Q2 2024 AMMO Inc Earnings Call
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Ladies and gentlemen, thank you for standing by good afternoon, and welcome to the Ammo, Inc. Second quarter 'twenty 'twenty four earnings call.
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I would now like to turn the call over to Scott Arnold of core I or the company's Investor Relations firm. Please go ahead Sir.
Good afternoon, and thank you for participating in today's conference call. Joining me from Abbott leadership team are Fred wagon halls, Executive Chairman, Jared Smith, Chief Executive Officer.
Rob wildly Chief Financial Officer Jeremy.
During this call management will be making forward looking statements, including statements that address analysts' expectations for future performance or operational results.
We're looking statements involve risks and other factors that may cause actual results to differ materially from those statements for more information about these risks. Please refer to the risk factors described in hamlet. Most recent filed periodic reports on Form 10-K and Form 10-Q, the form 8-K filed with the SEC today and the company's press release that accompany.
This call, particularly the cautionary statements in it.
Today's conference call includes non-GAAP financial measures. The handler believes can be useful in evaluating its performance you should not consider this additional information in isolation or as a substitute for results prepared in accordance with GAAP for a reconciliation of this non-GAAP financial measure to net loss its most directly comparable GAAP financial measure please see the.
Asian table located in the company's earnings press release, the content of this call contains time sensitive information that is accurate only as of today November 19, 2023, except as required by law ammo disclaims any obligation to publicly update or revise any information to reflect events or circumstances that occur. After this call.
It is now my pleasure to turn the call over to <unk>, Chief Executive Officer Jarrett Smith.
Good afternoon, everyone. Our fiscal second quarter was a very difficult quarter for our industry.
Which had been previously anticipated full reported by our major competitors.
With that said the market is moving very quickly.
International and domestic and events.
From our perspective, we continued to transition our business to a leaner and more profitable operating model.
We remain focused on addressing operational inefficiencies.
Of note during our fiscal second quarter for which we report today, we EMCORE incurred $3 9 million of nonrecurring expenses due to legal and professional fees.
Payments incurred upon change of control.
Cool or contingencies from activity originating on the 2021 2022 fiscal years.
There wasn't there wasn't an additional one 1 million and stock compensation expense due to the tangible pull activities and point 4 million write offs of deposits from the 2022 fiscal year.
These actions, while not favorable in the quarter.
Allow us to move forward without the burden of prior fiscal year activities. We believe that these actions are illustrative of the necessary adjustments that we believe are necessary to transition all of them with greater transparency and profitability in the years to come.
On a positive note, we lowered our working inventory by $1.3 million created $9.9 million in cash and reduced working capital by $8 9 million since year end.
Revenues were flat sequentially, but profitability suffered as we cleared out slow moving inventory at a loss so that future reporting quarters could be clean and a true measure of the changes we are making.
We believe these strategic moves were timely as recent international events have created strong tailwind sporting ammunition Division and.
And we are beginning to see increased traffic and conversion and broker dot com as our enhancements are beginning to pay off.
This past quarter gun broker Dot com has successfully launched its centralized payment processing gateway and is now onboard and sellers as anticipated. This.
This is the first major step in our evolution to a multi out of cart and streamlining the checkout process as we transition from an auction house to an Amazon like model with auction functionality.
In line with our expectations, we experienced a sequential decline in sales in Q2.
This quarter tracking $1.4 million down in topline revenue.
This decline in sales was anticipated and we are now starting to see the lift in ourselves, that's usually including a 14, 7% sequential increase in volume to our platform in October versus September which is in line with seasonal trends and the current macro environment.
This acceleration is amplified as we onboard new sellers and users begin to experience outdoor pay for the first time, which is our centralized payment processing platform and escrow service.
We have on boarded 2826 sellers since we went live with outdoor pay.
We remain very enthusiastic about the progress and outlook wasn't broken dot com.
Now, let me turn our attention to some specifics on our ammunition division.
Tough news is best served to state as.
As with any transition year with a new management team, we have taken certain steps to clean up our inventory books and outstanding debts liabilities.
While we anticipated a rough market. We also took substantial margin losses on slow moving inventory as we cleaned up our stocks.
In context, the ammunition market and our Q2 as reported by other publicly traded companies was well below our already low expectations.
