Greetings, and welcome to the Byrna Technologies Fiscal Third Quarter 2022 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 may 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 Investor Relations section of our website, ir.byrna.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. Sir, please go ahead.

Thank you very much. Good morning, everyone, and thank you for joining us for Byrna’s fiscal year 2022 third quarter earnings call. As usual, David North will be discussing our financial results, after which time I will provide some additional color on the quarter and discuss recent events. I'd like to start by turning the call over to David, so he can discuss our third quarter financial performance. David and I will be taking questions at the conclusion of the presentation. David?

Thanks, Bryan. And thanks, everyone, for joining us today. Let's start with a walk down to third quarter's income statement. Third quarter revenues came in at $12.4 million, an increase of 43% over revenues of $8.7 million in the third quarter of 2021. Revenues were also up $0.8 million from the second quarter of this year making this the third consecutive quarter of revenue growth in 2022. We ended the quarter with $1.7 million of unshipped orders, all of which we expect to ship this quarter. Byrna’s gross profit margin was 55.4% after $0.2 million of charges for inventory reserves and another $0.2 million of unfavorable manufacturing variances. Our move of our manufacturing operations into our larger new Greenfield facility in Ft. Wayne, Indiana went well and we're back up and running smoothly and experiencing higher levels of both efficiency and quality in this larger, more efficient facility. Nevertheless, some minor startup inefficiencies are inevitable in such a move and the unfavorable manufacturing variances were a result of those. Gross margin was favorably affected by a variance of about $0.1 million as a result of receiving our first raw material shipments by ocean freight and we anticipate further margin benefits as we transition more of our incoming shipments to ocean freight from the far more expensive airfreight shipments that the company has been relying on for the past two years. The reason we are now in a position to transition to ocean freight is that we've built up adequate inventory levels, so we can wait to 60 days or more that it takes to sell a container across the Pacific. The increase in levels of both finished goods and raw materials should significantly reduce the risk of any unforeseen supply chain disruptions. Operating expenses were $8.3 million in the third quarter, which is up from $6.7 million for the same period one year ago, but is relatively flat in comparison with the past three fiscal quarters. Our non-GAAP adjusted EBITDA measure, which we use as an estimate of cash flow from ongoing operations was a positive $0.3 million in the third quarter, compared to a loss of $0.8 million for the third quarter of fiscal 2021. Now let's take a look at the balance sheet. Despite our positive adjusted EBITDA, cash dropped $1.4 million from $25.9 million at the end of the second quarter to $24.5 million at the end of the third quarter of 2022, that's because inventory increased by $1.9 million from $13.5 million at the end of the second quarter to $15.4 million. As I've explained, we've built inventory during the third quarter to allow for less expensive, but slower ocean freight. We've also built inventory levels in anticipation of the traditionally very strong fourth quarter. We expect to see a reduction in inventory levels by year-end as a result of the expected surge in holiday sales during the fourth quarter. Total assets were up $1.2 million from the end of the second quarter to $58 million. At the same time, total liabilities were down $0.4 million with an increase in shareholders' equity of $1.6 million in comparison to the end of the previous quarter. The company continues to have no current or long-term debt. Now I'll hand it back over to Bryan.

