UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C.
FORM 10-Q
| ☒ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
| For the quarterly period ended December 31, 2022 | |
| OR | |
| ☐ | TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
| For the transition period from ________ to ________ | |
AMMO, Inc.
(Exact Name of Registrant as Specified in its Charter)
| delaware | 001-13101 | 83-1950534 | ||
(State of incorporation) |
(Commission File No.) |
(I.R.S. Identification Number) |
7681 E Gray Road, Scottsdale, AZ 85260
(Address of Principal Executive Offices) (Zip Code)
Registrant’s telephone number including area code: (480) 947-0001
| Title of each class | Trading Symbol(s) | Name of each exchange on which registered | ||
| Common Stock, $0.001 par value | POWW | The Nasdaq Stock Market LLC (Nasdaq Capital Market) | ||
| 8.75% Series A Cumulative Redeemable Perpetual Preferred Stock, $0.001 par value | POWWP | The Nasdaq Stock Market LLC (Nasdaq Capital Market) |
Indicate by check mark whether the issuer (1) filed all reports required to be filed by Sections 13 or 15(d) of the Securities Exchange Act of 1934 during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
| Large accelerated filer ☐ | Accelerated filer ☐ | |
| Non-accelerated filer ☒ | Smaller reporting company ☒ | |
| Emerging growth company ☐ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). ☐ Yes ☒ No
As of February 10, 2023, there were shares of $0.001 par value Common Stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE: None.
TABLE OF CONTENTS
| 2 |
PART I
ITEM 1. FINANCIAL STATEMENTS
AMMO, Inc.
CONDENSED CONSOLIDATED BALANCE SHEETS
| December 31, 2022 | March 31, 2022 | |||||||
| (Unaudited) | ||||||||
| ASSETS | ||||||||
| Current Assets: | ||||||||
| Cash and cash equivalents | $ | 27,093,614 | $ | 23,281,475 | ||||
| Accounts receivable, net | 30,419,611 | 43,955,084 | ||||||
| Due from related parties | 15,000 | |||||||
| Inventories | 67,145,401 | 59,016,152 | ||||||
| Prepaid expenses | 3,838,968 | 3,423,925 | ||||||
| Current portion of restricted cash | 500,000 | |||||||
| Total Current Assets | 128,997,594 | 129,691,636 | ||||||
| Property and Equipment, net | 55,290,328 | 37,637,806 | ||||||
| Other Assets: | ||||||||
| Deposits | 9,656,907 | 11,360,322 | ||||||
| Patents, net | 5,156,120 | 5,526,218 | ||||||
| Other intangible assets, net | 126,870,205 | 136,300,387 | ||||||
| Goodwill | 90,870,094 | 90,870,094 | ||||||
| Right of use assets - operating leases | 1,378,711 | 2,791,850 | ||||||
| TOTAL ASSETS | $ | 418,219,959 | $ | 414,178,313 | ||||
| LIABILITIES AND SHAREHOLDERS’ EQUITY | ||||||||
| Current Liabilities: | ||||||||
| Accounts payable | $ | 20,964,686 | $ | 26,817,083 | ||||
| Factoring liability | 1,678,450 | 485,671 | ||||||
| Accrued liabilities | 4,298,739 | 6,178,814 | ||||||
| Inventory credit facility | 825,675 | |||||||
| Current portion of operating lease liability | 518,778 | 831,429 | ||||||
| Current portion of note payable related party | 358,263 | 684,639 | ||||||
| Current portion of construction note payable | 258,430 | |||||||
| Insurance premium note payable | 119,449 | |||||||
| Total Current Liabilities | 28,196,795 | 35,823,311 | ||||||
| Long-term Liabilities: | ||||||||
| Contingent consideration payable | 158,570 | 204,142 | ||||||
| Notes payable related party, net of current portion | 181,132 | |||||||
| Construction note payable, net of unamortized issuance costs | 10,967,947 | 38,330 | ||||||
| Operating lease liability, net of current portion | 980,009 | 2,091,351 | ||||||
| Deferred income tax liability | 2,819,962 | 1,536,481 | ||||||
| Total Liabilities | 43,123,283 | 39,874,747 | ||||||
| Shareholders’ Equity: | ||||||||
| Series A cumulative perpetual preferred Stock 8.75%, ($ per share, $ par value) shares issued and outstanding as of December 31, 2022 and March 31, 2022, respectively | 1,400 | 1,400 | ||||||
| Common stock, $ par value, shares authorized and shares issued and and outstanding at December 31, 2022 and March 31, 2022, respectively | 117,894 | 116,487 | ||||||
| Additional paid-in capital | 390,501,876 | 385,426,431 | ||||||
| Accumulated deficit | (15,233,633 | ) | (11,240,752 | ) | ||||
| Treasury Stock | (290,861 | ) | ||||||
| Total Shareholders’ Equity | 375,096,676 | 374,303,566 | ||||||
| TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY | $ | 418,219,959 | $ | 414,178,313 | ||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
| 3 |
AMMO, Inc.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
| For the Three Months Ended December 31, | For the Nine Months Ended December 31, | |||||||||||||||
| 2022 | 2021 | 2022 | 2021 | |||||||||||||
| Net Revenues | ||||||||||||||||
| Ammunition sales | $ | 20,250,965 | $ | 44,069,473 | $ | 90,607,817 | $ | 112,629,655 | ||||||||
| Marketplace revenue | 15,419,202 | 17,596,769 | 46,486,842 | 46,646,051 | ||||||||||||
| Casing sales | 3,041,327 | 3,022,944 | 10,661,420 | 10,891,897 | ||||||||||||
| 38,711,494 | 64,689,186 | 147,756,079 | 170,167,603 | |||||||||||||
| Cost of Revenues | 26,184,315 | 42,166,320 | 104,257,529 | 102,457,775 | ||||||||||||
| Gross Profit | 12,527,179 | 22,522,866 | 43,498,550 | 67,709,828 | ||||||||||||
| Operating Expenses | ||||||||||||||||
| Selling and marketing | 1,010,543 | 1,510,574 | 3,987,214 | 4,226,817 | ||||||||||||
| Corporate general and administrative | 7,835,201 | 3,737,455 | 17,920,197 | 10,976,288 | ||||||||||||
| Employee salaries and related expenses | 4,705,636 | 2,939,095 | 11,414,434 | 7,943,076 | ||||||||||||
| Depreciation and amortization expense | 3,309,074 | 3,725,921 | 9,950,752 | 10,044,994 | ||||||||||||
| Total operating expenses | 16,860,454 | 11,913,045 | 43,272,597 | 33,191,175 | ||||||||||||
| Income/(Loss) from Operations | (4,333,275 | ) | 10,609,821 | 225,953 | 34,518,653 | |||||||||||
| Other Expenses | ||||||||||||||||
| Other income/(expense) | (170,403 | ) | 363 | 28,193 | 21,788 | |||||||||||
| Interest expense | (320,439 | ) | (190,319 | ) | (538,191 | ) | (468,404 | ) | ||||||||
| Total other expense | (490,842 | ) | (189,956 | ) | (509,998 | ) | (446,616 | ) | ||||||||
| Income/(Loss) before Income Taxes | (4,824,117 | ) | 10,419,865 | (284,045 | ) | 34,072,037 | ||||||||||
| Provision for Income Taxes | (721,125 | ) | 1,351,998 | 1,369,427 | 1,351,998 | |||||||||||
| Net Income/(Loss) | (4,102,992 | ) | 9,067,867 | (1,653,472 | ) | 32,720,039 | ||||||||||
| Preferred Stock Dividend | (782,639 | ) | (782,582 | ) | (2,339,409 | ) | (1,902,966 | ) | ||||||||
| Net Income/(Loss) Attributable to Common Stock Shareholders | $ | (4,885,631 | ) | $ | 8,285,285 | $ | (3,992,881 | ) | $ | 30,817,073 | ||||||
| Net Income/(Loss) per share | ||||||||||||||||
| Basic | $ | (0.04 | ) | $ | 0.07 | $ | (0.03 | ) | $ | 0.28 | ||||||
| Diluted | $ | (0.04 | ) | $ | 0.07 | $ | (0.03 | ) | $ | 0.27 | ||||||
| Weighted average number of shares outstanding | ||||||||||||||||
| Basic | 117,348,511 | 114,757,014 | 116,950,013 | 111,289,024 | ||||||||||||
| Diluted | 117,348,511 | 116,717,500 | 116,950,013 | 113,350,998 | ||||||||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
| 4 |
AMMO, Inc.
CONDENSED CONSOLIDATED STATEMENT OF SHAREHOLDERS’ EQUITY
(Unaudited)
| Preferred Stock | Common Shares | |||||||||||||||||||||||||||||||
| Number | Par Value | Number | Par Value | Additional Paid-In Capital | Accumulated (Deficit) | Treasury Stock | Total | |||||||||||||||||||||||||
| Balance as of March 31, 2022 | 1,400,000 | $ | 1,400 | 116,485,747 | $ | 116,487 | $ | 385,426,431 | $ | (11,240,752 | ) | $ | $ | 374,303,566 | ||||||||||||||||||
| Common stock issued for cashless warrant exercise | - | 99,762 | 99 | (99 | ) | |||||||||||||||||||||||||||
| Employee stock awards | - | 338,375 | 338 | 1,174,725 | 1,175,063 | |||||||||||||||||||||||||||
| Stock grants | - | - | 47,844 | 47,844 | ||||||||||||||||||||||||||||
| Preferred stock dividends declared | - | - | (638,071 | ) | (638,071 | ) | ||||||||||||||||||||||||||
| Dividends accumulated on preferred stock | - | - | (136,061 | ) | (136,061 | ) | ||||||||||||||||||||||||||
| Net income | - | - | 3,253,027 | 3,253,027 | ||||||||||||||||||||||||||||
| Balance as of June 30, 2022 | 1,400,000 | $ | 1,400 | 116,923,884 | $ | 116,924 | $ | 386,648,901 | $ | (8,761,857 | ) | $ | $ | 378,005,368 | ||||||||||||||||||
| Common stock issued for exercised warrants | - | 12,121 | 12 | 24,230 | 24,242 | |||||||||||||||||||||||||||
| Employee stock awards | - | 338,750 | 339 | 1,176,036 | 1,176,375 | |||||||||||||||||||||||||||
| Stock grants | - | - | 43,750 | 43,750 | ||||||||||||||||||||||||||||
| Preferred stock dividend | - | - | (646,595 | ) | (646,595 | ) | ||||||||||||||||||||||||||
| Dividends accumulated on preferred stock | - | - | (136,044 | ) | (136,044 | ) | ||||||||||||||||||||||||||
| Net loss | - | - | (803,507 | ) | (803,507 | ) | ||||||||||||||||||||||||||
| Balance as of September 30, 2022 | 1,400,000 | $ | 1,400 | 117,274,755 | $ | 117,275 | $ | 387,892,917 | $ | (10,348,003 | ) | $ | $ | 377,663,589 | ||||||||||||||||||
| Common stock issued for exercised warrants | - | 165,152 | 165 | 31,639 | 31,804 | |||||||||||||||||||||||||||
| Employee stock awards | - | 604,510 | 604 | 2,105,931 | 2,106,535 | |||||||||||||||||||||||||||
| Stock grants | - | - | 43,750 | 43,750 | ||||||||||||||||||||||||||||
| Warrants issued for services | - | - | 427,639 | 427,639 | ||||||||||||||||||||||||||||
| Preferred stock dividend | - | - | (638,304 | ) | (638,304 | ) | ||||||||||||||||||||||||||
| Dividends accumulated on preferred stock | - | - | (144,334 | ) | (144,334 | ) | ||||||||||||||||||||||||||
| Net loss | - | - | (4,102,992 | ) | (4,102,992 | ) | ||||||||||||||||||||||||||
| Treasury shares purchased | - | (150,000 | ) | (150 | ) | (290,861 | ) | (291,011 | ) | |||||||||||||||||||||||
| Balance as of December 31, 2022 | 1,400,000 | $ | 1,400 | 117,894,417 | 117,894 | 390,501,876 | (15,233,633 | ) | (290,861 | ) | 375,096,676 | |||||||||||||||||||||
| Preferred Stock | Common Shares | |||||||||||||||||||||||||||||||
| Number | Par Value | Number | Par Value | Additional Paid-In Capital | Accumulated (Deficit) | Treasury Stock | Total | |||||||||||||||||||||||||
| Balance as of March 31, 2021 | $ | 93,099,967 | $ | 93,100 | $ | 202,073,968 | $ | (41,819,539 | ) | $ | $ | 160,347,529 | ||||||||||||||||||||
| Acquisition stock issuances | - | 18,500,000 | 18,500 | 132,626,500 | 132,645,000 | |||||||||||||||||||||||||||
| Common stock issued for exercised warrants | - | 219,144 | 219 | 477,592 | 477,811 | |||||||||||||||||||||||||||
| Common stock issued for cashless warrant exercise | - | 275,155 | 275 | (275 | ) | |||||||||||||||||||||||||||
| Common stock issued for services | - | 750,000 | 750 | 1,499,250 | 1,500,000 | |||||||||||||||||||||||||||
| Employee stock awards | - | 202,500 | 203 | 699,297 | 699,500 | |||||||||||||||||||||||||||
| Stock grants | - | - | 66,914 | 66,914 | ||||||||||||||||||||||||||||
| Issuance costs | - | - | (4,670,422 | ) | (4,670,422 | ) | ||||||||||||||||||||||||||
| Issuance of Series A Preferred Stock, net of issuance costs | 1,400,000 | 1,400 | - | 34,998,600 | 35,000,000 | |||||||||||||||||||||||||||
| Dividends accumulated on preferred stock | - | - | (337,745 | ) | (337,745 | ) | ||||||||||||||||||||||||||
| Net income | - | - | 9,536,660 | 9,536,660 | ||||||||||||||||||||||||||||
| Balance as of June 30, 2021 | 1,400,000 | $ | 1,400 | 113,046,766 | $ | 113,047 | $ | 367,771,424 | $ | (32,620,624 | ) | $ | $ | 335,265,247 | ||||||||||||||||||
| Acquisition stock issuances | - | - | (29,500 | ) | (29,500 | ) | ||||||||||||||||||||||||||
| Common stock issued for exercised warrants | - | 160,998 | 161 | 343,684 | 343,845 | |||||||||||||||||||||||||||
| Common stock issued for cashless warrant exercise | - | 1,752 | 2 | (2 | ) | |||||||||||||||||||||||||||
| Common stock issued for services and equipment | - | 21,250 | 21 | 127,479 | 127,500 | |||||||||||||||||||||||||||
| Employee stock awards | - | 352,250 | 352 | 1,153,273 | 1,153,625 | |||||||||||||||||||||||||||
| Stock grants | - | - | 65,098 | 65,098 | ||||||||||||||||||||||||||||
| Dividends accumulated on preferred stock | - | - | (782,639 | ) | (782,639 | ) | ||||||||||||||||||||||||||
| Net income | - | - | 14,115,512 | 14,115,512 | ||||||||||||||||||||||||||||
| Balance as of September 30, 2021 | 1,400,000 | $ | 1,400 | 113,583,016 | $ | 113,583 | $ | 369,431,456 | $ | (19,287,751 | ) | $ | $ | 350,258,688 | ||||||||||||||||||
| Acquisition stock issuances | - | 1,500,000 | 1,500 | 10,753,500 | 10,755,000 | |||||||||||||||||||||||||||
| Common stock issued for exercised warrants | - | 50,938 | 51 | 122,200 | 122,251 | |||||||||||||||||||||||||||
| Common stock issued for services and equipment | - | 1,200 | 2 | 4,198 | 4,200 | |||||||||||||||||||||||||||
| Employee stock awards | - | 301,250 | 301 | 1,044,824 | 1,045,125 | |||||||||||||||||||||||||||
| Stock grants | - | - | 65,098 | 65,098 | ||||||||||||||||||||||||||||
| Common stock warrant issuance | - | - | 594,034 | 594,034 | ||||||||||||||||||||||||||||
| Preferred stock dividends declared | - | - | (638,021 | ) | (638,021 | ) | ||||||||||||||||||||||||||
| Dividends accumulated on preferred stock | - | - | (144,561 | ) | (144,561 | ) | ||||||||||||||||||||||||||
| Net income/(loss) | - | - | 9,067,867 | 9,067,867 | ||||||||||||||||||||||||||||
| Balance as of December 31, 2021 | 1,400,000 | $ | 1,400 | 115,436,404 | $ | 115,437 | $ | 382,015,310 | $ | (11,002,466 | ) | $ | $ | 371,129,681 | ||||||||||||||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
| 5 |
AMMO, Inc.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOW
(Unaudited)
| For the Nine Months Ended December 31, | ||||||||
| 2022 | 2021 | |||||||
| Cash flows from operating activities: | ||||||||
| Net Income | (1,653,472 | ) | 32,720,039 | |||||
| Adjustments to reconcile Net Income/(Loss) to Net Cash provided by (used in) operations: | ||||||||
| Depreciation and amortization | 12,950,972 | 12,778,103 | ||||||
| Debt discount amortization | 62,440 | 18,905 | ||||||
| Employee stock awards | 4,457,973 | 2,898,250 | ||||||
| Stock grants | 135,344 | 197,110 | ||||||
| Stock for services | 4,200 | |||||||
| Warrants issued for services | 106,909 | 148,508 | ||||||
| Contingent consideration payable fair value | (45,572 | ) | (362,753 | ) | ||||
| Allowance for doubtful accounts | 1,327,419 | 1,097,985 | ||||||
| (Gain) on disposal of assets | (12,044 | ) | ||||||
| Reduction in right of use asset | 512,063 | 496,469 | ||||||
| Deferred income taxes | 1,283,481 | 958,019 | ||||||
| Changes in Current Assets and Liabilities | ||||||||
| Accounts receivable | 12,208,054 | (20,755,245 | ) | |||||
| Due to (from) related parties | 15,000 | |||||||
| Inventories | (8,129,249 | ) | (30,599,676 | ) | ||||
| Prepaid expenses | 1,941,206 | 1,569,928 | ||||||
| Deposits | 1,678,415 | (13,051,850 | ) | |||||
| Accounts payable | (5,852,397 | ) | 7,538,451 | |||||
| Accrued liabilities | (2,044,248 | ) | 1,310,641 | |||||
| Operating lease liability | (522,917 | ) | (514,872 | ) | ||||
| Net cash provided by (used in) operating activities | 18,431,421 | (3,559,832 | ) | |||||
| Cash flows from investing activities: | ||||||||
| Purchase of equipment | (10,566,182 | ) | (50,517,840 | ) | ||||
| Gemini acquisition | (12,868,156 | ) | ||||||
| Proceeds from disposal of assets | 59,800 | |||||||
| Net cash used in investing activities | (10,566,182 | ) | (63,326,196 | ) | ||||
| Cash flow from financing activities: | ||||||||
| Payments on inventory facility, net | (825,675 | ) | (896,287 | ) | ||||
| Proceeds from factoring liability | 57,300,000 | 86,465,962 | ||||||
| Payments on factoring liability | (56,107,221 | ) | (84,210,284 | ) | ||||
| Payments on note payable - related party | (507,508 | ) | (463,192 | ) | ||||
| Payments on insurance premium note payment | (1,916,070 | ) | (1,922,651 | ) | ||||
| Proceeds from construction note payable | 1,000,000 | |||||||
| Payments on construction note payable | (66,586 | ) | ||||||
| Preferred stock dividends paid | (2,195,075 | ) | (1,758,405 | ) | ||||
| Common stock repurchase plan | (291,011 | ) | ||||||
| Common stock issued for exercised warrants | 56,046 | 943,907 | ||||||
| Payments on assumed debt from Gemini | (50,000,000 | ) | ||||||
| Payments on note payable | (4,000,000 | ) | ||||||
| Sale of preferred stock | 35,000,000 | |||||||
| Common stock issuance costs | (3,199,922 | ) | ||||||
| Net cash used in financing activities | (3,553,100 | ) | (24,040,872 | ) | ||||
| Net increase/(decrease) in cash | 4,312,139 | (90,926,900 | ) | |||||
| Cash, beginning of period | 23,281,475 | 118,341,471 | ||||||
| Cash and restricted cash, end of period | $ | 27,593,614 | $ | 27,414,571 | ||||
(Continued)
| 6 |
AMMO, Inc.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOW
(Unaudited)
| For the Nine Months Ended December 31, | ||||||||
| 2022 | 2021 | |||||||
| Supplemental cash flow disclosures: | ||||||||
| Cash paid during the period for: | ||||||||
| Interest | $ | 433,761 | $ | 474,454 | ||||
| Income taxes | $ | 1,302,811 | $ | |||||
| Non-cash investing and financing activities: | ||||||||
| Construction note payable | $ | 10,237,032 | $ | |||||
| Insurance premium note payment | $ | 2,035,519 | $ | 2,166,852 | ||||
| Dividends accumulated on preferred stock | $ | 144,334 | $ | 144,561 | ||||
| Operating lease liability | $ | 901,076 | $ | 501,125 | ||||
| Warrants issued for services | $ | 427,639 | $ | 387,968 | ||||
| Acquisition stock issuances | $ | $ | 143,400,000 | |||||
| Warrants issued for services | $ | $ | 594,034 | |||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
| 7 |
AMMO, Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2022 and March 31, 2022
(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 their common stock 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 of the issued and outstanding shares of the common stock of the Company. 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). (PRIVCO) subsequently changes its name to AMMO Munitions, Inc.
| 8 |
AMMO, Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Accounting Basis
The accompanying unaudited condensed consolidated financial statements and related disclosures included in this Quarterly Report on Form 10-Q have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) and reflect all adjustments, which consist solely of normal recurring adjustments, needed to fairly present the financial results for these periods. Additionally, these condensed consolidated financial statements and related disclosures are presented pursuant to the rules and regulations of the Securities Exchange Commission (“SEC”).
