclose the Subscriber’s identity to OFAC. The Subscriber further acknowledges that the Company may, by written notice to the Subscriber, suspend the redemption rights (if any) of the Subscriber if the Company reasonably deems it necessary to do so to comply with anti-money laundering regulations applicable to the Company or any of the Company’s other service providers. These individuals include specially designated nationals, specially designated narcotics traffickers and other parties subject to OFAC sanctions and embargo programs;

 

(y) The Subscriber represents and warrants that, to the best of its knowledge, none of: (1) the Subscriber; (2) any person controlling or controlled by the Subscriber; (3) if the Subscriber is a privately-held entity, any person having a beneficial interest in the Subscriber; or (4) any person for whom the Subscriber is acting as agent or nominee in connection with this investment is a senior foreign political figure,2 or any immediate family member3 or close associate4 of a senior foreign political figure, as such terms are defined in the footnotes below;

 

 

1 These individuals include specially designated nationals, specially designated narcotics traffickers and other parties subject to OFAC sanctions and embargo programs.

 

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(z) If the Subscriber is affiliated with a non-U.S. banking institution (a “Foreign Bank”), or if the Subscriber receives deposits from, makes payments on behalf of, or handles other financial transactions related to a Foreign Bank, the Subscriber represents and warrants to the Company that: (1) the Foreign Bank has a fixed address, other than solely an electronic address, in a country in which the Foreign Bank is authorized to conduct banking activities; (2) the Foreign Bank maintains operating records related to its banking activities; (3) the Foreign Bank is subject to inspection by the banking authority that licensed the Foreign Bank to conduct banking activities; and (4) the Foreign Bank does not provide banking services to any other Foreign Bank that does not have a physical presence in any country and that is not a regulated affiliate;

 

(aa) (For Residents of All States) The Subscriber acknowledges that the Units, Notes and the Warrants have not been recommended by any federal or state securities commission or regulatory authority. In making an investment decision investors must rely on their own examination of the Company and the terms of the offering, including the merits and risks involved. Furthermore, the foregoing authorities have not confirmed the accuracy or determined the adequacy of this document. Any representation to the contrary is a criminal offense. The Units, the Notes, the Warrants and the Note and Warrant Shares issuable upon exercise of the Notes and Warrants, respectively, are subject to restrictions on transferability and resale and may not be transferred or resold except as permitted under the Securities Act, and the applicable state securities laws, pursuant to registration or exemption therefrom. Subscribers should be aware that they will be required to bear the financial risks of this investment for an indefinite period of time, including a complete loss of capital; and

 

The foregoing representations and warranties are true and accurate as of the date hereof, shall be true and accurate as of the date of delivery of this Subscription Agreement and accompanying documents to the Company and shall survive such delivery. If, in any respect, those representations and warranties shall not be true and accurate prior to delivery of the payment of the purchase price of the Units, the undersigned shall immediately give written notice to the Company specifying which representations and warranties are not true and accurate and the reason therefor. In addition, the Subscriber agrees to notify the Company immediately in writing if the Subscriber ceases to be an “accredited investor” within the meaning of Rule 501(a) of Regulation D under the Securities Act. Until the Subscriber provides a notice described in the preceding two sentences, the Company may rely on the representations, warranties, covenants and agreements contained herein in connection with any matter related to the Company. Without limiting the generality of the preceding sentence, the Company may assume that all such representations and warranties are correct in all respects as of the date hereof and may rely on such representations and warranties in determining whether (i) the Subscriber is suitable as a purchaser of Units, (ii) Units may be sold to the Subscriber or any other Subscriber without first registering the Units under the Securities Act or any other applicable securities laws, (iii) the conditions to the acceptance of subscriptions for Units have been satisfied, and (iv) the Subscriber meets the eligibility standards set by the Company.

 

 

2 A “senior foreign political figure” is defined as a current or former senior official in the executive, legislative, administrative, military or judicial branches of a foreign government (whether elected or not), a senior official of a major foreign political party, or a senior executive of a foreign government-owned commercial enterprise. In addition, a “senior foreign political figure” includes any corporation, business or other entity that has been formed by, or for the benefit of, a senior foreign political figure.

 

3 “Immediate family” of a senior foreign political figure typically includes the figure’s parents, siblings, spouse, children and a spouses’ parents and siblings.

 

4 A “close associate” of a senior foreign political figure is a person who is widely and publicly known (or is actually known by the relevant covered financial institution) to maintain an unusually close relationship with the senior foreign political figure, and includes a person who is in a position to conduct substantial domestic and international financial transactions on behalf of the senior foreign political figure.

 

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4. Representations, Warranties and Covenants of the Company. The Company hereby represents and warrants to and covenants with the Subscriber as follows:

 

(a) The Units, the Notes, and the Warrants have been duly authorized and reserved for issuance and, when issued and paid for in accordance with this Subscription Agreement upon the closing of this Subscription Agreement, will be duly and validly issued, fully paid and non-assessable, will have been issued in compliance with all applicable federal, state, and U.S. securities laws, and will not have been issued in violation of or subject to any preemptive or similar right that does or will entitle any Person (as defined below) to acquire any Relevant Security from the Company or any Subsidiary upon issuance or sale of the Securities in this offering. Neither the Company nor any Subsidiary has outstanding warrants, options to purchase, or any preemptive rights or other rights to subscribe for or to purchase, or any contracts or commitments to issue or sell, any Relevant Security. As used herein, the term “Person” means any foreign or domestic individual, corporation, trust, partnership, joint venture, limited liability company or other entity. As used herein, the term “Relevant Security” means any Shares or other security of the Company that is convertible into, or exercisable or exchangeable for Shares or equity securities of the Company, or that holds the right to acquire any Shares or equity securities of the Company or any other such Relevant Security.

 

(b) The Shares underlying the Notes (the “Conversion Shares”) have been duly authorized for issuance, have been validly reserved for future issuance and will, upon conversion of the Notes, be duly and validly issued, fully paid and non-assessable and have been issued in compliance with all federal and state securities laws, and will not have been issued in violation of or subject to preemptive or similar rights to subscribe for or purchase securities of the Company. The issuance of such securities is not subject to any statutory preemptive rights and is not and will not be subject to any preemptive rights under the Company’s certificate of incorporation or bylaws as in effect at the time of issuance, rights of first refusal or other similar rights of any security holder of the Company

 

(c) The Warrant Shares (together with the Units, the Notes, the Warrants, and the Conversion Shares, the “Securities”) have been duly authorized for issuance, have been validly reserved for future issuance and will, upon exercise of the Warrants and payment of the exercise price thereof, be duly and validly issued, fully paid and non-assessable and have been issued in compliance with all federal and state securities laws, and will not have been issued in violation of or subject to preemptive or similar rights to subscribe for or purchase securities of the Company. The issuance of such securities is not subject to any statutory preemptive rights and is not and will not be subject to any preemptive rights under the Company’s certificate of incorporation or bylaws as in effect at the time of issuance, rights of first refusal or other similar rights of any security holder of the Company.

 

(d) The Company holds no ownership or other interest, nominal or beneficial, direct or indirect, in any corporation, partnership, joint venture or other business entity other than the entities itemized on Schedule 4(d) hereto (the “Subsidiaries” and each a “Subsidiary”). All of the issued and outstanding shares of capital stock of the Subsidiaries have been duly and validly authorized and issued and are fully paid and non-assessable and are owned directly by the Company.

