Byrna Technologies Inc. Q4 FY2022 Earnings Call

Greetings, and welcome to the Byrna Technologies Fourth 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, please see the press release in the Investors 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. Good morning, everyone, and thank you for joining us for Byrna's fiscal 2022 fourth quarter earnings call. David North, our CFO, and I will be discussing our Q4 and full-year 2022 results. I will provide some additional color on both the quarter and the year and discuss recent developments. We'd like to start by turning the call over to David so that he can discuss the Q4 and full-year results and financial performance. David and I will be taking questions at the conclusion of the presentation. David?

Thanks, Bryan, and thanks to all for joining us today. Let's start with a review of the financial results for the fiscal fourth quarter. Revenues for the fourth quarter of 2022 were $16.0 million; that's a 43.5% increase over the $11.0 million from last year's fourth quarter. Gross profit increased by 52.0% to $8.7 million from $5.7 million in last year's fourth quarter while gross margin improved to 54.1% of net revenue from 51.1% in last year's fourth quarter. The improvement in gross margin was driven by a reduced dependence on air freight and an improved product mix with higher margin ammo sales representing a greater percentage of overall sales. Operating expenses remained relatively flat at $8.7 million in the fourth quarter of 2022 compared to $8.8 million in the fourth quarter of last year. The combination of higher revenue and a higher gross margin percentage coupled with flat operating expenses resulted in improved profitability. Net loss for the fourth quarter was near breakeven at $0.1 million or $0.01 per share compared to a net loss of $3.2 million or $0.14 per share in the fourth quarter of fiscal 2021. Excluding long-term stock-based compensation and one-time severance costs, our non-GAAP adjusted EBITDA was $1.4 million for this year making this the second sequential fiscal quarter with positive non-GAAP adjusted EBITDA. Taking a look now at the full-year financial results, revenues for the full year increased by 13.8% to $48.0 million compared to $42.2 million in the prior year. In 2022, the company saw increases in international sales, dealer sales, and Amazon sales specifically. International sales increased by $5.7 million or 164%, dealer sales rose by $1.6 million or 28.4%, and Amazon's sales grew by $4.6 million or 522.5%. This more than offset the decline in Byrna website sales of $6.6 million or 20.9%. 2022 website sales were lower than in 2021 because 2021 benefited from a one-time $9 million spike in sales attributable to an unsolicited endorsement from Sean Hannity in April of that year. Higher sales drove an increase in gross profit of $3.4 million to $26.3 million in fiscal 2022 as compared to gross profit of $22.9 million in fiscal 2021. Gross margin percentage for the full year for fiscal 2022 remained relatively consistent at 54.7% compared to 54.3% in fiscal 2021 as the increase in the proportion of lower margin international and dealer sales was offset by lower freight costs and an improved product mix. Operating expenses rose by $7.5 million to $33.7 million in 2022 from $26.2 million in fiscal 2021, due primarily to increased spending on marketing, which increased by $3.3 million. Non-cash stock compensation expense was up by $2.3 million and variable selling expenses increased by $1.2 million due to the higher sales volume. Net loss for this fiscal year was $7.9 million compared to a net loss of $3.3 million in fiscal year 2021. Non-GAAP adjusted EBITDA resulted in a loss of $1.0 million versus a profit of $1.3 million in fiscal 2021. Finally, a look at our balance sheet and financial position. We ended the fiscal year with $20.1 million of cash on the balance sheet. Obviously, this is significantly lower than the $56.4 million on the balance sheet at the end of 2021 after having raised $56 million from the sale of 2.8 million shares of common stock in the third quarter of that year at $21 per share. In 2022, we used $17.5 million of cash to buy back 2.2 million of those shares at an average price of $8.08. The other main use of cash was to increase working capital levels. We increased inventory levels by $8.8 million from $6.6 million at the end of 2021 to $15.5 million at the end of 2022. That allowed us to cut our reliance on exorbitant air freight for raw materials and to move to slower, but far less expensive ocean freights. Our accounts receivable balance of $5.9 million was $4.3 million higher than the prior year-end balance, mainly due to large international sales in the fourth quarter. We also used $1.9 million of cash to enter the self-defense spray market with the acquisition of Fox Labs in May of 2022. At year-end, there was no current or long-term debt. And with that, I'll turn it back over to Bryan.

