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 June 30, 2007
[_] 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)
Nevada 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 [_]
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act): YES [_] NO [X]
State the number of shares outstanding of each of the issuer's classes of common
equity as of the latest practicable date: As of September 17, 2007:, the
Transfer Agent's records indicate that there are 28,372,922 shares outstanding.
Of these shares, a total of 21,803,335 shares were subject to an escrow
agreement referenced in later filings.
Transitional Small Business Disclosure Format (check one): YES [_] NO [X]
American Ammunition, Inc.
Form 10-QSB for the Quarter ended June 30, 2007
Table of Contents
Page
Part I - Financial Information
Item 1 Financial Statements 3
Item 2 Management's Discussion and Analysis or Plan of Operation 21
Item 3 Controls and Procedures 24
Part II - Other Information
Item 1 Legal Proceedings 25
Item 2 Recent Sales of Unregistered Securities and Use of Proceeds 25
Item 3 Defaults Upon Senior Securities 27
Item 4 Submission of Matters to a Vote of Security Holders 27
Item 5 Other Information 27
Item 6 Exhibits 27
Signatures 27
Part I
Item 1 - Financial Statements
American Ammunition, Inc. and Subsidiaries
Consolidated Balance Sheets
June 30, 2007 and 2006
(Unaudited)
(Restated)
June 30, 2007 June 30, 2006
------------- -------------
ASSETS
Current Assets
Cash on hand and in bank $ 141,989 $ 250,413
Accounts receivable - trade, net of allowance for
doubtful accounts of $-0- and $10,000, respectively 301,490 241,954
Inventory 350,350 426,676
Prepaid interest 226,169
Prepaid expenses 87,700 55,324
------------- -------------
Total Current Assets 881,529 1,200,536
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Property and Equipment - at cost - -
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Other Assets 208,765 294,424
------------- -------------
TOTAL ASSETS $ 1,090,294 $ 1,494,960
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current Liabilities
Working capital advance $ - $ 200,000
Convertible debenture - 226,365
Customer deposits 134,637 188,020
Accounts payable - trade 725,155 804,847
Accrued Federal excise taxes payable 23,563 -
Accrued salaries and wages 488,904 337,648
Accrued interest payable 74,650 30,162
Accrued dividends payable 88,228 71,221
------------- -------------
Total Current Liabilities 1,535,137 1,858,263
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Long-Term Liabilities
Notes payable to stockholders 1,075,000 1,075,000
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Derivative liability from note conversion features 3,146,963 3,229,770
------------- -------------
Total Long-Term Liabilities 4,221,963
------------- -------------
Total Liabilities 5,757,100 6,163,033
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Commitments and Contingencies
Stockholders' Equity (Deficit)
Preferred stock - $0.001 par value
20,000,000 shares authorized.
2,004,562 and 2,072,902 shares issued and outstanding, respectively 2,004 2,072
Common stock - $0.001 par value.
300,000,000 shares authorized.
23,029,320 and 5,122,931 shares issued and outstanding, respectively 23,029 5,123
Additional paid-in capital 33,709,835 26,039,482
Accumulated other comprehensive loss (2,652,018)
Accumulated deficit (35,851,615) (27,887,732)
------------- -------------
(4,494,340) (4,493,073)
Stock subscription receivable - (175,000)
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Total Stockholders' Equity (Deficit) (4,494,340) (4,668,073)
------------- -------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 1,262,760 $ 1,494,960
============= =============
The financial information presented herein has been prepared by management
without audit by independent certified public accountants.
The accompanying notes are an integral part of these consolidated financial
statements.
3
American Ammunition, Inc. and Subsidiaries
Consolidated Statements of Operations and Comprehensive Income (Loss)
Six and Three months ended June 30, 2007 and 2006
(Unaudited)
(Restated) (Restated)
Six months Six months Three months Three months
ended ended ended ended
June 30, 2007 June 30, 2006 June 30, 2007 June 30, 2006
------------- ------------- ------------- -------------
Revenues $ 1,390,377 $ 1,379,497 $ 699,988 $ 669,386
------------- ------------- ------------- -------------
Cost of Sales
Materials, Direct Labor
and other direct costs 1,733,467 2,012,170 857,704 665,089
Depreciation 41,376 31,024 - -
------------- ------------- ------------- -------------
Total Cost of Sales 1,774,843 2,043,194 857,704 665,089
------------- ------------- ------------- -------------
Gross Profit (384,466) (663,697) (157,716) 4,297
------------- ------------- ------------- -------------
Operating Expenses
Research and development expenses 567 - - -
Selling and marketing expenses 40,726 74,075 8,354 18,258
Other operating expenses 439,532 852,390 155,193 477,482
Interest expense 72,0665 302,789 44,063 152,460
Depreciation and amortization 27,569 27,569 13,784 13,784
------------- ------------- ------------- -------------
Total Operating Expenses 580,460 1,256,823 221,394 661,984
------------- ------------- ------------- -------------
Loss from Operations (964,926) (1,920,520) (63,678) (657,687)
Other Income (Expense)
Interest and other income 30,091 189,492 30,002 147,935
------------- ------------- ------------- -------------
Income (Loss) before Income Taxes (995,017) (1,731,028) (33,676) (509,752)
Provision for Income Taxes - - - -
------------- ------------- ------------- -------------
Net Income (Loss) (995,017) (1,731,028) (33,676) (509,752)
Other Comprehensive Income
Change in derivative related
to note conversion 1,910,578 (2,694,571) (491,681) 54,379
------------- ------------- ------------- -------------
Comprehensive Income (Loss) $ 915,561 $ (4,425,599) $ (525,357) $ (455,373)
============= ============= ============= =============
Preferred Stock Dividends (26,134) (43,492) (13,094) (31,440)
------------- ------------- ------------- -------------
Net Loss available to
Common Shareholders $ (1,021,151) $ (1,774,520) $ (46,770) $ (541,192)
============= ============= ============= =============
Loss per weighted-average share of
common stock outstanding,
computed on net loss -
basic and fully diluted $ (0.04) $ (0.39) $ (0.00) $ (0.11)
============= ============= ============= =============
Weighted-average number of
common shares outstanding 23,021,823 4,537,640 23,027,997 4,797,286
============= ============= ============= =============
The financial information presented herein has been prepared by management
without audit by independent certified public accountants.
The accompanying notes are an integral part of these consolidated financial
statements.
