Byrna Technologies Inc. - Quarter Report: 2020 February (Form 10-Q)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended February 29, 2020

☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                  to

Commission File No. 333-132456

Securities registered pursuant to Section 12(b) of the Act: None.

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes ☐ No ☒

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of "large accelerated filer," "accelerated filer," "smaller reporting company," and "emerging growth company" in Rule 12b-2 of the Exchange Act.

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act):
Yes ☐ No ☒

As of May 29, 2020, the Company had 126,299,568 issued and outstanding shares of common stock.

EXPLANATORY NOTE

Byrna Technologies Inc. is a voluntary filer under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and is therefore not subject to, or required to file reports pursuant to, Section 13 or Section 15(d) of the Exchange Act. 

TABLE OF CONTENTS

References in this Quarterly Report on Form 10-Q to the “Company,” “we,” “us” or “our” refer to Byrna Technologies Inc. (formerly known as Security Devices International Inc.).

See accompanying notes to the unaudited condensed consolidated financial statements.

See accompanying notes to the unaudited condensed consolidated financial statements.

SUPPLEMENTAL DISCLOSURES OF NON-CASH INVESTING AND FINANCING ACTIVITIES:

See accompanying notes to the unaudited condensed consolidated financial statements.

See accompanying notes to the unaudited condensed consolidated financial statements.

Accounts Receivable

The following table presents the Company's accounts receivable:

Accounts receivable at February 29, 2020 and November 30, 2019 primarily relate to sales of the new Byrna^® HD to several large distributors during the fiscal year ended November 30, 2019.

Revenue Disaggregation

The following table presents disaggregation of the Company's revenue by product type and distribution channel:

Trade payables at February 29, 2020 and November 30, 2019 primarily relate to raw material purchases. The increase in trade payables at February 29, 2020 as compared to November 30, 2019 was driven by professional fees. Other accrued liabilities at February 29, 2020 consists of accruals for patent costs $80,000, inventory purchases $61,886, payroll $49,552, Roboro Industries Pty LTD (“Roboro”) management fee $16,626 and other $49,263. 

2017 Plan

The Company grants stock options and other stock-based awards under its 2017 Stock Option Plan (the "2017 Plan"). All stock option awards granted to employees are valued at fair value by using either the Black-Scholes or Binomial Lattice option pricing models and recognized on a straight-line basis over the service periods of each award. The Company accounts for equity instruments issued in exchange for the receipt of goods or services from non-employees using the estimated fair market value of the consideration received or the estimated fair value of the equity instruments issued, whichever is more reliably measurable. The value of equity instruments issued for consideration for employees and non-employee services is determined on the earlier of a performance commitment or completion of performance by the provider of goods or services.

During the three months ended February 29, 2020, the Company granted options to purchase 3,917,500 shares of common stock to its employees and directors. The Company recorded stock-based compensation expense for options granted to its employees and directors of $602,108 and $4,227 during the three months ended February 29, 2020 and February 28, 2019, respectively.

During the three months ended February 29, 2020, the Company granted options to purchase 110,000 shares of common stock to non-employees (consultants). The Company recorded stock-based compensation expense for options granted to non-employees of $19,244 and $Nil during the three months ended February 29, 2020 and February 28, 2019, respectively.

Stock Option Valuation

The assumptions that the Company used to determine the grant-date fair value of stock options granted to employees and non-employees for the three months ended February 29, 2020 were as follows:

Three Months Ended February 29, 2020

Employee, Director and Non-Employee Options (Black-Scholes option pricing model)

The following table summarizes option activity under the 2017 Plan during the three months ended February 29, 2020:

Incentive Warrants

During the year ended November 30, 2019, the Company issued 750,000 warrants each to two consultants (the "Incentive Warrants") to purchase common shares. The Incentive Warrants were issued outside of the 2017 Plan and became fully vested in December 2019.

During the three months ended February 29, 2020, the Company issued 150,000 warrants in exchange for services to a marketing consultant to purchase common shares. The warrants were issued outside of the 2017 Plan and were fully vested as of February 29, 2020.

Stock-based compensation expense for the three months ended February 29, 2020 and February 28, 2019 was $15,434 and $119,440, respectively.

The assumptions the Company used to determine the grant-date fair value of warrants granted to the marketing consultant during the three months ended February 29, 2020 were as follows:

Stock-Based Compensation Expense

Total stock-based compensation expense of $636,786 and $123,667 for the three months ended February 29, 2020 and February 28, 2019, respectively, were recorded in SG&A expenses.

