AMMO Q2 2024 Earnings Call Transcript

Quartr
Provided by Quartr
November 9, 2023

There are 6 speakers on the call.

Operator

Ladies and gentlemen, thank you for standing by. Good afternoon, and welcome to the AMMO Inc. 2nd Quarter 2024 Earnings Call. At this time, all participants are in a listen only mode. Followed by 0.

Operator

After today's presentation, there will be an opportunity to ask questions. 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.

Speaker 1

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 ks and Form 10 Q, The Form 8 ks filed with the SEC today and the company's press release that accompanies this call, particularly the cautionary statements in it.

Speaker 1

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 GAAP Financial Measures, 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.

Speaker 2

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 The recent international and domestic events. From our perspective, we continue to transition our business to a leaner and more profitable operating model For today, we incurred $3,900,000 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 2022 fiscal years. There was an additional $900,000 stock compensation expense due to the change in control activities and $400,000 write offs of deposits from the 2022 fiscal year.

Speaker 2

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 On a positive note, we lowered our working inventory by $1,300,000 created $9,900,000 in cash and reduced Working capital by $8,900,000 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.

Speaker 2

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 Decline sales in Q2 from the previous quarter, tracking $1,400,000 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 outdoor pay for the first time, which is our centralized payment processing platform and escrow service.

Speaker 2

We have onboarded 2,826 sellers Since we went live with Outdoor Pay, 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.

Speaker 2

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 While we initiated the investments for mechanical and electrical failure redundancy, We do not have the investments in place to keep our workforce and the downstream process operational. This led to an additional $1,750,000 and expenses for the quarter.

Speaker 3

Of the

Speaker 2

$1,750,000 there is roughly $800,000 in tooling expenses incurred in the quarter that will help The fundamentals of our transition to OEM brass sales become even more crucial in Our go to market strategy is 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 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 presses continue to sit idle, we have not sit 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.

Speaker 2

Although I am disappointed with our performance this quarter, these trends reinforce my confidence 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 556 into the commercial market from Lake City, We simply cannot have been down at a worse time. Events in October have completely slipped 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. Broker.com is starting to see the payoff of Cardi 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.

Speaker 2

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 and the remainder of the year. With that, I will turn the call over to our CFO, Rob Wyler, to review the Q2 results in more detail. Rob?

Speaker 4

Thank you, Jared. Welcome, everyone. Let me now review the financials of the Q2 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.

Speaker 4

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 We are positioned to capitalize on these positive trends given our strong financial position as we have reported $129,500,000 in current assets, including $49,600,000 of cash and cash equivalents in comparison to $27,600,000 in current liabilities. Additionally, we have generated $18,200,000 in cash from operations through the midpoint of our fiscal year. We ended the Q1 with total revenues of approximately $34,400,000 in comparison to $48,300,000 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.

Speaker 4

S. Commercial ammunition market during the reporting quarter. Our casing sales, however, which afford us higher gross margins increased to 6,400,000 up from $4,300,000 in the prior year period. Our marketplace revenue was $12,500,000 for the reported quarter Compared to $14,600,000 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 $26,100,000 for the quarter compared to $35,500,000 in the comparable prior year quarter.

Speaker 4

The decrease in cost of goods sold was related to the decrease in sales volume. Our gross margin for the quarter was $8,300,000 or 24.1 percent compared to 12 point That 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 $3,900,000 of non recurring expenses related to legal and professional fees and also accruals for contingencies from activities Commencing in our 2021 2022 fiscal years. There was also $900,000 of Additional stock compensation expense as a result of change in control and also $400,000 of write offs incurred in our 2nd fiscal quarter.

Speaker 3

All of

Speaker 4

these items, among others, are included as add backs to adjusted EBITDA. For the quarter, we recorded EBITDA of $1,200,000 compared to the prior year quarter adjusted EBITDA of $5,700,000 This resulted in a net loss per share of $0.07 Our 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 1,200,000 shares repurchased in total under the plan. That concludes our opening remarks.

Speaker 4

I will now turn the call over to the operator for questions. Thank you.

Operator

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.

Speaker 3

Hey, guys. It's Mike Zabran on for Matt. Maybe just starting off on the ammo segment, how sustainable is the uptick And 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?

Speaker 2

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 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?

Speaker 2

We think there is a Strategic repricing that's happening going into the 2024 year.

