AMMO, INC. 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 theSecurities and Exchange Commission , references to "AMMO, Inc. ", "AMMO", "the Company", "we," "us," "our" and similar terms refer toAMMO, Inc. , aDelaware corporate, and its wholly owned consolidated subsidiaries.
Overview
Our vision is to modernize the ammunition industry by bringing new technologies
to market. We intend to do that through acquisition and application of
intellectual property that is unique to the industry and through investing in
manufacturing equipment and processes that enable us to compete globally.
Our innovative line of match grade armor piercing ("AP") and hard armor piercing
incendiary ("HAPI") tactical rounds are the centerpiece of the Company's
strategy to address the unique needs of the armed forces community. This
ammunition was designed around a match grade portfolio of projectiles, that
include a solid copper boat tail and armor piercing configuration. The
distinction between these rounds and other sold, is that the manufacturing
process was engineered to ensure extremely tight tolerances between each
projectile manufactured, ensuring for the end user that the ballistic trajectory
remains consistent between rounds without regard to the actual configuration or
round fired. Our AP and HAPI line are also available with our O.W.L.
Technology™. The Company has aligned its manufacturing operations to support the
large caliber demand from military personnel, such as the 12.7 mm and .50
caliber BMG configurations. On February 2, 2021 , we announced that we restarted
our improved .50 caliber manufacturing line to address increased market demand
and fulfill current orders.
We offer ammunition casings for pistol ammunition through large rifle
ammunition. Our casing operations is backed by decades of manufacturing
experience that allows the production of high-quality pistol brass and rifle
brass components. Borne from the automotive industry and refined over time to
deliver durable and consistent sporting components, Jagemann™ Casings, has
become one of the largest brass manufacturers in the country, with the capacity
to produce more than 750 million pieces of brass each year with the ability to
scale to 1 billion rounds on an annual basis. Proud of its American-made
components and capabilities, the Company now has complete control over the
manufacturing process. This results in a number of advantages when it comes to
the brass that leaves our state-of-the-art facility.
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On April 30, 2021 , we acquired Gemini Direct Investments, LLC ("Gemini") and
nine of its subsidiaries, all of which are related to Gemini's ownership ofthe Gunbroker.com marketplace.
GunBroker.com is a large online marketplace dedicated to firearms, hunting, shooting and related products. Aside from merchandise bearing its logo, GunBroker.com currently sells none of the items listed on its website. Third-party sellers list items on the site and federal and state laws govern the sale of firearms and other restricted items. Ownership policies and regulations are followed using licensed firearms dealers as transfer agents. With our recent addition of the Gunbroker.com marketplace, we aim to further enhance our vision of bringing technologies to the industry. Gunbroker.com is a marketplace that connects millions of buyers and sellers allowing our users to access a daily average of over one million unique items. The focus for our 2022 fiscal year is to continue to expand our brand presence into the markets identified above and to continue to grow our sales within our targeted markets. We intend to do this through establishing key strategic relationships, enrolling in government procurement programs, establishing relationships with leading law enforcement associations and programs, expanding distributor channels, and revitalized marketing campaigns. 26 Results of Operations
Our financial results for the three and six months endedSeptember 30, 2021 reflect our newly positioned organization. We believe that we have hired a strong team of professionals, developed innovative products, and continue to raise capital sufficient to establish our presence as a high-quality ammunition provider and marketplace. We continue to focus on growing our top line revenue, and streamlining our operations, and as a result, we experienced an increase in our gross profit margin for the three and six months endedSeptember 30, 2021 . This was the result of a significant increase in sales allowing us to cover a greater percentage of our fixed manufacturing costs, which include our non-cash amortization and depreciation expense as well as the addition of our new marketplace, Gunbroker.com The following table presents summarized financial information taken from our condensed consolidated statements of operations for the three and six months endedSeptember 30, 2021 compared with the three and six months endedSeptember 30, 2020 : For the Three Months Ended For the Six Months EndedSeptember 30 ,September 30 ,