 

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(e) Each of the Company and the Subsidiaries have been duly incorporated, formed or organized, and validly exists as a corporation, partnership or limited liability company in good standing under the laws of its jurisdiction of incorporation, formation or organization. Each of the Company and the Subsidiaries have all requisite power and authority to carry on its business as it is currently being conducted, and to own, lease and operate its respective properties. Each of the Company and the Subsidiaries is duly qualified to do business and is in good standing as a foreign corporation, partnership or limited liability company in each jurisdiction in which the character or location of its properties (owned, leased or licensed) or the nature or conduct of its business makes such qualification necessary, except, in each case, for those failures to be so qualified or in good standing which (individually and in the aggregate) would not reasonably be expected to have a material adverse effect on clauses (i) through (iv) below, or any event, circumstance, change or effect that, individually or in the aggregate with all other events, circumstances, changes and effects, is or is reasonably likely to be materially adverse to: (i) the business, condition (financial or otherwise), assets, liabilities, results of operations, shareholders’ equity, properties or prospects of the Company and the Subsidiaries, taken as a whole; (ii) the long-term debt or capital stock of the Company or any Subsidiary; (iii) the offering or consummation of any of the other transactions contemplated by this Subscription Agreement, or (iv) the ability of the Company to consummate the transactions contemplated by this Agreement and to perform its obligations under this Subscription Agreement, the Notes, the Warrant, or the Other Transaction Documents (as defined below) (any such effect being a “Material Adverse Effect”).

 

(f) There is no judicial, regulatory, arbitral or other legal or governmental proceeding or other litigation or arbitration, domestic or foreign, pending to which the Company, any Subsidiary, or any of its officers or directors is a party or of which any property, operations or assets of the Company or any Subsidiary is the subject which, individually or in the aggregate, if determined adversely to the Company or any Subsidiary, would reasonably be expected to have a Material Adverse Effect, and to the Company’s knowledge, no such proceeding, litigation or arbitration is threatened or contemplated. Each of the Company and the Subsidiaries is in compliance with all applicable laws, rules, regulations, ordinances, directives, judgments, decrees and orders, foreign and domestic, except for any non-compliance the consequences of which would not have or reasonably be expected to have a Material Adverse Effect. Neither the Company, nor any of its Affiliates (within the meaning of Rule 144 under the Securities Act) (“Affiliates”) has received any notice or other information from any regulatory or other legal or governmental agency which could reasonably be expected to result in any material default or potential decertification by the Company, or any of its Affiliates. Except as described in the Executive Overview or in the financial statements of the Company attached thereto, the Company has not received any notice of any violation of, or noncompliance with, any federal, state, local or foreign laws, ordinances, regulations and orders (including, without limitation, those relating to environmental protection, occupational safety and health, securities laws, equal employment opportunity, consumer protection, credit reporting, “truth-in-lending”, and warranties and trade practices) applicable to its business, the violation of, or noncompliance with, which would have or would reasonably be expected to have a Material Adverse Effect, and the Company knows of no facts or set of circumstances which could give rise to such a notice.

 

(g) The Company is not a party or subject to the provisions of any material order, writ, injunction, judgment or decree of any governmental authority that has not been satisfied in full, otherwise discharged or which, if determined adversely, could reasonably be expected to have a Material Adverse Effect.

 

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(h) Neither the Company nor the Subsidiaries: (i) is in violation of its certificate or articles of incorporation, memorandum and articles of association, by-laws, certificate of formation, limited liability company agreement, joint venture agreement, partnership agreement or other organizational documents, (ii) is in default under, and no event has occurred which, with notice or lapse of time or both, would constitute a default under or result in the creation or imposition of any lien, charge, mortgage, pledge, security interest, claim, equity, trust or other encumbrance, preferential arrangement, defect or restriction of any kind whatsoever (any “Lien”) upon any of its property or assets pursuant to, any indenture, mortgage, deed of trust, loan agreement or other agreement or instrument to which it is a party or by which it is bound or to which any of its property or assets is subject, or (iii) is in violation in any respect of any law, rule, regulation, ordinance, directive, judgment, decree or order of any judicial, regulatory or other legal or governmental agency or body, foreign or domestic, except (solely with regard to (ii) and (iii) above) for such violations or defaults which (individually or in the aggregate) would not reasonably be expected to have a Material Adverse Effect.

 

(i) The Company has full right, power and authority to execute and deliver this Subscription Agreement, the Notes, the Warrants, and all other agreements, documents, certificates and instruments required to be delivered pursuant to this Subscription Agreement (collectively, the “Other Transaction Documents”). The Company has duly and validly authorized this Subscription Agreement, the Notes, the Warrants, the Other Transaction Documents, and each of the transactions contemplated thereby. This Subscription Agreement and the Other Transaction Documents have been duly and validly executed and delivered by the Company and constitute the legal, valid and binding obligations of the Company and are enforceable against the Company in accordance with their respective terms, except as enforceability may be limited by applicable bankruptcy, insolvency, reorganization, moratorium or similar laws affecting creditors’ rights generally and except as enforceability may be subject to general principles of equity (regardless of whether such enforceability is considered in a proceeding in equity or at law).

 

(j) When issued, the Note will constitute valid and binding obligations of the Company to issue and sell, upon conversion thereof, the number and type of securities of the Company called for thereby in accordance with the terms thereof and such Notes are enforceable against the Company in accordance with their respective terms, except: (i) as such enforceability may be limited by bankruptcy, insolvency, reorganization or similar laws affecting creditors’ rights generally; (ii) as enforceability of any indemnification or contribution provision may be limited under federal and state securities laws; and (iii) that the remedy of specific performance and injunctive and other forms of equitable relief may be subject to the equitable defenses and to the discretion of the court before which any proceeding therefor may be brought.

 

(k) When issued, the Warrants will constitute valid and binding obligations of the Company to issue and sell, upon exercise thereof and payment of the respective exercise prices therefor, the number and type of securities of the Company called for thereby in accordance with the terms thereof and such Warrants are enforceable against the Company in accordance with their respective terms, except: (i) as such enforceability may be limited by bankruptcy, insolvency, reorganization or similar laws affecting creditors’ rights generally; (ii) as enforceability of any indemnification or contribution provision may be limited under federal and state securities laws; and (iii) that the remedy of specific performance and injunctive and other forms of equitable relief may be subject to the equitable defenses and to the discretion of the court before which any proceeding therefor may be brought.

 

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(l) The execution, delivery, and performance of this Subscription Agreement, the Notes, the Warrants, and the Other Transaction Documents, and consummation of the transactions contemplated by this Subscription Agreement, including the issuance, sale and delivery of the Securities to be issued, sold and delivered hereunder, do not and will not: (i) conflict with, require Consent under or result in a breach of any of the terms and provisions of, or constitute a default (or an event which with notice or lapse of time, or both, would constitute a default) under, or result in the creation or imposition of any Lien upon any property or assets of the Company or any Subsidiary pursuant to, any indenture, mortgage, deed of trust, loan agreement or other agreement, instrument, franchise, license or permit to which the Company or any Subsidiary is a party or by which the Company or any Subsidiary or their respective properties, operations or assets may be bound, or (ii) violate or conflict with any provision of the certificate or articles of incorporation, by-laws, certificate of formation, limited liability company agreement, partnership agreement or other organizational documents of the Company or any Subsidiary, or (iii) violate or conflict with any law, rule, regulation, ordinance, directive, judgment, decree or order of any legal or require Consent from, any governmental agency or body, domestic or foreign, or (iv) trigger a reset or repricing of any outstanding securities of the Company, except in the case of subsections (i) and (iii) for any default, conflict or violation that would not have or reasonably be expected to have a Material Adverse Effect, except for such Consents as may be required under state securities or blue sky laws or the by-laws, each of which has been obtained and is in full force and effect.

 

(m) Each of the Company and the Subsidiaries has all consents, approvals, authorizations, orders, registrations, qualifications, licenses, filings and permits of, with and from all judicial, regulatory and other legal or governmental agencies and bodies and all third parties, foreign and domestic (collectively, the “Consents”), to own, lease and operate its properties and conduct its business as it is now being conducted or is contemplated to be conducted, and each such Consent is valid and in full force and effect, except where, either individually or in the aggregate, the absence or ineffectiveness of such Consent would not be expected to have a Material Adverse Effect. Neither the Company nor any Subsidiary has received notice of any investigation or proceedings which results in or, if decided adversely to the Company or any Subsidiary, could reasonably be expected to result in, the revocation of, or imposition of a materially burdensome restriction on, any Consent. No Consent contains a materially burdensome restriction.

