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.

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?

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…

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…

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

Good morning, everyone. Just wanted to touch on the backlog for Q2. And I'm just wondering what you anticipate for revenues for Q2, maybe a range there? And then gross margin, any impact to gross margin from some of the production difficulties maybe just a sense of where gross margin might wind up for Q2? And then also any change to your prior annual guidance?

So we've got gross margin guidance and our Q2 numbers, which I'm not going to give you. So we are still, as I said, we're producing the Byrna LE, and we are shipping the Byrna LE every day, but the production numbers are not where we would like them to be. And we're not sure how long it's going to take for us to get this into production at the level of the SD. That said, we do have 704 orders that are in our system. That means these are orders that people have actually given us their credit card and we are in the process of shipping. We have another 6,877 orders that we have not taken their money. And what we are doing is we put people on the wait list and then we are opening the wait list up 500 people at a time and letting them actually order the product. And the reason we're doing this is although people get angry with delays in shipping, they're significantly less angry if you haven't taken their money. So we recognize this from the significant rush of sales we got after Hannity. We sold with Hannity One, about 10,000 launchers in a couple of days, and we were struggling to get those out the door. Of course, because these people have put their orders in through our online e-commerce store, we had to build their credit card, and that created additional problems. So this time, when we knew we were having production issues with the LE, we said that we would not accept any orders, we would only allow people to sign up for the LE on the wait list. As I said, we have -- essentially between the orders in our system and the wait list, we have…

No, that helps. Just a couple of follow-ups to that. Just as you were talking about the LE, is that open to the general public now? Or is that the orders that you have are most of those law enforcement?

No. These are mostly general public orders. Orders for law enforcement are a lengthy process. We're going to have to supply LE launchers to law enforcement for trial. They'll have to be what's called TD testing and evaluation. So that process will take some time. These are, for the most part, the 6,877 people in the customer waitlist are all online customers at MSRP. So that does not include our dealer sales.

Yes. We've lined it up so that the LE is aimed for first introduction on DTC through website and the 12-gauge on the other hand, is lined up for first introduction to dealers.

Okay. So that's pretty interesting because it just -- I mean, it speaks to a more powerful launcher getting demand that's really a lot bigger than what you expected initially.

Jeff, if I can just add, we introduced a third new product, which we did go into production on, that's the Byrna EP, which was our lower-priced product. And we had anticipated that with the $299 MSRP, that would be the product that had a lot of interest. And that's been only 10% of our revenue or 10% of our orders. So we were very, very pleased to see that there is more price elasticity than we had thought and that the $479 price point is not off putting to people.

And really, the initial conclusions, let's hope that these indicators continue. But the initial conclusion is that the marketing strategy of putting in good, better, best options is leading to better upsell than we had anticipated.

Okay. And then just one more follow-up on the production. What needs to happen to get the production levels running where you've targeted them at this point?

There's two things that need to happen. One is just training of personnel. It's a completely different process and it requires retraining of personnel. The other is getting our suppliers to produce products within spec. So when we ask our suppliers, can you achieve the specification tolerances on the drawing everybody, of course, says, yes. And for the first 100 pieces that we use for the pre-production build, these are what we refer to the industry’s golden parts, they always achieve the specifications. So, the first 100 launches that we built during pre-production worked incredibly well. We presented them at SHOT Show, they performed flawlessly. And then when we ordered 10,000 parts, they were not up to the same specifications or same tolerances as the original golden parts that we received. So we've been working very closely with our suppliers to see what can they achieve in serial production. And what can we live with. So right now, we're both training our personnel and working closely with our suppliers. And we're not talking about dozens or hundreds of parts. We're talking about a couple of very critical parts where the tolerances are very exacting where we need suppliers to figure out how to be able to produce within the required specifications. So, that's really -- these are just mechanical problems. They're not existential problems. I can assure you that they -- we will overcome these. We will get to a point where the production of the LE is smooth and easy and with a very high first pass yield. But it's going to take a number of weeks and or months, honestly, to get there.

Okay. So just to clarify one point. When you guys reported Q4 at that point in time, it looks like you were going to have the orders out the door by the end of the quarter as planned. And then the last couple of weeks of the quarter, things just kind of got tough with the production levels and with the component availability to your specs. Is that an availability --.

We did our preproduction build to prove that we could -- and the preproduction build is actually built not by the engineering team, but built by the factory personnel. And those 100 launches from preproduction work flawlessly and led us to believe that we would have no issues going into production. And so we introduced at SHOT Show. As you know, we debuted at Range Day and we fired thousands or maybe tens of thousands rounds the SHOT Show and everybody tested it, and we have very strong demand for the product. And as we went into production, that's when we discovered that the components that we had gotten for the preproduction build were perfect and the components we got for serial production were less than perfect.

Okay. And you went into production, can you just refresh my memory on when you went into production?

We went into production on January 23.

Okay. Got it. Thanks for taking my questions.

Thank you, Jeff.

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

Thank you. Good morning. What are the capital requirements for the rest of the year for both the investment in the JV as well as just normal capital spending?

Hey Jim, how are you? For the investment in the JV, we don't anticipate any additional capital requirements for the balance of the year. I just got back from Argentina yesterday. I was down there working with our team and going through the budget for the year. We anticipate that the JV will be self-sustaining by the end of the year and that the capital contribution that we made and that our partners made to start the company will be more than adequate to fund it through cash flow profitability. In terms of capital for other projects, the only big project we have in terms of capital is the payload projectile for the 12-gauge. So we introduced the 12-gauge with the Kinetic projectile initially. We are working on the payload projectile, which we expect to have in production later this year. This is a very expensive piece of equipment to fill and well these projectiles. We've been working on this, honestly, for probably 24 months.

