Sunday , 1 October 2023

AMMO Inc. Cancels Planned Separation Of Units

Back on October 26th, 2022, I wrote an article (see here) for TalkMarkets in which I said: “AMMO, Inc. is taking the bold step of splitting up its successful business of manufacturing, marketing and selling an array of small caliber bullets and online marketing of ammunition to increase sales, improve margins and expand its business platform and, in doing so, to significantly enhance shareholder value.”

An original article by Lorimer Wilson

As I referenced in my October 2022 article, Fred Wagenhals, AMMO’s Chairman & CEO, commented that there were a number of compelling reasons supporting the separation of the two business units, maintaining that each company would be:

  1. better situated to be appropriately valued by the market, i.e. better positioned to enhance shareholder value,
  2. better able to facilitate the enhancement and expansion of the brand strengths developed in both separate operational units, thus further supporting increased enterprise and therefore shareholder value,
  3. better positioned to refine and focus capital allocation strategies moving forward,
  4. able to build upon AMMO’s well-established track record as an attractive acquirer through enhanced M&A work in the outdoor recreation marketplace, allowing it to secure best-in-class partnerships with other manufacturers…
  5. better able to attract and retain the top industry talent best situated for each operation’s separate operational and financial objectives,
  6. better positioned to support the specific operational needs and growth drivers of each separate company,
  7. will enable financial and human capital resources to be deployed in a more focused manner to better support the specific operational needs and growth drivers of each separate company and
  8. will be able to enhance support of AMMO’s growing base of international customers (commercial and governmental).

AMMO’s analysis of the separation of these distinct business units on a go-forward pro forma basis projected 2023 AOS Fiscal Year guidance of revenue at $230 -$240 million and Adjusted EBITDA at $57-$60 million. At the time of the article, three analysts who covered the company forecast:

  • an average target price of $8.00, almost doubling AMMO’s price at the time ($4.15) and
  • an average 12-month growth rate in consolidated revenue of 32% with 23% in F2023 and 20% in F2024.

I concluded my article back then with the following:

“With robust consumer demand at home, production capacity running at full tilt, supply chain issues creating scarcity, input costs going up, and import restrictions that will further inflame inventory problems, the ammo market is suddenly a high-profit center for manufacturers, and AMMO, Inc. stands to be a key beneficiary with its new state-of-the-art production facility and the splitting of its operation into separate manufacturing and sales (online) publicly traded companies to better focus on the major opportunities at hand.”

So…what happened? Well,

  1. On Aug. 29, 2022, it become clear that there was internal strife. Steve Urvan, the original owner, made a public letter to shareholders in which he:
    • painted a different picture of the situation at the company,
    • questioned the need for a spinoff and
    • wanted to replace the board with his own slate of directors at the upcoming annual meeting given the fact that Chairman and CEO Wagenhals only owned 6.1% of the company and other insiders only 1.1% compared to his 17.1% and 0.03% by Susan Lokey.
  2. On Sept. 6, the company put Urvan, a director and Chief Strategy Officer at the time, and Susan Lokey, CFO at the time, on administrative leave, and
    • accused them of misappropriating the Company’s data and digital assets and
    • transmitting that data to a third party controlled by Urvan and with which Lokey was associated.
  3. On Nov. 7, the company reached a settlement with the Urvan Group, headed by Steve Urvan, that:
    • there would be no break up of the company into two public companies,
    • that Urvan could add 2 people to the 7-person board giving him 3 out of 9 votes, and
    • that a new CEO would be hired.

The proxy fight has taken its toll:

  • At the time of the spinoff announcement on Aug. 25, 2022, AMMO stock had been trading at $4.15.
  • The spinoff was not well received by investors and its stock price declined by 15% (to $3.53) by September 6th when Urvan was put on administrative leave.
  • With the proxy fight in full swing the stock price went down a further 15% (to $2.98) by the time the agreement was reached on November 7th.
  • With the negative sentiment created by the turmoil at AMMO, however, the stock price has continued to decline and is now down a further 30% (to $2.08) as of the market close on February 17th.

It is rather ironic that Wagenhals’ primary reason for wanting to separate the two business units was that, in doing so, each company would be better situated to be appropriately valued by the market, i.e. better positioned to enhance shareholder value but that didn’t turn out to be the case. The stock dropped 28% from $4.15 at the time he announced the company’s spin-off plans until the proxy fight had ended and continued its downward spiral even further leading up to the release of its Q3 financials.  For what it is worth, however, in the last 90 days three (3) Wall Street analysts have projected (two with a Strong Buy and one with a Hold) a 28% increase in POWW’s stock price to $2.67 with no time frame provided.

The recent drop in Ammo Inc.’s stock price was exacerbated by the February 14th release of its Q3 2023 financials for the quarter ended December 31, 2023 that reported:

  • earnings well short of earnings estimates ($0.05 in adjusted earnings per share versus expectations of $0.08),
  • a 40.2% decline in revenue from the prior year quarter,
  • a 44% contraction in gross margin from the prior year quarter to $12.5M with margin compression expected to continue into Q4, and
  • plans to cut its full-year forecasts with
    • revenue to decline by somewhere between 16% and 23% from its prior range and well below analyst consensus expectations. the $224M consensus expectation and
    • adjusted EBITDA to decline by 56% to 63% from its forecast in the prior quarter.

Going Forward

Wagenhals remains optimistic regarding the future of the company given that most of Ammo’s recent headwinds came from costs associated with the proxy contest, a longer-than-expected time to get its new production facility in Wisconsin up and running, supply chain constraints, rising materials costs, and its site not getting the short-term results the company was expecting.

It would appear that the worst is over for Ammo:

  • their new facility in Wisconsin will be running at full capacity (from about 400 million rounds to approximately 1 billion rounds) by the fourth fiscal quarter of 2023 which will:
    • drive down costs and boost gross profit, profit margin and net income and
    • enable it to increase in export opportunities by fulfilling orders for ammunition that other countries have been unable to supply as a result of their inventories being dramatically depleted due to the war between Russia and Ukraine,
  • the continuing rollout of enhancements to its Marketplace site will improve the buying process for potential customers which should result in more sales, and
  • the addition of Jared Smith as their new President & COO should enable POWW to significantly outperform in the near and long term.


Given the above, POWW could surprise to the upside in the near term, especially after having headwinds in the last quarter that are slowly being mitigated as highlighted above.