UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
Form 10-QSB/A
(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, 2006
[_] 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/A for the Quarter ended September 30, 2006
Table of Contents
Page
PART I - FINANCIAL INFORMATION
ITEM 1 - Financial Statements 3
ITEM 2 - Management's Discussion and Analysis or Plan of Operation 28
ITEM 3 - Controls and Procedures 31
PART II - OTHER INFORMATION
ITEM 1 - Legal Proceedings 32
ITEM 2 - Unregistered Sales of Equity Securities and Use of Proceeds 32
ITEM 3 - Defaults Upon Senior Securities 32
ITEM 4 - Submission of Matters to a Vote of Security Holders 33
ITEM 5 - Other Information 33
ITEM 6 - Exhibits 33
SIGNATURES 33
PART I - FINANCIAL INFORMATION
ITEM 1 - Financial Statements
The September 30, 2006 and 2005 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.
American Ammunition, Inc. and Subsidiaries
Consolidated Balance Sheets
September 30, 2006 and 2005
(Unaudited)
(Restated) (Restated)
September 30, September 30,
2006 2005
------------- --------------
ASSETS
Current Assets
Cash on hand and in bank $ 127,986 $ 107,972
Accounts receivable - trade, net allowance for
doubtful accounts of $12,463 and $-0-, respectively 141,844 105,773
Inventory 404,457 566,870
Prepaid interest 304,702 239,112
Prepaid expenses 71,362 61,684
------------- -------------
Total Current Assets 1,050,351 1,081,411
------------- -------------
Property and Equipment - at cost or contributed value - 2,993,031
------------- -------------
Other Assets
Restricted cash 700,000 -
Patents, Trademarks and Noncompetition agreement,
net of accumulated amortization of approximately
$105,681 and $50,543, respectively 170,009 225,147
Loan costs, net of accumulated amortization
of approximately $51,765 and $2,620, respectively 13,485 21,380
Deposits and other 77,860 83,660
------------- -------------
Total Other Assets 961,354 330,187
------------- -------------
TOTAL ASSETS $ 2,011,705 $ 4,434,407
============= =============
3
American Ammunition, Inc. and Subsidiaries
Consolidated Balance Sheets
September 30, 2006 and 2005
(Unaudited)
(Restated) (Restated)
September 30, September 30,
2006 2005
------------- --------------
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
Current Liabilities
Loans payable to stockholders $ 1,075,000 $ -
Convertible debenture 2,150,000 -
Customer deposits 232,690 201,890
Accounts payable - trade 725,787 957,487
Other accrued liabilities 495,001 186,792
------------- --------------
Total Current Liabilities 4,678,478 1,346,169
------------- --------------
Long-Term Liabilities
Loans payable to stockholders - 650,000
Convertible debenture - 241,365
Derivative liabilities from note conversion factors 5,496,586 -
------------- --------------
Total Liabilities 10,175,064 2,546,381
------------- --------------
Commitments and Contingencies
Stockholders' Equity (Deficit)
Preferred stock - $0.001 par value
20,000,000 shares authorized.
2,022,902 and 3,833,205 shares issued and outstanding 2,023 2,010
Common stock - $0.001 par value.
300,000,000 shares authorized.
, 5,495,803 and 4,108,324 shares issued and outstanding 5,496 4,108
Additional paid-in capital 25,758,828 25,084,467
Accumulated other comprehensive income (loss) (4,727,216) 33,279
Accumulated deficit (29,202,490) (23,197,445)
------------- --------------
(8,163,359) 1,926,419
Stock subscription receivable - (38,393)
------------- --------------
Total Stockholders' Equity (8,163,359) 1,888,026
------------- --------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 2,011,705 $ 4,434,407
============= ==============
The accompanying notes are an integral part
of these consolidated financial statements.
4
American Ammunition, Inc. and Subsidiaries
Consolidated Statements of Operations and Comprehensive Income (Loss)
Nine and Three months ended September 30, 2006 and 2005
(Unaudited)
(Restated) (Restated) (Restated) (Restated)
Nine months Nine months Three months Three months
ended ended ended ended
September 30, September 30, September 30, September 30,
2006 2005 2006 2005
-------------------------------------------------------------------
Revenues $ 1,685,302 $ 2,233,336 $ 305,805 $ 378,326
-------------------------------------------------------------------
Cost of Sales
Materials, Direct Labor
and other direct costs 2,707,237 3,447,036 695,067 944,194
Depreciation 31,024 573,466 - 191,155
-------------------------------------------------------------------
Total Cost of Sales 2,738,261 4,020,502 695,067 1,135,349
-------------------------------------------------------------------
Gross Profit (1,052,959) (1,787,166) (389,262) (757,023)
-------------------------------------------------------------------
Operating Expenses
Research and development expenses - 2,615 - 804
Marketing and promotion expenses 94,266 161,502 20,191 49,750
Other operating expenses 1,188,357 1,108,423 335,967 278,902
Interest expense 456,738 69,875 153,949 55,181
Depreciation and amortization 41,354 45,305 13,785 15,102
-------------------------------------------------------------------
Total Operating Expenses 1,780,715 1,377,720 523,892 399,739
-------------------------------------------------------------------
Loss from Operations (2,833,674) (3,174,886) (913,154) (1,156,089)
Other Income (Expense)
Interest and other income 189,897 8,146 405 1,914
Prepayment penalty on early
redemption of Series E 8%
Convertible Preferred Stock (25,000) - (25,000) -
Settlement fees on restructuring
of convertible debentures (354,450) - (354,450) -
-------------------------------------------------------------------
Loss before Income Taxes (3,023,277) (3,166,740) (1,292,199) (1,154,848)
Provision for Income Taxes - - - -
-------------------------------------------------------------------
Net Loss (3,023,277) (3,166,740) (1,292,199) (1,154,848)
Other Comprehensive Income
Change in derivative related to
note conversion (4,769,770) 33,279 (2,075,199) 32,496
-------------------------------------------------------------------
Comprehensive Loss $ (7,792,997) $ (3,133,461) $ (3,367,398) $ (1,122,352)
===================================================================
- Continued -
5
American Ammunition, Inc. and Subsidiaries
