UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
Form 10-QSB
(Mark one)
[X] Quarterly Report Under Section 13 or 15(d) of The Securities Exchange Act
of 1934
For the quarterly period ended September 30, 2004
[_] Transition Report Under Section 13 or 15(d) of The Securities Exchange Act
of 1934
For the transition period from ______________ to _____________
Commission File Number: 0-32379
American Ammunition, Inc.
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(Exact name of small business issuer as specified in its charter)
California 91-2021594
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(State of incorporation) (IRS Employer ID Number)
3545 NW 71st Street, Miami, FL 33147
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(Address of principal executive offices)
(305) 835-7400
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(Issuer's telephone number)
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Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. YES [X] NO [_]
State the number of shares outstanding of each of the issuer's classes of common
equity as of November 18, 2004: 74,740,580
Transitional Small Business Disclosure Format (check one): YES [_] NO [X]
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American Ammunition, Inc.
Form 10-QSB for the Quarter ended September 30, 2004
Table of Contents
Page
Part I - Financial Information
Item 1 Financial Statements 3
Item 2 Management's Discussion and Analysis or Plan of Operation 22
Item 3 Controls and Procedures 27
Part II - Other Information
Item 1 Legal Proceedings 28
Item 2 Recent Sales of Unregistered Securities and Use of Proceeds 28
Item 3 Defaults Upon Senior Securities 28
Item 4 Submission of Matters to a Vote of Security Holders 28
Item 5 Other Information 28
Item 6 Exhibits 29
Signatures 29
Part I
Item 1 - Financial Statements
American Ammunition, Inc. and Subsidiaries
Consolidated Balance Sheets
September 30, 2004 and 2003
(Unaudited)
September 30, September 30,
2004 2003
------------ ------------
ASSETS
Current Assets
Cash on hand and in bank $ 658,641 $ 1,347,532
Accounts receivable - trade, net allowance for
doubtful accounts of $-0- and $-0-, respectively 255,236 288,503
Inventory 1,025,824 651,097
Prepaid expenses 62,725 36,421
------------ ------------
Total Current Assets 2,002,426 2,323,553
------------ ------------
Property and Equipment - at cost or contributed value
Manufacturing equipment 7,623,415 6,895,850
Office furniture and fixtures 82,719 62,893
Leasehold improvements 187,397 190,028
------------ ------------
7,893,531 7,148,771
Accumulated depreciation (4,595,887) (3,891,321)
------------ ------------
Net Property and Equipment 3,297,644 3,257,450
------------ ------------
Other Assets
Deposits and other 415,000 77,860
------------ ------------
TOTAL ASSETS $ 5,715,070 $ 5,658,863
============ ============
- Continued -
The accompanying notes are an integral part of these financial statements.
The financial information presented herein has been prepared by management
without audit by independent certified public accountants.
3
American Ammunition, Inc. and Subsidiaries
Consolidated Balance Sheets - Continued
September 30, 2004 and 2003
(Unaudited)
September 30, September 30,
2004 2003
------------ ------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Current maturities of leases payable $ 525 $ 9,507
Customer deposits 220,006 4,100
Accounts payable - trade 665,077 471,085
Working capital advance 74,000 400,000
Accrued payroll payable 54,445 28,810
Accrued dividends payable 13,421 34,261
------------ ------------
Total Current Liabilities 1,042,474 947,763
Long-Term Liabilities - -
Capital leases payable - 828
------------ ------------
Total Liabilities $ 1,042,474 $ 948,591
------------ ------------
Commitments and Contingencies
Convertible Debenture 266,365 431,365
------------ ------------
Mandatory Convertible Preferred Stock
net of Beneficial Conversion Discount Feature
91,700 and 123,700 shares issued and outstanding 518,500 602,610
------------ ------------
Stockholders' Equity
Preferred stock - $0.001 par value
20,000,000 shares authorized.
1,795,320 shares allocated to Series A - -
1,000,000 shares allocated to Series B - -
Common stock - $0.001 par value.
300,000,000 shares authorized.
73,686,672 and 62,718,137 shares issued
and outstanding 73,687 62,718
Additional paid-in capital 23,098,312 19,961,671
Accumulated deficit (19,009,268) (16,348,092)
------------ ------------
4,162,731 3,676,297
Stock subscription receivable (275,000) -
------------ ------------
Total Stockholders' Equity 3,887,731 3,676,297
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 5,715,070 $ 5,658,863
============ ============
The accompanying notes are an integral part of these financial statements.
The financial information presented herein has been prepared by management
without audit by independent certified public accountants.
3
American Ammunition, Inc. and Subsidiaries
Consolidated Statements of Operations and Comprehensive Income (Loss)
Nine and Three months ended September 30, 2004 and 2003
(Unaudited)
Nine months Nine months Three months Three months
ended ended ended ended
September 30, September 30, September 30, September 30,
2004 2003 2004 2003
--------------- ---------------- ---------------- -------------
Revenues $ 1,712,280 $ 1,215,717 $ 861,988 $ 317,729
--------------- ---------------- ---------------- -------------
Cost of Sales
Materials, Direct Labor
and other direct costs 1,911,210 1,713,888 308,503 614,748
Depreciation 523,815 494,633 176,304 165,464
--------------- ---------------- ---------------- -------------
Total Cost of Sales 2,435,025 2,208,521 484,807 780,212
--------------- ---------------- ---------------- -------------
Gross Profit (722,745) (992,804) 377,181 (462,483)
--------------- ---------------- ---------------- -------------
Operating Expenses
Research and development expenses 8,332 9,208 1,858 8,824
Marketing and promotion expenses 368,458 30,350 114,404 16,835
Other operating expenses 845,663 788,599 250,570 330,127
Bad debt expense 27,819 - - -
Interest expense 15,825 26,270 58 9,725
Depreciation expense 5,681 3,387 1,894 1,129
Compensation expense related to
common stock issuances at less
than "fair value" 356,000 736,102 - 371,798
--------------- ---------------- ---------------- -------------
Total Operating Expenses 1,627,778 1,593,916 368,784 738,498
--------------- ---------------- ---------------- -------------
Loss from Operations (2,350,523) (2,586,720) 8,397 (1,200,981)
Other Income (Expense)
Interest and other income 1,409 2,594 1,155 -
Amortization of Beneficial
Conversion Feature Discount
on Preferred Stock - (77,787) - (46,839)
--------------- ---------------- ---------------- -------------
Loss before Income Taxes (2,349,114) (2,661,913) 9,552 (1,247,820)
Provision for Income Taxes - - - -
--------------- ---------------- ---------------- -------------
Net Loss (2,349,114) (2,661,913) 9,552 (1,247,820)
Other Comprehensive Income - - - -
--------------- ---------------- ---------------- -------------
Comprehensive Loss $ (2,349,114) $ (2,661,913) $ 9,552 $ (1,248,820)
=============== ================ ================ =============
Loss per weighted-average share of
common stock outstanding, computed
on net loss - basic and fully diluted $ (0.03) $ (0.04) $ (0.00) $ (0.02)
=============== ================ ================ =============
Weighted-average number of
common shares outstanding 70,873,791 59,222,995 73,673,416 61,683,424
=============== ================ ================ =============
The accompanying notes are an integral part of these financial statements.
The financial information presented herein has been prepared by management
without audit by independent certified public accountants.
3
American Ammunition, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
Nine months ended September 30, 2004 and 2003
(Unaudited)
Nine months Nine months
ended ended
September 30, September 30,
2004 2003
-------------- -------------
Cash flows from operating activities
Net loss for the year $ (2,349,114)$ (2,661,913)
Adjustments to reconcile net loss to
net cash provided by operating activities
Depreciation and amortization 529,496 498,020
Bad debt expense 27,819 -
Accretion of Beneficial Conversion Feature
Discount on Preferred Stock - 77,787
Compensation expense related to common stock
issuances at less than "fair value" 356,000 736,102
Common stock issued for fees and services 90,160 -
(Increase) Decrease in
Accounts receivable 237,780 (257,215)
Inventory 86,932 (266,283)
Prepaid expenses, deposits and other (28,137) (17,030)
Increase (Decrease) in
Accounts payable - trade 36,213 56,175
Other accrued expenses 54,445 10,101
Customer deposits 215,906 (76,853)
-------------- -------------
Net cash used in operating activities (727,500) (1,901,109)
-------------- -------------
Cash flows from investing activities
Purchase of property and equipment (436,214) (58,845)
-------------- -------------
Net cash used in investing activities (436,214) (58,845)
-------------- -------------
Cash flows from financing activities
Funding of working capital advance 74,000 400,000
Principal paid on long-term debt - (450,000)
Principal paid on long-term capital leases (7,316) (7,013)
Cash paid to obtain capital - (61,850)
Cash received on convertible debenture - 350,000
Cash received on sale of convertible preferred stock - 458,500
Cash received on sale of common stock 1,250,000 2,460,533
-------------- -------------
Net cash provided by financing activities 1,316,684 3,150,170
-------------- -------------
Increase (Decrease) in Cash 152,970 1,190,216
Cash at beginning of year 505,671 157,316
-------------- -------------
Cash at end of year $ 658,641 $ 1,347,532
============== =============
- Continued -
The accompanying notes are an integral part of these financial statements.
