Outdoor Holding Co: Form 10-Q for the period ended Dec 31, 2024

This Management’s Discussion and Analysis of Financial Condition and Results of Operations is intended to provide a reader of our financial statements with management’s perspective on our financial condition, results of operations, liquidity, and certain other factors that may affect our future results. The following discussion and analysis of our financial condition and results of operations should be read in conjunction with (i) the accompanying unaudited consolidated financial statements and notes thereto for the three and nine months ended December 31, 2024, (ii) the audited consolidated financial statements and notes thereto for the year ended March 31, 2024 included in our Annual Report on Form 10-K/A (as amended, the “Form 10-K/A”) filed with the Securities and Exchange Commission (the “SEC”) on May 20 ,2025 and (iii) the discussion under the caption “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in the Form 10-K/A. Except for certain information as of March 31, 2024, all amounts herein are unaudited. Unless we state otherwise or the context otherwise requires, the terms “we,” “us,” “our” and the “Company" refer to Outdoor Holding Company (formerly AMMO, Inc.) and its consolidated subsidiaries.

Sale of Ammo Manufacturing Business and Name Change

On April 18, 2025, the Company, together with its subsidiaries AMMO Technologies, Inc., an Arizona corporation (“AMMO Tech”), Enlight Group II, LLC d/b/a Jagemann Munition Components d/b/a Buythebullets, a Delaware limited liability company (“Enlight”), Firelight Group I, LLC, a Delaware limited liability company (“Firelight”, and together with AMMO Tech, and Enlight, collectively, the “Sellers”, and the Sellers together with the Company, the “Seller Group”) completed the previously announced (i) sale of all assets of the Sellers related to the Sellers’ business of designing, manufacturing, marketing, distributing and selling ammunition and ammunition components (collectively, the “Ammunition Manufacturing Business”) along with certain assets of the Company related to the Ammunition Manufacturing Business, and (ii) assumption of certain liabilities of the Seller Group related to the Ammunition Manufacturing Business, for a gross purchase price of $75,000,000, subject to certain adjustments, in accordance with the terms of that certain Asset Purchase Agreement, dated January 20, 2025, by and among the Seller Group and Olin Winchester, LLC, a Delaware limited liability company (the “Buyer”), as amended on April 18, 2025 by the First Amendment to the Asset Purchase Agreement (the “Purchase Agreement” and the transaction contemplated thereby, the “Transaction"). The assets acquired, and the liabilities assumed, by the Buyer were those primarily related to the Ammunition Manufacturing Business, including the Ammunition Manufacturing Business’ dedicated manufacturing facility in Manitowoc, Wisconsin. The Company will continue to operate its online marketplace business associated with selling ammunition and firearms as a brokering agent or through direct sales through the Company’s subsidiary Speedlight Group I, LLC d/b/a GunBroker and its subsidiaries.

On April 21, 2025 and in connection with the closing of the Transaction, the Company changed its name from “AMMO, Inc.” to “Outdoor Holding Company.” Except as otherwise provided in this Item 2, all references to the Company in this Item 2 refer to the Company and its subsidiaries on a consolidated basis prior to the closing of the Transaction. For additional information regarding the Transaction, see Note 17, "Subsequent Events" of the unaudited condensed consolidated financial statements included in this report.

Overview

AMMO, Inc., owner of the GunBroker Marketplace ("GunBroker" or the "Marketplace"), the largest online marketplace serving the firearms and shooting sports industries, and a producer of high-performance ammunition and premium components began its operations in 2017.

Through our GunBroker Marketplace segment, we allow third-party sellers to list firearms, hunting gear, fishing equipment, outdoor gear, collectibles, and much more on our site. In addition to offering a wide breadth of products, GunBroker helps facilitate the legal transfer of regulated goods by stipulating these purchases be transferred through our network of more than 31,000 local Federal Firearms License holders. This requirement helps our 8.3 million users stay compliant with federal and state laws that govern the sale of firearms and other restricted items. As an online auction and sales platform, GunBroker also affords us a unique analytical view into the total domestic market for the purpose of understanding sales trends at a granular level across the shooting sports industry, with ever-growing data capabilities in associated outdoor segments. Our vision is to continue to expand services under the GunBroker umbrella and to become a valued and trusted partner to those in our industry. Recent expansions we have made to the platform include the following;

• Recommended Items Feature – Our cart has been augmented with the addition of recommended product suggestions. Items that complement what a buyer has placed in the cart are presented to enhance their shopping experience.
• Financing – A buyer’s ability to purchase items has been expanded with the addition of financing. Sellers now have the ability to offer financing on purchases to their customers directly within the platform. When coupled with the cart and checkout a buyer can finance an entire basket of items from a seller in one easy transaction.
• Outdoor Analytics – Has been rebranded from GunBroker Analytics to service the broader industry. We provide insights that help manufacturers, distributors and dealers refine their market strategies based on timely information from the largest outdoor marketplace.
• Collector’s Elite – To meet the needs of sellers with specialty items GunBroker.com has launched Collector’s Elite Auctions. This elevated experience presents unique, collectible and high value merchandise to buyers looking for curated items outside of the traditional marketplace inventory. We believe a highly competitive fee structure makes Collector’s Elite Auctions an attractive option amongst its peers.

