Byrna Technologies Inc. (BYRN) on Q1 2023 Results - Earnings Call Transcript
Operator: Greetings, and welcome to the Byrna Technologies First Quarter 2023 Earnings Conference Call and Webcast. As a reminder, this conference call is being recorded and all participants are in a listen-only mode. Before turning the call over to Bryan Ganz, Byrna Technologies’ Chief Executive Officer, I will read the safe harbor statement. Some discussions made today include forward-looking statements. Actual results could differ materially from the statements made today. Please refer to Byrna’s most recent 10-K and 10-Q filings for a more complete description of risk factors that could affect these projections and assumptions. The Company assumes no obligation to update forward-looking statements as a result of new information, future events or otherwise. As this call will include references to non-GAAP results, please see the press release in the Investors section of our website, ir.bynra.com for further information regarding forward-looking statements and reconciliations of non-GAAP results to GAAP results. I'll now turn the call over to Mr. Bryan Ganz. Please go ahead.
Bryan Ganz : Thank you. Good morning, everyone, and thank you for joining us for Byrna’s fiscal year 2023 first quarter earnings call. Our CFO, David North, will be discussing our Q1 results; after which I will provide some additional color on the quarter. I'd like to start by turning the call over to David, so that he can discuss our results and financial performance for the first quarter. David and I will be taking questions at the conclusion of the presentation. David?
David North: Thanks, Bryan, and thanks all who have joined us today. Let's start with a review of the income statement for the first fiscal quarter. Revenues for the first quarter of 2023 were $8.4 million, that's a 5.4% increase over the $8.0 million for last year's first quarter. Gross profit increased 13.7% to $5.2 million from $4.6 million in last year's first quarter, while gross margin, which is gross profit as a percentage of sales, improved to 62.4% of net revenue from 57.8% in last year's first quarter. The improvement in gross profit as a percentage of sales is primarily due to realization of significant cost reductions and switching from air freight to ocean freight and to lower cost suppliers for raw materials. Operating expenses declined 9.8% or $0.8 million to $7.2 million compared to $8.0 million in last year's first quarter. Costs were managed lower in payroll and compensation, discretionary marketing, professional fees, public company costs and insurance premiums, combination of higher revenue, a higher gross margin percentage and a reduction of operating expenses resulted in improved profitability. Loss from operations for the first quarter was $2.0 million, an improvement of $1.4 million compared to the operating loss of $3.4 million in the first quarter of fiscal 2022. On January 10 of this year, the Company partnered with the owners of Argentinian Gunsmiths Bersa S.A. to form a new joint venture created to manufacture its products within the Mercosur trade zone to expand the Company's operations and presence in South American markets. The Company holds 51% of the stock in the joint venture entity, and our 51% share of start-up expenses this quarter was $167,000 shown as other expenses on our income statement. Net loss after tax was $2.1 million compared to a net loss of $3.2 million in last year's first quarter. Excluding long-term stock-based compensation and one-time severance costs, adjusted EBITDA, which is a non-GAAP measure that excludes non-cash stock-based compensation and one-time severance costs, was a loss of $0.6 million for the quarter compared to a loss of $1.8 million in the first quarter of last year. Now to our balance sheet and financial position. We ended the first quarter with $14.4 million of cash and cash equivalents. This is a decrease of $5.6 million from the balance of $20.0 million at the end of the fiscal year on November 30, 2022. This was principally due to three uses of cash: first, accounts payable and accrued expenses decreased by $2 million due to payments of certain annual expenses that come due in the first quarter; second, we used $2.1 million to fund our new LATAM joint venture with a $0.5 million in capital and $1.5 million loan; and third, inventory increased by $2.5 million. While the first two of these were according to our plans, the increase in inventory was the result of a long lead time between committing to the purchase by putting a ship on the water and delivery of the inventory at our plant, actual sales demand and inventory consumption during the first quarter when the inventory arrived were not as great as had been expected when the inventory was committed to and shipped. As a consequence, we finally have several months of inventory on hand. At quarter-end, there was no current or long-term debt. And with that, I'll turn it back over to Bryan.