And most of the cash was already spent in the past fiscal year on that. The machines are -- the ammo loading machines are pretty much there and waiting for us to get the final design and the projectile. For the entire year, we've got a capital budget -- capital expenditure budget of $2.5 million. Most of that remains to be spent. It's molds and that sort of thing. So yes, those are the numbers.

That's great. Thank you. And then secondly, on the JV, do you have a right or an obligation to buy out your partner after a certain period of time or after hitting a revenue level, anything like that?

Both. So we have the right to buy them out, and they also have the right to put their stock to us. Our partners are individuals. So unlike Byrna, which is a public company and theoretically has indefinite life, these people are going to want to cash out of their investment. So they have the right to put their stock to us after three years, and we have the right to call it away from them if they've not done so after 10 years. But we would anticipate that they'll probably put it to us long before that 10-year period. We wanted them involved for the first three years because of as the owners of Bersa, one of the only two large gun companies in South America, they have very, very good relationships with all of these law enforcement agencies and dealers throughout the Mercosur region. So they've been making introductions. We sent our LE training folks down to Argentina two months ago, and they put on a presentation for 27 different major law enforcement agencies in Argentina, representing probably 75% of the law enforcement agents in Argentina. So their assistance and support early on will be critical, but once these relationships are solidified. And once we start to pick up these law enforcement agencies as customers, a lot of what they're bringing to the table, we will have taken advantage of. And my guess is at some point between that three years and 10 years, they'll put the stock to us.

And the price that, that transaction to take place is a third-party valuation or it's a fixed dollar amount now or a fixed value...

It's a third-party valuation in a very commonly used practice. We've agreed on a set of valuation firms. Two will be selected, one by us, one by them, and that we'll take the midpoint between the two valuations unless the valuations are too far apart in which case, we'll bring in a third valuation firm. But we didn't want to use a fixed metric just because in different environments, these metrics change dramatically. If we were to use a metric based on valuations from two years ago, that would seem very high relative to valuations today. So we thought it better to use the third parties to set the value.

Got it. Great. That's it for me.

Thank you, Jim.

Thank you. Our next question comes from the line of Ryan Rackley with Raymond James.

Hi guys, thanks for the time. So it sounds like, I think you said that you're shipping the 12-guage round to consumers. And I think you said previously that you were going to fulfill the dealer demand before you started shipping to consumers. I just want to make sure that this basically means that you guys are meeting all of dealer demand at this point? Or is there a change of strategy there?

No. All of the dealer orders have been shipped, and we're now into shipping online. We expect that we will get dealer reorders before the end of the quarter. And frankly, we expect that we'll be getting new dealer orders. We're in the process of using the 12-gauge also to open up new dealer business. So we are going to be doing several mailings of two 12-guage rounds to FFLs around the country. The first mailing will be to thousand dealers in four select states. We've been getting on the phone asking these dealers if they'd like to receive the rounds. So far, the response has been 100% in the affirmative. And we think this will be a very interesting way for us to open the doors to dealers that we have been unable to open the doors with our Byrna launchers. So we're really excited about the 12-guage not just from the sales perspective, but also from its ability to get us in front of FFLs and to get us in front of gun owners that up until this point, really don't know about Byrna.

Okay. Great. And are most of these dealers are they shipping to all of their -- are they stocking all of their locations? Or are they just trying out a couple of locations? Is there a way to think about the kind of the broader trends?

So far, the orders that we've gotten have generally been from the bigger box stores that we deal with, and they're putting a relatively small number of boxes in many of their locations. Because like us, they want to see what the demand is going to be. We are extremely encouraged from the anecdotal and empirical evidence that we get. But as of yet, we -- this is a new round. We just started shipping this, I think, a week ago, Monday. So these just went out the door. We're now starting to ship, I think, probably early next week, the online orders that we've been getting and potency of that response.

We still realizes that the proof of the pudding will be in a sell-through in this case.

Great. That makes sense. And shifting over to the LE. I just wanted the wait list, the 5,000 units on the wait list. Is there a way to think about the conversion on that? Are these people that just signed up for an e-mail notification or how strong is that interest? Or should we think of that as like a backlog?

We're thinking of it as a backlog, but I would be surprised if it's 100%. Right now, though, it's more than just an e-mail notification because we are not taking orders online. So we're basically saying, we're uncertain as to when this is going to ship. We don't want to charge your credit card. But if you want the LE get on the list, if you go online, you'll see that there have been -- I mean we've shipped 1,000 of these launches already. And a lot of people have started to do reviews and the reviews have been very universally positive, and they sort of all end with the message, get on the wait list. So I think a lot of people that are sort of avid-Byrna customers want to upgrade from their SD. The LE is a significant upgrade. It is 60% more powerful than the SD, it has 40% more shot capacity. It has a 7 around Mag. It has an enhanced citing system. So I think that there's a lot of the -- among the 250,000 people that have bought Byrna domestically, there's a lot of people that are going to want to upgrade to the LE. So we would suspect the conversion rate on the wait list, which is now up to, as of yesterday, it was about 6,900 customers will probably be pretty high.

Great. Well Thanks guys. I appreciate the time.

Thanks, Ryan.

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.

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.

Thank you. Ladies and gentlemen, that concludes our conference call. You may disconnect your lines at this time. Thank you for your participation.