Business context and reporting period
The supplied filing is AMMO, Inc.’s unaudited Form 10-Q for the quarter ended June 30, 2017; it does not identify Outdoor Holding Co. as the registrant. AMMO describes itself as a U.S. ammunition designer, manufacturer and marketer. The company acquired the operating AMMO business in a March 2017 share exchange; the transaction was treated as a capital transaction and recapitalization. AMMO had been inactive before its recent restart, so prior-period comparisons are limited.
Financial performance and condition
| Metric | Three months ended June 30, 2017 | Six months ended June 30, 2017 |
|---|---|---|
| Net sales | $315,579 | $969,363 |
| Gross margin | $32,270 (about 10.2%) | $219,621 (about 22.7%) |
| Operating expenses | $619,096 | $1,482,697 |
| Operating loss | $586,826 | $1,263,076 |
| Interest expense | $22,741 | $443,921 |
| Net loss | $609,567; $0.03 per share | $1,706,997; $0.10 per share |
At June 30, total assets were $4.35 million, including cash of $44,764 and inventory of $1.55 million. Current liabilities were $2.65 million versus current assets of $1.96 million, resulting in negative working capital of $687,661 and a current ratio of about 0.74. Reported liabilities included a $1.775 million convertible note, $300,040 payable to a related party, and a $62,210 insurance-premium note. Shareholders’ equity was $1.70 million.
Six-month operating cash use was $1.69 million; investing cash use was $62,873; financing provided $1.79 million, principally from stock sales. Cash increased by $34,648 to $44,764. Inventory growth and increased receivables were significant operating cash uses.
Changes, outlook, and risks
- There are no comparable 2016 operating results in the presented income statement. Management says historical results are not necessarily indicative of future performance.
- The company acquired ATAC collateral through a February 2017 credit bid, recording inventory, equipment and goodwill; goodwill was $1.95 million at quarter-end. Inventory rose from $219,105 at December 31, 2016 to $1.55 million.
- For the six months, selling and marketing expense was $387,734 and general and administrative expense was $775,454, including $344,730 of consulting and $144,414 of legal and professional costs, which management characterized as necessary organizational expenditures.
- Management expects to make the company fully operational and achieve substantial sales in the coming year. It says working capital, operating cash flow and further financing are expected to fund operations for 12 months, but also acknowledges financing may not be available on acceptable terms and further equity or convertible debt could dilute shareholders. The company reported accumulated losses of $1.86 million and stated that substantial revenue had not yet been generated.
- Customer concentration is material: approximately 83% of revenue came from two customers, and 70% of accounts receivable was due from one customer. The filing gives no revenue or earnings guidance with specific targets.
- Subsequent to quarter-end, the company sold 132,000 shares and issued 132,000 warrants for $165,000. Shares outstanding were 16,849,175 as of August 18, 2017.
- Management reported no known legal proceedings and no material off-balance-sheet arrangements. The filing says disclosure controls were ineffective, but its stated evaluation date is March 31, 2013, an apparent inconsistency requiring clarification.
- Risks include ongoing losses, limited liquidity, financing availability and dilution, customer concentration, and regulatory requirements governing ammunition and firearms. The filing says AMMO’s federal firearms licenses were effective through February 1, 2020.
Most important facts to verify
- Confirm the intended issuer: the supplied filing is for AMMO, Inc., not Outdoor Holding Co.
- Check the convertible note’s current balance, maturity, conversion terms and repayment status; the filing describes it as short-term and reports only a $100,000 payment during the quarter.
- Validate the company’s 12-month liquidity forecast against $44,764 of cash, negative working capital and expected financing needs.
- Review collectability of receivables and the valuation and recoverability of inventory and $1.95 million of goodwill, including assets obtained in the ATAC collateral foreclosure.
- Clarify the disclosure-controls evaluation date of March 31, 2013 and the reported conclusion that controls were ineffective.
- Assess customer concentration, post-quarter share and warrant issuances, and the resulting dilution risk.