Bryan Ganz : Thank you, David. Well, we are very pleased with the improvements we saw in Q1 in terms of expanding gross profit margins and lower operating expenses, we were, of course, disappointed with the fact that our sales growth in Q1 was only 5.4%. The shortfall in sales versus our projections was directly attributable to the fact that we were unable to ship either of our new flagship products in Q1. Those, of course, are the much more powerful Byrna LE edition and our groundbreaking 12-gauge round. At the end of the first quarter, we had approximately 5,000 customers on our Byrna LE waitlist at $479 MSRP per unit and with an average order value of well over $500, this represents $2 million in revenue. We also had a projected -- we also projected 250,000 12-gauge rounds with an average selling price of $4 each, representing another $1.0 million in deferred revenue. Had we been able to ship these product sales growth would have been well in excess of our internal Q1 projections, of course, this sales shortfall also affected our cash position by reducing our cash by this $3 million. Unfortunately, supplier issues and production problems prevented us from shipping either of these two new flagship products during Q1. In the case of the Byrna LE, out-of-spec components led to quality issues and production problems, which prevented us from going into serial production. In the case of the 12-guage less lethal round, a shortage of a particular raw material resulted in delays in the production of the proprietary casing used in Byrna’s 12-gauge round. To make matters worse, almost all of our Q1 marketing spend focused on these two new innovative products. Both the Byrna LE and our new less lethal 12-gauge round were introduced at the Las Vegas Shot Show in January to great fanfare. In fact, Byrna’s new 12-guage round made several best new products at SHOT Show list, including the NRA, Police One and Tactical Life. To support the introduction of the Byrna LE and the new 12-gauge route, the majority of Byrna’s Q1 marketing and promotional budget was dedicated to these two new breakthrough products. As a result, a significant number of the orders received from both consumers and dealers were for these two new products, which we are unable to ship during the quarter. While the production and shipping delays are disappointing as everyone in manufacturing knows industrializing new products, particularly products that employ game-changing technology that has never been seen before, is extremely difficult and unforeseen delays are not unusual. In the case of the Byrna LE, we have designed a revolutionary new valve that produces significantly greater force while using the same exterior volume as a traditional valve. This has increased the force of the launcher by 60%. This new technology will be used in all future Byrna launches and will allow us to produce the much anticipated and much smaller compact launcher. The first of these new products is due to be released in 2024. The valve in Byrna LE, frankly, is analogous to the engine in a Formula 1 racecar. As with the Formula 1 engine, the ultra-high-performance valve used in the Byrna LE is extremely demanding and requires components of exact intolerances. Unfortunately, several components from the initial production runs were simply not up to spec. This caused us to suspend production as our suppliers scramble to produce new components. These are simply the growing pains associated with constantly pushing the envelope in terms of performance. As of yesterday, we have now shipped 986 Byrna LE launchers. Yesterday, we had 704 units on back order and another 6,877 customers on the Byrna LE waitlist. Although production is still not where we would like it to be, as the Byrna LE is a much more difficult launcher to produce and our factory personnel are still getting up to speed. We hope to work through this backlog and wait list by the end of the quarter. The delays in the production of Byrna’s new state-of-the-art 12-gauge rounds were not due to nonconforming parts but rather the difficulty in obtaining the exact raw material needed to produce the components. Well, to those not in the industry, plastic is plastic, nothing could be further from the truth to produce less lethal shotgun rounds capable of stopping an assailant at distances of up to 100 feet, we need to produce the various components that go into the round from very specialized plastics. Our testing showed that substituting a similar plastic for the very difficult to obtain plastic that we needed for the casing would have negatively impacted the accuracy of the rounds. For obvious reasons, when dealing with the rounds that are intended to be used for self-defense, any loss of accuracy is simply unacceptable. We have now secured adequate supplies of the required raw materials to produce up to 500,000 rounds per month. The first shipment of a finished 12-gauge rounds left the factory on April 3, headed for our dealers, and we are now producing approximately 10,000 rounds per day in our Fort Wayne production facility. These revolutionary new grounds are also now