Outdoor Holding Co annual report, FY2022

Business context and reporting period

The filing is AMMO, Inc.’s Form 10-K for the fiscal year ended March 31, 2022, not a filing identified as Outdoor Holding Co. or a calendar-year 2021 Q4 report. AMMO manufactures and sells ammunition and casings and, following its April 30, 2021 acquisition of Gemini, operates GunBroker.com, an online marketplace for firearms and related products.

Financial performance and liquidity

Revenue increased 285% year over year. FY2022 revenue included $161.5 million from ammunition, $14.2 million from casings, and $64.6 million from marketplace fees. Management attributed the margin improvement largely to GunBroker.com’s higher-margin business. By segment, ammunition generated $175.7 million of revenue and $1.8 million of operating income; marketplace generated $64.6 million of revenue and $35.3 million of operating income. Results include GunBroker.com only from the acquisition date.

Adjusted EBITDA, a non-GAAP measure, was $75.5 million versus $8.1 million. The company cautions that this measure excludes items including stock compensation, taxes, depreciation and amortization, and does not reflect working-capital or capital-expenditure needs.

Cash and cash equivalents were $23.3 million at March 31, 2022, down from $118.3 million a year earlier. Working capital was $93.9 million, versus $133.5 million. Operating cash generation was modest relative to net income, with substantial cash absorbed by increases in inventory, receivables, and deposits. Investing used $69.7 million, including $50.5 million for the Gemini acquisition and $19.2 million for equipment and facility construction. Financing used $28.2 million.

Total liabilities were $39.9 million, including $35.8 million of current liabilities. The balance sheet reported $0.9 million of related-party notes, $0.8 million outstanding on the inventory credit facility, and $38,330 of construction note payable at year-end. The construction loan permits borrowing up to $11.625 million; subsequent to year-end, advances totaled approximately $5.8 million by June 24, 2022. The company reported $3.5 million of future minimum lease payments. Series A preferred stock carries an 8.75% cumulative dividend; $2.7 million of preferred dividends were paid or recognized for the year, and approximately $0.1 million of accrued dividends remained unpaid as of the filing date.

Material changes and unusual items

• The Gemini/GunBroker.com acquisition had an estimated fair-value consideration of $243.9 million, including $50.0 million cash consideration, repayment of $50.0 million of assumed debt, and common stock. It added $90.9 million of goodwill and substantial acquired intangible assets. The filing identifies acquisition accounting and valuation estimates as a critical audit matter.
• Sales growth also reflected increased ammunition production and demand. Standard ammunition sales were $151.4 million versus $44.3 million; proprietary ammunition sales were $10.1 million versus $5.3 million.
• Operating expenses rose to $51.6 million from $16.8 million, including increased acquisition-related costs, amortization, compensation, commissions, and insurance. FY2022 included $13.7 million of operating depreciation and amortization and $5.8 million of employee stock awards.
• The company issued 1.4 million preferred shares in 2021, raising $35.0 million gross, and used $50.0 million to repay debt assumed in the Gemini transaction.

Outlook, risks, and contingencies

Management said existing working capital, operating cash flow, bank borrowing, and equity or debt financing were expected to fund operations over the following year. It gave no specific revenue or earnings guidance. Priorities included continued sales growth, expanding commercial and government channels, and improving gross margins over the next 12 to 24 months through proprietary products, cost reductions, automation, and greater production scale. A new 160,000-square-foot Wisconsin manufacturing facility was scheduled to open in summer 2022; management expected it to expand capacity into late 2022 and 2023.

Key risks include supply shortages and inflation, production and facility execution, customer and product concentration, competitive pricing, demand volatility, firearms and ammunition regulation, export licensing, product liability, cybersecurity, and the long sales cycle for government and military business. The company disclosed a former employee’s lawsuit alleging retaliation and related claims; AMMO disputes the allegations. Another former-employee dispute was settled and dismissed with prejudice. Management reported no other known contingencies at year-end.

Management concluded that internal control over financial reporting was ineffective at March 31, 2022, citing limited accounting personnel, inadequate segregation of duties, and controls that may not be adequately designed or operating effectively. Disclosure controls were also deemed ineffective. The independent auditor gave an unqualified opinion on the financial statements but did not audit internal-control effectiveness.

Most important facts for investors to verify

• Confirm the issuer and period: this document is AMMO, Inc.’s FY2022 10-K, despite the request metadata naming Outdoor Holding Co. and 2021 Q4.
• Assess how much of the reported growth and profit reflects the GunBroker.com acquisition, its partial-year contribution, and acquisition-related accounting estimates.
• Review the quality of earnings and cash conversion, including working-capital growth, the $3.1 million doubtful-account allowance, and the gap between net income and operating cash flow.
• Track facility completion, construction-loan advances and repayment terms, production expansion, and the effect of capacity utilization on margins and liquidity.
• Monitor remediation of the disclosed material weaknesses, preferred-dividend obligations, customer concentration, and the status or outcome of the pending litigation.