2021 2020 2021 2020
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
Net Sales $ 61,002,085 $ 12,012,872 $ 105,478,417 $ 21,672,842
Cost of Revenues 34,786,017 10,723,246 60,291,455 19,311,811
Gross Margin 26,216,068 1,289,626 45,186,962 2,361,031
Sales, General &
Administrative Expenses 11,987,750 2,999,566 21,278,130 6,851,160
Income (loss) from
Operations 14,228,318 (1,709,940 ) 23,908,832 (4,490,129 )
Other income (expense)
Other expense (112,806 ) (628,685 ) (256,660 ) (952,285 )
Income (loss) before
provision for income taxes $ 14,115,512 $ (2,338,625 ) $ 23,652,172 $ (5,442,414 )
Provision for income taxes - - - -
Net Income (Loss) $ 14,115,512 $ (2,338,625 ) $ 23,652,172 $ (5,442,414 ) 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 inthe 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 Six Months Ended30-Sep-21 30-Sep-20
Reconciliation of GAAP net income to Adjusted EBITDA Net Income (Loss)$ 14,115,512 $ (2,338,625 ) $ 23,652,172 $ (5,442,414 ) Depreciation and amortization 4,667,957 1,195,835 8,154,748 2,364,836 Loss on Purchase - - - 1,000,000 Excise Taxes 3,937,118 864,570 6,334,889 1,505,693 Interest expense, net 112,806 442,085 278,085 765,685 Employee stock awards 1,153,625 220,436 1,853,125 475,736 Stock grants 65,098 70,909 132,012 147,675 Other income, net - - (21,425 ) - Contingent consideration fair value (3,444 ) (29,390 ) (60,082 ) (57,358 ) Adjusted EBITDA$ 24,048,672 $ 425,820 $ 40,323,524 $ 758,853 27
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: depreciation and amortization, loss on purchase, share-based compensation expenses, and changes to the contingent consideration fair value. We believe it is useful to exclude these non-cash expenses because the amount of such expenses in any specific period may not directly correlate to the underlying performance of our business operations. Adjusted EBITDA as a non-GAAP financial measure also excludes other cash interest income and expense, as these items are not components of our core operations. We have not included adjustment for any provision or benefit for income taxes as we currently record a valuation allowance and we have included adjustment for excise taxes.
Non-GAAP financial measures have limitations, should be considered as supplemental in nature and are not meant as a substitute for the related financial information prepared in accordance with GAAP. These limitations include the following:
? Employee stock awards and stock grants expense has been, and will continue to
be for the foreseeable future, a significant recurring expense in the Company
and an important part of our compensation strategy;
? the assets being depreciated or amortized may have to be replaced in the
future, and the non-GAAP financial measures do not reflect cash capital
expenditure requirements for such replacements or for new capital expenditures
or other capital commitments; and
? non-GAAP measures do not reflect changes in, or cash requirements for, our
working capital needs
? other companies, including companies in our industry, may calculate the
non-GAAP financial measures differently or not at all, which reduces their
usefulness as comparative measures.
Because of these limitations, you should consider the non-GAAP financial measures alongside other financial performance measures, including our net loss and our other financial results presented in accordance with GAAP.
Net Sales The following table shows our net sales by proprietary ammunition versus standard ammunition for the three and six months endedSeptember 30, 2021 and 2020. "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.
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For the Three Months Ended For the Six Months Ended
September 30 , September 30 ,
2021 2020 2021 2020
Proprietary Ammunition $ 1,333,347 $ 1,582,542 $ 2,443,968 $ 3,477,683
Standard Ammunition 38,875,055 7,158,738 66,116,214 11,675,265
Ammunition Casings 4,016,467 3,271,592 7,868,953 6,519,894
Marketplace Revenue 16,777,216 - 29,049,282 -
Total Sales $ 61,002,085 $ 12,012,872 $ 105,478,417 $ 21,672,842 Sales for the three and six months endedSeptember 30, 2021 increased 408% and 387%, respectively or approximately$49.0 million or$83.7 million , respectively over the three and six months endedSeptember 30, 2020 . This increase was the result of approximately$31.7 million and$54.4 million of respective increased sales in bulk pistol and rifle ammunition, a decrease of approximately$0.2 million and$1.0 million of respective sales of Proprietary Ammunition, an increase of approximately$0.7 million and$1.3 million of respective sales from our casing operations, and$16.8 million and$29.0 million in respective revenue generated from our recently acquired marketplace, Gunbroker.com, which includes auction revenue, payment processing revenue, and shipping income. Management expects the sales of Proprietary Ammunition to outpace the sales of our Standard Ammunition.