available online at Byrna.com. There are an estimated 47 million shotgun owners in the United States. For $59.99, these shotgun owners can use their existing 12-gauge shotgun to fire less lethal rounds capable of stopping the assailant at distance. Our mission is to convince 10% of these 47 million shotgun owners to try Byrna’s new less lethal 12-gauge rounds. After all, Byrna was founded on the belief that no one really wants to take a life when protecting themselves and their family if they can avoid it. There were several bright spots on the sales front in Q1. Essentially, Amazon and Canada, neither channel was affected by our inability to ship the Byrna LE or 12-gauge as neither of these products were offered through these channels. Amazon sales were up 60% year-over-year, and we expect this trend to continue. Canadian sales were up from almost nothing in Q1 of 2022 to $261,000 in Q1 of 2023. This was more than we sold in Canada during the entire year of 2022. Late in Q4, Canada essentially banned the sale of all handguns. This has resulted in a significant increase in web sessions and sales of Byrna launchers in Canada despite the continuing difficulties that we have had shipping into Canada. We expect to see this positive sales trend continue as we establish a 3PL shipping facility in Canada to better serve the Canadian market. Our retail store in Las Vegas was also a bright spot as we are seeing continual improvement in retail sales numbers. We opened our Las Vegas retail store co-located with our sales and marketing office in Las Vegas. The purpose of the store is to one, gain first-hand knowledge of our customer demographics and two, to understand if stand-alone Byrna store could be economically viable. By meeting our customers and having a chance to speak with them directly, we can better understand our customer base, including the split between gun owners and non-gun owners between men and women, the age of our customers, the reason for their purchases, how they heard of Byrna. Additionally, the Las Vegas store is now starting to pay for itself. Sales in Q1 tracked at an annual pace of $215,000 a year versus $68,000 for all of last year. So far in Q2, the pace has climbed to $300,000. And last week, we were tracking at $500,000. And all of this to-date without any local advertising. In summary, while we encounter challenges bringing to Byrna LE and our new 12-guage round to market during Q1, in the great scheme of things, the difference between starting to ship these two game-changing new products in March and April rather than January and February is not meaningful. The most important consideration at Byrna is that the products we released to market are of the highest quality and that our customers can use them with confidence. This is the only thing that drives our decisions. So while we struggled to bring the LE and 12-gauge to market in Q1 of 2023, the significant improvement in gross profit margins and the reduction in our operating costs largely made up for the shortfall in sales as our operating loss for the quarter was less than $100,000 off of our budgeted number. Given all the challenges we faced during the quarter and the progress we have now made in getting these two revolutionary new products into production, we are not unhappy with this result. Now I'd like to turn it back over to the operator, and we'll be happy to take any questions from our analysts.
Operator: Thank you. [Operator Instructions]. Our first question comes from the line of Jeff Van Sinderen with B. Riley Securities. Please proceed with your question.
Operator: [Operator Instructions]. Our next question comes from the line of Jim McIlree with Dawson James. Please proceed with your question.
Operator: Thank you. Our next question comes from the line of Ryan Rackley with Raymond James.
Operator: Thank you. Ladies and gentlemen, that concludes our time allowed for questions. I'll turn the floor back to Mr. Ganz for any final comments.
Bryan Ganz: Thank you very much. Again, well, we were disappointed that we were unable to achieve our internal sales projections because of our inability to ship the 12-gauge in LE during Q1. Both of these products are now in production. We've begun shipping [bigger number] (ph) in Q2. This is a temporary delay. And frankly, the encouraging aspect is that there's very strong demand for both of these projects -- products, which we've been unable to ship. So that in conjunction with the fact that we were able to see a significantly improved gross profit margin, which we anticipate continuing throughout the year and that we've been able to control our expenses, which we also anticipate seeing throughout the year. We think it was not such a bad quarter as it may appear on its face. We think actually, we made very significant progress during Q1. Again, I want to thank everybody for their support and interest in Byrna. And as always, you can reach out to us if you have further questions.
Operator: Thank you. Ladies and gentlemen, that concludes our conference call. You may disconnect your lines at this time. Thank you for your participation.