Through our Ammunition segment, we are tailoring our focus of our manufacturing operations to the production of premium pistol and rifle ammunition and supporting industry partners with manufactured components such as premium pistol and rifle brass casings. We will continue to leverage our flagship brands that are proprietary in nature, including STREAK VISUAL AMMUNITION™ , /stelTH/™, Signature-on-Target, and HUNT and extend our product offering with premium rifle lines and brands that complement our technologically innovative heritage. We also continue to ensure dynamic performance under the exacting standards of the United States military complex in support of our cutting-edge developmental ammunition programs as we seek out and effectively execute upon new governmental-based opportunities.

Results of Operations

Our financial results for the three and nine months ended December 31, 2024, reflect our transition into our new operational strategic position, focusing on higher brass casing production and sales. We believe that we have hired a strong team of professionals and developed innovative products to establish our presence as a high-quality ammunition provider and marketplace. We continue to focus on building profitability through our rifle brass manufacturing.

The following table presents summarized financial information taken from our consolidated statements of operations for the three and nine months ended December 31, 2024, compared with the three and nine months ended December 31, 2023:

(Unaudited)

(Unaudited)

(Unaudited)

(Unaudited)

Non-GAAP Financial Measures

We analyze operational and financial data to evaluate our business, allocate our resources, and assess our performance. In addition to total net sales, net loss, and other results under accounting principles generally accepted in the United States (“GAAP”), the following information includes key operating metrics and non-GAAP financial measures that we use to evaluate our business. We believe that these measures are useful for period-to-period comparisons of the Company's performance. We have included these non-GAAP financial measures because they are key measures management uses to evaluate our operational performance, produce future strategies for our operations, and make strategic decisions, including those relating to operating expenses and the allocation of our resources. Accordingly, we believe that these measures provide useful information to investors and others in understanding and evaluating our operating results in the same manner as our management and Board of Directors.

Adjusted EBITDA

(1) For the three and nine months ended December 31, 2024, other nonrecurring expenses consisted of professional and legal fees related to the SEC Investigation, the Special Committee Investigation, the restatement and the Delaware lawsuit as well as settlement contingencies. For the three and nine months ended December 31, 2023, other nonrecurring expenses consisted of professional and legal fees related to the SEC Investigation as well as settlement contingencies.

Adjusted EBITDA is a non-GAAP financial measure that displays our net loss, adjusted to eliminate the effect of certain items as described below. We define Adjusted EBITDA as net income (loss) excluding (i) interest expense, net, (ii) other income (expense), net, (iii) provision or benefit for income taxes, (iv) depreciation and amortization, (v) share-based or warrant-based compensation expenses, (vi) changes to the contingent consideration fair value, (vii) proxy contest fees and (viii) other nonrecurring expenses, such as professional and legal fees.

We believe that it is useful to exclude these non-cash expenses and non-recurring expenses because the amount of such expenses in any specific period may not directly correlate to the underlying performance of our business operations.

Non-GAAP financial measures have limitations, should be considered as supplemental in nature and are not meant as a substitute for the related financial information prepared in accordance with GAAP. These limitations include the following:

• employee stock awards, stock grants, and common stock purchase options expense has been, and will continue to be for the foreseeable future, a significant recurring expense in the Company and an important part of our compensation strategy;
• the assets being depreciated or amortized may have to be replaced in the future, and the non-GAAP financial measures do not reflect cash capital expenditure requirements for such replacements or for new capital expenditures or other capital commitments;
• non-GAAP measures do not reflect changes in, or cash requirements for, our working capital needs; and
• other companies, including companies in our industry, may calculate their non-GAAP financial measures differently or not at all, which reduces their usefulness as comparative measures.

Due to these limitations, you should consider the non-GAAP financial measures alongside other financial performance measures, including our net loss and our other financial results presented in accordance with GAAP.

Net Revenues

The following table presents our revenues by the various categories that comprise our total revenues for the three and nine months ended December 31, 2024 and 2023. “Proprietary ammunition” includes those lines of ammunition that we manufacture at our facilities and sell under the brand names “STREAK VISUAL AMMUNITION™” and “/stelTH/™”. We define “standard ammunition” as non-proprietary ammunition that directly competes with other brand manufacturers. Our “standard ammunition” includes ammunition that we manufacture at our facilities as well as any completed ammunition that we acquire in the open market for sale to others. Also included in this category is low-cost target pistol and rifle ammunition as well as bulk packaged ammunition that we manufacture using reprocessed brass casings. Ammunition within the standard ammunition product line typically carries much lower gross margins than our proprietary ammunition.