Thank you, David. As David said, the fourth quarter was a record quarter for the company, the second in a row and the third consecutive quarter of sequential top-line growth. Q4 was also the second consecutive quarter of profitability on an adjusted EBITDA basis. The improving profitability is due to improved operating leverage. Sales last quarter grew by 43% in comparison to the fourth quarter of 2022, while operating expenses were actually down slightly, down 1% compared to the same quarter last year. While our sales growth for the full year of 2022 was a disappointing 14%. Over the last two quarters of the year, Byrna experienced year-over-year revenue growth of 43%. Full year sales growth was dragged down by the 14% decline in the first half sales of 2022. As David mentioned, this decline in the first half of the sales of 2022 was due to the $9 million spike in sales in the first half of 2021 resulting from an unexpected and frankly unsolicited endorsement from Sean Hannity on live television in April of 2021. If we back out the $9 million of Hannity effect sales that occurred in the second quarter of 2021, sales in the first half of 2022 would have been up 47% year-over-year, and full year 2022 sales would have been up 45% year-over-year, more in keeping with Byrna's long-term growth trajectory. In fact, over the last four years, Byrna has experienced a compound annual growth rate of 272%. This significant top-line growth for Byrna has been driven by both growing brand awareness and an increase in the demand for less lethal alternatives to traditional firearms. Byrna specifically and the less lethal industry generally is benefiting from two societal trends that while they may seem countervailing, when combined create a tailwind for the less lethal industry. First, as we all know, there is an overall sense of unease driven by a spike in violent crime and growing civil unrest. This is a global phenomenon as people around the world are becoming increasingly concerned for their safety and the safety of their families. At the same time, there is growing outrage over the level of gun violence, which has resulted in tougher gun laws. Just a few months ago, Canada essentially banned the sale of handguns. This had an immediate effect on Byrna as we saw sales in Canada more than triple after the ban went into effect. Even in the U.S., an increasing number of states such as Oregon are adopting more stringent gun laws. We believe that this is the beginning of a longer-term trend that will greatly benefit Byrna. These tailwinds can be seen in the increased interest in Byrna's line of less lethal personal self-defense products. In 2022, web sessions on Byrna.com grew by 32% year-over-year. If we include Amazon DTC sessions, total visitors grew by 75% year-over-year to more than 11 million visitors, with more than half of the traffic being new to Byrna. At the same time, we are seeing an increase in repeat customers. In fiscal year '22, 47% of Byrna sales on Byrna.com were to repeat customers compared to 40% in 2021 and 24% in 2022. This supports our thesis that Byrna benefits from a razor/razorblade model. As our installed user base grows, we are seeing an increase in sales of higher margin ammo accessories and other products such as pepper spray, body armor, and less lethal rifles to our existing customer base. In fact, as of the end of the year, our top 250 customers on Byrna.com have each purchased more than $4,200 of Byrna products. Two months ago, we said that we would be introducing several new products at SHOT Show. SHOT Show is the premier trade show for the shooting sports, hunting, law enforcement, and firearms industries. SHOT Show, which takes place in Las Vegas every January, was back in full swing this year as worries over the pandemic subsided. I am pleased to report that the show this year was an amazing success for Byrna. We debuted our new good-better-best pistol strategy with the introduction of the price point Byrna EP and the all-new, much more powerful Byrna LE or law enforcement edition. Consumers, representatives of the media, and industry insiders had the chance to test fire these weapons at both the industry range day, which takes place the day before SHOT Show, and at the grand opening of Byrna's Las Vegas retail center. We also introduced Byrna's new 12-gauge round at SHOT Show, and the response was overwhelming. With a 100-foot effective range, no recoil, and tremendous stopping power, Byrna's new less-lethal 12-gauge Kinetic round was a smashing success. It was named one of the four best new products at SHOT Show by Police1 magazine and made the list of best Personal Defense World's top picks for 2023. Most importantly, our first production run of 250,000 rounds, 25,000 boxes, is completely spoken for based on the demand at SHOT Show. Based on the strong demand we have already seen, we have commissioned additional 12-gauge molds that will allow us to double our production of the Kinetic 