Outdoor Holding - Q2 2024

Transcript

Operator (participant)

Ladies and gentlemen, thank you for standing by. Good afternoon, and welcome to the AMMO, Inc. Second Quarter 2024 earnings call. At this time, all participants are in a listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one on your telephone keypad. To withdraw your question, please press star then two. Participants of this call are advised that the audio of this conference is being broadcast live over the internet and is also being recorded for playback purposes. I would now like to turn the call over to Scott Arnold of Core IR, the company's investor relations firm. Please go ahead, sir.

Scott Arnold (Senior Managing Director)

Good afternoon, and thank you for participating in today's conference call. Joining me from AMMO's leadership team are Fred Wagenhals, Executive Chairman, Jared Smith, Chief Executive Officer, and Rob Wiley, Chief Financial Officer. During this call, management will be making forward-looking statements, including statements that address AMMO's expectations for future performance or operational results. Forward-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 AMMO's 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 accompanies this call, particularly the cautionary statements in it. Today's conference call includes non-GAAP financial measures that AMMO 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 reconciliation 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 9, 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 AMMO's Chief Executive Officer, Jared Smith.

Jared Smith (CEO)

Good afternoon, everyone. Our fiscal second quarter was a very difficult quarter for our industry, which had been previously anticipated and reported by our major competitors. With that said, the market is moving very quickly due to recent international and domestic events. From our perspective, we continue to transition our business to a leaner and more profitable operating model and remain focused on addressing operational inefficiencies. Of note, during our fiscal second quarter for which we report today, we incurred $3.9 million of non-recurring expenses due to legal and professional fees, payments incurred upon change in control, and accruals or contingencies from activity originating in the 2021 and 2022 fiscal years. There was an additional $0.9 million stock compensation expense due to the change in control activities and $0.4 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 burdens of prior fiscal year activities. We believe that these actions are illustrative of the necessary adjustments that we believe are necessary to transition AMMO, Inc. for greater transparency and profitability in the years to come. On a positive note, we've 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 tailwinds for the ammunition division, and we are beginning to see increased traffic and conversion through GunBroker.com as our enhancements are beginning to pay off. This past quarter, GunBroker.com has successfully launched its centralized payment processing gateway and is now onboarding sellers as anticipated. This is the first major step in our evolution to a multi-item 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 from the previous quarter, tracking $1.4 million down in top-line revenue.

This decline in sales was anticipated, and we are now starting to see the lift in our sales for Q3, including a 14.7% sequential increase in volume through our platform in October versus September, which is in line with seasonal trends in the current macro environment. This acceleration is amplified as we onboard new sellers and users begin to experience OutdoorPay for the first time, which is our centralized payment processing platform and escrow service. We have onboarded 2,826 sellers since we went live with OutdoorPay. We remain very enthusiastic about the progress and outlook for GunBroker.com. Now, let me turn our attention to some specifics on our ammunition division. Tough news is best served straight.

As with any transition year with a new management team, we have taken certain steps to clean up our inventories, books, and outstanding debts and 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 in 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 tooling 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 failures of our primary presses for our rifle case 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 presses operational. This led to an additional $1.75 million in expenses for the quarter. Of the $1.75 million, there is roughly $800,000 in tooling expenses incurred in the quarter that will help offset future costs as these presses come back online. The fundamentals of our transition to OEM brass sales become even more crucial in our go-to-market strategies. Our demand for products exceeds our current industrial throughput due to these 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, and continue to sign new OEM customers for supply of rifle and pistol brass. Events around the world have driven demand for our product offerings, and we are increasing the output of the facility through continued CapEx. While our highest margin presses continue to sit idle, we have not sat idle over the last quarter. 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 the international market increase its demand for our products, and due to recent news of further consolidation in our industry, coupled with limited sales of 5.56 into the commercial market from Lake City, we simply cannot have been down at a worse time. Events in October have completely flipped the market on its head, and we see a return to revenue growth and improved margins in both the brass and loaded ammunition market today. GunBroker.com is starting to see the payoff of carting and payment processing capabilities on the platform. We continue to add talent to our team and recently brought on industry veteran Paul Schreiner to help us recruit and retain talent in our organization. The turnaround is in place and bearing fruit, albeit with more bumps along the way than we 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 Wiley, to review the second quarter results in more detail. Rob?