We experienced an 18.9% and 12.5% decrease in our net revenues for the three and nine months ended December 31, 2024, respectively, compared with the three and nine months ended December 31, 2023. These decreases were the result of decreased revenue in both of our reporting segments due to changes in market demand and specifically for our ammunition division, changes in pricing, and sales mix. In addition, our brass customer demand decreased due to a shortage of powder available in the market. We believe that the shift in our operational strategy focusing on higher margin brass casing production and sales negatively impacted our sales in the three and nine months ended December 31, 2024, as compared to the three and nine months ended December 31, 2023. Our focus on creating profitability is in contrast to revenue growth. In our Marketplace segment, revenue declined in three and nine months ended December 31, 2024 compared to the three and nine months ended December 31, 2023 due to less demand for firearms and lower disposable income for recreation purposes partially offset by an increase in the take rate over the prior year periods.

The opening of our manufacturing plant in Manitowoc, WI in August 2022, allows us the ability to increase capacity based upon the needs of the market and through further expansion of our casing and loading lines and allows us to continue to expand distribution into commercial markets, introduce new product lines, and continue to initiate sales to U.S. law enforcement, military, and international markets.

For example, through our acquisition of SW Kenetics, Inc., the Company developed and deployed a line of tactical armor piercing (“AP”) and hard armor piercing incendiary (“HAPI”) precision ammunition to meet the lethality requirements of both the U.S. and foreign military customers. We continue to demonstrate our AP and HAPI ammunition to military personnel at scheduled and invite only events, resulting in increased interest and procurement discussions. The Company has since developed the ballistic match (“BMMPR”) and Signature-on-Target rounds under contract with the U.S. Government in support of U.S. special operations, which contracts have been publicly announced pursuant to governmental authorization. Additional work continues in support of the military operations of the United States and its allied military components, the status of which is not currently subject to disclosure.

It is important to note that, although U.S. law enforcement, military and international markets represent significant opportunities for our Company, they also have a long sales cycle. The Company’s sales team has been effective in establishing sales and distribution channels, both in the United States and abroad, that we anticipated will drive sustained sales opportunity in the military, law enforcement, and commercial markets.

Cost of Revenues

Cost of revenues for our Ammunition segment consists of product cost and cost directly and indirectly associated with getting those products to a sellable state. Cost of revenues for our Marketplace segment consists of costs associated with facilitating transactions on the platform.

Cost of revenues decreased by approximately $3.7 million and $4.7 million to $21.4 million and $66.8 million, respectively, for the three and nine months ended December 31, 2024, compared to the three and nine months ended December 31, 2023. These decreases were the result of a decrease in net sales as well increases to non-cash depreciation related to increases in production equipment, expensing of increased labor, and overhead used to produce finished product during the three and nine months ended December 31, 2024 as compared to the prior year periods.

Gross Margin

Our gross margin percentage, which measures our gross profit as a percentage of sales, decreased to 26.7% for the three months ended December 31, 2024 from 30.3% for the three months ended December 31, 2023. Our gross margin percentage decreased to 27.1% for the nine months ended December 31, 2024 from 31.7% , for the same period in 2023. These decreases were a result of increased cost of materials, labor, and overhead in our Ammunition segment, the impact of which was partially offset by contributions from our marketplace, GunBroker.com, which improved margins period over period by increased fees and services.

We believe that as we grow Ammunition segment sales through new markets and expanded distribution, our gross margins will continue to increase. Our goal in the next 12 to 24 months is to continue to improve our gross margins. We expect to accomplish this through the following:

• Capacity improvements at the Manitowoc, WI facility and expansion of our rifle casing and loading lines;
• Increased product sales, specifically of proprietary and flagship lines of ammunition, such as the STREAK VISUAL AMMUNITION™, /stelTH/™, Signature-on-Target, and HUNT all of which carry higher margins as a percentage of their selling price;
• Introduction of new lines of ammunition that carry higher margins in the consumer and government sectors;
• Reduced component costs through insourced operations of our Ammunition segment and expansion of strategic relationships with component providers resulting in cost savings;
• Expanded use of automation equipment that reduces the total labor required to assemble finished products;
• Vertical integration into tooling manufacturing and annealing of rifle cases that have previously been outsourced;
• Better leverage of our fixed costs through expanded production to support the sales objectives;
• Enhancing the recently implemented multi-item cart and related payment processing, which adjusts our category fees for nonregulated items that will enable us to increase our take rate across the platform as we enable cross selling;
• Growing our advertising sales, financing partnerships, and bringing enhanced shipping options to our community.

Operating Expenses

Operating expenses consist of selling and marketing expenses, which include advertising, tradeshows, commissions and marketing expenses, corporate general and administrative expenses, which include legal and professional fees and as well as insurance and rent, employee salaries and related expenses, which include salaries, benefits and stock based compensation as well as depreciation and amortization expenses.

