Good morning. Welcome to Byrna's Fiscal Second Quarter 2023 Earnings Conference Call. My name is Kevin, and I'll 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'll open the call for questions. Earlier today, Byrna released results for its fiscal second quarter ended May 31, 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'll 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 our website, ir.byrna.com, for further information regarding forward-looking statements and reconciliations of non-GAAP results to GAAP results. Now, I'd like to turn the call over to Byrna's CEO, Bryan Ganz. Sir, please proceed.

Thank you, Kevin, and thank you everyone for joining us today. As Kevin mentioned, this morning we filed our 10-Q with the SEC and issued a press release providing our financial results for the second quarter ended May 31, 2023 along with key business accomplishments. Today, I would like to start by providing a few key highlights and recent business developments. Then, I will hand the call over to David North to discuss our financial results in more detail. After that, I'll come back and provide some color on our performance, touching on both those areas of the business we are pleased with and the underperforming areas of the business that require our attention. After that, we can take questions from our publishing analysts. And with that, let's begin. First, production. I am pleased to report that during the quarter, we commenced production -- serial production of the new, more powerful Byrna LE Launcher, and successfully worked through the backlog and waitlist of 5,800 units reported at the end of the first quarter of 2023, shipping out a total of 6,235 Byrna LE Kits during Q2. Byrna is continuing to ramp up production of the Byrna LE and we intend to release it on Amazon this week. We believe, while there is still room for improvement in terms of manufacturing efficiency, the manufacturing and supply chain challenges that we face while rolling out the Byrna LE are firmly behind us. We also commenced production and shipment of our new revolutionary 12-gauge less-lethal round during the quarter. The round was voted Best of SHOT Show 2023 and was recently favorably reviewed by Firearms News. A copy of this article is available to view on our website in the 12-gauge section and is linked to our press release issued this morning. These…

Thank you, Bryan, and good morning, everyone. Let's discuss our financial results for fiscal Q2. Net revenue for the second quarter of 2023 declined slightly by 1% year-over-year to $11.5 million from $11.6 million in Q2 of 2022. The slight decrease in sales are primarily due to a decline in international orders, specifically a one-time $1.1 million order from South Africa, which was recorded last year in Q2, as well as a temporary drop in online sales due to production delays affecting Byrna LE products. The decrease in sales was offset by a $900,000 increase in sales to domestic dealers, which were up 47% year-over-year. Gross profit for the second quarter of 2023 increased to $6.2 million from $6.1 million in the prior-year period. Gross profit margin for the second quarter of 2023 improved to 53.9% from 52.7% in the same period last year. The improvement in gross profit and gross margin was primarily due to the decrease in the proportion of sales to lower-margin international channels. Gross margin improvements were slightly offset by challenges in production and supply chain disruptions early in the quarter. On a sequential basis, gross margin declined due to both customer mix, a larger percentage of lower-margin dealer and international sales in Q2, as well as unfavorable manufacturing variances resulting from lower production volumes and resulting scrap as the factory worked to get the Byrna LE into serial production. Operating expenses were $7.0 million. That's a 20% decrease from $8.7 million in Q2 of 2022. This reduction primarily resulted from a $600,000 decrease in payroll cost, a reduction in marketing spend of $600,000, and lower professional fees and insurance costs of $400,000. Turning to our profitability measures. We recorded a net loss of $1.1 million, marking a 64% improvement from $3.0 million in the prior-year period. The improvement was the result of reduction in operating expenses that I just mentioned. Adjusted EBITDA, which is a non-GAAP metric, improved by $1.6 million to $700,000 in the second quarter of 2023 compared to a $900,000 loss in the second quarter of 2022. The improvement in EBITDA primarily stems from slightly higher margins, coupled with the decrease in operating expenses, as previously mentioned. Onto the balance sheet. As of May 31, 2023, we had $15.4 million in cash and cash equivalents, which was up from $14.4 million at the end of the fiscal first quarter on February 28, 2023. At quarter-end, we also held $17.5 million in inventory compared to $18.0 million at the end of the first quarter. We're also continuing to maintain a debt-free balance sheet. That concludes my prepared remarks. I'll now turn it back to Bryan.

Thank you, David. I would now like to provide some color on the results outlined by David. First, let me repeat that I believe that the production and supply chain problems that we grappled within Q1 and the beginning of Q2 are behind us. We do not see production issues negatively impacting sales in the foreseeable future. Second, the structural changes and management reorganization that we have implemented at Byrna this year, which has resulted in a lower operating expense run rate, we believe will continue at the current pace. While we will be adding some new positions in product development and sales and marketing, we'll also be consolidating some positions in other areas of the company so that the net effect should be neutral. So that brings me to what I really want to talk about. Sales. While net revenue for Q2 2023 was essentially flat year-over-year, that doesn't begin to tell the whole story. As I will explain, there are segments of the business that have surprised to the upside. There are other segments of the business that, while they appear to be underperforming, are, in fact, in line with expectations. And finally, there are still other segments of the business that were appearing to be keeping pace with last year are areas of concern for management. On the positive side, we have dealer sales, which were up 47% or $900,000 compared to Q2 2022. As we discussed, this is being driven by several factors, including our Premier Dealer program, as well as our new Inside Sales initiative. Until this year, Byrna relied primarily on a handful of manufacturers' rep groups to open new dealer accounts. This approach was advantageous for Byrna, given our smaller size and relatively limited human resources. These manufacturer reps groups, with their well-established…

Certainly. The company will now be taking questions from its publishing analysts. [Operator Instructions] Our first question is from Jeff Van Sinderen from B. Riley. Your line is now live.