During the three months ended February 29, 2020, the Company issued 498,418 warrants to those note holders who returned interest checks and accepted payment in kind of units consisting of convertible notes with a face value of $124,603 together with 4,000 warrants for every $1,000 of accrued interest to satisfy $124,603 of accrued interest that was payable on October 31, 2019. The warrants are each exercisable for one share of common stock at an exercise price of $0.25 per share on or before the 3.8-year anniversary of the issuance. The Company also issued 150,000 warrants as payment to a consultant for marketing services. The warrants are each exercisable for one share of common stock at an exercise price of $0.25 per share on or before the five-year anniversary of the issuance.

On September 16, 2019, the Company entered into a securities purchase agreement with two investors to sell a total of 818.0 units, for aggregate principal of $818,000, at a price of $1,000 per unit, consisting of (i) $1,000 10% interest secured convertible promissory note, convertible into the Company's common stock at a conversion price of $0.15 per share and (ii) four thousand warrants each exercisable for one share of common stock at an exercise price of $0.25 per share on or before January 22, 2024. The Company issued 3,272,000 warrants in connection with this transaction. The relative grant date fair value of these warrants was estimated at $363,846 using the Binomial lattice option pricing model and reflected in additional paid-in capital.

On July 22, 2019, the Company entered into a securities purchase agreement with several investors to sell a total of 2,282.5 units, for aggregate principal of $2,282,500, at a price of $1,000 per unit, consisting of (i) $1,000 10% interest secured convertible promissory note, convertible into the Company's common stock at a conversion price of $0.15 per share and (ii) four thousand warrants each exercisable for one share of common stock at an exercise price of $0.25 per share on or before January 22, 2024. The Company issued 9,130,000 warrants in connection with this transaction. The relative grant date fair value of these warrants was estimated at $1,038,081 using the Binomial lattice option pricing model and reflected in additional paid-in capital.

On April 22, 2019 and May 20, 2019, the Company entered into a securities purchase agreement with several accredited investors to sell a total of 2,080.265 units, for aggregate principal of $2,080,265, at a price of $1,000 per unit, consisting of (i) $1,000 10% interest secured convertible promissory note, convertible into the Company's common stock at a conversion price of $0.15 per share and (ii) four thousand warrants each exercisable for one share of common stock at an exercise price of $0.25 per share on or before October 22, 2023. The Company issued 8,321,058 warrants in connection with this transaction. The relative grant date fair value of these warrants was estimated at $888,444 using the Binomial lattice option pricing model and is reflected in additional paid-in capital.

On October 22, 2018, the Company entered into a securities purchase agreement with several accredited investors to sell 1,275.0 units, for aggregate principal of $1,275,000, at a price of $1,000 per unit, consisting of (i) $1,000 10% interest convertible promissory note ("the 2018 Notes"), convertible into the Company's common stock at a conversion price of $0.15 per share, and (ii) four thousand warrants each exercisable for one share of common stock at an exercise price of $0.25 per share on or before the five-year anniversary of the issuance. Pursuant to this private placement, the Company issued 5,100,000 warrants. The grant date fair value of these warrants was estimated at $524,089 using the Binomial lattice option pricing model and reflected in additional paid-in capital.

The following table summarizes warrant activity during the three months ended February 29, 2020:

Future lease payments under non-cancelable operating leases, applicable under ASC 842, as of February 29, 2020 were as follows:

ASC 840 Comparative Disclosures

The Company has the following lease commitments by fiscal year at November 30, 2019:

ITEM 2 - Management's Discussion and Analysis of Financial Condition and Results of Operations

References in this report (the "Quarterly Report") to "we," "us" or the "Company" refer to Byrna Technologies Inc. References to our "management" or our "management team" refer to our officers and directors. The following discussion and analysis of the Company's financial condition and results of operations should be read in conjunction with the financial statements and the notes thereto contained elsewhere in this Quarterly Report. Certain information contained in the discussion and analysis set forth below includes forward-looking statements that involve risks and uncertainties.