Operating expenses increased by approximately $20.4 million for the three months ended December 31, 2024 compared to the three months ended December 31, 2023, and increased as a percentage of sales to 116.2% for the three months ended December 31, 2024 from 37.4% for the three months ended December 31, 2023. The increase was primarily due to $10.0 settlement contingency, a $9.7 million increase in legal and professional fees related to the restatement, the Special Committee Investigation and the SEC Investigation and professional fees associated with investments in increased manufacturing efficiencies.

Operating expenses increased approximately $27.0 million for the nine months ended December 31, 2024 compared to the nine months ended December 31, 2023, and increased as a percentage of sales to 80.6% for the nine months ended December 31, 2024 from 44.7% for the nine months ended December 31, 2023. This increase was primarily due to a $10.8 million increase in legal and professional fees related to the restatement, the Special Committee Investigation and the SEC Investigation, a $10.0 million settlement contingency, $3.5 million in expenses related to a settlement contingency, partially offset by $1.3 million due to insurance audit refunds, and a decrease of $0.2 million in bad debt expenses.

Other Income

Other income for the three and nine months ended December 31, 2024, increased by $0.2 million and $0.3 million, respectively, compared to the three and nine months ended December 31, 2023. This increase was primarily the result an increase in interest income earned during the three and nine months ended December 31, 2024.

Interest expense remained constant for the three and nine months ended December 31, 2024, compared to the three and nine months ended December 31, 2023.

Income Taxes

For the three and nine months ended December 31, 2024, we recorded a benefit for federal and state income taxes of approximately zero and $4.7 million, respectively. For the three and nine months ended December 31, 2023, we recorded a benefit for federal and state income taxes of approximately $0.4 million and $2.4 million, respectively. The change in tax benefit for the three and nine months ended December 31, 2024 is a result of recording a full valuation allowance against our deferred tax assets as we concluded it is more likely than not that the net deferred tax assets will not be realized.

Liquidity and Capital Resources

As of December 31, 2024, we had $31.9 million of cash and cash equivalents, a decrease of $23.7 million from March 31, 2024. For the nine months ended December 31, 2024, the $23.7 million decrease in cash and cash equivalents is primarily due to $8.0 million related to the settlement with Triton Value Partners, LLC, $14.0 million in legal fees, $2.7 million in unpaid Firearms and Ammunition Excise Tax from the prior fiscal year, $1.9 million in consulting fees related to the improvement of the manufacturing process in rifle brass at our manufacturing facility in Manitowoc, WI, $1.5 million due to the purchase of inventory, $1.4 million increase in capital expenditures related to acquiring an annealing oven and tooling equipment, and $1.1 million in stock buybacks.

Working capital is summarized and compared as follows:

Changes in cash flow are summarized as follows:

Operating Activities

For the nine months ended December 31, 2024, net cash used in operations was primarily the result of our net loss offset by non-cash depreciation and amortization and a decrease in accounts receivable due to lower sales and increased collection efforts and by an increase in our deferred tax asset.

For the nine months ended December 31, 2023, net cash provided by operations was primarily the result of a decrease in accounts receivable, an increase in inventory and deposits for inventory and equipment and non-cash expense for depreciation and amortization partially offset by an increase in our deferred tax asset.

Investing Activities

For the nine months ended December 31, 2024, net cash used in investing activities consisted of $4.1 million related to purchases of production equipment, and capitalized software development costs related to our marketplace, GunBroker.

For the nine months ended December 31, 2023, net cash used in investing activities consisted of approximately $5.6 million related to purchases of production equipment for our manufacturing facility in Manitowoc, WI and capitalized software development costs related to our marketplace, GunBroker.com.

Financing Activities

For the nine months ended December 31, 2024, net cash used in financing activities consisted of $5.9 million under the stock repurchase plan which included shares repurchased related to the settlement described in the Contingencies section of Note 2, $2.2 million of insurance premium note payments, $2.2 million for the payment of preferred stock dividends, and $0.5 million used to repurchase Common Stock to cover taxes on share awards issued to employees.

For the nine months ended December 31, 2023, net cash used in financing activities consisted of approximately $2.2 million used in our common stock repurchase plan, $3.0 million from insurance premium note payments, approximately $2.2 million for the payment of Preferred Stock dividends, and the generation of approximately $37.2 million from accounts receivable factoring, which was offset by payments of approximately $37.2 million.

Liquidity

We expect existing working capital, cash flow from operations, bank borrowings, and sales of equity and debt securities to be adequate to fund our operations over the next 12 months. Generally, we have financed operations to date through the proceeds of stock sales, bank financings, and related-party notes. These sources have been adequate to fund our recurring cash expenditures including but not limited to our working capital requirements, capital expenditures to expand our operations, debt repayments, and acquisitions. We intend to continue to use the aforementioned sources of funding for capital expenditures, debt repayments, share repurchases and any potential acquisitions.