Good morning, everyone. This is just sort of a, I guess, a conceptual question around Meta. Do you think -- and I'm surprised that they're not responding at all, that seems really unusual to me. But do you think that Meta has any idea that by default, their ban is actually supporting injury and perhaps death with firearms by just not enabling people to learn about non-lethal? Just any more around that? Because it just seems like such a strange position for them to take.

Yes. Look, I think that this is not intentional. I don't think Meta clearly is looking to -- for people to get injured. On the other hand, every time somebody complains about a website that shows something that looks like a gun, they have to deal with it. So I think they've taken the easy way out and just say "It's easier for us not to deal with this and we'll just ban Byrna's products from the website." Our efforts to engage with them, and this includes taking out billboards right across from their office, to get them to understand that less lethal weapons are part of the solution to the epidemic of gun violence in America. We're hopeful that over time these efforts will be successful. I think this was a knee-jerk reaction. This happened in the wake of the Nashville school shooting where all of the websites just basically cracked down on any advertising of any weapon on their platforms. But I think over time, Jeff, we should be able to convince them that it is important. If you look at Meta's historic mission, their mission is to educate the public. Their mission is to provide a forum for the transfer of knowledge. So, we are hopeful that we can get this message across to them. And that's also why we are urging all of our customers. We've got an email subscriber list of almost 300,000 people. We're trying to engage on social media, in various chat rooms and so forth. But we would like people to start engaging with Meta and carrying this story forward, because it is an important story to tell.

Okay. That's helpful. I think to understand that maybe it's just, as you said, a knee-jerk reaction and Meta needs to dig into it a little bit deeper and I guess kind of understand that a powerful platform that they have can actually do some good and prevent injury in this world. Maybe we can turn to -- I realize you went through guidance, but I guess just thinking along the lines of order of magnitude, maybe what are you thinking about the revenue progression over the remainder of this year, maybe considering various year-over-year comparison elements? Because I know we've got some of those and obviously we've got some episodic elements in some of your businesses. And then also just kind of considering increasing penetration in dealer sales, maybe you can just touch on anticipation for gross margin progression over the next couple of quarters?

Well, in terms of gross margin progression, we think that we'll be improving over the next couple of quarters. As we said, there was a relatively large negative manufacturing variance due to the difficulties we faced early in the quarter. David, you want to...

Yes. I think part of it is, over the long term, I expect gross margin to be improving to be more like what we saw in last quarter. But one of the drivers of where we are right now is simply that we've a lot of inventory and it's FIFO. And that means that we've got to sell out this inventory that we built at the old costs. So, I expect slight improvement in the next two quarters, probably not much improvement in Q3, slight improvement in Q4, and then probably as we get into Q1, we'll start to see the more modern costs coming in. But I would say over the next two quarters, only slight improvement.

Okay. And then just if we could turn to the 12-gauge for a minute. I realize we're still early in the process there, I know that you're in some dealers, maybe just kind of update us on where we stand there? How many dealers we're in at this point? And then any data on early sell throughs, which I'm sure is also being impacted by the marketing challenges?

Yes, we had a lot of success with the 12-gauge at SHOT Show, and we had taken orders for first 250,000 rounds with dealers. And our goal was to get those rounds out, which we have done. We have seen a little bit of reordering, but it's still too early. I think it's important to keep in mind that this is a completely new product category. So 12-gauge less-lethal is really not a thing. There are some bean bag rounds and other rounds that have been used by law enforcement, but it's not really a consumer product. So, we still have a lot of education that we need to do. I will say to you, we are extraordinarily encouraged because nobody has used it and had anything negative to say about it. So we know it is extremely well received and it's just a matter of word-of-mouth of getting it out there. What I think has been more interesting for us is the number of law enforcement agencies that have expressed an interest in it. And I can't discuss the specific agencies, but some of the very largest agencies in the U.S. Less lethal, of course, is an important part of policing. The 12-gauge rounds that they use currently carry between 70 and 110 joules of energy. There was just a story a couple of weeks ago about a bean bag round that was deployed and broke somebody's jaw and seriously injured the individual. And that agency is particularly looking at Byrna because rather than 70 to 110 joules of energy, we're at 19 joules of energy. So I think that with the combination of the Biokinetics' report validating that these rounds are extremely safe. And with the level of accuracy and effectiveness that we've been able to demonstrate that we will continue to see growth. It is a little difficult, Jeff, for us to gauge how quick this growth will come, but we are very encouraged that there is a real market for this and that, over time, this will become an important part of Byrna's revenue stream.