Thank you very much, David. Financial results for this third quarter demonstrate continuing improvement on both top and bottom lines. The company posted its third consecutive quarter of top line growth. Excluding the second quarter of last year, which included $8 million of incremental sales from an unexpected endorsement from Sean Hannity, this quarter sales of $12.4 million set a new record. Moreover, it marked an important inflection point for the company as Byrna was profitable on an adjusted EBITDA basis. The improving profitability is due to improving operating leverage. As David pointed out, sales grew by 43%, while OpEx grew by only 24%. Byrna expects to see further improvements in the fourth quarter of this year. We've issued revenue guidance of $16 million to $18 million for the quarter, this would be a new record for the company without any exception and compared to the same period of last year would represent 52% growth at the midpoints of the range. With operating expenses expected to be in line with the run rate over the last four quarters, we expect further improvement in all measures of profitability in the fourth quarter. We expect to see continued top line growth in 2023, as Byrna continues to benefit from growing brand awareness. We can see evidence of increased consumer awareness in our web traffic numbers. For the first nine months of this year 2022, Byrna registered 5.7 million web sessions on byrna.com and another 2.3 million on amazon.com for a total of 8 million web sessions. This compares to 4.2 million total web sessions during the same period of last year. In particular, in fiscal year 2023, we expect to see continued growth in Amazon sales as we're seeing momentum build in that channel. We also expect to see significant growth in sales of aerosol products under the Fox Labs and Byrna Bad Guy Repellent labels, as we have only had these products for sale during the second half of 2022. Moreover, these price point products may prove to be particularly strong sellers during what we perceive to be more difficult economic times in 2023. Along the same lines, we expect sales of the launcher products acquired with the Mission Less-Lethal acquisition specifically the TCR and the M-4 to add to 2023 sales as they also were not available for the full year of 2022. Finally, we plan to introduce the 12-gauge ammunition and the Byrna LE launcher within the next several months and these products should have a material impact on 2023 sales. Despite our expectations for a strong fourth quarter and for continued growth through next year, the economy is clearly softening. And whether we experience a soft landing or a recession in 2023, we do expect that the headwinds will negatively impact the demand for discretionary consumer products such as the Byrna SD launcher. As a result, we do not expect to see continued 40% to 50% growth in 2023, as we have seen these last several quarters and we have accordingly tempered our expectations. We are expecting more tempered growth in 2023 with revenues growing by 10% to 30%, rather than the 40% to 50% year-over-year growth we've seen recently. Given our expectations of a more difficult economic environment in 2023, Byrna is in the process of trimming operating costs. Our goal is to reduce operating expenses by 5% year-over-year, excluding such variable expenses as credit card fees and so forth. And as part of this process, we will be deemphasizing less productive areas of the business. This past year, Byrna embarked on a number of initiatives designed to drive growth. Some like the Fox Labs acquisition and the Mission Less-Lethal acquisition have been extremely successful resulting in annual sales that will be a multiple of the purchase price with little incremental overhead. Others, like the Ballistipax acquisition, which formed the basis of our school safety program, have been less successful, despite our best efforts and our sincere belief in the project as high overhead costs associated with this program and slow sales have resulted in poor ROI. Accordingly, Byrna will be shutting down its school safety initiative, although we will continue to offer the school safety products, specifically the Byrna Shield and Byrna Ballistipac online and through our dealer network. This should result in annual savings of more than $600,000. In conjunction with other planned cuts Byrna intends to reduce its operating expense budget by more than $1.6 million in 2023. As we are now cash flow positive from the perspective of adjusted EBITDA, and we have no acquisitions planned. We should have more than adequate cash on hand to fund operations for the foreseeable future. We do not believe that the market is valuing Byrna’s stock appropriately. And accordingly, we plan to reinstitute our previously approved stock buyback program. In conclusion, we've made excellent progress so far this year in terms of both growing the top line and controlling expenses. We believe we've reached the point in terms of operating leverage that will allow us to consistently generate positive cash flow with strong year-over-year revenue growth. Now I'd like to turn it back to the operator and we'll be happy to take questions from our analysts. Thank you.

Thank you. We will now be conducting a question-and-answer session. Our first question has come from the line of Jeff Van Sinderen with B. Riley. Please proceed with your questions.

Good morning, everyone. I wanted to begin by discussing a few items related to the profit and loss statement, particularly your expectations for gross margin in the fourth quarter. Additionally, what is your outlook for that area next year? I would also like to follow up on SG&A. I believe you mentioned a planned reduction of $1.6 million in SG&A for next year. Do you have any further insights on how we should approach modeling SG&A for the fourth quarter next year?