The financial information presented herein has been prepared by management
without audit by independent certified public accountants.
3
American Ammunition, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
Nine months ended September 30, 2004 and 2003
(Unaudited)
Nine months Nine months
ended ended
September 30, September 30,
2004 2003
-------------- -------------
Supplemental disclosure of interest
and income taxes paid
Interest paid for the period $ 825 $ 26,170
============== =============
Income taxes paid for the period $ - $ -
============== =============
Supplemental disclosure of non-cash
investing and financing activities
Asset purchase agreement for equipment,
inventory and intellectual property
accrued as a component of accounts payable $ 500,000 $ -
============== =============
(Remainder of this page left blank intentionally)
The accompanying notes are an integral part of these financial statements.
The financial information presented herein has been prepared by management
without audit by independent certified public accountants.
3
American Ammunition, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Note A - Organization and Description of Business
American Ammunition, Inc. (AAI or Company) was incorporated on February 1,
2000 in the State of California as FirsTelevision.com. AAI subsequently changed
its corporate name to FBI Fresh Burgers International which unsuccessfully
marketed a business plan concept of a national "fast food" restaurant chain.
On September 29, 2001, the Company, F&F Equipment, Inc. (F&F) and the
individual shareholders of F&F entered into an "Agreement For The Exchange Of
Common Stock" (Exchange Agreement) whereby the shareholders of F&F exchanged
100.0% of the issued and outstanding stock of F&F for 21,000,000 post-forward
split shares of restricted, unregistered common stock of the Company. F&F
Equipment, Inc. then became a wholly-owned subsidiary of the Company.
F&F Equipment, Inc.(Company) was incorporated on October 4, 1983 under the
laws of the State of Florida. The Company was formed to engage principally in
the "import, export, retail & wholesale of firearms equipment, ammunition &
other devices and for the purpose of transacting any and/or all lawful
business." The Company conducts its business operations under the assumed name
of "American Ammunition".
In June 2002, American Ammunition, Inc. formed a wholly owned subsidiary,
Industrial Plating Enterprise Co. (IPE), which started production on June 14,
2002. IPE is a fully licensed and approved state of the art electrochemical
metallization facility for processing the Company's line of projectiles as well
as other products and services while employing environmentally sound water
conservation and proven waste treatment techniques. The facility meets or
exceeds all current environmental requirements and enjoys the "conditionally
exempt small quantity generator" status for State and Federal regulations.
Note B - Preparation of Financial Statements
The acquisition of F&F Equipment, Inc., on September 29, 2001, by the
Company effected a change in control and was accounted for as a "reverse
acquisition" whereby F&F Equipment, Inc. was the accounting acquiror for
financial statement purposes. Accordingly, the historical financial statements
of the Company are those of F&F Equipment, Inc. from it's inception and those of
the consolidated entity subsequent to the September 29, 2001 transaction date.
The Company and its subsidiaries follow the accrual basis of accounting in
accordance with accounting principles generally accepted in the United States of
America and have adopted a year-end of December 31 for all entities.
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.
Management further acknowledges that it is solely responsible for adopting
sound accounting practices, establishing and maintaining a system of internal
accounting control and preventing and detecting fraud. The Company's system of
internal accounting control is designed to assure, among other items, that 1)
recorded transactions are valid; 2) valid transactions are recorded; and 3)
transactions are recorded in the proper period in a timely manner to produce
financial statements which present fairly the financial condition, results of
operations and cash flows of the Company for the respective periods being
presented
8
American Ammunition, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Note B - Preparation of Financial Statements - Continued
For segment reporting purposes, the Company operated in only one industry
segment during the periods represented in the accompanying financial statements
and makes all operating decisions and allocates resources based on the best
benefit to the Company as a whole.
During interim periods, the Company follows the accounting policies set
forth in its annual audited financial statements filed with the U. S. Securities
and Exchange Commission on its Annual Report on Form 10-KSB for the year ended
December 31, 2003. The information presented within these interim financial
statements may not include all disclosures required by accounting principles
generally accepted in the United States of America and the users of financial
information provided for interim periods should refer to the annual financial
information and footnotes when reviewing the interim financial results presented
herein.
In the opinion of management, the accompanying interim financial
statements, prepared in accordance with the U. S. Securities and Exchange
Commission's instructions for Form 10-QSB, are unaudited and contain all
material adjustments, consisting only of normal recurring adjustments necessary
to present fairly the financial condition, results of operations and cash flows
of the Company for the respective interim periods presented. The current period
results of operations are not necessarily indicative of results which ultimately
will be reported for the full fiscal year ending December 31, 2004.
The accompanying consolidated financial statements contain the accounts of
American Ammunition, Inc. and its wholly-owned subsidiaries, F&F Equipment, Inc.
and Industrial Plating Enterprise Co. All significant intercompany transactions
have been eliminated. The consolidated entities are collectively referred to as
"Company".
Note C - Summary of Significant Accounting Policies
1. Cash and cash equivalents
For Statement of Cash Flows purposes, the Company considers all cash
on hand and in banks, certificates of deposit and other highly-liquid
investments with maturities of three months or less, when purchased, to be
cash and cash equivalents.
Cash overdraft positions may occur from time to time due to the timing
of making bank deposits and releasing checks, in accordance with the
Company's cash management policies.
2. Accounts receivable and Revenue Recognition
In the normal course of business, the Company extends unsecured credit
to virtually all of its customers which are located throughout the United
States. Because of the credit risk involved, management has provided an
allowance for doubtful accounts which reflects its opinion of amounts which
will eventually become uncollectible. In the event of complete
non-performance, the maximum exposure to the Company is the recorded amount
of trade accounts receivable shown on the balance sheet at the date of
non-performance.
The Company ships all product on an FOB-Plant basis. Accordingly,
revenue is recognized by the Company at the point at which an order is
shipped at a fixed price, collection is reasonably assured, the Company has
no remaining performance obligations and no right of return by the
purchaser exists.
9
American Ammunition, Inc. and Subsidiaries
Notes to Consolidated Financial Statements - Continued
Note C - Summary of Significant Accounting Policies - Continued
3. Inventory
Inventory consists of raw materials, work-in-process and finished
goods related to the production and sale of small arms ammunition.
Inventory is valued at the lower of cost or market using the first-in,
first-out method.
4. Property, plant and equipment
Property and equipment are recorded at historical cost. These costs
are depreciated over the estimated useful lives of the individual assets
using the straight-line method, generally three to ten years.
Gains and losses from disposition of property and equipment are
recognized as incurred and are included in operations.
5. Income Taxes
The Company uses the asset and liability method of accounting for
income taxes. At September 30, 2004 and 2003, the deferred tax asset and
deferred tax liability accounts, as recorded when material to the financial
statements, are entirely the result of temporary differences. Temporary
differences represent differences in the recognition of assets and
liabilities for tax and financial reporting purposes, primarily accumulated
depreciation and amortization, allowance for doubtful accounts and vacation
accruals.
As of September 30, 2004 and 2003, the deferred tax asset related to
the Company's net operating loss carryforward is fully reserved. If these
carryforwards are not utilized, they will begin to expire in 2005.
6. Earnings (loss) per share
Basic earnings (loss) per share is computed by dividing the net income
(loss) available to common shareholders by the weighted-average number of
common shares outstanding during the respective period presented in our
accompanying financial statements. Fully diluted earnings (loss) per share
is computed similar to basic income (loss) per share except that the
denominator is increased to include the number of common stock equivalents
(primarily outstanding options and warrants). Common stock equivalents
represent the dilutive effect of the assumed exercise of the outstanding
stock options and warrants, using the treasury stock method, at either the
beginning of the respective period presented or the date of issuance,
whichever is later, and only if the common stock equivalents are considered
dilutive based upon the Company's net income (loss) position at the
calculation date.
At September 30, 2004 and 2003, the Company had no common stock
equivalents outstanding.