The accompanying condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and related disclosures contained in the Company’s Annual Report filed with the SEC on Form 10-K for the year ended March 31, 2022. The results for the three and nine month period ended December 31, 2022 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, 2022 and 2021, (b) the financial position at December 31, 2022, and (c) cash flows for the nine month periods ended December 31, 2022 and 2021.
We use the accrual basis of accounting and U.S. GAAP and all amounts are expressed in U.S. dollars. The Company has a fiscal year-end of March 31st.
Unless the context otherwise requires, all references to “Ammo”, “we”, “us”, “our,” or the “Company” are to AMMO, Inc., a Delaware corporation, and its consolidated subsidiaries.
Principles of Consolidation
The condensed consolidated financial statements include the accounts of AMMO, Inc. and its wholly owned subsidiaries. All significant intercompany accounts and transactions are eliminated in consolidation.
Use of Estimates
The preparation of financial statements in conformity with U.S. GAAP requires us to make estimates and assumptions that affect the amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the balance sheet and reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates. Significant estimates made in preparing the condensed consolidated financial statements include the valuation of allowances for doubtful accounts, valuation of deferred tax assets, inventories, useful lives of assets, goodwill, intangible assets, stock-based compensation and warrant-based compensation.
Goodwill
We evaluate goodwill for impairment annually or more frequently when an event occurs or circumstances change that would more likely than not reduce the fair value of the reporting unit below its carrying amount. In testing for goodwill impairment, we may elect to utilize a qualitative assessment to evaluate whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If our qualitative assessment indicates that goodwill impairment is more likely than not, we perform a two-step impairment test. We test goodwill for impairment under the two-step impairment test by first comparing the book value of net assets to the fair value of the reporting unit. If the fair value is determined to be less than the book value or qualitative factors indicate that it is more likely than not that goodwill is impaired, a second step is performed to compute the amount of impairment as the difference between the estimated fair value of goodwill and the carrying value. We estimate the fair value of the reporting units using discounted cash flows. Forecasts of future cash flows are based on our best estimate of future net sales and operating expenses, based primarily on expected category expansion, pricing, market segment share, and general economic conditions. Due to the declines in the value of our stock price and market capitalization, we assessed qualitative factors to determine if it is more likely than not that the fair value of the Marketplace segment is less than its carrying amount. Through our analysis we determined our stock price and market capitalization decline it is not indicative of a decrease in the the fair value of our Marketplace segment and a fair value calculation using the discounted cash flows was more appropriate due to the operational performance of the reporting segment. Accordingly, the impairment of Goodwill was not warranted for the three and nine months ended December 31, 2022. As of December 31, 2022, the Company has a goodwill carrying value of $90,870,094, all of which is assigned to the Marketplace segment. However, due to declines in the value of the Company’s common stock and market capitalization, it is possible that the book values of our Marketplace segment could exceed its fair value, which may result in the recognition of a material, noncash impairment of goodwill for the year ending March 31, 2023.
| 9 |
AMMO, Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Accounts Receivable and Allowance for Doubtful Accounts
Our accounts receivable represents amounts due from customers for products sold and include an allowance for uncollectible accounts which is estimated based on the aging of the accounts receivable and specific identification of uncollectible accounts. At December 31, 2022 and March 31, 2022, we reserved $4,382,671 and $3,055,252, respectively, of allowance for doubtful accounts.
Restricted Cash
We consider cash to be restricted when withdrawal or general use is legally restricted. Our restricted cash balance is comprised of cash on deposit with banks to secure the Construction Note Payable as discussed in Note 10. We report restricted cash in the Consolidated Balance Sheets as current or non-current classification based on the expected duration of the restriction.
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. The license agreement grants us the exclusive worldwide rights through April 12, 2026 to Mr. James’ image rights and trademarks associated with him in connection with the marketing, promotion, advertising, sale, and commercial exploitation of Jesse James Branded Products. We agreed to pay Mr. James royalty fees on the sale of ammunition and non-ammunition Branded Products and to reimburse him for any out-of-pocket expenses and reasonable travel expenses.
Patents
On September 28, 2017, AMMO Technologies Inc. (“ATI”), an Arizona corporation, which is 100% owned by us, merged with Hallam, Inc, a Texas corporation, with ATI being the survivor. The primary asset of Hallam, Inc. was an exclusive license to produce projectiles and ammunition using the Hybrid Luminescence Ammunition Technology under patent U.S. 8,402,896 B1 with a publication date of March 26, 2013 owned by the University of Louisiana at Lafayette. The license was formally amended and assigned to AMMO Technologies Inc. pursuant to an Assignment and First Amendment to Exclusive License Agreement. Assumption Agreement dated to be effective as of August 22, 2017, the Merger closing date. This asset will be amortized from September 2017, the first full month of the acquired rights, through October 29, 2028.
Under the terms of the Exclusive License Agreement, the Company is obligated to pay a quarterly royalty to the patent holder, based on a $ 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, 2022 and 2021, the Company recognized royalty expenses of $89,340 and $18,558, respectively under this agreement.
| 10 |
AMMO, Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
On October 5, 2018, we completed the acquisition of SW Kenetics Inc. ATI succeeded all of the assets of SW Kenetics, Inc. and assumed all of the liabilities.
The primary asset of SW Kenetics Inc. was a pending patent for modular projectiles. All rights to patent pending application were assigned and transferred to AMMO Technologies, Inc. pursuant to Intellectual Property Rights Agreement on September 27, 2018.
We intend to continue building our patent portfolio to protect our proprietary technologies and processes, and will file new applications where appropriate to preserve our rights to manufacture and sell our branded lines of ammunition.
Other Intangible Assets
On March 15, 2019, Enlight Group II, LLC d/b/a Jagemann Munition Components, a wholly owned subsidiary of AMMO, Inc., completed its acquisition of assets of Jagemann Stamping Company’s ammunition casing manufacturing and sales operations pursuant to the terms of the Amended and Restated Asset Purchase Agreement. The intangible assets acquired include a tradename, customer relationships, and intellectual property.
On April 30, 2021, we entered into an agreement and plan of merger (the “Merger Agreement”), by and among the Company, SpeedLight Group I, LLC, a Delaware limited liability company and a wholly owned subsidiary of the Company and Gemini Direct Investments, LLC, a Nevada limited liability company. Whereby SpeedLight Group I, LLC merged with and into Gemini Direct Investments, LLC, with SpeedLight Group I, LLC surviving the merger as a wholly owned subsidiary of the Company. At the time of the Merger, Gemini Direct Investments, LLC had nine (9) subsidiaries, all of which are related to Gemini’s ownership of Gunbroker.com, an online auction marketplace dedicated to firearms, hunting, shooting, and related products. The intangible assets acquired include a tradename, customer relationships, intellectual property, software and domain names.
Impairment of Long-Lived Assets
We continually monitor events and changes in circumstances that could indicate carrying amounts of long-lived assets may not be recoverable. When such events or changes in circumstances are present, we assess the recoverability of long-lived assets by determining whether the carrying value of such assets will be recovered through undiscounted expected future cash flows. If the total of the future cash flows is less than the carrying amount of those assets, we recognize an impairment loss based on the excess of the carrying amount over the fair value of the assets. Assets to be disposed of are reported at the lower of the carrying amount or the fair value less costs to sell. No impairment expense was recognized for the three and nine months ended December 31, 2022 and 2021.
Revenue Recognition
We generate revenue from the production and sale of ammunition, ammunition casings, and marketplace fee revenue, which includes auction revenue, payment processing revenue, and shipping income. We recognize revenue according to Accounting Standard Codification – Revenue from Contract with Customers (“ASC 606”). When the customer obtains control over the promised goods or services, we record revenue in the amount of consideration that we can expect to receive in exchange for those goods and services. We apply the following five-step model to determine revenue recognition:
| ● | Identification of a contract with a customer | |
| ● | Identification of the performance obligations in the contact | |
| ● | Determination of the transaction price | |
| ● | Allocation of the transaction price to the separate performance allocation | |
| ● | Recognition of revenue when performance obligations are satisfied |
| 11 |
AMMO, Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
We only apply the five-step model when it is probable that we will collect the consideration we are entitled to in exchange for the goods or services it transfers to the customer. At contract inception and once the contract is determined to be within the scope of ASC 606, we assess the goods or services promised within each contract and determine those that are performance obligations, and assess whether each promised good or service is distinct.
For Ammunition Sales and Casing Sales, our contracts contain a single performance obligation and the entire transaction price is allocated to the single performance obligation. We recognize as revenues the amount of the transaction price that is allocated to the respective performance obligation when the performance obligation is satisfied or as it is satisfied. Accordingly, we recognize revenues (net) when the customer obtains control of our product, which typically occurs upon shipment of the product or the performance of the service. In the year ended March 31, 2021, we began accepting contract liabilities or deferred revenue. We included Deferred Revenue in our Accrued Liabilities. We will recognize revenue when the performance obligation is met.
For Marketplace revenue, the performance obligation is satisfied, and revenue is recognized as follows:
Auction revenue consists of optional listing fees with variable pricing components based on customer options selected from the GunBroker website and final value fees based on a percentage of the final selling price of the listed item. The performance obligation is to process the transactions as initiated by the customer. Revenue is recognized at a point in time when the transaction is processed.
Payment processing revenue consists of fees charged to customers on a transactional basis. The performance obligation is to process the transactions as initiated by the customer. The price is set by the GunBroker user agreement on the website based on stand-alone selling prices. Revenue is recognized at a point in time when the transaction is processed.
Shipping income consists of fees charged to customers for shipping of sold items listed on the GunBroker website. The performance obligation is to ship the item sold as initiated by the customer. The price is set based on the third-party service provider selected to be used by the customer as well as the speed and location of shipment. Revenue is recognized at a point in time when the shipping label is printed.
Banner Advertising Campaign Revenue consists of fees charged to customers for advertisement placement and impressions generated through the GunBroker website. The performance obligation is to generate the number of impressions specified by the customer on banner advertisements on the GunBroker website using the placement selected by the customer. The price is set by the GunBroker user agreement on the website based on standalone selling prices, or by advertising insertion order as negotiated by media broker. If the number of impressions promised is not generated, the customer receives a refund and the refund is applied to the transaction price. Banner advertising campaigns generally run for one month, and revenue is recognized at a point in time at the end of the selected month.
Product Sales consists of fees charged for the liquidation of excess inventory for partner distributors. The performance obligation is to sell and ship the inventory item as initiated by the customer. The price depends on whether the inventory is a fixed price item or an auction item. For a fixed price item, the Company performs research to determine the current market rate for such an item, and the item is listed at that price. For an auction item, the price is set by what the buyer is willing to pay. The Company acts as a principal in these transactions due to the extent of control they have over the product prior to the sale. Due to the principal determination, gross revenue is recognized at a point in time when the item has been shipped.
Identity Verification consists of fees charged to customers for identity verification in order to gain access to the GunBroker website. The performance obligation is to process the identity verification as initiated by the customer. The price is set by the GunBroker user agreement on the website based on a stand-alone selling price. Revenue is recognized at a point in time when the identity verification is completed.
For the three and nine months ended December 31, 2022, the Company’s customers that comprised more than ten percent (10%) of total revenues and accounts receivable were as follows:
| Revenues at December 31, 2022 | Accounts Receivable | |||||||||||||||
| PERCENTAGES | Three Months Ended | Nine Months Ended | December 31, 2022 | March 31, 2022 | ||||||||||||
| Customers: | ||||||||||||||||
| A | 12.5 | % | 18.4 | % | 11.8 | % | ||||||||||
| 12.5 | % | 18.4 | % | 11.8 | % | |||||||||||
Disaggregated Revenue Information
The following table represent a disaggregation of revenue from customers by category. We attribute net sales to categories by product or services types; ammunition, ammunition casings, and marketplace fees. We note that revenue recognition processes are consistent between product and service type, however, the amount, timing and uncertainty of revenue and cash flows may vary by each product type due to the customers of each product and service type.
| For the Three Months Ended | For the Nine Months Ended | |||||||||||||||
| December 31, 2022 | December 31, 2021 | December 31, 2022 | December 31, 2021 | |||||||||||||
| Ammunition Sales | $ | 20,250,965 | $ | 44,069,473 | $ | 90,607,817 | $ | 112,629,655 | ||||||||
| Marketplace fee revenue | 15,419,202 | 17,596,769 | 46,486,842 | 46,646,051 | ||||||||||||
| Ammunition Casings Sales | 3,041,327 | 3,022,944 | 10,661,420 | 10,891,897 | ||||||||||||
| Total Sales | $ | 38,711,494 | $ | 64,689,186 | $ | 147,756,079 | $ | 170,167,603 | ||||||||
Ammunition products are sold through “Big Box” retailers, manufacturers, local ammunition stores, and shooting range operators. We also sell directly to customers online. In contrast, our ammunition casings products are sold to manufacturers. Marketplace fees are generated through our GunBroker.com online auction marketplace.
Advertising Costs
We expense advertising costs as they are incurred in selling and marketing expenses of operating expenses. Marketplace advertising costs are expenses as they are incurred in cost of revenues. We incurred advertising expenses of $912,959 and $448,367 for the nine months ended December 31, 2022 and 2021, respectively, recognized in selling and marketing expenses and $243,246 and $193,752 of marketplace advertising expenses recognized in cost of revenues for the nine months ended December 31, 2022 and 2021, respectively.
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, 2022. The respective carrying value of certain on-balance-sheet financial instruments approximated their fair value. These financial instruments include cash, accounts receivable, accounts payable, amounts due to related parties, factoring liability, and the construction note payable. 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.
Inventories
We state inventories at the lower of cost or net realizable value. We determine cost using the average cost method. Our inventory consists of raw materials, work in progress, and finished goods. Cost of inventory includes cost of parts, labor, quality control, and all other costs incurred to bring our inventories to condition ready to be sold. We periodically evaluate and adjust inventories for obsolescence.
| 12 |
AMMO, Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Property and Equipment
We state property and equipment at cost, less accumulated depreciation. We capitalize major renewals and improvements, while we charge minor replacements, maintenance, and repairs to current operations. We compute depreciation by applying the straight-line method over estimated useful lives, which are generally five to ten years.
Compensated Absences
We accrue a liability for compensated absences in accordance with Accounting Standards Codification 710 – Compensation – General (“ASC 710”).
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.
We account for stock-based compensation at fair value in accordance with Accounting Standards Codification 718 – Compensation – Stock Compensation (“ASC 718”). Which requires the measurement and recognition of compensation expense for all share-based payment awards to employees and directors. Stock-based compensation is recognized on a straight line basis over the vesting periods and forfeitures are recognized in the periods they occur. There were and shares of common stock issued to employees, members of the Board of Directors, and members of our advisory committee for services during the three and nine months ended December 31, 2022
Concentrations of Credit Risk
Accounts at banks are insured by the Federal Deposit Insurance Corporation (“FDIC”) up to $250,000. As of December 31, 2022, our bank account balances exceeded federally insured limits.
Income Taxes
We file federal and state income tax returns in accordance with the applicable rules of each jurisdiction. We account for income taxes under the asset and liability method in accordance with Accounting Standards Codification 740 – Income Taxes (“ASC 740”). The provision for income taxes includes federal, state, and local income taxes currently payable, and deferred taxes. We recognize deferred tax assets and liabilities for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax basis. We measure deferred tax assets and liabilities using enacted tax rates expected to apply to taxable amounts in years in which those temporary differences are expected to be recovered or settled. If it is more likely than not that some portion or all of a deferred tax asset will not be realized, a valuation allowance is recognized. In accordance with ASC 740, we recognize the effect of income tax positions only if those positions are more likely than not of being sustained. We measure recognized income tax positions at the largest amount that is greater than 50% likely of being realized. We reflect changes in recognition or measurement in the period in which the change in judgment occurs.
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 nine months ended December 31, 2022 and 2021, we recognized approximately $7.8 million and $10.3 million respectively, in excise taxes. For ease in selling to commercial markets, excise tax is included in our unit price for the products sold. We record this through net sales and expense the offsetting tax expense to cost of goods sold.
| 13 |
AMMO, Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Contingencies
Certain conditions may exist as of the date the condensed consolidated financial statements are issued that may result in a loss to us but will only be resolved when one or more future events occur or fail to occur. We assess such contingent liabilities, and such assessment inherently involves an exercise of judgment. In assessing loss contingencies related to legal proceedings that are pending against us or unasserted claims that may result in such proceedings, we evaluate the perceived merits of any legal proceedings or unasserted claims and the perceived merits of the amount of relief sought or expected to be sought therein.
If the assessment of a contingency indicates that it is probable that a material loss has been incurred and the amount of the liability is reasonably estimated, the estimated liability would be accrued in our condensed consolidated financial statements. If the assessment indicates that a potentially material loss contingency is not probable but is reasonably possible, or is probable but cannot be estimated, then the nature of the contingent liability, together with an estimate of range of possible loss if determinable and material, would be disclosed. On September 24, 2019, the Company received notice that a former employee that had voluntarily terminated filed a complaint against the Company, and certain individuals, with the U.S. Department of Labor (“DOL”). The Complaint in alleges that the individual reported potential violations of SEC rules and regulations by management and that as a result of such disclosures, the individual experienced a hostile work environment; that the Company lacks sufficient internal controls, and that the individual was the victim of retaliation and constructive discharge after being removed as a director by majority vote of the shareholders. The claims were investigated by a newly appointed Special Investigative Committee made up of independent directors represented by special independent legal counsel. The Special Investigative Committee and legal counsel found the material claims were unsubstantiated, including those concerning alleged SEC violations, and recommended enhancements to certain corporate governance charter documents and processes which the Company promptly implemented. The Parties participated in a successful mediation at the end of June 2022 and all matters relating to this former employee/claimant were confidentially resolved with the lawsuit dismissed with prejudice (Order pending). The settlement was covered by our Employment Practices Liability Policy and did not amount to a material amount. On February 10, 2022, AMMO filed a Texas state court complaint against Expansion Industries pursing eight (8) claims in pursuit of recovery of AMMO’s in primer acquisition deposit monies (i.e., Breach of Contract, Common Law Fraud, Violations of Texas Theft Liability Act, Conversion, Negligent Misrepresentation, Unjust Enrichment, Money Had and Received and Constructive Trust). AMMO has since moved aggressively to further the process, including successfully garnishing a portion of the deposit monies in Expansion bank accounts, filing a Motion for Summary Judgement, continuing to pursue written discovery, and amending the Complaint to add Expansion principal as an individual party. The putative primer manufacturer settled the two related lawsuits in September 2022 by repaying all deposit monies due AMMO, in addition to payment of principally all fees and costs incurred by the Company in pursuit of the resolution. The principal lawsuit and AMMO’s garnishment action adverse the defendant were dismissed with prejudice. Along with countless other suppliers of Remington Outdoors, AMMO was served with an avoidance claim lawsuit by the bankruptcy trustee. AMMO presented substantial “ordinary course” defense evidence to the Trustee and the case was settled for a nominal sum in September 2022, with the lawsuit dismissed with prejudice. AMMO is defending two contract arbitration cases involving adverse former employees that are presently in discovery, one involving an employee terminated for cause and the second action involving a termination without cause wherein the former employee is seeking contract wages, commissions and allegedly earned common stock. The Company also received notice in October that an OSHA whistleblower complaint had been filed with the US Department of Labor by an employee that had been terminated for cause. The regulatory filing was received after AMMO refused to capitulate to the former employee’s demands. AMMO has produced documents and submitted its position statement to OSHA and the matter is currently pending at the agency level. There were no other known contingencies at December 31, 2022.
| 14 |
AMMO, Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
We calculate basic income per share using the weighted-average number of shares of common stock outstanding during each reporting period. Diluted loss per share includes potentially dilutive securities, such as outstanding options and warrants. We use the treasury stock method, in the determination of dilutive shares outstanding during each reporting period. We have issued warrants to purchase shares of common stock. Due to the net loss attributable to common shareholders for the three and nine months ended December 31, 2022, potentially dilutive securities, which consists of and ( and warrants, respectively, for the three and nine months ended December 31, 2022 were excluded as a result of the treasury stock method) common stock purchase warrants and and equity incentive awards, respectively for the three and nine months ended December 31, 2022, have been excluded from the dilutive EPS calculation as the effect would be antidilutive.
| For the Three Months Ended December 31, | For the Nine Months Ended December 31, | |||||||||||||||
| 2022 | 2021 | 2022 | 2021 | |||||||||||||
| Numerator: | ||||||||||||||||
| Net income/(loss) | $ | (4,102,992 | ) | $ | 9,067,867 | $ | (1,653,472 | ) | $ | 32,720,039 | ||||||
| Less: Preferred stock dividends | (782,639 | ) | (782,582 | ) | (2,339,409 | ) | (1,902,966 | ) | ||||||||
| Net income/(loss) attributable to common stockholders | $ | (4,885,631 | ) | $ | 8,285,285 | $ | (3,992,881 | ) | $ | 30,817,073 | ||||||
| Denominator: | ||||||||||||||||
| Weighted average shares of common stock – Basic | 117,348,511 | 114,757,014 | 116,950,013 | 111,289,024 | ||||||||||||
| Effect of dilutive common stock purchase warrants | 1,835,395 | 1,934,172 | ||||||||||||||
| Effect of dilutive equity incentive awards | 125,091 | 127,802 | ||||||||||||||
| 117,348,511 | 116,717,500 | 116,950,013 | 113,350,998 | |||||||||||||
| Basic earnings per share: | ||||||||||||||||
| Income/(loss) per share attributable to common stockholders – basic | $ | (0.04 | ) | $ | 0.07 | $ | (0.03 | ) | $ | 0.28 | ||||||
| Diluted earnings per share: | ||||||||||||||||
| Income/(loss) per share attributable to common stockholders – diluted | $ | (0.04 | ) | $ | 0.07 | $ | (0.03 | ) | $ | 0.27 | ||||||
| (1) | Weighted average of contingently issuable shares measured from the effective date of merger, April 30, 2021 |
NOTE 4 – INVENTORIES
At December 31, 2022 and March 31, 2022, the inventory balances are composed of:
December 31, 2022 | March 31, 2022 | |||||||
| Finished product | $ | 20,760,747 | $ | 6,167,318 | ||||
| Raw materials | 31,387,096 | 33,924,813 | ||||||
| Work in process | 14,997,558 | 18,924,021 | ||||||
| $ | 67,145,401 | $ | 59,016,152 | |||||
NOTE 5 – PROPERTY AND EQUIPMENT
We state equipment at historical cost less accumulated depreciation. We compute depreciation using the straight-line method at rates intended to depreciate the cost of assets over their estimated useful lives, which are generally to ten years. Upon retirement or sale of property and equipment, we remove the cost of the disposed assets and related accumulated depreciation from the accounts and any resulting gain or loss is credited or charged to other income. We charge expenditures for normal repairs and maintenance to expense as incurred.