Leases

We currently lease three locations that are used for our offices, production, and warehousing. As of December 31, 2024, we had $1.7 million of fixed lease payment obligations with $0.5 million payable within the next 12 months. Please refer to Note 9, "Leases" in our financial statements for additional information.

Construction Loan

On October 14, 2021, we entered into a Construction Loan Agreement (the “Hiawatha Loan Agreement”) with Hiawatha National Bank (“Hiawatha”). The Hiawatha Loan Agreement specifies that Hiawatha may lend up to $11.625 million to AMMO, INC. and Firelight Group I, LLC (together, the "Borrower") to pay a portion of the construction costs of the approximately 185,000 square foot Manitowoc manufacturing facility (the “Construction Loan”). The first advance of Construction Loan funds by Hiawatha was made on October 14, 2021 in the amount of $329,843. We received advances of Construction Loan funds approximately every month as our “owner’s equity” was fully funded into the ongoing new plant construction project. The Construction Loan is an advancing term loan and not a revolving loan so any portion of the principal repaid cannot be re-borrowed.

Additionally, on October 14, 2021, we issued a Promissory Note in favor of Hiawatha (the “Hiawatha Note”) in the amount of up to $11.625 million with an interest rate of four and one-half percent (4.5%). The maturity date of the Hiawatha Note is October 14, 2026. Under the terms of the Hiawatha Loan Agreement, we are required to make monthly payments of $64,620, which consists of principal and interest until the maturity date, at which time the remaining principal balance of the Construction Loan would become due.

We can prepay the Hiawatha Note in whole or in part starting in July 2022 with a prepayment premium of 1% of the principal being prepaid.

The Hiawatha Loan Agreement contains customary events of default including, but not limited to, a failure to make any payments pursuant to the Hiawatha Loan Agreement or Hiawatha Note, a failure to complete construction of the project, a lien of $100,000 or more against the property, or a transfer of the property without Hiawatha’s consent. Upon the occurrence of an event of default, among other remedies, the amounts due pursuant to the Construction Loan can be accelerated, Hiawatha can foreclose on the property pursuant to the mortgage, and a late charge of five percent (5%) of the amount due will be owed with all amounts then owed pursuant to the Hiawatha Note bearing interest at an increased rate.

We are required to maintain a debt service coverage ratio (as defined in the terms of the Hiawatha Loan Agreement) of not less than 1.25 to 1.00 for the period defined below and continuing to and including the maturity date. The debt service coverage ratio is tested on an annual basis, as of July 1, for each previous year. We have maintained compliance with the debt service coverage ratio under the Hiawatha Loan Agreement since its inception.

During the year ended March 31, 2023, approximately $11.2 million of Construction Loan funds were advanced including $1.0 million of cash collateral or restricted cash as security for the Construction Loan. We made $183,195 and $181,639 in principal payments for the nine months ended December 31, 2024 and December 31, 2023, respectively. The restricted cash can be released per the terms documented in the Hiawatha Loan Agreement. During the year ended March 31, 2023, $500,000 of restricted cash was released with $500,000 remaining restricted. During the fiscal year ended March 31, 2024, the remaining $500,000 of restricted cash was released, resulting in a zero balance for restricted cash as of March 31, 2024.

We financed a portion of our Manitowoc, WI facility with the Construction Loan. As of December 31, 2024, we expect to make $0.3 million in principal and interest payments within the next 12 months. The principal balance of the Construction Loan will mature on October 14, 2026.

Revolving Loan

On December 29, 2023, we entered into a Loan and Security Agreement (the “Sunflower Agreement”) by and among the Company and the other borrowers party to the Sunflower Agreement, the lenders party thereto (collectively, the “Lenders”) and Sunflower Bank, N.A., as administrative agent and collateral agent (the “Agent”), pursuant to which the Lenders provided us a revolving loan in the principal amount of the lesser of (a) $20.0 million (the “Total Commitment Amount”) and (b) the Borrowing Base (a formula based on certain amounts owed to Borrower for goods sold or services provided and eligible inventory) (the “Revolving Loan”). The proceeds of loans under the Sunflower Agreement may be used for working capital, general corporate purposes, permitted acquisitions, to pay fees and expenses incurred in connection with the Revolving Loan, to facilitate our stock repurchase program and to fund our general business requirements.

The Revolving Loan bears interest at a rate of the greater of (x) 3.50% and (y) Term SOFR, plus 3.00% (the “Revolving Facility Applicable Rate”) and is computed on the basis of a 360-day year for the actual number of days elapsed. Except in an event of default, advances under the Revolving Loan bear interest, on the outstanding daily balance thereof, at the Revolving Facility Applicable Rate. Interest is due and payable on the first calendar day of each month during the term of the Sunflower Agreement. We are also obligated to pay to Agent, for the ratable benefit of Lenders, an origination fee, prepayment fee, unused facility fee, collateral monitoring fee and Lender expenses.