Consolidated Statements of Operations and Comprehensive Income (Loss)
Nine and Three months ended September 30, 2006 and 2005 - Continued
(Unaudited)
(Restated) (Restated) (Restated) (Restated)
Nine months Nine months Three months Three months
ended ended ended ended
September 30, September 30, September 30, September 30,
2006 2005 2006 2005
-------------------------------------------------------------------
Net Loss $ (3,023,277) $ (3,166,740) $ (1,292,199) $ (1,154,848)
Preferred Stock dividends (66,050) (40,830) (22,558) (13,610)
-------------------------------------------------------------------
Net Loss available to
Common Shareholders $ (3,089,327) $ (3,207,570) $ (1,314,757) $ (1,141,238)
===================================================================
Loss per weighted-average share of
common stock outstanding, computed
on net loss - basic and fully diluted $ (0.65) $ (0.84) $ (0.25) $ (0.28)
===================================================================
Weighted-average number of
common shares outstanding 4,760,317 3,833,205 5,199,890 4,005,024
===================================================================
The accompanying notes are an integral part
of these consolidated financial statements.
6
American Ammunition, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
Nine months ended September 30, 2006 and 2005
(Unaudited)
(Restated) (Restated)
Nine months Nine months
ended ended
September 30, September 30,
2006 2005
------------- -------------
Cash flows from operating activities
Net loss for the period $ (3,023,277) $ (3,166,740)
Adjustments to reconcile net loss to
net cash provided by operating activities
Depreciation and amortization 452,086 664,626
Consulting expense related to common stock
issuances at less than "fair value" 259,789 198,000
Common stock issued for fees and services 30,288 17,333
Prepayment penalty on early redemption of
Series E 8% Convertible Preferred Stock 25,000 -
Settlement fees on restructuring of convertible debentures 354,450 -
(Increase) Decrease in
Accounts receivable 429,583 533,671
Inventory 155,633 345,554
Prepaid expenses, deposits and other (8,773) (2,838)
Increase (Decrease) in
Accounts payable - trade (120,830) (29,398)
Other accrued expenses 198,961 15,773
Customer deposits - (239,016)
------------- -------------
Net cash used in operating activities (1,247,040) (1,663,035)
------------- -------------
Cash flows from investing activities
Increase in restricted cash (700,000) -
Purchase of property and equipment (31,024) (111,065)
------------- -------------
Net cash used in investing activities (731,024) (111,065)
------------- -------------
Cash flows from financing activities
Cash received on new convertible debenture 2,150,000 -
Cash received from loans payable to stockholders 100,000 650,000
Funding of working capital advance 50,000 -
Cash received on sale of preferred stock 500,000 -
Cash received on sale of common stock - 436,607
Cash paid to retire convertible debenture,
refund working capital advances and pay settlement fees (585,000) -
Cash paid to obtain capital (265,000) (10,000)
Cash paid to retire preferred stock,
including $25,000 prepayment penalty (275,000) -
------------- -------------
Net cash provided by financing activities 1,675,000 1,076,607
------------- -------------
- Continued -
7
American Ammunition, Inc. and Subsidiaries
Consolidated Statements of Cash Flows - Continued
Nine months ended September 30, 2006 and 2005
(Unaudited)
(Restated) (Restated)
Nine months Nine months
ended ended
September 30, September 30,
2006 2005
------------- -------------
Increase (Decrease) in Cash (303,064) (697,493)
Cash at beginning of year 431,050 805,465
------------- -------------
Cash at end of year $ 127,986 $ 107,972
============= =============
Supplemental disclosure of interest
and income taxes paid
Interest paid for the period $ 15,342 $ 10,753
============= =============
Income taxes paid for the period $ - $ -
============= =============
Supplemental disclosure of non-cash investing and financing activities
Common stock issued for payment of loan costs $ - $ 24,000
============= =============
The accompanying notes are an integral part
of these consolidated financial statements.
8
American Ammunition, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
September 30, 2006 and 2005
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 have been dedicated to
the needs and demands of F&F.
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, 2005. 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.
9
American Ammunition, Inc. and Subsidiaries
Notes to Consolidated Financial Statements - Continued
September 30, 2006 and 2005
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, 2006.
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 - 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.
10
American Ammunition, Inc. and Subsidiaries
Notes to Consolidated Financial Statements - Continued
September 30, 2006 and 2005
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.
In accordance with SFAS No. 144, the Company evaluates the accompanying
financial statements to determine if any impairment indicators are present
related to its fixed assets and other long-term assets. If impairment
indicators were present, future cash flows related to the asset group are
estimated. The sum of the undiscounted future cash flows attributable to
the asset group was then compared to the carrying amount of the asset
group. The cash flows were estimated utilizing various assumptions
regarding future revenue and expenses, availability of working capital, and
proceeds, if any, from asset disposals on a basis consistent with the
Company's strategic plan. If the carrying amount exceeded the sum of the
future undiscounted future cash flows, the Company discounted the future
cash flows using a risk-free discount rate and recorded an impairment
charge as the difference between the discounted cash flows and the carrying
value of the asset group. Generally, the Company performed its testing of
the asset group at the overall corporate level, as this is the lowest level
for which identifiable cash flows are available. As a result of the
impairment testing described above, management is of the opinion that no
impairment charge is appropriate.