4
American Ammunition, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
Six months ended June 30, 2007 and 2006
(Unaudited)
(Restated)
Six months Six months
ended ended
June 30, 2006 June 30, 2005
------------- -------------
Cash flows from operating activities
Net loss for the year $ (995,017) $ (1,731,028)
Adjustments to reconcile net loss to
net cash provided by operating activities
Depreciation and amortization 97,678 311,731
Bad debt expense - 14,153
Operating expenses paid with common stock - 20,186
Consulting expense related to common stock sales
at less than air value - 139,373
Gain on disposition of fixed assets (30,000) -
(Increase) Decrease in
Accounts receivable 95,148 315,320
Inventory 159,754 133,414
Prepaid expenses, deposits and other (107,365) 1,465
Increase (Decrease) in
Accounts payable - trade (10,106) (41,770)
Other accrued expenses (220,503) 91,719
Accrued interest payable 39,863 40,494
Customer deposits (55,203) (44,670)
------------- -------------
Net cash used in operating activities (1,025,751) (749,613)
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Cash flows from investing activities
Purchase of property and equipment (41,376) (31,024)
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Net cash used in investing activities (41,376) (31,024)
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Cash flows from financing activities
Cash advanced on loans from stockholders - 100,000
Cash received on working capital advance - 50,000
Cash received from the sale of preferred stock - 100,000
Cash received from sale of common stock - -
Cash paid to acquire capital - (50,000)
------------- -------------
Net cash provided by financing activities - 600,000
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Increase (Decrease) in Cash (1,067,127) (180,637)
Cash at beginning of year 1,209,116 431,050
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Cash at end of period $ 141,989 $ 250,413
============= =============
Supplemental disclosure of interest and income taxes paid
Interest paid for the period $ 3,470 $ 9,157
============= =============
Income taxes paid for the period $ - $ -
============= =============
Supplemental disclosure of non-cash investing and financing activities
Conversion of debt and/or accrued interest payable into common stock $ - $ 36,720
============= =============
Common stock issued in payment for costs of raising capital $ - $ -
============= =============
Common stock issued in payment of accrued dividends
on Preferred Stock - Series B $ 8,542 $ -
============= =============
The financial information presented herein has been prepared by management
without audit by independent certified public accountants.
The accompanying notes are an integral part of these consolidated financial
statements.
5
American Ammunition, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
June 30, 2007 and 2006
Note A - Organization and Description of Business
American Ammunition, Inc. (AAI or Company) was incorporated on February 1, 2000
in accordance with the Laws of the State of California. The Company functions as
a holding company providing management oversight services to it's wholly-owned
operating subsidiaries; F&F Equipment, Inc. and Industrial Plating Enterprise
Co.
F&F Equipment, Inc.(F&F) was incorporated on October 4, 1983 in accordance with
the Laws of the State of Florida. F&F is engaged in the design, manufacture and
international sales of small arms ammunition. F&F has conducted its business
operations under the assumed name of "American Ammunition" since its inception.
Industrial Plating Enterprise Co. (IPE), which was incorporated and commenced
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
small arms 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. All activities of IPE since it's inception were dedicated solely to
the needs and demands of F&F. During the 2nd quarter of 2007, the Company closed
the operations of this entity, disposed of related fixed assets as per
environmental requirements. The company may have a continuing obligation or
liability related to this portion of the Company's manufacturing process.
On January 9, 2006, by written consent in lieu of meeting, a majority of the
Company's stockholders approved a recommendation by the Company's Board of
Directors to effect a one share for twenty shares reverse stock split of our
common stock, par value $.001 per share, with fractional shares rounded up to
the nearest whole share. The reverse split became effective on that date. As a
result of the reverse split, the total number of issued and outstanding shares
of the Company's common stock decreased from 92,576,839 to 4,629,381shares,
after giving effect to rounding for fractional shares. The effect of this action
is reflected in the Company's financial statements as of the first day of the
first period presented.
Note B - Preparation of Financial Statements
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
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, 2006. The information presented within these interim financial
statements may not include all disclosures required by generally accepted
accounting principles 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.
6
American Ammunition, Inc. and Subsidiaries
Notes to Consolidated Financial Statements - Continued
June 30, 2007 and 2006
Note B - Preparation of Financial Statements - Continued
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, 2007.
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.
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 - Going Concern Uncertainty
The Company continues to experience fluctuating periodic revenues, as
demonstrated in Note P. The Company's operations consistently demonstrate a
negative cash flow position as evidenced by net cash used in operating
activities of approximately $(1,716,000), $(1,802,000), $(649,000),
$(2,918,000), $(1,236,000) and $(1,100,000) for each of the respective years
ended December 31, 2006, 2005, 2004, 2003, 2002 and 2001.
The Company has sustained liquidity through the sale of equity securities,
restricted and unrestricted, domestically and in international markets and
significant working capital advances have been made by members of management
and/or existing shareholders. Future liquidity may be dependent upon future
offerings of debt and/or equity securities; however, the availability of further
liquidity from these sources is uncertain.
The Company's continued existence is principally dependent upon its ability to
generate sufficient cash flows from operations to support its daily operations
on a timely basis. There is no assurance that the Company will be able to obtain
raw materials in sufficient quantity, due to its financial condition, to ensure
success of its business plan. Further the ability to obtain additional funding
through the sales of additional equity securities or, that such funding, if
available, will be obtained on terms favorable to or affordable by the Company
is uncertain.
The Company anticipates that additional working capital will be necessary to
support and preserve the integrity of the corporate entity. However, there is no
assurance that the Company will be able to obtain additional funding through
either bank lines-of-credit or the sale of additional equity securities or, that
such funding, if available, will be obtained on terms favorable to or affordable
by the Company.
If no additional operating capital is received during the next twelve months,
the Company will be forced to rely on existing cash in the bank, the cash
generated from operating activities and/or additional funds loaned by the
Company's management and/or shareholders to preserve the integrity of the
corporate entity. In the event, the Company is unable to acquire advances from
management and/or significant stockholders, the Company's ongoing operations
would be negatively impacted to the point that all operating activities are
ceased.
While the Company is of the opinion that good faith estimates of the Company's
ability to secure additional capital in the future to reach our goals have been
made, there is no guarantee that the Company will receive sufficient funding to
sustain operations or implement any future business plan steps.
7
American Ammunition, Inc. and Subsidiaries
Notes to Consolidated Financial Statements - Continued
June 30, 2007 and 2006
Note D - 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, "as-is" 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 and the Company
has no remaining performance obligations related to the sale. The Company
sells all products with "no right of return" by the purchaser for any
factor other than defects in the product's production.
On rare occasion, the Company may elect to accept product returns from
customers on a case-by-case basis to offset unpaid accounts receivable.
These situations are a "last case" scenario and are initiated by senior
management through negotiations with the respective customer.
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.
In November 2004, Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("Statement") No. 151,
"Inventory Costs - an amendment of Accounting Research Bulletin No. 43,
Chapter 4." Statement No. 151 requires that abnormal amounts of costs,
including idle facility expense, freight, handling costs and spoilage,
should be recognized as current period charges. The provisions of this
Statement became effective for inventory costs incurred during fiscal years
beginning after June 15, 2005. Statement No. 151 was adopted the Company on
January 1, 2006. There was no material impact resulting from the adoption
of Statement No. 151 on the Company's financial statements.
