Byrna Technologies Inc. (BYRN) Earnings Call Transcript & Summary

Good morning. Welcome to Byrna's Fiscal Second Quarter 2026 Earnings Conference Call. My name is Rob, and I'll be your operator for today's call. Joining us for today's presentation are the company's CEO, Conn Davis; and CFO, Lauri Kearnes. Following their remarks, we will open the call to questions. Earlier today, Byrna released results for its fiscal second quarter ended May 31, 2026, and a copy of the press release is available on the company's website. Before turning the call over to Conn Davis, 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 of our website ir.byrna.com, 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, Conn Davis. Sir, please proceed.

Thank you, operator, and thank you, everyone, for joining us today. Q2 came in below our expectations with revenue of $16.4 million and did not reflect the level of performance we believe Byrna can deliver. We entered the quarter knowing it would represent the beginning of a transition period as we worked to improve direct-to-consumer conversion retail productivity and the discipline and structure of our operations. The quarter ultimately became a steeper reset than we originally expected, and the results reinforced why the transformation underway is necessary and why we are moving with urgency. These results were driven by 2 things: first, the e-commerce pressure we discussed on our Q1 call continued with website traffic down 13% through the quarter year-over-year. Second, in retail, many partners entered the quarter with elevated inventory levels following meaningful post-holiday restocking in Q1, and sell-through during that quarter didn't support the level of reorders we had incorporated into our plan. Those challenges came together during the quarter and drove revenue below our expectations. Q2 sharpened our priorities and accelerated decisions. The results are important but they do not tell the full story of Byrna or the work underway across the business. During the quarter, we started implementing tactical changes to demand generation and our cost structure with more in motion as we transition the Byrna brand more fully during the balance of fiscal 2026. These changes will take time to show up in revenue, but we believe they are the right ones that will allow us to return to growth. A few weeks ago, I issued my first 100-day shareholder letter. The letter, which is available in the Investor Relations section of our website, established a reference point for where Byrna stands today where execution has fallen short and what we are changing to position Byrna to capture the opportunity ahead in less lethal personal safety. Today, I want to build on the letter by connecting our 3 key near-term priorities directly to what Q2 showed us and detailing the work now underway against each. Our first priority is consumer conversion and retail productivity. Byrna has created a solid base of awareness with a core audience and our products were available in roughly 1,500 retailer and dealer locations nationwide at quarter end. Our focus now is on turning our expanding reach into purchases repeat engagement and consumer advocacy. We know that the strongest results come when consumers understand the product are able to compare options and experience burner directly. So our work under this priority is to make the consumer journey easier and more consistent online and in stores. The second priority is changing how Byrna builds demand. The narrow reach behind our Q2 traffic softness reflects a structural issue. Historically, Byrna has relied too heavily on a relatively narrow audience and lack the visibility into which messages, media channels and partnerships actually produce to consumers. We are actively changing our message to consumers and the way sales and marketing operate with the goal of reaching more people without losing the core consumer. We are building a systematic approach to demand generation that will allow us to better attribute traffic, conversion and retail sell-through over time. The third priority is connecting demand more tightly to production, inventory and cash generation. We are building a rolling financial and operating model that brings together elements such as website trends, retail sell-through, partner inventory, confirmed orders and manufacturing capacity to help us produce and purchase against visible demand trends. As the business returns to growth, our disciplined model should drive margin expansion, lower working capital and better cash conversion. These priorities are all connected. Better marketing brings more qualified consumers into the funnel, better online and retail execution turns new interest into sales more effectively and more refined forecasting and production lets those sales flow through to the bottom line more efficiently. When these pieces work together, Byrna becomes a more predictable and scalable business. Before getting into our progress against these priorities in greater detail, I'll turn it over to Lauri to walk through the financial results. Lauri?