We are focused on continuing to grow top line revenue quarter-over-quarter as we continue to further expand distribution into commercial markets, introduce new product lines, and initiate sales toU.S. law enforcement, military, and international markets. Through our acquisition of SWK, the Company has developed and deployed a new line of tactical armor piercing (AP) and hard armor piercing incendiary (HAPI) precision ammunition to meet the lethality requirements of both the US and foreign military customers. We continue to demonstrate our AP and HAPI ammunition to military personnel at scheduled and invite only events, resulting in increased interest and procurement discussions. It is important to note that, althoughU.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 inthe United States and abroad, which are reasonably anticipated to drive sustained sales opportunity in the military, law enforcement, and commercial markets. Sales outside ofthe United States require licenses and approval from either theU.S. Department of Commerce or theU.S. State Department , which typically takes approximately 30 days to receive. OnJuly 21, 2020 , we renewed our annual registration with the International Traffic in Arms Regulations ("ITAR"), which remains valid through the report date. This permits the Company to export and broker ammunition and other controlled items covered under ITAR. OnJune 23, 2021 , we announced that we were awarded aU.S. Department of Defense contract for the development and manufacture of ballistically matched multi-purpose rounds to design and manufacture multiple Ballistically Matched Multi-Purpose Rounds (BM-MPR) in support ofU.S. military operations. OnSeptember 23, 2021 , we announced that we were awarded aU.S. Department of Defense contract to design and manufacture signature-on-target rounds ("SoT") in support ofU.S. military operations. The SoT ammunition allows the machine gunner to see bullet impacts without a visible signature in flight exposing their firing location in the manner which occurs with currently utilized tracer ammunition. Cost of Revenues
Cost of Revenues increased by approximately$24.1 million and$41.0 million from$10.7 million and$19.3 million to$34.8 million and$60.3 million for the three and six months endedSeptember 30, 2021 compared to the comparable period ended in 2020. This was the result of a significant increase 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 2021 as compared to 2020, and additional cost of revenues from our recent acquisition of our marketplace, Gunbroker.com. As a percentage of sales, cost of goods sold decreased by 36.1% and 35.8 % when comparing the three and six months endedSeptember 30, 2021 and 2020. Gross Margin Our gross margin percentage increased to 42.9% and 42.8% from 10.7% and 10.9% during the three and six months endedSeptember 30, 2021 , respectively, as compared to the same period in 2020. This was a result of increased sales allowing us to cover a greater percentage of our fixed manufacturing costs, which include our non-cash amortization and depreciation expense, and the inclusion of our newly acquired marketplace, Gunbroker.com which, by nature has significantly higher margins than our manufactured products. 29 We believe as we continue to grow sales through new markets and expanded distribution that our gross margins will also increase, as evidenced by the improvement over this time last year. Our goal in the next 12 to 24 months is to continue to improve our gross margins. This will be accomplished through the following:
? Increased product sales, specifically of proprietary lines of ammunition, like
the STREAK VISUAL AMMUNITION™, 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;
? Leverage of our newly acquired marketplace, Gunbroker.com, through the
introduction of additional services and product offerings;
? 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 six months ended September 30, 2021 , our operating
expenses increased by approximately $9.0 million and $14.4 million over the
three and six months ended September 30, 2020 , and decreased as a percentage of
sales from 25.0% and 31.6% for the three and six months ended September 30, 2020
to 19.7% and 20.1% for the three and six months ended September 30, 2021 . The
increase was primarily related to approximately $8.6 million of additional
operating expenses following our merger with Gemini, including $5.5 million of
depreciation and amortization expenses. Our operating expenses include non-cash
depreciation and amortization expense of approximately $3.7 million and $6.3
million for the three and six months ended September 30, 2021 . Our operating
expenses consisted of commissions related to our sales increases, stock
compensation expense associated with issuance of our Common Stock in lieu of
cash compensation for employees, and board members, and key consultants for the
organization during the period. Operating expenses for the six months ended
September 30, 2021 and 2020 periods included noncash expenses of approximately
$8.2 million and $2.4 million , respectively. We expect to see administrative
expenditures to continue to decrease as a percentage of sales in the 2022 fiscal
year, as we leverage our work force and expand our sales opportunities.
During the three and six months ended September 30, 2021 , our selling and
marketing expenses increased by approximately $1.2 million and $2.0 million in
comparison to the three and six months ended September 30, 2020 . The increase
was primarily related to commission on the increases in the sale of our products
resulting of approximately $1.1 million and $1.8 million for the three and six
months ended September 30, 2021 in comparison to the comparable prior period.
Our corporate general & administrative expenses increased approximately $3.0
million and $5.1 million in the three and six months ended September 30, 2021
from the comparable prior period mainly due to increased general corporate
expenses related to the addition of Gemini of approximately $1.4 million and
$1.9 million and increased professional and legal fees of $0.7 million primarily
related to our acquisition of Gemini.