 

(n) The Company maintains a system of internal accounting controls designed to provide reasonable assurances that (A) transactions are executed in accordance with management’s general or specific authorization; (B) transactions are recorded as necessary to permit preparation of financial statements in conformity with United States generally accepted accounting principles (“GAAP”) and to maintain accountability for assets; (C) access to assets is permitted only in accordance with management’s general or specific authorization; and (D) the recorded accountability for assets is compared with existing assets at reasonable intervals and appropriate action is taken with respect to any differences. Since November 14, 2019, there has been no change in the Company’s internal control over financial reporting that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

 

(o) The board of directors of has not been informed, nor is any executive officer or director of the Company aware, of: (i) any significant deficiencies or material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the Company’s ability to record, process, summarize and report financial information; or (ii) any fraud, whether or not material, that involves management or other employees who have a significant role in the Company’s internal control over financial reporting.

 

(p) Neither the Company nor any of its Affiliates has, prior to the date hereof, directly or indirectly, made any offer or sale of any securities which are required to be “integrated” pursuant to the Securities Act or the rules and regulations of the SEC with the offer and sale of the Securities pursuant to this Subscription Agreement. Neither the Company nor any of its Affiliates has sold or issued any Relevant Security during the six (6)-month period preceding the date hereof, including but not limited to any sales pursuant to Rule 144A or Regulation D or Regulation S under the Securities Act, other than Shares issued pursuant to employee benefit plans, qualified stock option plans or employee compensation plans or pursuant to outstanding options, rights or warrants.

 

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(q) No director or officer of the Company is subject to any non-competition agreement or non-solicitation agreement with any employer or prior employer which could materially affect such person’s ability to be and act in such person’s respective capacity of the Company.

 

(r) No holder of any securities of the Company or any Relevant Security has any rights to require the Company to register any such securities under the Securities Act as part or on account of, or otherwise in connection with, the offer and sale of the Securities contemplated hereby, and any such rights so disclosed have either been fully complied with by the Company or effectively waived by the holders thereof, and any such waivers remain in full force and effect.

 

(s) The Company is not and, at all times up to and including consummation of the transactions contemplated by this Subscription Agreement, and after giving effect to application of the net proceeds of this offering, will not be, subject to registration as an “investment company” under the Investment Company Act of 1940, as amended, and is not and will not be an entity “controlled” by an “investment company” within the meaning of such act. Neither the Company nor any of the Subsidiaries is, and, after giving effect to this offering and the application of the proceeds thereof, neither of them will be, a “controlled foreign corporation” as defined by the U.S. Internal Revenue Code of 1986, as amended.

 

(t) The consolidated financial statements and notes of the Company and its Subsidiaries attached hereto on Schedule 4(t) (the “Company Financials”), fairly present in all material respects the financial position and the results of operations, changes in shareholders’ equity, and cash flows of the Company and the Subsidiaries, on a consolidated basis, at the respective dates of and for the periods referred to in such financial statements, all in accordance with (i) GAAP methodologies applied on a consistent basis throughout the periods involved and (ii) Regulation S-X or Regulation S-K, as applicable (except as may be indicated in the notes thereto and for the omission of notes and audit adjustments in the case of unaudited quarterly financial statements to the extent permitted by Regulation S-X or Regulation S-K, as applicable).

 

(u) Except as and to the extent reflected or reserved against in the Company Financials, the Company has no outstanding Indebtedness (as defined below) in excess of $100,000 or any obligations of the type required to be reflected on a balance sheet in accordance with GAAP that is not adequately reflected or reserved on or provided for in the Company Financials. For purposes of this Agreement: (a) “Indebtedness” means, with respect to the Company: (i) indebtedness for borrowed money; (ii) amounts owing as deferred purchase price for property or services, including “earn-out” payments; (iii) indebtedness for borrowed money evidenced by any note, bond, debenture, mortgage or other debt instrument or debt security; (iv) obligations under any interest rate, currency or other hedging or similar agreement; (v) obligations under any performance bond, surety bond, letter of credit or similar instrument, but only to the extent drawn or called as of such time; (vi) all liabilities secured by any lien or other encumbrance on the assets or property owned or held by the Company; (vii) all equity holder loans and employee advances; (viii) all accrued (or earned) and unpaid employee salaries and all accrued (or earned) and unpaid employee bonus payments related to any period of time prior to the date hereof; (ix) any indebtedness guaranteed for which the Company is liable; and (x) all accrued and unpaid taxes of the Company and its predecessors, related to any period of time prior to the date hereof. The Company has not, in violation of Sarbanes-Oxley Act of 2002 (“Sarbanes-Oxley”), directly or indirectly, including through a Subsidiary (other than as permitted under Sarbanes-Oxley for depositary institutions), extended or maintained credit, arranged for the extension of credit, or renewed an extension of credit, in the form of a personal loan to or for any director or executive officer of the Company.

 

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(v) The Company and the Subsidiaries own or lease all such properties as are necessary to the conduct of its business as presently operated and as proposed to be operated. The Company and the Subsidiaries have good and marketable title in fee simple to all real property and good and marketable title to all personal property owned by them, in each case free and clear of all Liens except or such as do not (individually or in the aggregate) materially affect the business or prospects of the Company or the Subsidiaries. Any real property and buildings held under lease or sublease by The Company and the Subsidiaries are held by them under valid, subsisting and enforceable leases with such exceptions as are not material to, and do not interfere with, the use made and proposed to be made of such property and buildings by the Company and the Subsidiaries. Neither the Company nor the Subsidiaries has received any notice of any claim adverse to its ownership of any real or personal property or of any claim against the continued possession of any real property, whether owned or held under lease or sublease by the Company or the Subsidiaries.

 

(w) The Company and the Subsidiaries: (i) own or possess adequate right to use all patents, patent applications, trademarks, service marks, trade names, trademark registrations, service mark registrations, copyrights, licenses, formulae, customer lists, and know-how and other intellectual property (including trade secrets and other unpatented and/or unpatentable proprietary or confidential information, systems or procedures, “Intellectual Property”) necessary for the conduct of their respective businesses as currently operated and as proposed to be operated and (ii) have no knowledge that the conduct of their respective businesses do or will conflict with, and they have not received any notice of any claim of conflict with, any such right of others. Neither the Company nor any Subsidiary has granted or assigned to any other Person any right to sell the current products and services of the Company and the Subsidiaries or those products and services, except as would not be expected, individually or in the aggregate, to have a Material Adverse Effect. To the Company’s knowledge, there is no infringement by third parties of any such Intellectual Property; there is no pending or threatened action, suit, proceeding or claim by others challenging the Company’s or any Subsidiary’s rights in or to any such Intellectual Property, and the Company is unaware of any facts which would form a reasonable basis for any such claim; and there is no pending or, to the Company’s knowledge, threatened action, suit, proceeding or claim by others that the Company or any Subsidiary infringes or otherwise violates any patent, trademark, copyright, trade secret or other proprietary rights of others, and the Company is unaware of any other fact which would form a reasonable basis for any such claim, except as would not be expected, individually or in the aggregate, to have a Material Adverse Effect. Neither the Company nor any Subsidiary has received any claim for royalties or other compensation from individuals, including employees or former employees of the Company, who made inventive contributions to Company’s technology or products that are pending or unsettled, and, neither the Company nor the Subsidiaries will have any obligation to pay royalties or other compensation to such individuals on account of inventive contributions.

 

(x) No securities of the Company have been sold by the Company or by or on behalf of, or for the benefit of, any person or persons controlling, controlled by, or under common control with the Company since inception.