5. Income Taxes
The Company uses the asset and liability method of accounting for income
taxes. At September 30, 2006 and 2005, 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, 2006 and 2005, 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 at the end of
2005.
11
American Ammunition, Inc. and Subsidiaries
Notes to Consolidated Financial Statements - Continued
September 30, 2006 and 2005
Note C - Summary of Significant Accounting Policies - Continued
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 September 30, 2006 and 2005, and subsequent thereto, the Company had
no options outstanding. The outstanding warrants and convertible preferred
stock and mandatorily 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.
Note D - Correction of an Error
On August 22, 2007, our management concluded that the financial statements
included in our Forms 10-QSB for June and September 2005, the calendar year 2006
and for the period ending March 31, 2007, and the Forms 10-KSB for the periods
ending December 31, 2005 and December 31, 2006, all of which have been
previously filed with the Securities and Exchange Commission, need to be
restated, due to the failure to include the beneficial conversion feature
discount on unsecured convertible indebtedness.
Management discovered such changes needed to be made after consulting with
Pollard-Kelley Auditing Services, our independent registered public accounting
firm as of June 26, 2007, who have concurred with management as to the
reexamination of the above mentioned issues.
The Company has entered into certain notes payable to shareholders and other
affiliated parties with embedded conversion features and warrant issues. The
appropriate accounting is governed by EITF 98-5: "Accounting for convertible
securities with beneficial conversion features or contingency adjustable
12
American Ammunition, Inc. and Subsidiaries
Notes to Consolidated Financial Statements - Continued
September 30, 2006 and 2005
Note D - Correction of an Error - Continued
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
fair value is determined 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.
The errors discovered by management relate directly to the accounting for and
recording various conversion features and warrants as follows:
Nine months Nine months
ended ended
September 30, September 30,
2006 2005
------------- -------------
Net Loss, as previously reported $ (2,683,975)$ (3,123,504)
Effect of the correction of an error
(Increase) Decrease in Net Loss by financial statement line item:
Operating expenses: Interest expense recognized
from beneficial conversion discount feature on
notes payable to shareholders and other affiliates (339,302) (43,236)
------------- -------------
Total effect of changes on Loss from Operations and Net Loss (339,302) (43,236)
------------- -------------
Net Loss, as restated $ (3,023,277)$ (3,166,740)
============= =============
Net loss available to common stockholders,
as previously reported $ (2,750,025)$ (3,164,334)
Effect of the correction of an error
Total effect as shown above (339,302) (43,236)
------------- -------------
Net Loss available to common stockholders, as restated $ (3,089,327)$ (3,207,570)
============= =============
Earnings per share, as previously reported $ (0.58)$ (0.83)
Total effect of changes (0.07) (0.01)
============= =============
Earnings per share, as restated $ (0.65)$ (0.84)
============= =============
13
American Ammunition, Inc. and Subsidiaries
Notes to Consolidated Financial Statements - Continued
September 30, 2006 and 2005
Note D - Correction of an Error - Continued
In light of the restatements to the financial statements disclosed above,
caused, in part, by a failure in the Company's internal control over financing
reporting due to the limitations in the Company's accounting resources to
identify and react in a timely manner to non-routine, complex and/or
transactions originated by other parties on the Company's behalf, as well as
gaining an adequate understanding of the disclosure requirements relating to
these types of transactions, we feel that the existing controls and procedures
were and remain effective. Because of said controls, which resulted in the
review, discovery and disclosure by amendment of filings to adequately disclose
required information, management also concludes that by requiring supplemental
reviews of financing transactions that its existing controls and procedures will
be more effective.
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.
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 - Concentrations of Credit Risk
The Company maintains its cash accounts in a single financial institutions
subject to insurance coverage issued by the Federal Deposit Insurance
Corporation (FDIC). Under FDIC rules, the Company and its subsidiaries are
entitled to aggregate coverage of $100,000 per account type per separate legal
entity per financial institution.
During the period ended September 30, 2006 and the periods subsequent thereto,
respectively, the various operating companies maintained deposits in this
financial institution with credit risk exposures in excess of statutory FDIC
coverage. The Company incurred no losses through September 30, 2006,and
subsequent thereto, as a result of any of these unsecured situations.
14
American Ammunition, Inc. and Subsidiaries
Notes to Consolidated Financial Statements - Continued
September 30, 2006 and 2005
Note G - Inventory
As of September 30, 2006 and 2005, inventory consisted of the following
components:
September 30 September 30,
2006 2005
--------------- ----------------
Raw materials $ 366,725 $ 434,305
Work in process 30,268 122,561
Finished goods 7,464 10,004
---------- ----------
Totals $ 404,457 $ 566,870
========== =========
Note H - Property and Equipment
Property and equipment consist of the following components:
September 30, September 30, Estimated
2006 2005 useful life
-------------------------------------------
Manufacturing equipment $ 7,944,673 $ 8,096,289 3-10 years
Office furniture and fixtures 69,889 55,577 3- 7 years
Leasehold improvements 184,939 190,277 8-20 years
----------------------------------------
8,199,501 8,342,143
Accumulated depreciation (5,575,782) (5,379,112)
Impairment of recoverability of carrying value (2,623,719) -
----------------------------
Net property and equipment $ - $ 3,963,031
===========================
Total depreciation expense charged to operations for the nine months ended
September 30, 2006 and 2005 was approximately $31,024 and $577,417,
respectively.