Special Note Regarding Forward-Looking Statements

This Quarterly Report includes "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933, as amended (the "Securities Act") and Section 21E of the Exchange Act that are not historical facts, and involve risks and uncertainties that could cause actual results to differ materially from those expected and projected. All statements, other than statements of historical fact included in this Form 10-Q including, without limitation, statements in this "Management's Discussion and Analysis of Financial Condition and Results of Operations" regarding the Company's financial position, business strategy and the plans and objectives of management for future operations, are forward-looking statements. Words such as "expect," "believe," "anticipate," "intend," "estimate," "seek" and variations and similar words and expressions are intended to identify such forward-looking statements. Such forward-looking statements relate to future events or future performance, but reflect management's current beliefs, based on information currently available. A number of factors could cause actual events, performance or results to differ materially from the events, performance and results discussed in the forward-looking statements. For information identifying important factors that could cause actual results to differ materially from those anticipated in the forward-looking statements, please refer to the Risk Factors section of the Company's Annual Report on Form 10-K filed with the U.S. Securities and Exchange Commission (the "SEC"). The Company's securities filings can be accessed on the EDGAR section of the SEC's website at www.sec.gov. Except as expressly required by applicable securities law, the Company disclaims any intention or obligation to update or revise any forward-looking statements whether as a result of new information, future events or otherwise.

OVERVIEW

The following discussion and analysis is intended to help you understand us, our operations and our financial performance. It should be read in conjunction with our consolidated financial statements and the accompanying notes, which are included in Item 1 of this report.

We develop, manufacture and sell less-lethal ammunition and security devices. These products are used by the military, correctional services, police agencies, private security and consumers. We have two main product lines. Our first main product line and primary focus is our Byrna^® line of personal security devices and related products. The Byrna^® product line includes our Byrna^® HD, our first handheld personal security device, which has the size and form factor of a compact handgun and is designed to be used by civilians and private security professionals, as well as accessories and third-party products that are compatible with the Byrna^® HD, including the projectiles used in the Byrna^® HD. Our second, legacy, line of business is the sale of less-lethal munitions designed for 40mm rifled launchers utilized by law enforcement, correctional services and military markets. These less-lethal munitions include impact rounds designed to stop an individual without causing permanent injury or death and "payload" rounds carrying a variety of payload packages including chemical irritants and various marking products designed to control or identify instigators in riot situations. Our flagship product in this market is the 40mm blunt impact projectile ("BIP"), which uses patented collapsible gel head technology. In addition to our two main product lines, we are selling out remaining inventory of two 12 gauge less-lethal impact rounds that we no longer manufacture.

Our business strategy is twofold: (1) to fulfill the growing demand for less-lethal products in the law enforcement, correctional services, and private security markets and (2) to provide civilians - including those whose work or daily activities may put them at risk of being a victim - with easy access to an effective, non-lethal way to protect themselves and their loved ones from threats to their person or property.

We believe that the United States, along with many other parts of the world, is experiencing a significant spike in the demand for less-lethal products and that the less-lethal market will be one of the faster growing segments of the security market over the next decade, particularly given the fear caused by the recent COVID-19 pandemic. The less lethal market has been projected to approach 12 billion dollars per year by 2023 (Statistics MRC. Non-Lethal Weapons - Global Market Outlook (2017-2023)). The Company plans to respond to this demand for less-lethal products through the serial production and distribution of the Byrna^® HD and expansion of the Byrna product line.

RESULTS OF OPERATIONS

Although our results for the three months ended February 29, 2020 were not impacted by the COVID-19 pandemic, we subsequently were and continue to be significantly impacted by the pandemic and related economic conditions, experiencing both positive and negative effects from the impact of the virus and resulting suspension of economic activity and daily routines. On the positive side, the general level of apprehension among the population as a whole, has led many people to seek means of protecting themselves and their families in the event that there is a breakdown or a fraying of the fabric of civil society. This general uneasiness has driven a run on guns and ammunition as well as increased demand for non-lethal weapons such as the Byrna^®HD. On the negative side, the government mandated lock down orders and shelter in place requirements have significantly disrupted the Company's supply chain and temporarily stopped production and delayed shipments of the Byrna^®HD. While production resumed in late March 2020 after our manufacturing facility was deemed an "essential business," and our supply chain is functioning currently, we cannot predict the extent of supply, production, and distribution disruption that may result from the ongoing pandemic or whether the increased demand we are seeing will continue after the immediate health crisis has abated. Nor can we predict the potential impact on our employees, day to day operations and key members of management.