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.
8
American Ammunition, Inc. and Subsidiaries
Notes to Consolidated Financial Statements - Continued
June 30, 2007 and 2006
Note D - Summary of Significant Accounting Policies - Continued
5. Income Taxes
The Company uses the asset and liability method of accounting for income
taxes. At June 30, 2007 and 2006, 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 June 30, 2007 and 2006, the deferred tax asset related to the
Company's net operating loss carryforward is fully reserved. The Company's
net operating loss carryforwards, if not fully utilized, began to expire at
December 31, 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.
As of June 30, 2007 and 2006, and subsequent thereto, the Company had no
options outstanding. The outstanding warrants, mandatory convertible
preferred stock and mandatory convertible debentures are anti-dilutive due
to the Company's net operating loss position.
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.
8. Pending and/or New Accounting Pronouncements
The Company is of the opinion that any pending accounting pronouncements,
either in the adoption phase or not yet required to be adopted, will not
have a significant impact on the Company's financial position or results of
operations.
Note E - 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.
9
American Ammunition, Inc. and Subsidiaries
Notes to Consolidated Financial Statements - Continued
June 30, 2007 and 2006
Note E - Fair Value of Financial Instruments - Continued
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 F - Inventory
As of June 30, 2007 and 2006, inventory, as valued using the lower-of-cost or
market, consisted of the following components:
June 30, June 30,
2007 2006
---------- -----------
Raw materials $ 267,443 $ 398,511
Work in process 57,896 19,313
Finished goods 25,011 8,852
---------- -----------
Totals $ 350,350 $ 425,337
========== === =======
Note G - Property and Equipment
Property and equipment consist of the following components:
June 30, June 30, Estimated
2007 2006 useful life
------------ ------------ -------------
Manufacturing equipment $ 7,752,656 $ 7,939,335 3-10 years
Office furniture and fixtures 71,437 69,889 3- 7 years
Leasehold improvements 184,939 190,277 8-20 years
------------ ------------
8,009,032 8,199,501
Accumulated depreciation (5,561,851) (5,575,782)
Impairment of recoverability
of carrying value (2,447,181) (2,623,719)
------------ ------------
Net property and equipment $ - $ -
============ ============
Total depreciation expense charged to operations for each of the six month
periods ended June 30, 2007 and 2006, respectively, was approximately $41,376
and $31,024.
In accordance with Statement of Financial Accounting Standards No. 144,
"Accounting for the Impairment or Disposal of Long-Lived Assets", the Company
follows the policy of evaluating all property and equipment as of the end of
each reporting quarter. Pursuant to the requirements of this accounting
standard, there were no impairments for the future recoverability of these
assets during either of the six month periods ended June 30, 2007 and 2006.
10
American Ammunition, Inc. and Subsidiaries
Notes to Consolidated Financial Statements - Continued
June 30, 2007 and 2006
Note H - Loans from Shareholders
June 30, June 30,
2007 2006
------------- ------------
Notes payable to three separate stockholders. Interest at
8.0%, payable monthly. Principal due at maturity on December
31, 2008. Shareholder/lender has the option to convert the
principal amount into common stock of the Company at the
lesser of 66-2/3% of the average closing bid and ask price
on the date of conversion or $0.07 per share, whichever is
less. Each note is unsecured. $ 1,075,000 $ 1,075,000
============= ============
Note I - Federal Excise Taxes Payable
On March 29, 2007, the Company reached a settlement and executed a Payment
Agreement with the Department of the Treasury, Bureau of Alcohol, Tobacco and
Firearms, related to a audit, which commenced during 2006, of the Company's
Federal Excise Taxes obligation. The Department of Treasury, Bureau of Alcohol,
Tobacco and Firearms ratified and affirmed this settlement in writing on April
4, 2007. The Payment Agreement calls for the Company to pay an aggregate total
of $300,000, plus interest at the statutory rate starting on March 29, 2007.
This obligation was fully accrued in the Company's financial statements as of
December 31, 2006.
The Company paid this obligation in full during the quarter ended June 30, 2007
for approximately $303,470 cash, including approximately $3,470 in accrued
interest. To the best of the Company's knowledge, there are no continuing
liabilities or obligations related to this situation.
Note J - Convertible Debenture
On October 4, 2002, the Company entered into a Securities Purchase Agreement
with La Jolla Cove Investors, Inc. ("La Jolla") for the sale of (I) $250,000 in
convertible debentures and (ii) warrants to buy 30,000,000 shares of the
Company's common stock. On March 13, 2003 and May 6, 2003, La Jolla advanced an
aggregate of $350,000 to our company, which such funding was allocated towards
the principal balance of our convertible debentures.
As of September 30, 2006, the outstanding balance on the La Jolla convertible
debenture has been retired. A recap of the debenture activity is as follows:
Debenture Warrant
(in dollars) (in shares)
----------- -----------
Initial amount $ 600,000 6,000,000
2003 redemptions (208,635) (2,086,350)
2004 redemptions (125,000) (1,250,000)
2005 redemptions (40,000) (400,000)
2006 retirement (226,365) (2,263,650)
----------- -----------
Balances outstanding at September 30, 2006 $ - -
=========== ===========
In addition to retiring the debenture, the Company repaid $200,000 in prepaid
warrant exercises and approximately $158,635 in negotiated prepayment and
penalty fees for an aggregate payment of $585,000.
11
American Ammunition, Inc. and Subsidiaries
Notes to Consolidated Financial Statements - Continued
June 30, 2007 and 2006
Note J - Convertible Debenture-Continued
Additionally, the Company recognized a charge to operations, including the
aforementioned $158,635 cash payment, of approximately $354,450 for the issuance
of 56,003 shares of common stock to La Jolla and the forgiveness of $175,000 in
monies due from La Jolla for common stock issued on warrant exercises in prior
periods.
On September 13, 2006, La Terraza Trading and Asset Management Ltd. ("Investor")
deposited a total of $2,150,000 in escrow for the use and benefit of the
Company. The escrow deposit was for the following:
1. The sum of $585,000 was paid to La Jolla Cove Investors, Inc. ("La Jolla")
to acquire for Investor a full and complete assignment of any and all of La
Jolla's right, title and interest in any and all of AAMU indebtedness to La
Jolla and specifically including La Jolla's rights under the active SB-2
Registration Statement for the issuance and registration of securities
thereunder; the consent of AAMU to the foregoing subject to the right of
AAMU to prepay any and all indebtedness thereunder in AAMU common stock,
without penalty, at any time before or after default.
2. The sum of $275,000 to be used by AAMU to redeem and satisfy in full the
Series E Preferred Stock funded by third party investors on or about July
12, 2006, including a prepayment redemption penalty of $25,000.
3. The sum of $215,000 payable as fees to Capital Investment Services, Inc.
("CIS") for locating, negotiating and closing the funding.
