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Ammo Inc.’s Management Gives Activist Shareholder Plenty of Ammunition
I first became aware of Ammo Inc. (“Ammo”) after reading Brandon Beylo’s article on it last year (https://macro-ops.com/how-poww-transformed-into-an-online-marketplace-powerhouse/). I found it interesting. You had a small-cap company put together by an entrepreneur and it seemed like there were several ways to win. First off, Ammo manufactured ammunition for mostly consumer sales. Ammunition was in short supply due to the impact of COVID 19, which caused first, a rush to buy ammunition, and second, an increase in first-time gun owners, which exasperated the ammunition shortage. Shortly after the article came out, President Biden banned the import of ammunition and ammunition raw materials from Russia, which exasperated the shortage. Aside from benefiting from a shortage of ammunition, Ammo was introducing interesting proprietary products, such as non-incendiary tracer rounds (I recently bought my first box and I am anxious to try them out), as well as made a push into government sales. This is all well and good, but what really excited me was Ammo’s then recent purchase of GunBroker.com. I had used that service before and in my mind, it was the eBay of guns. Aside from having a growing user base, and revenue stream, I thought that Ammo could use GunBroker.com to sell some of its ammunition directly to consumers, and trade up from wholesale margins to retail margins. Aside from being the eBay for guns, GunBroker.com ensures that Federally Licenses Firearm dealers ship firearms on behalf of the seller to another licensed dealer on behalf of the buyer. The receiving dealer then ensures compliance with federal, state, and local firearm regulations such as background checks, waiting periods, registrations, etc. This feature of it, make the business a likely beneficiary of any future gun control legislation. Ammo also began construction on a new manufacturing facility. Which would increase their manufacturing capabilities. The facility was finished this summer.
The business was certainly interesting and there were multiple ways to win. It seemed to be trading extremely cheap, which was good, as it was not without some hair. As said before, I think the business would benefit from gun control initiatives, so I did not view that as a risk. The risks lie in the management. The CEO was an entrepreneur who is on the older side. He also has a reputation for being promotional. The president has no manufacturing or e-commerce experience. The CFO was extremely young with limited work experience, particularly given the complexities of a public company that executed several acquisitions. The board seemed in need of professionalizing. Ammo also had a history of replacing their auditors. These are real issues, but also issues typical of small public companies. That said, there is a real business here, and the corporate defense profile of the company is weak. If management steps out of line, it would not be too difficult for an activist to get control of the business.
Fast forward a year, they shut their manufacturing facility down in Arizona, moved the equipment to the new facility, and commissioned the new facility. Their stock price has been beaten up with the rest of the market, but this is nothing that continued execution (now that their new facility is up and running) and perhaps some share repurchases likely could not fix. It seems like management may have gotten a bit impatient and decided to separate the manufacturing business from the e-commerce business via a tax-free spinoff. Management listed their reasons in the press release on this and in their Q1 21 earnings call. That said, separating the business will likely destroy shareholder value as it would remove their ability to sell ammunition directly to consumers.
The stock price did not react kindly post announcement, falling from $5.98 the day before the announcement to the current price of $3.25. Shortly after the separation announcement, Steve Urvan, the largest shareholder of Ammo, current board member of Ammo, and the former owner of GunBroker.com announced a slate of candidates to replace the current board. The letter can be viewed here (https://www.businesswire.com/news/home/20220829005245/en/The-Urvan-Group-Issues-Letter-to-AMMO-Inc.-Shareholders-Regarding-its-Nomination-of-a-Full-Slate-of-Highly-Qualified-Candidates-for-Election-to-the-Company%E2%80%99s-Board-of-Directors), but needless to say, Urvan called for a new direction for the company.
Ammo engaged Sidley Austin LLP for its proxy defense, followed by placing Urvan and another employee on administrative leave from the company, and announced an investigation into Urvan. This seems standard operating procedure for a proxy defense, so I am not reading too much into it.
Shortly following this, Edwin Dorsey published in his The Bear Cave Substack an article with some troubling news regarding a senior executive at Ammo, Chris Larson. Apparently, Mr. Larson is under sanction by the Securities and Exchange Commission, which bars him from, among other things, participating in the reporting of financial statements or audits of public companies. You can read more here:
Further digging on Mr. Larson shows that he is the brother of the President of Larson Building (public records shows that they were born in the same town to the same parents), the company that built the manufacturing facility for Ammo. I can’t find any disclosures for a related party transaction, but it seems that one is necessary in this case. At the very least, the board should investigate to ensure that there was not any shareholder money funneled out of the company. Related party transactions are areas where inappropriate activities can occur, it sure seems like a disclosure was necessary. That said, at the very lease the board should investigate to ensure the transaction was completed at an arm’s length. Further digging into senior employees shows that another executive is likely an attorney who was disbarred in the State of Arizona in 2019.
So where does that put us?
You have a CEO who wants to separate the two businesses – likely not a good move.
You have the largest shareholder leading a proxy contest against a board whose members are elected annually.
You have a board investigating this shareholder who is also one of the board members, likely for retribution for initiating a proxy contest.
You have the same shareholder calling on the independent directors of the board to uphold their fiduciary duties.
You have a possible related party transaction that was undisclosed.
You likely have senior executives who received professional sanctions.
The current management and board are giving Mr. Urvan plenty of ammunition to hit them with. That said, Mr. Urvan released another press release offering to come to a settlement with the board and reminding the independent board members to uphold their fiduciary duties (https://www.businesswire.com/news/home/20220919005270/en/The-Urvan-Group-Offers-to-Collaborate-with-AMMO-Inc.%E2%80%99s-Board-of-Directors-to-Set-a-Date-for-the-2022-Annual-Meeting-of-Shareholders). It seems like if a settlement is there to be had, that may be the best course for the board. They will likely lose in a proxy contest, so why waste shareholder funds on a defense? It will be interesting to see what happens next.
Disclaimer: Long. Due your own due diligence. For informational purposes only. Not a solicitation to buy or sell any security.