With this backdrop our results were further impacted because the major investments we've made in contact tours for brass production equipment did not come online in the quarter and our overhead absorption for the plant suffered.
This is by no means from a lack of demand, but due to the mechanical and electrical failure of our primary presses.
Rifle post production.
While we initiated the investments for mechanical and electrical failure redundancy, we did not have the investments in place to keep our workforce and the downstream processes operational there.
This led to an additional 1.75 million.
For the quarter.
The 1.75 million there is roughly 800000 in tool expenses incurred in the quarter that will help offset future cost of these projects come back online.
The fundamentals of our transition to OEM blast cells become even more crucial in our go to market strategy is our demand for our products exceeds our current industrial throughput due to mechanical and supply issues, we experienced in the quarter.
We expect to see strong demand and high margin growth in future quarters, but we are roughly a quarter behind where we thought we would be by now.
On a positive note we have brought on an additional 132, new domestic ammunition customers will continue to sign new OEM customers for supply of rifle and pistol bras.
Events around the world have driven demand for our product offering and we are increasing the output of the facility to continue that capex.
While our highest margin pressures continue to sit idle we have not sat idle over the last quarter we.
We have expanded brass sales by 47% compared to this quarter last year and brass sales now make up 30% of total sales a 27% increase over last year.
Although I am disappointed with our performance this quarter these trends reinforce my confidence in the strategic direction of our ammunition business.
Since we last reported our earnings in August we have seen in the international market increase its demand bar products and due to recent news of further consolidation in our industry, coupled with limited sales of 556 into the commercial market for Lake City.
We simply cannot been have been down at a worst time.
Events in October have completely slipped a market on its head and we see a return to revenue growth and improved margins in both the breadth and loaded ammunition market today.
Then broker dot com is starting to see the pay off of Carty and payment processing capabilities on the platform.
We continue to add talent to our team and recently brought on industry veteran Paul trying or to help us recruit and retain talent in the organization.
The turnaround is in place and bearing fruit, albeit I'll bet with more bumps along the way that he hoped.
I look forward to better results in our fiscal third quarter and the remainder of the year.
With that I will turn the call over to our CFO, Rob wildly to review the second quarter results in more detail.
Well.
Thank you Jarrod and welcome everyone.
Let me now review the financials of the second quarter of 2020 fiscal year in more detail.
The margins in our marketplace segment remained strong.
Although our gross margins have decreased their ammunition segment due to the aforementioned operational struggles we're optimistic on the future performance of this segment.
While challenges continue in the market today.
<unk> for our brass casings remain robust.
Beginning to see positive trends in the demand for our ammunition products and we're seeing the activity on gun broker dot com increase as we enter into our third fiscal quarter.
We are positioned to capitalize on these positive trends given our strong financial position as we have reported a $129 5 million in current assets, including $49 6 million of cash and cash equivalents in comparison to $27 6 million and current liabilities.
Additionally, we have generated $18 2 million in cash from operations through the midpoint of our fiscal year.
We entered the first quarter with total revenues of approximately $34 4 million in comparison to $48.3 million in the prior year quarter.
The decrease in revenue was primarily related to a decrease in sales activity from our ammunition segment as a result of the state of U S commercial ammunition market during the reported quarter.
Our casing sales whoever want to afford us higher gross margins increased to $6 4 million up from $4 3 million in the prior year period.
Our marketplace revenue was $12 5 million for the reported quarter compared to $14 6 million in the prior year quarter, which decreased as a result of the current macroeconomic environment impacting our industry as well as others.
Cost of goods sold was approximately $26 1 million for the quarter compared to $35 $5 million in the comparable prior year quarter.
Decrease in cost of goods sold was related to the decrease in sales volume.
Our gross margin for the quarter was $8 3 million or 24, 1%.
Compared to $12 8 million or 26, 6% in the prior year period the.
The decrease in gross profit margin was related to the shift in our sales mix, but was also related to higher costs associated with our manufacturing process and our ammunition segment.
Primarily our cost absorption suffered due.
Due to the setbacks, we experienced as a result of the rifle casing prices going down in the reported quarter.
There were approximately $3 9 million of nonrecurring expenses related to legal and professional fees and also accruals for contingencies from activities.
And our 2021 and 2022 fiscal years.
