GunBroker.com website has a database of over 6.0 million registered users GunBroker.com’s 2020 revenues were approx. $60 million ($40 million EBITDA)
Deal to close by March 31, 2021
Combined Sales of $160M in sales and $70M in EBITDA
Gross Profit Margins will increase from 20% to over 35%
Ammo, Inc. (NASDAQ: POWW) the premier American ammunition and components manufacturer and technology leader announced last Friday that it has entered into a non-binding LOI with IA Tech LLC, the owners of GunBroker.com, the world’s largest on-line auction marketplace dedicated to firearms, hunting and shooting related products. This acquisition not only changes the trajectory for the company by giving them a commanding lead in the industry but could perhaps revolutionize the industry itself. This is an example of how technology can disrupt an over 200-year-old firearms industry.
Since the beginning of December, the company’s share price has appreciated nicely climbing from $2.50 to nearly $10/share last week and has since settled down to around $7.50/share. Shareholders who have held stock during that 10-week window have enjoyed 300-400% gains and are wondering if the fundamentals have gotten ahead of themselves or if they are too conservative with their growth factors.
Details of the GunBroker.com Deal
According to the letter of intent (LOI), the parties intend to sign a definitive agreement and work expeditiously to close the Transaction on or before March 31, 2021. According to company news, the final structure of the Transaction will be determined by the parties following the receipt of tax, corporate, and securities law advice. GunBroker.com’s enterprise value in the Transaction has been valued at approximately $240 million, which will be paid by Ammo Inc. via a combination of cash and shares of common stock.
The completion of the Transaction is subject to a number of conditions, including but not limited to the following: completion of mutually satisfactory due diligence, execution of the Definitive Agreement, successful completion of a capital raise, and receipt of all required corporate and third-party approvals, including fulfillment of all applicable regulatory requirements and conditions necessary to complete the Transaction.
Although the deal is not finalized some assumptions could be made on what the final structure could look like. It’s a cash and stock deal, but the buyer Ammo Inc. doesn’t have a balance sheet padded with cash so it's unlikely that the cash component of the deal is over 50%. The sellers of Gunbroker.com have incredible margins of 67% and made $40 million in EBITDA. The company has indicated it is pursuing a 2-year strategy. Therefore, it's reasonable to think that the owners of Gunbroker.com would want about $80 million in cash over the next two years, as that is what they would net theoretically over that period of time. That happens to work with a nice, neat number of 2/3rd stock and 1/3rd cash.
The real question is how these cash payments would be staged over time. The owners of Gunbroker.com probably do not want to lose out on what they expected over the coming years. Therefore $40 million could be split over the coming year and then the balance in the following year dripped out on a quarterly basis. With 2/3rds in stock that works out to $160 million and if they are long term oriented, they will take the recent high of $10/share. This would result in 16 million more shares being minted by the treasury and works out to a 25% dilution for bringing in almost 40% of the revenues. As the company indicated they were doing an accretive deal, and this fits the definition.
The last 10-Q showed $19 mil in cash and almost $7 million in accounts receivable. Their cash actually increased quarter over quarter as their stock offering in conjunction with the move to NASDAQ boosted their bank account. They appear to be in a neutral cash burn position and recorded only a $428K loss from operations in the last quarter. There are 63.5 million shares issued up from 45.8 the prior year which represents a 37.5% increase. Based on this cash position it's quite possible that the company would need to do another $20 million raise this year.
The eBay/Amazon of Guns & Ammo
With giants like eBay, Amazon and Walmart out of the guns and ammo retail/auction space, a wide-open opportunity to cater to a lucrative and passionate market of hunters, law enforcement, military and gun enthusiasts. Along came GunBroker.com to fulfill that need and has since built a database of nearly 6 million registered users. GunBroker.com’s unique business model has allowed them to become the world’s largest on-line auction marketplace dedicated to firearms, hunting and shooting related products and ultimately become the ebay of guns and ammo. Aside from merchandise bearing its logo, GunBroker.com, which launched in 1999, sells none of the items listed on its website. Third-party sellers list items on the site and Federal and state laws govern the sale of firearms and other restricted items. Ownership policies and regulations are followed using licensed firearms dealers as transfer agents.
So, buyers on the website choose to have their item(s) shipped to their neighborhood gun store where the store representative can have the buyer fill out the regulatory paperwork and show the proper certifications and identifications to complete the purchase. The store affiliate will receive a facilitator fee for the completion of the transaction which they welcome because GunBroker is essentially delivering a customer to their facility giving them direct access to the consumer. The customer then may purchase additional items while at the store. It is a win win situation for associated parties.
The website has also implemented AI technology when the customer is about to checkout, such as offers on items that would go along with the merchandise they just won or are choosing to purchase. Similar to Amazon.com, one may see “Others have also purchased ‘this’ with their order of XYZ”...ultimately boosting sales for the website. Similar to eBay, the site offers auctions while consumers can simply buy merchandise now also.
Why Doesn’t eBay or Amazon Sell Guns and Ammo?
Ebay Inc (NASDAQ: EBAY) announced on January 2, 2002 via their online trading community that eBay was ending user listings of all firearms and ammunition on their site. The company said its decision was based on the belief that the Internet is not an appropriate venue for that kind of merchandise. Beginning March 5, 2002 firearms will not be listed in any categories, including the "Firearms," "Antique," "Collectibles," and "Sport" categories.
