Good morning. Welcome to Byrna’s Fiscal Fourth Quarter and Full Year 2023 Earnings Conference Call. My name is Shamal and I will be your operator for today’s call. Joining us for today’s presentation are the company’s CEO, Bryan Ganz; and CFO, David North. Following their remarks, we will open the call to questions.

Earlier today, Byrna released results for its fiscal fourth quarter and full year ended November 30, 2023. A copy of the press release is available on the company’s website. Before turning the call over to Bryan Ganz, Byrna Technologies’ Chief Executive Officer, I will read the Safe Harbor statement.

Some discussions held 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.byrna.com for further information regarding forward-looking statements and reconciliations of non-GAAP results to GAAP results. Now, I would like to turn the call over to Byrna’s CEO, Bryan Ganz. Sir, please proceed..

Thank you, operator, and thank you, everyone, for joining us today. This morning, we issued a press release providing our financial results for the fiscal fourth quarter and full year ended November 30, 2023, along with key business accomplishments for 2023 and an update on Q1 performance 2024 performance.

We will also be filing our 10-K with the SEC later today. I’m going to begin this morning by passing the call to David North, our CFO, to discuss our financial results for both the fourth quarter and the full year 2023. Following that, I’ll review what was a very eventful year and offer insights into our operations and go-forward strategy.

Lastly, we’ll open the call to questions from our publishing analysts.

David?.

Thank you, Bryan, and good morning, everyone. Let’s discuss our financial results for the fiscal fourth quarter and full year of 2023 ended November 30, 2023. Net revenue for the fourth quarter in 2023 was $15.6 million compared to $16.0 million in the fiscal fourth quarter of 2022.

The slightly lower net revenue is primarily attributed to exceptional international sales in Q4 of 2022, which included a $3.4 million stocking order for the company’s distributor in Argentina. Total international sales in Q4 of 2023 and were $225,000 compared to $4.3 million in the prior year.

Without this one-time surge in international sales in the prior year, the fourth quarter displayed strong growth. Domestic revenue in the quarter totaled $15.4 million. That’s a 32% increase from Q4 of 2022, and it’s a quarterly record.

Gross profit for Q4 2023 was $9.0 million, or 58% of net revenue compared to $8.7 million or 54% of net revenue for Q4 of 2022. The increase in gross margin primarily resulted from a much smaller percentage of lower-margin international sales. Operating expenses for Q4 2023 were $9.7 million compared to $8.8 million for Q4 of 2022.

The increase in operating expenses was primarily driven by an increase in marketing spend as part of the company’s influencer partnership strategy. Net loss for Q4 2023 was negative $800,000 compared to a negative $100,000 for Q4 of 2022. And the increase in net loss was primarily due to the increase in marketing spend.

Adjusted EBITDA, which is a non-GAAP metric for Q4 of 2023, totaled $0.4 million compared to $1.4 million for Q4 of 2022. Net revenue for the full year totaled $42.6 million compared to $48.0 million for the prior year.

This decline was, again, largely due to a $7.6 million decrease in international sales from South Africa, South America and Asia, which are characterized by large but infrequent orders, as experienced in the prior year.

This impact was partially offset by a $900,000 increase in sales on Amazon and a $400,000 increase in Fox Labs sales despite temporary headwinds from social media advertising bans. Domestic dealer and distributor sales, which are less dependent on online advertising, grew by $1.6 million.

Gross profit for the full year ended 2023 was $23.6 million, or 56% of net revenue compared to $26.3 million, or 55% of net revenue for the prior year period. Gross margins remained stable as the increase in lower-margin dealer and distributor sales was counterbalanced by the reduction in lower-margin international sales.

For the full year, operating expenses were $31.4 million, which is a decrease from $33.7 million in the previous year. This $2.3 million decrease was largely achieved through strategic realignments and cost optimizations in key areas.

Notably, sales and marketing expenses were reduced by approximately $920,000 due to the lower advertising spend earlier in the year resulting from the social media advertising ban.

Additionally, professional fees, including legal and accounting service, were reduced by $680,000, while insurance costs decreased by $510,000 due to renegotiated premiums. Payroll expenses decreased by $340,000 contributing to our overall more efficient cost structure.

Looking ahead, we are focused on maintaining a balanced approach to managing our operating expenses. We are preparing for a measured uptick in these costs as part of our strategic investment to drive revenue growth. Net loss for the full year was $8.2 million compared to a loss of $7.9 million for the prior year.

The slight increase in net loss was primarily due to the decrease in revenue, partly offset by a decrease in operating expenses. For the full year, adjusted EBITDA totaled negative $2.0 million compared to negative $1.0 million in the prior year. The decrease in adjusted EBITDA was primarily due to the increase in net loss previously noted.