In order to reduce our dependence on third parties for production and our vulnerability to delays in inventory shipments to the Fort Wayne, Indiana distribution center, we purchased our supplier Roboro Industries Pty LTD (“Roboro”) and are accelerating our efforts to open a second manufacturing facility in the US. Effective May 5, 2020, we acquired 100% of the outstanding common shares of Roboro for $500,000, subject to working capital adjustments and unpaid transaction expenses. As a result of this stock acquisition, we also assumed payment of Roboro’s outstanding debt of rand 1,788,000 (approximately USD $97,000) plus accrued interest for March and April 2020. Concurrently with this stock acquisition, Roboro’s sellers agreed to purchase 1,388,889 shares of our common stock at $0.36 per share for total consideration of $500,000. The shares, which were issued on May 27, 2020, are restricted and subject to a 15-month vesting schedule.

Operations Overview

We generate revenues from (1) consumers through the e-commerce portal, Shopify, (2) dealers, distributors and big box and chain stores; and (3) large end users including security companies, correctional facilities, and governmental and law enforcement agencies. 

We entered into the following transactions during the first quarter of 2020 which impacted our results of operations and the comparability among the periods, as discussed below:

• On February 20, 2020, the October 2018 Notes, April/May 2019 Notes, July 2019 Notes and September 2019 Notes were amended by consent of all holders (the "Amendment") to waive all rights to receive interest in cash and to accept payment in kind of accrued interest. See Note 13, “Convertible Notes Payable and Derivative Liabilities,” in the Notes to Consolidated Financial Statements included in Item 1 of this report for further discussion.
  

• On December 19, 2019, we dissolved SDI Canada.

• On December 18, 2019 (the “Amendment Date”), we and Buys, our CTO, agreed to certain amendments to the terms of the previously announced purchase and sale agreement entered into on April 13, 2018 pursuant to which Buys sold and assigned certain intellectual property rights (the “Buys Portfolio”) to the Company, which rights were subject to reversion in the event a second payment of $500,000 or $750,000 of restricted common shares of the Company's stock was not made by April 13, 2020 and Buys retained a security interest in the intellectual property pending the Second Payment. Pursuant to the amended terms (the "Amended Agreement"), which were approved by the Board on December 19, 2019, the Company agreed (i) to issue a revised second payment to Buys consisting of restricted common stock shares valued at $630,000 (based on the average closing price over the 20 days prior to the Amendment Date) which resulted in the issuance of 3,866,810 shares with a fair value of $696,799 (the “Second Payment”) and (ii) must make an additional cash payment to Buys of $80,000 which is included in accrued liabilities as of February 29, 2020. The Amended Agreement also terminates Buys' security interest and reversionary rights to the intellectual property upon the Second Payment and modifies other terms of the purchase and sale agreement to, among other things, clarify ambiguities related to the royalty terms.

• Effective December 1, 2019 (binding agreement July 2019), we executed a manufacturing agreement with Roboro, whereby Roboro became our exclusive manufacturer in South Africa of various products including the Byrna^® HD. Roboro's manufacturing activities include plastic molding component production and assembly, dispatch and other services.

• During the first quarter of 2020, we (1) granted 4,027,500 stock options to directors, employees and non-employees, and (2) issued 625,000 shares of restricted stock to management.

Our two foreign subsidiaries, SDI Canada (dissolved December 19, 2019) and Byrna South Africa maintain their books and records in their functional currency, Canadian dollars and South African rand, respectively which exposes us to foreign exchange risk. Our results of operations are unfavorably impacted during times of a strengthening United States dollar against the respective foreign currencies and favorably impacted during times of a weakening United States dollar against those currencies.

Below are our statements of operations and comprehensive loss for the quarters ended February 29, 2020 and February 28, 2019.

Three months ended February 29, 2020 as compared to three months ended February 28, 2019:

Net Revenue

Revenues were $148,580 in the first quarter of 2020 which represents an increase of $137,473 or 1,238% as compared to the prior year period revenues of $11,107. This increase was driven by sales of the Byrna HD personal security devices and accessories which began shipping during the second quarter of 2019. Sales of 40mm BIP products were $21,214 in the first quarter of 2020, which represents an increase of $10,107 or 91% as compared to the prior year period revenues of $11,107, and consisted largely of reorders from existing customers to restock inventory.

Revenues in the first quarter of 2020 were net of $140,089 of returns from two customers related to revenues recognized during the year ended November 30, 2019. Excluding these returns, revenues generated in the first quarter of 2020 were $288,669. The associated inventory is saleable and has been used in its entirety in the second quarter of  2020 to fulfill our backlog of orders.

Cost of Goods Sold

Cost of goods sold was $182,779 in the first quarter of 2020 compared to $5,549 in the prior year period. This $177,230 increase is primarily due to costs associated with the manufacture and corresponding sales of the Byrna HD and related products, whereas cost of goods sold during the prior year period consisted of 40mm sales.   