Based on a google search, its unknown if Amazon Inc (NASDAQ: AMZN) ever sold firearms or they stopped around 2012, but back in December of 2013, Activist investors asked Amazon.com Inc at the time to review its sales of firearms accessories, concerned that the online retailer offers products that could be used to convert semi-automatic rifles into weapons that fire too rapidly to be legal. The shareholder scrutiny of the world's largest online retailer came a day before the anniversary of the school massacre in Newtown, Connecticut, where a gunman killed 26 people. The incident led to extensive debate over U.S. gun-control laws and pressure on gunmakers and traditional retailers. An Amazon representative said the company does not sell guns or ammunition and cited its policies in response to other questions. The company's website notes that some jurisdictions might restrict the sale of some products. It also says it prohibits third parties from selling on Amazon "converters that can give a gun automatic capability" and "parts or accessories related to assault weapons." Even Walmart (NYSE: WMT) eventually caved to selling firearms years ago.
Facebook’s (NASDAQ: FB) Marketplace bans the sale of guns on their platform, but back in 2019, gun sellers used a simple trick to do business on the Marketplace at a time when more mass shootings in the U.S. had renewed the debate in Washington over access to firearms. The Marketplace feature, which Facebook launched six years ago, enabled its more than two billion users to buy and sell almost any secondhand item by clicking a button on their homepage. However, the private sale of many items, including guns, is specifically forbidden under Facebook policy. To dodge the prohibition, sellers simply listed gun cases or boxes at inflated prices. Those postings have become “code” for actual guns, while in many instances evading Facebook efforts to bar banned items. Sellers, via private messages, describe the more valuable hardware with would-be buyers and hash out a deal.
An example, one seller in Lincolnton, N.C., posted a photo of a hard, gray case on Marketplace under the title “Gun case” and asking $950. A similar case has a retail cost of $30. The seller, in an interview with The Wall Street Journal conducted over Facebook Messenger, said he was really offering an AR-15 style semi-automatic rifle. This drama is what GunBroker.com has managed to avoid through its business model of shipping directly to a certified dealer to complete the transaction.
Recent and Future Earning Projections
In the latest earnings report for Ammo, Inc., they boasted a backlog of nearly $135 million at the end of last year, and had an excellent quarter which they announced on February 16th, 2021. Their fiscal third quarter delivered the best quarterly performance in Company history, with even better quarters expected throughout fiscal 2022. AMMO's sales for the quarter were $16.6 million, a 500% increase in comparison to the Fiscal 2020 quarter. Sales for the nine-month period (year-over-year) increased 282% to $38.3 million. Additionally, the Company experienced sales of 38% quarter-over-quarter, a $4.6 million increase.
The Company's margins have also increased to approximately 20% for our third fiscal quarter, an increase of 163% or $4.2 million year-over-year. When depreciation and amortization are added back to the cost of goods sold, their gross profit margin increases to 25% for the quarter.
Their operating expenses as a percentage of sales was 23% - 28% decrease from the prior year quarter. Adjusted EBITDA has grown to $2.4 million for the quarter - 295% increase from the prior year. For the nine-month period, our Adjusted EBITDA was $3.3 million - 170% increase from the prior year. The adjusted EBITDA and margin improvement shows the impact of the scaling we are beginning to see in our operational costs. We expect our first half fiscal 2022 EBITDA to be better than the second half of fiscal 2021 as a standalone.
The guidance for their fiscal 4th quarter as a standalone company is $20M and $58M for their fiscal year ended March 31, 2021. The company will be updating guidance if the previously announced Gunbroker.com transaction comes into focus such that it has an impact on their fourth quarter results. Ammo currently has $180 million in backlog over the next year which would translate into $100 million in revenues and 20 - 25 million in EBITDA. If they are able to increase production capacity beyond $100 million there may be an increase in EBITDA. Last year Gunbroker.com did $60 million in revenue and 45 mil in EBITDA so the combined business would look like $160 million in revenues and $70 million in EBITDA with an EPS of $.88. The company has an estimated P/E of 10 but with such a large growth rate and over 40% combined margins should trade at a much higher multiple.
Investment Analysis
Based on the immediate boost in both profit margin and revenues, Ammo Inc. will do all it can to close this transaction with GunBroker.com. For fiscal year 2022, POWW gave guidance that they could potentially generate staggering numbers in the neighborhood of 150 million in revenues and 70 million in EBITDA. Retail stocks have an average multiple running between 10 - 15X which translates into a current fair market value between $8.75 and $15.00. The company is potentially scooping up GunBroker.com at just a 6X EBITDA multiplier due to recent legislative risks. Investors are not concerned with President Biden taking office and a Democratic led congress. If legislation is drawn up to tighten the grip on gun control, through enhanced background checks and the banning of gun shows, it will only enhance online sales through their future website portal GunBroker.com who work directly with local registered dealers. We are optimistic the company will further utilize A.I. to increase sales at checkout and maximize its 6 million and growing database of registered users. As far as the ammunition side of the business, there is currently a $180 million backlog and if the United States goes to war or war breaks out somewhere around the world, it will only enhance the demand for potential military related sales.