Business context and reporting period
The supplied filing identifies the registrant as AMMO, Inc., not Outdoor Holding Co. It is a Form 10-Q for the quarter ended September 30, 2019; AMMO’s fiscal year ends March 31, making this fiscal Q2 and the first six months of fiscal 2020. The financial statements are unaudited.
AMMO manufactures and sells ammunition and ammunition casings. Its strategy includes expanding proprietary and tactical ammunition offerings and growing commercial, law-enforcement, military, and international sales. The March 2019 acquisition of Jagemann’s casing operations added casing revenue, production assets, and a related-party acquisition note.
Financial results and liquidity
| Metric | Three months ended September 30 | Six months ended September 30 |
|---|---|---|
| Net sales, 2019 | $2.95 million | $7.25 million |
| Net sales, 2018 | $1.46 million | $2.71 million |
| Gross profit (loss), 2019 | $(718,044) | $(1.37) million |
| Gross profit, 2018 | $188,219 | $332,791 |
| Operating loss, 2019 | $(3.24) million | $(6.89) million |
| Net loss, 2019 | $(3.44) million | $(7.29) million |
| Net loss, 2018 | $(1.58) million | $(3.36) million |
| Loss per share, 2019 | $(0.08) | $(0.16) |
For the quarter, gross margin was negative 24.3%, compared with positive 12.8% a year earlier. For the six months, it was negative 18.9%, versus positive 12.3%. Management attributed the deterioration to acquired-asset depreciation and amortization, lower-margin product mix, and higher raw-material and overhead costs. Six-month adjusted EBITDA, a non-GAAP measure, was a loss of $3.56 million; quarterly adjusted EBITDA was a loss of $1.72 million.
- Cash flow: Six-month operating cash use was $2.98 million, investing cash use was $426,467, and financing provided $1.74 million. Cash fell from $2.18 million at March 31 to $513,738 at September 30.
- Liquidity: Current assets were $9.07 million and current liabilities were $15.50 million, resulting in negative working capital of $6.42 million, versus positive working capital of $4.14 million at March 31.
- Debt and obligations: The Jagemann-related party note had an $8.4 million balance, due April 1, 2020, and its rate rose from approximately 4.6% to 9% beginning October 1, 2019. A separate $375,000 related-party note was extended to October 31, 2019. The company also reported $1.04 million in factoring liability, $1.05 million in contingent consideration, and $4.29 million in operating lease liabilities.
- Equity: AMMO raised $2.47 million from common-stock sales during the six months and issued shares for note conversion, services, and compensation. It had 8.85 million warrants outstanding at September 30, with a weighted-average exercise price of $2.11.
Material changes versus the prior comparable period
- Sales increased 102% for the quarter and 167% for the six months, primarily from newly acquired casing operations. Casing sales were $1.64 million for the quarter and $4.80 million for the six months.
- Proprietary ammunition sales declined to $675,328 for the quarter and $873,624 for the six months, while standard ammunition sales increased. Management said proprietary sales are expected to outpace standard ammunition over time.
- Cost of goods sold exceeded sales in both 2019 periods; management said sales volume did not absorb fixed manufacturing costs, including depreciation and amortization from the acquired operations.
- Operating expenses rose to $2.53 million for the quarter and $5.52 million for the six months, including increased amortization, payroll, stock compensation, marketing, and professional fees. Interest expense also increased materially, including accrued interest on related-party debt.
- AMMO adopted lease accounting Topic 842 on April 1, 2019, recognizing $4.29 million of right-of-use assets and lease liabilities.
Outlook, risks, contingencies, and unusual items
- Management provided no formal revenue or earnings guidance. It aims to improve gross margins over the next 12 to 24 months through higher sales of proprietary products, lower component costs, automation, and better use of manufacturing capacity.
- Management expects casing sales to be a significant part of future sales and says it is pursuing commercial distribution, law-enforcement, military, and international opportunities. It cautions that government and international sales have long cycles and export activity requires approvals.
- Management stated that cash, operating cash flow, borrowings, and equity or debt financing should fund operations for at least 12 months, but acknowledged that financing may not be available on acceptable terms or at all. This outlook should be considered alongside the low cash balance, negative working capital, and near-term acquisition-note maturity.
- The company entered a 24-month factoring agreement with a $5 million maximum advance, secured by receivables and other assets, at Prime plus 4.5%, with a $150,000 facility fee.
- A former employee filed a retaliation and constructive-discharge complaint with the Department of Labor; the matter was under administrative investigation. AMMO said it believes the allegations are without merit. No other known contingencies were reported.
- After quarter-end, AMMO received a patent for its modular projectiles on October 8, 2019 and issued 14,500 shares for employee compensation.
Important facts for investors to verify
- Confirm the issuer identity: the filing is for AMMO, Inc., notwithstanding the supplied company metadata.
- Reconcile the six-month sales figure: the financial statements report $7,253,135, while one MD&A table reports $7,235,135.
- Assess the company’s ability to refinance or repay the $8.4 million Jagemann note, including the increase in its interest rate and stated maturity.
- Review cash runway, negative working capital, factoring terms and collateral, and the assumptions underlying management’s 12-month liquidity statement.
- Track manufacturing utilization, gross-margin recovery, product mix, and whether proprietary and military-related sales materialize as expected.
- Consider potential dilution from outstanding warrants and future equity financing, and monitor the DOL complaint and contingent acquisition payments.