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. At December 31, 2005, pursuant to the requirements of
this accounting standard, management recorded an impairment for the future
recoverability of these assets of approximately $2,777,829.
15
American Ammunition, Inc. and Subsidiaries
Notes to Consolidated Financial Statements - Continued
September 30, 2006 and 2005
Note I - Loans from Shareholders
September 30, September 30,
2006 2005
------------ -------------
Notes payable to three separate stockholders. Interest at
8.0%, payable monthly. Principal due at maturity on December
31, 2006. 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. Each note is
unsecured. $ 1,075,000 $ 650,000
============= =============
Note J - Convertible Debenture
The Company entered into a Securities Purchase Agreement with La Jolla Cove
Investors, Inc. ("La Jolla") on October 4, 2002 for the sale of (I) $250,000 in
convertible debentures and (ii) warrants to buy 30,000,000 shares of our 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.
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.
16
American Ammunition, Inc. and Subsidiaries
Notes to Consolidated Financial Statements - Continued
September 30, 2006 and 2005
Note J - Convertible Debenture - Continued
On September 13, 2006, in accordance with the terms of a September 6, 2006
financing agreement between the Company and La Terraza Trading and Asset
Management, Ltd ("the Investor") (hereafter referred to as the "Financing
Agreement"), the Company received $2,150,000 from the Investor for the Company's
use and benefit, the funds of which were distributed on or about the same day,
as follows:
1. $585,000 was paid to La Jolla Cove Investors, Inc. ("La Jolla") to acquire
for the Investor a full and complete assignment of any and all of La
Jolla's right, title and interest in any and all of the Company's
indebtedness to La Jolla, specifically including La Jolla's rights under
the active SB-2 Registration Statement for the issuance and registration of
securities on the SB-2 thereunder; the Company's consent to the foregoing
was subject to its right to prepay any and all indebtedness thereunder in
the Company's common stock, without penalty, at any time before or after
default.
2. $275,000 to be used by the Company 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. $215,000 payable as fees to Capital Investment Services, Inc. ("CIS") for
locating, negotiating and closing the Investor funding.
4. $100,000 to repay in full, without interest, an unsecured bridge loan from
the Investor to the Company dated and funded on August 25, 2006.
5. $275,000 for the Company's working capital.
6. $700,000 to be retained in escrow and disbursed to the Company for payment
in reduction of the assigned La Jolla debenture and required warrant
exercise, 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 the Company to deposit in escrow with CIS,
the escrow agent in the transaction, a total of 11,470,000 shares of its common
stock for later delivery (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. The Escrow Agreement between the
Company and CIS requires CIS, as the Escrow Agent, to release such shares for
delivery in accordance with the terms of the Company's pending SB-2 Registration
Statement currently on file with the Securities and Exchange Commission and in
accordance with the terms and conditions of the Financing Agreement dated
September 2006 between the Company and the Investor, and only after reasonable
notification to the Company prior to delivery of any such certificates. Further,
disbursement and distribution of the shares may only be made in accordance with
the terms of the applicable SB-2 registration - specifically, that the Investor
and/or the selling stockholder agreed to restrict its ability to convert or
exercise its warrants and receive shares of the Company's 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 Company's then issued and outstanding
shares of common stock. The Financing Agreement also calls for an additional
5,000,000 shares of the Company's restricted common stock 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 the Investor and the Company for future
services to advance the Company's overall business. In addition, the Company
granted the 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 escrow were in fact deposited in
escrow on September 26, 2006, as required.
17
American Ammunition, Inc. and Subsidiaries
Notes to Consolidated Financial Statements - Continued
September 30, 2006 and 2005
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.
Note L - Preferred Stock Transactions
Preferred stock consists of the following as of September 30, 2006 and 2005,
respectively:
September 30, 2006 September 30, 2005
------------------ ------------------
# shares value # shares value
-------- ---------- -------- ----------
Series A Cumulative Convertible Preferred Stock 12,000 $ 60,000 12,000 $ 60,000
Series B Cumulative Convertible Preferred Stock 55,020 275,100 91,700 458,500
Series C Convertible Preferred Stock 1,905,882 324,000 1,905,882 324,000
Series E 8% Convertible Preferred Stock 50,000 250,000 - -
--------- ------------ --------- ----------
2,022,902 $ 909,100 2,009,582 $ 842,500
========= ============ ========= ==========
Series A Convertible Preferred Stock
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.
18
American Ammunition, Inc. and Subsidiaries
Notes to Consolidated Financial Statements - Continued
September 30, 2006 and 2005
Note L - Preferred Stock Transactions - Continued
Series A Convertible Preferred Stock - continued
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.
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.
Series B Convertible Preferred 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.
In September and December 2004, respectively, the Holders of the Series B
Preferred Stock exercised their conversion rights and exchanged an aggregate
18,340 shares of Series B Preferred Stock for 66,810 post-reverse split shares
of restricted, unregistered common stock.
19
American Ammunition, Inc. and Subsidiaries
Notes to Consolidated Financial Statements - Continued
September 30, 2006 and 2005
Note L - Preferred Stock Transactions - Continued
Series B Convertible Preferred Stock - continued
On March 31 and June 30, 2006, respectively, the holders of the Series B
Preferred Stock exercised their conversion rights and exchanged an aggregate
18,340 shares (9,170 shares per conversion) of Series B Preferred Stock for
415,706 shares of restricted, unregistered common stock.