Thank you, Conn, and good morning, everyone. Let's review our financial results the fiscal second quarter ended May 31, 2026. Net revenue for Q2 2026 was $16.4 million compared to $28.5 million in the prior year period. E-commerce sales through our website at Amazon decreased by $5.8 million or 35% compared to the prior year due to a reduction in traffic and lower conversion rates. Our domestic dealer channel, including dealers, distributors and chain stores decreased $3.5 million or 47%. This was mainly due to the slower reorder activity following substantial restocking in fiscal Q1 and slower-than-expected sell-through. Product sales through our international dealer and distributor channel decreased $1.2 million or 43% due to large orders last year that were not repeated in the current year. Gross profit for Q2 2026 was $1.8 million or 11% of net revenue compared to $17.6 million or 62% of net revenue for Q2 2025. The reported gross margin included onetime $3.6 million inventory write-down, a $3.5 million impairment loss on manufacturing equipment and a $2.3 million inventory reserve due to strategic product rationalization. These were partially offset by a $1.1 million tariff refund recorded in cost of goods sold. Excluding these items, adjusted gross profit was $10.1 million, representing adjusted gross margin of approximately 62%. We expect our adjusted gross margin to remain near or above this level through the balance of the year. The inventory write-down of $3.6 million and the $3.5 million impairment loss were directly related to the closure of our Fort Wayne ammunition manufacturing facility. The additional $2.3 million inventory reserve was a combination of finished goods and raw materials that will either end of life or will not be used due to engineering process changes. Operating expenses for Q2 2026 were $14.6 million compared to $14.2 million for Q2 2025, an increase of 3%. The increase primarily reflected an impairment charge of $1 million as well as continued investment in marketing, partially offset by the change in variable selling expenses associated with a decrease in sales. During the second half, we expect incremental expense as our new commercial and consumer acquisition programs ramped. Those investments will precede their full potential revenue contributions and outside of those targeted areas, we are managing spending against the current revenue base, and continuing to evaluate costs. Net loss for Q2 2026 was $10.1 million compared to net income of $2.4 million for Q2 2025. Net loss included noncash impairment and inventory write-down charges of $10.4 million related to the shutdown of our ammunition manufacturing facility in Fort Wayne and product rationalization. A tax benefit of $2.7 million was also recorded for the quarter. Adjusted EBITDA, a non-GAAP metric for Q2 2026 was negative $600,000 compared to $4.3 million for Q2 2025. Cash, cash equivalents and marketable securities at May 31, 2026, totaled $10.4 million compared to $9.6 million at February 28, '26 and $15.5 million at November 30, 2025. Collections of accounts receivable supported cash during the quarter, and we ended the quarter with no debt. Inventory on May 31, 2026, totaled $30.4 million compared with $33.1 million at February 28, 2026, and $32.7 million at November 30, 2025. The decline in reported inventory primarily reflected the write-down discussed earlier. We remain focused on reducing physical inventory and improving working capital efficiently. We continue to expect inventory turns to approach 2x by year-end. I will now pass the call back to Conn to discuss what we learned during the quarter and the actions underway across the business. Conn?