12-gauge round by June of this coming year. Until then, we will allocate all production to our Byrna Authorized Stocking Dealers. The first shipments to dealers will begin later this month. We will roll this product out to our online customers once we have taken care of our dealers, which we expect to be sometime in April. We plan to release the payload rounds later this year. These rounds will carry the same chemical irritant formulations as the 68-caliber projectiles used by our range of less-lethal launchers. Accordingly, we will be introducing the Byrna Pepper 12-gauge round, the Byrna Max 12-gauge round, and the Byrna Pro-training 12-gauge round. We are also developing a dedicated launcher, our Pump Action Launcher, that will be able to shoot the .61-caliber fin-tail projectiles that are fired from our 12-gauge rounds without the need for a 12-gauge shotgun and without the need for a casing, wad, and protective clamshell. For 2023, while we remain bullish on the long-term prospects for the less lethal industry and while we expect to maintain our leadership position in the Consumer segments of the less-lethal industry, we do not expect to see sales continue to grow by 40% this year. Rather, we are forecasting revenue growth for fiscal year '23 of approximately 20%, and accordingly, we are providing revenue guidance of $55 million to $60 million for the full year of 2023. The reason that we have dampened our growth expectations somewhat for this coming year is that we believe that 2023 will be a more difficult economic environment than 2022 for consumer products companies. Whether or not the U.S. is technically in a recession and whether or not the Fed has engineered a soft landing, rising prices and higher interest rates have reduced demand for high-priced discretionary consumer goods. In coming up with this guidance, we also took into account the uncertainty associated with rolling out three brand new products with no sales history and opening a new production facility in South America. For this reason, we did not think it would be prudent to provide precise earnings guidance at this time. However, we do expect to be solidly profitable for the full year 2023 on an adjusted EBITDA basis and we expect to be cash flow positive this year. The improvement in profitability is a result of the operating leverage that comes from growing sales, improving profit margins, and stable operating expenses. For 2023, we expect to be able to hold the line on operating expenses other than variable expenses that track with sales and expenses at our South American Byrna LATAM joint venture. We also believe that we will see a minimum 5% improvement in gross profit margins for the full year of 2023 due to a continued transition from air freight to ocean freight and an improving product mix. In addition, for 2023, we are significantly reducing our reliance on discounts and special pricing to move our products on Byrna.com. During much of 2022, Byrna relied heavily on discounts and special pricing to drive DTC sales. This had the negative effect of conditioning our customers to expect discounts and to wait for discounts. It also undermined our dealer sales effort, and the constant discounting depressed margins. For 2023, Byrna is committed to maintaining price integrity. Prices will only be discounted on special pre-planned MAP holidays, and these MAP holidays will be shared with our dealers well in advance. The first such MAP holiday for 2023 will be the four-day period over Presidents' Day weekend. Understandably, reinstating pricing integrity may negatively impact sales for a period of time as our customers adjust to our new pricing policy. We believe, however, that this short-term pain is well worth the long-term gain. Already during the first six weeks of Q1, gross profit margins company-wide have come in at 62%, a full 8 percentage points higher than the 54% we reported for Q4 of 2022. 2023 should be a very exciting year for Byrna as we roll out these new products and begin production at our new Argentine production facility. While there are always hiccups with any new product launch or the opening of any new subsidiary or facility, we expect that the combination of new products and a production facility dedicated to the South American market will open significant new markets and opportunities for Byrna. Once the Argentine facility is in full swing and once we have better visibility on the sell-through of the new products, we should be able to better refine our guidance for both top line and bottom line. In conclusion, we've made excellent progress this year in terms of both growing the top line and controlling expenses. As I said in our last earnings call, we have reached the point in terms of operating leverage that will allow us to consistently generate positive cash flow and 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. Our first question comes from Jeff Van Sinderen with B. Riley. Please proceed with your question.