7. Advertising costs
The Company does not conduct any direct response advertising
activities. For non-direct response advertising, the Company charges the
costs of these efforts to operations at the first time the related
advertising is published.
10
American Ammunition, Inc. and Subsidiaries
Notes to Consolidated Financial Statements - Continued
Note D - Fair Value of Financial Instruments
The carrying amount of cash, accounts receivable, accounts payable and
notes payable, as applicable, approximates fair value due to the short term
nature of these items and/or the current interest rates payable in relation to
current market conditions.
Interest rate risk is the risk that the Company's earnings are subject to
fluctuations in interest rates on either investments or on debt and is fully
dependent upon the volatility of these rates. The Company does not use
derivative instruments to moderate its exposure to interest rate risk, if any.
Financial risk is the risk that the Company's earnings are subject to
fluctuations in interest rates or foreign exchange rates and are fully dependent
upon the volatility of these rates. The company does not use derivative
instruments to moderate its exposure to financial risk, if any.
Note E - Concentrations of Credit Risk
The Company maintains its cash accounts in a financial institution subject
to insurance coverage issued by the Federal Deposit Insurance Corporation
(FDIC). Under FDIC rules, the separate companies are each entitled to aggregate
coverage of $100,000 per account type per separate legal entity per financial
institution. During the years ended December 31, 2003 and 2002 and for the nine
month period ended September 30, 2004, respectively, the various operating
companies had deposits in a financial institution with credit risk exposures in
excess of statutory FDIC coverage. The Company has incurred no losses as a
result of any of these unsecured situations.
Note F - Inventory
As of September 30, 2004 and 2003, inventory consisted of the following
components:
September 30, September 30,
2004 2003
------------- -------------
Raw materials $ 231,456 $ 205,818
Work in process 515,622 246,477
Finished goods 278,746 198,802
----------- -----------
Totals $ 1,025,824 $ 651,097
=========== ===========
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11
American Ammunition, Inc. and Subsidiaries
Notes to Consolidated Financial Statements - Continued
Note G - Property and Equipment
Property and equipment consist of the following components:
September 30, September 30, Estimated
2004 2003 useful life
-------------- --------------- -----------
Manufacturing equipment $ 7,623,415 $ 6,895,850 3-10 years
Office furniture and fixtures 82,719 62,893 3-7 years
Leasehold improvements 187,397 190,028 8-20 years
------------- ------------
7,893,531 7,148,771
Accumulated depreciation (4,595,887) (3,891,321)
------------- ------------
Net property and equipment $ 3,297,644 $ 3,257,450
============= ============
Total depreciation expense charged to operations for the respective nine
month periods ended September 30, 2004 and 2003 was approximately $529,496 and
$498,020.
Included in the amounts reflected in the accompanying balance sheet are the
following fixed assets on long-term capital leases:
September 30, September 30,
2004 2003
------------- -------------
Manufacturing equipment $ 153,400 $ 153,400
Less accumulated depreciation (81,364) (66,024)
----------- -----------
$ 72,036 $ 87,376
=========== ===========
Note H - Working Capital Advance
On March 13, 2003, La Jolla Cove Investors, Inc., the holder of the
Company's convertible debenture, advanced the Company an additional $200,000 for
working capital purposes. At La Jolla Cove's sole discretion, the $200,000 could
be allocated in any proportion to a) an increase in the principal amount of the
debenture and/or b) a prepayment for a future warrant exercise. During the 2nd
quarter of 2003, La Jolla elected to add this balance to the principal balance
on the convertible debenture.
In August 2004, the Company's controlling shareholders advanced the Company
approximately $74,000 for working capital to fund certain capital equipment
purchases. These advances are non-interest bearing and are repayable upon
demand.
(Remainder of this page left blank intentionally)
12
American Ammunition, Inc. and Subsidiaries
Notes to Consolidated Financial Statements - Continued
Note I- Capital Leases Payable
Capital leases payable consist of the following as of September 30, 2004
and 2003, respectively:
September 30, September 30,
2004 2003
------------- -------------
Three capital leases, respectively, payable to various
equipment financing companies. Interest ranging between
11.37% and 14.05%. Payable in aggregate monthly installments
of approximately $935, including accrued interest. Final
maturities occur between September 2004 and December 2004.
Collateralized by the underlying leased manufacturing
equipment. $ 525 $ 10,335
Less current maturities (525) (9,507)
--------- ---------
Long-term portion $ - $ 828
========= =========
Future maturities of capital leases payable are as follows:
Year ending
December 31 Amount
------------------------
2004 $ 2,606
=======
Note J - Convertible Debenture
On October 4, 2002, the Company issued an 8.0% Convertible Debenture
(Debenture) in the face amount of $250,000 and a Warrant which requires the
Holder to purchase shares of common stock equal to ten (10) times the number of
shares of common stock issued to the Holder on conversion of the Debenture. In
no event shall the number of shares issued under the Warrant exceed 30,000,000.
During the second quarter of Calendar 2003, the Holder made additional cash
advances to the Company totaling $350,000 which were applied to the then
outstanding principal balance on the Debenture.
The Debenture bears interest at 8.0% and matures on October 4, 2004. The
full principal amount of the Debenture is due upon default, as defined in the
Debenture agreement. The Debenture interest is payable monthly in arrears
commencing on November 15, 2002.
At June 30, 2004 and 2003, respectively, the outstanding balance on the
Debenture was approximately $266,365 and $524,865.
In December 2002, the Company and the Debenture Holder amended the
above-referenced debenture and warrants as follows:
The number of common shares into which the debenture may be converted
is equal to the dollar amount of the debenture being converted multiplied
by eleven, minus the product of the conversion price, multiplied by ten
times the dollar amount of the debenture being converted, divided by the
conversion price. The conversion price is obtained by multiplying the
average of the five (5) lowest Volume Weighted Average Prices (VWAP) during
the 20 trading days prior to the date of conversion by the Discount
Multiplier of 80%.
13
American Ammunition, Inc. and Subsidiaries
Notes to Consolidated Financial Statements - Continued
Note J - Convertible Debenture - Continued
The warrants are exercisable at $1.00 per share for up to 2,500,000 shares.
The warrant holder is obligated to exercise the warrant concurrently with
the conversion of the debenture for a number of shares equal to ten times
the dollar amount of the debenture being converted.
The Company was obligated to file a Registration Statement under the
Securities Act of 1933 to register the underlying conversion shares on either
Form SB-2 or S-3. This Registration Statement was declared effective by the U.
S. Securities and Exchange Commission on May 14, 2003.
The Debenture Holder has contractually committed to convert not less than
5.0% and not more than 10.0% of the original face value of the Debenture monthly
beginning the month after the effective date of the Registration Statement and
the Holder is required to concurrently exercise warrants and purchase shares of
common stock equal to ten (10) times the number of shares of common stock issued
to the Holder upon the respective mandatory conversion of the Debenture.
The Holder has further contractually agreed to restrict its ability to
convert the Debenture or exercise their warrants and receive shares of the
Company's common stock such that the number of shares held by the Holder and its
affiliates after such conversion or exercise does not exceed 4.99% of the then
issued and outstanding shares of common stock of the Company.
In the event an election to convert is made and the volume weighted average
price of the Company's common stock is below $0.30 per share, the Company shall
have the right to prepay any portion of the outstanding Debenture that was
elected to be converted, plus any accrued and unpaid interest, at 125.0%.
Due to the contractually agreed mandatory conversion of this Debenture, the
Company has reflected this transaction in its balance sheet as a "mezzanine"
level debt obligation on its balance sheet, between "Total Liabilities" and
"Stockholders' Equity". Upon the respective mandatory conversion, the Company
will relieve the respective portion of the Debenture and the any related
accrued, but unpaid interest, and credit this amount to the respective "common
stock" and "additional paid-in capital" accounts in the stockholder's equity
section for the par value and excess amount over the par value of the respective
shares issued.
As the warrant is non-detachable from the Debenture and requires
simultaneous exercise upon conversion of the Debenture, no value was assigned to
the issued warrant. Upon exercise of the warrant, the Company will record the
issuance of the underlying shares as a new issuance of common stock on the date
of each respective exercise.
On various dates through June 30, 2004, the Debenture Holder elected to
convert an aggregate $333,635, through 29 separate transactions, in outstanding
Debenture principal into restricted, unregistered common stock. This election
caused the Company to issue 8,711,753 shares of restricted, unregistered common
stock to the Debenture Holder. Additionally, pursuant to the contract terms, the
Debenture Holder concurrently exercised a portion of the outstanding Warrant to
purchase 3,336,350 shares of the Company's restricted, unregistered common stock
for gross proceeds of $3,336,350.