Series C Convertible Preferred Stock
In November 2004, the Company sold 1,905,882 shares of Series C Convertible
Preferred Stock to an existing stockholder and officer of the Company in a
private transaction pursuant to Section (4)2 of the Securities Act of 1933 for
gross proceeds of approximately $324,000. No underwriter was used in conjunction
with this transaction.
The Series C Convertible Preferred Stock provides for dividends at a rate of
4.0% per annum, to be declared and paid monthly in either cash or stock at the
discretion of the Company.
Each share of Series C Preferred Stock is convertible at a rate of $0.18 per
share into 1,800,000 shares of the Company's common stock at any time at the
option of the holder, subject to adjustments for customary anti-dilution events.
Series E 8% Convertible Preferred Stock
On March 1, 2006, the Company issued a Private Placement Memorandum offering up
to 200,000 shares of 8% Convertible Preferred Stock at an offering price of
$5.00 per share on a "best efforts" basis through an unrelated placement agent.
The Series E 8% Convertible Preferred Stock provides for cumulative dividends at
the rate of 8% per year, payable quarterly, 50% in cash and 50% in shares or
100% in cash at the Company's election. In the event the Company elects to pay
such dividends in shares of the Company's Common Stock, the number of shares to
be issued shall be based on the average of the closing prices of the Company's
Common Stock, as reported on the NASDAQ Over the Counter Bulletin Board (or such
other market on which the Company's Common Stock is then traded) for the 10
consecutive trading days preceding the record date for each such dividend, with
such record date being the 14th day preceding the end of each calendar quarter.
Each share of Series E Convertible Preferred Stock shall be convertible into
shares of the Company's Common Stock at any time after March 1, 2007. The number
of shares to be issued on a conversion shall be based on 80% of the average
closing price of the Common Stock of the Company; as reported on the NASDAQ OTC
Bulletin Board (or such other market on which such stock is traded) for ten (!0)
consecutive trading days preceding the date the Company received notice of such
conversion. Subject to certain restrictions, the Series E 8% Convertible
Preferred Stock shall automatically convert into shares of the Company's Common
Stock upon any of the following events: (I) the sale by the Company of all or
substantially all of its assets; (ii) the consummation of a merger or a
consolidation in which the Company is not the survivor; or (iii) the sale or
exchange of all or substantially all of the outstanding shares of the Company's
common stock (including by way of merger, consolidation, or other similar
action).
20
American Ammunition, Inc. and Subsidiaries
Notes to Consolidated Financial Statements - Continued
September 30, 2006 and 2005
Note L - Preferred Stock Transactions - Continued
Series E 8% Convertible Preferred Stock - continued
In the event of the liquidation, dissolution or winding up of the Company, the
holders of Series E Convertible Preferred Stock shall have a liquidation
preference over holders of common stock and shares junior to the Series E 8%
Convertible Preferred Stock equal to $5.50 per share. Additionally, the Company
shall not impose or allow any additional liens on it's existing fixed assets in
excess of $1,000,000; provided that at such time as total gross proceeds from
the offering equal or exceed $2,000,000, the Company shall satisfy such existing
liens on its existing fixed assets and shall not impose or allow any additional
liens on its existing fixed assets unless subordinated to the interest of the
Series E 8% Convertible Preferred Stock, with such preference on the fixed
assets equal to the fixed asset value, as determined in accordance with the
United States Generally Accepted Accounting Principles ("GAAP"), of 150% of the
stated value of the aggregate of the outstanding shares of Series E Convertible
Preferred Stock except for fixed assets of the Company that were otherwise
purchased pursuant to a security interest.
The Series E 8% Convertible Preferred Stock shall be redeemable, at the option
of the Company, for cash in the amount of $5.50 per share of Series E
Convertible Preferred Stock or for shares of the Company's Common Stock in
accordance with the Conversion Rate, at any time after March 1, 2007, or in the
event the closing sale price of the Company's Common Stock, as reported on the
NASDAQ Over the Counter Bulletin Board (or such other market on which the
Company's Common Stock is then traded), is greater than or equal to $7.00 after
March 1, 2007 for any consecutive five trading days. In addition, the Series E
8% Convertible Preferred Stock shall be redeemable, at the option of the holder,
at any time for shares of the Company's Common Stock in accordance with the
Conversion Rate. At any time after March 1, 2007, at the option of the holder,
the Series E 8% Convertible Preferred Stock shall be redeemable for cash in the
amount of $5.10 per share of Series E Convertible Preferred Stock or for shares
of the Company's Common Stock in accordance with the Conversion Rate. After such
date, if redemption is for cash, shares will be redeemed at the rate of 1/10 of
such aggregate shares per quarterly period for any 10 consecutive quarters
commencing after March 1, 2007. Any redemption by either the Company or the
holder shall be subject to 15 days written notice.
The Company warrants and agrees that if, at any time within the period
commencing on the date of the final closing of the Offering and expiring on the
5 th anniversary of the date thereof, the Company should file a registration
statement with the SEC under the Securities Act (other than in connection with a
merger or other business combination transaction or pursuant to Form S-8), it
will give written notice at least 30 calendar days prior to the filing of each
such registration statement to the holders of the Series E 8% Convertible
Preferred Stock and the holders of the share of the Common Stock issued upon the
conversion or redemption of the shares of Series E Convertible Preferred Stock,
or their permitted assigns (Holders) of its intention to do so. If the Holders
notify the Company within 30 calendar days after receipt of any such notice of
its or their desire to include any such shares of Common Stock issued or
issuable upon the conversion or redemption of the Series E 8% Convertible
Preferred Stock in such proposed registration statement, the Company shall use
its "best efforts" to have any such shares of Common Stock is issued or issuable
upon the conversion or redemption of the Series E 8% Convertible Preferred Stock
registered under such registration statement.