Yes, I'm going to discuss the margins and I'll turn it over to David for the SG&A part of your question. We expect margins to dip slightly in Q4 as a result of the holiday specials that we will be offering. We saw this last year and we expect it to impact one or two margin points. We do expect there to be a continuing upward trend. As David pointed out, we benefited from $100,000 favorable freight variance in Q3, and that was the result of a single shipment of components coming in from Malaysia by ocean freight rather than air freight. As we start to put more and more of the components and ammunition on the water, we expect that to have a continuing positive impact on margins. So next year, we expect our average margin to be several percentage points higher than it is this year. David, can you address the SG&A issues?

Would you repeat the exact question, please?

Yes, of course. We are trying to understand your outlook on operating expenses for the fourth quarter of next year. We recognize that you are planning some reductions, and you mentioned around $1.6 million for next year. We would like to know how you are approaching that $1.6 million or whatever the total is for next year.

Sure. About a year ago, we successfully completed a public issue and secured significant funding which we committed to reinvesting in the business. We spent time experimenting with various initiatives, including the school safety program that Bryan mentioned. Recently, as part of our annual budget preparation, senior management conducted a thorough line-by-line review of these investments to determine which ones are performing effectively and which are not. One notable area where we've increased our expenditure is marketing. We promised to analyze our return on advertising to assess what strategies are effective and what aren't. Through this detailed evaluation, we've identified $1.6 million in expenditures that we believe can be cut due to lack of return or to enhance efficiency. Overall, it's been a comprehensive examination of our entire organization.

I strongly believe that we haven't made cuts that hurt our core operations. As David mentioned, we've identified $1.6 million in expenses that weren't yielding a significant return on investment. We were able to eliminate those without negatively affecting our growth prospects.

Yes, I was just saying to Bryan yesterday, a lot of my background is in more mature industrial manufacturing and I'm used to going through this process on a regular basis. But I'm used to it being a lot more difficult I think because in a more mature company, you've done it so many times that it's very difficult to find more marginal success in this sort of thing, but Byrna is a very young company. So it’s, you know, it was quite a productive exercise to go through and find these efficiencies.

Okay. Fair enough. That's helpful. And then just as a follow-up to that, given that, that’s broadly speaking, let's say, the more affluent consumer generally seems to be holding up better than the lower-end consumer. How are you thinking about that phenomenon as it relates to your product line? And then I guess thoughts on evolving marketing to go after maybe more that high-end consumer? I know you mentioned the aerosol as being perhaps more accessible?

Yes. Look, I think that you're correct, we're seeing auto sales start to fall off except in the luxury segment of the market, it is clear that the high-end consumer is not being affected to the same extent as the average consumer. Our product is a relatively high-end product. We think our demographic is a relatively wealthy demographic. As we start planning our marketing push for next year, we will be focusing on demographics that are wealthier. So we're going to be targeting RV owners, we're going to be targeting boat owners, we're going to be targeting business owners. People that own liquor stores and convenience stores. So we're very cognizant of the fact that in the infamous words of John Dillinger as to why he robs banks, because that's where the money is. We are going after the market where the money is and that is the wealthier consumer.

Okay, thanks. And then if I could just squeeze a little more in here and I'll turn it over. Just anything you could tell us about the response to the Bad Guy Repellent launch in the dealer channel? And then on Amazon and Walmart?

The Bad Guy Repellent launch has been very well received. We started off with just the Fox Labs brand and we are continuing to offer the Fox Labs brand, because it's so well known in law enforcement. What we're beginning to see is sales of Bad Guy Repellent are starting to eclipse sales of the Fox Labs spray. So we think we're just at the very, very early stages of this. These aerosol markets are very, very large markets well in excess of $100 million domestically and we think we can take a significant share of that market.

Okay. Thanks very much. I'll jump back in the queue.

Thank you. Our next question is coming from the line of Jim McIlree with Dawson James. Please proceed with your questions.

Thank you. Good morning. Hi, can you talk about what needs to be done in order to get the LE and the 12-gauge launch? What are the final steps on getting that to the market?