4. The sum of $100,000 to repay in full, without interest, an unsecured bridge
loan from Investor to AAMU dated and funded on August 25, 2006.
5. The sum of $275,000 released to AAMU for working capital.
6. The balance of $700,000, to be retained in escrow and disbursed to AAMU for
payment in reduction of the assigned La Jolla debenture and required
warrant exercised thereunder, until the debenture and warrant obligations
are satisfied in full in accordance with the terms of the assigned La Jolla
documents.
The financing transaction requires AAMU to deposit in escrow with CIS for later
delivery a total of 11,470,000 shares of its common stock (to be held as
unissued and not outstanding) to guarantee availability of stock as required for
the reduction of the debenture and satisfaction of warrant obligations. Escrow
agreement calls for Escrow Agent to release such shares for delivery in
accordance with the terms of the pending SB-2 Registration Statement of AAMU
currently on file with the SEC and in accordance with the terms and conditions
of the Financing Agreement dated September 2006 entered into between AAMU and
the Investor, and only after reasonable notification thereof to AAMU prior to
delivery of any such certificates. Disbursement and distribution of shares shall
only be made in accordance with the terms of the applicable SB-2 registration.
The Investor and/or the selling stockholder has contractually agreed to restrict
its ability to convert or exercise its warrants and receive shares of AAMU
common stock such that the number of shares held by them and their affiliates
after such conversion or exercise does not exceed 4.9% of the then issued and
outstanding shares of common stock. The agreement also calls for an additional
5,000,000 shares of the restricted common stock of AAMU to be deposited in a
separate escrow to be used for any other expenses and compensation to third
parties that may be agreed upon between Investor and AAMU for future services to
advance the overall business of AAMU. In addition AAMU granted Investor 600,000
warrants exercisable at the lesser of $0.1875 per share or the average closing
price per share for the common stock during the twelve (12) month period prior
to the date of exercise, such warrants exercisable at any time on or before five
(5) years from and after July 24, 2006. All shares required to be deposited into
escrowed have in fact been deposited in escrow on September 26, 2006 as
required.
The Investor provided additional funding in the amount of $1,000,000 to AAMU on
December 21, 2006 for an additional 5,333,335 shares. The sum of $100,000 was
paid as fees to CIS for locating, negotiating and closing the additional
funding. All other terms and conditions of the escrow agreement and related
financing agreement, including in corporation of the terms of the SB-2
requirements, remain the same.
12
American Ammunition, Inc. and Subsidiaries
Notes to Consolidated Financial Statements - Continued
June 30, 2007 and 2006
Note J - Convertible Debenture-Continued
We have included additional disclosure under Part II, Item 5, regarding La
Terraza's breaches of the agreement, and possible securities laws violations by
La Terraza.
Discussion of retired debenture
The debentures bore interest at 8% and were scheduled to mature on June 31
[sic], 2007, and were convertible into the Company's common stock, at the
selling stockholder's option. The convertible debentures were convertible into
the number of the Company's shares of common stock equal to the principal amount
of the debentures being converted multiplied by 11, less the product of the
conversion price multiplied by 10 times the dollar amount of the debenture. The
conversion price for the convertible debentures is the lesser of (I) $1.00 or
(ii) seventy six percent of the average of the five lowest volume weighted
average prices during the twenty (20) trading days prior to the conversion.
Accordingly, there is in fact no limit on the number of shares into which the
debenture may be converted. However, in the event that our market price is less
than $0.30 per share, the Company will have the option to prepay the debenture
at 125% rather than have the debenture converted. In addition, the selling
stockholder is obligated to exercise the warrant concurrently with the
submission of a conversion notice by the selling stockholder. As of December 31,
2006, the warrant has been cancelled due to the repayment and final settlement
on the convertible debenture.
In December 2004, we entered into an addendum to the convertible debenture and
warrant whereby the Company agreed to the following:
* the discount multiplier was reduced from eighty percent to seventy six
percent;
* within five business days after this registration statement being declared
effective, La Jolla is required to submit a debenture conversion in the
amount of $10,000 and every ten business days thereafter La Jolla shall
submit three additional debenture conversions in the amount of $10,000
each;
* within five business days after this registration statement being declared
effective, La Jolla shall wire $400,000 to us as a prepayment towards the
exercise of its warrant; and
* immediately following the sale of all shares held by La Jolla in connection
with the debenture conversions in the aggregate amount of $40,000, La Jolla
shall wire $275,000 to us as a prepayment towards the exercise of its
warrant and shall submit a debenture conversion in the amount of $6,250 on
the first business day of each month until the debenture is no longer
outstanding.
In May 2005, we entered into an additional addendum to the convertible debenture
and warrant whereby the Company agreed to the following:
* The Company shall deposit 4,000,000 unregistered shares in the name of
LaJolla with the Company's Escrow Agent and, upon confirmation of receipt,
LaJolla will wire the Company $150,000 as an advance on the $400,000 amount
that LaJolla was obligated to fund pursuant to the December 2004 Addendum.
In the event that the Company's Registration Statement was not declared
effective within nine (9) months of the date of this Addendum, the
4,000,000 shares in escrow will be released to LaJolla and sold by LaJolla
pursuant to Rule 144. If LaJolla sells these shares for net sales proceeds
of more than $150,000 (without interest accruing on this amount), the
excess over $150,000 will be refunded to the Company.
* The maturity date of the convertible debenture and warrant was extended to
June 31, [sic], 2007.
* All other terms and conditions remain in full force and effect.
LaJolla has contractually agreed to restrict its ability to convert or exercise
its warrants and receive shares of our common stock such that the number of
shares of common stock held by them and their affiliates after such conversion
or exercise does exceed 4.9% of the then issued and outstanding shares of common
stock.
13
American Ammunition, Inc. and Subsidiaries
Notes to Consolidated Financial Statements - Continued
June 30, 2007 and 2006
Note J - Convertible Debenture-Continued
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 December 31, 2003, the Debenture Holder elected to
convert an aggregate $208,635, through 24 separate transactions, in outstanding
Debenture principal into restricted, unregistered common stock. This election
caused the Company to issue 4,561,753 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 2,086,350 shares of the Company's restricted, unregistered common stock
for gross proceeds of $2,086,350.
On various dates between January 1, 2004 and December 31, 2004, the Debenture
Holder elected to convert an aggregate $125,000, through 6 separate
transactions, in outstanding Debenture principal into registered common stock.
This election caused the Company to issue 4,150,000 shares of 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 1,250,000 shares of the Company's common stock for gross proceeds of
$1,250,000. As of December 31, 2004, an aggregate of 1,000,000 shares of the
Company's common stock have been issued by the Company and are being held in
escrow by the Company's counsel pending receipt of the final $175,000 from the
Debenture Holder. As of December 31, 2005, this amount remains unpaid.