It was also 0.9 million of additional stock compensation expense as a result of change in control.
And also 0.4 million of write off incurred during our second fiscal quarter.
All of these items among others are included as add backs to adjusted EBITDA.
For the quarter, we recorded adjusted EBITDA of $1 2 million compared to the prior year quarter, adjusted EBITDA of $5 7 million.
This resulted in a net loss per share of seven cents or adjusted net income per share of zero cents compared to the prior year period or a net loss per share of <unk> and adjusted net income per share of four cents.
We continue to push forward on the improvements to our marketplace gun broker dot com.
We have formally launched outdoor pay our payment processing platform and are in the process of Onboarding, our user base this platform, which.
Which will enable us to launch our cart platform soon thereafter.
We repurchased approximately 198000 shares of our common stock under our repurchase plan in the reported quarter, bringing us to just over one 2 million shares repurchased.
In total under the plan.
That concludes our opening remarks, I will now turn the call over to the operator for questions.
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Our first question today comes from Matt Koranda with Roth. Please go ahead.
Hey, guys, it's Mike zebra them onto Matt.
Maybe just starting off on the EM segment.
Sustainable is the uptick in demand that we saw in October has demand sustained at that same level. Since then and I guess just as a result have we seen wholesale pricing changed much.
Yeah.
Matt Great question, we're seeing whole cell pricing because the event happened just before the N. S. GW event, we're seeing wholesale pricing increase slightly.
There's a lot of optimism out in the market out there that this price is going to hold going into the election year.
We're certainly optimistic.
For the trends that we're seeing and we continue to see.
Opportunistic buys out there that says that price continues to escalate so.
Do we think it will that this is a long term hold we think there is a.
Strategic repricing, that's happening going into the 2024 year.
Got it and any calibers and specific where we're noticing pricing changing much or just kind of across the board.
Yeah, So I mean.
Stuff that everybody is running 4556 in two to 376 two by 39, all your larger rightful calibers anything related to military counters.
Because of the news between Israeli and her mom, but.
I would say across the board, we're getting increased demand.
And increased inquiries on bringing on new customers.
Got it it makes sense and core ammo margins are slim.
Slipped back negative into Q, I know, we talked about and referenced the rifle casing pressure going down, but it isn't a sequentially worse gross margin coming entirely from lack of cost absorption.
On the catering side, just trying to gauge the boat loaded ammo and casings have sequentially worse gross margins or was that just from.
From the cases side of the business.
We only really took a gross margin hit in some slow moving product that we really were sitting on too much of leftover from 'twenty, two we flushed all that inventory out.
We've not seen any price erosion on brass casings, and we've not seen any price erosion on nine in two to three it was flushing out of inventory.
And.
Back in June when our press didn't come online. The first time, we had made strategic purchases of contact tool in bunkers.
Another tool that we expense upon receiving.
And month after month that press did not come online and so that that contact tooling that those expenses continued to flow in and that's really the major hit to our profitability.
Aviation Division.
Got it makes sense last one for me maybe you find gun broker good to see the payment processing are finalized.
Maybe just remind us on how to think about the magnitude of the benefit to take rate and how we should expect to see you take rate climb in the coming quarters as a result.
Well.
The take rate, we see climbing somewhere between one to three per cent as.
As we capture.
Credit card fees.
You're also going to see an uptick just due to the sheer seasonality that we see over and got in broker, but that doesn't really affect the take rate. We're also seeing our take rate.
Hum.
The word I'm looking for.
Well the main effect is that youre going to see somewhere between a 1% to 3% and our take rate over the next three and a half to four months as we onboard these new sellers.
Got it okay.
Last quick one is cutting lives I thought I heard you referenced benefits from it on the prepared remarks.
Yeah, we we are not party yet.
What's happening right now as we're onboarding, new sellers through our payment gateway and centralized processing and Cardiome will not come on until we finish onboarding all of our sellers.
Got it makes sense, that's all for me guys. Thanks.
The next question is from Mark Smith with Lake Street. Please go ahead.
Hey, Mark Hey, guys.
A bunch of things to work through here.
First just maybe hit a little deeper on the demand environment that we saw in October can you just talk a little bit about you know maybe the consumer demand first you know how much you saw that uptick and did you see that you know maybe maybe.