Thank you, Lauri. At the time of our Q1 call, website traffic was generally holding and conversion was the primary issue. During Q2, traffic weakened as well. Byrna.com generated approximately 2.6 million sessions, down 13% year-over-year. Conversion averaged 0.59% compared with 1% in Q2 2025 and average order value declined 19% to approximately $302. Byrna.com sessions declined from approximately $1.1 million in March to roughly $783,000 in April and $779,000 in May. During the quarter, we continued to spend through many of our historical media and influencer relationships. But those channels generated less traffic and fewer purchases. The performance reinforced our need to address both sides of the funnel, how we bring people to byrna.com and what happens after they arrive. Our find to the right launcher experience online shows the positive impact of better education. More than 150,000 responses have been completed, and those consumers continue to convert at approximately twice the rate of the overall website. The quiz responses are also telling us why consumers are considering Byrna, which products fit their needs and where the website might be leaving questions unanswered. Just over 7% of all byrna.com visitors are engaging with and completing our find the right launcher experience and we are working to highlight the experience better across the site. More importantly, we are now using the data gained from this experience to improve product comparisons, landing pages, consumer onboarding and follow-up communications. Within the next 2 weeks, we will be launching personalized experiences and guided product selection across byrna.com. These are the first steps in an ongoing process to improve our digital experience and conversion using our proprietary data. Our limited "try before you buy" program addresses the same education gap through direct product experience. A consumer pays $50 to receive a demonstration unit, training ammunition, CO2 and educational materials for a 2-week trial. This fee covers the principal program costs and becomes a $50 purchase credit. The program has generated strong conversion near 30%. Most participants are new to Byrna and purchasers are generally adding ammunition and accessories at healthy rates. The test has been small and has not yet meaningfully contributed to revenue but we are currently evaluating the processes and economics required to expand it responsibly. Given the success of the program, we are expanding it beyond an initial test so that 8x the number of consumers will be able to participate in the next phase of the program. The same core principle of improving education applies in our retail channel as well. Byrna performs better when consumers are able to understand the differences across the product lineup and receive useful guidance from store associates. During the quarter, we worked with one of our premier chain partners to move from basic shelf placements to dedicated Byrna in caps across more than 20 stores. Before the change, the partner averaged approximately 81,000 in monthly purchases. Purchases increased to approximately $200,000 in April, the first full month after the rollout and expanded product assortment. Every location with this chain partner has placed a stocking order since the new program begin. These results don't mean every retail store will produce these same increases, but they show how we can materially support partner load-ins and revenue. We are applying our learnings across the footprint now and working more closely with our partners on inventory planning and improving sell-through. The CL platform continued to gain share during Q2 represented more than 40% of launcher sales in retail. The CL accounted for an even greater share in Byrna owned stores and at some of our higher performing partners. Looking at overall unit sales, the CL share grew by 11% from our fiscal second quarter of last year to this year. This mix shift supports our margin profile and provides another example of the value of focusing on and investing in product education. As more consumers understand the advantages of the CL platform, we believe it will continue to gain share. The work we are doing inside the sales funnel only matters if we are bringing the right people into it. Q2 showed that Byrna cannot reach its full potential by repeatedly targeting the same audience with the same message. Our core consumer is important, but we have still only reached a small portion of our addressable market in the United States. With HLK support, we have identified several priority consumer segments with a strong potential fit for Byrna, including personal safety-minded urban professionals, security-minded suburban homeowners and preparedness focus outdoor enthusiasts. Together, these segments represent more than 50 million likely buyers that Byrna has not historically addressed in a focused way. Reaching those consumers requires more than simply placing Byrna in front of a larger audience. We need to explain where the product fits into their lives and communicate through the media channels with marketing campaigns that are relevant to them. And that's why we are shifting towards safety and use case first messaging across areas such as home protection, outdoor activity, travel and small business activity. In June, we made organizational moves to transform the marketing and sales functions separating the 2 areas that we can build them back stronger with more accountability, focus and ownership. Q2 showed our prior organizational structure didn't create enough accountability within each function and channel. As performance fell short, the old system made it too difficult to isolate root causes and move quickly to address the changing demand environment. The teams will remain closely connected, but there will be a clear division of responsibility allowing us to respond more quickly and allocate resources more effectively. The separation should make problems easier to identify and faster to address. Our recent agency and media appointments support different parts of this new operating model. HL is helping us define and refine our audiences, main use cases and creative expression to broaden Byrna's relevance. Acceleration Partners is building a more measurable creator and affiliate program in a way that will allow us to link individual partners and campaigns to traffic, conversion and revenue. We also announced the FOX Sports activation, which kicked off in recent weeks and was funded by reallocating dollars from relationships that were underperforming rather than adding incremental media expense. We are still on schedule to deliver the core brand repositioning work for the 2026 holiday