On various dates between June 28, 2005 and August 10, 2005, the Debenture Holder
elected to convert an aggregate $40,000, through 4 separate transactions, in
outstanding Debenture principal into registered common stock. This election
caused the Company to issue 5,872,048 shares of 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 400,000
shares of the Company's common stock for gross proceeds of $400,000.
As of December 31, 2006, the Company has no continuing obligation under the
convertible debenture and attached warrant.
Note K - Derivative Liability arising from Warrants
The Company accounts for debt with embedded conversion features and warrant
issues in accordance with EITF 98-5: "Accounting for convertible securities with
beneficial conversion features or contingency adjustable conversion" and EITF
No. 00-27: "Application of issue No 98-5 to certain convertible instruments".
Conversion features determined to be beneficial to the holder are valued at fair
value and recorded to additional paid in capital. The Company determines the
fair value to be ascribed to the detachable warrants issued with the convertible
debentures utilizing the Black-Scholes method. Any discount derived from
determining the fair value to the debenture conversion features and warrants is
amortized to financing cost over the life of the debenture. The unamortized
discount, if any, upon the conversion of the debentures is expensed to financing
cost on a pro rata basis.
Debt issues with the variable conversion features are considered to be embedded
derivatives and are accountable in accordance with FASB 133; "Accounting for
Derivative Instruments and Hedging Activities". The fair value of the embedded
derivative is recorded to derivative liability. This liability is required to be
marked each reporting period. The resulting discount on the debt is amortized to
interest expense over the life of the related debt.
14
American Ammunition, Inc. and Subsidiaries
Notes to Consolidated Financial Statements - Continued
June 30, 2007 and 2006
Note L - Common Stock Transactions
On January 9, 2006, by written consent in lieu of meeting, a majority of the
Company's stockholders approved a recommendation by the Company's Board of
Directors to effect a one share for twenty shares reverse stock split of our
common stock, par value $.001 per share, with fractional shares rounded up to
the nearest whole share. The reverse split became effective on that date. As a
result of the reverse split, the total number of issued and outstanding shares
of the Company's common stock decreased from 92,576,839 to 4,629,381shares,
after giving effect to rounding for fractional shares. The effect of this action
is reflected in the Company's financial statements as of the first day of the
first period presented.
In April 2007, the Company issued approximately 269,934 shares of restricted,
unregistered common stock, valued at approximately $21,595, to an existing
stockholder as for payment of accrued interest associated with approximately
$975,000 short-term working capital loans to the Company and reimbursement of
various operating expenses paid in cash on behalf of the Company. 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 April 2007, the Company issued an aggregate 10.948 shares of restricted,
unregistered common stock in payment of approximately $3,668 in accrued
dividends payable on the Company's outstanding Series B Preferred Stock for the
quarter ended March 31, 2007. 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 - Contingent Liability
The Company and the Miami-Dade County Property Appraiser are in negotiations
related to an audit of the Company's Tangible Personal Property assessments for
the years ended December 31, 2002, 2003, 2004 and 2005. The Company is
cooperating fully with all requests and is aggressively challenging all claims
and using all defenses available to it. The ultimate outcome, and impact on the
Company's financial statements, is not readily determinable at this time.
During the 2nd quarter of 2007, the Company closed the operations of IPE,
disposed of related fixed assets as per environmental requirements. The company
may have a continuing obligation or liability related to this portion of the
Company's manufacturing process.
Note N - Employment Contracts
During the quarter ended June 30, 2007, the Company executed employment
contracts with Emilio Jara, who is a current employee, member of management and
stockholder of the Company and Joe Fernandez, Jr., who is a current employee and
brother of the Company's Chief Executive Officer and son of the Company's
Chairman of the Board, to formalize their employment and significance to the
Company's production activities. Mr. Jara and Mr. Fernandez, Jr. will each
receive an increase in compensation to $75,000 annually, plus normal and
customary benefits. Through June 30, 2007, Mr. Jara and Mr. Fernandez, Jr. are
continuing to be paid in cash at the weekly pay rate in place immediately prior
to the execution of the related employment contract and the difference between
the paid cash compensation and the contractual amount has been accrued in the
accompanying financial statements.
(Remainder of this page left blank intentionally)
15
Item 2 - Management's Discussion and Analysis or Plan of Operation
Caution Regarding Forward-Looking Information
Certain statements contained in this Registration Statement 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 on Form 10-QSB
and investors in our equity securities 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.
Restatement issues
The June 30, 2006 financial statements have been restated to account for
the derivative liability that was incurred in connection with the common stock
conversion features and the warrants issued with certain notes payable.
The Company accounts for debt with embedded conversion features and warrant
issues in accordance with EITF 98-5: "Accounting for convertible securities with
beneficial conversion features or contingency adjustable conversion" and EITF
No. 00-27: "Application of issue No 98-5 to certain convertible instruments".
Conversion features determined to be beneficial to the holder are valued at fair
value and recorded to additional paid in capital. The Company determines the
fair value to be ascribed to the detachable warrants issued with the convertible
debentures utilizing the Black-Scholes method. Any discount derived from
determining the fair value to the debenture conversion features and warrants is
amortized to financing cost over the life of the debenture. The unamortized
discount, if any, upon the conversion of the debentures is expensed to financing
cost on a pro rata basis.
Debt issues with the variable conversion features are considered to be
embedded derivatives and are accountable in accordance with FASB 133;
"Accounting for Derivative Instruments and Hedging Activities". The fair value
of the embedded derivative is recorded to derivative liability. This liability
is required to be marked each reporting period. The resulting discount on the
debt is amortized to interest expense over the life of the related debt.
General
American Ammunition, Inc. is a holding company with two operating
subsidiaries: F&F Equipment, Inc. and Industrial Plating Enterprise Co.
F&F Equipment, Inc. (F&F) was incorporated on October 4, 1983 under the
laws of the State of Florida. F&F 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."
16
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 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. All of the activities of IPE
since it's inception were dedicated solely to the needs and demands of F&F.
During the 2nd quarter of 2007, management elected to outsource this operation
and closed the operations of this entity through the sale of the related fixed
assets and cleaning of the leased facility in accordance with the terms and
conditions of the lease agreement, under the supervision of and approval of the
appropriate governmental oversight agencies.
Results of Operations
Six months ended June 30, 2007 compared with the six months ended June 30, 2006.
During the six months ended June 30, 2007, we experienced aggregate net
revenues of approximately $1,390,000 (approximately $700,000 in the current
quarter) as compared to approximately $1,379,000 (approximately $669,000
corresponding to the current quarter).
We experienced costs of goods sold of approximately $1,775,000
(approximately $858,000 in the current quarter) for the six months ended June
30, 2007 as compared to approximately $2,043,000 (approximately $665,000
corresponding to the current quarter) for the six months ended June 30, 2006.