Gross (Loss) Profit

Gross profit is calculated as total revenue less cost of goods sold and gross margin is calculated as gross profit divided by total revenue. Included as cost of goods sold are costs associated with the production and procurement of products, such as inbound freight costs, manufacturing depreciation, purchasing and receiving costs, and inspection costs. Gross (loss) profit was $(34,199) in the first quarter of 2019, a gross loss margin of (23)%. The negative margin was a result of a level of sales that was less than fixed costs of cost of goods sold such as the monthly production management fee due to Roboro, rework costs and depreciation. Gross profit in the prior year period of $5,549, a gross profit margin of 50% was attributable to 40mm sales.

Selling, General and Administrative Expenses/Operating Loss

Selling, general and administrative (“SG&A”) expenses were $1,565,831 in the first quarter of 2020, which represents an increase of $467,863 or 43% as compared to the prior year period SG&A expenses of $1,097,968. This increase was driven by (i) $526,704 increase in payroll expenses related to the ramp up of infrastructure and Byrna® HD production, (ii) $513,199 increase in stock-based compensation expense; partially offset by (iii) $181,561 decrease in consulting expenses as  certain consulting services utilized in the first quarter of 2019 did not recur in the current year period, (iv) $131,730 decrease in marketing costs as the prior year period included amounts associated with the February 2019 launch of the Byrna® HD, (iv) $131,275 decrease in research and development (“R&D”) spending. R&D spending incurred the first quarter of 2019 related to validating components and processes prior to making commercial product for the Byrna product line. In mid-2018, we started development of finned tail ammunition which is designed to increase the distance and accuracy of our Byrna® line of projectiles. We expect R&D spending for finned tail ammunition to accelerate during the second and third quarters of 2020 as we plan to bring new products to market in the fourth quarter of 2020. The decreases in consulting and marketing expenses noted above were a result of one-time expenses incurred in the first quarter of 2019 in connection with the initial Byrna® HD launch, including the NASCAR sponsorship and related events, which were not repeated in the current year period or replaced by equivalent marketing expenditures.

This increase in SG&A was the primary reason for the $509,763 or 46% increase in loss from operations, from $1,116,954 in the first quarter of 2019 to $1,626,717 in the first quarter of 2020.

Depreciation

Depreciation expense recorded in operating expenses and related to non-revenue generating assets decreased $2,664 to $6,514 in in the first quarter of 2020 as compared to $9,178 in the prior year period driven by assets that were fully depreciated in 2019. 

Amortization of Patent Rights

Amortization of patent rights increased $14,385 to $16,218 in the first quarter of 2020 as compared to $1,833 in the prior year period due to the Second Payment and Final Payment of $776,799 made in the first quarter of 2020 to terminate Buys’ security interest and reversionary rights in the Buys Portfolio. Of the $776,799, $80,000 is included in accrued liabilities as of February 29, 2020, as the payment is due in the second quarter of 2020.

Accretion of Debt Discounts and Interest Expense

Accretion of debt discounts increased $395,266 in the first quarter of 2020 to $498,124 from $102,858 in the prior year period. The increase was driven by capital raises of $5,180,765 relate to private placements of convertible notes which occurred in the second, third and fourth quarters of 2019. Interest expense increased $100,142, to $159,532 in the first quarter of 2020 from $59,390 in the prior year period. The increase was also due to the fiscal 2019 capital raises. Effective April 8, 2020, we exchanged an aggregate of approximately $6.95 million of our outstanding convertible notes payable, representing principal and accrued interest through April 7, 2020, for 1,391 shares Series A Convertible Preferred Stock (“Preferred Stock”). We no longer have any outstanding notes payable and, therefore, accretion of debt discounts and interest expense is expected to decrease in the second quarter of 2020 as compared to the first quarter of 2020. See Note 13, “Convertible Notes Payable and Derivative Liabilities,” in the Notes to Consolidated Financial Statements included in Item 1 of this report for further discussion.

Change in Fair Value of Derivative Liabilities

Change in fair value of derivative liabilities decreased $395,430 to $Nil in the first quarter of 2020 from $395,430 in the prior year period. The amount recognized in the prior year period consists of (i) $236,150 related to the Canadian debentures which were repaid on May 31, 2019 and (ii) $159,280 associated with the October 2018 Notes which we re-evaluated in the fourth quarter of 2019 and determined they did not contain any embedded terms or features that require classification as derivatives. See Note 15, "Convertible Notes Payable and Derivative Liabilities," in the Notes to Consolidated Financial Statements included in Item 8 of the Company's Annual Report on Form 10-K for the year ended November 30, 2019 for further discussion.