As of June 30, 2004, pursuant to the conversion terms of the Debenture, the
Debenture Holder is in arrears in the contractually obligated conversions, and
accordingly, the related mandatory warrant exercise and owes the Company an
aggregate $275,000 in cash for Warrant exercise and debenture conversion
transactions.
14
American Ammunition, Inc. and Subsidiaries
Notes to Consolidated Financial Statements - Continued
Note K - Preferred Stock Transactions
Preferred stock consists of the following as of September 30, 2004 and
2003, respectively:
September 30, 2004 September 30, 2003
------------------ ------------------
# shares value # shares value
-------- --------- -------- ---------
Series A Cumulative Convertible Stock 12,000 $ 60,000 32,000 $ 160,000
Series B Cumulative Convertible Stock 91,700 458,500 91,700 458,500
-------- --------- -------- ---------
103,700 518,500 123,700 618,500
========= =========
Beneficial Conversion Feature Discount (15,890)
--------- ---------
Totals 518,500 $ 602,610
========= =========
In September, October and November 2001, the Company sold an aggregate
222,600 shares of $5.00 Series A Convertible Preferred Stock (Series A Preferred
Stock) for total proceeds of approximately $1,113,000 through a Private
Placement Memorandum. The Series A Convertible Preferred Stock provides for
cumulative dividends at a rate of 8.0% per year, payable quarterly, in cash or
shares of the Company's common stock at the Company's election. Each share of
Series A Preferred Stock is convertible into 11 shares of the Company's common
stock initially at any time after 6 months of the date of issue and prior to the
notice of redemption at the option of the holder, subject to adjustments for
customary anti-dilution events. In December 2001, at the request of the holders
of the Series A Preferred Stock, the Company and the individual holders modified
the holding period for conversion to allow for conversion in December 2001.
In September 2001, the Company's principal stockholder converted
approximately $4,007,327 of unsecured debt and approximately $3,546,273 of
cumulative and unpaid accrued interest into 1,510,710 shares of Series A
Preferred Stock.
In September 2001, a creditor of the Company agreed to convert
approximately $10,000 of trade accounts payable into 2,000 shares of Series A
Preferred Stock.
In December 2001, concurrent with a modification in the holding period
prior to conversion, certain holders of the Series A Preferred Stock orally
notified the Company of their intent to exercise the conversion features on
1,749,720 issued and outstanding shares of Series A Preferred Stock into
19,246,920 shares of common stock prior to December 31, 2001. Due to the timing
of the requisite documentation, the clerical activities related to this
conversion were not completed until February 2002.
In conjunction with the Series A Preferred Stock, certain shares were sold
after the Company's common stock was approved for trading by the National
Association of Securities Dealers on the OTC Bulletin Board in October 2001. The
shares of Series A Preferred Stock sold subsequent to this date had an
equivalent per share value of common stock below the ending quoted market price
of the Company's common stock on their respective issue dates. This difference
created a Beneficial Conversion Feature Discount of approximately $1,207,993.
This discount was then amortized over the unexpired time period between the date
of issue of the eligible shares and the eligible conversion date, as amended.
All of the shares sold subsequent to the initial trading date were converted in
December 2001 and, accordingly, the approximate $1,207,993 in Beneficial
Conversion Feature Discount was fully amortized to operations.
In December 2002, a holder of 5,000 shares of Series A Preferred Stock
exercised his conversion rights and converted these shares of Series A Preferred
Stock into 55,000 shares of restricted, unregistered common stock.
15
American Ammunition, Inc. and Subsidiaries
Notes to Consolidated Financial Statements - Continued
Note K - Preferred Stock Transactions - Continued
In January 2003, three separate holders of 9,000 shares of Series A
Preferred Stock exercised their conversion rights and converted these shares of
Series A Preferred stock into 99,000 shares of restricted, unregistered common
stock.
In May 2003, the Company sold an aggregate 91,700 shares of $5.00 Series B
Convertible Preferred Stock (Series B Preferred Stock) for total proceeds of
approximately $458,500 through a separate Private Placement Memorandum. The
Series B Convertible Preferred Stock provides for cumulative dividends at a rate
of 8.0% per year, payable quarterly, in cash or shares of the Company's common
stock at the Company's election. Each share of Series B Preferred Stock is
convertible into 11 shares of the Company's common stock initially at any time
after 6 months of the date of issue and prior to the notice of redemption at the
option of the holder, subject to adjustments for customary anti-dilution events.
Note L - Common Stock Transactions
In January 2003, the Company issued an aggregate 937,568 shares of
restricted, unregistered common stock for cash proceeds of approximately
$324,182. These sales were made at a price of either $0.23 or $0.36 per share,
which was in excess of the discounted "fair value" of the Company's common stock
based on the quoted closing price of the Company's common stock on the date of
the respective transaction. The proceeds of this transaction were used for
operating working capital. The Company relied upon Section 4(2) of the
Securities Act of 1933, as amended, for an exemption from registration of these
shares and no underwriter was used in this transaction.
In February 2003, the Company issued 384,615 shares of restricted,
unregistered common stock for cash proceeds of approximately $100,000. These
sales were made at a price of $0.26 per share, which was in excess of the
discounted "fair value" of the Company's common stock based on the quoted
closing price of the Company's common stock on the date of the respective
transaction. The proceeds of this transaction were used to reduce the Company's
outstanding long-term debt. The Company relied upon Section 4(2) of the
Securities Act of 1933, as amended, for an exemption from registration of these
shares and no underwriter was used in this transaction.
In March 2003, the Company issued 972,222 shares of restricted,
unregistered common stock for cash proceeds of approximately $350,000. These
sales were made at a price of $0.36 per share, which was in excess of the
discounted "fair value" of the Company's common stock based on the quoted
closing price of the Company's common stock on the date of the respective
transaction. The proceeds of this transaction were used to reduce the Company's
outstanding long-term debt. The Company relied upon Section 4(2) of the
Securities Act of 1933, as amended, for an exemption from registration of these
shares and no underwriter was used in this transaction.
In March 2003, the Company issued an aggregate 966,608 shares of
restricted, unregistered common stock to the Holder of the Company's 8.0%
Convertible Debenture upon notice of conversion of $35,000 of outstanding
principal and exercise of a portion of the outstanding warrant to purchase
350,000 shares of common stock. This transaction was valued at $385,000, or
approximately $0.40 per share, which was in excess of the discounted "fair
value" of the Company's common stock based on the quoted closing price of the
Company's common stock on the date of the respective transaction. The cash
proceeds of this transaction were used to provide working capital and support
operations.
16
American Ammunition, Inc. and Subsidiaries
Notes to Consolidated Financial Statements - Continued
Note L - Common Stock Transactions - Continued
In May 2003, the Company issued 1,967 shares of restricted, unregistered
common stock in payment of approximately $1,200 in accrued dividends payable on
the Company's outstanding Series A Preferred Stock for the quarter ended March
31, 2003. The Company relied upon Section 4(2) of the Securities Act of 1933, as
amended, for an exemption from registration of these shares and no underwriter
was used in this transaction.
During the period from July 1, 2003 through September 30, 2003, the Company
issued an aggregate 2,902,129 shares of common stock, in 15 separate
transactions, in exchange for the redemption of approximately $93,500 in
outstanding debenture balance and approximately $935,000 in cash from the
exercise of the affiliated warrant. Where the closing price of the Company's
common stock was in excess of the respective price per share on the respective
transaction date, the Company recognized a charge to operations for
"compensation expense related to common stock issuances at less than "fair
value". The cumulative effect of transactions where the transaction price, as
established in the Debenture Agreement, was less than the closing price on the
date of the respective transactions resulted in a cumulative charge to
operations of approximately $317,539 during this time period.
In October 2003, in a separate transaction, the Company sold 2,200,000
shares of restricted, unregistered common stock to the Debenture Holder for cash
proceeds of approximately $400,000, or approximately $0.18 per share, which was
in excess of the discounted "fair value" of the Company's common stock based on
the quoted closing price of the Company's common stock on the date of the
respective transaction. The cash proceeds of this transaction were used to
provide working capital and support operations.
In October 2003, the Company issued an aggregate 1,659,847 shares of common
stock, in 3 separate transactions, in exchange for the redemption of
approximately $40,000 in outstanding debenture balance and approximately
$400,000 in cash from the exercise of the affiliated warrant. Where the closing
price of the Company's common stock was in excess of the respective price per
share on the respective transaction date, the Company recognized a charge to
operations for "compensation expense related to common stock issuances at less
than "fair value". The cumulative effect of transactions where the transaction
price, as established in the Debenture Agreement, was less than the closing
price on the date of the respective transactions resulted in a cumulative charge
to operations of approximately $146,189 during this time period.