The LE is in testing right now. We've done our first engineering build. We're now in a preproduction build. As you can imagine, with products like the Byrna, we have to ensure the safety of our consumers and there's a lot of testing that goes into it. But we are extremely pleased with the Byrna LE. We think that consumers in law enforcement will find it to be significantly improved from the SD in terms of both the speed of the rounds, the feel of the launcher, the trigger pull is significantly lighter in terms of its operating range, it will be able to operate at very cold temperatures. But it does require a lot of testing. So we would expect this to go into serial production, I think we're scheduled for November 15 to go into serial production and between now and then we're just going to be doing a significant amount of testing of the products. The 12-gauge, we were forced to pivot a little bit on the 12-gauge, because of the unavailability of 12-gauge hulls. So we had originally designed the product to work in a standard hull like a Fiocchi hull, and because of the shortage of ammunition, these hulls are not readily available. We've pivoted to producing this in a plastic injection molded hull. We think over the long run, this is a much better solution for two reasons: one, it differentiates the product. It will not look like a normal 12-gauge round. So it will never be confused for a normal 12-gauge round. And I think one of the risks with a Less Lethal 12-gauge round is that people might think they're using Less Lethal and instead put a Lethal round in their shotgun. So by going with a plastic injection molded hull, we will be able to get away from that risk. Secondly, we're able to control our own destiny. So right now, this was a good wake up call when we were unable to get the number of hulls we wanted, we were able to secure hulls in the tens of thousands when we need them in the hundreds of thousands or frankly millions of hulls. So by going with the plastic injection molded hull, we'll be able to control our own destiny. And we do have a lot of experience with plastic injection molded hulls, because if you remember the genesis of this business was the 40 millimeter business and we use a plastic injection molded hull for that. So that put us back a little bit, but we do expect to be in production later this quarter. We are going to have an official kickoff at SHOT Show in Las Vegas. The week of January 20 will be introducing the 12-gauge at Range Day. So we'll be able to allow people to fire these rounds. And I think we expect it to be extremely well received.

Great. Thank you. And then I was a little bit confused about your answer to the questions on gross margin in Q4. I was uncertain as to whether or not you were talking about the total gross margin being impacted by 100 basis points or 200 basis points or if there was just an aspect of gross margins that was getting impacted from incentives in Q4? Can you clarify that for me please?

Yes, we think the total gross margin will be negatively impacted by 100 basis points or 200 basis points. Keep in mind that we will be offering large specials. We've got the second Amazon Prime Day coming up in a couple of days. And in order to participate in Amazon Prime Day, we need to give a 20% discount. We will be giving relatively significant discounts on our own website for our Black Friday sales and Cyber Monday sales. And of course, we also then have to give, if not the exact same discount somewhat commensurate discounts to our dealers when we drop below our MAP pricing and we create a MAP holiday. So for Q4, we do expect overall margins to decline by 100 basis points or 200 basis points. That said, we expect to see sales volumes increased pretty substantially.

Right. And that decline is measured against Q3? Or it's measured against the prior year?

No, measured against Q3.

Fantastic. All right. Thanks a lot guys. That's all for me.

Thanks, Jim.

Thank you. Our next question is coming from the line of Jeff Van Sinderen with B. Riley. Please proceed with your questions.

Thanks. Just a quick couple of follow-ups here. What were the inventory reserves taken in Q3? I think you mentioned inventory reserves?

Yes. There were several factors involved. About half of it was attributed to South Africa, which thoroughly reviewed their inventories and undertook a cleanup to prevent a recurrence in Q4, a situation we have encountered in the past. We also set aside a small reserve for inventory in transit to Amazon due to some discrepancies, though that's around $40,000. Additionally, we established a reserve for certain products intended for customers who have made repeat purchases. Some of the initial shipments of our seven round magazine had minor issues, so we sent replacement merchandise to those customers, which contributed to the reserves as well. Overall, it was a collection of minor factors.