season, followed by the complete brand and website experience in Q1 2027. We are already busy testing and implementing shorter cycle improvements in our creative, media allocations and owned channels. This broader approach to consumer acquisition is also supported by our definitive agreement to acquire HERO Defense Systems. HERO adds a complementary less lethal self-defense product family that sets below and adjacent to our core Byrna Launcher platform. Today, all launchers serve consumers looking for a more robust, less lethal launcher solution. HERO would add smaller more discrete everyday carry options, including the HERO 2020 irritant Launcher and HERO Pepper Gel platform, which can appeal to consumers who are interested in personal safety but may not yet be ready to purchase a full longer system. Strategically, this gives us a fuller product ladder. We can meet consumers earlier in their personal safety journey, introduce them to the less lethal categories through a more accessible form factor and price point and then use our evolving marketing platform to support long-term engagement across our product ecosystem. HERO fits directly with our marketing redesign. As we move towards more targeted use case-driven messaging, HERO gives us another product family to match against specific consumer needs. Over time, this should allow us to build more relevant creative and a more effective consumer journey across channels. The transaction is structured on a debt-free basis, with consideration consisting of $65,000 in cash and $625,000 in restricted shares of Byrna common stock and a performance-based royalty tied to future net sales of HERO products and derivative products. We expect the transaction to close within approximately 30 days, subject to customary closing conditions. Because these changes will influence revenue gradually over the coming quarters, we also acted during Q2 to align production with the current demand trends we see today. In May, we reduced launcher assembly from 4 production lines to 2. We are now producing below the current sales rate, which should allow physical inventory to decline while preserving the ability to add capacity as demand improves. We also stopped manufacturing ammunition in-house because purchasing it from qualified external suppliers cost less. We completed a make versus buy analysis of ammunition production and qualified external suppliers that can produce the required ammunition at a lower fully loaded cost than our previous internal operation. The change does not affect our quality standards or ability to meet anticipated consumer demand. These decisions related to the larger planning change that I discussed earlier. We are rolling out a model that connects e-commerce trends and retail sell-through to production and inventory by product. We will be reviewing this model on a monthly cadence, allowing us to purchase components and plan manufacturing against real-time dynamic data rather than against a static assumption. The changes in our launcher production lines in May were a direct result of this process, and we expect our inventory level to work its way down, especially as the holiday season load-ins begin this fall. We are applying the same discipline to production as well. We improved the CL's first pass yield by 6.5% from May to the end of June, with the expectation we can move it north of 90% in Q4. As Lauri mentioned, we had an inventory write-down this quarter. Some of that was connected to the parks we are now using with the CL. Instead of continuing to use parts that produced inconsistent results in our process, we went back to core manufacturing principles and a valued what was causing the issues. After a thorough assessment, we focused on remedying the top causes of fallout and made targeted improvements that led to major production improvements immediately. While there is still more work to be done, the higher first pass yield reduces rework, increases effective production capacity and lowers the cost required to produce each unit. As we think about longer-term product development, we have moved from a hardware first development process towards one that starts with the consumer need and aligns R&D, marketing and operations before a product reaches launch. Further, we are including design for manufacturing as a core component of our product development process. So products launched with a higher quality at a lower manufacturing cost. The refined process has begun now in the development stage, and we are looking forward to demonstrating how a successful product launch can perform with this more modern approach. Turning to the remainder of the year. Based on current expectations, fiscal 2026 will not be a revenue growth year. Q2 reset the revenue baseline and we are continuing to execute our strategic transition against current demand signals and expanding the long-term opportunity rather than assuming a quick return to prior growth rates. We expect improvement from the first half of the fiscal year to the second half results as retailers prepare for the holidays and more of the new marketing and consumer acquisition initiatives enter the market. The improvement will build in stages. Q3 remains a transition quarters as these initiatives ramp. While we expect Q4 to improve with the holiday season and the work we are doing across marketing, conversion and retail activation more fully deployed in the market. We are building from a more realistic baseline with the opportunity to outperform as the new initiatives begin to contribute. Our current focus and initiatives are centered around improving website traffic and conversion to the second half, along with retail sell-through and reorder cadence to support a return to revenue growth in the near term. We still expect to exit fiscal 2026 with gross margins of approximately 62% and we are continuing to reduce inventory levels and improve cash flow. We move into the second half of the year with a stronger organizational structure, a production base aligned more closely with current demand and several consumer conversion and demand generation initiatives that are already in producing encouraging signs. The opportunity ahead remains as important as ever and we are now bringing the operating discipline required to continue leading the charge in less legal personal safety. We believe this reset positions us to finish fiscal 2026 on a stronger footing and enter fiscal 2027 with a business capable of delivering more consistent growth. We know confidence will grow from results, and our focus is now on executing against our 3-point plan and showing progress from the year. With that, operator, we are ready to take questions.