Speaker 3

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

Speaker 2

Yes. So I mean, the stuff that everybody is running for is 5.56 and 2.23, 7.62x39, all your Larger rifle calibers, anything related to military calibers

Speaker 3

because of

Speaker 2

the news between Israeli and Hamas. But I would say across the board, we're getting increased demand and increased inquiries on bringing on new

Speaker 3

Got it. Makes sense. And core ammo margins Flipped back negative in 2Q. 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.

Speaker 3

Just trying to gauge did both loaded ammo and Do you have sequentially worse gross margins or was that just from the casings side of the business?

Speaker 2

We only really took a gross margin hit And some slow moving products that we really were sitting on too much of leftover from 'twenty two. We flushed all that inventory out. We've not Any price erosion on brass casings and we've not seen any price erosion on 9 and 223. It was flushing out inventory. And Back in June, when our press didn't come online the first time, we had made strategic purchases of contact tooling bunters, Another tooling that we expense upon receiving and month after month that press did not come online, So that contact tooling and those expenses continue to flow in and that's really the major hit to our profitability in the ammunition division.

Speaker 3

Got it. Makes sense. Last one for me. Maybe it's on Gunbroker. Good to see the payment Processing finalized.

Speaker 3

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

Speaker 2

Well, the take rate we see climbing somewhere You're also going to see an uptick just due to the sheer seasonality that we see over Gunbroker, but that doesn't really We're also seeing our take rate, what's the word I'm looking for? Well, the main effect is that you're going to see somewhere between 1% to 3% in our take rate over the next 3.5 to 4 months as we onboard these new sellers.

Speaker 3

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

Speaker 2

Yes. We are not carding yet. What's happening right now is we're onboarding those sellers through our payment gateway and centralized processing And Cardi will not come on until we finish onboarding all our sellers.

Speaker 3

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

Operator

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

Speaker 5

Hey, Mark. Hi, guys.

Speaker 3

A bunch

Speaker 5

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 maybe the consumer demand first, How much you saw that uptick and did you see that maybe what the impact was within your gun broker business? I think that you said that You just quantified, was it 14.7 percent up sequentially, but that was the typical seasonality. Walk us through kind of What you're seeing on the ground with consumers?

Speaker 2

Yes. 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 Trend in that 14.7 percent and that's really because these events happened in the second half of It was really sharp incline after the events in Israel and Hamas that we saw the uptick.

Speaker 5

Okay. I

Speaker 2

think I answered only 1 or 2 of your 2 more questions, so please repeat.

Speaker 5

Yes. Maybe just elaborate on that. Are you seeing demand that demand, is that primarily on firearms or is that spread across Firearms, ammunition and kind of other accessories.

Speaker 2

Right across firearms and ammunition and we're certainly seeing an increase in ammunition

Speaker 5

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

Speaker 2

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 May when we forecasted that this new press was coming online. So That's our biggest issue. We could go out and take on $200,000,000 $300,000,000 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.

Speaker 5

And then on that, as we think about these Got it. Rifle process, these equipment issues that you've had. Where are we at today versus maybe where we were At the end of the quarter or mid quarter?

Speaker 2

Yes. Great question. So Back in April, when we started to do the walk through 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.

Speaker 2

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.

Speaker 2

And so we think we have a press that we can count on going forward, but the last 3 to 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.

Speaker 5

Okay. And maybe the last one is Mark.

Speaker 2

One of the things that will help explain this press, this press It's part of our pre form 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 90,000,000 to 120,000,000 piece capacity on. So it's a big deal for us and has been.

Speaker 5

Okay. The last piece here maybe for me and I can jump back in with any others is, As we think about the profitability that was impacted by kind of clearing out, we'll call it aged or not 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?

Speaker 2

No, at this point going forward, 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 overheads from not running the rifle presses, we pushed really hard Margins that we didn't even want to take, but the bleeding should be over now and we're off to a better footing.

Speaker 5

Okay.

Speaker 2

Thank you, Bryce. Great.

Speaker 5

Thank you

Speaker 4

very much.

Speaker 2

Absolutely. Thank you, Mark.

Speaker 5

Yes. Maybe Jared, I don't know if you still got me, but you said taking price helped. Was that kind of post quarter end?

Speaker 2

Yes. I mean, what we're seeing, yes, 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.

Speaker 5

Okay, great. Thank you.

Operator

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

Speaker 2

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 Q3 2024 results early next year. I appreciate the investors sticking with us and just want to wish you all a good day.

Operator

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

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