We capitalize additions and expenditures for improving or rebuilding existing assets that extend the useful life. Leasehold improvements made either at the inception of the lease or during the lease term are amortized over the shorter of their economic lives or the lease term including any renewals that are reasonably assured.
| 15 |
AMMO, Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Property and Equipment consisted of the following at December 31, 2022 and March 31, 2022:
| December 31, 2022 | March 31, 2022 | |||||||
| Building | $ | 28,113,684 | $ | |||||
| Construction in progress | 1,834,688 | 14,335,371 | ||||||
| Leasehold Improvements | 257,009 | 257,009 | ||||||
| Furniture and Fixtures | 368,359 | 343,014 | ||||||
| Vehicles | 153,254 | 153,254 | ||||||
| Equipment | 37,689,716 | 32,524,850 | ||||||
| Tooling | 143,710 | 143,710 | ||||||
| Total property and equipment | $ | 68,560,420 | $ | 47,757,208 | ||||
| Less accumulated depreciation | (13,270,092 | ) | (10,119,402 | ) | ||||
| Net property and equipment | $ | 55,290,328 | $ | 37,637,806 | ||||
Depreciation Expense for the three and nine months ended December 31, 2022 totaled $1,089,243, and $3,150,691, respectively. Depreciation Expense for the three and nine months ended December 31, 2021 totaled $1,087,550, and $3,184,976, respectively.
NOTE 6 – FACTORING LIABILITY
On July 1, 2019, we entered into a Factoring and Security Agreement with Factors Southwest, LLC (“FSW”). FSW may purchase from time to time the Company’s Accounts Receivables with recourse on an account by account basis. The twenty-four month agreement contains a maximum advance amount of $5,000,000 on 85% of eligible accounts and has an annualized interest rate of the Prime Rate published from time to time by the Wall Street Journal plus 4.5%. The agreement contains fee of 3% ($150,000) of the Maximum Facility assessed to the Company. Our obligations under this agreement are secured by present and future accounts receivables and related assets, inventory, and equipment. The Company has the right to terminate the agreement, with 30 days written notice, upon obtaining a non-factoring credit facility. This agreement provides the Company with the ability to convert our account receivables into cash. As of December 31, 2022, the outstanding balance of the Factoring Liability was $1,678,450. For the three and nine months ended December 31, 2022, interest expense recognized on the Factoring Liability was $42,286 and $111,220 including $37,500 of amortization of the commitment fee and for the three and nine months ended December 31, 2021, interest expense recognized on the Factoring Liability was $103,876 and $216,242, respectively, including $37,500 of amortization of the commitment fee.
On June 17, 2021, this agreement was amended which extended the maturity date to June 17, 2023.
NOTE 7 – INVENTORY CREDIT FACILITY
On June 17, 2020, we entered into a Revolving Inventory Loan and Security Agreement with FSW. FSW will establish a revolving credit line, and make loans from time to time to the Company for the purpose of providing capital. The twenty-four month agreement secured by our inventory, among other assets, contains a maximum loan amount of $1,750,000 on eligible inventory and has an annualized interest rate of the greater of the three-month LIBOR rate plus 3.09% or 8%. The agreement contains a fee of 2% of the maximum loan amount ($35,000) assessed to the Company. On July 31, 2020, the Company amended its Revolving Loan and Security Agreement to increase the maximum inventory loan amount to $2,250,000. As of December 31, 2022, there was no outstanding balance of the Inventory Credit Facility. Interest expense recognized on the Inventory Credit Facility for the nine months ended December 31, 2022 and 2021 was $6,580 and $24,256 (including $8,561 of amortization of the annual fee), respectively.
NOTE 8 – LEASES
We lease office, manufacturing, and warehouse space in Scottsdale, AZ, Atlanta and Marietta, GA, and Manitowoc, WI under contracts we classify as operating leases. None of our leases are financing leases. The Scottsdale lease does not include a renewal option. In August of 2021 we extended the lease of our Atlanta offices through May of 2027, accordingly we increased our Right of Use Assets and Operating Lease Liabilities by $501,125 at September 30, 2021. In January of 2022, we extended the lease of our second Manitowoc, WI location and increased our Right of Use Assets and Operating Lease Liabilities by $308,326. We terminated our lease agreement in our first Manitowoc, WI location during the nine months ended December 31, 2022. Accordingly, we decreased our Right of Use Assets and Operating Lease Liabilities by $901,076.
As of December 31, 2022 and March 31, 2022, total Right of Use Assets were $1,378,711 and $2,791,850, respectively. As of December 31, 2022 and March 31, 2022, total Operating Lease Liabilities were $1,498,787 and $2,922,780, respectively. The current portion of our Operating Lease Liability on December 31, 2022 and March 31, 2022 is $518,778 and $831,429 respectively and is reported as a current liability. The remaining $980,009 of the total $1,498,787 for the quarter ended December 31, 2022 and the $2,091,351 of the total $2,922,780 for the year ended March 31, 2022 of the Operating Lease Liability is presented as a long-term liability net of the current portion.
| 16 |
AMMO, Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The weighted average remaining lease term and weighted average discount rate for operating leases were 3.4 years and 10.0%, respectively.
Future minimum lease payments under non-cancellable leases as of December 31, 2022 are as follows:
| Years Ended March 31, | ||||
| 2023 (1) | $ | 160,757 | ||
| 2024 | 583,768 | |||
| 2025 | 387,214 | |||
| 2026 | 351,962 | |||
| 2027 | 257,508 | |||
| Thereafter | 43,516 | |||
| 1,784,725 | ||||
| Less: Amount Representing Interest | (285,938 | ) | ||
| $ | 1,498,787 | |||
| (1) | This amount represents future lease payments for the remaining three months of fiscal year 2023. It does not include any lease payments for the nine months ended December 31, 2022. |
NOTE 9 – NOTES PAYABLE – RELATED PARTY
For the three and nine months ended December 31, 2022, the Company made $173,134 and $507,507 in principal payments, respectively, in connection with the Amended Note B, an amended related party note payable with Jagemann Stamping Company (“JSC”). We entered into the Amended Note B with JSC on November 4, 2020 and the note matures on June 26, 2023. We recognized $12,753 and $41,450 in respective interest expenses for the three and nine months ended December 31, 2022, respectively.
| 17 |
AMMO, Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 10 – CONSTRUCTION NOTE PAYABLE
On October 14, 2021, we entered into a Construction Loan Agreement (the “Loan Agreement”) with Hiawatha National Bank (“Hiawatha”). The Loan Agreement specifies that Hiawatha may lend up to $11,625,000 to the Borrower to pay a portion of the construction costs of an approximately 160,000 square foot manufacturing facility to be constructed on our property (the “Loan”). The first advance of Loan funds by Hiawatha was made on October 14, 2021 in the amount of $329,843. We expect to receive further advances of Loan funds approximately every month as our “owner’s equity” is fully funded into the ongoing new plant construction project. The Loan is an advancing term loan and not a revolving loan so any portion of the principal repaid cannot be reborrowed.
Additionally, on October 14, 2021, we issued a Promissory Note in favor of Hiawatha (the “Note”) in the amount of up to $11,625,000 with an interest rate of four and one-half percent (4.5%). The maturity date of the Note is October 14, 2026.
We can prepay the Note in whole or in part starting in July 2022 with a prepayment premium of one percent (1%) of the principal being prepaid.
The Loan Agreement contains customary events of default including, but not limited to, a failure to make any payments pursuant to the Loan Agreement or Note, a failure to complete construction of the project, a lien of $100,000 or more against the property, or a transfer of the property without Hiawatha’s consent. Upon the occurrence of an event of default, among other remedies, the amounts due pursuant to the Loan can be accelerated, Hiawatha can foreclose on the property pursuant to the mortgage, and a late charge of five percent (5%) of the amount due will be owed with all amounts then owed pursuant to the Note bearing interest at an increased rate.
For the nine months ended December 31, 2022, approximately $11.2 million of Loan funds were advanced including $1.0 million of cash collateral or restricted cash as security for the Loan. We made $66,585 in principal payments for the three and nine months ended December 31, 2022. The restricted cash can be released per the terms documented in the Loan Agreement filed with the Commission on Form 10-Q on February 14, 2022. During the nine months ended December 31, 2022, $500,000 of restricted cash was released to the Company.
NOTE 11 – CAPITAL STOCK
Our authorized capital consists of shares of common stock with a par value of $ per share.
During the nine month period ended December 31, 2022, we issued shares of common stock as follows:
| ● | shares were issued for cashless exercise of warrants | |
| ● | shares were issued for the exercise of warrants for a total value of $56,046 | |
| ● | shares valued at $4,457,973 were issued to employees, members of the Board of Directors, and members of the Advisory Committee as compensation |
| 18 |
AMMO, Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
At December 31, 2022, outstanding and exercisable stock purchase warrants consisted of the following:
| Number of Shares | Weighted Average Exercise Price | Weighted Average Life Remaining | ||||||||||
| Outstanding at March 31, 2022 | 2,933,755 | $ | 2.32 | |||||||||
| Granted | 150,000 | 0.01 | - | |||||||||
| Exercised | (277,273 | ) | 0.21 | - | ||||||||
| Forfeited or cancelled | (25,000 | ) | 2.00 | - | ||||||||
| Outstanding at December 31, 2022 | 2,781,482 | $ | 2.41 | |||||||||
| Exercisable at December 31, 2022 | 2,781,482 | $ | 2.41 | |||||||||
As of December 31, 2022, we had 2,781,482 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 911 shares of Common Stock at an exercise price of $1.65 per share until April 2025; (2) warrants to purchase 1,769,294 shares of our Common Stock at an exercise price of $2.00 per share consisting of 30% of the warrants until August 2024, and 70% until February 2026; (3) warrants to purchase 474,966 shares of Common Stock at an exercise price of $2.40 until September 2024; (4) warrants to purchase 386,311 shares of Common Stock at an exercise price of $2.63 until November 2025, and (5) warrants to purchase 150,000 shares of Common Stock at an exercise price of $6.72 until February 2024.
During the three months ended December 31, 2022, the Company issued warrants for services to purchase shares of Common Stock at an exercise price of $. The total value of the warrants was $427,639.
| 19 |
AMMO, Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 12 – PREFERRED STOCK
On May 18, 2021, the Company filed a Certificate of Designations (the “Certificate of Designations”) with the Secretary of State of the State of Delaware to establish the preferences, voting powers, limitations as to dividends or other distributions, qualifications, terms and conditions of redemption and other terms and conditions of the Series A Preferred Stock.
The Company will pay cumulative cash dividends on the Series A Preferred Stock when, as and if declared by its board of directors (or a duly authorized committee of its board of directors), only out of funds legally available for payment of dividends. Dividends on the Series A Preferred Stock will accrue on the stated amount of $ per share of the Series A Preferred Stock at a rate per annum equal to 8.75% (equivalent to $2.1875 per year), payable quarterly in arrears. Dividends on the Series A Preferred Stock declared by our board of directors (or a duly authorized committee of our board of directors) will be payable quarterly in arrears on March 15, June 15, September 15 and December 15.
Generally, the Series A Preferred Stock is not redeemable by the Company prior to May 18, 2026. However, upon a change of control or delisting event (each as defined in the Certificate of Designations), the Company will have a special option to redeem the Series A Preferred Stock for a limited period of time.
Preferred dividends accumulated as of December 31, 2022 were $144,334. On November 18, 2022, the Board of Directors of the Company declared a dividend on the Company’s Series A Preferred Stock for the period beginning September 15, 2022 through and including December 14, 2022 payable on December 15, 2022 to holders of record of Series A Preferred Stock on November 30, 2022 equal to $0.5529514 per share. Dividends totaling $774,132 were paid on December 15, 2022. On August 17, 2022, the Board of Directors of the Company declared a dividend on the Company’s Series A Preferred Stock for the period beginning June 15, 2022 through and including September 14, 2022 payable on September 15, 20221 to holders of record of Series A Preferred Stock on August 31, 2022 equal to $$0.55902778 per share. Dividends totaling $782,639 were paid on September 15, 2022. On May 12, 2022, the Board of Directors of the Company declared a dividend on the Company’s Series A Preferred Stock for the period beginning March 15, 2022 through and including June 14, 2022 payable on June 15, 2022 to holders of record of Series A Preferred Stock on May 31, 2022 equal to $0.559027777777778 per share. Dividends totaling $782,639 were paid on June 15, 2022.
| 20 |
AMMO, Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 13 – ACQUISITION
Gemini Direct Investments, LLC
On April 30, 2021 (the “Effective Date”) we entered into an agreement and plan of merger (the “Merger Agreement”), by and among the Company, SpeedLight Group I, LLC, a Delaware limited liability company and a wholly owned subsidiary of the Company (“Sub”), Gemini Direct Investments, LLC, a Nevada limited liability company (“Gemini”), and Steven F. Urvan, an individual (the “Seller”), whereby Sub merged with and into Gemini, with Sub surviving the merger as a wholly owned subsidiary of the Company (the “Merger”). At the time of the Merger, Gemini had nine (9) subsidiaries, all of which are related to Gemini’s ownership of the GunBroker.com business. GunBroker.com is an on-line auction marketplace dedicated to firearms, hunting, shooting, and related products. The Merger was completed on the Effective Date.
In consideration of the Merger, on the terms and subject to the conditions set forth in the Merger Agreement, on the Effective Date, (i) the Company assumed and repaid an aggregate amount of indebtedness of Gemini and its subsidiaries equal to $50,000,000 (the “Assumed Indebtedness”); and, (ii) the issued and outstanding membership interests in Gemini (the “Membership Interests”), held by the Seller, automatically converted into the right to receive (A) $50,000,000 (the “Cash Consideration”), and (B) shares of common stock of the Company, $ par value per share (the “Stock Consideration”).
In connection with the Merger Agreement, the Company and the Seller agreed that the Stock Consideration consisted of: (a) shares issued without being held in escrow or requiring prior stockholder approval; (b) shares issued subject to the Pledge and Escrow Agreement; and (c) shares that will not be issued prior to the Company obtaining stockholder approval for the issuance (the “Additional Securities”).
The total estimated consideration consisted of cash payment of $50,000,000 less $1,350,046 of acquired cash, a working capital adjustment of $2,000,000, debt assumption and repayment upon closing of $50,000,000, contingent consideration of $10,755,000 for Additional Securities, and 18,500,000 shares of AMMO Inc. Common Stock. The shares were valued at $ per share, the five-day average closing price of the Company’s Common Stock immediately preceding the signing of the binding agreement.
Pursuant to the Merger Agreement, the Company completed a Post-Closing Adjustment following the close of the Merger equal to the Closing Working Capital minus the Estimated Working Capital at closing of the Merger. Accordingly, the Company received a cash payment of $129,114 and adjusted the $2,000,000 Estimated Working Capital Adjustment in the fair value of the consideration transferred to $1,870,886.
In accordance with the acquisition method of accounting for business combinations, the assets acquired, and the liabilities assumed have been recorded at their respective fair values. The consideration in excess of the fair values of assets acquired, and liabilities assumed are recorded as goodwill.
The fair value of the consideration transferred was valued as of the date of the acquisition as follows:
| Cash | $ | 48,649,954 | ||
| Working capital adjustment | 1,870,886 | |||
| Contingent consideration | 10,755,000 | |||
| Common stock | 132,645,000 | |||
| Assumed debt | 50,000,000 | |||
| $ | 243,920,840 |
The allocation for the consideration recorded for the acquisition is as follows:
| Accounts receivable, net | $ | 17,002,362 | ||
| Prepaid expenses | 478,963 | |||
| Equipment | 1,051,980 | |||
| Deposits | 703,389 | |||
| Other Intangible assets(1) | 146,617,380 | |||
| Goodwill(1) | 90,870,094 | |||
| Right of use assets – operating leases | 612,727 | |||
| Accounts payable | (12,514,919 | ) | ||
| Accrued expenses | (196,780 | ) | ||
| Operating lease liability | (704,356 | ) | ||
| Total Consideration | $ | 243,920,840 |
| (1) | Other intangible assets consist of Tradenames, Customer Relationships, Intellectual Property, and other tangible assets related to the acquired business. |
Unaudited Pro Forma Results of Operations
This pro forma results of operations gives effect to the acquisition as if it had occurred April 1, 2021. Material pro forma adjustments include the removal of approximately $1.8 million of interest expenses and debt discount amortization and the addition of approximately $0.9 million depreciation and amortization expenses.
| INCOME STATEMENT DATA | For the Nine Months Ended December 31, 2021 | |||
| Net revenues | $ | 178,213,024 | ||
| Net income | $ | 37,266,527 | ||
| 21 |
AMMO, Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 14 – GOODWILL AND INTANGIBLE ASSETS
During our fiscal year ended March 31, 2022, we recorded $90,870,094 of Goodwill generated from our Merger with Gemini.
