Business context and reporting period
The filing is AMMO, Inc.’s unaudited Form 10-Q for the quarter ended September 30, 2022, the second quarter of its fiscal year ending March 31, 2023. The company reports ammunition manufacturing and GunBroker.com marketplace operations. The request identifies Outdoor Holding Co., but the filing identifies AMMO, Inc. (Nasdaq: POWW; preferred stock: POWWP); verify the intended issuer.
Financial performance and liquidity
| Metric | Three months ended Sep. 30, 2022 | Six months ended Sep. 30, 2022 |
|---|---|---|
| Revenue | $48.3 million, down 20.8% year over year | $109.0 million, up 3.4% |
| Gross profit / margin | $12.8 million / 26.6%, versus $26.2 million / 42.9% | $31.0 million / 28.4%, versus $45.2 million / 42.8% |
| Operating income (loss) | $(0.5) million, versus $14.2 million | $4.6 million, versus $23.9 million |
| Net income (loss) | $(0.8) million, versus $14.1 million | $2.4 million, versus $23.7 million |
| Net income (loss) attributable to common shareholders | $(1.6) million | $0.9 million |
| Adjusted EBITDA (non-GAAP) | $8.2 million, versus $24.0 million | $22.5 million, versus $40.3 million |
For the six months, operating cash flow was $17.7 million, compared with cash used of $7.1 million in the prior-year period. Investing activities used $8.4 million, primarily for equipment and the new manufacturing facility; financing activities used $2.6 million. Cash and cash equivalents were $29.0 million at September 30, 2022, with an additional $1.0 million of restricted cash. Working capital was $101.0 million.
Total liabilities were $46.8 million and shareholders’ equity was $377.7 million. Borrowings and financing liabilities included approximately $10.9 million of construction-note principal, $0.8 million of factoring liability, $0.5 million of related-party notes, and $0.7 million of insurance-premium notes; the inventory credit facility had no balance. The construction loan permits borrowing up to $11.625 million and matures in October 2026.
Material changes and management commentary
- Second-quarter revenue fell mainly because standard bulk ammunition sales declined; proprietary ammunition sales rose by about $2.0 million, while marketplace revenue fell about $2.2 million year over year. For the six months, proprietary ammunition and marketplace revenue increased, partially offsetting lower standard ammunition sales.
- Management attributed the lower gross margin to higher raw-material, labor, and overhead costs. It expects the new production facility, automation, product mix, and greater production scale to support margin improvement, with a stated goal of improving margins over the next 12–24 months. The facility was expected to come online during fiscal 2023.
- Marketplace operating income was $6.8 million for the quarter and $15.3 million for the six months. Ammunition operations recorded operating losses of $3.4 million and $3.3 million, respectively; corporate and other expenses were also significant.
- Management said existing working capital, operating cash flow, and access to borrowing and equity or debt financing should fund operations over the next year. It provided no numerical revenue or earnings guidance. Management emphasized that military, law-enforcement, and international sales opportunities have long sales cycles and export approvals are required.
- Adjusted EBITDA is non-GAAP and excludes, among other items, taxes, depreciation and amortization, stock compensation, and proxy-contest fees; the company cautions that it is supplemental and does not reflect working-capital needs or capital expenditures.
Risks, contingencies, and unusual items
- Management concluded disclosure controls and procedures were not effective as of September 30, 2022, citing limited personnel, lack of segregation of duties, and potentially inadequate control design or operation.
- After quarter-end, a November 3, 2022 settlement with the Urvan Group led the company to suspend its previously announced separation into Action Outdoor Sports, Inc. and Outdoor Online, Inc. while the board evaluates strategic options.
- The filing reports two former-employee contract arbitrations in discovery and an OSHA whistleblower complaint received in October 2022. Several other disclosed disputes were settled or dismissed in September 2022; management said routine litigation was not expected to have a material effect.
- Other considerations include customer receivables concentration, a $4.1 million allowance for doubtful accounts, bank balances above FDIC-insured limits, and $136,044 of accumulated preferred dividends. The 8.75% Series A preferred stock carries cumulative dividends.
Important facts for investors to verify
- Confirm the issuer identity: this filing is for AMMO, Inc., not an entity named Outdoor Holding Co.
- Track whether the new manufacturing facility becomes operational on schedule and whether utilization, product mix, and cost efficiencies improve gross margins.
- Assess the sustainability and cash conversion of reported operating cash flow, including inventory investment, receivables, factoring activity, and restricted cash.
- Review the construction loan’s final balance, repayment terms, and any financing needs, alongside the company’s stated expectation that liquidity will cover the next year.
- Monitor progress and potential outcomes of the arbitration and OSHA matters, the strategic separation review, and remediation of the disclosed control weaknesses.
- Compare GAAP results with non-GAAP Adjusted EBITDA, including its adjustments and the recurring nature of stock-based compensation.