In October 2003, the Company issued an aggregate 37,866 shares of
restricted, unregistered common stock in payment of approximately $16,710 in
accrued dividends payable on the Company's outstanding Series A and Series B
Preferred Stock for the quarters ended June 30, 2003 and September 30, 2003,
collectively. The Company relied upon Section 4(2) of the Securities Act of
1933, as amended, for an exemption from registration of these shares and no
underwriter was used in this transaction.
In January 2004, the Company issued 38,038 shares of restricted,
unregistered common stock in payment of approximately $10,000 in accrued
dividends payable on the Company's outstanding Series A and Series B Preferred
Stock for the quarter ended December 31, 2003. The Company relied upon Section
4(2) of the Securities Act of 1933, as amended, for an exemption from
registration of these shares and no underwriter was used in this transaction.
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17
American Ammunition, Inc. and Subsidiaries
Notes to Consolidated Financial Statements - Continued
Note L - Common Stock Transactions - Continued
During the period from January 1, 2004 through March 31, 2004, the Company
issued an aggregate 2,400,000 shares of common stock, in two (2) separate
transactions, in exchange for the redemption of approximately $50,000 in
outstanding debenture balance and approximately $500,000 in cash from the
exercise of the affiliated warrant. Where the closing price of the Company's
common stock was in excess of the respective price per share on the respective
transaction date, the Company recognized a charge to operations for
"compensation expense related to common stock issuances at less than "fair
value". The cumulative effect of transactions where the transaction price, as
established in the Debenture Agreement, was less than the closing price on the
date of the respective transactions resulted in a cumulative charge to
operations of approximately $321,000 during this time period.
In May 2004, the Company issued 25,260 shares of restricted, unregistered
common stock in payment of approximately $9,170 in accrued dividends payable on
the Company's outstanding Series B Preferred Stock for the quarter ended March
31, 2004. The Company relied upon Section 4(2) of the Securities Act of 1933, as
amended, for an exemption from registration of these shares and no underwriter
was used in this transaction.
During the period from April 1, 2004 through June 30, 2004, the Company
issued an aggregate 3,000,000 shares of common stock, in three (3) separate
transactions, in exchange for the redemption of approximately $75,000 in
outstanding debenture balance and approximately $750,000 in cash from the
exercise of the affiliated warrant. Where the closing price of the Company's
common stock was in excess of the respective price per share on the respective
transaction date, the Company recognized a charge to operations for
"compensation expense related to common stock issuances at less than "fair
value". The cumulative effect of transactions where the transaction price, as
established in the Debenture Agreement, was less than the closing price on the
date of the respective transactions resulted in a cumulative charge to
operations of approximately $35,000 during this time period. Additionally, on
June 29, 2004, the Company issued an additional 1,000,000 shares of common stock
in advance of the exercise of a $25,000 redemption on the outstanding debenture
payable and a $250,000 cash payment on the exercise of the affiliated warrant,
which was received in July 2004.
On May 26, 2004, the Company issued 300,000 shares of restricted,
unregistered common stock to two separate corporations in payment and full
satisfaction of all amounts due for fees and/or commissions due in conjunction
with the Company's convertible debenture financing transaction. This transaction
was valued at approximately $36,000, which approximated the "fair value" of the
underlying securities given in payment and the related charges for the services
provided. The Company relied upon Section 4(2) of the Securities Act of 1933, as
amended, for an exemption from registration of these shares and no underwriter
was used in this transaction.
In August 2004, the Company issued 29,746 shares of restricted,
unregistered common stock in payment of approximately $9,170 in accrued
dividends payable on the Company's outstanding Series B Preferred Stock for the
quarter ended June 30, 2004. The Company relied upon Section 4(2) of the
Securities Act of 1933, as amended, for an exemption from registration of these
shares and no underwriter was used in this transaction.
Note M - Rental Commitments
The Company leases its corporate office and manufacturing facility from its
controlling stockholder under a long- term operating lease agreement. The lease
requires a monthly payment of approximately $5,410, including applicable sales
taxes. After the five (5) year and five month term of this lease, should the
parties desire to renew this lease, Lessor and Lessee shall renegotiate the
annual rent paid by Lessee. The Company is responsible for all utilities and
maintenance expenses. The lease expires on December 31, 2009. Total rent expense
under this lease was approximately $67,075 and $54,100, respectively, for each
of the years ended December 31, 2003 and 2002.
18
American Ammunition, Inc. and Subsidiaries
Notes to Consolidated Financial Statements - Continued
Note M - Rental Commitments - Continued
The Company's subsidiary, IPE, leases it's manufacturing facility from an
unrelated third-party under a long-term operating lease agreement. This lease is
for a period of five (5) years and requires graduated monthly payments, changing
on the lease anniversary date, ranging from approximately $1,751 to $1,914, plus
the applicable sales taxes. The Company is responsible for all utilities and
maintenance expenses. The lease expires on February 28, 2007 and may be renewed
for an additional five (5) year term at a rental rate of approximately $1,971,
plus applicable sales taxes for the first renewal year and 3.0% increase on each
succeeding anniversary date. Total rent expense under this lease was
approximately $20,752 and $16,622, respectively, for each of the years ended
December 31, 2003 and 2002.
In May 2004, the Company entered into a long-term lease agreement for a
warehouse facility adjacent to the Company's primary office and manufacturing
facility. This lease is for a period of two (2) years and requires payments of
approximately $6,206 per month for the first 12 months and approximately $6,393
for the second 12 months, plus applicable sales taxes. The Company is
responsible for all utilities and maintenance expenses. This lease expires on
May 31, 2006. Further, the Company is responsible for any incremental real
estate taxes and property insurance in excess of the amounts incurred by the
landlord for the calendar year immediately preceding the execution of the lease.
Future minimum rental payments on the above leases are as follows:
Year ended
December 31, Amount
----------------------
2004 $ 138,365
2005 166,974
2006 117,244
2007 72,643
2008 68,815
2007 68,815
---------
Totals $ 632,856
=========
Note N - Income Taxes
The components of income tax (benefit) expense for the nine month periods
ended September 30, 2004 and 2003, respectively, are as follows:
Nine months Nine months
ended ended
September 30, September 30,
2004 2003
------------- -------------
Federal:
Current $ - $ -
Deferred - -
------- -------
- -
------- -------
State:
Current - -
Deferred - -
------- -------
- -
------- -------
Total $ - $ -
======= =======
19
American Ammunition, Inc. and Subsidiaries
Notes to Consolidated Financial Statements - Continued
Note N - Income Taxes - Continued
As of December 31, 2003, the Company has a net operating loss carryforward
of approximately $8,500,000 to offset future taxable income. Subject to current
regulations, components of this carryforward began to expire in 2003. The amount
and availability of the net operating loss carryforwards may be subject to
limitations set forth by the Internal Revenue Code. Factors such as the number
of shares ultimately issued within a three year look-back period; whether there
is a deemed more than 50 percent change in control; the applicable long-term tax
exempt bond rate; continuity of historical business; and subsequent income of
the Company all enter into the annual computation of allowable annual
utilization of the carryforwards.
The Company's income tax expense (benefit) for the nine month periods ended
September 30, 2004 and 2003, respectively, differed from the statutory federal
rate of 34 percent as follows:
Nine months Nine months
ended ended
September 30, September 30,
2004 2003
---------------------------
Statutory rate applied to loss before income taxes $ (799,000) $ (902,000)
Increase (decrease) in income taxes resulting from:
State income taxes - -
Other, including reserve for deferred tax asset 799,000 902,000
---------- -----------
Income tax expense $ - $ -
========== ===========
Temporary differences, consisting primarily of statutory differences in the
depreciable lives for property and equipment, between the financial statement
carrying amounts and tax bases of assets and liabilities give rise to deferred
tax assets and liabilities as of December 31, 2004 and 2003, respectively:
December 31, December 31,
2004 2003
------------------------------
Deferred tax assets - long-term - net $ 3,000,000 $ 2,150,000
Less valuation allowance (3,000,000) (2,150,000)
------------- -------------
Net Deferred Tax Asset $ - $ -
============= =============
During the years ended December 31, 2004 and 2003, respectively, the
valuation allowance increased by approximately $656,000 and $629,000.
Note O - Subsequent Events
In October 2004, the Company issued 53,908 shares of restricted,
unregistered common stock in payment of approximately $9,170 in accrued
dividends payable on the Company's outstanding Series B Preferred Stock for the
quarter ended September 30, 2004. The Company relied upon Section 4(2) of the
Securities Act of 1933, as amended, for an exemption from registration of these
shares and no underwriter was used in this transaction.