 

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(y) Each of the Company and the Subsidiaries has accurately prepared and timely filed all federal, state, foreign and other tax returns that are required to be filed by it and has paid or made provision for the payment of all taxes, assessments, governmental or other similar charges, including without limitation, all sales and use taxes and all taxes which the Company or any Subsidiary is obligated to withhold from amounts owing to employees, creditors and third parties, with respect to the periods covered by such tax returns (whether or not such amounts are shown as due on any tax return). No deficiency assessment with respect to a proposed adjustment of the Company’s or any Subsidiary’s federal, state, local or foreign taxes is pending or, to the Company’s knowledge, threatened. The accruals and reserves on the books and records of the Company and the Subsidiaries in respect of tax liabilities for any taxable period not finally determined are adequate to meet any assessments and related liabilities for any such period consistent with GAAP and, since the date of the Company’s most recent audited financial statements, The Company and the Subsidiaries have not incurred any liability for taxes other than in the ordinary course of its business. There is no tax lien, whether imposed by any federal, state, foreign or other taxing authority, outstanding against the assets, properties or business of the Company or any Subsidiary. No transaction, stamp or other issuance or transfer taxes or duties, and no capital gain, income transfer, withholder or other tax or duty is payable in the United States by or on behalf of the subscribers to any taxing authority thereof or therein in connection with (i) the issuance, sale and delivery of the Securities by the Company; (ii) the holding or transfer of the Securities; or (iii) the execution and delivery of this Subscription Agreement or any other document to be furnished hereunder.

 

(z) No labor disturbance or dispute by or with the employees of the Company or the Subsidiaries, which, individually or in the aggregate, would reasonably be expected to have a Material Adverse Effect, currently exists or, to the Company’s knowledge, is threatened. The Company and the Subsidiaries are in compliance in all material respects with the labor and employment laws and collective bargaining agreements and extension orders applicable to their employees in the United States.

 

(aa) Except as would not be expected, individually or in the aggregate, to have a Material Adverse Effect, the Company and the Subsidiaries have at all times operated their respective businesses in material compliance with all Environmental Laws, and no material expenditures are or will be required in order to comply therewith. Neither the Company nor any Subsidiary has received any notice or communication that relates to or alleges any actual or potential violation or failure to comply with any Environmental Laws that would individually or in the aggregate, result in a Material Adverse Effect. As used herein, the term “Environmental Laws” means all applicable laws and regulations, including any licensing, permits or reporting requirements, and any action by a federal, state, local or foreign government entity pertaining to the protection of the environment, protection of public health, protection of worker health and safety, or the handling of hazardous materials, including without limitation, the Clean Air Act, 42 U.S.C. § 7401, et seq., the Comprehensive Environmental Response, Compensation and Liability Act of 1980, 42 U.S.C. § 9601, et seq., the Federal Water Pollution Control Act, 33 U.S.C. § 1321, et seq., the Hazardous Materials Transportation Act, 49 U.S.C. § 1801, et seq., the Resource Conservation and Recovery Act, 42 U.S.C. § 690-1, et seq., and the Toxic Substances Control Act, 15 U.S.C. § 2601, et seq.

 

(bb) Each employment, severance or other similar agreement, arrangement or policy and each material plan or arrangement providing for insurance coverage (including any self-insured arrangements), workers’ compensation, disability benefits, severance benefits, supplemental unemployment benefits, vacation benefits, retirement benefits or for deferred compensation, profit-sharing, bonuses, stock options, stock appreciation or other forms of incentive compensation, or post-retirement insurance, compensation or benefits which: (i) is entered into, maintained or contributed to, as the case may be, by the Company and (ii) covers any officer or director or former officer or director of the Company (collectively, the “Benefit Arrangements”) have each been maintained in substantial compliance with its terms and with requirements prescribed by any and all statutes, orders, rules and regulations that are applicable to that Benefit Arrangement.

 

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(cc) Neither the Company nor any Subsidiary is a party to or subject to any employment contract or arrangement providing any officer or director with annual compensation, or the opportunity to earn annual future compensation (whether through fixed salary, bonus, commission, options or otherwise) of more than $120,000.

 

(dd) None of the execution of this Subscription Agreement, the Notes, the Warrants, or consummation of this offering and the transaction contemplated under this Subscription Agreement will constitute a triggering event under any employee plan or any other employment contract, whether or not legally enforceable, which (either alone or upon the occurrence of any additional or subsequent event) will or may result in any payment (of severance pay or otherwise), acceleration, increase in vesting, or increase in benefits to any current or former participant, employee or director of the Company or any Subsidiary other than an event that is not material to the financial condition or business of the Company or any Subsidiary, either individually or taken as a whole.

 

(ee) Neither the Company, any Subsidiary nor, to the Company’s knowledge, any of their respective employees or agents has at any time during the last five (5) years: (i) made any unlawful contribution to any candidate for domestic or foreign office, or failed to disclose fully any contribution in violation of law, or (ii) made any payment to any foreign, federal or state governmental officer or official or Person charged with similar public or quasi-public duties in the United States, other than payments that are not prohibited by the laws of the United States or any jurisdiction thereof.

 

(ff) The Company has not offered the Securities to any Person or entity with the intention of unlawfully influencing: (i) a customer or supplier of the Company or any Subsidiary to alter the customer’s or supplier’s level or type of business with the Company or any Subsidiary or (ii) a journalist or publication to write or publish favorable information about the Company, any Subsidiary or its products or services.

 

(gg) As of the date hereof and as of the closing of this Subscription Agreement, and except as contemplated by this Subscription Agreement, neither the Company nor any Subsidiary operates within the United States or any state or territory thereof in such a manner so as to subject the Company or its operations or businesses to registration as a foreign company doing business in any state within the United States in a way which would violate any of the following laws in any material respect: (i) the Bank Secrecy Act, as amended, (ii) the Uniting and Strengthening of America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001, as amended, (iii) the Foreign Corrupt Practices Act of 1977, as amended, (iv) the Currency and Foreign Transactions Reporting Act of 1970, as amended, (v) the Employee Retirement Income Security Act of 1974, as amended, (vi) the Money Laundering Control Act of 1986, as amended, (vii) the rules and regulations promulgated under any such law, or any successor law, or any judgment, decree or order of any applicable administrative or judicial body relating to such law, and (viii) any corresponding law, rule, regulation, ordinance, judgment, decree or order of any state or territory of the United States or any administrative or judicial body thereof.

 

  28  
     

 

(hh) The operations of the Company and the Subsidiaries are and have been conducted at all times in compliance with applicable financial record keeping and reporting requirements and money laundering statutes of the United States, and, to the Company’s knowledge, all other jurisdictions to which the Company and the Subsidiaries are subject, the rules and regulations thereunder and any related or similar rules, regulations or guidelines, issued, administered or enforced by any applicable governmental agency, including the Currency and Foreign Transactions Reporting Act of 1970, as amended (collectively, the “Money Laundering Laws”) and no action, suit or proceeding by or before any court or governmental agency, authority or body or any arbitrator involving the Company or any of the Subsidiaries with respect to the Money Laundering Laws is pending or, to the best knowledge of the Company, threatened.

 

(ii) Neither the Company nor, to the knowledge of the Company, any director, officer, agent, employee or Affiliate of the Company is currently subject to any U.S. sanctions administered by the Office of Foreign Assets Control of the U.S. Treasury Department (“OFAC”); and the Company will not directly or indirectly use the proceeds of this offering, or lend, contribute or otherwise make available such proceeds to any joint venture partner or other person or entity, for the purpose of financing the activities of any person currently subject to any U.S. sanctions administered by OFAC.

 

(jj) None of the Company, the Subsidiaries or their respective directors or officers or, to the knowledge of the Company, any agent, employee, affiliate or other person acting on behalf of the Company or any of the Subsidiaries has engaged in any activities sanctionable under the Comprehensive Iran Sanctions, Accountability, and Divestment Act of 2010, the Iran Sanctions Act of 1996, the National Defense Authorization Act for Fiscal Year 2012, the Iran Threat Reduction and Syria Human Rights Act of 2012 or any Executive Order relating to any of the foregoing (collectively, and as each may be amended from time to time, the “Iran Sanctions”); and the Company will not directly or indirectly use the proceeds of this offering, or lend, contribute or otherwise make available such proceeds to any Subsidiary, joint venture partner or other person or entity, for the purpose of engaging in any activities sanctionable under the Iran Sanctions.