Cash and cash equivalents. Here, I wanted to call attention to a complete reversal of the trend of declining cash balances that prevailed through the first three quarters of the year due to declining sales and high inventory balances. The balance of cash and cash equivalents was $13.7 million at the end of the third quarter on August 31, 2023.

By year-end, on November 30, 2023, cash and cash equivalents had risen to $20.5 million due to the increase in the sales and also to our ability to sell down high inventory levels. Inventory at November 30, 2023, totaled $13.9 million compared to $16.7 million at August 31, 2023. The company currently has no current long-term debt.

And that concludes my prepared remarks. I’ll turn it back over to Bryan..

one, was it replicable; two, was it scalable; and three, was it sustainable. After almost 6 months, we can answer the first two questions. First, it is replicable. After kicking off the program with Sean Hannity, we have been able to successfully add three additional celebrities to the mix; Judge Jeanine, Glenn Beck, and Bill O’Reilly.

In each instance, we have seen very similar ROAS numbers. Second, we found out that it’s not scalable. Adding more money to these individual campaigns results in diminishing returns. Once we’re advertising 3 to 4 days a week, increasing the frequency does not yield a commensurate increase in revenue.

Third, with regards to sustainability, the simple answer is that we do not yet know how sustainable this program is. Will we see a drop in ROAS over time once we have saturated each celebrity endorsers market? To date, we’ve not seen any material decline in effectiveness over time.

However, it’s still early, and we will be closely monitoring ROAS numbers for any changes in the trend. So what does that mean for growth? As we look ahead to the rest of the year, based on what we have seen to date, we are quite optimistic about the sustained impact of our celebrity endorsement model.

For the month of December, the only month in 2024 where we’ve closed the books, byrna.com’s preliminary revenue numbers were up 89% over last year, and amazon.com’s preliminary revenue numbers were up 98% over last year. Well, this torrid pace has slowed somewhat in the post-holiday selling season.

The trend in January and February to date remains very strong. There is, of course, no assurance that these trends will continue. And given the fact that we are still in the early innings of our new celebrity endorsement program, we will not be giving guidance.

However, it is safe to say that, based on the first 11 weeks of Q1, we expect to see strong growth in our online business in Q1 and, hopefully, well beyond. Of course, strong sales requires significant ad expenditures, and we expect to see a significant increase in marketing expenses related to our celebrity endorsement program.

However, with a 5x ROAS and a 60% plus gross profit margin for our online sales, the return on marketing spend is very accretive.

At the same time that we expect to see strong sustainable growth in DTC sales, we also expect to see a marked increase in dealer sales, driven largely by our premier dealer program as we look to double the number of participating dealers. We also expect to see strong double-digit growth from both Canada and Mexico this year.

All told, we have every reason to expect strong yet manageable year-over-year growth in 2024. In 2025, we may look to add additional names to our roster of celebrity endorsers. However, that decision will depend largely upon the success of our new compact launcher, which we hope to debut early in 2025.

This launcher will be the size of a micro-compact pistol, similar to the SIG Sauer P365, the most popular handgun in the world. We believe that the compact launcher will be a game changer for Byrna, as the number one complaint we currently get about the Byrna SD is its size.

For this reason, we believe that this new, much smaller launcher will appeal to many of Byrna’s current customers and, at the same time, expand our market to women and those consumers interested in easily concealable non-lethal launcher.

If SIG Sauer’s success with the introduction of their micro-compact pistol is any indication, we should see a dramatic increase in overall sales when we introduce this micro-compact launcher.

For 2024, we also expect to see improved operational efficiencies, reduced product costs and improved margins as a result of a number of initiatives that we are undertaking. One recent change we made is to simplify our product offering, recognizing the need for simplicity and ease in the purchasing process.

Last month, we introduced the Byrna Universal Kit, a one-size-fits-all solution that is legal in all 50 states and Canada. This replaces the Byrna Pepper and Byrna Kinetic kits. Having two different configurations created a lot of confusion for first-time customers. Now we have only one configuration.

Customers are asked to choose between the Byrna SD, our most popular pistol, and the Byrna LE, our most powerful pistol. They are then asked to choose their color, black, orange, or tan. Every other color will be a special offering, for example pink on Valentine’s Day, which we’re actually rolling out today.

Finally, customers will be asked if they want the launcher with or without a thumb safety. The configuration of each kit, however, will be the same - one launcher, one extra 5-round magazine, one 5-count tube of Kinetic, one 5-count tube of Eco-Kinetic and one 5-count tube of Pro Training. Chemical irritant rounds will be sold separately.

This streamlines the checkout process and offers additional opportunities to upsell ammunition, making this a win-win for customers and Byrna.

We anticipate that this change will lead to a slight increase in average order value over time as the Universal Kit is selling for the same price as the Pepper kit was previously selling for despite the fact that it does not come with chemical irritant rounds.