21
American Ammunition, Inc. and Subsidiaries
Notes to Consolidated Financial Statements - Continued
September 30, 2006 and 2005
Note L - Preferred Stock Transactions - Continued
Series E 8% Convertible Preferred Stock - continued
Notwithstanding the foregoing, the Company shall have the right at any time
after it shall have given written notice (irrespective of whether a written
request for inclusion of any such securities shall have been made) to elect not
to file any such proposed registration statement, or to withdraw the same after
the filing but prior to the effective date thereof. If the managing underwriter
of an offering to which the above "piggyback registration rights" apply, in good
faith and for valid business reasons, objects to such rights, such objection
shall preclude such inclusion. All expenses incurred by the Company in
registration of the shares of Common Stock issued or issuable upon the
conversion or redemption of The Series E 8% Convertible Preferred Stock,
including with out limitation all registration and filing fees, listing fees,
printing expenses, fees and disbursements of all independent accounts, or
counsel for the Company and the expense of any special audits incident to or
required by any such registration and the expenses of complying with the
securities or blue sky laws of any jurisdiction shall be paid by the Company.
The Company has agreed to pay the Placement Agent a cash commission equal to 10%
of the aggregate Purchase Price of the shares of Series E Convertible Preferred
Stock sold by the Placement Agent in the Offering (Placement Agent Fee). The
Company shall also pay the Placement Agent reasonable expenses associated with
the Offering, which expenses shall not exceed $50,000 (Expense Allowance). In
addition, the Company shall issue to the Placement Agent 500 warrants for each
$50,000 of Series E Convertible Preferred Stock sold by the Placement Agent in
the Offering (Placement Agent Warrants), each warrant entitling the holder to
purchase 1 share of the Company's Common Stock at an exercise price of $0.90 per
share exercisable at any time for a period of 3 years from date of issuance.
Upon completion of the Maximum Offering, the Company will receive net proceeds
of approximately $900,000.00. The Company intends to use the net proceeds for
potential acquisitions, working capital, general corporate purposes and
repayment of outstanding debt.
The Company and the Placement Agent shall have discretion to increase the
Maximum Offering to $2,000,000.00, without notice to investors.
Through June 30, 2006, the Company sold 100,000 shares in a two separate
transactions under this Private Placement Memorandum and has received the gross
sales proceeds of $500,000 and has paid an aggregate of $50,000 to the Placement
Agent for the 10% fees due on these transactions.
On September 13, 2006, the Company exercised it's repurchase rights and retired
50,000 shares of the Series E 8% Convertible Preferred Stock, including a 10%
prepayment penalty, for $275,000 cash.
22
American Ammunition, Inc. and Subsidiaries
Notes to Consolidated Financial Statements - Continued
September 30, 2006 and 2005
Note M - 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 (1 for 20) 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 conjunction with the above discussed reverse stock split, all share
references in the following paragraphs reflect the January 9, 2006 reverse split
action.
Calendar 2005 Transactions
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 293,602 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.
In September and December 2004, respectively, the Holders of the Series B
Preferred Stock exercised their conversion rights and exchanged an aggregate
18,340 shares of Series B Preferred Stock for 66,810 shares of restricted,
unregistered common stock.
In July 2005, the Company issued approximately 8,333 shares of unregistered,
restricted common stock to Paul Goebel, the Company's Director of Domestic
Sales, as an employee bonus. These shares were valued at approximately $17,166,
which approximated the market value of the shares on the transaction date. 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, August, September and December 2005, the Company issued an
aggregate 23,615 shares of restricted, unregistered common stock in payment of
approximately $44,124 in accrued dividends payable on the Company's outstanding
Series B Preferred Stock for the quarters ended December 31, 2004, March 31,
2005, June 30, 2005, September 30, 2005 and December 31, 2005, respectively. 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, November and December 2005, respectfully, the Company issued an
aggregate 37,500 shares of restricted, unregistered common stock to an existing
stockholder as payment of various fees and costs associated with the funding of
approximately $875,000 short-term working capital loans to 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.
23
American Ammunition, Inc. and Subsidiaries
Notes to Consolidated Financial Statements - Continued
September 30, 2006 and 2005
Note M - Common Stock Transactions - Continued
Calendar 2006 Transactions
In February 2006, the Company issued approximately 41,666 shares of
unregistered, restricted common stock to Paul Goebel, the Company's Director of
Domestic Sales, as an employee bonus. These shares were valued at approximately
$17,500, which approximated the market value of the shares on the transaction
date. 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 2006, the Company issued approximately 226,065 shares of restricted,
unregistered common stock, valued at approximately $18,325, to an existing
stockholder as for payment of accrued interest associated with approximately
$875,000 short-term working capital loans to the Company and reimbursement of
direct public relation expenses. 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. As the per share value
of this transaction was substantially less than the "fair value" of the
Company's common stock, per the closing price of the Company's common stock on
the transaction date, the Company recognized "consulting expense related to the
issuance of common stock at less than "fair value" in the amount of
approximately $70,080 on this transaction.
In May 2006, the Company issued approximately 266,511 shares of restricted,
unregistered common stock, valued at approximately $21,054, 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
direct public relation expenses. 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. As the per share value
of this transaction was substantially less than the "fair value" of the
Company's common stock, per the closing price of the Company's common stock on
the transaction date, the Company recognized "consulting expense related to the
issuance of common stock at less than "fair value" in the amount of
approximately $69,293 on this transaction.
