| Summary of Significant Accounting Policies | NOTE 2 - SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES Accounting Basis The
accompanying unaudited consolidated financial statements and related disclosures included in this Quarterly Report on Form 10-Q
have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”)
and reflect all adjustments, which consist solely of normal recurring adjustments, needed to fairly present the financial results
for these periods. Additionally, these consolidated financial statements and related disclosures are presented pursuant to the
rules and regulations of the Securities Exchange Commission (“SEC”). The
accompanying consolidated financial statements should be read in conjunction with the audited consolidated financial statements
and related disclosures contained in the Company’s Annual Transition Report filed with the SEC on Form 10-KT for three-month
transition period ended March 31, 2018. The results for the three and nine month periods ended December 31, 2018 are not necessarily
indicative of the results that may be expected for the entire fiscal year. Accordingly, certain information and note disclosures
normally included in financial statements prepared in accordance with U.S. GAAP have been omitted pursuant to the rules and regulations
of the SEC. In the opinion of management, all adjustments have been made, which consist only of normal recurring adjustments necessary
for a fair statement of (a) the results of operations for the three and nine month periods ended December 31, 2018 and 2017, (b)
the financial position at December 31, 2018, and (c) cash flows for the nine month periods ended December 31, 2018 and 2017. We
use the accrual basis of accounting and accounting principles generally accepted in the United States of America (“GAAP”)
and all amounts are expressed in U.S. dollars. We have adopted a March 31 year end. Unless
the context otherwise requires, all references to “Ammo”, “we”, “us”, “our,” or
the “Company” are to AMMO, Inc., a Delaware corporation. Principles of Consolidation The
consolidated financial statements include the accounts of AMMO, Inc. and its wholly owned subsidiaries, SNI, LLC, AMMO Munitions,
Inc., AMMO Technologies, Inc., and Enlight Group II, LLC. All significant intercompany accounts and transactions are eliminated
in consolidation. Use of Estimates The
preparation of financial statements in conformity with accounting principles generally accepted in the United States requires us
to make estimates and assumptions that affect the amounts of assets and liabilities and disclosure of contingent assets and liabilities
at the date of the balance sheet and reported amounts of revenue and expenses during the reporting period. Actual results could
differ from those estimates. Cash and Cash Equivalents For
purposes of the statement of cash flows, we consider highly liquid financial instruments purchased with a maturity of three months
or less to be cash equivalents. Accounts Receivable
and Allowance for Doubtful Accounts Our
accounts receivable represents amounts due from customers for products sold and include an allowance for uncollectible accounts
which is estimated based on the aging of the accounts receivable and specific identification of uncollectible accounts. At December
31, 2018 and March 31, 2018, we reserved $14,046 and $23,046, respectively, of allowance for doubtful accounts. License Agreements We
are a party to a license agreement with Jesse James, a well-known motorcycle designer, and Jesse James Firearms, LLC, a Texas limited
liability company, or JJF. The license agreement grants us the exclusive worldwide rights through October 15, 2021 to Mr. James’
image rights and trademarks associated with him in connection with the marketing, promotion, advertising, sale, and commercial
exploitation of Jesse James Branded Products. In addition, Mr. James agreed to make himself available for certain promotional activities
and to promote Jesse James Branded Products through his own social media outlets. We agreed to pay Mr. James royalty fees on the
sale of ammunition and non-ammunition Branded Products and to reimburse him for any out-of-pocket expenses and reasonable travel
expenses. We also issued 100,000 shares of our common stock upon the execution of the license agreement with the potential issuance
of up to 75,000 additional shares of common stock upon achieving certain gross sales with $15 million in gross sales required to
earn the entire 75,000 shares. We
are a party to a license agreement with Jeff Rann, a well-known wild game hunter and spokesman for the firearm and ammunition industries.