This change has also allowed us to reduce the number of product variants offered by more than 25 SKUs. This should allow us to both reduce inventory levels and improve factory efficiency, which in turn should bring down costs, over time.

This simplified offering, coupled with our new expedited shipping option, should help improve both revenues and margins. To be able to keep up with the anticipated growth this year, we’ve recently initiated a plan to scale up our manufacturing capabilities.

This initiative includes increasing our production facility personnel by 25% and opening a second assembly line. These steps are designed to increase launcher production capacity from 10,000 units per month to 12,500 units per month. Since we are still operating on only one shift a day, we have significant excess capacity for expansion as needed.

In addition to the expansion of our launcher production capacity, we are also focusing on increasing ammunition production by opening a second ammunition production facility, which will be located here in the U.S.

This move is aimed at both strengthening our supply chain and reducing the risk of supply chain disruption, thereby ensuring that we can meet the forecasted demand for our high-margin ammunition products even if international shipments become more difficult for any reason.

We expect these projects to be completed in the second half of 2024, setting a strong foundation for Byrna’s continued growth and operational efficiency. Fortunately, Byrna’s strong financial footing provides the foundation to be able to undertake these projects and handle the expected growth in sales.

At the end of December, cash had actually climbed to $23 million. And as David mentioned, there is no debt on our books, so we are well-positioned for growth.

In conclusion, we believe that 2023 demonstrated that this management team can react to whatever challenges are thrown our way, safely navigating Byrna through troubled waters on the way to our charted destination. Now let’s open the call for your questions. Operator, please provide the appropriate instructions..

Thank you. [Operator Instructions] Our first question comes from Jeff Van Sinderen with B. Riley Securities. Please proceed with your questions..

Hi, good morning, everyone. And thanks for taking our questions. I guess the first question I had is really just around marketing, realize that you’ve added a bunch of new folks to your influencer group. I’m just wondering what we should anticipate for the advertising budget in 2024..

The advertising budget in 2024 is currently around $7.5 million. That’s up from $5 million that we had when we were focused on social media advertising..

Okay. And then, since you were just mentioning the Universal Kit, maybe you can just touch on sales trend by product. Wondering if your new marketing is driving sales of any of the other products, maybe higher-velocity products versus lower-velocity products, and then which products you’re seeing ramping the most outside of the Universal Kit..

Well, again, the big surprise for us was the demand for the LE. So the LE has an MSRP of $479 versus an MSRP for the SD of $379. So for an extra $100, we thought that we’d only get about 10% of customers opting for the LE. That’s run as high as 40%. Right now, it’s averaging about 33%. So that’s been a little bit of a surprise.

We’ve also seen some very strong interest in accessories. So again, one of the benefits of this new advertising campaign is that we’re bringing in a lot of new customers. And these new customers are then coming back buying things like our target tents, holsters, sites, etcetera. So, we have seen a pretty across the board interest.

Where we have not seen significant strength, frankly, is in our 12 Gauge. That’s been disappointing. We are going to be looking to partner with a manufacturer of pump-action shotguns so that we can have the 12 Gauge sent out with each new shotgun. But that’s probably been the biggest disappointment is 12 Gauge..

Do you think that that 12 Gauge would be more something for law enforcement at this point, or do you think it’s still consumer?.

No. We think there is a large law enforcement market. Keep in mind, our law enforcement sales in the U.S. are still relatively small. They represent 1% to 2% of our overall domestic sales. We do have interest in the 12 Gauge outside of the U.S., but again, there is issues with manufacturing and shipping and so forth.

But I do think that ultimately, law enforcement will probably be the bigger market for 12 Gauge..

Okay.

And then just as a final follow-on to that, maybe you can just touch on kind of the trend in ammo sales, and then what the outlook is for ammo sales given the increasing base of launchers?.

Yes. Ammo sales have always bounced around about 25%. If we look at the full year, they are at 25%, ammo plus accessories. However, in the fourth quarter, it was down to 22%. And I think that that’s due to the fourth quarter real extreme growth and probably a lot of new customers..

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

Thanks Jeff..

Thank you. Our next question comes from the line of Jon Hickman with Ladenburg Thalmann. Please proceed with your question..

Hey Bryan, could you walk through what would happen on your income statement if you got another order from Latin America?.

Again, the orders – what do you mean orders from Latin America?.

Do you mean just in accounting terms how that works or…?.

Yes..

Oh, sure. Yes. Basically, right now, we are using the equity method of accounting, which means that Latin America shows up simply as an investment on our balance sheet, and each quarter we give our 51% of their net loss or gain.

So, if they have an order there locally, say the Córdoba Police order more launchers from them, you don’t see anything on our financial statements. You simply see that, okay, they are more profitable, so we have got better results from investment in joint venture.

