Byrna Technologies Inc. Q2 FY2026 earnings call

- Core Quarterly Performance Context * Q2 2026 results came in below management expectations, resulting in a steeper business reset than originally planned, which reinforced the need for urgent operational and strategic transformation. Underperformance stemmed from continued year-over-year e-commerce traffic decline (13%) and slower retail partner reorders due to elevated post-holiday inventory. * Reported GAAP gross profit was $1.8 million (11% margin), including $10.4 million in one-time charges: $3.6 million inventory write-down, $3.5 million manufacturing equipment impairment, and $2.3 million inventory reserve for product rationalization (partially offset by a $1.1 million tariff refund). Adjusted gross profit was $10.1 million (62% adjusted margin), matching the prior year adjusted margin. * Net loss for the quarter was $10.1 million, compared to net income of $2.4 million in Q2 2025; adjusted EBITDA was negative $600,000, compared to positive $4.3 million in the prior year. Ending cash and marketable securities totaled $10.4 million with zero debt outstanding.

- Three Near-Term Strategic Priorities * Improve consumer conversion and retail productivity: Management is focused on turning brand awareness and expanding retail reach into purchases, repeat engagement, and advocacy by streamlining the consumer journey across online and in-store channels. Early tests of guided product selection and in-store dedicated displays have delivered strong conversion improvements. * Restructure demand generation: The company is shifting from overreliance on a narrow core audience to a systematic, data-driven approach targeting new addressable consumer segments, with a new organizational structure that splits marketing and sales for clearer accountability. * Align production, inventory, and cash flow with demand: Management is implementing a rolling forecasting model that ties real-time e-commerce trends, retail sell-through, and partner inventory to production planning, to improve margins, reduce working capital, and boost cash conversion.

- Key Operational Updates * Closed the Fort Wayne in-house ammunition manufacturing facility after a make-versus-buy analysis confirmed qualified third-party suppliers can produce ammunition at a lower fully loaded cost with no quality impact. Reduced launcher assembly lines from four to two to align production with current demand, reducing output to lower physical inventory while retaining flexibility to add capacity as demand improves. * Implemented process improvements that increased CL launcher first-pass production yield by 6.5% between May and June, with a target of over 90% yield in Q4 2026, reducing rework and per-unit production costs. * Entered a definitive agreement to acquire Hero Defense Systems for $625,000 cash, $625,000 in restricted common stock, and a performance-based sales royalty, expected to close in 30 days. Hero adds smaller, lower-priced, less lethal everyday carry products that fill a gap in Berna's product portfolio, allowing the company to capture consumers earlier in their personal safety journey and expand addressable market.

Total net revenue for Q2 2026 was $16.4 million, a 42.5% decrease from $28.5 million in the prior year period. 1. E-commerce (company website and Amazon): Revenue decreased $5.8 million (35% year-over-year), contributing ~43% of total Q2 2026 revenue, driven by lower traffic and reduced conversion rates. 2. Domestic dealer channel (dealers, distributors, chain stores): Revenue decreased $3.5 million (47% year-over-year), contributing ~22% of total Q2 2026 revenue, with the decline driven by elevated partner inventory after Q1 post-holiday restocking and slower-than-expected sell-through that reduced reorder volume. 3. International dealer and distributor channel: Revenue decreased $1.2 million (43% year-over-year), contributing ~10% of total Q2 2026 revenue, due to large one-time orders in the prior year that did not repeat in the current quarter.

- Fiscal 2026 full year revenue is not expected to grow, after Q2 reset the baseline, with management prioritizing strategic execution over a quick return to prior growth rates. - A sequential improvement from the first half to the second half of fiscal 2026 is expected, with Q3 remaining a transition quarter as new marketing and conversion initiatives ramp, and Q4 expected to deliver stronger performance driven by holiday season demand and full deployment of new initiatives. - Adjusted full year gross margin is expected to remain at approximately 62%, with potential for upside from the shift to third-party ammunition sourcing. - Inventory turns are expected to approach 2x by the end of fiscal 2026, with a targeted $5 million reduction in physical inventory to generate incremental free cash flow in Q4. - Management expects to exit fiscal 2026 positioned for more consistent growth in fiscal 2027, with full brand and website repositioning completed in Q1 2027.

- Current marketing and organizational restructuring, as well as new consumer acquisition initiatives, require incremental upfront investment that will precede revenue contributions, creating pressure on near-term profitability and cash flow. - E-commerce traffic and conversion have remained soft through the start of Q3, creating uncertainty around the timing of a revenue rebound. - Retail partner sell-through has underperformed initial expectations, with the company lacking full visibility into in-store conversion to quickly address root causes. - The planned revenue improvement relies on the successful deployment of multiple unproven new initiatives (new marketing messaging, retail display overhauls, the Hero Defense acquisition, and new organizational structure), with uncertain timing and magnitude of impact.

Q: Given ongoing restructuring and lower back half revenue expectations, how should investors model operating expense run rate for Q3 and Q4 relative to Q2? / A: Q2 can be used as a baseline, with incremental marketing and organizational investments of roughly $750,000 per quarter planned ahead of revenue contributions. Variable selling expenses will fluctuate at approximately 10% of sales, rising with expected Q4 holiday revenue growth. Outside of targeted investments, management is holding other operating expenses steady against the current revenue base.

Q: What has been the trend in e-commerce traffic and conversion entering Q3, and when will new HLK marketing messaging begin impacting results? / A: Traffic and conversion have remained largely consistent with the end of Q2 through early Q3, with no meaningful improvement yet. Almost none of HLK's new messaging is live yet; it will ramp throughout Q3, with full deployment ahead of the Q4 holiday season. Early wins from smaller initiatives (guided product quizzes, the Try Before You Buy program) are driving higher engagement that is expected to move metrics meaningfully higher in Q3.

Q: How is the Hero Defense Systems product line positioned relative to existing Berna products, and what are its current financial characteristics? / A: Hero will be positioned as a simpler, lower-priced product line below Berna's core launchers, filling a $250 price gap between Berna's existing low-end and entry-level products, with a less gun-forward form factor that appeals to new consumer segments. Hero has similar gross margins to Berna's existing business, and it was profitable as a small standalone business with limited prior marketing investment. Management expects to reduce Hero production costs to enable a lower retail price while maintaining margins.

Q: Is the shift to third-party ammunition manufacturing a permanent change, and what are the margin and inventory impacts of this shift? / A: The shift to third-party sourcing is expected to be a permanent long-term solution, as new supply options became available that deliver lower fully loaded costs than in-house production while maintaining quality standards. The margin delta will be positive, supporting the company's 62% full year gross margin target. The ammunition-related inventory write-down impacted only raw materials for in-house production; all existing finished ammunition inventory will still be sold to consumers.