Hi, good morning, everyone. First, let me say congratulations on the launch. Great to see that among other new product launches. So multipart questions here, so appreciate you guys bearing with me on this. Wondering if you could speak a little bit more about what you saw in projectile sales in Q4, maybe any sense you can give us of concentration of overall revenues and call it ammo. And then with the launch of the new product, just wondering what you're seeing out there in the early days. I realize it is very early. And then maybe remind us of the margin on the shotgun projectiles and if that will change when you have your own launcher and if the projectiles change? And then also, maybe you could just touch on the payload shotgun projectiles. I guess, what needs to happen to get those completed and ready to launch and any timeframe there? Sorry, I know there's a lot in that.

All right, well, at least Jeff, they're all sort of ammo-based questions. So let's focus on the 12-gauge first because that is the more important product. All of the initial production was spoken for by our Byrna Authorized Stocking Dealers, the large chain stores that carry Byrna. And frankly, most of our dealers were interested in carrying the 12-gauge. We made a commitment to the dealers at SHOT Show that we would not start selling to the consumer as long as there were open orders, and that we would give their refill orders priority. The reason for this is simple. We want to ensure that if they're giving us shelf space, it does not sit empty. So we've told them that we will not offer it online until we feel that we have adequate stock to fulfill their restocking orders and to sell online. Initially, we expect the margins on 12-gauge to be lower because 100% of the sales will be through retailers, and our margins through retailers are around 50%. Our margins when we start selling this online will, of course, be much higher, again, closer to 70% gross profit margins. We again do not know if we are at the right price point for this product. We're selling a 10 count box of rounds for $50. We did not seem to get any pushback at all on this price. If we have difficulty maintaining production to keep up with demand, we could consider raising the price, but I think $50 for a box of 10 rounds is a fair price and provides us adequate margin. The most important thing here is that we get them out into the market and allow consumers to use these rounds. When we were trying to understand the TAM for 12-gauge, our research told us that there are about 100 million shotguns in the U.S. and probably somewhere between 30 million and 50 million shotgun owners in the U.S. If we can capture 10% of that market over the next five years, that's 5 million people. If all they do is buy one box of rounds, that's $250 million in revenues. Therefore, we think getting this into the market and developing this market with shotgun owners and creating word-of-mouth is extremely important. In terms of the payload rounds, the payload rounds are significantly more complicated to produce because they require us to create the .61-caliber round ball payload projectile, and then we have to fill the tail fin and weld that into the tail fin. This requires some very expensive equipment to accomplish. We expect that equipment to be in the factory in South Africa sometime in June. Right now, we are undergoing basic testing of this process. However, we are uncertain about how crucial the payload rounds will be because the Kinetic rounds have significant stopping power. So with the Byrna SD, we did not advertise the kinetic rounds as a self-defense round; we marketed them as training rounds, meant for target practice. For the new Byrna LE, which is a much more powerful launcher, the joules energy has been increased to 16 joules. The Kinetic rounds therefore become a legitimate self-defense rounded at 16 joules, and as we go to the 12-gauge, that climbs to 20 joules of energy. We did a lot of human effects testing where we paid participants $100 per round to conduct tests, and we found that no one was willing to take more than two rounds before saying no more. Therefore, we know the Kinetic rounds have a lot of stopping power. Again, we are committed to the payload rounds, but we are uncertain if they will represent a significant portion of our overall sales due to the higher price point. David, I'm going to turn it over to you to discuss the product mix of the ammo.