If they make an order from us right now, from Byrna Technologies, that does show up as an external sale..

But keep in mind that there is a manufacturing facility down in Buenos Aires, so hopefully they are not ordering too much directly from us. Right now, they are producing their own launchers at Byrna LATAM. They are buying parts directly, component parts directly from Byrna LATAM.

So, the only sales that go from Byrna Technologies to Byrna LATAM are ammo. So, we are still supplying them with ammo because we don’t produce ammo in Latin America. But otherwise, there really are very little in the way of sales from Byrna Technologies to Byrna LATAM..

Okay. Thank you..

[Operator Instructions] Our next question comes from Jim McIlree with Dawson James. Please proceed with your question..

Thank you. Good morning. I am trying to understand the increase in operating expenses. And here is how I am looking at it. So, in Q4 of this year, your OpEx was $9.7 million, and that’s up about $1 million from the year ago quarter. And sales were down a little bit, and I understand all the puts and takes as to what’s going on with the sales.

But you talk about your current marketing campaign being much more efficient than the prior one, but we are seeing similar sales and much higher OpEx, and you are talking about a meaningful increase in OpEx, going forward. So, I am just trying to figure out what’s going on there..

Yes. As we have said, in Q4 of 2022, $4.3 million in sales were international, with $3.4 million of that going directly to our partner in Argentina, Bersa. So, the real comparison is not $15.6 million versus $16 million, it’s $15.6 million versus $11 million. So, we had a significant sales growth accompanied by an increase in marketing spend.

As I explained, with a 5x ROAS as a minimum, and as we described, our ROAS numbers have been running above 5x and with a 60% gross profit margin as a minimum with our online DTC, every advertising dollar we spend is quite accretive.

David, is there anything you want to add to that?.

Yes. I mean what you need to do is, if you are looking at the fourth quarter, yes, that advertising spend does make our breakeven point go up. But when we talk about efficiencies, if I go back to what I said in my remarks, that domestic revenue in the quarter totaled $15.4 million, and that’s a 32% increase from the same quarter a year ago.

So, that’s where we are really seeing the effect of this. And those are our highest margin sales as well..

Okay. And then also, Bryan, you talked about – I just want to make sure I heard you properly.

You said that increasing the frequency of advertising does not increase sales, is that true? And then, so what is the current frequency of advertising that you were referring to when you said increasing it doesn’t increase sales?.

So, once we have reached kind of the threshold of around four days a week, going up to 5 ads a week, 10 ads a week with the same celebrity doesn’t have the same impact. You start to see a diminishing return in terms of ROAS.

So, if we are spending, let’s just say, $2 million a year with Sean Hannity, spending $4 million a year with Sean Hannity would not double our return from Sean Hannity. So, you reach a point where you can’t just pour more money into the successful celebrity endorsers, but you have to add celebrity endorsers to the roster.

This year, our intention is to add one more celebrity endorser, which will start next quarter in March. But beyond that, we do not intend to add any more celebrity endorsers to the roster because we feel that, with these five, we will be able to generate all the growth we can handle..

Okay. And just one other thing on this same issue.

So, when you start with a new celebrity endorser, do you scale up to that, let’s call it that 4x a week baseline, or does it take – and does it take a little time to get that ROAS that you referred to, or do you get it somewhat instantaneously?.

Our experience has been that we get it somewhat instantaneously. One of the things that we have discovered is if we can get on their show, in other words, if we can get an interview on their show, as we did with Sean, as we hope to do with Glenn Beck and Bill O’Reilly, it allows us to really jump-start the advertising effectiveness.

But so far, we have not seen any delay in hitting our ROAS numbers. In fact, with Glenn Beck, the ROAS numbers were extraordinarily strong right out of the box, because in December, Glenn spoke about our product on his show, not as part of our advertising, but just as something that he was interested in.

So, we are looking for those celebrity endorsers that really believe in our product, that are passionate about our product, that believe in less-lethal self-defense. And as a result, there is a tendency for them to talk about it beyond just the advertising that we are paying for..

The other thing is that, with all of these, we start out with a relatively short-term contract so that we can make sure that this is going to be effective before we commit to anything long-term..

Yes, that’s correct. So, for example, with Sean, we started with a 90-day contract, but then we have now committed to the full-year 2024, with Glenn Beck, the same thing, with Bill O’Reilly, the same thing..

Okay. Thank you. That’s it for me..

Thanks Jim..

Thank you. At this time, this concludes our question-and-answer session. I would now like to turn the call back over to Mr. Ganz for closing remarks..

Okay. Thank you, operator, and thank you everybody who participated today, and particularly our investors, I want to thank you for your continued support. Thank you..

And this concludes today’s conference. We thank you for joining us today for Byrna’s fiscal fourth quarter and full year 2023 conference call. You may now disconnect..