The license agreement grants us through February 2022 the exclusive worldwide rights to Mr. Rann’s image rights and trademarks
associated with him in connection with the marketing, promotion, advertising, sale, and commercial exploitation of all Jeff Rann
Branded Products. Mr. Rann agreed to make himself available for certain promotional activities and to promote the Branded Products
through his own social media outlets. We agreed to pay Mr. Rann royalty fees on the sale of ammunition and non-ammunition Branded
Products and to reimburse him for any out-of-pocket expenses and reasonable travel expenses. We also issued 100,000 shares of our
common stock upon the execution of the license agreement with the potential issuance of 75,000 additional shares of common stock
upon achieving certain gross sales with $15 million in gross sales required to earn the entire 75,000 shares. Amortization
expense for the license agreements for the three and nine months ended December 31, 2018 and 2017 were $12,500, $37,500, $7,222
and $39,583, respectively. Patents On
September 28, 2017, AMMO Technologies Inc. (“ATI”), an Arizona corporation, which is 100% owned by us, merged with
Hallam, Inc, a Texas corporation, with ATI being the survivor. Under the terms of the Merger, we issued to Hallam, Inc.’s
two shareholders, 600,000 shares of our common stock, subject to restrictions, and payment of $200,000. The first payment of $100,000
to the Hallam, Inc. shareholders was paid on September 13, 2017, and the second payment of $100,000 was paid on February 6, 2018. The
shares were valued at $1.25 and the aggregate value of $950,000 was recorded as a patent asset. This asset will be amortized from
September 2017, the first full month of the acquired rights, through October 29, 2028. Patent amortization expense the three months
and nine months ended December 31, 2018 and 2017 were $21,269, $63,806, $25,166, and $25,166, respectively. Under
the terms of the Merger, ATI succeeded to all of the assets of Hallam, Inc. and assumed the liabilities of Hallam, Inc., which
were none. The primary asset of Hallam, Inc. was an exclusive license to produce projectiles and ammunition using the Hybrid Luminescence
Ammunition Technology under patent U.S. 8,402,896 B1 with a publication date of March 26, 2013 owned by University of Louisiana
at Lafayette. The license was formally amended and assigned to AMMO Technologies Inc. pursuant to an Assignment and First Amendment
to Exclusive License Agreement. Assumption Agreement dated to be effective as of August 22, 2017, the Merger closing date. Under
the terms of the Exclusive License Agreement, the Company is obligated to pay a royalty to the patent holder, based on a $0.01
per unit basis for each round of ammunition sold that incorporates this patented technology through October 29, 2028. For the nine
months ended December 31, 2018 and 2017, the Company accrued $22,495 and $6,000 respectively under this agreement. Additionally,
$10,783 was accrued for the three month period ended March 31, 2018. In
August 2018, we applied for additional patent coverage for the manufacturing methods or application of the Hybrid Luminescence
Ammunition Technology on a variety of projectile and ammunition types. The costs of filing this patent were expensed, but may be
recapitalized pending the outcome of the USPTO’s review of the application. On
October 5, 2018, we completed the acquisition of SW Kenetics Inc. on (See Note 7). Under the terms of the Merger, ATI succeeded
all of the assets of SW Kenetics, Inc. and assumed all of the liabilities. The primary asset of SW Kenetics Inc. was a pending
patent for modular projectiles. All rights to patent pending application were assigned and transferred to AMMO Technologies, Inc.
pursuant to Intellectual Property Rights Agreement on September 27, 2018. We
intend to continue building our patent portfolio to protect our proprietary technologies and processes, and will file new applications
where appropriate to preserve our rights to manufacture and sell our branded lines of ammunition. Impairment of Long-Lived
Assets We continually monitor
events and changes in circumstances that could indicate carrying amounts of long-lived assets may not be recoverable. When such
events or changes in circumstances are present, we assess the recoverability of long-lived assets by determining whether the carrying
value of such assets will be recovered through undiscounted expected future cash flows. If the total of the future cash flows is
less than the carrying amount of those assets, we recognize an impairment loss based on the excess of the carrying amount over
the fair value of the assets. Assets to be disposed of are reported at the lower of the carrying amount or the fair value less
costs to sell. No impairment expense was recognized for the three and nine months ended December 31, 2018 and the three and nine
months ended December 31, 2017. Revenue Recognition We
generate revenue from the production and sale of ammunition. We recognize revenue according to ASC 606. When the customer obtains
control over the promised goods or services, we record revenue in the amount of consideration that we can expect to receive in
exchange for those goods and services. The Company applies the following five-step model to determine revenue recognition:
● Identification of a contract with a customer
● Identification of the performance obligations in the contact
● determination of the transaction price
● allocation of the transaction price to the separate performance allocation
● recognition of revenue when performance obligations are satisfied The Company only applies