Okay. Thanks for taking my questions. I'll take the rest offline.

Thank you.

Thank you. [Operator Instructions] Our next question is coming from Jim McIlree from Dawson James. Your line is now live.

Thank you. Good morning. I'm hoping that you can help me understand the cost differences in advertising through the alternative websites that you discussed versus Meta as well as preliminarily what you think the take rate would be? So, if you have to make up numbers, about 10,000 at Meta in order to get 1,000 in sales, how many would you have to put out on alternative websites? So I'm just trying to again understand the response rates and costs of switching...

Honestly, we don't have enough information yet. We did not react overnight when Meta banned us, because as I said, in the past, this has happened probably a half dozen times and we were able to reach somebody at Meta, and usually within a month we were back up on Facebook and Instagram. We started to take this very seriously two months into this, and we recognized that this was a different situation that we had faced. So we are in the process of trying to find alternate sources of advertising. We have not yet engaged with any of these different platforms. But -- and just to give you an idea of what we're talking about, there are car magazines, probably a dozen different car magazines, where they send out emails to their subscriber base and those emails have advertising. And when you click on them and you go to their website, their websites have advertising. So we have started the process of reaching out. We're hiring a digital advertising specialist to manage this process, because this will take a lot more work than just giving Facebook $200,000. Now instead of giving Facebook $200,000, we're going to have to give 40 different platforms $5,000 to drive business. But we intend to do this in the segments where we know we're speaking to our demographic. One of the things that's kind of interesting about this is Facebook was sort of like crack. It was easy and it was somewhat effective and it was hard for us to get off. But we recognized that over time, it was becoming less effective. So even when the sessions fell off dramatically, when our sessions went from 26,000 to 12,000, we did not see a significant drop off in sales. As I said, our sales for the quarter were off less than 1%, and we are still seeing a much, much higher conversion rate than we did when we were advertising on Meta. So, we knew the effectiveness of Meta was waning. And we think it's waning -- was waning for two reasons. One, we were unable to really focus our ads as precisely as we had been in the past. As Apple has started to provide less personal information about its customers, it has become more difficult to really slice their customer base demographically. We think that by going after these specific platforms that cater to our customer base, we're able to do two things. One, we're able to replicate, in total, the number of views that we're getting. But more importantly, we'll be able to do it -- geared to the specific demographics that we know are interested in Byrna. So, as I said, we will keep people apprised of our success going forward. We don't have enough information at this point.

Yes. This is the main reason for our withdrawing guidance, because this is uncharted territory. And really what you're asking about is what will the results be, what will the uptick in sales be and what would the return on advertising dollars be? We don't know. We'll tell you as it goes.

But we'll know soon.

And as far as, David, your discussion about gross margin, that obviously assumes some mix shift away from direct to consumer. Does that have a big impact on your prediction that gross margin improve modestly over the next couple of quarters? Or are we seeing two things happen: one, we're getting rid of the old inventory, but we're getting hit by the change in the mix?

The main thing I'm looking at is just what's the cost of the old inventory is going to be going at. I haven't done a lot to predict what will the change in the mix be for the same reason why we're not providing guidance. It's hard to predict what the mix will be over the next couple of quarters. Over the longer term, what we see happening with the dealer sales, that I expect to be a long term trend that will -- the dealer sales will gradually form a greater percentage of our overall revenues. And yes, over the longer term, that will have a dampening effect on our gross margin percentage. That's longer term and I really...

David, if I can just interrupt. But not as much as you would think. So with these Side Hustle dealers and with these Premier Dealers, we are not working through rep groups, so we are not building in the margin of the reps. We are not working through distributors, so we're not building in the margin of the distributors. These are the highest margin dealer sales, the Side Hustle business and the premier dealers. So we think that, yes, the change in mix will have some impact, but not as great as just substituting our current dealer margins for our current DTC margins.

Got it. Okay. Thank you. That's it from me. Thanks.

Thank you.

Thank you. We've reached the end of our question-and-answer session. I'd like to turn the floor back over to management for any further or closing comments.

Again, I want to thank everybody for participating on this call. I'd like to take this opportunity to just share a little bit of a sad news. Michael Wager, who was our Chief Strategy Officer, passed away this last weekend after a very difficult battle with cancer. He was a really good friend and colleague and was very important over the last several years in Byrna's growth and development, and we'll miss him. Anyways, thank you very much for joining us, and we'll look forward to taking other questions offline.

Thank you. That does conclude today's teleconference and webcast. You may disconnect your line at this time, and have a wonderful day. We thank you for your participation today.