20
American Ammunition, Inc. and Subsidiaries
Notes to Consolidated Financial Statements - Continued
Note O - Subsequent Events - Continued
On October 19, 2004, the Company completed negotiations and closed an Asset
Purchase Agreement by and between the Company, Voluto Ventures LLC (a New York
limited liability company and Voluto Patent Holding Co., Inc. (a New York
corporation). The Company acquired certain machinery and equipment, inventory
and the assignment of certain patents and intellectual property related to the
manufacture and production of specialty small- arms ammunition. The Company
issued 1,111,111 shares of restricted, unregistered common stock with an agreed-
upon value of $500,000 for this transaction.
The sellers agreed to contractually restrict their sale of the 1,111,111
shares of restricted, unregistered common stock to an amount of up to 175,000
shares per month starting on April 28, 2005.
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21
Item 2 - Management's Discussion and Analysis or Plan of Operation
(1) Caution Regarding Forward-Looking Information
Certain statements contained in this Quarterly Report including, without
limitation, statements containing the words "believes", "anticipates", "expects"
and words of similar import, constitute forward-looking statements. Such
forward-looking statements involve known and unknown risks, uncertainties and
other factors that may cause the actual results, performance or achievements of
the Company, or industry results, to be materially different from any future
results, performance or achievements expressed or implied by such
forward-looking statements.
Such factors include, among others, the following: international, national
and local general economic and market conditions: demographic changes; the
ability of the Company to sustain, manage or forecast its growth; the ability of
the Company to successfully make and integrate acquisitions; raw material costs
and availability; new product development and introduction; existing government
regulations and changes in, or the failure to comply with, government
regulations; adverse publicity; competition; the loss of significant customers
or suppliers; fluctuations and difficulty in forecasting operating results;
changes in business strategy or development plans; business disruptions; the
ability to attract and retain qualified personnel; the ability to protect
technology; and other factors referenced in this and previous filings.
Given these uncertainties, readers of this Quarterly Report and investors
are cautioned not to place undue reliance on such forward-looking statements.
The Company disclaims any obligation to update any such factors or to publicly
announce the result of any revisions to any of the forward-looking statements
contained herein to reflect future events or developments.
Overview
We were incorporated on February 1, 2000 in the State of California as
FirsTelevision.com. We subsequently changed our corporate name to FBI Fresh
Burgers International which unsuccessfully marketed a business plan concept of a
national "fast food" restaurant chain.
American Ammunition, Inc. is a holding company with two operating
subsidiaries: F&F Equipment, Inc. and Industrial Plating Enterprise Co.
F&F Equipment, Inc. was incorporated on October 4, 1983 under the laws of
the State of Florida. The company was formed to engage principally in the
"import, export, retail & wholesale of firearms equipment, ammunition & other
devices and for the purpose of transacting any and/or all lawful business." F&F
conducts its business operations under the assumed name of "American
Ammunition."
22
In June 2002, American Ammunition, Inc. formed a wholly owned subsidiary,
Industrial Plating Enterprise Co., which started production on June 14, 2002.
Industrial Plating is a fully licensed and approved electrochemical
metallization facility with significant capacity for processing our line of
projectiles as well as other products and services while employing
environmentally sound water conservation and proven waste treatment techniques.
During the third quarter of 2003, the Company's operations experienced the
negative impact of a lower than anticipated or budgeted purchases by Elliot
Brothers, a significant customer.
However, during this same time period, the Company has entered into a
strategic alliance with Israel Military Industries (IMI), an entity owned by the
State of Israel, for the cross-production and sale of various small arms
ammunition. This alliance is anticipated to greatly expand the Company's catalog
of products and assist in utilizing existing production capacity.
In prior periods, the Company executed a private labeling agreement with
Century International Arms, Inc. (Century). Under this agreement, the Company
was to produce it's standard catalog of small arms ammunition plus one specialty
small arms cartridge to Century's specifications for packaging in Century's
designated labeling. This agreement required no modifications to the Company's
production line and did not require the addition of supplemental personnel or
equipment. The Company made an initial shipment under this agreement to Century
during December 2003. In early-January 2004, the Company began to experience
problems with Century regarding Century's compliance with their performance
criteria under this agreement. During the first quarter of 2004, Century
defaulted on certain agreed-upon payment schedules on merchandise sold during
December 2003. In repayment of the outstanding trade debt, the Company accepted
unscheduled product returns as payment of the trade debt. As a result of these
issues, the Company recognized a charge to operations of approximately $28,000
on it's business activity with Century. The returned merchandise was repackaged
and is resalable by the Company to other customers. As of June 30, 2004, the
Company has cancelled this agreement, and is contemplating litigation against
Century for breach of contractual obligations under this agreement.
Additionally, the Company has been awarded three (3) separate contracts
from various departments of the U. S. Government. Each contract is for an
initial term of one year (commencing between April 24, 2003 and September 30,
2003) with four (4) successive individual one-year extension options, of which
the first extension period has been exercised. The contracts are summarized as
follows:
Contract 1: U. S. Department of State. Minimum annual volume of approximately
100,000 rounds of military grade small arms ammunition. Maximum
annual volume of approximately 5,000,000 rounds. Maximum volume
may be increased at the discretion of the Contracting Officer and
respective utilization requirements. The Company has received
23
firm orders for 2,265,000 rounds of ammunition under this
contract and has approximately 1,265,000 rounds ready for
shipment. The ammunition under this contract will be subject to
the strategic alliance with Israel Military Industries (IWI).
Contract 2: U. S. Department of Energy. This contract covers seven (7)
separate products in the Company's standard catalog of products.
The U. S. Department of Energy is obligated to purchase an
aggregate of 4,549,000 rounds of ammunition under this contract.
Contract 3: U. S. Department of Homeland Security. This contract covers four
(4) separate products being introduced to the Company's catalog
through the strategic alliance with IMI and requires no
modifications to the Company's production facilities or additions
to the labor force. The minimum annual volume is 1,000 rounds of
each product and a maximum annual volume of 9,600,000 rounds of
two (2) products and 36,000,000 of the remaining two (2)
products.
The Company has received purchase orders against these contracts; however,
due to delays in receiving the initial purchase orders and the unpredictability
of subsequent reorder cycles, the Company is unable to fully anticipate or
predict the future impact of these contracts. The Company remains in negotiation
and to prepare bids on other contracts from these and other U. S. Governmental
agencies.
During the first quarter of 2004, the Company commenced a direct
solicitation program for it's "dealer direct" sales program. As this endeavor
has received a very positive initial response from the qualified retail
resellers of the Company's product, the announcement of this program had a
significantly detrimental impact on the Company's relationship with wholesale
distributors and, accordingly, had a significant negative impact on first
quarter 2004 sales. The Company continues to experience increases in customer
demand, order size and reorder quantities in this program by smaller "single
store" owner/operators of retail outlets selling the Company's products. During
November 2004, the Company qualified it's 1,000th dealer under this program for
direct sales and it is anticipated that the overall Calendar 2004 sales volume
through the "dealer direct" program may well equal or exceed the sales volumes
generated by wholesale distributors in prior years.
Results of Operations
Nine months ended September 30, 2004 compared with the nine months ended
September 30, 2003.
During the nine and three months ended September 30, 2004, we experienced
net revenues of approximately $1,712,000 and $862,000, respectively, as compared
to approximately $1,216,000 and $317,000 for the same respective periods of
2003.
24
During the first quarter of 2004, the Company commenced a direct
solicitation program for it's "dealer direct" sales program. As this endeavor
has received a very positive initial response from the qualified retail
resellers of the Company's product, the announcement of this program had a
significantly detrimental impact on the Company's relationship with wholesale
distributors and, accordingly, had a significant negative impact on first
quarter 2004 sales. The Company continues to experience significant increases in
customer demand, order size and reorder quantities in this program by smaller
"single store" owner/operators of retail outlets selling the Company's products.
During November 2004, the Company qualified it's 1,000th dealer under this
program for direct sales and it is anticipated that the overall Calendar 2004
sales volume through the "dealer direct" program may well equal or exceed the
sales volumes generated by wholesale distributors in prior years.
We experienced costs of goods sold of approximately $2,435,000 for the nine
months ended September 30, 2004 as compared to approximately $2,209,000 for the
nine months ended September 30, 2003. Included in these amounts are
approximately $524,000 and $495,000, respectively, for depreciation expense on
manufacturing equipment and leasehold improvements on our production facility.