[Operator Instructions] And our first question is from the line of Jeremy Hamblin with Craig-Hallum.

So in terms of looking at the reorganization that's happening and obviously a significant amount of change. Can you talk to how you're looking at your operating expense structure, obviously, with lower expectations on revenue for the back half of the year and then starting to build off that into '27. How should we be thinking about your operating expense structure given the amount of heavy lift that you need to do in kind of reformulating your marketing, and kind of realigning the organization as a whole? Should we assume that kind of that operating expense run rate that you -- we saw in Q2 is kind of where things might fall in Q3 and Q4? Or how are you addressing rightsizing your cost base?

Hi Jeremy, thanks for the question. So when we look at operating expenses for the back half of the year, you can kind of start with Q2 as a baseline, but we are going to be making some investments that we talked about with some of the marketing agencies as we move forward in this new plan. So some of those expenses are going to come ahead of when the revenue comes. So we will have some investment there to the tune of -- it's 250,000 or so a month, so 750,000 maybe a quarter. As you know, we have variable selling expenses. So those will fluctuate in OpEx is kind of a roughly 10% of sales. So as sales increase, which especially in Q4 with the holiday, right? That piece will go up. rest of the OpEx we're trying to hold as much as possible. We do obviously have some investments in some of these new positions that we're trying to hire to support the sales and marketing. But I think if you use Q2 as a baseline and make those adjustments, that should be good for the back half of the year.

Got it. And then just looking at top line and relationships. So a little bit surprised certainly with where the wholesale revenue was in Q2. I know you signed a deal with Academy to roll out, and they've got roughly 300 locations across the U.S. Can you provide us with an update on the rollout with that large partner? And in terms of building back the wholesale business, which seems like kind of the area of potential growth on a go-forward basis, what other feedback are you getting from your retail partners when you talk about kind of retail sell-through that disappointed in the quarter, what else are they sharing that you feel like needs to change and be addressed to really drive that channel of business going forward?

Thanks, Jeremy. I mean, as you know, we don't have the same level of visibility into conversion at the retail side as we do on byrna.com or our own retail stores. But what we do know is that our product sells better when consumers can engage with it directly, and there's really strong education at the retail point of sale. So that's where we're focused from a sell-through point of view is really ramping our education and the ability for the consumer to learn about the product, frankly, on their own in that retail experience as they discover it. Similarly, we've moved to more of an in-cap environment, more of an easy to discover environment than being in the gun case where it's a little bit more hidden. I spent some time in the quarter talking with all of our major retail partners. And frankly, all of them remain very excited about Byrna, what we can deliver and where we're going together. I will tell you that in the quarter, we really did enter with pretty high inventories in the retail channel following really strong demand through the holiday period last year. There was just really large restocking that occurred and throughout the quarter, we just didn't see the sell-through at that high of a level to generate as quickly of reordering there. Reordering and sell-through remained consistent, but just not quite at a level to drive what we had hoped. As far as Academy, in that particular business, that shifted from a load in from Q2 into Q3 just from a timing and on their side.

Okay. Got it. And then in terms of the HERO acquisition, taking that, I wanted to see what type of annual revenues the business was doing prior to acquisition. And then their launchers are a little bit less expensive than the Byrna launchers. But in terms of thinking about the fit with the business and where Byrna goes from here. I don't know if kind of what you're hinting at is that part of the issue with Byrna is simply the price points being too high, for broadening the marketing to kind of a different audience than what your traditional kind of conservative gun owning customer has been over the last 5 years or so.

Thanks, Jeremy. I'm really excited about the HERO opportunity and what that represents for the business. And for me, it really goes back to kind of the 4 Ps of marketing and where we're going as an organization. HL is really leaning in to help us from a promotion point of view. How we talk about Byrna, the customers we're targeting and the media channels that we're moving through there. Similarly, what we're doing from a retail point of view and the door expansion is really driving our placement and making Byrna much more accessible. Where HERO comes in is really on the product and the price point of view, as you say. We are a very tactical brand today, the way we show up in the marketplace. The product form factor of HERO is really a different, less gun forward product structure which really opens up a new consumer opportunity from us from just a product point of view. Similarly, if you look at it from a pricing point of view, you mentioned they come in slightly below where we are. Frankly, there's a pretty big gap in our portfolio from the sprays business that we have to the ST, right? That's a $20 price point to a $400 price point. What's nice about HERO is we've been able to dig into their product pretty deeply, and we believe there's an opportunity to significantly reduce the build cost of that product. and provide a solution for consumers in the $250-ish range that will really open up a new consumer opportunity for us there.