 

(kk) Except for payments due to the Placement Agent here are no contracts, agreements or understandings between the Company and any Person that would give rise to a valid claim against the Company or any subscriber for a brokerage commission, finder’s fee, financial consulting fee or other like payment in connection with the transactions contemplated by this Subscription Agreement or any arrangements, agreements, understandings, payments or issuance with respect to the Company or any of its officers, directors, shareholders, partners, employees, Subsidiaries or Affiliates that may affect the Placement Agent’s compensation as determined by Financial Industry Regulatory Authority, Inc. (“FINRA”). The Company has not made any direct or indirect payments (in cash, securities or otherwise) to: (i) any person, as a finder’s fee, consulting fee or otherwise, in consideration of such person raising capital for the Company or introducing to the Company persons who raised or provided capital to the Company; (ii) to any FINRA member; or (iii) to any person or entity that has any direct or indirect affiliation or association with any FINRA member, within the 180 days prior to the Effective Date, other than the prior payment of $25,000 to the Placement Agent in connection with this offering. None of the net proceeds of this offering will be paid by the Company to any participating FINRA member or its affiliates, except as specifically authorized herein. No officer, director or any beneficial owner of the Company’s securities (whether debt or equity, registered or unregistered, regardless of the time acquired or the source from which derived) (any such individual or entity, a “Company Affiliate”) has any direct or indirect affiliation or association with any FINRA member (as determined in accordance with the rules and regulations of FINRA); no Company Affiliate is an owner of stock or other securities of any member of FINRA (other than securities purchased on the open market); no Company Affiliate has made a subordinated loan to any member of FINRA; and no proceeds from the sale of Securities (excluding compensation owed to the Placement Agent) will be paid to any FINRA member, or any persons associated with or affiliated with any member of FINRA. No FINRA member participating in the offering has a conflict of interest with the Company. For this purpose, a “conflict of interest” exists when a member of FINRA and/or its associated persons, parent or affiliates in the aggregate beneficially own 10% or more of the Company’s outstanding subordinated debt or common equity, or 10% or more of the Company’s preferred equity. “FINRA member participating in the offering” includes any associated person of a FINRA member that is participating in the offering, any member of such associated person’s immediate family and any affiliate of a FINRA member that is participating in this offering.

 

  29  
     

 

(ll) As used in this Subscription Agreement, references to matters being “material” with respect to the Company or the Subsidiaries shall mean a material event, change, condition, status or effect related to the condition (financial or otherwise), properties, assets (including intangible assets), liabilities, business, prospects, operations or results of operations of the Company or the Subsidiaries, either individually or taken as a whole, as the context requires.

 

(mm) As used in this Subscription Agreement, the term “knowledge of the Company” (or similar language) shall mean the knowledge of the executive officers and directors of the Company and the Subsidiaries, with the assumption that such executive officers and directors shall have made reasonable and diligent inquiry of the matters presented (with reference to what is customary and prudent for the applicable individuals in connection with the discharge by the applicable individuals of their duties as executive officers, directors or managers of the Company or its applicable Subsidiary).

 

(nn) Neither the Company, any of the Subsidiaries nor any of its properties or assets has any immunity from the jurisdiction of any court or from any legal process (whether through service or notice, attachment to prior judgment, attachment in aid of execution or otherwise) under the laws of the United States.

 

(oo) The capitalization of the Company is as set forth on Schedule 4(oo).

 

(pp) The Company and the Subsidiaries are insured by insurers of recognized financial responsibility against such losses and risks and in such amounts as the board of directors of the Company has determined, in their good faith business judgment, to be necessary or prudent, including, but not limited to, customary directors and officers insurance coverage at least equal to the aggregate Subscription Amount. Neither the Company nor any Subsidiary has any reason to believe that it will not be able to renew its existing insurance coverage as and when such coverage expires or to obtain similar coverage from similar insurers as may be necessary to continue its business without a significant increase in cost.

 

(qq) The Company and the board of directors have taken all necessary action, if any, in order to render inapplicable any control share acquisition, business combination, poison pill (including any distribution under a rights agreement) or other similar anti-takeover provision under the Company’s certificate of incorporation (or similar charter documents) or the laws of its state of incorporation that is or could become applicable to the subscribers as a result of the subscribers and the Company fulfilling their obligations or exercising their rights under this Subscription Agreement and the Other Transaction Documents, including without limitation as a result of the Company’s issuance of the Securities and the subscribers’ ownership of the Securities.

 

(rr) Based on the consolidated financial condition of the Company as of the closing of this Subscription Agreement, after giving effect to the receipt by the Company of the proceeds from the sale of the Securities hereunder, (i) the fair saleable value of the Company’s assets exceeds the amount that will be required to be paid on or in respect of the Company’s existing debts and other liabilities (including known contingent liabilities) as they mature, (ii) the Company’s assets do not constitute unreasonably small capital to carry on its business as now conducted and as proposed to be conducted including its capital needs taking into account the particular capital requirements of the business conducted by the Company, consolidated and projected capital requirements and capital availability thereof, and (iii) the current cash flow of the Company, together with the proceeds the Company would receive, were it to liquidate all of its assets, after taking into account all anticipated uses of the cash, would be sufficient to pay all amounts on or in respect of its liabilities when such amounts are required to be paid. The Company does not intend to incur debts beyond its ability to pay such debts as they mature (taking into account the timing and amounts of cash to be payable on or in respect of its debt). The Company has no knowledge of any facts or circumstances which lead it to believe that it will file for reorganization or liquidation under the bankruptcy or reorganization laws of any jurisdiction within one (1) year from closing of this Subscription Agreement. Schedule 4(rr) sets forth as of the date hereof all outstanding secured and unsecured Indebtedness of the Company or any Subsidiary, or for which the Company or any Subsidiary has commitments.

 

  30  
     

 

(ss) The Company acknowledges and agrees that each of the subscribers is acting solely in the capacity of an arm’s length subscriber with respect to the Transaction Documents and the transactions contemplated thereby. The Company further acknowledges that no subscriber is acting as a financial advisor or fiduciary of the Company (or in any similar capacity) with respect to this Subscription Agreement or the Other Transaction Documents and the transactions contemplated thereby and any advice given by any subscriber or any of their respective representatives or agents in connection with this Subscription Agreement or the Other Transaction Documents and the transactions contemplated thereby is merely incidental to the subscribers’ purchase of the Securities. The Company further represents to each subscriber that the Company’s decision to enter into this Subscription Agreement and the Other Transaction Documents has been based solely on the independent evaluation of the transactions contemplated hereby by the Company and its representatives.

 

(tt) Neither the Company nor any Person acting on behalf of the Company has offered or sold any of the Securities by any form of general solicitation or general advertising. The Company has offered the Securities for sale only to the subscribers and certain other “accredited investors” within the meaning of Rule 501 under the Securities Act.

 

(uu) With respect to the Securities to be offered and sold hereunder in reliance on Rule 506 under the Securities Act, none of the Company, any of its predecessors, any affiliated issuer, any director, executive officer, other officer of the Company participating in the offering hereunder, any beneficial owner of 20% or more of the Company’s outstanding voting equity securities, calculated on the basis of voting power, nor any promoter (as that term is defined in Rule 405 under the Securities Act) connected with the Company in any capacity at the time of sale (each, an “Issuer Covered Person”) is subject to any of the “Bad Actor” disqualifications described in Rule 506(d)(1)(i) to (viii) under the Securities Act (a “Disqualification Event”), except for a Disqualification Event covered by Rule 506(d)(2) or (d)(3). The Company has exercised reasonable care to determine whether any Issuer Covered Person is subject to a Disqualification Event. The Company has complied, to the extent applicable, with its disclosure obligations under Rule 506(e), and has furnished to the subscribers a copy of any disclosures provided thereunder.