Management is of the opinion that the production labor force is stable and
able to maintain a constant standard of quality for future periods. We
experience variable costs in the area of material consumption and direct labor.
These depreciation levels are anticipated to remain fairly constant as
compared to the first quarter of 2004. Management has placed on order, and
placed initial deposits on, new manufacturing equipment to automate the product
packaging process and to add new quality assurance equipment on the production
line. These commitments aggregate approximately $450,000, of which the majority
has been expended through September 30, 2004.
Management, at this time, does not anticipate any further significant
capital equipment acquisitions.
Further, the addition of the Industrial Plating Enterprise Co. equipment
during 2003 allows us to produce certain components which were previously
outsourced to unrelated third parties.
For the nine month periods ended September 30, 2004 and 2003, respectively,
we have generated a negative gross profit of approximately $(723,000), or
(42.21%), and approximately $(993,000), or (81.66%).
As previously reported, our research during the second quarter of 2004 has
revealed that the various governmental agencies which have issued purchase
contracts to us either purchased large quantities during the last 60 days of the
Federal Government's year ended September 30, 2003 or are experiencing
25
transitional purchasing problems or issues surrounding the reorganization of
various agencies into the Department of Homeland Security, with the related
issues of Congressional appropriations for funding the necessary expenditures of
these reorganized agencies. The actions of the third quarter proved this
research to be correct and we received several purchase order releases on our
contract with the Department of Homeland Security. The timing of Congressional
approval of the related appropriation bills to fund the various executive branch
departments of the United States of America continues to impact the timing and
release of purchase orders under our contracts as previously discussed.
We continue to anticipate that with the fulfillment of the government
contracts discussed above, continually expanding retail consumer demand for our
product line, lower production costs being experienced from internally generated
plating activities and adequate liquidity, we will be able to generate a
positive gross profit in future periods. Further, based on production cost
information developed during the 4th quarter of 2002 and further refined during
2003, management has developed a new model for the pricing of its products to
its customers. It is anticipated that this model will allow management to better
manage expense levels, control labor costs and maximize revenue opportunities.
We had minimal costs allocated to research and development expenses during
either of the quarters ended September 30, 2004 and 2003.
Through the nine months ending September 30, 2004, we expended
approximately $368,000 in advertising and marketing expenses, principally in
developing and promoting our retail dealer direct program. We anticipate to
continue our marketing efforts in this area in future periods; however, the
volume and frequency of our expenditures may fluctuate as management allocates
available capital to these efforts.
Other general and administrative expenses increased by approximately
$57,000 from approximately $789,000 for the nine months ended September 30, 2003
as compared to approximately $846,000 for the nine months ended September 30,
2004. These increases are not identifiable by one specific area; however, relate
to general corporate expenses, office and administrative wages and salaries and
other related office overhead.
Included in our results of operations for the first nine months of 2004 are
certain non-cash expenditure charges to operations of approximately $356,000 for
compensation expense related to common stock issuances at less than "fair
value". The calculation of these charges result from our issuing common stock
for either cash or services at valuations below the closing quoted market price
26
of our common stock (as discounted, as applicable) and either the cash received
or the value of the services provided to us by third parties. During Calendar
2003, we experienced a charge of approximately $94,000 for the amortization of
the Beneficial Conversion Feature Discount on our Preferred Stock. This charge
results from the difference between the closing quoted market price on our
common stock and the equivalent converted price of our Mandatory Convertible
Preferred Stock which was sold and converted during 2003.
We recognized a net loss of approximately $(2,350,000) and $(2,662,000) for
the respective three month periods ended September 30, 2004 and 2003,
respectively, or $(0.03) and $(0.04) per share.
Liquidity And Capital Resources
As of September 30, 2004, December 31, 2003 and September 30, 2003,
respectively, we had working capital of approximately $960,000, $2,000,000 and
$1,348,000. Our working capital position continues to fluctuate based on
collections on our trade accounts receivable and receipt of cash from the
mandatory exercise of our outstanding warrant contractually tied to our
convertible debenture. Further, we anticipate that we have sufficient inventory
levels to support our retail dealer direct program and our existing and
anticipated U. S. Government contracts.
We have used cash in operating activities of approximately $(727,500) and
$(1,901,000) during the quarters ended September 30, 2004 and 2003,
respectively.
The most significant use of cash in operations during the nine months ended
September 30, 2004 was for the support of our operations where our costs,
expenses and overhead was in excess of the sales volume that we generated,
including increased advertising and marketing expenses to institute our new
retail dealer direct program.
We anticipate that our improved liquidity position will continue to improve
as management is of the opinion that the production capacity is in place to
support all existing orders and accept existing inquiries which have previously
been denied due to the lack of production capacity and liquidity.
During the nine months ended September 30, 2004 and 2003, respectively, we
added approximately $436,000 and $59,000 in new equipment. Depending on future
demand for our products, we may develop plans to increase our production
capacity by an additional 50% to 100%, as influenced by the availability of
manufacturing equipment on the open market and product sales demand. Management
is of the opinion that sufficient demand will be present, as supported by new
product development and increased product marketing efforts, to justify this
expansion. However, we may not be able to obtain additional funding or, that
such funding, if available, will be obtained on terms favorable to or affordable
by us.
27
Convertible Debenture
On October 4, 2002, we signed a Securities Purchase Agreement with La Jolla
Cove Investors, Inc. (La Jolla) for the sale of a $250,000 8% convertible
debenture and a warrant to purchase up 30,000,000 shares of our common stock.
The debenture bears interest at 8% and matures two years from the date of
issuance.
In December 2002, the Company and La Jolla, the Debenture and/or Warrant
Holder, amended the above-referenced debenture and warrants as follows:
The number of common shares into which the debenture may be converted is
equal to the dollar amount of the debenture being converted multiplied by
eleven, minus the product of the conversion price, multiplied by ten times
the dollar amount of the debenture being converted, divided by the
conversion price. The conversion price is obtained by multiplying the
average of the five (5) lowest Volume Weighted Average Prices (VWAP) during
the 20 trading days prior to the date of conversion by the Discount
Multiplier of 80%.
The warrants are exercisable at $1.00 per share for up to 2,500,000 shares.
The Warrant Holder is obligated to exercise the warrant concurrently with
the conversion of the debenture for a number of shares equal to ten times
the dollar amount of the debenture being converted.
We were obligated to file a Registration Statement under the Securities Act
of 1933 to register the underlying conversion shares on either Form SB-2 or S-3
and have said Registration Statement effective no later than 120 days after
October 4, 2002. Our Registration Statement on Form SB-2 was deemed effective by
the U. S. Securities and Exchange Commission on May 14, 2003 at 1:00 pm EDT.
La Jolla has contractually committed to convert not less than 5.0% and not
more than 10.0% of the original face value of the Debenture monthly beginning
the month after the effective date of the Registration Statement and is required
to concurrently exercise warrants and purchase shares of common stock equal to
ten (10) times the number of shares of common stock issued to La Jolla upon the
respective mandatory conversion of the Debenture.
La Jolla has further contractually agreed to restrict its ability to
convert the Debenture or exercise their warrants and receive shares of our
common stock such that the number of shares held them or their affiliates after
such conversion or exercise does not exceed 4.99% of the then issued and
outstanding shares of our common stock.
In the event an election to convert is made and the volume weighted average
price of our common stock is below $0.30 per share, we have the right to prepay
any portion of the outstanding Debenture that was elected to be converted, plus
any accrued and unpaid interest, at 125.0%.
28
La Jolla could have demanded repayment of the Debenture of 125.0% of the
face amount outstanding, plus all accrued and unpaid interest, in cash at any
time prior to May 14, 2003, the date that underlying Registration Statement
under the Securities Act of 1933 was declared effective by the U. S. Securities
and Exchange Commission, within 3 business days of such demand. If the repayment
was accelerated, we were obligated to issue La Jolla 25,000 shares of common
stock and $10,000 cash for each 30 day period, or portion thereof, during which
the face amount, including interest thereon, remains unpaid with the cash
payment to increase to $15,000 for each 30 day period the balance remains unpaid
after the initial 90 day period.
If La Jolla does not elect to accelerate the Debenture, the Company shall
immediately issue and pay La Jolla 25,000 shares of common stock and $10,000
cash for each 30 day period, or portion thereof, during which the face amount,
including interest thereon, remains unpaid with the cash payment to increase to
$15,000 for each 30 day period the balance remains unpaid after the initial 90
day period.