Amortization expenses related to our intangible assets for the three and nine months ended December 31, 2022 were $3,266,761 and $9,800,281, respectively. Amortization expenses related to our intangible assets for the three and nine months ended December 31, 2021 were $3,535,805 and $9,593,127.
| December 31, 2022 | ||||||||||||||||
| Life | Licenses | Patent | Other Intangible Assets | |||||||||||||
| Licensing Agreement – Jesse James | 5 | $ | 125,000 | $ | - | $ | - | |||||||||
| Licensing Agreement – Jeff Rann | 5 | 125,000 | - | - | ||||||||||||
| Streak Visual Ammunition patent | 11.2 | - | 950,000 | - | ||||||||||||
| SWK patent acquisition | 15 | - | 6,124,005 | - | ||||||||||||
| Jagemann Munition Components: | ||||||||||||||||
| Customer Relationships | 3 | - | - | 1,450,613 | ||||||||||||
| Intellectual Property | 3 | - | - | 1,543,548 | ||||||||||||
| Tradename | 5 | - | - | 2,152,076 | ||||||||||||
| GDI Acquisition: | ||||||||||||||||
| Tradename | 15 | - | - | 76,532,389 | ||||||||||||
| Customer List | 10 | - | - | 65,252,802 | ||||||||||||
| Intellectual Property | 10 | - | - | 4,224,442 | ||||||||||||
| Other Intangible Assets | 5 | - | - | 607,747 | ||||||||||||
| 250,000 | 7,074,005 | 151,763,617 | ||||||||||||||
| Accumulated amortization – Licensing Agreements | (250,000 | ) | - | - | ||||||||||||
| Accumulated amortization – Patents | - | (1,917,885 | ) | - | ||||||||||||
| Accumulated amortization – Intangible Assets | - | - | (24,893,412 | ) | ||||||||||||
| $ | $ | 5,156,120 | $ | 126,870,205 | ||||||||||||
Annual amortization of intangible assets for the next five fiscal years are as follows:
| Years Ended March 31, | Estimates for Fiscal Year | |||
| 2023 (1) | $ | 3,294,934 | ||
| 2024 | 13,074,489 | |||
| 2025 | 12,664,775 | |||
| 2026 | 12,664,775 | |||
| 2027 | 12,553,355 | |||
| Thereafter | 77,773,997 | |||
| $ | 132,026,325 | |||
| (1) | This amount represents future amortization for the remaining nine months of fiscal year 2023. It does not include any amortization for the nine months ended December 31, 2022. |
| 22 |
AMMO, Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 15 – SEGMENTS
On April 30, 2021, we entered into an agreement and plan of merger with Gemini, which, along with its subsidiaries, engages primarily in the operation of an online marketplace dedicated to firearms, hunting, shooting and related products, which created a second reportable segment. Our Chief Executive Officer reviews financial performance based on our two operating segments as follows:
| ● | Ammunition – which consists of our manufacturing business. The Ammunition segment engages in the design, production and marketing of ammunition and ammunition component products. | |
| ● | Marketplace – which consists of the GunBroker.com marketplace. In its role as an auction site, GunBroker.com supports the lawful sale of firearms, ammunition and hunting/shooting accessories. |
In the current period, we began the reporting of the separate allocation of certain corporate general and administrative expenses including non-cash stock compensation expense, as such we have updated the prior period disclosure herein. The following tables set forth certain financial information utilized by management to evaluate our operating segments for the interim period presented:
| For the Three Months Ended December 31, 2022 | ||||||||||||||||
| Ammunition | Marketplace | Corporate and other expenses | Total | |||||||||||||
| Net Revenues | $ | 23,292,292 | $ | 15,419,202 | $ | $ | 38,711,494 | |||||||||
| Cost of Revenues | 23,865,275 | 2,319,040 | 26,184,315 | |||||||||||||
| General and administrative expense | 4,838,081 | 1,719,707 | 6,993,592 | 13,551,380 | ||||||||||||
| Depreciation and amortization | 143,378 | 3,165,696 | 3,309,074 | |||||||||||||
| Income/(Loss) from Operations | $ | (5,554,442 | ) | $ | 8,214,759 | $ | (6,993,592 | ) | $ | (4,333,275 | ) | |||||
For the Nine Months Ended December 31, 2022 | ||||||||||||||||
| Ammunition | Marketplace | Corporate and other expenses | Total | |||||||||||||
| Net Revenues | $ | 101,269,237 | $ | 46,486,842 | $ | $ | 147,756,079 | |||||||||
| Cost of Revenues | 97,555,732 | 6,701,797 | 104,257,529 | |||||||||||||
| General and administrative expense | 12,117,828 | 6,713,561 | 14,490,456 | 33,321,845 | ||||||||||||
| Depreciation and amortization | 437,694 | 9,513,058 | 9,950,752 | |||||||||||||
| Income/(Loss) from Operations | $ | (8,842,017 | ) | $ | 23,558,426 | $ | (14,490,456 | ) | $ | 225,953 | ||||||
| For the Three Months Ended December 31, 2021 | ||||||||||||||||
| Ammunition | Marketplace | Corporate and other expenses | Total | |||||||||||||
| Net Revenues | $ | 47,092,417 | $ | 17,596,769 | $ | $ | 64,689,186 | |||||||||
| Cost of Revenues | 39,904,811 | 2,261,509 | 42,166,320 | |||||||||||||
| General and administrative expense | 3,941,639 | 2,251,146 | 1,994,339 | 8,187,124 | ||||||||||||
| Depreciation and amortization | 420,077 | 3,305,844 | 3,725,921 | |||||||||||||
| Income/(loss) from Operations | $ | 2,825,890 | $ | 9,778,270 | $ | (1,994,339 | ) | $ | 10,609,821 | |||||||
| For the Nine Months Ended December 31, 2021 | ||||||||||||||||
| Ammunition | Marketplace | Corporate and other expenses | Total | |||||||||||||
| Net Revenues | $ | 123,521,552 | $ | 46,646,051 | $ | $ | 170,167,603 | |||||||||
| Cost of Revenues | 96,203,542 | 6,254,233 | 102,457,775 | |||||||||||||
| General and administrative expense | 10,068,430 | 5,400,925 | 7,676,826 | 23,146,181 | ||||||||||||
| Depreciation and amortization | 1,260,064 | 8,784,930 | 10,044,994 | |||||||||||||
| Income/(Loss) from Operations | $ | 15,989,516 | $ | 26,205,963 | $ | (7,676,826 | ) | $ | 34,518,653 | |||||||
| 23 |
AMMO, Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 16 – INCOME TAXES
The income tax provision effective tax rates were 14.9% and 482.1% for the three and nine months ended December 31, 2022, 13.0% and 4.0% for the three and nine months ended December 31, 2021, respectively. During the three and nine months ended December 31, 2022, the effective tax rate differed from the U.S. federal statutory rate primarily due to state income taxes. For the three and nine months ended December 31, 2021 the effective tax rate differed from the U.S. federal statutory rate due to our valuation. The effective tax rates increased during the three and nine months ended December 31, 2022 compared to the prior year period due to the removal of our valuation allowance.
The Company has never had an Internal Revenue Service audit; therefore, the tax periods ended December 31, 2016, December 31, 2017, and March 31, 2018, 2019, 2020, 2021, and 2022 are subject to audit.
NOTE 17 – RELATED PARTY TRANSACTIONS
Through our acquisition of Gemini, a related party relationship was created through one of our Members of the Board of Directors by ownership of entities that transacts with Gemini. Our Accounts Receivable consisted of $182,344 in receivables from these entities at December 31, 2022. We recognized $222,300 in Marketplace Revenue for the nine months ended December 31, 2022 that was attributable to that relationship. We issued shares of Common Stock for a total value of $105,000 to this Member of the Board of Directors as consideration for service on the Board.
During the nine months ended December 31, 2022, we paid $211,712 in service fees to two independent contractors and shares in the aggregate to our advisory committee members for service for a total value of $129,705.
Settlement Agreement
On November 3, 2022, AMMO, Inc. (the “Company”) entered into a Settlement Agreement (the “Settlement Agreement”) with Steven F. Urvan and Susan T. Lokey (collectively with each of their respective affiliates and associates, the “Urvan Group”).
Pursuant to the Settlement Agreement, the Urvan Group has agreed to withdraw its notice of stockholder nomination of its seven director candidates (the “Urvan Candidates”) and its demand to inspect books and records, pursuant to Section 220 of the General Corporation Law of the State of Delaware, and the Company agreed to immediately increase the size of the Board from seven to nine directors and appoint Christos Tsentas and Wayne Walker (each, a “New Director” and the New Directors together with Mr. Urvan, the “Urvan Group Directors”) to the Board to serve as directors with terms expiring at the 2022 annual meeting of stockholders (the “2022 Annual Meeting”). The Company will include the Urvan Group Directors in its director candidates slate for the 2022 Annual Meeting and any subsequent annual meeting of stockholders of the Company occurring prior to the Termination Date (as defined below). The Company has agreed to not increase the size of the Board above nine directors prior to the Termination Date unless the increase is approved by at least seven directors. Mr. Wagenhals will continue to serve as a director and Chairman of the Board.
Unless otherwise mutually agreed to in writing by each party, the Settlement Agreement will remain in effect until the date that is the earlier of (i) 30 days prior to the earlier of (A) the deadline set forth in the notice requirements of Federal “Universal Proxy Rules” promulgated under Rule 14a-19(a) and Rule 14a-19(b) under the Securities Exchange Act of 1934, as amended (the “UPR Deadline”) relating to the Company’s 2023 annual meeting of stockholders (the “2023 Annual Meeting”) and (B) any deadline that may be set forth in the Company’s Amended and Restated Certificate of Incorporation (as amended from time to time, the “Certificate”) or Bylaws (the “Bylaws”) following the execution of the Settlement Agreement relating to the nomination of director candidates for election to the Board at the 2023 Annual Meeting, and (ii) 90 days prior to the first anniversary of the 2022 Annual Meeting (such date, the “Termination Date”). However, if the Company notifies Mr. Urvan in writing at least 15 days prior to such Termination Date that the Board irrevocably offers to re-nominate the Urvan Group Directors for election at the 2023 Annual Meeting and Mr. Urvan accepts such offer within 15 days of receipt of such notice, the Termination Date will be automatically extended until the earlier of (i) 30 days prior to the earlier of (A) the UPR Deadline relating to the Company’s 2024 annual meeting of stockholders (the “2024 Annual Meeting”) and (B) any deadline that may be set forth in the Certificate or the Bylaws following execution of the Settlement Agreement relating to the nomination of director candidates for election to the Board at the 2024 Annual Meeting, and (ii) 90 days prior to the first anniversary of the 2023 Annual Meeting. Notwithstanding the foregoing, the “Termination Date” shall not occur prior to 20 days after Mr. Urvan’s departure from the Board.
Pursuant to the Settlement Agreement, the Company will suspend the previously announced separation of Company into Action Outdoor Sports, Inc. and Outdoor Online, Inc., pending the further evaluation of strategic options by the Board. The Company paid approximately $500,000 of the Urvan Group’s costs, fees and expenses per the terms of the Settlement Agreement. Additionally, the Company issued shares of Common Stock for a total value of $437,500 to an employee and issued shares of Common Stock for a total value of $385,000 to an independent contractor as a result of termination without cause per the terms of the Settlement Agreement.
The foregoing summary of the Settlement Agreement does not purport to be complete and is subject to, and qualified in its entirety, by reference to the full text of the Settlement Agreement, a copy of which was previously filed as Exhibit 10.1 in the Form 8-K filed with the SEC on November 7, 2022, and incorporated herein by reference.
NOTE 18 – SUBSEQUENT EVENTS
Common Stock Issuances
Subsequent to the December 31, 2022, the Company issued shares pursuant the exercise of warrants for a total value of $45,460 and cancelled shares previously issued as employee stock awards for a total value of $87,500.
| 24 |
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
Management’s Discussion and Analysis of Financial Condition and Results of Operations is provided to assist the reader in understanding the results of operations, financial condition, and liquidity through the eyes of our management team. This section should be read in conjunction with other sections of this Quarterly Report, specifically, our Consolidated Financial Statements and Supplementary Data.
FORWARD-LOOKING STATEMENTS
This document contains certain “forward-looking statements”. All statements other than statements of historical fact are “forward-looking statements” for purposes of federal and state securities laws, including, but not limited to, any projections of earnings, revenue or other financial items; any statements of the plans, strategies, goals and objectives of management for future operations; any statements concerning proposed new products and services or developments thereof; any statements regarding future economic conditions or performance; any statements or belief; and any statements of assumptions underlying any of the foregoing.
Forward looking statements may include the words “may,” “could,” “estimate,” “intend,” “continue,” “believe,” “expect,” or “anticipate,” or other similar words, or the negative thereof. These forward-looking statements present our estimates and assumptions only as of the date of this report. Accordingly, readers are cautioned not to place undue reliance on forward-looking statements, which speak only as of the dates on which they are made. We do not undertake to update forward-looking statements to reflect the impact of circumstances or events that arise after the dates they are made. You should, however, consult further disclosures and risk factors we included in the section titled Risk Factors contained herein.
In our filings with the Securities and Exchange Commission, references to “AMMO, Inc.”, “AMMO”, “the Company”, “we,” “us,” “our” and similar terms refer to AMMO, Inc., a Delaware corporation, and its wholly owned consolidated subsidiaries.
Overview
AMMO, Inc., owner of the GunBroker.com Marketplace, the largest online marketplace serving the firearms and shooting sports industries, and a vertically integrated producer of high-performance ammunition and premium components began its operations in 2016.
Through our GunBroker.com Marketplace segment (acquired in April 2021), we allow third party sellers to list items consisting of firearms, hunting gear, fishing equipment, outdoor gear, collectibles, and much more on our site, while facilitating compliance with federal and state laws that govern the sale of firearms and restricted items. This allows our base of over 7.6 million users to follow ownership policies and regulations through our network of over 35,000 federally licensed firearms dealers as transfer agents. The nature and operation of the Marketplace as an online auction and sales platform also affords our Company a unique view into the total domestic market for the purpose of understanding sales trends at a granular level across all elements of the outdoor sports and shooting space. Our vision is to expand the services on GunBroker.com and to become a peer to those in our industry. In the short term, we will be implementing the following services;
● Payment Processing - facilitating payment between parties allowing sellers of all sizes to offer fast and secure electronic payments and allowing buyers to experience the ease of using a single form of payment for all items purchased,
● Carting Ability - allowing our buyers to purchase multiple items from multiple sellers at one point in time, and
● GunBroker.com Analytics – through the compilation and refinement of vast Marketplace data, we plan to offer domestic market analytics to our industry peers to allow them to better manage their businesses.
Through our Ammunition segment, we are tailoring our focus to build a new future for our manufacturing operations focused on premium pistol and rifle ammunition and supporting industry partners for manufactured components. We will continue to leverage our proprietary brands like Streak Visual AmmunitionTM and Stelth subsonic ammunition and extend our product offering with premium rifle lines and brands that complement our technologically innovative heritage. We also continue to ensure dynamic performance under the exacting standards of the US military complex in support of our cutting-edge developmental ammunition programs as we seek out and effectively execute upon new governmental-based opportunities.
| 25 |
In September of 2022, we began operating out of our new 185,000 square foot manufacturing facility. This new, state-of-the-art ammunition production facility is part of our commitment to the continuing development of differentiated, cutting-edge technology.
Results of Operations
Our financial results for the three and nine months ended December 31, 2022 reflect our newly positioned organization as we transition into our new manufacturing facility. We believe that we have hired a strong team of professionals, developed innovative products, and continue to raise capital sufficient to establish our presence as a high-quality ammunition provider and marketplace. We continue to focus on growing our top line revenue and streamlining our operations. We experienced a 13.2% decrease in our Net Revenues for the nine months ended December 31, 2022 compared with the nine months ended December 31, 2021. This was the result of decreased ammunition sales due to changes in market demand.
The following table presents summarized financial information taken from our condensed consolidated statements of operations for the three and nine months ended December 31, 2022 compared with the three and nine months ended December 31, 2021:
| For the Three Months Ended | For the Nine Months Ended | |||||||||||||||
| December 31, 2022 | December 31, 2021 | December 31, 2022 | December 31, 2021 | |||||||||||||
| (Unaudited) | (Unaudited) | (Unaudited) | (Unaudited) | |||||||||||||
| Net Sales | $ | 38,711,494 | $ | 64,689,186 | $ | 147,756,079 | $ | 170,167,603 | ||||||||
| Cost of Revenues | 26,184,315 | 42,166,320 | 104,257,529 | 102,457,775 | ||||||||||||
| Gross Margin | 12,527,179 | 22,522,866 | 43,498,550 | 67,709,828 | ||||||||||||
| Sales, General & Administrative Expenses | 16,860,454 | 11,913,045 | 43,272,597 | 33,191,175 | ||||||||||||
| Income (loss) from Operations | (4,333,275 | ) | 10,609,821 | 225,953 | 34,518,653 | |||||||||||
| Other income (expense) | ||||||||||||||||
| Other income (expense) | (490,842 | ) | (189,956 | ) | (509,998 | ) | (446,616 | ) | ||||||||
| Income (loss) before provision for income taxes | $ | (4,824,117 | ) | $ | 10,419,865 | $ | (284,045 | ) | $ | 34,072,037 | ||||||
| Provision for income taxes | (721,125 | ) | 1,351,998 | 1,369,427 | 1,351,998 | |||||||||||
| Net Income (Loss) | $ | (4,102,992 | ) | $ | 9,067,867 | $ | (1,653,472 | ) | $ | 32,720,039 | ||||||
Non-GAAP Financial Measures
We analyze operational and financial data to evaluate our business, allocate our resources, and assess our performance. In addition to total net sales, net loss, and other results under accounting principles generally accepted in the United States (“GAAP”), the following information includes key operating metrics and non-GAAP financial measures we use to evaluate our business. We believe these measures are useful for period-to-period comparisons of the Company. We have included these non-GAAP financial measures in this Quarterly Report on Form 10-Q because they are key measures we use to evaluate our operational performance, produce future strategies for our operations, and make strategic decisions, including those relating to operating expenses and the allocation of our resources. Accordingly, we believe these measures provide useful information to investors and others in understanding and evaluating our operating results in the same manner as our management and board of directors.
Adjusted EBITDA
| For the Three Months Ended | For the Nine Months Ended | |||||||||||||||
| 31-Dec-22 | 31-Dec -21 | 31-Dec -22 | 31-Dec -21 | |||||||||||||
| Reconciliation of GAAP net income to Adjusted EBITDA | ||||||||||||||||
| Net Income (Loss) | $ | (4,102,992 | ) | $ | 9,067,867 | $ | (1,653,472 | ) | $ | 32,720,039 | ||||||
| Provision for Income Taxes | (721,125 | ) | 1,351,998 | 1,369,427 | 1,351,998 | |||||||||||
| Depreciation and amortization | 4,356,004 | 4,623,355 | 12,950,972 | 12,778,103 | ||||||||||||
| Interest expense, net | 320,439 | 190,319 | 538,191 | 468,404 | ||||||||||||
| Employee stock awards(1) | 2,106,535 | 1,045,125 | 4,457,973 | 2,898,250 | ||||||||||||
| Stock grants | 43,750 | 65,098 | 135,344 | 197,110 | ||||||||||||
| Stock for services | - | 4,200 | - | 4,200 | ||||||||||||
| Warrant Issuance | 106,909 | 145,508 | 106,909 | 145,508 | ||||||||||||
| Other income/(expenses), net | 170,403 | (363 | ) | (28,193 | ) | (21,788 | ) | |||||||||
| Contingent consideration fair value | (20,326 | ) | (359,309 | ) | (45,572 | ) | (362,753 | ) | ||||||||
| Proxy contest fees | 3,983,254 | - | 4,724,385 | - | ||||||||||||
| Tax effect(2) | (1,438,439 | ) | (5,476,081 | ) | (5,350,584 | ) | (5,290,304 | ) | ||||||||
| Adjusted EBITDA | $ | 4,804,412 | $ | 10,657,717 | $ | 17,205,380 | $ | 44,888,767 | ||||||||
| (1) | Includes proxy contest fees of $910,000 for Employee Stock Awards issued as a result of the Settlement Agreement as discussed in our Quarterly Report on Form 10-Q. | |
| (2) | Tax effect computed at statutory rates. |
| 26 |
Adjusted EBITDA is a non-GAAP financial measure that displays our net income (loss), adjusted to eliminate the effect of certain items as described below.
We have excluded the following non-cash expenses from our non-GAAP financial measures: provision or benefit for income taxes, depreciation and amortization, share-based or warrant-based compensation expenses, and changes to the contingent consideration fair value. We believe it is useful to exclude these non-cash expenses because the amount of such expenses in any specific period may not directly correlate to the underlying performance of our business operations.
Adjusted EBITDA as a non-GAAP financial measure also excludes other cash interest income and expense, and non-recurring expenses incurred as a result of a proxy contest as these items are not components of our core operations.
We have modified our Adjusted EBITDA calculation in the current period to remove the adjustment for Excise Taxes as we believe this is a better representation of our operations. In prior periods, we included an adjustment for Excise Taxes.
Non-GAAP financial measures have limitations, should be considered as supplemental in nature and are not meant as a substitute for the related financial information prepared in accordance with GAAP. These limitations include the following:
| ● | Employee stock awards and stock grants expense has been, and will continue to be for the foreseeable future, a significant recurring expense in the Company and an important part of our compensation strategy; | |
| ● | the assets being depreciated or amortized may have to be replaced in the future, and the non-GAAP financial measures do not reflect cash capital expenditure requirements for such replacements or for new capital expenditures or other capital commitments; and | |
| ● | non-GAAP measures do not reflect changes in, or cash requirements for, our working capital needs | |
| ● | other companies, including companies in our industry, may calculate the non-GAAP financial measures differently or not at all, which reduces their usefulness as comparative measures. |
Because of these limitations, you should consider the non-GAAP financial measures alongside other financial performance measures, including our net loss and our other financial results presented in accordance with GAAP.