 

(vv) The Company will notify the subscribers in writing, prior to the closing of this Subscription Agreement of (i) any Disqualification Event relating to any Issuer Covered Person and (ii) any event that would, with the passage of time, reasonably be expected to become a Disqualification Event relating to any Issuer Covered Person, in each case of which it is aware.

 

The foregoing representations and warranties are true and accurate as of the date of closing of this Subscription Agreement. If, in any respect, those representations and warranties shall not be true and accurate at the time of closing of this Subscription Agreement, the Company shall immediately give written notice to the Placement Agent specifying which representations and warranties are not true and accurate and the reason therefor. In such event, the Company and the Placement Agent shall determine if it then becomes necessary to amend or supplement the Executive Summary or this Subscription Agreement so that the representations and warranties herein remain true and correct in all material respects, and in such case, the Subscriber will promptly receive such an amendment or supplement prior to the closing of this Subscription Agreement.

 

  31  
     

 

5. Rule 144 Issuances. If at any time, beginning one hundred and eighty (180) days from the date of issuance of the Warrants, Rule 144 under the Securities Act (“Rule 144”) can be relied upon by the Subscriber with respect to its sale of the Warrant Shares (hereinafter in this Section 5, the “Registrable Securities”), then the Company shall cause certificates evidencing such Registrable Securities to be issued without any legend. The Company shall cause its counsel at its sole expense (or at Subscriber’s option, counsel selected by Subscriber and at the sole expense of the Company) to issue a legal opinion to the Company’s transfer agent (the “Transfer Agent”) or the Subscriber promptly if required by the Transfer Agent to effect the removal of the legend hereunder, or if requested by the Subscriber, respectively. If such Registrable Securities may be sold under Rule 144 without the requirement for the Company to be in compliance with the current public information required under Rule 144 as to such Registrable Securities and without volume or manner-of-sale restrictions or if such legend is not otherwise required under applicable requirements of the Securities Act (including judicial interpretations and pronouncements issued by the staff of the Securities and Exchange Commission) then such Registrable Securities shall be issued free of all legends. The Company agrees that following such time as such legend is no longer required under this Section 5, it will, no later than the earlier of (i) two (2) Trading Days (as defined below) and (ii) the number of Trading Days comprising the Standard Settlement Period (as defined below) following the delivery by the Subscriber to the Company or the Transfer Agent of a certificate representing Registrable Securities, as applicable, issued with a restrictive legend (such date, the “Legend Removal Date”), deliver or cause to be delivered to the Subscriber a certificate representing such Registrable Securities that is free from all restrictive and other legends. The Company may not make any notation on its records or give instructions to the Transfer Agent that enlarge the restrictions on transfer set forth in this Section 5. Certificates for Registrable Securities subject to legend removal hereunder shall be transmitted by the Transfer Agent to the Subscriber by crediting the account of the Subscriber’s prime broker with the Depository Trust Company System as directed by the Subscriber. As used herein, “Standard Settlement Period” means the standard settlement period, expressed in a number of Trading Days, on the Company’s primary Trading Market with respect to the Shares as in effect on the date of delivery of a certificate representing Registrable Securities, as applicable, issued with a restrictive legend. As used herein, “Trading Day” means a day on which the principal Trading Market is open for trading. As used herein, “Trading Market” means any of the following markets or exchanges on which the Company’s Shares is listed or quoted for trading on the date in question: the NYSE American, the Nasdaq Capital Market, the Nasdaq Global Market, the Nasdaq Global Select Market, or the New York Stock Exchange (or any successors to any of the foregoing).

 

6. Indemnification. The Subscriber acknowledges that it understands the meaning and legal consequences of the representations, warranties and covenants in paragraph 3 hereof and that the Company has relied upon such representations, warranties and covenants, and he hereby agrees to indemnify and hold harmless the Company and the Placement Agent and their respective officers, directors, controlling persons, agents, managers and employees, from and against any and all losses, damages or liabilities due to or arising out of a breach of any representation, warranty or covenant made by the Subscriber herein. Notwithstanding the foregoing, however, no representation, warranty, covenant, acknowledgment or agreement made herein by the Subscriber shall in any manner be deemed to constitute a waiver of any rights granted to the Subscriber under Federal or state securities laws. All representations, warranties and covenants contained in this Subscription Agreement and the indemnification contained in this paragraph 6 shall survive the acceptance of this subscription.

 

7. Restrictions on Transfer. The Subscriber understands and agrees that, in addition to the provisions regarding restrictions on withdrawal and transferability of his investment contained in the securities comprising the Units, the following restriction and limitation is applicable to the Subscriber’s investment in the Units pursuant to Section 4(a)(2) of the Securities Act and Rule 506 of Regulation D promulgated thereunder: The Notes, Warrants, the Conversion Shares, and the Warrant Shares shall not be sold, pledged, hypothecated or otherwise transferred unless they are registered under the Securities Act and applicable state securities laws or are exempt therefrom.

 

8. Investor Qualification. The Subscriber previously or simultaneously herewith has furnished a completed and executed Confidential Subscriber Questionnaire, the information in which is true and correct in all respects and which is hereby incorporated by reference herein.

 

9. Modification. Neither this Subscription Agreement nor any provision hereof shall be waived, modified, changed, discharged or terminated except by an instrument in writing signed by the party against whom any waiver, modification, change, discharge or termination is sought to be enforced.

 

10. Notices. All notices, requests, consents and other communications hereunder shall be in writing and shall be deemed to have been duly made when delivered, or mailed by registered or certified mail, return receipt requested:

 

(a) If to the Subscriber, to the address set forth on the signature page of this Subscription Agreement;

 

Or

 

(b) If to the Company, to the address set forth on the first page of this Subscription Agreement; or

 

(c) At such other address as the Subscriber or the Company may hereafter have advised the other by a notice conforming with this paragraph 8.

 

11. Binding Effect. Except as otherwise provided herein, this Subscription Agreement shall be binding upon and inure to the benefit of the parties hereto and their heirs, executors, administrators, successors, legal representatives and assigns. If the Subscriber is more than one person, the obligation of such Subscriber shall be joint and several and the agreements, representations, warranties, covenants and acknowledgments herein contained shall be deemed to be made by and be binding upon each such person and his or its heirs, executors, administrators, successors, legal representatives and assigns.

 

  32  
     

 

12. Third Party Beneficiaries. The Placement Agent shall be deemed a third party beneficiary of the representations and warranties of the Subscriber contained in Section 3 hereof and the Company as contained in Section 4 hereof and shall have the right to enforce such provisions directly to the extent it may deem such enforcement necessary or advisable to protect its rights.

 

13. Entire Agreement. This Subscription Agreement contains the entire agreement of the parties with respect to the matters set forth herein and there are no representations, covenants or other agreements except as stated or referred to herein or as are embodied in the Notes and the Warrants.

 

14. Assignability. This Subscription Agreement, and the rights, interests and obligations hereunder, are not transferable or assignable by the undersigned or any successor thereto.

 

15. Applicable Law. This Subscription Agreement shall be governed by and construed in accordance with the laws of the State of New York, without reference to the principles thereof relating to the conflict of laws.

 

16. Arbitration. The parties agree to submit all controversies relating to the subject matter of this Subscription Agreement to arbitration in accordance with the provisions set forth below and understand that:

 

Arbitration is final and binding on the parties.

 

The parties are waiving their right to seek remedies in court, including the right to a jury trial. Pre-arbitration discovery is generally more limited and different from court proceedings.

 

The arbitrator’s award is not required to include factual findings or legal reasoning and any party’s right to appeal or to seek modification of rulings by arbitrators is strictly limited.