Due to the contractually agreed mandatory conversion of this Debenture, we
have reflected this transaction in our balance sheet as a "mezzanine" level debt
obligation on its balance sheet, between "Total Liabilities" and "Stockholders'
Equity". Upon the respective mandatory conversion, we will relieve the
respective portion of the Debenture and the any related accrued, but unpaid
interest, and credit this amount to the respective "common stock" and
"additional paid-in capital" accounts in the stockholder's equity section for
the par value and excess amount over the par value of the respective shares
issued.
As the warrant is non-detachable from the Debenture and requires
simultaneous exercise upon conversion of the Debenture, no value was assigned to
the issued warrant. Upon exercise of the warrant, the Company will record the
issuance of the underlying shares as a new issuance of common stock on the date
of each respective exercise.
Concurrent with the execution of the Debenture agreement, we executed an
engagement letter with La Jolla's counsel for legal representation with regard
to the preparation of the Registration Statement under the Securities Act of
1933 on Form SB-2.
On March 13, 2003 and May 6, 2003, La Jolla Cove Investors, Inc., the
holder of the Company's convertible debenture, advanced the Company an
additional $200,000 and $150,000, respectively, for working capital purposes.
During the second quarter of 2003, La Jolla elected to allocate the entire
$350,000 in additional funding to the principal balance of the convertible
debenture.
29
On various dates between May 7, 2003 and June 30, 2003, La Jolla elected to
convert an aggregate $75,135, through six (6) separate transactions, in
outstanding Debenture principal into restricted, unregistered common stock. This
election caused the Company to issue 1,334,777 shares of restricted,
unregistered common stock to the Debenture Holder. Additionally, pursuant to the
contract terms, the Debenture Holder concurrently exercised a portion of the
outstanding Warrant to purchase 751,350 shares of the Company's restricted,
unregistered common stock for gross proceeds of $751,350.
During the period from July 1, 2003 through September 30, 2003, the Company
issued an aggregate 2,902,129 shares of common stock, in 15 separate
transactions, to La Jolla in exchange for the redemption of approximately
$93,500 in outstanding debenture balance and approximately $935,000 in cash from
the exercise of the affiliated warrant. Where the closing price of the Company's
common stock was in excess of the respective price per share on the respective
transaction date, the Company recognized a charge to operations for
"compensation expense related to common stock issuances at less than "fair
value". The cumulative effect of transactions where the transaction price, as
established in the Debenture Agreement, was less than the closing price on the
date of the respective transactions resulted in a cumulative charge to
operations of approximately $317,539 during this time period.
In October 2003, the Company issued an aggregate 1,659,847 shares of common
stock, in 3 separate transactions, in exchange for the redemption of
approximately $40,000 in outstanding debenture balance and approximately
$400,000 in cash from the exercise of the affiliated warrant. Where the closing
price of the Company's common stock was in excess of the respective price per
share on the respective transaction date, the Company recognized a charge to
operations for "compensation expense related to common stock issuances at less
than "fair value". The cumulative effect of transactions where the transaction
price, as established in the Debenture Agreement, was less than the closing
price on the date of the respective transactions resulted in a cumulative charge
to operations of approximately $146,189 during this time period.
During the period from January 1, 2004 through March 31, 2004, the Company
issued an aggregate 2,400,000 shares of common stock, in two (2) separate
transactions, in exchange for the redemption of approximately $50,000 in
outstanding debenture balance and approximately $500,000 in cash from the
exercise of the affiliated warrant. Where the closing price of the Company's
common stock was in excess of the respective price per share on the respective
transaction date, the Company recognized a charge to operations for
"compensation expense related to common stock issuances at less than "fair
value". The cumulative effect of transactions where the transaction price, as
established in the Debenture Agreement, was less than the closing price on the
date of the respective transactions resulted in a cumulative charge to
operations of approximately $321,000 during this time period.
30
During the period from April 1, 2004 through June 30, 2004, the Company
issued an aggregate 3,000,000 shares of common stock, in three (3) separate
transactions, in exchange for the redemption of approximately $75,000 in
outstanding debenture balance and approximately $750,000 in cash from the
exercise of the affiliated warrant. Where the closing price of the Company's
common stock was in excess of the respective price per share on the respective
transaction date, the Company recognized a charge to operations for
"compensation expense related to common stock issuances at less than "fair
value". The cumulative effect of transactions where the transaction price, as
established in the Debenture Agreement, was less than the closing price on the
date of the respective transactions resulted in a cumulative charge to
operations of approximately $35,000 during this time period. Additionally, on
June 29, 2004, the Company issued an additional 1,000,000 shares of common stock
in advance of the exercise of a $25,000 redemption on the outstanding debenture
payable and a $250,000 cash payment on the exercise of the affiliated warrant,
which was received in July 2004.
Research and Development
Depending on the demand for new product lines and the refinement of our
production processes under our production agreement with Israel Military
Industries (IMI), an entity owned by the State of Israel, for the
cross-production and sale of various small arms ammunition, we may or may not
incur increased spending on research and development activities during Calendar
2004.
Further, additional ammunition calibers and/or projectiles may be developed
by us depending upon market research, acceptance in the marketplace of existing
products and production capabilities. At this time, there are no definitive
plans for the further introduction of other new products into the marketplace.
Item 3 - Controls and Procedures
As required by Rule 13a-15 under the Exchange Act, within the 90 days prior
to the filing date of this report, the Company carried out an evaluation of the
effectiveness of the design and operation of the Company's disclosure controls
and procedures. This evaluation was carried out under the supervision and with
the participation of the Company's President, Chief Executive and Chief
Financial Officer. Based upon that evaluation, the Company's President, Chief
Executive and Chief Financial Officer concluded that the Company's disclosure
controls and procedures are effective. There have been no significant changes in
the Company's internal controls or in other factors, which could significantly
affect internal controls subsequent to the date the Company carried out its
evaluation.
31
Disclosure controls and procedures are controls and other procedures that
are designed to ensure that information required to be disclosed in Company
reports filed or submitted under the Exchange Act is recorded, processed,
summarized and reported, within the time periods specified in the Securities and
Exchange Commission's rules and forms. Disclosure controls and procedures
include, without limitation, controls and procedures designed to ensure that
information required to be disclosed in Company reports filed under the Exchange
Act is accumulated and communicated to management, including the Company's Chief
Executive Officer and Chief Financial Officer as appropriate, to allow timely
decisions regarding required disclosure.
Part II - Other Information
Item 1 - Legal Proceedings
None
Item 2 - Recent Sales of Unregistered Securities and Use of Proceeds
In August 2004, the Company issued 29,746 shares of restricted,
unregistered common stock in payment of approximately $9,170 in accrued
dividends payable on the Company's outstanding Series B Preferred Stock for the
quarter ended March 31, 2004. The Company relied upon Section 4(2) of the
Securities Act of 1933, as amended, for an exemption from registration of these
shares and no underwriter was used in this transaction.
In October 2004, the Company issued 53,908 shares of restricted,
unregistered common stock in payment of approximately $9,170 in accrued
dividends payable on the Company's outstanding Series B Preferred Stock for the
quarter ended September 30, 2004. The Company relied upon Section 4(2) of the
Securities Act of 1933, as amended, for an exemption from registration of these
shares and no underwriter was used in this transaction.
On October 19, 2004, the Company completed negotiations and closed an Asset
Purchase Agreement by and between the Company, Voluto Ventures LLC (a New York
limited liability company and Voluto Patent Holding Co., Inc. (a New York
corporation). The Company acquired certain machinery and equipment, inventory
and the assignment of certain patents and intellectual property related to the
manufacture and production of specialty small-arms ammunition. The Company
issued 1,111,111 shares of restricted, unregistered common stock with an
agreed-upon value of $500,000 for this transaction.
The sellers agreed to contractually restrict their sale of the 1,111,111
shares of restricted, unregistered common stock to an amount of up to 175,000
shares per month starting on April 28, 2005.
32
Item 3 - Defaults on Senior Securities
None
Item 4 - Submission of Matters to a Vote of Security Holders
None
Item 5 - Other Information
None
Item 6. Exhibits and Reports on Form 8-K
(a) The exhibits required to be filed herewith by Item 601 of Regulation
S-B, as described in the following index of exhibits, are incorporated herein by
reference, as follows:
Exhibit
number Descriptions
--------- -----------------------
31.1 Certification pursuant to Section 302 of Sarbanes-Oxley Act of 2002.
32.1 Certification pursuant to Section 906 of Sarbanes-Oxley Act of 2002.
(b) Reports on Form 8-K
None
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
American Ammunition, Inc.
Date: November 19, 2004
By: /s/ Andres F. Fernandez
----------------------------------
Andres F. Fernandez
President, Chief Executive Officer
Chief Financial Officer and Director
33