Yes, ammo in the fourth quarter has traditionally been around 25% of total sales, but it was closer to 30% this time, up from lower levels than last year's fourth quarter. So we are seeing a gradual increase as a total percentage.

Keep in mind, what we're observing is a few things with the increase in returning customers. Our returning customers went from 40% to 47% of sales this year, allowing us to see an increase in ammo sales, although with a slightly lower average order value. Our average order value went from $345 in 2021 to $320 in 2022. However, we saw improving margins. We believe that over time, ammo and accessory sales will approach 45% of overall sales eventually. I don't know if that's in five years or ten years, but that’s the trajectory toward which we are likely heading, and we base that on what we have observed with other less-lethal companies, including Mission Less Lethal, which we purchased, and one of our direct competitors from which we have several former employees. This indicates that the 45% range for ammo is where you tend to settle once you stop growing at double-digit rates.

Okay. I think you covered all those questions pretty well.

Those were a lot of questions.

A few more questions in my next question, but I guess if we can just touch a little bit more on - it sounds like you're putting the dealers first with a 12-gauge allocation at least. Maybe you could just speak a little more about production plans when will the Pump Action Launcher be introduced? And then also with the new Latin American facility, the factory in Argentina, how much of your production do you expect to move there? And also does that include the shotgun rounds in Argentina?

That was a lot of questions.

Yes. The shotgun rounds, the plastic pieces making up the shotgun rounds are going to be made at one factory. Each factory—the U.S., South America, the Argentine factory, and South Africa—will each install the propulsion. Thus, it does not become ammo or pyrotechnic ammo until we add the propulsion into it. This will occur in local markets, making shipping simpler.

Has to do with regulation and new taxation and…

Yes, it's easier for us to ship when it's just plastic pieces and not full ammo.

I wanted to add to this question because the inquiry implies some misunderstanding about our Latin American joint venture. We were asked how much of production will be moved there. The reason for the Latin American joint venture is not to relocate production; it is to tap into the two major South American markets, Argentina and Brazil. This means leveraging local content manufacturing within the tariff boundaries of Mercosur, which has a 20% tariff surrounding those countries. Therefore, we can now sell our products into those markets at a profit while absorbing that 20% tariff. By establishing production there, we will claim the profits for the investors and gain direct access to those markets.

I think that's an excellent point. Moreover, what really emphasized this was the last shipment we sent to Argentina, for which we paid $37 per launcher in freight and another $38 per launcher in duty. This translates to $75 in freight and duty costs, while the bill of materials for that launcher was $82. So essentially, by moving within the Mercosur region, we can effectively minimize those substantial freight and duty expenses.

Additionally, this creates a barrier to entry for competition. Throughout my career in various multinational manufacturing companies, I have learned that establishing production there is crucial for gaining market share in those areas.

Okay, good. That's really helpful to understand that. I'll let somebody else jump in, if I ask you too many questions already.

Thank you, Jeff.

Our next question comes from the line of Ryan Rackley with Raymond James. Please proceed with your question.

Hey, guys. Thanks for taking my question. Actually, sorry to do this, but I have a couple more on the 12-gauge round. It's really interesting to us. I just wanted to clarify. So you've seen demand across all of your dealers or is it concentrated just within a few? How's that spread across your customer base?

It's been pretty universal. Obviously, we've got some very large dealers that are taking thousands of boxes and tens of thousands of rounds, but we also have a lot of dealers taking 10 boxes, 100 rounds. It’s pretty universal. I think that the dealers, like us, are very keen to see what the sell-through is. We will know a lot more in three months. So we need to get it on the shelf and need to see how quickly it moves off the shelf. The good news is that this is a relatively easy market to reach shotgun owners. There are very specific magazines for us to advertise in. This product is being covered in several publications, receiving acclaim from platforms like Police1 and Personal Defense World. Therefore, we should get a insight into consumer demand, but frankly, we need to start with getting it onto the shelves first. We deemed the dealers important in this process because we don't currently know what percentage of our customers own a shotgun. My assumption is that it is well under 50%, potentially only 10%, and that is why they are buying at Byrna. By targeting these consumers through a brick-and-mortar dealer base, we are fulfilling two objectives: creating a market for shotgun owners and bringing new customers into our Byrna ecosystem.