Net Sales
The following table shows our net sales by proprietary ammunition versus standard ammunition for the three and nine months ended December 31, 2022 and 2021. “Proprietary Ammunition” include those lines of ammunition manufactured by our facilities that are sold under the brand names: STREAK VISUAL AMMUNITION™ and Stelth. We define “Standard Ammunition” as non-proprietary ammunition that directly competes with other brand manufacturers. Our “Standard Ammunition” is manufactured within our facility and may also include completed ammunition that has been acquired in the open market for sale to others. Also included in this category is low cost target pistol and rifle ammunition, as well as bulk packaged ammunition manufactured by us using reprocessed brass casings. Ammunition within this product line typically carries lower gross margins.
| 27 |
| For the Three Months Ended | For the Nine Months Ended | |||||||||||||||
| December 31, 2022 | December 31, 2021 | December 31, 2022 | December 31, 2021 | |||||||||||||
| Proprietary Ammunition | $ | 2,090,785 | $ | 3,784,380 | $ | 8,298,711 | $ | 6,228,348 | ||||||||
| Standard Ammunition | 18,160,180 | 40,285,093 | 82,309,106 | 106,401,307 | ||||||||||||
| Ammunition Casings | 3,041,327 | 3,022,944 | 10,661,420 | 10,891,897 | ||||||||||||
| Marketplace Revenue | 15,419,202 | 17,596,769 | 46,486,842 | 46,646,051 | ||||||||||||
| Total Sales | $ | 38,711,494 | $ | 64,689,186 | $ | 147,756,079 | $ | 170,167,603 | ||||||||
Sales for the three and nine months ended December 31, 2022 decreased 40% and 13%, respectively, or approximately $26 million and $22.4 million, over the three and nine months ended December 31, 2021 due to changes in market conditions. The decrease for the three month period was largely the result of a decrease of $22.1 million in sales of bulk pistol and rifle ammunition, a decrease of $1.7 million of sales of Proprietary Ammunition, and a decrease of $2.2 million generated from our marketplace, GunBroker.com, which includes auction revenue, payment processing revenue, and shipping income. The decrease for the nine month period was the result of an increase of approximately $2.0 million of sales of Proprietary Ammunition, a decrease of $24.1 million of sales in bulk pistol and rifle ammunition, and a decrease of approximately and $0.2 million of sales from our casing operations. Management expects the sales growth rate of Proprietary Ammunition to greatly 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 continue to initiate sales to U.S. law enforcement, military, and international markets.
Through our acquisition of SWK, the Company has developed and deployed a line of tactical armor piercing (AP) and hard armor piercing incendiary (HAPI) precision ammunition to meet the lethality requirements of both the US and foreign military customers. We continue to demonstrate our AP and HAPI ammunition to military personnel at scheduled and invite only events, resulting in increased interest and procurement discussions. The Company has since developed the ballistic match (BMMPR) and signature-on-target (SoT) rounds under contract with the U.S. Government in support of US special operations which have been publicly announced pursuant to governmental authorization. Additional work continues in support of the military operations of the U.S. and its ally military components which is not currently subject to disclosure.
It is important to note that, although U.S. law enforcement, military and international markets represent significant opportunities for our Company, they also have a long sales cycle. The Company’s sales team has been effective in establishing sales and distribution channels, both in the United States and abroad, which are reasonably anticipated to drive sustained sales opportunity in the military, law enforcement, and commercial markets.
Sales outside of the United States require licenses and approval from either the U.S. Department of Commerce or the U.S. State Department, which typically takes approximately 30 days to receive. On June 16, 2022, we renewed our annual registration with the International Traffic in Arms Regulations (“ITAR”), which remains valid through the report date. This permits the Company to export and broker ammunition and other controlled items covered under ITAR.
Cost of Revenues
Cost of Revenues decreased by approximately $16 million and increased $1.8 million from $42.2 million and $102.5 million to $26.2 million and $104.3 million for the three and nine months ended December 31, 2022 compared to the comparable period ended in 2021. This was the result of a significant decrease in net sales as well increases to non-cash depreciation related to increases in production equipment, expensing of increased labor, overhead, and raw materials used to produce finished product during 2022 as compared to 2021.
Gross Margin
Our gross margin percentage decreased to 32.4% and 29.4% from 34.8% and 39.8% during the three and nine months ended December 31, 2022, respectively, as compared to the same period in 2021. The decrease in our gross margin was related to increased costs of raw materials, labor, and overhead costs.
| 28 |
We believe as we continue to grow sales through new markets and expanded distribution that our gross margins will also increase by efficiencies added through our new production facility. Our goal in the next 12 to 24 months is to continue to improve our gross margins. This will be accomplished through the following:
| ● | Increased product sales, specifically of proprietary lines of ammunition, like the STREAK VISUAL AMMUNITION™, Stelth and now our tactical Armor Piercing (AP) and Hard Armor Piercing Incendiary (HAPI) precision ammunition, all of which carry higher margins as a percentage of their selling price; | |
| ● | Introduction of new lines of ammunition that historically carry higher margins in the consumer and government sectors; | |
| ● | Reduced component costs through operation of our ammunition segment and expansion of strategic relationships with component providers; | |
| ● | Expanded use of automation equipment that reduces the total labor required to assemble finished products; | |
| ● | And better leverage of our fixed costs through expanded production to support the sales objectives. |
Operating Expenses
Overall, for the three and nine months ended December 31, 2022, our operating expenses increased by approximately $4.9 million and $10 million over the three and nine months ended December 31, 2021 and increased as a percentage of sales from 18.4% and 19.5% for the three and nine months ended December 31, 2021 to 43.6% and 29.3% for the three and nine months ended December 31, 2022. Our operating expenses include non-cash depreciation and amortization expense of approximately $3.3 million and $9.9 million for the three and nine months ended December 31, 2022, respectively. Our operating expenses consisted of commissions related to our sales, 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. Operating expenses for the three and nine months ended December 31, 2022 included noncash expenses of approximately $6.6 million and $19.0 million, respectively.
During the three months ended December 31, 2022, our selling and marketing expenses decreased by approximately $0.5 million, while for the nine months ended December 31, 2022 our selling and marketing expenses decreased by approximately $0.2 million, in comparison to the three and nine months ended December 31, 2021. The decrease was primarily related to decreases in sales commission due to the decrease in the sale of our products resulting of approximately $2.2 million for the nine months ended December 31, 2022.
Our corporate general & administrative expenses increased approximately $4.1 million and $7.0 million in the three and nine months ended December 31, 2022 from the comparable prior period due to $3.3 million and $4.0 million of respective legal and professional fees and expenses largely related to our proxy contest in the three and nine months ended December 31, 2022.The increase was also partly due to inclusion of the full nine months of Gemini expenses for the nine month period ended December 31, 2022, as compared to partial inclusion during the period ended December 31, 2021, as a result of the acquisition occurring on April 30, 2021.
Employee salaries and related expenses increased approximately $1.8 million and $3.5 million for the three and nine months ended December 31, 2022 compared to the comparable period ended in 2021. The increase for the nine months ended December 31, 2022 when compared to the prior period, was primary related to $1.2 million of additional payroll expenses incurred in the three months ended December 31, 2022 as a result of payments due upon termination without cause as a result of the proxy contest and as well as $1.5 million in additional stock compensation expenses.
Depreciation and amortization expenses for the three months ended December 31, 2022 decreased by approximately $0.4 million, and decreased for the nine months ended December 31, 2022 by approximately $0.1 million.
Interest and Other Expenses
For the three and nine months ended December 31, 2022, interest expense increased by approximately $0.3 million and $0.1 million compared with the comparable three and nine months ended December 31, 2021. The change from the prior periods was mainly due to the repayment of notes during the three and nine months ended December 31, 2022.
Income Taxes
For the three and nine months ended December 31, 2022, we recorded a provision for federal and state income taxes of approximately ($0.7) million and $1.4 million, respectively. For the three and nine months ended December 31, 2021, we recorded a provision for federal and state income taxes of approximately $1.4 million, respectively.
Net Income
We ended the three months ended December 31, 2022 with a net loss of approximately $4 million compared with a net income of approximately $9.1 million for the three months ended December 31, 2021. We ended the nine months ended December 31, 2022 with a net loss of approximately $1.6 million compared with a net income of approximately $32.7 million for the nine months ended December 31, 2021.
| 29 |
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, 2022, we had $27,093,614 of cash and cash equivalents, an increase of $3,812,139 from March 31, 2022.
Working Capital is summarized and compared as follows:
| December 31, 2022 | March 31, 2022 | |||||||
| Current assets | $ | 128,997,594 | $ | 129,691,636 | ||||
| Current liabilities | 28,196,795 | 35,823,311 | ||||||
| $ | 100,800,799 | $ | 93,868,325 | |||||
Changes in cash flows are summarized as follows:
Operating Activities
For the nine months ended December 31, 2022, net cash provided by operations totaled approximately $18.4 million. This was primarily the result of net loss of approximately $1.7 million, which was offset by decreases in our accounts receivable of approximately $12.2 million, decreases in prepaid expenses of approximately $1.9 million, and decreases in our accounts payable of approximately $5.8 million, increases in our inventories of approximately $8.1 million, and decreases in deposits of approximately $1.7 million. Non-cash expenses for depreciation and amortization totaled approximately $13.0 million and non-cash expenses for employee stock awards totaled $4.5 million.
For the nine months ended December 31, 2021, net cash used in operations totaled approximately $3.6 million. This was primarily the result of net income of approximately $32.7 million, which was offset by increases in our inventories of approximately $30.1 million, increases in deposits of approximately $13.1 million, increases in our accounts receivable of approximately $20.7 million, decreases in prepaid expenses of approximately $1.6 million, and increases in our accounts payable and accrued liabilities of $7.5 million and $1.3 million, respectively. Non-cash expenses for depreciation and amortization totaled approximately $12.8 million and non-cash expenses for employee stock awards totaled $2.9 million.
Investing Activities
During the nine months ended December 31, 2022, we used approximately $10.6 million in net cash for investing activities. Net cash used in investing activities consisted of approximately $9.3 million related to purchases of production equipment and the construction of our new manufacturing facility in Manitowoc, WI.
During the nine months ended December 31, 2021, we used approximately $63.3 million in net cash for investing activities. Net cash used in investing activities consisted of approximately $50.5 million used in connection with the merger of Gemini, and approximately $12.9 million related to purchases of production equipment and the construction of our new manufacturing facility in Manitowoc, WI.
Financing Activities
During the nine months ended December 31, 2022, net cash used in financing activities was approximately $3.6 million. This was the net effect of an approximate $0.8 million reduction in our Inventory Credit Facility, approximately $1.9 million from insurance premium note payments, approximately $2.2 million of Preferred Stock dividends paid, generation of approximately $57.3 million from accounts receivable factoring, which was offset by payments of approximately $56.1 million, and proceeds from our Construction Note Payable of $1.0 million.
| 30 |
During the nine months ended December 31, 2021, net cash used in financing activities was approximately $24.0 million. This was the net effect of a $50.0 million payment on debt assumed from Gemini, $35.0 million of proceeds from the sale of our preferred stock net of approximately $3.2 million of issuance costs, approximately $0.9 million was generated from common stock issued for exercised warrants, the $4.0 million repayment of a note payable, and an approximate $0.9 million reduction in our Inventory Credit Facility. Additionally, approximately $86.5 million was generated from accounts receivable factoring, which was offset by payments of approximately $84.2 million.
Liquidity
Existing working capital, cash flow from operations, bank borrowings, and sales of equity and debt securities are expected to be adequate to fund our operations over the next year. Generally, we have financed operations to date through the proceeds of stock sales, bank financings, and related-party notes. These sources have been adequate to fund our recurring cash expenditures including but not limited to our working capital requirements, capital expenditures to expand our operations, debt repayments, and acquisitions. We intend to continue use the aforementioned sources of funding for capital expenditures, debt repayments, share repurchases and any potential acquisitions.
Leases
We lease four locations that are used for our offices, production, and warehousing. As of December 31, 2022, we had $1.8 million of fixed lease payment obligations with $.6 million payable within the next 12 months. Please refer to Note 8– Leases for additional information.
Related Party Note Payable
As of December 31, 2022, we had an outstanding balance on our Related Party Note Payable of approximately $0.4 million, which is due within the next 12 months.
Construction Note Payable
We will finance a portion of our new production facility with our Construction Note Payable. We expect to make $0.3 million in principal and interest payments within the next 12 months. The principal balance of the Construction Note will mature on October 14, 2026.
Off-Balance Sheet Arrangements
As of December 31, 2022, 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
The preparation of financial statements in conformity with GAAP requires us to make estimates and assumptions that affected the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates. Significant estimates made in preparing the condensed consolidated financial statements include the valuation of allowances for doubtful accounts, valuation of deferred tax assets, inventories, useful lives of assets, goodwill, intangible assets, stock-based compensation, and warrant-based compensation. A summary of our critical accounting policies is included in our Annual Report on Form 10-K for the year ended March 31, 2022, under “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” There have been no significant changes to these policies during the three and nine months ended December 31, 2022. For disclosure regarding recent accounting pronouncements and the anticipated impact they will have on our operations, please refer to Note 2 to the consolidated financial statements included in our Annual Report on Form 10-K for the year ended March 31, 2022.
Goodwill
We evaluate goodwill for impairment annually or more frequently when an event occurs or circumstances change that would more likely than not reduce the fair value of the reporting unit below its carrying amount. In testing for goodwill impairment, we may elect to utilize a qualitative assessment to evaluate whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If our qualitative assessment indicates that goodwill impairment is more likely than not, we perform a two-step impairment test. We test goodwill for impairment under the two-step impairment test by first comparing the book value of net assets to the fair value of the reporting unit. If the fair value is determined to be less than the book value or qualitative factors indicate that it is more likely than not that goodwill is impaired, a second step is performed to compute the amount of impairment as the difference between the estimated fair value of goodwill and the carrying value. We estimate the fair value of the reporting units using discounted cash flows. Forecasts of future cash flows are based on our best estimate of future net sales and operating expenses, based primarily on expected category expansion, pricing, market segment share, and general economic conditions. Due to the declines in the value of our stock price and market capitalization, we assessed qualitative factors to determine if it is more likely than not that the fair value of the Marketplace segment is less than its carrying amount. Through our analysis we determined our stock price and market capitalization decline it is not indicative of a decrease in the the fair value of our Marketplace segment and a fair value calculation using the discounted cash flows was more appropriate due to the operational performance of the reporting segment. Accordingly, the impairment of Goodwill was not warranted for the three and nine months ended December 31, 2022. As of December 31, 2022, the Company has a goodwill carrying value of $90,870,094, all of which is assigned to the Marketplace segment. However, due to declines in the value of the Company’s common stock and market capitalization, it is possible that the book values of our Marketplace segment could exceed its fair value, which may result in the recognition of a material, noncash impairment of goodwill for the year ending March 31, 2023.
| 31 |
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, 2022. Based on the evaluation of these disclosure controls and procedures, our Chief Executive Officer and Chief Financial Officer concluded our disclosure controls and procedures were not effective. Our controls were ineffective due to the size of the Company and available resources. There are limited personnel to assist with the accounting and financial reporting function, which results in: (i) a lack of segregation of duties and (ii) controls that may not be adequately designed or operating effectively. Despite the existence of material weaknesses, the Company believes the financial information presented herein is materially correct and fairly presents the financial position and operating results of the three months ended December 31, 2022, in accordance with GAAP.
Changes in internal controls
There were no changes in our internal control over financial reporting, as defined in Rule 13a-15(f) promulgated under the Exchange Act, during the quarterly period from October 1, 2022 to December 31, 2022, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
| 32 |
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
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 three months ended December 31, 2022, the Company issued 150,000 warrants to purchase 150,000 shares of common stock at an exercise price of $0.01 for services provided to the Company. The total value of the warrants were $427,639.
There were no other unregistered sales of the Company’s equity securities during the quarter ended December 31, 2022 that were not previously reported in a Current Report on Form 8-K.
Share Repurchases
On February 8, 2022, the Company announced that its Board of Directors approved a share repurchase program (the “Share Repurchase Program”), providing for the repurchase of up to $30 million of the Company’s outstanding shares of common stock. The share repurchase program expires on February 7, 2023.The Share Repurchase Program commenced in December 2022.
Under the Share Repurchase Program, the Company is authorized to repurchase shares through open market purchases, privately-negotiated transactions, accelerated share repurchases or otherwise in accordance with applicable federal securities laws, including through Rule 10b5-1 trading plans and under Rule 10b-18 of the Securities Exchange Act of 1934, as amended. The repurchases have no time limit and may be suspended or discontinued completely at any time. The specific timing and amount of repurchases will vary based on available capital resources and other financial and operational performance, market conditions, securities law limitations, and other factors. The repurchases will be made using the Company’s cash resources.
The Company made the following purchases of its equity securities in December 2022.
| Period | Total Number of Shares Purchased | Average Price Paid per Share | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs | Approximate Dollar Value of Shares that May Yet Be Purchased Under the Programs | ||||||||||||
| December 1, 2022 to December 31, 2022 | 150,000 | $ | 1.92 | 150,000 | $ | 29,700,000 | ||||||||||
| Total | 150,000 | 150,000 | $ | 29,700,000 | ||||||||||||
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable
| 33 |
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS
| 101.INS* | Inline XBRL Instance Document | |
| 101.SCH* | Inline XBRL Taxonomy Extension Schema Document | |
| 101.CAL* | Inline XBRL Taxonomy Extension Calculation Linkbase Document | |
| 101.LAB* | Inline XBRL Taxonomy Extension Labels Linkbase Document | |
| 101.PRE* | Inline XBRL Taxonomy Extension Presentation Linkbase Document | |
| 101.DEF* | Inline XBRL Taxonomy Extension Definition Linkbase Document | |
| 104 | Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101) |
*Filed Herewith.
** Furnished Herewith.
| 34 |
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, 2023 | By: | Fred W. Wagenhals, Chief Executive Officer |
| /s/ Robert D. Wiley | ||
| Dated: February 14, 2023 | By: | Robert D. Wiley, Chief Financial Officer |
| 35 |
Exhibit 10.1
AMENDED AND RESTATED EXCLUSIVE LICENSE AGREEMENT
This Amended and Restated Exclusive License Agreement (“AGREEMENT”) is made by and between the University of Louisiana Lafayette, organized under the Laws of the State of Louisiana, having an address of 104 University Circle, Lafayette, LA 70503 (“LICENSOR”), herein represented by Dr. E. Joseph Savoie, its duly authorized President; and Ammo Technologies, Inc., an Arizona corporation, whose mailing address is 6401 E. Thomas Road, Suite 106, Scottsdale, AZ 85251 (“LICENSEE”), represented herein by Fred W. Wagenhals, its duly authorized President. This AGREEMENT is dated as 16th day of November, 2017 and to be effective starting on January 1, 2018 (“EFFECTIVE DATE”).
RECITALS
WHEREAS, LICENSOR is the owner of intellectual property referred to as HYRID LUMINESCENCE AMMUNITION TECHNOLOGY invented and/or developed, in whole or in part, by Dr. William A. Holler man, Brady Broussard, and Noah Bergeron during the course of research funded in whole or in part by the State of Louisiana;
WHEREAS, LICENSOR wishes to partner with another party to commercialize the referenced invention;
WHEREAS, LICENSEE is interested in obtaining an exclusive license to develop and commercialize HYBRID LUMINESCENCE AMMUNITION TECHNOLOGY;
WHEREAS the arrangement contemplated by this AGREEMENT is of mutual interest to LICENSEE and LICENSOR and furthers the objectives of LICENSOR;
WHEREAS the Exclusive License was previously entered into with Hallam, Inc., a Texas corporation, as Original Licensee dated May 21,2009;
WHEREAS, the Exclusive License was assigned to LICENSEE pursuant to the Assignment and First Amendment to Exclusive License Agreement effective as of the Closing (August 22, 2017) when Hallam, Inc. merged into Ammo Technologies, Inc. pursuant to a Forward Triangular Merger; and
WHEREAS, LICENSOR and LICENSEE now desire to completely amend and restate the Exclusive License.
NOW, THEREFORE, the parties hereto agree as follows:
ARTICLE 1. DEFINITIONS
1.1 “AFFILIATE” shall mean any person, directly or indirectly, controlling, controlled by or under direct or indirect common control with LICENSEE whether such control exists on or becomes effective subsequent to the EFFECTIVE DATE, and whether such control is partial or complete. For the purpose of this definition, the term “control” shall mean the power and authority, whether or not exercised, to direct, cause the direction of, or influence the management and policies of another person, whether through ownership of voting securities, by contract, or otherwise.
1.2 “CONFIDENTIAL INFORMATION” shall mean any and all technical information of LICENSOR AND LICENSEE made available and disclosed by it, directly or indirectly, to the other party pursuant to the provisions of this Agreement and which is related to the HYBRID LUMINESCENCE AMMUNITION TECHNOLOGY, except:
(a) technical information which at the time of disclosure is in the public domain,
(b) technical information which after disclosure is published or otherwise becomes part of the public domain through no fault of the recipient (but only after it is published or otherwise becomes part of the public domain),
(c) technical information which the recipient can show was in its possession at the time of disclosure and was not acquired, directly or indirectly, from the other party hereto under this AGREEMENT or was not acquired from a third party under obligation of confidence to one of the parties hereto, or
(d) technical information which is received by the recipient after the time of disclosure hereunder from a third party who did not require the recipient to hold such information in confidence and did not acquire such information, directly or indirectly, from the disclosing party under an obligation of confidence, or from a party who obtains such technical information by fraudulent or illegal means.
For the purposes of this Paragraph 1.2, specific technical information disclosed by one party to the other pursuant to the provisions of this AGREEMENT shall not be deemed, as to the recipient, to be within any of the above exceptions merely because it is embraced by more general information within one of the said exceptions.