Our next questions are from the line of Matt Koranda with ROTH Capital Partners.

Maybe just attacking this from a different angle on channel. I wanted to hear a little bit more about the e-comm channel and how traffic and conversion has trended in June and July. I know you mentioned some of the trends in April and May come, but just any help with sort of what that looked like quarter-to-date? Any improvement that we've seen in terms of traffic or conversion metrics? And how much of the HLK messaging, I guess, has been rolled out? Or when do you expect that to roll out and start to impact traffic on a broader basis?

Thanks, Matt. Let me address the first part of that question. So from an HLK messaging point of view, we are still very much in the early stages of that and almost none of that is live at this point in time. That will be ramping throughout Q3 as we do the work to really understand what messages will resonate across the quarter and the new audiences that we're targeting. So I expect that to really ramp through Q3, both from a Byrna owned channel point of view and what we're doing from a social media partnership point of view with acceleration partners. So that's kind of where we are from that point of view. Throughout Q2, we really were still focused and relied on some of the traditional media partnerships that we had. You saw us just a couple of weeks ago, launched the FOX Sports partnership, and that was really by reallocating previously committed dollars with one partner to a different outlet that they had. So that's kind of where we are right now. I expect that to continue to ramp as we go through Q3, and really have a lot of that messaging and new targeting in place as we enter the holiday period in Q4. When you think about how we've performed from an e-commerce point of view, I would tell you, traffic has still been fairly consistent from the end of Q2 into the start of Q3 and conversion roughly the same as well. We are seeing an increased engagement on our "find the right launcher" quiz and our "try-before-you-buy" program. So those are tailwinds that will really ramp both end of last month and through July that we believe will meaningfully move the needle there throughout the quarter.

Okay. I appreciate that. And then maybe just if we're thinking about the HERO acquisition, when should we expect that to be, I guess, integrated into the Byrna website? Will it be and how should we expect the product to sort of roll out? Is it going to be with Byrna branding? Do you start with sort of the legacy Hero product and eventually add your branding once you kind of reengineer the product? How should we think about sort of how that unfolds over time?

No, that's great. Let me address one thing that I forgot to mention in your prior question as well. We are ramping up our TV as well from an advertising point of view. During the World Cup, it was a little expensive when they were all the games on, but now it's more cost effective for us to do that. So we're ramping that back up as well to drive traffic. When you think about Hero once we close that transaction, we will focus on the existing HERO product line as it is and really promoting that and driving that forward. We will work to integrate the HERO product line into byrna.com so that we can sell it through that channel towards the end of Q3, Q4. But really, you'll see us in Q1 have that more tied in with the Byrna brand and the positioning overall and really tied into a unified experience.

Okay. And then maybe just last one for me. It sounds like with sort of sales trends kind of continuing from the second quarter, maybe we see a little bit of a seasonal ramp in the fourth quarter, but we're still ramping on the marketing expense seems like EBITDA profitability is going to be a little bit challenging for the rest of the year. How should we think about free cash flow? Maybe Lauri, if you want to kind of address how much you think you can flush from inventory for the remainder of the year, how the cash balance looks toward the end of the year in light of that? How should we be thinking about those trends?

Sure. Thanks, Matt. So we really expect cash to kind of hold through Q3. Q4 is when you're really going to see us reduce inventory and then obviously, we'll have the holiday sales. So we're targeting a $5 million reduction in inventory to really generate cash. So we expect to end the year with more cash than we have at the moment. and keeping that steady through Q3. I mean we typically burn cash the first part of the year. But I think cash wise, we're in good shape and still with no debt.

Our next question comes from the line of Jeff Van Sinderen with B. Riley Securities.