Employee salaries and related expenses increased approximately $1.5 million and
$2.8 million for the three and six months ended September 30, 2021 compared to
the comparable period ended in 2020. The increase for the three and six months
ended September 30, 2021 when compared to the prior period, was primary related
to an increase in stock compensation of approximately $0.9 million and $1.4
million , respectively.
Depreciation and amortization expenses for the three and six months ended
September 30, 2021 increased by approximately $3.3 million and $5.5 million from
the comparable prior periods due to depreciation and amortization expenses in
connection with the acquisition of Gemini.
Interest and Other Expenses
For the three and six months ended
Net Income As a result of increases in revenues from increased production as well as our acquisition of Gemini, we ended the three and six months endedSeptember 30, 2021 with a net income of approximately$14.1 million and$23.7 million , respectively compared with a net losses of approximately$2.3 million and$5.4 million for the three and six months endedSeptember 30, 2020 . 30
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
Working Capital is summarized and compared as follows:
September 30, March 31,
2021 2021
Current assets $ 110,951,670 $ 145,620,332
Current liabilities 42,997,607 12,098,493
$ 67,954,063 $ 133,521,839 Changes in cash flows are summarized as follows:
Operating Activities For the six months endedSeptember 30, 2021 , net cash used in operations totaled approximately$7.1 million . This was primarily the result of net income of approximately$23.7 million , which was offset by increases in our inventories of approximately$19.1 million , increases in deposits of approximately$14.7 million , increases in our accounts receivable of approximately$14.2 million , decreases in prepaid expenses of approximately$1.1 million , and increases in our accounts payable and accrued liabilities of$3.9 million and$1.0 million , respectively. Non-cash expenses for depreciation and amortization totaled approximately$8.2 million and non-cash expenses for employee stock awards totaled$1.9 million . For the six months endedSeptember 30, 2020 , net cash used in operations totaled approximately$3.8 million . This was primarily the result of a net loss of approximately$5.4 million , increases in our period end inventories and accounts receivable of approximately$3.2 million and$2.3 million , respectively, increases in accounts payable and accrued liabilities of approximately$1.9 million and$1.1 million , respectively, and a loss on Jagemann Munition Components of$1.0 million . The cash used in operations were partially offset by the benefit of non-cash expenses for depreciation and amortization of$2.4 million , employee stock compensation of$0.5 million , and stock grants totaling$0.1 million . Investing Activities
During the six months endedSeptember 30, 2021 , we used approximately$55.7 million in net cash for investing activities. Net cash used in investing activities consisted of approximately$50.5 million uses in connection with the merger of Gemini, and approximately$5.2 million related to purchases of production equipment and the construction of our new manufacturing facility
inManitowoc, WI.
During the six months ended
Financing Activities During the six months endedSeptember 30, 2021 , net cash used in financing activities was approximately$22.5 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$50.4 million was generated from accounts receivable factoring, which was offset by payments of approximately$49.1 million . 31 During the six months endedSeptember 30, 2020 , net cash provided by financing activities was approximately$8.6 million . This was the net effect of approximately$2.9 million of proceeds from the sale of common stock net of approximately$0.1 million of issuance costs, approximately$3.5 million of proceeds from a related party note, approximately$2.3 million generated from our Inventory Credit Facility, approximately$1.1 million in proceeds from our paycheck protection program notes payable, and approximately$0.2 million was generated from common stock issued for exercised warrants. Additionally, approximately$15.3 million was generated from accounts receivable factoring, which was offset by payments of approximately$15.2 million . Approximately$1.1 million of cash was used for payments on related party notes payable, and$270,233 toward our insurance premium notes payable.
Liquidity and Capital Resources
Existing working capital, cash used in operations, bank borrowings, and sales of equity and debt securities are expected to be adequate to fund our operations over the next year. Generally, we have financed operations to date through the proceeds of stock sales, bank financings, and related-party notes. We believe financing will be available, both through conventional financing relationships and through the continued sales of our Common Stock. However, there is no assurance that such funding will be available on terms acceptable to us or at all. We believe that our current cash on hand, coupled with alternative sources of funding, will be sufficient to satisfy intended capital expenditures, potential acquisitions and general liquidity requirements through at least
the next twelve months.
Off-Balance Sheet Arrangements
As ofSeptember 30, 2021 , 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, intangible assets, and stock-based compensation. A summary of our critical accounting policies is included in our Annual Report on Form 10-K for the year endedMarch 31, 2021 , under "Management's Discussion and Analysis of Financial Condition and Results of Operations." There have been no significant changes to these policies during the six months endedSeptember 30, 2021 . 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 endedMarch 31, 2021 . 32
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