We may borrow, repay and re-borrow under the Revolving Loan until December 29, 2026, at which time the commitments will terminate and all outstanding loans, together with all accrued and unpaid interest, must be repaid. If the Revolving Loan is refinanced by another lender prior to December 29, 2026, there is an additional fee payable concurrently with such refinancing based on a percentage (ranging from 1.0% to 3.0%) of the Total Commitment Amount depending on the date of the refinancing. Upon an event of default under the Sunflower Agreement, all obligations under the Sunflower Agreement will bear interest at a rate equal to three (3.0) percentage points above the interest rate applicable immediately prior to the occurrence of the event of default.

As of December 31, 2024, we did not have an outstanding balance on the Revolving Loan.

Off-Balance Sheet Arrangements

As of December 31, 2024 and March 31, 2024, we did not have any off-balance sheet arrangements that have or are reasonably likely to have a current or future material effect on our financial condition, net sales, expenses, results of operations, liquidity capital expenditures, or capital resources.

Critical Accounting Estimates

Our condensed consolidated financial statements were prepared in accordance with GAAP. Critical accounting estimates are those that we believe are most important to the portrayal of our financial condition and results of operations. The preparation of our consolidated financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses. Our estimates are evaluated on an ongoing basis and are drawn from historical operations, current trends, future business plans and other factors that management believes are relevant at the time our consolidated financial statements are prepared. Actual results may differ from our estimates. Management believes that the accounting estimates reflect the more significant judgments and estimates we use in preparing our consolidated financial statements.

Certain accounting policies that require significant management estimates, and are deemed critical to our results of operations or financial position, are discussed in the critical accounting policies and estimates section of Management’s Discussion and Analysis of Financial Condition and Results of Operations in the Form 10-K/A. There have been no material changes to the critical accounting policies disclosed in the Form 10-K/A.

There have been no material changes from the market risks disclosed under the caption “Quantitative and Qualitative Disclosures About Market Risk” in Part II, Item 7A of the Annual Report on Form 10-K for the year ended March 31, 2024 and filed with the SEC on June 13, 2024 and is hereby incorporated by reference.

Background and Results of Special Committee Investigation

As described in additional detail in the Explanatory Note to the Form 10-K/A, in September 2024, a Special Committee of the Board of Directors initiated an independent investigation of certain matters impacting the Company's accounting procedures, disclosure controls and internal controls during prior periods. The investigation was undertaken through independent legal counsel, who received assistance from outside consultants. During the course of the investigation, the Special Committee discovered accounting and financial reporting errors that required restatement resulting primarily from (i) inaccurate valuation of, and accounting for, share-based compensation awards to employees, non-employee directors and other service providers, and shares issued in exchange for goods and services, (ii) inappropriate capitalization of certain share issuance costs and (iii) inappropriate accounting for certain convertible notes and warrants issued by the Company. During the course of the investigation, the Special Committee also found that the Company had not properly disclosed certain executive officers, related party transactions and executive compensation.

Based on the results of the independent investigation, our review of our financial records, and other work completed by our management, the Special Committee concluded that there were material misstatements in the consolidated financial statements as of and for the fiscal years ended March 31, 2024, 2023 and 2022. Accordingly, the Board of Directors and management concluded that our consolidated financial statements for these periods should no longer be relied upon and that such financial statements required restatement. The restated consolidated financial statements as of and for the fiscal years ended March 31, 2024, 2023 and 2022 were provided in the Form 10-K/A.

Evaluation of Disclosure Controls and Procedures

Our management evaluated the effectiveness of our disclosure controls and procedures as defined in Rule 13a-15(c) and 15d-15(e) under the Exchange Act, as of December 31, 2024. Our disclosure controls and procedures are designed to provide reasonable assurance that information we are required to disclose in the reports we file or submit under the Exchange Act is accumulated and communicated to our management, including our Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”), as appropriate, to allow timely decisions regarding required disclosures, and is recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms.

Based upon that evaluation, our CEO and CFO have concluded that our disclosure controls and procedures were not effective at a reasonable assurance level as of December 31, 2024 due to the material weaknesses previously identified and disclosed in the Form 10-K/A and listed below.

Material Weaknesses and Management’s Remediation Plan

Management determined that the previously disclosed material weaknesses in its internal control over financial reporting processes that involve the control environment, information and communication, monitoring activities, and control activities components of the framework set forth in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) continue to exist at December 31, 2024, and specifically include:

Control Environment, Information and Communication, and Monitoring Activities – Under the COSO framework, the Board of Directors and senior management establish the tone at the top regarding the importance of internal controls and management reinforces expectations at the various levels of the company.