We have expanded our product line during the last quarter of 2006 and the
first quarter of 2007 as we have identified a market demand for additional rifle
cartridges and "cowboy action shooting" calibers. We continue to experience
strong interest and/or demand and are continue to receive larger orders for
these products, our current volumes cause production delays in managing our
production tooling setups to produce all of the products in our catalog. We
continue to believe that our order quantities will increase to a level to allow
for more efficient utilization of our production capacities.
The various raw materials that are integral components of our manufacturing
processes are currently subject to rapidly increasing pressures caused by
foreign demand, limitations on mining/production and commodity market
speculation for both our costs and the overall availability of these resources.
We are experiencing direct pressure in the marketplace for the brass component
of our ammunition manufacture by recent orders for copper placed by the People's
Republic of China. We have also experienced periodic limitations or allocations
on the availability of lead for projectile manufacture due to increased demand
for this commodity and limitations on the opening of new domestic mines for lead
due to various Federal and State environmental laws and regulations. In
conjunction with the large order for raw copper placed by the Chinese, the
marketplace has experienced a substantial increase in futures speculation on
this and other comparable commodities in the financial exchanges. Further, we
experience competition for raw materials from our competitors that are better
funded and have earned priority status among our suppliers.
We are also experiencing the effect of rapidly increasing energy costs, not
only in our own plant; but, in the costs of our raw materials and supplies being
purchased from other vendors that are forced to pass these costs through to
their customers, including us.
All of these discussed factors are causing significant fluctuation in the
prices that we must pay for our raw materials that may or may not be able to be
passed through to our customers through price increases. Our management is
monitoring both the cost side of this equation and the availability of price
increases to our customers and to their end-users. The balancing of these events
is highly unpredictable and uncertain as we go forward into future periods.
We are aware that a major manufacturer of ammunition, and one of our
competitors, ATK, has advised its customers in writing of a pending 15.0% price
increase in all small arms ammunition. Our management is currently studying the
impact of this action by our competitor on the marketplace and the possible
impact on our operations.
17
During 2006 and 2005, we experienced negative trends off of our standard
production costs for material and labor due to difficulties in employee turnover
and the related training requirements, adding new products to our catalog and
lower than expected orders due to uncontrollable delays in ordering by various
U. S. Governmental entities. Management is of the opinion that the production
labor force is relatively stable and able to maintain a constant standard of
quality for future periods. At the present time, our payroll burden averages
approximately $20,000 per week in cash resources, inclusive of officer salaries,
payroll taxes and workers compensation insurance coverage.
In the second quarter of 2006, management took drastic steps to reduce
excess labor capacity through the elimination of the 2nd shift, which was never
able to reach full utilization. This action is not expected to have any adverse
impact on our ability to meet our existing and future product demands.
We have recognized depreciation expense on production equipment of
approximately $41,300 and $31,000, respectively, in the above cost of goods
expense totals. These depreciation levels are anticipated to fluctuate nominally
in future periods based upon either the full depreciation of older equipment
and/or the addition of new equipment to expand capacity.
For the respective six month periods ended June 30, 2007 and 2006,
respectively, we generated a negative gross profit of approximately $(384,000)
or approximately (27.65%), and approximately $(664,000) or approximately
(48.11%). While we continue to maintain a backlog of orders and future order
commitments from retail customers, distributors and/or governmental agencies, we
anticipate that we should be able to generate a positive gross profit in future
periods; however, there are no guarantees or any certainty that this will occur.
We experienced nominal research and development expenses of approximately
$600 and $-0-, during each of the six month periods ended June 30, 2007 and
2006, principally related to research related to the potential expansion of our
product line.
In 2004, the Company initiated a direct solicitation program for a "dealer
direct" sales program. This endeavor has received a very positive response from
the qualified retail resellers of our products. However, we are realizing that
the existence of previously announced contracts with various U. S. Governmental
agencies and orders from foreign governments are becoming more erratic in their
order placements. Accordingly, management is realizing that a consistent demand
from the U. S. retail segment will be our best source of consistent sales.
Further, we have identified certain production issues which has inhibited the
full realization of existing product demands and management believes that the
necessary steps are being taken to remedy any production deficiencies.
During the six months of 2007 and 2006, we expended approximately $41,000
and $74,000, respectively, in advertising and marketing expenses, principally in
continuing the promotion and expansion of 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 declined to approximately
$612,000 for the six months ended June 30, 2007 from approximately $852,000 for
the six months ended June 30, 2006. The six months ended June 30, 2006 includes
a charge of approximately $139,000 for consulting expense related to common
stock sales at less than "fair value". After compensating for this non-cash
charge, the Company's general and administrative expenditure levels are
comparable at approximately $612,000 and $713,000, respectively.
Management is of the opinion that these costs are relatively stable and
should not experience significant increases except for inflationary pressures
caused principally by increases in energy costs which are affecting all
businesses in all sectors of the U. S. economy.
We recognized a net loss of approximately $(1,097,000) and $(1,731,000) for
the respective six month periods ended June 30, 2007 and 2006, respectively, or
$(0.05) and $(0.39) per share.
18
Liquidity And Capital Resources
As of June 30, 2007, December 31, 2006 and June 30, 2006, respectively, we
had working capital of approximately $(491,000), $684,000 and $(658,000). Our
working capital position continues to fluctuate based on collections on our
trade accounts receivable. We anticipate that we have sufficient inventory
levels to support our order demand and have access to raw material suppliers
that will enable us to receive raw materials for future periods. We also note
that at the end of 2006, we renegotiated $1,075,000 in notes payable to existing
shareholders to long-term status with renewed maturity dates of December 31,
2008. Due to these relationships, these notes may or may not be renegotiated,
repaid in common stock of the Company or otherwise reclassified prior to their
maturity on December 31, 2008.
We have used cash in operating activities of approximately $(1,025,000) and
$(750,000) during the six month periods ended June 30, 2007 and 2006,
respectively. Due to our history of operating losses, our resources for
additional working capital are becoming more scarce.
We anticipate that our liquidity position will continue to improve as
management is of the opinion that, with the current changes to our production
capacity, the Company will be in a position to better support all existing
orders and accept existing and future inquiries.
During each of the respective six month periods ended June 30, 2007 and
2006, respectively, we added approximately $41,000 and $31,000 in new equipment.
Any equipment to be added in future periods is fully dependent upon the
Company's cash position, the availability of either new equity or debt capital
and the ultimate realization of communicated future product sales demand.
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.
During the quarter ended June 30, 2007, the Company executed employment
contracts with Emilio Jara, who is a current employee, member of management and
stockholder of the Company and Joe Fernandez, Jr., who is a current employee and
brother of the Company's Chief Executive Officer and son of the Company's
Chairman of the Board, to formalize their employment and significance to the
Company's production activities. Mr. Jara and Mr. Fernandez, Jr. will each
receive an increase in compensation to $75,000 annually, plus normal and
customary benefits. Through June 30, 2007, Mr. Jara and Mr. Fernandez, Jr. are
continuing to be paid in cash at the weekly pay rate in place immediately prior
to the execution of the related employment contract and the difference between
the paid cash compensation and the contractual amount has been accrued in the
accompanying financial statements.