Rob Wiley (CFO)

Thank you, Jared. Welcome, everyone. Let me now review the financials of the second quarter of our 2024 fiscal year in more detail. The margins in our marketplace segment remain strong, and although our gross margins have decreased in our ammunition segment due to the aforementioned operational struggles, we are optimistic on the future performance of this segment. While challenges continue in the market today, demand for our brass casings remain robust. We are beginning to see positive trends in the demand for our ammunition product, and we are seeing the activity on GunBroker.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 $129.5 million in current assets, including $49.6 million of cash and cash equivalents, in comparison to $27.6 million in 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 the U.S. commercial ammunition market during the reported quarter.

Our casing sales, however, which 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. The 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 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 in our ammunition segment. Primarily, our cost absorption suffered due to the setbacks we experienced as a result of the rifle casing presses going down in the reported quarter. There were approximately $3.9 million of non-recurring expenses related to legal and professional fees,... and also accruals for contingencies from activities commencing in our 2021 and 2022 fiscal years. There was also $0.9 million of additional stock compensation expense as a result of change in control, and also $0.4 million of write-offs 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 $0.07, or adjusted net income per share of $0.00, compared to the prior year period of a net loss per share of $0.01 and adjusted net income per share of $0.04. We continue to push forward on the improvements to our marketplace, GunBroker.com. We have formally launched Outdoor Pay, our payment processing platform, and are in the process of onboarding our user base to this platform, which will enable us to launch our cart platform soon thereafter.

We repurchased approximately 198,000 shares of our common stock under our repurchase plan in the reported quarter, bringing us to just over 1.2 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. Thank you.

Operator (participant)

Ladies and gentlemen, if you wish to ask a question on today's call, you will need to press Star, then the number 1 on your telephone. If your question has been answered and you wish to withdraw your request, you may do so by pressing Star, then the number 2. If you are using a speakerphone, please pick up your handset before entering your request and speaking on the call. One moment please, for the first question. Our first question today comes from Matt Koranda with Roth. Please go ahead.

Mike Zavern (Analyst)

Hey, guys, it's Mike Zabran on for Matt. Maybe just starting off on the ammo segment, how 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 change much?

Jared Smith (CEO)

Matt, great question. We're seeing wholesale pricing because the event happened just before the NASGW 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.

Mike Zavern (Analyst)

Got it. And any specific calibers, we're noticing pricing changing much, or just kind of across the board?

Jared Smith (CEO)

Yeah. So I mean, the stuff that everybody's running for is 5.56 and .223, 7.62x39, all your larger rifle calibers, anything related to military calibers, because of the news between Israel and Hamas. But, I would say across the board, we're getting increased demand and, increased inquiries on bringing on new customers.

Mike Zavern (Analyst)

Got it. Makes sense. Core ammo margins flipped back negative in 2Q. I know, I know we talked about and referenced the rifle casings, pressure going down, but is the sequentially worse gross margin coming entirely from lack of cost absorption on the casing side? Just trying to gauge, did both loaded ammo and casings have sequentially worse gross margins, or was that just from the casings side of the business?

Jared Smith (CEO)

We only really took a gross margin hit in some slow-moving products that we really were sitting on too much of leftover from 2022. 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 9 and 223. It was flushing out inventory. Back in June, when our press didn't come online the first time, we had made strategic purchases of contact tooling, bunters, and other tooling that we expense upon receiving. Month after month, that press did not come online, and so that contact tooling and those expenses continued to flow in, and that's really the major hit to our profitability in the ammunition division.

Mike Zavern (Analyst)

Got it. Makes sense. Last one for me, maybe just on GunBroker. Good to see the payment processing 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 take rate climb in the coming quarters as a result.

Jared Smith (CEO)

Well, the take rate, we see climbing somewhere between 1%-3% as we capture credit card fees. You're also going to see an uptick just due to the sheer seasonality that we see over GunBroker, but that doesn't really affect the take rate. We're also seeing our take rate. Well, the main effect is that you're going to see somewhere between a 1%-3% in our take rate over the next 3.5-4 months as we onboard these new sellers.

Mark Smith (Senior Research Analyst)

Got it. Okay. And last quick one, is carting live? I thought I heard you reference benefits from it on the prepared remarks.

Jared Smith (CEO)

Yeah, we are not carting yet. What's happening right now is we're onboarding those sellers through our payment gateway and centralized processing, and carting will not come on until we finish onboarding all our sellers.