 

The panel of arbitrators will typically include a minority of arbitrators who were or are affiliated with the securities industry.

 

All controversies which may arise between the parties concerning this Subscription Agreement shall be determined by arbitration pursuant to the rules then pertaining to the Financial Industry Regulatory Authority, Inc. in New York, New York. Judgment on any award of any such arbitration may be entered in the Supreme Court of the State of New York or in any other court having jurisdiction of the Person or Persons against whom such award is rendered. Any notice of such arbitration or for the confirmation of any award in any arbitration shall be sufficient if given in accordance with the provisions of this Subscription Agreement. The parties agree that the determination of the arbitrators shall be binding and conclusive upon them.

 

17. Confidentiality; Certain Disclosures. The Company will use their best efforts to keep the information provided in the Confidential Subscriber Questionnaire strictly confidential. The Company may present this Subscription Agreement and the information provided in the Confidential Subscriber Questionnaire to such parties as they deem advisable if compelled by law or called upon to establish the availability under any Federal or state securities laws of an exemption from registration of the offering or if the contents thereof are relevant to any issue in any action, suit, or proceeding to which the Manager or the Company is a party or by which it is or may be bound.

 

18. Use of Proceeds. The net proceeds of the offering shall be used for working capital requirement and general corporate purposes.

 

19. Information Rights. The Company will provide to each subscriber within thirty (30) days following the end of each quarter a report detailing operating results and other financial information for the prior quarter until the earlier of the consummation of a Qualified Financing or full repayment of the Notes. As used herein, “Qualified Financing” means the closing of a firm commitment underwritten public offering of Shares or units of Shares and Warrants which results in gross proceeds of not less than $7.5 million and the Shares being traded on a national securities exchange.

 

22. Miscellaneous.

 

(a) Each of the parties hereto shall pay its own fees and expenses (including the fees of any attorneys, accountants, appraisers or others engaged by such party) in connection with this Subscription Agreement and the transactions contemplated hereby whether or not the transactions contemplated hereby are consummated.

 

(b) This Subscription Agreement may be executed in one or more counterparts each of which shall be deemed an original (including signatures sent by facsimile transmission or by email transmission of a PDF scanned document), but all of which shall together constitute one and the same instrument.

 

(c) Each provision of this Subscription Agreement shall be considered separable and, if for any reason any provision or provisions hereof are determined to be invalid or contrary to applicable law, such invalidity or illegality shall not impair the operation of or affect the remaining portions of this Subscription Agreement.

 

(d) Paragraph titles are for descriptive purposes only and shall not control or alter the meaning of this Subscription Agreement as set forth in the text.

 

(e) All terms used in any one number or gender in this Subscription Agreement shall be extended to mean and include any other number and gender as the facts, context or sense of this Subscription Agreement may require.

 

  33  
     

 

ANTI MONEY LAUNDERING REQUIREMENTS

 

The USA PATRIOT Act   What is money laundering?   How big is the problem and why is it important?
         

The USA PATRIOT Act is designed to detect, deter, and punish terrorists in the United States and abroad. The Act imposes new anti-money laundering requirements on brokerage firms and financial institutions. Since April 24, 2002 all brokerage firms have been required to have new, comprehensive anti-money laundering programs.

 

To help you understand these efforts, the Placement Agent wants to provide you with some information about money laundering and its steps to implement the USA PATRIOT Act.

 

  Money laundering is the process of disguising illegally obtained money so that the funds appear to come from legitimate sources or activities, Money laundering occurs in connection with a wide variety of crimes, including illegal arms sales, drug trafficking, robbery, fraud, racketeering, and terrorism.   The use of the U.S. financial system by criminals to facilitate terrorism or other crimes could well taint our financial markets. According to the U.S. State Department, one recent estimate puts the amount of worldwide money laundering activity at $1 trillion a year.

 

As part of the Placement Agent’s required program, it may ask you to provide various identification documents or other information. Until you provide the information or documents the Placement Agent needs, it may not be able to effect any transactions for you.

 

What are we required to do to eliminate money laundering?

 

Under rules required by the USA PATRIOT Act, the Placement Agent’s anti-money laundering program must designate a special compliance officer, set up employee training, conduct independent audits, and establish policies and procedures to detect and report suspicious transaction and ensure compliance with such laws. 

 

 

  34  
     

 

IN WITNESS WHEREOF, the undersigned has executed this Subscription Agreement as of the ________ day of __________, 2020

 

Number of Units Subscribed for at $100,000 per Unit: ________________________

 

Dollar Amount of Units Subscribed for $ ________________________

 

If the Subscriber is a NATURAL PERSON, purchased as an INDIVIDUAL, as JOINT TENANTS, as TENANTS IN COMMON, or as COMMUNITY PROPERTY by more than one individual:

 

     
    (Signature of Subscriber)
     
     
    (Name Typed or Printed)
     
     
    (Signature of Co-Subscriber)
     
     
    (Name Typed or Printed)

 

     
Mailing Address   Residence Address
(if not residence)    
     
City, State and Zip Code   City, State and Zip Code
     
     
Social Security Number of Subscriber    
     
     
Social Security Number of Co-Subscriber    

 

     
     

 

IN WITNESS WHEREOF, the undersigned has executed this Subscription Agreement as of the _______ day of ______________, 2020.

 

Number of Units Subscribed for at $100,000 per Unit: _____________________________

 

Dollar Amount of Units Subscribed for $ _____________________________

 

If the Subscriber is an ENTITY:

 

Type of Ownership: (Check One)

 

____ Corporation
____ Limited Partnership
____ General Partnership
____ Limited Liability Company
____ Limited Liability Partnership
____ Revocable Trust
____ Irrevocable Trust
____ Tax Exempt Organization
____ Estate
____ Other (specify)  _________________________________

 

   
    Name of Entity (Print)
     
   
    Signature of Subscriber’s Authorized Signatory
     
   
    Name of Subscriber’s Authorized Signatory (Print)

 

 
Principal Business Mailing Address   Title of Authorized Signatory (Print)
 
City, State and Zip Code   Federal Tax Identification Number

 

     
     

 

  Accepted as of the [  ] day of
  January, 2020
  AMMO, Inc.
   
  By:        
  Name: 
  Title:

 

   
Joseph Gunnar & Co., LLC  
[for internal use only]  

 

[AMMO, Inc. Signature Page to AMMO, Inc. Subscription Agreement]

 

     
     

 

ITEM C — FORM OF 8% CONVERTIBLE PROMISSORY NOTE

 

     
     

 

ITEM D — FORM OF WARRANT

 

     
     

 

ITEM E — CONFIDENTIAL SUBSCRIBER QUESTIONNAIRE (NATURAL PERSONS)

 

AMMO, INC.

CONFIDENTIAL SUBSCRIBER QUESTIONNAIRE

(NATURAL PERSONS)

 

Name(s) of Subscriber(s):*

 

  (1) ___________________________________________________________________
   
  (2) ___________________________________________________________________

 

1. Background Information. a.

 

  a. Home Address ___________________________________________________________
                               ___________________________________________________________
     
  b. Primary Telephone: _______________________________________________________
     
  c. Social Security #(s): _______________________________________________________
     
  d. U.S. Citizen:  _____Yes  ______No
     
  e. Occupation: _____________________________________________________________
     
  f. Employer: ______________________________________________________________
     
  g. Bus. Address:  __________________________________________________________
     
  h. Bus. Telephone: __________________________________________________________
     
  i. Date of Birth:  ____________________
     
  j. Send Mail to:  _____Home  _____ Office
     
  Other:  __________________________________________________________
     
               __________________________________________________________
     
  k. E-Mail: ___________________________________________________________

 

* If there is more than one Subscriber (other than husband and wife), a separate Confidential Subscriber Questionnaire must be completed for each such Subscriber and attached to this Confidential Subscriber Questionnaire.

