One-On-One With AMMO, Inc. Management

By Avisol Capital Partners

Thursday, November 24, 2022 8:07 AM EST

Avisol Capital Partners sat down with AMMO, Inc. management, including CEO Fred Wagenhals, to discuss their company. We asked about the Manitowoc plant, the management, their revenue and business plan, and their plans to split the company into two. We got candid responses for most of these questions. Though they could not comment on the “split” due “market conditions and the current proxy battle”

Ammo, Inc. (Nasdaq: POWW & POWWP) is a manufacturer of ammunition for military and law enforcement agencies, recreational shooters, and private buyers. The company was founded in 2016 and saw a rapid growth in the last 6 years, especially after it acquired Gunbroker.com last year. Gunbroker.com is “the leading online marketplace for shooting sports and outdoor enthusiasts.” The company went from $2mn in revenue in fiscal 2016 to a projected $250mn in fiscal 2022. This year, as part of their aggressive growth strategy, the company launched a new, 185k sqft manufacturing plant in Manitowoc, Wisconsin.
The company has decided to split the company into two parts, the original AMMO part and the gunbroker.com part. While this seems logical, we wanted to understand the company’s rationale for the split. What I mean is, the same reason that makes the split logical makes the original buy less logical. If the segments are so different that they should be split, then why buy gunbroker.com in the first place? And if there’s enough synergy to buy it, then why split?

So Snehasish Chaudhuri, MBA, on behalf of Avisol Capital Partners, got in touch with company management to ask them about some of these things:

Question: What made you decide to buy gunbroker.com last year? This segment seems somewhat casually related to your core business of ammunition manufacturing. And today, as you are splitting the two segments, what is the logic behind the decision?

[The company has decided not to discuss the “split” question at this time. They will come out with a press release shortly.]

The company recently started a 185k sqft manufacturing facility in Manitowoc, WI. According to the company, Manitowoc is a manufacturing/industrial hub “for a whole host of assorted industries” supporting everything from big auto, to the manufacturing of refrigerators and many other things. Nearest big city is Chicago, if you ignore Milwaukee. Transportation is using waterways, or the I-43/94 to Chicago and to Minneapolis using state highways.

Question: So why did you choose Manitowoc, WI, for your manufacturing hub? How does that facilitate transport to your major markets? How about availability of skilled labor?

Jagemann Sporting Company (JSC) is a 3rd generation/Manitowoc, WI located heavy press based manufacturer in operation to support big auto. 15-20 years ago, they stood up a division using the same presses, with different tooling, to enter the brass case manufacturing industry to supply brass cases to the loaded ammunition industry (i.e. SIG, Remington, Winchester and eventually AMMO). In 2019, AMMO acquired the JSC brass case manufacturing assets, retaining the multi-generational workforce and all related assets in a segregated portion of the JSC plant that had been constructed and secured to solely support the brass mfg operations. It only made sense from a quality and cost management perspective to retain all those employees in place since they had often grown up in the business, operating that technical equipment. When the time came to separate physically from the leased JSC space, AMMO shopped around nationally for the best State/County/City supported package and Manitowoc (as a community and government) stepped up and provided a Tax Incremental Financing Package that was too good to pass up – and thus we built our new state-of-the-art 185,000 sqft. plant about 1500 meters from the leased location at JSC where we had been in operation. We had shuttered our Payson, AZ mfg ops in late 2020 and relocated the loaded ammunition assets and certain employees to Manitowoc to integrate all mfg operations at that location. And the decision has already paid dividends in quality, staffing and cost containment. Further, the City provided inexpensive contiguous property for lease to support additional potential expansion and provide AMMO with secure and legally compliant real estate to address our powder and primer storage needs which support the end-state manufacturing of loaded ammunition.

President Biden passed the gun control bill in June, which is touted as the most important gun control bill in 30 years. However, according to research, Presidents that are pro-gun control have seen a spur in gun buying.

On the other hand, due to supply chain problems caused by the pandemic, mainly of copper, there’s a huge demand in the US for ammo.

Ammo Inc, has stated that it too has a large backlog of orders, one of the reasons for starting the new facility in Wisconsin.

Question: How do these two opposing factors - Democratic gun restrictions, and supply chain related demand - play out for Ammo Inc? Are you looking at a bullish market sentiment over the next 12 months, or a bearish one?

The “new normal” appears to have settled in at this time, so comparisons in regards to demand are best based upon review of 2018/2019 data (i.e. 2020🡪 8 months ago was the incredibly aberrational demand driven by the political campaign, BLM and related rioting and COVID). The supply chain pressures were real and AMMO managed our way through all of that based upon our size and because we internalized/vertically integrated our brass operations by acquiring Jagemann’s brass division. Demand is below the crazy surge referenced above, but still much higher than it was back in 2018/2019. The NICS background check data is one of the indicators the market typically looks at to see what is happening in the 2nd Amendment space and those numbers continue to be relatively high under this new normal. Finally, the political environment is not expected across our market to negatively impact or otherwise restrict our operations (or growth) and financial performance. If the current administration had the political capital to effect profound change, it would have happened in the first year or two of the administration. The split within Congress and the constitutional-based analysis of the federal judiciary has thus ensured the protection of the US citizenries 2nd Amendment rights and that is not anticipated to change in a manner that will adversely impact AMMO’s mfg or marketplace (GunBroker.com) operations. And with the added leveraging activities we are bringing to the market via GunBroker.com with credit card processing and the development of a cart and data analytics, we expect and have projected a very favorable financial growth chart.

Question: Recently, POWW became profitable for the first quarter since they started out. The company reported positive operating income, free cash flow, and net income. The question that would occur to new investors is, how is the split going to affect the financials? Will one of these companies become more investment-worthy than the other? Or will the split simply increase efficiency costs, like doubling of G&A costs, for example? Clearly, the market hasn’t taken the decision to split well. The stock is down strongly since the August announcement. Your comments please.

[The company has decided not to discuss the “split” question at this time. They will come out with a press release shortly.]

In August this year, activist investor Steve Urvan, who owns 17.1% of POWW and is also the founder of gunbroker.com, nominated seven candidates for election to the AMMO Inc. board of directors. It appears that Mr Urvan is against the split, and his effort at creating a new board has, among other goals, plans to rethink the decision to split the company.

Question: How is the current BoD at POWW looking at this situation? Do you plan to “collaborate” with Mr Urvan? Please provide some color here within the limits of confidentiality.

The Board and management are in direct and constant communications with Director Urvan at this time as we explore a cohesive approach and path forward that allows the Company to leverage off the incredible strengths of our collective Board and AMMO family to chart an even stronger financial chart for the benefit of our shareholders. We remain hopeful we will move through the impending Annual Shareholder Meeting in a very positive manner and look forward to working with Director Urvan inside the Board room as we unlock the real value of GunBroker.com (which is why the Board and management targeted and close the acquisition) as we incrementally and quite profoundly increase our manufacturing capabilities and capacity out of our new Wisconsin plant.

AMMO, Inc. is a very interesting company. I was, frankly, pleasantly surprised by management’s candid responses to most of my questions. Although we didn’t discuss the split, I look forward to learning more about their upcoming board meeting, and how things work out from here on out.

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