Maybe what the impact was within your gun broker business I think that you said that.
You've quantified was at 14, 7%.
For a sequentially, but that was kind of typical seasonality walk us through kind of what youre seeing on the ground with consumers.
Yeah. So we would expect anywhere between a 5% to 6% increase.
And a gentle trend coming from September into October this was a pretty sharp.
That trend.
And that 14, 7%.
And that's really because these events happened in the second half of October.
It was really really sharp incline after the events in Israel and come off that we saw the uptick.
Okay.
So the only one or two of your two part question. So please repeat.
[laughter], Yeah, maybe just elaborate on that or are you seeing demand.
That demand is that primarily on firearms or is that spread across.
Firearms ammunition, and kind of other accessories across firearms and ammunition and we're certainly seeing an increase in ammunition sales on the platform.
And those tests that calendars.
Okay and then the other piece of increase the Mad maybe walk us through what you're seeing from OEM customers for brass casings or have you seen that demand uptick significantly and you know October as well and I don't know if there's anything you can quantify around that.
The issue being is that we've been sold out.
For quite a while mark and until these presses come online, we're not really wanting to take any new orders because we need to make sure that we're getting the orders that we have on our books and that we are supplying our customers that placed orders back in March April and May.
When we forecasted that this new press was coming online. So that's our biggest issue we could go out and.
Take on.
203 hundred.
Millions more brass case capacity, but the demand today that exceeds our output is really in a rifle case capacity and that's where we've had a shortfall in operational efficiencies.
Okay.
And then on that you know as we think about these kind of rightful process. These equipment issues that you've had.
Where are we at today versus maybe where we were.
At the end of the quarter mid quarter.
Yeah, Great Great question.
So back in April when we started to do the walk through of the new plant. We recognize that we didn't have the redundancy that we needed. So we bought additional presses, but those presses won't come online until December the press that went down the parts showed up last week, we're running and testing off this week.
Once again, it's not from a lack of demand it's not from a lack of everybody pulling together trying to get this press up and running this press was bought during Covid. Some of the parts were made during COVID-19.
And the parts that are being made today are being made by the original equipment manufacturer versus when they outsource the parts for these and so we think we have a press that we can count on going forward.
But the last three to four months of sending the parts back and forth in trying to get the parts to work has been a very frustrating experience for everybody on the team.
Okay.
Hey, Andrew.
Martin I can jump back into it.
One of the things that'll help explain this press this press as part of our pre foreign process and it feeds about six other presses downstream. So it's not like a single press goes down.
And you just work around that press is the feeder press for our entire medium action line, which we have somewhere between 90 to 120 million piece capacity on so it's it's a big deal for us and it has been.
Okay.
The last piece here, maybe for me and I can jump back in with any others is as we think about you know the profitability that was impacted by kind of clearing out we'll call it aged or not is current of the inventory I don't know if you can quantify anything else there around how big of an impact that had on.
In the quarter and then also do you feel like you got through that process during the quarter or is there still some remaining loaded ammo.
That may go out at a lower margin or maybe even loss.
As we roll into Q3.
No at this point going forward, we've cleared out our.
Oh, the inventory part of our push to get that older inventory out.
Is that our overheads are calculated on goods sold so.
Because we had such a <expletive> in on our overhead from not running the rifle presses.
We pushed really hard you know at margins that we didn't even want to take but the bleeding should be over now and we're off to a better footing.
Okay.
Hey, great right. Thank you very much.
Absolutely. Thank you Mark.
Yep there.
Maybe Jerry I don't know if you've still got me, but you said taken price helped with that.
Got it.
Quarter end.
Yeah, I mean, what we're saying yeah, that's post quarter end, we're seeing demand in 2024.
That allows us.
At least a little bit of breathing room.
Youre not seeing as much price margin compression as you've seen in the past.
Okay, great. Thank you.
Yeah.
This concludes our question and answer session I would like to turn the conference back over to Gerry Smith for any closing remarks.
I just want to thank everybody for participating on today's call and your interest in Ammo, Inc. We look forward to sharing ongoing progress when we report our fiscal third quarter 2024 results early next year.
I appreciate the investors sticking with us and just want to wish you all a good day.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.
Yes.
Okay.
Yeah.
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