The parties agree to maintain CONFIDENTIAL INFORMATION in confidence and to use the same degree of care and procedures which each uses to protect and safeguard its own confidential information of like kind and character to prevent disclosure thereof to others. The obligations of confidentiality imposed shall survive the termination of this AGREEMENT and shall remain in effect for five (5) years thereafter or the life of the PATENT, whichever is longer.
1.3 “DERIVATIVES” shall mean any and all inventions, improved inventions, or modifications of the invention, HYBRID LUMINESCENCE AMMUNITION TECHNOLOGY, developed by LICENSOR or LICENSEE during the term of the AGREEMENT. Those inventions, improved inventions, and technology, developed by LICENSEE that exhibit substantially different functionality than LICENSED TECHNOLOGY shall not be considered DERIVATIVES for the purposes of the AGREEMENT. Any process to apply the LICENSED TECHNOLOGY to ammunition is not considered DERVIATIVES.
1.4 “DOCUMENTATION” shall mean and include, without limitation, all manuals, guides, diagrams, schematics, and other related written materials pertaining to the LICENSED TECHNOLOGY and/or DERIVATIVES, if any, which may be available and furnished by LICENSOR to LICENSEE.
1.5 “INTELLECTUAL PROPERTY” shall mean all inventions, technology and their derivatives whether or not patentable, copyrightable or considered trade secrets embodied in the LICENSED TECHNOLOGY, including any intellectual property rights related to the LICENSED TECHNOLOGY and conceived and/or reduced to practice during the term of this AGREEMENT by LICENSOR or LICENSEE and/or any affiliates thereof all of whom owe a duty to assign to LICENSOR any and all inventions, software and/or technology created during the term of this AGREEMENT.
1.6 “LICENSED TECHNOLOGY” shall mean HYBRID LUMINESCENCE AMMUNITION TECHNOLOGY as represented in U.S. Patent application 11/499,535 filed August 4, 2006, U.S. Patent Continuation in Part application 12/260,583, filed October 29, 2008, and granted as Patent US 8402896 BI with a publication date of March 26, 2013 (the “PATENT”) and all DERVATIVES thereof, and related additional information or materials. The term LICENSED TECHNOLOGY shall include any and all tradenames, trademarks, service marks, or logos of LICENSOR associated with the LICENSED TECHNOLOGY as of the date of signing.
1.7 “LICENSED TERRITORY” shall mean worldwide.
1.8 “NET SALES” shall mean;
In the case of manufacture and sale of materials by LICENSEE or an AFFILIATE employing the LICENSED TECHNOLOGY or by any SUBLICENSEE:
One cent (1ȼ) for each and every projectile and/or bullet sold by LICENSEE or SUBLICENSEE utilizing the LICENSED TECHNOLOGY.
1.9 “ROYALTY” or “ROYALTIES” shall mean the monetary sums to be paid to LICENSOR by LICENSEE for use by LICENSEE and/or SUBLICENSEE of the LICENSED TECHNOLOGY and DERIVATIVES as provided in Article 4.
1.10 “SUBLICENSEE” shall mean any person, party, or business entity to which LICENSEE grants a license to develop, commercialize, and/or manufacture the LICENSED TECHNOLOGY, and wherein said term SUBLICENSEE shall also include any and all licenses granted by a SUBLICENSEE to another party.
1.11 “HYBRID LUNINESCENCE AMMUNITION TECHNOLOGY” shall mean LICENSOR’S information relating to tracer ammunition which uses luminescent materials and the methods of making said ammunition, and including the information disclosed in the PATENT, continuations, continuations-in-part, divisions, reissues, and foreign counterparts thereof.
ARTICLE 2. TERM AND RENEWAL
2.1 The initial term of this AGREEMENT shall begin on the EFFECTIVE DATE of this AGREEMENT and shall end four (4) years from the EFFECTIVE DATE unless otherwise terminated pursuant to ARTICLE 8 of this AGREEMENT.
2.2 LICENSOR agrees that LICENSEE may thereafter renew this AGREEMENT for successive periods of four (4) years beyond the then current period provided LICENSEE is in compliance with the terms of this Agreement and upon payment of the minimum Royalties due to LICENSOR for the then-current period.
| 2 |
ARTICLE 3. LICENSE
3.1 LICENSOR hereby grants to LICENSEE an exclusive license to make, use, and sell, or otherwise exploit, including the grant of sub licenses to third parties for commercial purposes, the LICENSED TECHNOLOGY, DERIVATIVES, INTELLECTUAL PROPERTY, and DOCUMENTATION within the LICENSED TERRITORY as provided for in this AGREEMENT. This grant of the license is subject to rights retained by LICENSOR to:
3.1.1 Publish the general scientific findings from research related to the LICENSED TECHNOLOGY and DERIVATIVES subject to the terms of Article 6;
3.1.2 Use LICENSED TECHNOLOGY and DERIVATIVES for research, teaching, and other educationally-related purposes.
3.2 The license granted through this AGREEMENT is exclusive in the LICENSED TERRITORY for the term of this AGREEMENT.
3.3 LICENSEE may extend the license granted herein to any AFFILIATE on the condition that the AFFILIATE is bound by this AGREEMENT to the same extent as is LICENSEE, which extension shall be agreed to in writing by AFFILIATE. The granting of sublicenses by LICENSEE or by any SUBLICENSEE shall require fifteen (15) day notification to LICENSOR. Should LICENSOR provide any comments relative to the granting of said sublicenses, LICENSEE shall reasonably consider said comments by LICENSOR. If no comment is made by LICENSOR within the fifteen (15) day notification period, LICENSEE may assume that LICENSOR has no objection to the granting of said sublicense.
3.4 LICENSOR shall retain ownership of the LICENSED TECHNOLOGY, DERIVATIVES, TRADENAMES developed by it, DOCUMENTATION of LICENSOR and any patents, copyrights, technology, and tangible research materials and other INTELLECTUAL PROPERTY related thereto as of the date of signing without regard to whether DERIVATIVES or INTELLECTUAL PROPERTY created during the term of this AGREEMENT were developed by LICENSOR or LICENSEE and/or LICENSEE’S AFFILIATES. LICENSEE will own any trademarks developed by it.
3.5 LICENSEE acknowledges that LICENSOR is the owner of all of the INTELLECTUAL PROPERTY associated with the LICENSED TECHNOLOGY and its DERIVATIVES. LICENSEE hereby agrees that it will not do or cause to be done any act or thing contesting or interfering with such ownership.
3.6 LICENSEE shall disclose all derivatives of the LICENSED TECHNOLOGY and its DERIVATIVES which LICENSEE and/or its AFFLIATES may develop during the term of this AGREEMENT. LICENSEE shall also be obligated to disclose to LICENSOR all derivatives of the LICENSED TECHNOLOGY and DERIVATIVES that LICENSEE may develop that relate to any other potential uses of the LICENSED TECHNOLOGY and its DERIVATIVES. LICENSOR agrees that all disclosures of LICENSEE made to LICENSOR hereunder shall be deemed confidential.
3.7 LICENSEE shall cooperate fully in any efforts made by LICENSOR to obtain and perfect LICENSOR’S interest in the INTELLECTUAL PROPERTY, such cooperation including, but not limited to, LICENSEE and its AFFILIATES’ review and execution of patent applications, copyright registrations, trademark registrations, assignments, and any other related documents. LICENSEE also agrees to cooperate fully in any litigation involving the INTELLECTUAL PROPERTY. LICENSEE’S duty to cooperate in obtaining protection for, and in any litigation concerning, the LICENSED TECHNOLOGY, DERIVATIVES, and INTELLECTUAL PROPERTY related thereto shall continue beyond the term of this AGREEMENT. In performing its obligations pursuant to this section 3.7, LICENSEE agrees to bear TWO THOUSAND AND NO/lOO ($2,000.00) DOLLARS of the cost of same subject to the limitations set forth in section 5.2 hereof once a defendable patent related to LICENSED TECHNOLOGY AND THIS AGREEMENT has been issued.
3.8 LICENSEE shall provide to LICENSOR monthly backups of all data related to this AGREEMENT and/or LICENSED TECHNOLOGY, as indicated in Section 4.4. To the extent that compliance with this section 3.8 is determined to be a violation of any duty to protect the privacy of such information, LICENSEE shall not be required to comply; but rather, will archive said information and in the event of a Termination of this Agreement, cooperate in securing the consent of the appropriate parties for release of the information to LICENSOR.
| 3 |
ARTICLE 4. CONSIDERATION: ROYALTY COMPUTATION, PAYMENT AND REPORTING
4.1 LICENSEE shall pay to LICENSORS a nonrefundable license issue fee of SIX THOUSAND AND NO/l00 ($6,000.00) DOLLARS, payable within 5 days of the execution of this AGREEMENT. This fee is creditable toward royalties or minimums due to LICENSOR from LICENSEE up to the EFFECTIVE DATE.
4.2 During the term of this AGREEMENT, LICENSEE or SUBLICENSEE shall pay to LICENSOR, in accordance with Section 4.5, a ROYALTY on quarterly NET SALES, as defined in Section 1.8, calculated on a quarter calendar year basis, of One Cent (1ȼ) per projectile and/or bullet as ROYALTY on NET SALES.
4.3 If the minimum ROYALTIES, as listed in this section, for current calendar year have not been met, commencing January 1, 2018 and on each calendar year thereafter, LICENSEE guarantees that it will pay to LICENSOR within 30 days of the end of each designated period set forth below, the minimum ROYALTIES, prescribed herein, during the term of this AGREEMENT. No credit for amounts paid in excess of minimum ROYALTIES will be carried forward.
4.3.1 $20,000 per calendar year commencing for the calendar year January 1, 2018, with the first payment due on January 30, 2019 (for the period ending December 31, 2018) less ROYALTIES on Net Sales.
4.4 LICENSEE will provide quarterly written royalty reports (“Royalty Reports”) to LICENSOR, accompanied by payment for ROYALTIES due within thirty (30) days after the last day of March, June, September, and December of each calendar year during the term of the AGREEMENT. Royalty Reports shall include at least the following information, receipts, and/or other documentation as it relates to LICENSED TECHNOLOGY covered by this AGREEMENT:
1. Gross Sales;
2. Net Sales.
Royalty Reports shall be certified as accurate by a duly authorized representative of LICENSEE and shall separately state for the preceding quarterly period the following information: the type and quantity of royalty bearing transactions and the total ROYALTY payable. Royalty Reports shall be furnished to LICENSOR regardless of whether any ROYALTY bearing transactions were completed during the reporting period or whether any ROYALTY is actually owed. The receipt or acceptance by LICENSOR of Royalty Reports or ROYALTY payments shall not prevent LICENSOR from subsequently challenging the validity or accuracy of Royalty Reports or the accompanying ROYALTY payments.
4.5 LICENSEE shall make all payments required under this AGREEMENT in United States dollars by check(s) representing current and available funds written against LICENSEE’S account in a federally insured United States bank. Payment should be made payable to the University of Louisiana at Lafayette referencing HYBRID LUMINESCENCE AMMUNITION TECHNOLOGY and sent to:
Dr. E. Joseph Savoie
Office of the President
University of Louisiana at Lafayette
104 University Circle
Lafayette, LA 70503
4.6 “Final” Royalty Reports and ROYALTY payments shall be made within thirty (30) days after the expiration or termination of this AGREEMENT with respect to all ROYALTY bearing transactions completed by LICENSEE but not previously reported and/or paid.
4.7 Any ROYALTY payment not made by LICENSEE to LICENSOR when first due shall thereafter additionally bear interest payable at a ten (10%) per cent per annum rate until such payments and interest thereon are paid in full.
4.8 LICENSEE will make and retain, and as necessary, and cause its AFFILIATE(s) to make and retain, for at least seven (7) years following the submission of a Royalty Report to LICENSOR hereunder, true and accurate records, files, and books of account containing all data reasonably required for the full computation and verification of the amounts to be paid under this AGREEMENT and set forth in said Royalty Report.
| 4 |
4.9 Upon thirty (30) days advance notice by LICENSOR, and at any reasonable time during normal business hours, but no more frequently than once during each consecutive twelve-month period beginning with the EFFECTIVE DATE of the AGREEMENT, LICENSEE will permit, and will cause its AFFILIATE(S) to permit, the reasonable inspection of the aforementioned records, files, and books of account by LICENSOR through a duly authorized representative mutually accepted by both parties, or a representative of the Office of the State Legislative Auditor as required by law, for the sole purpose of verifying the information set forth in the Royalty Reports. In the event that such inspection reveals an overpayment by LICENSEE of the actual amount owed to LICENSOR, such overpayment with interest thereon calculated at a per annum rate equal to the applicable, allowable legal interest rate will be credited against future ROYALTIES due LICENSOR by LICENSEE. If however, such inspection reveals an underpayment by LICENSEE of the actual amount owed to LICENSOR, LICENSEE will, within thirty (30) days of such determination, pay LICENSOR such underpayment in full together with interest thereon calculated monthly at a per annum rate equal to the applicable, allowable legal interest rate.
4.10 The cost of the inspection of LICENSEE’S records, files, and books of account prescribed in paragraph 4.9 above shall be borne by LICENSOR; provided, however, that in the event such inspection reveals an underpayment of ROYALTIES due by LICENSEE to LICENSOR of ten percent (10%) or more of ROYALTIES due, then LICENSEE shall pay for the inspection.
4.11 All taxes resulting by operation of this AGREEMENT shall be borne by the party obligated to pay them under applicable law. Each party shall be responsible for its payment of taxes as required by law.
ARTICLE 5. FUTURE PATENTS AND FUTURE PATENT EXPENSES
5.1 LICENSOR will control the prosecution of its own patents, copyrights, and trademarks developed by it and pursued after the EFFECTIVE DATE of this Agreement and will own all patents, copyrights, and trademarks developed by it included in LICENSED TECHNOLOGY.
5.2 LICENSEE shall reimburse LICENSOR for all reasonable patent expenses, incurred after the latter of the EFFECTIVE DATE of the, or after a defendable patent related to the LICENSED TECHNOLOGY has been issued. LICENSOR will invoice LICENSEE for those expenses and LICENSEE shall pay LICENSOR the invoiced amount within 30 days of receipt of said invoice. The total patent expenses for which LICENSEE shall be responsible during the term of the AGREEMENT shall not exceed $2,000.00 in any one calendar year during the term of this AGREEMENT.
ARTICLE 6. CONFIDENTIALITY, PUBLICATION, USE OF NAME
6.1 LICENSOR shall not use LICENSEE’S name, corporate name, or name of any corporate officer, or affiliates without LICENSEE’S prior written consent. LICENSEE shall not use LICENSOR’S name, or the name of any officer, faculty member, student or employee thereof, without LICENSOR’S prior written consent.
ARTICLE 7. DISCLAIMER OF WARRANTIES, INDEMNIFICATION
7.1 LICENSOR MAKES NO WARRANTIES, EXPRESS OR IMPLIED, AS TO ANY MATTER WHATSOEVER, INCLUDING, WITHOUT LIMITATION, WARRANTIES WITH RESPECT TO THE CONDUCT, COMPLETION, SUCCESS, OR PARTICULAR RESULTS OF THE RESEARCH FROM WHICH THE LICENSED TECHNOLOGY OR DERIVATIVES ARE DEVELOPED, OR THE CONDITION, OWNERSHIP, MERCHANTABILITY, OR FITNESS FOR A PARTICULAR PURPOSE OF THE LICENSED TECHNOLOGY OR DERIVATIVES. LICENSOR SHALL NOT BE LIABLE FOR ANY DIRECT, INDIRECT, CONSEQUENTIAL, OR PUNITIVE DAMAGES SUFFERED BY LICENSEE OR ANY OTHER PERSON RESULTING FROM THE USE OF LICENSED TECHNOLOGY OR DERIVATIVES, OR ANY PRODUCTS RESULTING THEREFROM.
7.2 LICENSEE shall protect, defend, indemnify, and hold harmless LICENSOR, and any employees, trustees, members, officers, directors, faculty and students (collectively, the “INDEMNIFIED PERSONS”) from and against any and all liability, claims, demands, lawsuits, losses, damages, costs, or expenses (including attorney’s fees), for which the INDEMNIFIED PERSONS may be alleged to be responsible, or be required to pay arising out of or related to LICENSEE’S performance of this AGREEMENT. LICENSEE shall notify LICENSOR upon learning of the institution or threatened institution of any such liability, claims, demands, lawsuits, losses, damages, costs, and expenses and LICENSOR shall cooperate with LICENSEE in every proper way in the defense or settlement thereof at LICENSEE’S request and expense. LICENSEE shall not be required to indemnify, defend, release, or hold LICENSOR harmless of or from allegations of its own negligence or the failure to perform its obligations under this AGREEMENT .
| 5 |
ARTICLE 8. TERMINATION
8.1 LICENSEE may terminate this AGREEMENT by giving LICENSOR written notice at least 60 days in advance of the effective date of termination selected by LICENSEE.
8.2 LICENSOR may terminate this AGREEMENT if LICENSEE:
8.2.1 Is delinquent on any report or payment and such delinquency continues for 60 days following written notice thereof;
8.2.2 Is in breach of any provision and fails to cure said breach following 30 days written notice;
8.2.3 Provides any knowingly false report; or
8.2.4 LICENSEE fails to pay LUMINESCENCE AMMUNITION ROYALTY PAYMENTS as provided in Section 2.3.
8.3 Termination of this AGREEMENT shall not affect the rights and obligations of the parties accrued prior to termination hereof. The provisions of Article 6 entitled CONFIDENTIALITY, PUBLICATION, USE OF NAME; Article 7, entitled DISCLAIMER OF WARRANTIES, INDEMNIFICATION; and Article 9, entitled ADDITIONAL PROVISIONS, shall survive such termination.
ARTICLE 9. ADDITIONAL PROVISIONS
9.1 No rights hereunder may be assigned by LICENSEE, directly or by merger or other operation of law, without the express written consent of LICENSOR, which consent shall not be unreasonably withheld. Any prohibited assignment of this AGREEMENT or the rights hereunder shall be null and void. No assignment shall relieve LICENSEE of responsibility for the performance of any accrued obligations, which it has prior to such assignment.
9.2 A waiver by either party of a breach or violation of any provision of this AGREEMENT will not constitute or be construed as a waiver of any subsequent breach or violation of that provision or as a waiver of any breach or violation of any other provision of this AGREEMENT.
9.3 Nothing herein shall be deemed to establish a relationship of principal and agent between LICENSOR and LICENSEE, nor any of their agents or employees, nor shall this AGREEMENT be construed as creating any form of legal association or arrangement which would impose liability upon one party for the act or failure to act of the other party. Nothing in this AGREEMENT, express or implied, is intended to confer on any person other than the parties hereto or their permitted assigns, any benefits, rights or remedies.
9.4 Notices, statements, reports and other communications under this AGREEMENT shall be in writing and shall be deemed to have been received as of the date dispatched if sent by public overnight courier (e.g., Federal Express) and addressed as follows:
If to LICENSOR:
Dr. E. Joseph Savoie
Office of the President
University of Louisiana at Lafayette
104 University Cir.
Lafayette LA 70503
And
Office of Innovation Management
University of Louisiana at Lafayette
P.O. Box 43610
Lafayette, LA 70504-3610
If to LICENSEE:
Fred W. Wagenhals
Ammo Technologies, Inc.
6401 E. Thomas Road, Suite 106
Scottsdale, AZ 85251
9.5 This AGREEMENT and all claims arising out of or relating to this AGREEMENT shall be governed exclusively by the laws of the State of Louisiana, without regard to conflicts of law principles and federal law, as applicable.
| 6 |
9.6 LICENSOR AND LICENSEE shall not discriminate on the basis of race, color, national origin, age, religion, sex, sexual orientation, or disability in admission to, access to, treatment in or employment as required by Title VI and Title VII of the Civil Rights Act of 1964, Age Discrimination in Employment Act of 1967, Age Discrimination Act of 1975, the Equal Pay Act of 1963, Title IX of the Education Amendments of 1972, Executive Order 11246, Section 503 and 504 of the Rehabilitation Act of 1973, Section 402 of the Vietnam Era Veterans Readjustment Assistance Act of 1974 and the 1990 Americans with Disabilities Act.
9.7 Neither party shall be liable for any failure to perform as required by this AGREEMENT to the extent such failure to perform is due to circumstances reasonably beyond such party’s control, including, without limitation, labor disturbances or labor disputes of any kind, failure of any governmental approval required for full performance, civil disorders or commotions, acts of aggression, acts of God, energy or other conservation measures imposed by law or regulation, failure of utilities, disease, or other such occurrences.
9.8 LICENSEE and LICENSOR shall comply with all laws, regulations, and other legal requirements applicable in coimection with this AGREEMENT, including, but not limited to, any legal requirements applicable to the use of the results of the LICENSED TECHNOLOGY or DERIVATIVES and laws controlling the export of technical data, HYBRID LUMINESCENCE AMMUNITION TECHNOLOGY, and all other export controlled commodities.
9.9 Notwithstanding the definitions set forth in section 1.3, 1.5, 1.6 and any other provision of this AGREEMENT, this AGREEMENT does not in any way affect, apply to, include, or otherwise grant any rights to LICENSEE in connection with any intellectual property or programs other than HYBRID LUMINESCENCE AMMUNITION TECHNOLOGY.