the five-step model when it is probable that the Company will collect the consideration it is entitled to in exchange for the goods
or services it transfers to the customer. At contract inception and once the contract is determined to be within the scope of ASC
606, we assess the goods or services promised within each contract and determines those that are performance obligations, and assesses
whether each promised good or service is distinct. If a contract contains a single performance obligation, the entire transaction
price is allocated to the single performance obligation. Contracts that contain multiple performance obligations require an allocation
of the transaction price based on the estimated standalone selling price of each identified performance obligation. We recognize
as revenues the amount of the transaction price that is allocated to the respective performance obligation when the performance
obligation is satisfied or as it is satisfied. Accordingly, we recognize revenues (net) when the customer obtains control of the
Company’s product, which typically occurs upon shipment of the product. For the nine and three
months ended December 31, 2018, the Company’s customers that comprised more than ten percent (10%) of total revenues and
accounts receivable were as follows: PERCENTAGES
Revenues Accounts Receivable
For the Nine-Months ended December 31, 2018
Customers:
A 26.23 % -
B 21.22 % 12.89 %
C 10.95 % -
D - 39.36 %
E - 14.10 %
58.40 % 66.35 %
For the Three-Months ended December 31, 2018
Customers:
A - -
B - 12.89 %
C - -
D - 39.36 %
E 17.70 % 14.10 %
17.70 % 66.35 % Advertising Costs We
expense advertising costs as they are incurred. We incurred advertising of $180,589 and $436,501 for the three and nine months
ended December 31, 2018, respectively. Inventories We
state inventories at the lower of cost or market. We determine cost using the average cost method. Our inventory consists of raw
materials, work in progress, and finished goods. Cost of inventory includes cost of parts, labor, quality control, and all other
costs incurred to bring our inventories to condition ready to be sold. We periodically evaluate and adjust inventories for obsolescence. Property and Equipment We
state property and equipment at cost, less accumulated depreciation. We capitalize major renewals and improvements, while we charge
minor replacements, maintenance, and repairs to current operations. We compute depreciation by applying the straight-line method
over estimated useful lives, which are generally five to seven years. Compensated Absences We
accrue a liability for compensated absences in accordance with Accounting Standards Codifications 710 – Compensation –
General Stock-Based Compensation We
account for stock-based compensation at fair value in accordance with SFAS No. 123 and 123 (R) (ASC 718). There were 437,500 shares
of common stock issued to employees, members of the Board of Directors, and members of the Advisory Committee for services during
the nine months ended December 31, 2018. On
March 12, 2018, we entered into an employment agreement with an executive that included, among other provisions, an equity grant
of 400,000 shares of restricted common stock that vests at the rate of 100,000 shares annually for four years. The $660,000 compensation
value is being recognized ratably on a straight-line basis over the four-year period covered by the agreement. On
May 1, 2018, we entered into an employment agreement with an executive that included, among other provisions, an equity grant of
100,000 shares of restricted common stock that vests at the rate of 33,333 shares annually for three years. The $250,000 compensation
value is being recognized on a straight-line basis over the three-year period covered by the agreement. On
September 27, 2018, we entered into three separate employment agreements that each included, among other provisions, an equity
grant of 80,000 shares of restricted common stock that vests at the rate of 20,000 shares annually for four years. Each compensation
value of $261,000 ($783,000 total) is being recognized on a straight-line basis over the four-year period covered by the agreement. Concentrations
of Credit Risk Accounts
at banks are insured by the Federal Deposit Insurance Corporation (“FDIC”) up to $250,000. As of December 31, 2018,
our bank account balances exceeded federally insured limits. Income Taxes We file federal and
state income tax returns in accordance with the applicable rules of each jurisdiction. We account for income taxes under the asset
and liability method in accordance with Accounting Standards Codification 740 - Income Taxes (“ASC 740”). The provision
for income taxes includes federal, state, and local income taxes currently payable, and deferred taxes. We recognize deferred tax
assets and liabilities for the future tax consequences attributable to differences between the financial statement carrying amounts
of existing assets and liabilities and their respective tax basis. We measure deferred tax assets and liabilities using enacted
tax rates expected to apply to taxable amounts in years in which those temporary differences are expected to be recovered or settled.
If it is more likely than not that some portion or all of a deferred tax asset will not be realized, a valuation allowance is recognized.
In accordance with ASC 740, we recognize the effect of income tax positions only if those positions are more likely than not of
being sustained. We measure recognized income tax positions at the largest amount that is greater than 50% likely of being realized.