In September 2006, the Company issued approximately 275,229 shares of
restricted, unregistered common stock, valued at approximately $22,018, 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 direct public relation expenses. 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. As
the per share value of this transaction was substantially less than the "fair
value" of the Company's common stock, per the closing price of the Company's
common stock on the transaction date, the Company recognized "consulting expense
related to the issuance of common stock at less than "fair value" in the amount
of approximately $118,348 on this transaction.
On September 13, 2006, the Company issued 56,003 shares of common stock to La
Jolla Cove Investors, Inc. to complete all obligations to La Jolla and assign
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
24
American Ammunition, Inc. and Subsidiaries
Notes to Consolidated Financial Statements - Continued
September 30, 2006 and 2005
Note M - Common Stock Transactions - Continued
Calendar 2006 Transactions - continued
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 to La Terraza Trading and
Asset Management, Inc.
In July and August 2006, the Company issued an aggregate 41,245 shares of
restricted, unregistered common stock in payment of approximately $13,675 in
accrued dividends payable on the Company's outstanding Series B Preferred Stock
for the quarters ended March 31, 2006 and June 30, 2006.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 N - 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 $5,735, including applicable sales
taxes. The Company is responsible for all utilities and maintenance expenses.
The lease expires on December 1, 2009 and contains a clause that upon
expiration, the Company and the controlling shareholder shall renegotiate the
annual rental amount.
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, 2004 and 2003.
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 expired on
May 31, 2006. The Company has no further responsibility under this lease
agreement.
Future minimum rental payments on the above leases are as follows:
Year ended
December 31, Amount
------------ ----------
2005 $166,974
2006 117,244
2007 72,643
2008 68,815
2007 68,815
---------
Totals $494,491
========
25
American Ammunition, Inc. and Subsidiaries
Notes to Consolidated Financial Statements - Continued
September 30, 2006 and 2005
Note O - Income Taxes
The components of income tax (benefit) expense for the respective nine month
periods ended September 30, 2006 and 2005 are as follows:
Nine months Nine months
ended ended
September 30, September 30,
2006 2005
------------ ------------
Federal:
Current $ - $ -
Deferred - -
------- ------
- -
------- ------
State:
Current - -
Deferred - -
------- ------
- -
------- ------
Total $ - $ -
======= ======
As of December 31, 2005, the Company has a net operating loss carryforward of
approximately $10,500,000 to offset future taxable income. Subject to current
regulations, components of this carryforward began to expire at the end of
Calendar 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 months ended September
30, 2006 and 2005, respectively, differed from the statutory federal rate of 34
percent as follows:
Nine months Nine months
ended ended
September 30, September 30,
2006 2005
--------------------------
Statutory rate applied to loss before income taxes $(1,021,500) $(1,076,700)
Increase (decrease) in income taxes resulting from:
State income taxes - -
Imputed interest on derivative liability from
warrants and convertible notes 108,500 14,700
Other, including reserve for deferred tax asset 913,000 1,062,000
----------- ----------
Income tax expense $ - $ -
=========== ==========
[Balance of this page intentionally left blank.]
26
American Ammunition, Inc. and Subsidiaries
Notes to Consolidated Financial Statements - Continued
September 30, 2006 and 2005
Note O - Income Taxes - Continued
Temporary differences, consisting primarily of the net operating loss
carryforward and 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, 2006 and 2005, respectively:
Year ended Year ended
December 31, December 31,
2005 2004
------------------------------
Deferred tax assets - long-term
Net operating loss carryforwards $ 4,080,000 $ 2,669,000
Deferred tax liabilities - long-term
Statutory depreciation differences (525,000) (690,000)
----------- -----------
3,555,000 1,979,000
Less valuation allowance (3,555,000) (1,979,000)
----------- -----------
Net Deferred Tax Asset $ - $ -
=========== ===========
During the years ended December 31, 2005 and 2004, respectively, the valuation
allowance increased (decreased) by approximately $1,576,000 and $(671,000).
[Balance of this page intentionally left blank.]
27
ITEM 2 - Management's Discussion and Analysis or Plan of Operation
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.
Restatement issues
The June 30, 2006 and 2005 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 (see Notes I and J to the accompanying consolidated financial
statements).
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.
28
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."
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.
Results of Operations
Nine months ended September 30, 2006 compared with the nine months ended
September 30, 2005.
During the nine months ended September 30, 2006, we experienced aggregate
net revenues of approximately $1,685,000 ($306,000 in the current quarter), as
compared to approximately $2,233,000 during the first nine months of Calendar
2005 ($378,000 in the current quarter). The decline in sales was attributable to
our curtailing of production during January 2006 to improve the operating
efficiency of our manufacturing equipment and better automate select machines so
we can rely upon lower labor requirements in future periods.
In 2004, the Company initiated a direct solicitation program for it's
"dealer direct" sales program. This endeavor has received a very positive
initial response from the qualified retail resellers of the Company's product.
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.
We experienced costs of goods sold of approximately $2,738,000 for the nine
months ended September 30, 2006 as compared to approximately $4,021,000 for the
first nine months of Calendar 2005. Through September 30, 2006, and subsequent
thereto, we continue to experience negative trends with relation to our
calculated standard production costs for material and labor due to excess labor
capacity due to anticipated governmental orders which did not materialize as
management was led to believe from the various U. S. Governmental agencies
contracting officers. Management remains of the opinion that the production
labor force is stable and able to maintain a constant standard of quality in
future periods. We experience variable costs in the area of material consumption
and direct labor. 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.