Item 3 - Controls and Procedures
(a) Evaluation of Disclosure Controls and Procedures
Under the supervision and with the participation of our management,
including our principal executive officer and principal financial officer, we
conducted an evaluation of our disclosure controls and procedures, as such term
is defined under Rule 13a-15(e) promulgated under the Securities Exchange Act of
1934, as amended (Exchange Act), for the quarter ended June 30, 2007. As of the
end of the period covered by this report, management, including the chief
executive officer and chief financial officer evaluated the effectiveness of the
design and operation of our disclosure controls and procedures. Based upon and
as of the date of that evaluation, our CEO and CFO concluded that the disclosure
controls and procedures were effective
(b) Changes in Internal Controls
There were no significant changes (including corrective actions with regard
to significant deficiencies or material weaknesses) in our internal controls
over financial reporting that occurred during the quarter ended June 30, 2007
that has materially affected, or is reasonably likely to materially affect, our
internal control over financial reporting.
19
Part II - Other Information
Item 1 - Legal Proceedings
The Company may become involved in various claims and legal actions arising
in the ordinary course of business. In the opinion of management, the ultimate
disposition of these matters will not have a material adverse impact either
individually or in the aggregate on consolidated results of operations,
financial position or cash flows of the Company.
Item 2 - Unregistered Sales of Equity Securities and Use of Proceeds
In April 2007, the Company issued approximately 269,934 shares of
restricted, unregistered common stock, valued at approximately $21,595, to an
existing stockholder as for payment of accrued interest associated with
approximately $975,000 short-term working capital loans to the Company and
reimbursement of various operating expenses paid in cash on behalf of the
Company. 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 April 2007, the Company issued an aggregate 10.948 shares of restricted,
unregistered common stock in payment of approximately $3,668 in accrued
dividends payable on the Company's outstanding Series B Preferred Stock for the
quarter ended March 31, 2007. 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.
Item 3 - Defaults on Senior Securities
None
Item 4 - Submission of Matters to a Vote of Security Holders
None
Item 5 - Other Information
Breaches of Agreement by La Terraza Trading and Asset Management, Ltd. and
Capital Investment Services, Inc. and Possible Violations of the Registration
Provisions of the Federal Securities Laws
Background
The La Jolla Assignment On or about August 17, 2006, in connection with a
lawsuit by La Jolla Cove Investors, Inc. ("La Jolla") against us alleging
breaches of contract, La Jolla agreed to dismiss such lawsuit against us in
exchange for our payment of $585,000. In connection with that settlement, on
September 6, 2006, La Jolla executed an Assignment of Convertible Debenture,
Warrant to Purchase Common Stock, Securities Purchase Agreement and Registration
Rights Agreement ("the La Jolla Assignment"), which provided that in exchange
for the $585,000 payment, La Jolla would assign its right, title, and interest
in the following:
a) An 8% amended Convertible Debenture dated October 4, 2002 that we issued to
La Jolla;
b) An amended Warrant to purchase our common stock with conversion rights
dated October 4, 2002 that we issued to La Jolla;
c) An amended Registration Rights Agreement dated October 4, 2002 between us
and La Jolla;
d) An amended Securities Purchase Agreement dated October 4, 2002 between us
and La Jolla; and
e) An amended Form SB-2 Registration that we filed on January 14, 2005.
Assumption of La Jolla Assignment by La Terraza Trading and Asset Management,
Ltd and La Terraza Agreement
20
On the same day as the La Jolla Assignment, based upon prior discussions
and understandings between our Chief Executive Officer and representatives of La
Terraza Trading and Asset Management, Ltd ("La Terraza"), a company based in
Spain, that we would assign the La Jolla Assignment to La Terraza, and that as
an Investor, La Terraza would complete a financing agreement with us, we
completed such agreement on September 6, 2006 ("the La Terraza Agreement"). The
La Terraza Agreement stated that on or about July 24, 2006, we and La Terraza
agreed in principle that La Terraza would finance us in the amount of
$2,150,000, which would be used, as follows: (i) by La Terraza to acquire our
indebtedness to La Jolla; and (ii) the balance of the funds that we would use
for fees, satisfaction of existing payables, and working capital. The La Terraza
Agreement included the following terms:
a) Based upon the $0.1875 market price of our shares of common stock on July
24, 2006, 11,470,000 shares would be escrowed and distributed as needed in
accordance with the terms of our SB-2 Registration Statement (the
"11,470,000 SB-2 Shares");
b) We would issue an additional 5,000,000 shares of our restricted common
stock in escrow to use for expenses and as compensation to third parties
"to advance our business", to be agreed upon by us and La Terraza, and that
such shares would be used for our benefit;
c) We would grant 600,000 warrants to La Terraza exercisable at the lesser of
$0.1875 per share or the average closing price per share for our common
stock over the 12 months prior to the date of exercise, with a 5 year term
for the exercise of the warrants, such term to begin on July 24, 2006;
d) The shares that we issue in connection with the La Terraza Agreement will
be registered upon La Terraza's request, to the extent that such shares are
not the subject to issuance as free trading shares under our SB-2
Registration Statement at the time; and
e) The 11,470,000 SB-2 Shares and the 5,000,000 restricted shares would be
delivered in Escrow to Capital Investment Services, Inc. ("Capital
Investment"), as the Escrow Agent, for disbursement and distribution in
accordance with the terms of our SB-2 Registration Statement.
Distribution of Funds in Connection with La Terraza Agreement
On or about September 13, 2006, in accordance with the La Terraza
Agreement, we received $2,150,000 from La Terraza, the funds of which were
distributed on or about the same day, as follows:
a) $585,000 was paid to La Jolla to acquire for La Terraza a full and complete
assignment of any and all of La Jolla's right, title and interest in any
and all of our indebtedness to La Jolla, including La Jolla's rights under
the active SB-2 Registration Statement for the issuance and registration of
securities under that Registration Statement;
b) $275,000 that we would use to redeem and satisfy in full the Series E
Preferred Stock that had been funded by third party investors on or about
July 12, 2006, including a prepayment redemption penalty of $25,000;
c) $215,000 payable as fees to Capital Investment for locating, negotiating
and closing the La Terraza funding;
d) $100,000 to repay in full, without interest, an unsecured bridge loan from
an investor to us dated and funded on August 25, 2006;
e) $275,000 for our working capital; and
f) $700,000 to be retained in escrow and disbursed to us for payment in
reduction of the assigned La Jolla debenture and required warrant exercise,
until the debenture and warrant obligations are satisfied in full according
to the terms of the La Jolla Assignment and related agreements.