We reflect changes in recognition or measurement in the period in which the change in judgment occurs. We currently have substantial
net operating loss carryforwards. We have recorded a valuation allowance equal to the net deferred tax assets due to the uncertainty
of the ultimate realization of the deferred tax assets. Contingencies Certain
conditions may exist as of the date the consolidated financial statements are issued that may result in a loss to us but will only
be resolved when one or more future events occur or fail to occur. We assess such contingent liabilities, and such assessment inherently
involves an exercise of judgment. In assessing loss contingencies related to legal proceedings that are pending against us or unasserted
claims that may result in such proceedings, we evaluate the perceived merits of any legal proceedings or unasserted claims and
the perceived merits of the amount of relief sought or expected to be sought therein. If
the assessment of a contingency indicates that it is probable that a material loss has been incurred and the amount of the liability
is reasonably estimated, the estimated liability would be accrued in our consolidated financial statements. If the assessment indicates
that a potentially material loss contingency is not probable but is reasonably possible, or is probable but cannot be estimated,
then the nature of the contingent liability, together with an estimate of range of possible loss if determinable and material,
would be disclosed. There were no known contingencies at December 31, 2018 or March 31, 2018. Recent Accounting
Pronouncements In May 2014, FASB issued
ASU 2014-09, “Revenue from Contracts with Customers”. This ASU is a comprehensive new revenue recognition model that
requires a company to recognize revenue to depict the transfer of goods or services to a customer at an amount that reflects the
consideration it expects to receive in exchange for those goods or services. The revised effective date for this ASU is for annual
and interim periods beginning on or after December 15, 2017, and early adoption will be permitted, but not earlier than the original
effective date of annual and interim periods beginning on or after December 15, 2016, for public entities. We adopted ASU 2014-09
as of January 1, 2018, and it did not have a material impact on the Company’s consolidated results of operations, financial
position or cash flows for the period ended December 31, 2018. Sales are initiated in three ways –
● third party sales representative obtains signed purchase order from a customer
● direct contact by in-house sales representatives who obtains signed purchase order
● electronic purchase order from a customer (usually the very large customers) Once a customer’s order is received a
sales order is generated by authorized sales or management personnel. Once approved for shipping, the sales order is entered, the
inventory control department will pull the purchased items from the inventory or if needed will request the manufacture of a specific
product. When the items that were ordered are available for shipment, the merchandise is prepared for shipping and shipped by FedEx
or common carrier. All sales are recorded upon shipment and, depending
on credit worthiness of customer, the payment terms will vary from thirty (30) to sixty (60) days. No refunds are allowed on any
product shipped. Each product manufactured by the Company has
standard specifications and performance objectives. The Company has an extensive product testing program and, if the Company were
given notice of a product defect by a customer, the Company would request the return of the product so that the manufacturing defect
could be identified. From inception to December 31, 2018 the Company has had no returned products related to product warranty. The revenue recognition procedures set forth
above have been used by the Company since its inception and are consistent with requirements of ASC 606 “Revenue from Contracts
with Customers”. In February 2016, the FASB
issued ASU 2016-02 – “Leases (Topic 842)” Under ASU 2016-02, entities will be required to recognize lease asset
and lease liabilities by lessees for those leases classified as operating leases. Among other changes in accounting for leases,
a lessee should recognize in the statement of financial position a liability to make lease payments (the lease liability) and a
right-of-use asset representing its right to (and a lessor) should include payments to be made in optional periods only if the
lessee is reasonably certain to exercise an option to extend the lease or not to exercise an option to terminate the lease. Similarly,
optional payments to purchase the underlying asset should be included in the measurement of lease assets and lease liabilities
only if the lessee is reasonably certain to exercise that purchase option. The amendments in ASU 2016-02 will become effective
for fiscal years beginning after December 15, 2018, including interim periods with those fiscal years for public business entities.
We are currently evaluating the effect of the adoption of ASU 2016-02 will have on our consolidated results of operations, financial
position or cash flows. On June 20, 2018, the FASB
expanded the scope of Accounting Standards Codification (ASC) 718, Compensation – Stock Compensation, to include share-based
payments to nonemployees for goods and services. The accounting board said the amendments in Accounting Standards Update (ASU)
No. 2018-07, Compensation – Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting, align
the guidance for stock compensation to employees and nonemployees. The amended guidance replaces ASC 505-50, Equity – Equity-Based
Payments to Non-Employees. We anticipate that this ASC will not have a material effect on the Company’s financial statements. The amendments in ASU No.
2018-07 apply “to all share-based payment transactions in which a grantor acquires goods or services to be used or consumed
in a grantor’s own operations by issuing share-based payment awards,” the FASB said. But the amended guidance does
not cover stock compensation that is used to provide financing to the company that issued the shares or stock awards tied to a
sale of goods or services as part of a contract accounted for according to ASC 606, Revenue From Contracts With Customers. The amendments are effective
for public companies for fiscal years that begin after December 15, 2018, and the quarterly and other interim periods in those
years, the FASB said the amended guidance can be applied before it becomes effective, but businesses are not permitted to use the
guidance in ASU No. 2018-07 before they have implemented ASC 606. We have evaluated the effect of the adoption of ASU 2018-07 will
have on our consolidated results of operations, financial position or cash flows and determine the effects will not be material
to the Company’s financial statements. Management does not believe
that any other recently issued, but not yet effective, accounting standards could have a material effect on the accompanying financial
statements. As new accounting pronouncements are issued, we will adopt those that are applicable under the circumstances. Loss Per Common
Share We
calculate basic loss per share using the weighted-average number of shares of common stock outstanding during each reporting period.
Diluted loss per share includes potentially dilutive securities, such as outstanding options and warrants, using various methods,
such as the treasury stock or modified treasury stock method, in the determination of dilutive shares outstanding during each
reporting period. We have issued warrants to purchase 5,510,593 shares of common stock and equity grants of 640,000 shares of
common stock that are potentially dilutive. All weighted average numbers were adjusted for the reverse stock split and merger
transaction. Due to the loss from operations in the three and nine months ended December 31, 2017 and 2018, there are no common
shares added to calculate the dilutive EPS for those periods as the effect would be antidilutive. |