 

2. Type of Ownership.

 

Please indicate type of ownership subscribed for:

 

  ________  Individual
     
  ________  Joint Tenants
     
  ________  Joint Tenants with Rights of Survivorship
     
  ________  Tenants in Common
     
  ________  Tenants by the Entirety

 

     
 

 

3. Subscriber Suitability - Accredited Investor.

 

Please indicate all of the following (if any) certifications applicable to you:

 

(i) I certify that I am an “accredited investor” because I have an individual net worth (or joint net worth with my spouse) in excess of $1,000,000**.

 

Yes           No

 

(ii) I certify that I am an “accredited investor” because I had an individual income*** (not including any amounts attributable to my spouse or to property owned by my spouse) of more than $200,000 in each of the previous two calendar years and I reasonably expect to reach the same income level in the current year.

 

Yes           No

 

(iii) I certify that I am an “accredited investor” because I had a joint income*** with my spouse in excess of $300,000 in each of the previous two calendar years and I reasonably expect to reach the same income level in the current year.

 

Yes           No

 

(iv) I certify that I have substantial experience in investing in private placements, including private placements of securities of companies in the development stage, and acknowledge that (i) I am able to provide for my current financial needs and foreseeable contingencies and have such knowledge and experience in financial or business matters that I am capable of evaluating the merits and risks of the investment in the Units, (ii) I am able to bear the economic risk of an investment in the Units and I am able to afford a complete loss of such investment.

 

Yes           No

 

**For purposes of this question, a Subscriber’s “net worth” is equal to the excess of total assets at fair market value over total liabilities excluding, for the purposes of this net worth calculation, the value of such Subscriber’s primary resident, after deducting any mortgage securing such primary residence.

 

***For purposes of this Questionnaire, “income” means adjusted gross income, as reported for Federal income tax purposes, less any income attributable to a spouse or to property owned by a spouse, increased by the following amounts (but not including any amounts attributable to a spouse or to property owned by a spouse): (i) the amount of any tax-exempt interest income under Section 103 of the Internal Revenue Code of 1986, as amended (the “Code”) received, (ii) the amount of losses claimed as a limited partner in a limited partnership as reported on Schedule E of Form 1040 and (iii) any deduction claimed for depletion under Section 611 et. seq. of the Code.

 

     
     

 

IF YOU ARE UNABLE TO CERTIFY TO STATEMENT 3(i), (ii) OR (iii) AND (IV) ABOVE, YOU ARE NOT QUALIFIED TO MAKE AN INVESTMENT IN THE UNITS AND MAY NOT PURCHASE ANY UNITS.

 

4. Disqualification.

 

Please indicate all of the following (if any) certifications applicable to the Subscriber or any of its executive officers and directors, managing members or executive officers and directors of its managing members (each, for purposes of this Section 5, “you”). If additional space is required to answer any question, please explain your answer in the “Remarks” section below. Please identify all questions answered in this fashion by their respective question numbers:

 

(i) Have you been convicted, within the past ten years of any felony or misdemeanor (a) in connection with the purchase or sale of any security; (b) involving the making of any false filing with the SEC; or (c) arising out of the conduct of the business of an underwriter, broker, dealer, municipal securities dealer, investment advisor or paid solicitor of purchasers of securities?

 

Yes           No

 

(ii) Are you subject to any order, judgment or decree of any court of competent jurisdiction, entered within the past five years, that currently restrains or enjoins you from engaging or continuing to engage in any conduct or practice: (a) in connection with the purchase or sale of any security; (b) involving the making of any false filing with the SEC; or (c) arising out of the conduct of the business of an underwriter, broker, dealer, municipal securities dealer, investment adviser or paid solicitor of purchasers of securities?

 

Yes           No

 

(iii) Are you subject to a final order of a state securities commission (or an agency of officer of a state performing like functions); a state authority that supervises or examines banks, savings associations, or credit unions; a state insurance commission (or an agency or officer of a state performing like functions); an appropriate federal banking agency; the Commodity Futures Trading Commission; or the National Credit Union Administration that: (a) currently bars you from: (1) association with an entity regulated by such commission, authority, agency or officer; (2) engaging in the business of securities, insurance or banking; or (3) engaging in savings association or credit union activities; or (b) constitutes a final order based on a violation of any law or regulation that prohibits fraudulent, manipulative, or deceptive conduct entered within the past ten years?

 

Yes           No

 

(iv) Are you subject to an order of the SEC entered pursuant to section 15(b) or 15B(c) of the Securities Exchange Act of 1934 (the “Exchange Act”) or section 203(e) or 203(f) of the Investment Advisers Act of 1940 (the “Advisers Act”) that currently: (a) suspends or revokes your registration as a broker, dealer, municipal securities dealer or investment adviser; (b) places limitations on the activities, functions or operations of, or imposes civil money penalties on, such person; or (c) bars you from being associated with any entity or from participating in the offering of any penny stock?

 

Yes           No

 

     
 

 

(v) Are you subject to any order of the SEC, entered within the past five years, that currently orders you to cease and desist from committing or causing a future violation of: (a) any scienter-based anti-fraud provision of the federal securities laws, including, but not limited to, Section 17(a)(1) of the Securities Act, Section 10(b) of the Exchange Act and Rule 10b-5 thereunder, and Section 206(1) of the Advisers Act or any other rule or regulation thereunder; or (b) Section 5 of the Securities Act.

 

Yes           No

 

(vi) Have you been suspended or expelled from membership in, or suspended or barred from association with a member of, a securities self-regulatory organization (e.g., a registered national securities exchange or a registered national or affiliated securities association) for any act or omission to act constituting conduct inconsistent with just and equitable principles of trade?

 

Yes           No

 

(vii) Have you filed (as a registrant or issuer), or were you named as an underwriter in any registration statement or Regulation A offering statement filed with the SEC that, within the past five years, was the subject of a refusal order, stop order, or order suspending the Regulation A exemption, or is, at the time of the sale of the securities, the subject of an investigation or proceeding to determine whether a stop order or suspension order should be issued?

 

Yes           No

 

(viii) Are you subject to a United States Postal Service false representation order entered within the past five years, or are you currently subject to a temporary restraining order or preliminary injunction with respect to conduct alleged by the United States Postal Service to constitute a scheme or device for obtaining money or property through the mail by means of false representations?

 

Yes           No

 

If you answered yes to any of the foregoing questions, please explain your answer in the following “Remarks” section. Please identify all questions answered in this fashion by their respective question numbers.

 

REMARKS:

 

Question Number: Answer:

 

5. Reliance by the Company.

 

I understand that the Company will be relying on the accuracy and completeness of my responses to the foregoing questions and I represent, warrant and covenant to the Company as follows:

 

(i) The answers to the above questions are complete and correct and may be relied upon by the Company in determining whether the offering in connection with which I have executed this Questionnaire is exempt from registration under the Securities Act and complies with other applicable regulatory requirements; and

 

(ii) I will notify the Company immediately of any material change in any statement made herein or any event resulting in the omission of any statement required to be made herein that occurs prior to the acceptance of my subscription.

 

 
  (Signature of Subscriber)
Dated: January __, 2020  
 
   (Name Typed or Printed)
   
 
   (Signature of Co-Subscriber, if any)
   
 
   (Name Typed or Printed)

 

     
     

 

ITEM EE — CONFIDENTIAL SUBSCRIBER QUESTIONNAIRE (ENTITIES)

 

AMMO, INC.

CONFIDENTIAL SUBSCRIBER QUESTIONNAIRE

(ENTITIES)

 

Please attach or describe the contents of your (a) Partnership Agreement, (b) Declaration of Trust, (c) Articles of Incorporation or (d) Operating Agreement with this subscription.

 

1. Background Information.

 

  a. Name of Investing Entity: __________________________________________________
     
  b. Address: ________________________________________________________________
                     ________________________________________________________________

 

  Address for correspondence (if different):
  _________________________________________________________________
  _________________________________________________________________

 

  c. Telephone Number: __________________________________________