9.10 This AGREEMENT embodies the entire understanding between the parties relating to the subject matter hereof and supersedes all prior understandings and agreements, whether written or oral. This AGREEMENT may not be varied except by a written document signed by duly authorized representatives of both parties.
[Remainder of page intentionally left blank. Signature page to follow.]
| 7 |
Signatures Appear on the Following Page
IN WITNESS WHEREOF, the duly authorized representatives of the parties hereby execute this AGREEMENT as of the date first written above.
| WITNESSES: | University of Louisiana at Lafayette | |
| /s/ E. Joseph Savoie | ||
| Dr. E. Joseph Savoie, President | ||
| Ammo Technologies, Inc. | ||
| /s/ Fred Wagenhals | ||
| Fred W. Wagenhals, President |
| 8 |
FIRST AMEDMENT TO AMENDED AND RESTATED EXCLUSIVE LICENSE AGREEMENT
This First Amendment to the Amended and Restated Exclusive License Agreement (“FIRST AMENDMENT”) is made by and between the University of Louisiana Lafayette, organized under the Laws of the State of Louisiana, having an address of 104 University Circle, Lafayette, LA 70503 (“LICENSOR”), herein represented by Dr. E. Joseph Savoie, its duly authorized President; and Ammo Technologies, Inc., an Arizona corporation, whose mailing address is 6401 E. Thomas Road, Suite 106, Scottsdale, AZ 85251 (“LICENSEE”), represented by Fred W. Wagenhals, its duly authorized President. This AGREEMENT is dated as ____ day of April, 2018 and to be effective starting on April1, 2018 (“EFFECTIVE DATE”).
RECITALS
WHEREAS, LICENSOR is the owner of intellectual property referred to as HYRID LUMINESCENCE AMMUNITION TECHNOLOGY invented and/or developed, in whole or in part, by Dr. William A. Hollerrnan, Brady Broussard, and Noah Bergeron during the course of research funded in whole or in part by the State of Louisiana; and
WHEREAS, LICENSOR and LICENSEE entered into the Amended and Restated Exclusive License Agreement (the “AGREEMENT”) dated as 23rd day of November, 2017 and to be effective starting on January 1, 2018 (“EFFECTIVE DATE”)
WHEREAS, the LICENSEE now desire to amend a portion of the AGREEMENT as set forth below which LICENSOR approves.
NOW, THEREFORE, the parties hereto agree as follows:
| 1. | Section 4.4 of the AGREEMENT is deleted in its entirety and in its place a new Section 4.4 shall read as follows: |
LICENSEE will provide, at the sole election of LICENSEE, either monthly or quarterly written royalty reports (“Royalty Reports”) to LICENSOR, accompanied by payment for ROYALTIES due within thirty (30) days after the last day of each month, if LICENSEE elects monthly reporting for the Royalty Reports, or March, June, September, and December, if LICENSSE elects quarterly reporting of the Royalty Reports of each calendar year during the term of the AGREEMENT. Royalty Reports shall include at least the following information, Customer Name, Type of Sale, Date of Sale, Number, Sku, Case Quantity, Rounds Per Case, Extended Rounds and Royalty Amounts, such as is set forth in Exhibit “A” and/or other documentation as it relates to LICENSED TECHNOLOGY covered by this AGREEMENT:
| 1. | Net Sales. |
Royalty Reports shall be certified as accurate by a duly authorized representative of LICENSEE and shall separately state for the preceding monthly or quarterly period elected by LICENSEE the following information: the Net Sales of royalty bearing transactions and the total ROYALTY payable. Royalty Reports shall be furnished to LICENSOR regardless of whether any ROYALTY bearing transactions were completed during the reporting period or whether any ROYALTY is actually owed. The receipt or acceptance by LICENSOR of Royalty Reports or ROYALTY payments shall not prevent LICENSOR from subsequently challenging the validity or accuracy of Royalty Reports or the accompanying ROYALTY payments.
| 2. | All of the provisions of the AGREEMENT, shall remain in full force and effect, except as expressly modified by this FIRST AMENDMENT. |
| 9 |
IN WITNESS WHEREOF, the duly authorized representatives of the parties hereby execute this FIRST AMENDMENT as of the date first written above.
| WITNESS: | University of Louisiana at Lafayette | ||
| By: | /s/ Joseph Savoie | ||
| Print Name: | Dr. E. Joseph Savoie, President | ||
| WITNESS | Ammo Technologies, Inc. | ||
| By: | /s/ Fred Wagenhals | ||
| Print Name | Fred W. Wagenhals, President | ||
| 10 |
SECOND AMENDMENT TO AMENDED AND RESTATED EXCLUSIVE LICENSE AGREEMENT
This Second Amendment to Amended and Restated Exclusive License Agreement (the “Second Amendment”) is made as of this 22nd day of June, 2022, by and among the University of Louisiana at Lafayette, organized under the Laws of the State of Louisiana, (“LICENSOR”), herein represented by Dr. E. Joseph Savoie, its duly authorized President; and Ammo Technologies, Inc., an Arizona corporation, (“LICENSEE”), represented herein by Fred W. Wagenhals, its duly authorized President. Licensor and Licensee are sometimes referred to herein as the “Party” or, collectively, the “Parties.”
RECITALS
WHEREAS, the Parties entered into that certain Amended and Restated Exclusive License Agreement dated as of November 16, 2017 and made effective January 1, 2018 (the “License Agreement”) for the purposes of licensing certain Hybrid Luminescence Ammunition Technology for development and commercialization as defined in the License Agreement.
WHEREAS, the Agreement has previously been amended, including the First Amendment to the License Agreement made effective April 19, 2018 (the “Prior Amendment”).
WHEREAS, the Parties now wish to further amend and modify the License Agreement by this Second Amendment to extend the term of the License Agreement pursuant to Article 2 of the License Agreement for additional time, as set forth herein.
WHEREAS, this Second Amendment has been signed by the Parties for their mutual benefit and to properly modifiy the underlying License Agreement so that it supersedes and replaces all prior and contemporaneous agreements and understandings, oral and written, with regard to such provisions amended by this Second Amendment;
WHEREAS, the Parties intend for this Second Amendment to the License Agreement to be effective as of January 1, 2022 (the “Effective Date”);
AGREEMENT
NOW THEREFORE, in consideration of the foregoing recitals and the mutual covenants and representations contained herein, and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the Parties hereby agree as follows:
1. Recitals. The foregoing recitals are true and correct in all material respects and are hereby incorporated herein as a material part of this Second Amendment.
2. Term and Renewal of License Agreement. Pursuant to Article 2, Section 2 of the License Agreement, the Parties agree to extend the term of the License Agreement for a successive period of four (4) years beyond the current term (“Renewed Term”). The new term shall be from January 1, 2022 to January 1, 2026.
The Parties hereby acknowledge and agree that LICENSEE is in compliance with the terms of the License Agreement specifically including payment of the minimum Royalties due to LICENSOR for the then-current period.
3.Full Force and Effect of Other Terms. The Parties hereby confirm that all other terms and conditions of the License Agreement and Prior Amendment are in full force and effect and are un-amended except as expressly provided in this Second Amendment.
4.Counterparts. This Second Amendment may be executed in one or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same agreement.
5.Electronic Signatures. The Parties agree that any form of electronic signature, including but not limited to signatures via facsimile, scanning, or electronic mail, may substitute for the original signature and shall have the same legal effect as the original signature.
| 11 |
SIGNATURES
IN WITNESS WHEREOF, the duly authorized representatives of the parties hereby execute this Second Amendment as of the date first written above.
| University of Louisiana at Lafayette | |||
| /s/ Joseph Savoie | 6/30/2022 | ||
| Dr. E. Joseph Savoie, President | |||
| Ammo Technologies, Inc. | |||
| /s/ Fred Wagenhals | 7/7/2022 | ||
| Fred W. Wagenhals, President |
| 12 |
Exhibit 10.4
EMPLOYMENT AGREEMENT
This Employment Agreement (the “Agreement”) is made and entered into December 15, 2022 (the “Effective Date”) between AMMO, Inc., a Delaware corporation (the “Company”), and Jared R. Smith (“Employee”). Company and Employee are sometimes referred to individually as “Party” and collectively as “Parties”.
RECITALS
A. The Company is a public company, and its securities are quoted in the over-the-counter market under the ticker symbol “POWW”; and
B. The Employee has experience in the guns and ammunition industry and the Company desires to hire Employee to serve as its Chief Operating Officer.
C. The Company and Employee desire to embody the terms and conditions of Employee’s employment in a written agreement, which will supersede all prior agreements of employment, whether written or oral, between the Company and Employee, pursuant to the terms and conditions set forth herein.
NOW, THEREFORE, in consideration of their mutual covenants and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the Parties agree as follows:
ARTICLE I.
EMPLOYMENT DUTIES AND TERM
Section 1.1 Employment.
(a) The Company shall employ Employee as Chief Operating Officer and President of AMMO Inc. commencing on January 2, 2022 (“Start Date”). In this capacity, Employee shall perform such duties, assume such responsibilities and devote such time, attention and energy to the business of the Company at such locations as the Company’s officers or Employee’s supervisor shall from time to time require.
(b) Employee shall not, during the term of Employee’s employment hereunder, be engaged in any other activities if such activities materially interfere with Employee’s duties and responsibilities for the Company.
(c) Employee shall perform all such duties as instructed by the Company’s Board of Directors, including the duties set forth in Exhibit “A” attached hereto and incorporated herein by reference.
(d) In connection with the Employment, Employee shall be appointed to serve as a member of the Company’s Board of Directors within 90 days of the Start Date.
(e) As previously announced, the Company has created a Succession Planning Committee, and the current Chief Executive Officer will recommend Employee as an internal candidate for the consideration by the Succession Committee to become the Chief Executive Officer of the Company.
Section 1.2 Term. The Employment is on at-will basis, terminable by either party at any time for cause or no cause. The term of this Agreement shall commence on the Effective Date and shall continue, unless sooner terminated, until three (3) years thereafter (the “Initial Term”). The Company, in its discretion, shall have the right to extend this Agreement for up to three (3) additional one (1) year terms (the “Additional Terms,” and collectively with the Initial Term, the “Term”) subject to sixty (60) advance written agreement by parties.
ARTICLE II.
COMPENSATION
Section 2.1 Compensation. During the Term of Employment, Company shall pay and Employee shall receive the following compensation:
(a) Salary. The Company shall pay Employee Four Hundred and Seventy-Five Thousand Dollars ($475,000.00) per year during the Term paid in accordance with Company’s normal payroll practices (“Salary”). Employee shall be eligible for annual increase in Salary of up to 6% per year based upon performance in the discretion of the Board of Directors Compensation Committee.
(b) Stock Incentive Compensation; Performance Based Stock Grant. Employee shall earn an aggregate 600,000, restricted shares of common stock in the Company (or 200,000 shares per year) during the Initial Term (the “Shares”). The Shares shall be earned and vest quarterly and shall be issued quarterly in accordance with the Company’s standard share issuance practices (the “Shares Delivery Date”). Company and Employee agree that Employee may file a Section 83(b) election with the Internal Revenue Service in a form to be agreed to prior to the Commencement of Employment (the “Shares Grant Date”) and which shall be filed by Employee within thirty (30) days of the Shares Grant Date.
(c) Performance Bonus. During the Term, Employee shall be eligible to receive performance-based bonus compensation which shall be determined in the sole discretion of the Company’s Compensation Committee of the Board of Directors, from time to time. The Bonus target shall be 100-125% of Employee’s annual Salary (“Bonus”) and based upon performance for any full fiscal year of service (or pro-rated year as applicable during the first year). The bonus for the fiscal year ended March 31, 2023 is guaranteed for the sum of the pro-rated portion of the employee’s salary. Employee shall be entitled to receive a prorated Bonus for year ended March 31, 2023, to be issued in within 15 days of closing the financials for year ended March 31, 2023.
(d) Board Compensation. Solely as compensation for Employee’s service on the Board, he will receive, consistent with the compensation the other members of the Board, ten thousand (10,000) shares of the Company’s common stock each quarter.
Section 2.3 Restricted Stock. The Shares that may be issued by the Company pursuant to this Agreement will not be registered and are being issued pursuant to a specific exemption under the Securities Act, as well as under certain state securities laws for transactions by an issuer not involving any public offering or in reliance on limited federal preemption from such state securities registration laws. The shares to be issued by the Company pursuant to this Agreement must be held and may not be sold, transferred, or otherwise disposed of for value unless such securities are subsequently registered under the Securities Act or an exemption from such registration is available, and that the certificates representing the shares of the Company’s Common Stock issued pursuant to this Agreement will bear a legend in substantially the following form so restricting the sale of such securities:
The securities represented by this certificate have not been registered under the Securities Act of 1933, as amended (the “Securities Act”), and are “restricted securities” within the meaning of Rule 144 promulgated under the Securities Act. The securities have been acquired for investment and may not be sold or transferred without complying with Rule 144 in the absence of an effective registration or other compliance under the Securities Act.
| 2 |
The Company reserves the right to issue the Shares under the Company’s equity incentive plan, in its sole discretion.
Section 2.4 Participation in Employee Benefit Plans; Incentive Programs. Employee shall be entitled to participate in any employee benefit plans, the Company may establish or adopt for the benefit of employees of the Company. Employee benefits will become available to Employee in the first month following the active employment. Employer shall provide 3% match on 401(k) contributions after one year of employment with vesting of matching funds per the Company timeline and Company written policies. During the Term the Company shall provide Employee with health and medical insurance benefits with 100% of monthly premiums paid for by Company for the Employee and his/her immediate family.
Section 2.5 Time Off. Employee shall be entitled to 4 weeks of paid time off per year, whether because of sickness, vacation or to service Employee’s outside business interest as Employee shall determine (“Time Off”). Employee shall receive paid holidays commensurate with Company policy. The timing of vacations shall be scheduled in a manner reasonably acceptable to the Company. Accrued but unused Time Off shall not roll over to the next fiscal year and is ‘use it or lose it’ Time Off.
Section 2.6 Expenses. The Company shall reimburse Employee’s reasonable and actual out-of-pocket expenses incurred by Employee which are approved in advance by the Company in the performance of his duties and responsibilities under this Agreement.
(a) Relocation Expenses. In connection with the Employment, Employee shall be granted a relocation expense allowance of up to $25,000 to be reimbursed by Company to Employee within 120 days of the Start Date, subject to timely submission of all reimbursable expenses to the Company.
ARTICLE III.
TERMINATION OF EMPLOYMENT
Section 3.1 Death & Disability of Employee. In the event of the Employee’s death during the Term of Employment, this Agreement shall terminate immediately. If, during the Term, the Employee shall suffer a “Disability” within the meaning of Section 22(e)(3) of the Internal Revenue Code of 1986, the Company may terminate the Employee’s employment. Section 22(e)(3) provides, in relevant part: “An individual is permanently and totally disabled if he is unable to engage in any substantial gainful activity by reason of any medically determinable physical or mental impairment which can be expected to result in death or which has lasted or can be expected to last for a continuous period of not less than 12 months.” In the event the Employee is terminated due to death or Disability, the Employee (or his estate in the event of his death) shall be receive (i) all of Employee’s unpaid Salary through the date of death/Disability and a severance benefit of two (2) month’s pay, (ii) all reimbursable expenses and benefits owing to Employee through the date of Employee’s death/Disability together with any benefits payable under any life insurance program in which Employee is a participant, if applicable, and (iii) Employee’s estate shall be entitled to any pro-rata vested or earned Bonus, payable at the end the respective fiscal year.
| 3 |
Section 3.2 Termination with Cause By Company. The Company may terminate this Agreement at any time during the Term for “Cause” upon written notice to Employee, upon which termination shall be effective immediately. For purposes of this Agreement, “Cause” means the following, without limitation:
| (a) | Willful misconduct or willful failure by the Employee to perform his responsibilities to the Company; | |
| (b) | Employee’s material breach of this Agreement; | |
| (c) | Employee’s willful failure to adhere to any written Company Employer policy if Employee has been given reasonable opportunity to comply with such policy or cure his failure; | |
| (d) | Executive engages in misfeasance or malfeasance demonstrated by a pattern of failure to perform job duties diligently and professionally; | |
| (e) | the appropriation (or attempted appropriation) of a material business opportunity of the Company, including attempting to secure or securing any personal profit in connection with any transaction entered into on behalf of the Company; | |
| (f) | the misappropriation (or attempted misappropriation) of any of the Company’s funds or property; or | |
| (g) | The conviction of, the indictment for (or procedural equivalent), or entering of a guilty plea or plea of no contest with respect to any major felony involving moral turpitude, including breach of trust, dishonesty, or physical harm to any person, that reflects adversely upon the standing of the Company in the community. |
Section 3.3 Termination Without Cause By Company. The Company may terminate this Agreement at any time during the Term without “Cause” upon 5 days written notice to Employee.
Section 3.4 Termination By Employee for Good Reason. Employee may terminate this Agreement at any time by providing the Company 30 days’ written notice, with or without “Good Reason.” For purposes hereof, the term “Good Reason” shall exist upon (i) a material diminution in the Employees’ Salary; (ii) a material diminution in the Employee’s authority, duties or responsibilities; (iii) a material change in geographic location at which the Employee performs services; or (iv) any material breach by the Company of this Agreement. “Good Reason Process” means the following series of actions: (i) the Employee reasonably determines in good faith that Good Reason exists, (ii) the Employee notifies the Company or the acquiring or succeeding corporation (if applicable) in writing of the existence of Good Reason within 60 days of the occurrence of the event that gave rise to the existence of Good Reason, (iii) the Employee cooperates in good faith with the Company’s (or the acquiring or succeeding corporations, if applicable) efforts to remedy the conditions that gave rise to the existence of Good Reason for a period of 30 days following such notice (such 30 day period, the “Cure Period”), (iv) notwithstanding such efforts, Good Reason continues to exist and (v) the Employee terminates his employment within 30 days after the end of the Cure Period. For the avoidance of doubt, if the Company or the acquiring or succeeding corporation successfully remedies the conditions that gave rise to the existence of Good Reason during the Cure Period, Good Reason shall be deemed not to have existed. In the event the Employee terminates employment under this Agreement for Good Reason, the Employee shall be eligible to receive the severance benefits set forth in Section 3.6
Section 3.5 Termination by the Employee without Good Reason. The Employee may terminate the Employee’s employment with the Company without Good Reason at any time subject to the Employee’s provision of thirty (30) days’ advance written notice to the Company (the “Applicable Notice Period”), provided, however, that the Company may, in its sole discretion, in lieu of all or part of the Applicable Notice Period, pay the Employee an amount equal to the Salary that would otherwise have been payable to the Employee had the Employee remained employed for the duration of the Applicable Notice Period. In such instance, the Employee’s termination will become effective on the date set forth in a written notice of termination to be provided by the Company (the “Early Termination Date”), and the Employee will be paid an amount equal to the base Salary the Employee would have received had the Employee remained employed by the Company between the Early Termination Date and the end of the Applicable Notice Period (the “Early Termination Payment”), with the Early Termination Payment to be made no later than the 30th day following the end of the Applicable Notice Period.
| 4 |
Section 3.6 Compensation upon Termination.
(a) For Cause/Without Good Reason. In the event that the Company terminates the Employee’s employment hereunder due to a Termination for Cause or the Employee voluntarily terminates employment with the Company without Good Reason, the Employee shall be entitled to accrued but unpaid Salary, reimbursable expenses and benefits owing to Employee through the day on which Employee is terminated, and all vested Shares through date of termination.
(b) Without Cause/Good Reason. In the event that the Company terminates the Employee’s employment hereunder due to a Termination without Cause or Employee terminates the employment hereunder for Good Reason, Employee shall be entitled to compensation, including Base Salary and insurance benefits for a period of twelve (12) months from the effective date of termination (the “Severance Period”), and 100% of the Shares, including any remaining unvested Shares shall immediately become vested and issuable. The Employee’s reimbursable expenses shall be paid within 15 days of Termination. Except as otherwise contemplated by this Agreement, Employee will not be entitled to any other compensation upon termination of this Agreement.
(c) The salary and fringe benefits to be paid are referred to herein as the “Termination Compensation.” Employee shall not be entitled to any Termination Compensation unless, Employee complies with all surviving provisions of any confidentiality agreement that Employee may have signed and Employee’s execution of a standard release of claims in favor of the Company or its successor.
(d) If Employee terminates this Agreement by providing appropriate notice, the Company, at its election, Company may (i) require Employee to continue to perform duties hereunder for the full notice period, or (ii) terminate Employee employment at any time during such notice period, provided that any such termination shall not be deemed to be a termination without cause of Employee’s employment by the Company. Unless otherwise provided by this Section, all compensation and benefits paid by Company to Employee shall cease upon his last day of employment.