We did not execute appropriately designed entity-level controls governing the control environment and effective monitoring controls to prevent or detect material misstatements to the consolidated financial statements. These deficiencies were attributed to (i) a lack of a sufficient complement of qualified personnel within the accounting and financial reporting function, including reliance on unqualified personnel, with an appropriate level of technical expertise to provide for sufficient oversight, accountability and monitoring over the performance of control activities, (ii) insufficient governance to monitor compliance with the Company's Code of Conduct to identify, evaluate, and report potential fraud as well as related director and management behavior, such as, among other things, director independence, and (iii) improper review and approval of disclosure regarding related party transactions and executive compensation.

Control Activities – These material weaknesses in the control environment resulted in certain instances of inappropriate accounting decisions and inappropriate changes in accounting methodology and contributed to the following additional material weaknesses whereby we did not design, implement and maintain effective controls within certain business processes:

• Complex Technical Accounting: Stock Compensation / Warrants / Convertible Notes – We did not design and maintain controls over the effective review of the models, assumptions and data used in developing estimates or changes made to models, assumptions and data to ensure the appropriate application of GAAP. It was further determined that the existence of complementary or compensating controls could not be relied upon to mitigate the identified deficiencies given failures were detected in all critical procedures from initiation to disclosure of the related transactions, including: timely and accurate accounting assessments performed over newly executed contracts to ensure appropriate application of GAAP; the review and approval of the issuance of stock awards to employees and third-party service providers including determining specific grant dates and key terms; determination of an appropriate fair value measurement for financial instruments; review of the classification and recording of equity compensation expenses; timely and accurate application of GAAP related to equity issuance costs; and recognition and disclosure of compensation expense for all share-based payment awards to employees, directors and third parties.
• Related Party Transactions and Executive Compensation – We did not properly maintain controls over the identification and disclosure of related party transactions and executive compensation. There were insufficient management review procedures to validate the completeness and accuracy of related party and executive compensation disclosures and to clearly define and evidence the process used and criteria and judgment applied to identify and disclose related party transactions and executive compensation.
• Financial Reporting – We did not properly maintain controls over period-end financial reporting, including tie-out and review of supporting documentation. There were insufficient management review procedures to validate the completeness and accuracy of complex technical accounting transactions and to clearly define and evidence the process used and criteria and judgment applied in the performance of critical business components.
• Segregation of Duties – We failed to properly separate the execution of certain controls by designated senior management, which did not provide for proper segregation between preparer and reviewer for select transactions. We further failed to fully resolve identified segregation of duties conflicts with system access for designated business and IT users, thus related user access review and application change management procedures could not be relied upon for select Company systems.

Management’s Remediation Initiatives for Existing Material Weaknesses

Following the identification of the previously disclosed material weaknesses described above, and with the oversight of the Audit Committee, management remains committed to the planning and implementation of remediation efforts to address these material weaknesses. The remediation efforts, summarized below, which are either implemented or in process, are intended to both address the identified material weaknesses and strengthen our overall financial control environment. In this regard, our initiatives include:

Control Environment, Information and Communication, and Monitoring Activities:

• Executive Communications to Reinforce Compliance – The Company’s CEO and other executives, at the direction of the Board of Directors, continue to reinforce the importance of adherence to the Company’s policies and procedures regarding ethics and compliance and the importance of identifying misconduct and raising and communicating concerns. This reinforcement has occurred through email and employee newsletter communications, staff meetings, remarks given to senior management, as well as other employee forums, including mandatory ethics training.
• Organizational Enhancements – The Company continues to implement several organizational enhancements, as follows: (i) the hiring of a Chief Financial Officer, who brings extensive knowledge across finance, strategy, and transformation; (ii) the identification and hiring of a Vice President of Accounting and External Reporting, who has the responsibility and authority to ensure that GAAP and accounting for complex or non-routine transactions that require specialized accounting are appropriately applied corporate-wide (iii) the enhancement of the Company’s organizational structure over all finance functions and an increase in the Company’s accounting personnel with the requisite knowledge, experience, and training in GAAP to ensure that a formalized process for determining, documenting, communicating, implementing and monitoring controls over the period-end financial close and reporting processes is maintained and proper segregation exists between the preparer and reviewer for select transactions, and (iv) enhancement of accounting policies and procedures related to journal entries, invoice approval, account reconciliations and variance thresholds.
• Significant and Unusual Transactions - The Company continues to evaluate its practices related to significant non-recurring transactions and has begun implementing improvements in those practices, including: (i) updating the process to address agreements with non-standard terms, including formalized review and approval (ii) more formalized practices for assessing the need for utilization of a third-party expert for unusual or complex transactions and (iii) the development of a more comprehensive review process and monitoring controls over significant transactions to ensure accurate accounting and the preparation of accounting memoranda.
• Related Party Transaction Policy – The Company has been applying a new Related Party Transactions Policy to proactively identify transactions and improve disclosures. Guidance is provided by new corporate disclosure counsel with review/approval by the Audit Committee.
• Perquisites Policy – The Company has been applying the principles of an informal new perquisites policy to better define its perquisites disclosure requirements, perquisite identification, training, and employee compliance requirements.
• Establishment of Disclosure Committee - In June 2024, the company established a formal disclosure committee that includes key members of management that have responsibility for disclosure information necessary for periodic reports filed with the SEC. Going forward, this committee will meet on an as-needed basis as well as prior to the Audit Committee meeting in which the Form 10-K, Form 10-Q or other relevant Exchange Act document will be approved by the Audit Committee and the Board of Directors and will conduct follow-up meetings as necessary. The meetings covered all significant events from the period being reported upon and supporting information. A charter was created governing the conduct of this committee, a formal agenda was distributed prior to each meeting, and minutes were maintained for each meeting.