Mark Smith (Senior Research Analyst)

Got it. Makes sense. That's all for me, guys. Thanks.

Operator (participant)

The next question is from Mark Smith with Lake Street. Please go ahead.

Jared Smith (CEO)

Hey, Mark.

Mark Smith (Senior Research Analyst)

Hi, guys. A bunch of things to walk through here. First, this 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 what the impact was within your GunBroker business? I think that you said that you quantified was at 14.7% up-

Jared Smith (CEO)

Correct

Mark Smith (Senior Research Analyst)

... sequentially, but that was kind of typical seasonality. Walk us through kind of what you're seeing on the ground with consumers.

Jared Smith (CEO)

Yeah, so we would expect anywhere between a 5%-6% increase and a gentle trend coming from September into October. This was a pretty sharp trend in that 14.7%. And that's really because these events happened in the second half of October. It was really a really sharp incline after the events in Israel and Hamas that we saw the uptick.

Mark Smith (Senior Research Analyst)

Okay.

Jared Smith (CEO)

I think I answered only one of two of your two more questions, so please repeat.

Mark Smith (Senior Research Analyst)

Yeah. Maybe just elaborate on that. Are you seeing demand? You know, that demand, is that primarily on firearms, or is that spread across, you know, firearms, ammunition, and kind of other accessories?

Jared Smith (CEO)

It's spread across firearms and ammunition, and we're certainly seeing an increase in ammunition sales on the platform in those suspect calibers.

Mark Smith (Senior Research Analyst)

Okay. And then the other piece of increased demand, maybe walk us through what you're seeing from OEM customers for brass casings. Are you seeing, you know, that demand uptick significantly in, you know, October as well? And I don't know if there's anything you can quantify around that.

Jared Smith (CEO)

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, you know, 200, 300 million more brass case capacity, but the demand today that exceeds our output is really in rifle case capacity, and that's where we've had a shortfall in operational efficiencies.

Mark Smith (Senior Research Analyst)

And then on that, you know, as we think about these kind of rifle presses, these equipment issues that you've had, you know, where are we at today versus maybe where we were at the end of the quarter or mid-quarter?

Jared Smith (CEO)

Yeah, great, great question. So back in April, when we started to do the walkthrough of the new plant, we recognized 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. You know, 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, 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 3-4 months of sending the parts back and forth and trying to get the parts to work has been a very frustrating experience for everybody on the team.

Mark Smith (Senior Research Analyst)

Okay. And maybe the last one, and I can jump back into-

Jared Smith (CEO)

One of the things that'll help explain this press. This press is part of our preform process, and it feeds about 6 other presses downstream. So it's not like a single press goes down, and you just work around that press. It is the feeder press for our entire medium action line, which we have somewhere between 90-120 million piece capacity on. So it's, it's a big deal for us and has been.

Mark Smith (Senior Research Analyst)

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 as current of inventory. I don't know if you can quantify anything else there around how big of an impact that had 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 lower margin or maybe even loss, as we roll into Q3?

Jared Smith (CEO)

No, at this point going forward, we, we've cleared out our, old 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 hit on our overhead from not running the rifle presses, we, we pushed really hard, you know, at margins that we didn't even want to take. But, you know, the bleeding should be over now, and we're, we're off to a better footing.

Mark Smith (Senior Research Analyst)

Okay.

Jared Smith (CEO)

Taking price.

Mark Smith (Senior Research Analyst)

Thank you very much.

Jared Smith (CEO)

Absolutely. Thank you, Mark.

Mark Smith (Senior Research Analyst)

Yeah. Maybe, Jared, I don't know if you've still got me, but you said taking price helped. Was that kind of post-

Jared Smith (CEO)

Yeah, I mean-

Mark Smith (Senior Research Analyst)

-quarter end?

Jared Smith (CEO)

Yeah, I mean, what we're seeing. Yeah, that's post-quarter end. We're seeing demand in 2024 that allows us at least a little bit of breathing room. You're not seeing as much price margin compression as you've seen in the past.

Mark Smith (Senior Research Analyst)

Okay, great. Thank you.

Operator (participant)

This concludes our question and answer session. I would like to turn the conference back over to Jared Smith for any closing remarks.

Jared Smith (CEO)

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.

Operator (participant)

The conference is now concluded. Thank you for attending today's press conference.