Business Context and Reporting Period
The supplied filing is AMMO, Inc.’s Form 10-K for the fiscal year ended December 31, 2017, not a filing identified as Outdoor Holding Co. The company designs, manufactures and markets ammunition. It began operating its acquired Payson, Arizona facility in March 2017; 2017 was its first full year under current management. The comparable 2016 period covers only October 13 through December 31, 2016, and had no product sales.
Financial Results and Liquidity
| Metric | 2017 | 2016 comparable period |
|---|---|---|
| Net sales | $1.295 million | $0 |
| Cost of goods sold | $1.304 million | $0 |
| Gross profit (loss) | ($8,725); approximately -0.7% margin | $0 |
| Operating expenses | $3.968 million | $136,274 |
| Operating loss | ($3.976 million) | ($136,274) |
| Net loss | ($5.789 million) | ($155,024) |
| Loss per share | ($0.30) | ($0.01) |
| Cash used in operating activities | $3.279 million | $1.922 million |
At year-end, cash was $786,823, working capital was $605,514, total assets were $4.918 million and current liabilities were $2.414 million. Current liabilities included a $1.575 million convertible note and $100,000 related-party note. The convertible note was repaid in the first quarter of 2018; the $100,000 patent-related payment was also made in February 2018. Management said available working capital and expected financing sources would fund operations for the next 12 months, while also warning that additional financing might be needed.
Cash from financing activities was $4.460 million, principally reflecting $6.039 million from stock sales, offset by debt and other repayments. Investing activities used $404,188, including $304,188 for equipment and $100,000 for the Streak technology license. Inventory rose to $1.792 million from $219,105. Reported debt and financing terms should be read with the notes and subsequent-event disclosures.
Material Changes, Outlook and Risks
- Sales began in 2017, but approximately 77% were recorded in the first half and sales were primarily from inventory acquired in a foreclosure. One customer represented 57.6% of revenue; two customers accounted for 47.2% of year-end receivables.
- Management attributed the negative gross margin to liquidation of acquired inventory and early production costs. It expected gross margins to improve to approximately 25%–30% as staff gained experience, automation came online and component purchasing volumes increased. This is a management expectation, not a reported result or formal earnings forecast.
- The $5.789 million net loss included a $1.280 million write-off related to foreclosure of vendor notes receivable and $532,752 of interest expense. SG&A was $3.968 million, including merger, restart, hiring and growth-related spending; management expected SG&A to decline as a percentage of sales in 2018.
- The company planned equipment and facility investment to scale production. It reported annual facility capacity of 36 million rounds, with potential to scale to 200 million, subject to investment and execution.
- Subsequent to year-end and through the financial statements’ issuance date, the company sold 6,232,149 shares for $10.276 million and issued additional warrants. This strengthened funding but increased share count and potential dilution. Shares outstanding were 22,487,793 at year-end and 28,104,476 as of March 31, 2018.
- Key risks include limited operating history, recurring losses and operating cash burn; reliance on equity or other external financing; a concentrated customer base and cancellable purchase orders; supplier and component availability; competition; production ramp and quality; product-liability exposure; and extensive ammunition, environmental and export regulation. The company reported no material legal proceedings or known contingencies at year-end and no material off-balance-sheet arrangements.
- The financial statements received an unqualified independent auditor’s opinion. The auditor did not express an opinion on internal control effectiveness. The company disclosed that it had not established an audit committee or adopted a code of ethics.
Investor Verification Priorities
- Check subsequent filings for realized gross margins, sales growth, production utilization and whether the stated capacity expansion was achieved.
- Verify cash runway, operating cash burn, debt repayment and any further financing, including the dilution and terms of outstanding warrants.
- Assess customer concentration, receivable collection and inventory quality, obsolescence and turnover.
- Review the $1.280 million vendor-note foreclosure write-off and related acquisition accounting, as well as the related-party transactions and leases.
- Monitor regulatory compliance, product-liability coverage, internal controls and progress toward stronger governance and reporting practices.