Section 3.7 Change in Control. In addition, notwithstanding the foregoing, in the event that Employee’s continuous status as an employee of the Company is terminated by the Company without Cause or Employee terminates the employment with the Company for Good Reason, in either case upon or within twelve (12) months after a Change in Control (“CoC”) as defined below then, subject to Employee’s execution of a standard release of claims in favor of the Company or its successor, (i) Employee shall receive the Salary for a period of twelve (12) months, (ii) 100% of the Shares, including any remaining unvested Shares shall immediately become vested and issuable, (iii) Employee shall be entitled to the Bonus through the date of termination, if applicable, and (iv) Employee shall be released from any restriction on Non-Competition as set forth in Section 4.2 herein.
As used in this Agreement, “Change in Control” shall be deemed to have occurred if any “person” (as such term is used in Sections 13(d) and 14(d)(2) of the Exchange Act) is or becomes the beneficial owner, directly or indirectly, of securities of the Company representing 50% or more of the combined voting power of the Company’s then outstanding securities; (ii) if during any period of 18 consecutive months, individuals who were members of the Board at the beginning of such period (the “Incumbent Directors”) cease at any time during such period for any reason to constitute at least a majority of the Board; (iii) a sale of substantially all of the assets of the Company; or (iv) a liquidation of the Company. “Change in Control” shall specifically exclude any spin-off or reorganization of the Company contemplated prior to the Effective Date of this Agreement except as detailed above within Section 1.1(e).
| 5 |
ARTICLE IV.
RESTRICTIVE COVENANTS
Section 4.1 Confidentiality.
(a) Employee recognizes and acknowledges that Employee has had and will continue to have access to various trade secrets and/or proprietary information (collectively, the “Confidential Information”) concerning the Company. Employee acknowledges that the Confidential Information has been developed solely through the substantial efforts of the Company over a long period of time, and that such Confidential Information is valuable and unique and constitutes a trade secret of the Company.
(b) Employee agrees to keep all Confidential Information of the Company in strict confidence and agrees not to disclose any Confidential Information to any other person, firm, association, company, corporation or other entity for any reason except as such disclosure may be required in connection with his employment hereunder. Employee further agrees not to use any Confidential Information for any purpose except on behalf of the Company.
(c) For purposes of this Agreement, “Confidential Information” shall mean any information, process or idea that is not generally known in the industry, that the Company considers confidential and/or that gives the Company a competitive advantage, including, without limitation: (i) books and records relating to operation, finance, accounting, sales, personnel and management, (ii) policies and matters relating particularly to operations such as customer service requirements, costs of providing service and equipment, operating costs, and price matters, and (iii) various trade or business secrets, including business opportunities, marketing or business diversification plans, business development and bidding techniques, methods of processes, financial data and the like. If Employee is unsure whether certain information or material is Confidential Information, Employee shall treat that information or material as confidential unless Employee is informed by the Company, in writing, to the contrary. “Confidential Information” shall not include any information which: (i) is or becomes publicly available through no act or failure of Employee; (ii) was or is rightfully learned by Employee from a source other than the Company before being received from the Company; (iii) becomes independently available to Employee as a matter of right from a third Party having lawful right to make such communication; or (iv) is developed by Employee independently of any Confidential Information.
(d) Employee further agrees that upon termination of his employment with the Company, for whatever reason, Employee will surrender to the Company all of the property, notes, manuals, reports, documents and other things in Employee’s possession, including copies or computerized records thereof, which relate directly or indirectly to Confidential Information.
| 6 |
4.2 Non-Competition. Beginning on the date hereof and through the date that is six (6) months following the Termination Date (the “Restricted Period”), Employee will not, and will cause his or her affiliates not to, directly or indirectly, through or in association with any third party, in any territory which the Company operates as of the time Employee is no longer employed by, consulting for, serving as a board member of, or no longer otherwise works for, the Company, (i) engage in, market, sell, or provide any products or services which are the same or similar to or otherwise competitive with the products and services sold or provided by the Company or (ii) own, acquire, or control any interest, financial or otherwise, in a third party or business or manage, participate in, consult with, render services for or otherwise, any business, that in each case is engaged in selling or providing the same, similar or otherwise competitive services or products which the Company is selling or providing, other than ownership of one percent or less of the equity of a publicly traded company. Upon a Change in Control and in the event Employee’s status as employee is terminated for any reason, the Restricted Period shall be reduced to five (5) business days.
4.3 Non-Solicitation.
(a) During the Restricted Period, Employee will not, and will cause his or her affiliates not to, directly or indirectly, through or in association with any third party (1) call on, solicit, or service, engage or contract with, or take any action which may interfere with, impair, subvert, disrupt, or alter the relationship, contractual or otherwise, between the Company and any current or prospective customer, supplier, distributor, agent, contractor, developer, service provider, licensor, or licensee or other material business relation of the Company, (2) divert or take away the business or patronage (with respect to products or services of the kind or type developed, produced, marketed, furnished, or sold by the Company) of any of the clients, customers, or accounts, or prospective clients, customers, or accounts, of the Company or (3) attempt to do any of the foregoing, either for Employee’s own purposes or for any other third party.
(b) During the Restricted Period, Employee will not, and will cause his or her affiliates not to, directly or indirectly, through or in association with any third party (1) solicit, induce, recruit, or encourage any employees or independent contractors of or consultants to the Company to terminate their relationship with the Company or take away or hire such employees, independent contractors, or consultants or (2) attempt to do any of the foregoing, either for Employee’s own purposes or for any other third party.
Section 4.4 No Derogatory Statements. Employee shall not engage in any pattern of conduct that involves the making or publishing of written or oral statements or remarks (including, without limitation, the repetition or distribution of derogatory rumors, allegations, negative reports or comments) which are disparaging, deleterious or damaging to the integrity, reputation or goodwill of the Company, its competitors or its management.
Section 4.5. Remedies. If the provisions of this Article are violated, or threatened to be violated, in whole or in part, the Company shall be entitled to a temporary restraining order or a preliminary injunction restraining or enjoining Employee from using or disclosing, in whole or in part, such Confidential Information, without prejudice to any other remedies the Company may have at law or in equity. If Employee violates this Article, Employee agrees that the Company would be irreparably harmed.
| 7 |
ARTICLE V.
PROPERTY; INVENTIONS AND PATENTS
Section 5.1 Property. Employee agrees that all inventions, innovations, improvements, technical information, systems, software developments, methods, designs, analyses, drawings, reports, service marks, trademarks, trade names, logos, products, equipment, and all similar or related information and materials (whether patentable or unpatentable) (collectively, “Inventions”) which relate to the Company’s actual or anticipated business, research and development, or existing or future products or services and which are conceived, developed, or made by Employee or any other employee or person at his direction, advice or assistance (whether during usual business hours and whether alone or in conjunction with any other person) while employed (and for the Restricted Period if and to the extent such Inventions result from any work performed for the Company, any use of the Company’s premises or property or any use of the Company’s Confidential Information) by the Company (including those conceived, developed, or made prior to the date of this Agreement) together with all patent applications, letters patent, trademark, brands, tradename and service mark applications or registrations, copyrights, and reissues thereof that may be granted for or upon any of the foregoing (collectively referred to herein as, the “Work Product”), belong in all instances to the Company. Employee will promptly disclose such Work Product to the Company and perform all actions reasonably requested by the Company (whether during or after the Term) to establish and confirm the Company’s ownership of such Work Product (including, without limitation, the execution and delivery of assignments, consents, powers of attorney, and other instruments) and to provide reasonable assistance to the Company (whether during or after the Term) in connection with the prosecution of any applications for patents, trademarks, brands, trade names, service marks, or reissues thereof or in the prosecution or defense of interferences relating to any Work Product. Employee recognizes and agrees that the Work Product, to the extent copyrightable, constitutes works for hire under the copyright laws of the United States and that to the extent Work Product constitutes works for hire, the Work Product is the exclusive property of the Company, and all right, title, and interest in the Work Product vests in the Company. To the extent Work Product is not works for hire, the Work Product, and all of Employee’s right, title, and interest in Work Product, including without limitation every priority right, is hereby assigned to the Company.
Section 5.2 Cooperation. Employee shall, during the Term and at any time thereafter, assist and cooperate fully with the Company in obtaining for the Company the grant of letters patent, copyrights, and any other intellectual property rights relating to the Work Product in the United States and/or such other countries as the Company may designate. With respect to Work Product, Employee shall, during the Term and at any time thereafter, execute all applications, statements, instruments of transfer, assignment, conveyance or confirmation, or other documents, furnish all such information to the Company and take all such other appropriate lawful actions as the Company requests that are necessary to establish the Company’s ownership of such Work Product. Employee will not assert or make a claim of ownership of any Work Product, and Employee will not file any applications for patents or copyright or trademark registration relating to any Work Product.
Section 5.3 No Designation as Inventor; Waiver of Moral Rights. Employee agrees the Company shall not be required to designate Employee as the inventor or author of any Work Product. Employee hereby irrevocably and unconditionally waives and releases, to the extent permitted by applicable law, all of Employee’s rights to such designation and any rights concerning future modifications to any Work Product. To the extent permitted by applicable law, Employee hereby waives all claims to moral rights in and to any Work Product.
Section 5.4 Pre-Existing and Third-Party Materials. Employee will not, in the course of employment with the Company, incorporate into or in any way use in creating any Work Product any pre- existing invention, improvement, development, concept, discovery, works, or other proprietary right or information owned by Employee or in which Employee has an interest without the Company’s prior written permission. Employee hereby grants the Company a nonexclusive, royalty-free, fully paid, perpetual, irrevocable, sublicensable, worldwide license to make, have made, modify, use, sell, copy, and distribute, and to use or exploit in any way and in any medium, whether or not now known or existing, such item as part of or in connection with such Work Product. Employee will not incorporate any invention, improvement, development, concept, discovery, intellectual property, or other proprietary information owned by any party other than Employee into any Work Product without the Company’s prior written permission.
| 8 |
Section 5.5 Attorney-in-Fact. Employee hereby irrevocably designates and appoints the Company and its duly authorized officers and agents as Employee’s agent and attorney-in-fact, to act for and on Employee’s behalf to execute and file any such applications and to do all other lawfully permitted acts to further the prosecution and issuance of patents, copyright, trademark, and mask work registrations with the same legal force and effect as if executed by Employee, if the Company is unable because of Employee’s unavailability, dissolution, mental or physical incapacity, or for any other reason, to secure Employee’s signature for the purpose of applying for or pursuing any application for any United States or foreign patents or mask work or copyright or trademark registrations covering the Work Product owned by the Company pursuant to this Section.
ARTICLE VI.
MISCELLANEOUS
Section 6.1 Assignment; Binding Effect; Amendment. This Agreement and the rights of the Parties under it may not be assigned (except by operation of law and except that it may be assigned by the Company to an Affiliated Entity) and shall be binding upon and shall inure to the benefit of the Parties and their successors and assigns. This Agreement, upon execution and delivery, constitutes a valid and binding agreement of the Parties enforceable in accordance with its terms and may be modified or amended only by a written instrument executed by all Parties hereto.
Section 6.2 Entire Agreement. This Agreement is the final, complete and exclusive statement and expression of the agreement among the Parties hereto with relation to the subject matter of this Agreement, it being understood that there are no oral representations, understandings or agreements covering the same subject matter as this Agreement. This Agreement supersedes, and cannot be varied, contradicted or supplemented by evidence of any prior or contemporaneous discussions, correspondence, or oral or written agreements of any kind.
Section 6.3 Counterparts. This Agreement may be executed simultaneously in two or more counterparts, each of which shall be deemed an original and all of which together shall constitute but one and the same instrument.
Section 6.4 Notices. All notices or other communications required or permitted hereunder shall be in writing and may be given by depositing the same in United States mail, addressed to the Party to be notified, postage prepaid and registered or certified with return receipt requested, by nationally recognized overnight courier or by delivering the same in person to such Party.
| (a) | If to Employee, addressed to Employee’s last known address of record |
| (b) | If to the Company, addressed to it at: |
Ammo, Inc.
Attn: Fred Wagenhals
7681 E. Gray Road
Scottsdale, AZ 85260
| 9 |
Notice shall be deemed given and effective the day personally delivered, the day after being sent by overnight courier, subject to signature verification, and three business days after the deposit in the U.S. mail of a writing addressed as above and sent first class mail, certified, return receipt requested, or when actually received, if earlier. Any Party may change the address for notice by notifying the other Parties of such change in accordance with this Section.
Section 6.5 Governing Law; Arbitration. This Agreement shall be governed by and construed in accordance with the internal laws of the State of Arizona, without giving effect to any choice or conflict of law provision or rule (whether of the State of Arizona or any other jurisdiction) that would cause the application of the laws of any jurisdiction other than the State of Arizona; provided, however, that the following provisions shall be governed by the Federal Arbitration Act:
(a) Any dispute or controversy arising under or in connection with this Agreement shall be settled exclusively by arbitration, in accordance with the rules of the American Arbitration Association for employment disputes as then in effect. For the avoidance of doubt, it is understood and agreed that this Agreement to arbitrate includes any and all claims and disputes, including, without limitation, as to arbitrability, with respect to Employee’s employment with the Company or the termination of such employment, including, without limitation, any claim for alleged discrimination, harassment, or retaliation under on the basis of race, sex, color, national origin, sexual orientation, age, religion, creed, marital status, veteran status, alienage, citizenship, disability or handicap, or any other legally protected status, and any alleged violation of any federal, state, or other governmental law, statute or regulation, including, but not limited to, any alleged violation of Title VII of the Civil Rights Act of 1964, other civil rights statutes including, without limitation, 42 U.S.C. § 1981, 42 U.S.C. § 1982, and 42 U.S.C. § 1985, the Age Discrimination in Employment Act, the Americans with Disabilities Act, the Family and Medical Leave Act, the Worker Adjustment and Retraining Notification Act, the Employee Retirement Income Security Act, the Fair Labor Standards Act, the Occupational Safety and Health Act, the Immigration Reform and Control Act, the Sarbanes-Oxley Act, or any state or local law, statute or regulation, as such statutes, laws, and regulations are amended. Judgment may be entered on the arbitrator’s award in any court having jurisdiction.
Section 6.6 No Waiver. No delay of or omission in the exercise of any right, power or remedy accruing to any Party as a result of any breach or default by any other Party under this Agreement shall impair any such right, power or remedy, nor shall it be construed as a waiver of or acquiescence in any such breach or default, or of or in any similar breach or default occurring later; nor shall any waiver of any single breach or default be deemed a waiver of any other breach or default occurring before or after that waiver.
Section 6.7 Captions. The headings of this Agreement are inserted for convenience only, and shall not constitute a part of this Agreement or be used to construe or interpret any provision hereof.
Section 6.8 Severability. In case any prov1s1on of this Agreement shall be invalid, illegal or unenforceable, it shall, to the extent possible, be modified in such manner as to be valid, legal and enforceable but so as most nearly to retain the intent of the Parties. If such modification is not possible, such provision shall be severed from this Agreement. In either case the validity, legality and enforceability of the remaining provisions of this Agreement shall not in any way be affected or impaired thereby.
| 10 |
Section 6.9 Construction. The Parties have participated jointly in the negotiation and drafting of this Agreement. In the event an ambiguity or question of intent or interpretation arises, this Agreement shall be construed as if drafted jointly by the Parties, and no presumption or burden of proof shall arise favoring or disfavoring any Party by virtue of the authorship of any of the provisions of this Agreement. Any reference to any federal, state, local or foreign statute shall be deemed to refer to all rules and regulations promulgated thereunder, unless the context requires otherwise. The word “including” means including, without limitation. The Parties intend that representations, warranties and covenants contained herein shall have independent significance. If any Party has breached any representation, warranty or covenant contained herein in any respect, the fact that there exists another representation, warranty or covenant relating to the same subject matter (regardless of the relative levels of specificity) that the Party has not breached shall not detract from or mitigate the fact the Party is in breach of the first representation, warranty or covenant.
Section 6.10 No Derogatory Statement. The Company shall not engage in any pattern of conduct that involves the making or publishing of written or oral statements or remarks (including, without limitation, the repetition or distribution of derogatory rumors, allegations, negative reports or comments) which are disparaging, deleterious or damaging to the integrity or reputation of Employee.
Section 6.11 Indemnification by the Company. The Company shall indemnify, defend and hold Employee harmless from any liabilities, obligations, claims, penalties, fines or losses resulting from any unauthorized or unlawful acts of the Company which contravene any applicable statute, rule, regulation or order of any jurisdiction, foreign or domestic.
Section 6.12 Headings. The headings used herein are for convenience only and do not limit the contents of this Agreement.
| 11 |
IN WITNESS WHEREOF, the Parties have caused this Agreement to be executed effective as of the day and year first above written.
| AMMO, INC. | ||
| By: | Fred Wagenhals | |
| Its: | Chief Executive Officer | |
| EMPLOYEE: | ||
| By: | Jared R. Smith | |
| 12 |
EXHIBIT A
JOB DUTIES AND RESPONSIBILITIES
The Chief Operating Officer (“COO”) is responsible for leading the development and execution of the Company’s long-term strategy with a view to creating shareholder value. The COO’s leadership role also entails being ultimately responsible for all day-to- day management decisions and for implementing the Company’s long and short-term plans. The COO acts as a direct liaison between the Board and management of the Company and communicates to the Board on behalf of management. The COO will work closely with and directly answer to the CEO as his/her supervisor.
More specifically, the duties and responsibilities of the COO include the following:
| 1. | to lead, in conjunction with the Board, the development of the Company’s strategy along with the CEO; |
| 2. | to lead and oversee the implementation of the Company’s long and short term plans in accordance with its strategy; |
| 3. | to ensure the Company is appropriately organized and staffed and to have the authority to hire and terminate staff as necessary to enable it to achieve the approved strategy; |
| 4. | to ensure that expenditures of the Company are within the authorized annual budget of the Company, if one is adopted; |
| 5. | to assess the principal risks of the Company and to ensure that these risks are being monitored and managed; |
| 6. | to ensure effective internal controls and management information systems are in place; |
| 7. | to ensure that the Company has appropriate systems to enable it to conduct its activities both lawfully and ethically; |
| 8. | to ensure that the Company maintains high standards of corporate citizenship and social responsibility wherever it does business; |
| 9. | to act as a liaison between management and the Board; |
| 10. | communicate effectively with shareholders, employees, Government authorities, other stakeholders and the public; |
| 11. | to keep abreast of all material undertakings and activities of the Company and all material external factors affecting the Company and to ensure that processes and systems are in place to ensure that the COO, CEO and management of the Company are adequately informed; |
| 12. | to ensure that the Directors are properly informed and that sufficient information is provided to the Board to enable the Directors to form appropriate judgments; |
| 13. | to ensure the integrity of all public disclosure by the Company; |
| 14. | in concert with the Chairman, to develop Board agendas; |
| 15. | to sit on committees of the Board where appropriate as determined by the Board; and |
| 16. | to abide by specific internally established control systems and authorities, to lead by personal example and encourage all employees to conduct their activities in accordance with all applicable laws and the Company’s standards and policies, including its environmental, safety and health policies. |
| 13 |
Exhibit 31.1
CERTIFICATION
I, Fred W. Wagenhals, certify that:
1. I have reviewed this Quarterly Report on Form 10-Q of AMMO, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
| a) | Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; | |
| b) | Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; | |
| c) | Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and | |
| d) | Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s fourth fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting. |
5. I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
| (a) | All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and | |
| (b) | Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting. |
| Date: February 14, 2023 | By: | /s/ Fred W. Wagenhals |
| Name: | Fred W. Wagenhals | |
| Title: | Chief Executive Officer (Principal Executive Officer) |
Exhibit 31.2
CERTIFICATION
I, Robert D. Wiley, certify that:
1. I have reviewed this Quarterly Report on Form 10-Q of AMMO, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
| a) | Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; | |
| b) | Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; | |
| c) | Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and | |
| d) | Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s fourth fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting. |
5. I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
| (a) | All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and | |
| (b) | Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting. |
| Date: February 14, 2023 | By: | /s/ Robert D. Wiley |
| Name: | Robert D. Wiley | |
| Title: | Chief Financial Officer (Principal Financial Officer) |
EXHIBIT 32.1
CERTIFICATION PURSUANT TO
18 U.S.C. 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with Quarterly Report of AMMO, Inc. (the “ Company”) on Form 10-Q for the period ended December 31, 2022 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), the undersigned Fred W. Wagenhals, Chief Executive Officer (Principal Executive Officer) of the Company, certifies, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:
(1) The Quarterly Report fully complies with the requirements of Section 13a-14(b) or 15d-14(b) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
| Date: February 14, 2023 | By: | /s/ Fred W. Wagenhals |
| Name: | Fred W. Wagenhals | |
| Title: | Chief Executive Officer (Principal Executive Officer) |
EXHIBIT 32.2
CERTIFICATION PURSUANT TO
18 U.S.C. 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with Quarterly Report of AMMO, Inc. (the “ Company”) on Form 10-Q for the period ended December 31, 2022 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), the undersigned, Rob Wiley, Chief Financial Officer (Principal Financial Officer) of the Company, certifies, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:
(1) The Quarterly Report fully complies with the requirements of Section 13a-14(b) or 15d-14(b) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
| Date: February 14, 2023 | By: | /s/ Rob Wiley |
| Name: | Rob Wiley | |
| Title: | Chief Financial Officer (Principal Financial Officer) |