Additionally, this may allow us to access more dealers not already within our network because dealers that sell 12-gauge shotgun ammunition may not have been initially interested in acquiring a CO2 launcher. However, they are now interested in this product. We are still in early stages of this process, so we will learn more as we progress.

Great. And are you seeing any interest from dealers that don't sell traditional ammo?

Yes, yes.

Okay.

Moreover, we're also observing interest from dealers who do not currently sell Byrna products. Several dealers we've presented to have reached out expressing a desire to start with the 12-gauge, and depending on how things progress, they may consider expanding into our other offerings.

Okay, alright, that's great. So just the last one on the 12-gauge. The pump launcher for the fin tail project, just want to clarify that, that won't be considered. I know your fin tail projectile can be shot out of the firearm. But your pump launch will not be a firearm?

Correct. Interestingly, the fin tail projectile was initially developed to be fired from this Pump Action Launcher, so they were created in a synchronized fashion. We later conceived of placing that little projectile into a 12-gauge casing. The reason for this shift is that the Pump Action Launcher will retail for $1,000. Although there is a market for this, it is not a million-dollar market. Conversely, there are tens of millions of people who own a 12-gauge shotgun, which is a much lower entry price of $50. We pivoted the strategy, but we did not suspend the development of the Pump Action Launcher, which is very advanced in development now, with working prototypes available. This new launcher represents an amazing technological achievement. However, we don't believe it will have the commercial impact that making the projectile accessible in a 12-gauge casing will. Initially, we contemplated dropping the projectile into an existing 12-gauge casing obtained from an ammunition manufacturer. Due to a shortage of ammunition, we were unable to obtain casings from these ammo manufacturers, which turned out to be advantageous. It propelled us to create our own plastic casing, allowing us a variety of benefits. One, we have a round that does not resemble a conventional shotgun round at all, addressing a significant concern, especially from law enforcement regarding confusion between less-lethal and lethal rounds. Secondly, we have complete control over our production. We are not reliant on ammunition vendors, which means in times of shortages, we can continue to supply our 12-gauge offering.

Great okay, that's helpful thanks. So I guess, so jump into the 2023 guide. I know there are a lot of moving parts. The new products, and your Amazon relationship is maturing. How are you thinking about the seasonality of '23 relative to '22, and should we expect a similar pattern or is there anything different that might stray from what we saw in 2022?

No, we believe 2022 is pretty indicative of what we should anticipate going forward. Q1 is always soft because it follows our major Christmas shopping season in Q4. The summer months are typically slower, but what we observed in 2022—a consistent growth—is likely what we will see in 2023. 2020 and 2021 both featured the endorsement from Sean Hannity, which made the sales appear unstable and complicated quarter-over-quarter, year-over-year comparisons. This is the first time in 2023 when we won't have any exogenous events influencing our results.

Yes, overall seasonality appears to remain steady. What complicates forecasting this year is assessing the macroeconomic factors that we have encountered due to the pandemic, particularly in the fourth quarter. It is challenging to distinguish which effects were due to the macroeconomic environment and how that will affect 2023.

Okay, great. Well, that’s it for me. I really appreciate the time.

Thank you, Ryan.

Thanks, Ryan.

Any questions?

It seems we have reached the end of the question-and-answer session. I'll turn the call back over to Bryan Ganz for closing remarks. Great, thank you very much. I just want to express my gratitude to everyone for joining us today and for your interest in Byrna. If anyone would like to arrange a one-on-one call with either myself or David, please reach out to Erol Girgin at Stonegate. His email is erol@stonegateinc.com, and he will assist in scheduling a one-on-one conversation. Thank you once again, and we will be signing off.

And this concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.