Okay. And then wanted to just turn to international for a moment, if we could, if you could speak more about the opportunities you're seeing internationally?

The international opportunities are starting to really take off over the last several quarters as you've seen in our results. The international market for Byrna is somewhat different than the domestic market. Domestically, we are very, very significantly focused on the consumer market. Internationally, law enforcement is a much bigger channel for us. We did have a sale in Q2 of over $1 million that went to the Indonesia Federal Police. We are talking to a number of other large police agencies. Right now, we expect to see those sales go through in Q4. And as we've announced, we have a cooperation with one of the two gun companies in South America, Bersa. They think that because of the restrictions on owning firearms in Argentina and throughout South America frankly that the Byrna will be a really attractive product. So we expect to see continued growth. The one caveat of continued growth internationally is that our margins are lower. So we project our margins for sales into South Africa at only 40% and our margins generally for international at 50%. So we expect to see a relatively rapid growth next year in international sales, albeit at somewhat lower margins.

Okay. Thanks for taking my questions and best of luck.

Thank you very much.

Thank you. Our next question is coming from the line of Jim McIlree with Dawson James. Please proceed with your questions.

Yes, thanks again. You talked about gross margins improving, because of your shift to ocean freight, and there's been recent stories about significant declines in ocean freight costs. I'm wondering, if the margin projections that you've talked about include that significant reduction in ocean freight recently? Or if that could be an even larger improvement than what you're suggesting?

We are not building in the significant reduction in ocean freight costs, because we are not currently shipping by ocean freight. So ocean freight even at its peak, even with these crazy ocean freight rates, was a fraction of the air freight rate. And because we've sort of been operating behind the eight ball from the day we’ve sold the first Byrna, and we've been in short supply, we've been shipping everything into our factories by air freight, and we've been shipping everything out of our factories by air freight. So to give you a very quick example, our landed cost for a kinetic round is 700% higher than our FOB cost. So if you think about that for a second, we have the opportunity to save about 600% of our cost, our landed cost by transitioning the shipment of these kinetic rounds to ocean freight. So we do see a significant improvement in the bottom line, how much is somewhat difficult to quantify, I think the bigger issue for us is not what is the rate of ocean freight, but rather what is the availability of ocean freight. So as David spoke, about in the earlier part of this discussion. He said that we built up inventory so that we could deal with a 60-day delay of containers coming across the water. But right now, a lot of what we're faced with is the inability to find containers. I think as the economy softens a little bit and containers free up, that will be more meaningful to us in terms of reducing our cost of freight than the actual ocean freight rates.

Yes. So you asked how much is built into the estimates that we just discussed for the fourth quarter? And the answer is what's built in is what we expect to happen, but what we expect to happen is only a little bit of the potential that's still out there. In other words, we're starting to experience this, but getting everything on the water and getting all the potential as we can out of it, it's slow going.

Yes, that's going to take most of next year to transition everything to ocean freight. And so we expect next year to see improving margins quarter-by-quarter.

Would it be fair to say that most of the shipments currently are via air freight, and by the end of next year, most will be shipped by ocean freight? It's a good estimate for the year.

Yes, in this third quarter, we began to see the early positive effects of ocean freight. We got our first

One shipment.

Yes, we had our first container shipment from the Far East this quarter. We haven't really begun working on ammunition yet; we've just started assessing its potential. As Bryan mentioned, getting all the items coming from the Far East either resourced into the United States or arranging containers and ships to leave China will take a significant amount of time. Throughout next year, we do expect to see improvements in gross margin percentages.

All right. Very good. Thank you.

Thank you. There are no further questions at this time. I would now like to turn the call back over to Bryan Ganz for any closing comments.

Thank you, Daryl. I just would like to thank everybody for joining us this morning. And as always, we are open to speaking with the analysts whenever they'd like to set up a call. Thank you very much and have a good day.

This does conclude today's teleconference. We appreciate your participation. You may disconnect your lines at this time. Enjoy the rest of your day.