For the nine month periods ended September 30, 2006 and 2005, we generated
a positive (negative) gross profit of approximately $1,053,000, or (62,5%), and
approximately $(1,787,000), or (80.0%).
29
We experienced nominal research and development expenses of approximately
$-0- and $2,600, respectively, during the respective nine month periods ended
September 30, 2006 and 2005.
During the nine months of Calendar 2006 and 2005, we expended approximately
$94,000 and $162,000, respectively, 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 were approximately $1,188,000 for
the nine months ended September 30, 2006 as compared to approximately $1,108,000
for the nine months ended September 30, 2006. Included in these expenses are
non-cash charges of approximately $260,000 and $198,000 for consulting fees
related to the sale/issuance of common stock at less than "fair value".
Management is of the opinion that G&A expenses 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 $(3,023,000) and $(3,167,000) for
the respective nine month periods ended September 30, 2006 and 2005,
respectively, or $(0.65) and $(0.84) per share. We call to the reader's
attention that the loss per share calculation for the nine months ended
September 30, 2005 has been adjusted for the effect of our 1 for 20 reverse
stock split on January 9, 2006.
Liquidity And Capital Resources
As of September 30, 2006, December 31, 2005 and September 30, 2005,
respectively, we had working capital of approximately $(1,478,000), $(885,000)
and $(265,000). Our working capital position continues to fluctuate based on
collections on our trade accounts receivable and investments from the mandatory
exercise of our outstanding warrant related to our convertible debenture. 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 we have approximately $1,075,000
in short-term notes payable to existing stockholders which may or may not be
renegotiated, repaid in common stock of the Company or otherwise reclassified
prior to their maturity on December 31, 2006. This amount is a contributing
factor to our negative working capital position at September 30, 2006 and
December 31, 2005.
We have used cash in operating activities of approximately $(1,247,000) and
$(1,663,000) during the nine month periods ended September 30, 2006 and 2005,
respectively. Due to our history of operating losses, our resources for
additional working capital are becoming more scarce.
During the third quarter of 2006, we negotiated a settlement with La Jolla
Cove Investors, Inc. and the assignment of the existing debentures and
outstanding warrants to La Terraza Trading and Asset Management, Ltd. As a
result of this transaction, the Company received a net $700,000 in restricted
cash to be held for future exercise of outstanding warrants.
On March 1, 2006, the Company issued a Private Placement Memorandum
offering up to 200,000 shares of Series E 8% Convertible Preferred Stock at an
offering price of $5.00 per share on a "best efforts" basis through an unrelated
30
placement agent. As of September 30, 2006, the Company has sold an aggregate of
100,000 shares for gross proceeds of $500,000 in two separate transactions
pursuant to this Private Placement Memorandum. Management continues to undertake
all prudent measures to assure that the Company can be self-supporting.
On September 13, 2006, the Company exercised it's repurchase rights related
to 50,000 shares of Series E 8% Convertible Preferred Stock for $275,000,
including a prepayment penalty of $25,000.
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 the nine months ended September 30, 2006 and 2005, respectively, we
added approximately $31,000 and $111,000 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.
Convertible Debenture
The Company entered into a Securities Purchase Agreement with La Jolla Cove
Investors, Inc. ("La Jolla") on October 4, 2002 for the sale of (I) $250,000 in
convertible debentures and (ii) warrants to buy 30,000,000 shares of our 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. This Agreement was transferred by La
Jolla to La Terraza Trading and Asset Management, Ltd. on September 13, 2006.
The Company paid an aggregate of $585,000 to retire the outstanding principal
balance on the debentures, repayment of prepaid warrant exercises and all
penalties, prepayment fees and other items contractually agreed to between the
Company and La Jolla.
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 $ - -
========== ===========
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 September 30, 2006. 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
31
(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 September 30,
2006 that has materially affected, or is reasonably likely to materially affect,
our internal control over financial reporting.
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
On September 13, 2006, the Company exercised it's repurchase rights and
retired 50,000 shares of the Series E 8% Convertible Preferred Stock, including
a 10% prepayment penalty, for $275,000 cash.
In July and August 2006, the Company issued an aggregate 41,245 shares of
restricted, unregistered common stock in payment of approximately $13,675 in
accrued dividends payable on the Company's outstanding Series B Preferred Stock
for the quarters ended March 31, 2006 and June 30, 2006.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 September 2006, the Company issued approximately 275,229 shares of
restricted, unregistered common stock, valued at approximately $22,018, 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 direct public relation expenses. 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. As
the per share value of this transaction was substantially less than the "fair
value" of the Company's common stock, per the closing price of the Company's
common stock on the transaction date, the Company recognized "consulting expense
related to the issuance of common stock at less than "fair value" in the amount
of approximately $118,348 on this transaction.
On September 13, 2006, the Company issued 56,003 shares of common stock to
La Jolla Cove Investors, Inc. to complete all obligations to La Jolla and assign
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 to La Terraza Trading and
Asset Management, Inc.
ITEM 3 - Defaults on Senior Securities
None
32
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 following sets forth those exhibits filed pursuant to Item 601 of
Regulation S-K:
Exhibit 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) The following sets forth the Company's reports on Form 8-K that have
been filed during the quarter for which this report is filed:
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.
Dated: October 19, 2007 /s/ Andres F. Fernandez
------------------- -----------------------------------------
Andres F. Fernandez
President, Chief Executive Officer
Chief Financial Officer and Director
33