Escrow Agreement with Capital Investment
In connection with rights attendant to and securities that would be
tendered to La Terraza as well as the La Terraza Agreement, we completed an
Escrow Agreement on September 19, 2006 between us and Capital Investment, which
provided that:
a) We would deliver to the Escrow Agent certain share certificates specified
below;
b) The Escrow Agent would accept the shares for delivery to the beneficiary
indicated; and
c) The Escrow Agent agreed to release the shares for delivery only in
accordance with our SB-2 Registration Statement and in accordance with the
terms of the La Terraza Financing Agreement, only after reasonable
notification to us prior to delivery of such certificates.
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Then, on or about December 27, 2006, but effective as of September 13, 2006
(the date that Ta Terraza funded us in the amount of $2,150,000), we effected
the following issuances in the Capital Investment's Escrow account titled in the
name of the "Capital Investment Services Irrevocable Escrow Account" so that
Capital Investment would effectuate the terms of the Escrow Agreement and the La
Terraza Agreement, including that such issuances were required to be consistent
with the terms of our existing SB-2 Registration Statement: (a) 11,470,000 free
trading shares issued in: (i) 19 certificates of 500,000 shares each; (ii) 5
certificates of 300,000 shares each; and (iii) 1 certificate of 470,000 shares;
and (b) 5,000,000 shares of our restricted common stock issued in 10
certificates of 500,000 each.
In our Form 10-QSB for the period ending September 30, 2006 that we filed
on November 24, 2006, we disclosed that the 11,470,000 shares were deposited
into the Capital Investment Escrow account to be held as unissued and not
outstanding to guarantee the availability of stock as required for the reduction
of the debenture and satisfaction of the warrant obligations. In connection
therewith and as reflected above regarding the terms of the Escrow Agreement,
Capital Investment agreed to release the shares for delivery only in accordance
with our SB-2 Registration Statement and in accordance with the terms of the La
Terraza Financing Agreement, and only after reasonable notification to us prior
to delivery of such certificates. As discussed below, however, during the period
from the deposit of the 11,470,000 shares on December 27, 2006 to June 2007, we
never received any notification, request, instructions, or any communication
whatsoever from either La Terraza or Capital Investment notifying us prior to
the delivery of any such certificates to third parties or any other information
that would enable us to determine and/or monitor whether in fact the release of
any one or all of the certificates from the Escrow Account had occurred or
complied with the terms of our SB-2 Registration Statement.
Discovery of Matters Pertaining to La Terraza and Capital Investment On or
about May 18, 2007, our Chief Executive Office met with Mr. Abe Warshenbrot at
our offices, who represented himself as La Terraza's CPA representative and Mr.
Alistair Snowie, who had previously been introduced to us as an investor in a La
Terraza fund, regarding the possibility of additional financing by La Terraza.
Thereafter, we received no communication whatsoever, until June 6, 2007 when we
received correspondence from Mr. Warshenbrot stating that he had been granted
Power of Attorney to exercise all rights and privileges pertaining to: (a)
12,000,000 shares owned by Alistair Snowie; (b) 5,000,000 shares owned by La
Terraza; and (c) other of our shareholders. As a result of this discovery, we
commenced an inquiry of these matters to determine whether the terms of both the
La Terraza Agreement and the Escrow Agreement had been adhered to by La Terraza
and Capital Investment, and to determine whether the terms of our SB-2
Registration Statement had been complied with.
In connection with our inquiry, we obtained documents from our transfer
agent, Atlas Stock Transfer, which indicated that Capital Investment had
instructed our transfer agent to issue the following certificates from the
11,470,000 shares that had been previously deposited into the Escrow Account on
December 27, 2006:
o On September 26, 2006, issuance of 900,000 free trading shares in
certificate(s) to Pershing and Company;
o On September 26, 2006, issuance of 350,000 shares to DP Martin &
Associates;
o On October 20, 2006, issuance of 300,000 free trading shares in
certificate(s) to Cede & Company;
o On October 23, 2006, issuance of 45,455 free trading shares in
certificate(s) to Global Consulting;
o On October 30, 2006, issuance of 500,000 free trading shares in
certificate(s) to Cede & Company;
o On November 15, 2006, issuance of 1,000,000 free trading shares in
certificate(s) to Cede & Company;
o On December 4, 2006, issuance of 5,500,000 free trading shares in
certificate(s) to Alistair Snowie;
o On December 4, 2006, issuance of 689,545 free trading shares in
certificate(s) to Revim Development;
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o On December 4, 2006, issuance of 1,835,000 free trading shares in
certificate(s) to RFP Development;
o On June 7, 2007, issuance of 4,800,000 restricted shares in certificate(s)
to La Terraza; and
o On June 7, 2007, issuance of 45,455 restricted shares in certificate(s) to
Manuel Lugo.
Based on our analysis of the above issuances, we determined that both La
Terraza and Capital Investment had breached the terms of our agreements with
them, including that we received no notification prior to such issuances or
thereafter, and each of the issuances violated the terms of our SB-2, which La
Terraza and Capital Investment had agreed to -- most importantly, that each such
issuance from September 26, 2006 to June 7, 2007, as reflected immediately
above, individually and cumulatively, had violated the term of our SB-2 that
prohibited distribution and disbursement of 4.9% or more of our outstanding
common stock.
We are continuing our investigation of this matter and have recently
requested additional documentation from our transfer agent to determine whether
there have been unregistered distributions of our securities in violation of the
registration provisions of the federal securities laws. We will consider all
possible remedies against La Terraza and Capital Investment for their breaches
of our agreements with them. Additionally, if we discover that unregistered
distributions of our securities have occurred, we will consider all possible
remedies against any individual or entity that is responsible for such unlawful
securities distributions.
Related Party Transaction/Contract
During the quarter ended June 30, 2007, the Company executed employment
contracts with Emilio Jara, who is a current employee, member of management and
stockholder of the Company and Joe Fernandez, Jr., who is a current employee and
brother of the Company's Chief Executive Officer and son of the Company's
Chairman of the Board, to formalize their employment and significance to the
Company's production activities. Mr. Jara and Mr. Fernandez, Jr. will each
receive an increase in compensation to $75,000 annually, plus normal and
customary benefits. Through June 30, 2007, Mr. Jara and Mr. Fernandez, Jr. are
continuing to be paid in cash at the weekly pay rate in place immediately prior
to the execution of the related employment contract and the difference between
the paid cash compensation and the contractual amount has been accrued in the
accompanying financial statements.
Item 6 - Exhibits
Exhibits
-----------------
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.
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.
Dated: September 18, 2007 /s/ Andres F. Fernandez
------------------ ------------------------------------
Andres F. Fernandez
President, Chief Executive Officer
Chief Financial Officer and Director
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