Control Activities:

• Implementation of New Accounting System – The Company has implemented a new accounting system that may allow management to effectively design and implement appropriate general information technology and automated system controls, including system enforced segregation of duties. The Company continues to evaluate other systems and applications for additional controls. Management will also continue the rollout of

IT remediation action plans, including developing an enhanced risk assessment process for third-party IT systems and implementation of IT monitoring procedures.

• Implementation and Enhancement of Entity Level Controls - The Company intends to enhance existing entity level controls as a result of the control design remediation efforts and Audit Committee recommendations, and implement the following new entity level controls around the quarterly/annual financial reporting process:
• Enhanced Review Procedures: The Company has initiated enhancements to its management review procedures through additional training of accounting staff, improved evidence of review through tick marks and screenshots to validate the completeness and accuracy of transactions and to clearly define and evidence the process used and criteria and judgment applied in performance of critical business activities. The Company has also hired additional personnel and engaged third-party accounting experts, as needed, in its financial reporting and accounting function to ensure we have a sufficient complement of personnel with an appropriate level of knowledge, experience, and training commensurate with our financial reporting requirements.
• We believe the foregoing efforts, when fully implemented and operational, will effectively remediate the material weaknesses described above and strengthen our internal control over financial reporting. As we continue to evaluate and work to improve our internal control over financial reporting, we may take additional measures to address these control deficiencies or modify the remediation plan described above.

Changes in Internal Control over Financial Reporting

Other than the changes described above, there have not been any changes in our internal control over financial reporting (as such term is defined in Exchange Act in Rule 13a-15(c) and 15d-15(e) under the Exchange Act) during the quarter ended December 31, 2024, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. As of the filing of this report, we continue to implement the changes and remediation plan described above.

Our market risks are similar to those disclosed under the caption “Risk Factors” in Part I, Item 1A of the Form 10-K/A for the year ended March 31, 2024, and filed with the SEC on May 20, 2025. There have been no material changes other than those listed below to our Risk Factors disclosed in the Form 10-K/A.

The matters relating to the restatement of our financial statements have required, and may continue to require, a significant amount of management time and accounting, financial and legal resources, which could adversely affect our business, financial condition and results of operations.

The Special Committee investigation (the "Special Committee Investigation") and subsequent restatement process was highly time and resource-intensive and involved substantial attention from management and significant legal and accounting costs. Furthermore, as a result of the circumstances giving rise to the restatement, we have become subject to a number of additional risks and uncertainties, including unanticipated costs for accounting and legal fees in connection with or related to the restatement, stockholder litigation and a pending investigation by the SEC’s Division of Enforcement (the “SEC Investigation”). The SEC Staff has significant discretion in conducting investigations, and therefore, the Company cannot predict the scope or outcome of the SEC Investigation. Based upon document subpoenas to the Company and other communications in January 2025, it appears that the SEC Staff is investigating and likely will recommend that the SEC bring an enforcement action relating to the Company’s: (i) valuation of, and accounting for share-based compensation awards to employees, non-employee directors and other service providers, and issued in exchange for goods and services; (ii) capitalization of certain share issuance costs; (iii) disclosure of perquisites and the valuation of equity-based compensation paid to certain executives; (iv) disclosure of certain executive officers and related party transactions; and (v) disclosure concerning the calculation of Adjusted EBITDA. The SEC Staff have not issued a Wells Notice to the Company in the SEC Investigation. If the SEC Staff issues a Wells Notice, the Company will have the opportunity to present factual evidence, legal arguments and mitigating circumstances to the SEC why an enforcement action is not warranted. If, notwithstanding the Company’s Wells submission, the SEC authorizes a civil enforcement action, the agency may seek injunctions, civil penalties or other relief, and the Company may incur additional legal and other professional fees in defending such action or negotiating a resolution. Management's attention and resources have been, and may continue to be, diverted from the operation of our business as a result of the ongoing impact of the restatement, the Special Committee Investigation, the SEC investigation, litigation, and efforts to remediate material weaknesses. This diversion could adversely impact our operations, strategic initiatives, and ability to execute our business plans and could materially adversely affect our business, financial condition, and results of operations.