Income Tax Provision

Loss before income taxes consists of the following:

The Company's provision for income taxes was $Nil in each of the quarters ended February 29, 2020 and February 28, 2019.

LIQUIDITY AND CAPITAL RESOURCES

Cash Flow Summary

Cash and restricted cash as of February 29, 2020 was $391,751, a decrease of $782,149 from the amount as of November 30, 2019 of $1,173,900. The decrease included $697,565 cash used in operating activities, $44,032 cash used in investing activities, and $Nil cash flow from financing activities. Additionally, as of the date hereof, we no longer have any outstanding notes payable since effective April 8, 2020, we exchanged an aggregate of approximately $6.95 million of our outstanding convertible notes payable, representing principal and accrued interest through April 7, 2020, for 1,391 shares Preferred Stock.

As of February 29, 2020, approximately $120,977 of cash was held by our international subsidiaries, inclusive of an account maintained by SDI Canada which was dissolved in the first quarter of 2020 and the cash balance was transferred to our US bank account. Our intent is to reinvest indefinitely substantially all our earnings in our foreign subsidiaries outside of the US. However, if we decide to repatriate these earnings to the US, we may be required to accrue and pay additional taxes, including any applicable foreign withholding tax and US state income taxes. It is not practicable to estimate the amount of tax that may be due if these earnings were repatriated due to the complexity associated with the hypothetical calculation.

We have incurred a cumulative loss of $39,946,496 from inception through February 29, 2020 and have funded operations through the issuance of common stock, warrants, and convertible notes payable. We generate revenue from operations. However, we still expect to incur significant losses before our revenues can sustain operations. Our future success is dependent upon our ability to raise sufficient capital or generate adequate revenue, to cover ongoing operating expenses, and also to continue to develop and be able to profitably market our products. Our plans to continue operations include seeking to expand sales of the Byrna® HD in new marketing channels domestically and internationally, offering new products to drive revenue increases in the way that the April 2019 launch of the Byrna® HD drove the first quarter of 2020 revenue increase. In addition, subsequent to the quarter ended February 29, 2020, as discussed in the Financing Activities section below, we (1) raised approximately $3.2 million through warrant exercises and (2) exchanged all outstanding convertible debt for preferred stock. We may explore other financing alternatives to raise capital, if needed. There can be no assurance that such revenue will be generated, or financing will be available at all or on favorable terms. Based on these factors, there is substantial doubt about our ability to continue as a going concern. The financial statements do not include any adjustments that might result from the outcome of this uncertainty; such adjustments could be material.

Operating Activities

Cash used in operating activities was $697,565 in the first quarter of 2020 compared to $709,550 in the first quarter of 2019. This decrease of $11,985 consisted of the below changes in working capital and noncash activity, also discussed below:

Accounts Receivable: The change in accounts receivable increased $344,863 to $346,034 in the first quarter of 2020 compared to $1,171 in the first quarter of 2019. The fiscal 2020 accounts receivable collections related to sales during the fourth quarter of 2019, of the new Byrna HD to several large distributors in conjunction with the fourth quarter launch of our official dealer program for the new product.  

Inventory: The change in inventory increased $232,233 to $418,752 in the first quarter of 2020 compared to $186,519 in in the first quarter of 2019. The levels of component inventory maintained were increased during the current year period to fulfill orders of the Byrna HD and seek to ensure adequate parts inventory to meet increasing sales projections of the new product and to seek to ensure that inventory of custom-made parts and those with long lead times are adequate.

Accounts Payable: The production of Byrna® HD and increased activity in South Africa as well as maintaining legal and regulatory infrastructure led to higher payables to component suppliers and outside attorneys in the first quarter of 2020 compared to the prior year period.

Noncash Activity: The Company’s non-cash activity primarily consisted of (a) $498,124 accretion of debt discounts in the first quarter of 2020 as compared to $102,858 in the first quarter of 2019, (b) $118,750 issuances of common shares for services in the first quarter of 2020 as compared to $165,472 in the prior year period, (c) $636,786 stock-based compensation expense in the first quarter of 2020 as compared to $123,667 in the prior year period, and (d) $696,799 issuance of common shares in the first quarter of 2020 and $80,000 payment in connection with the Buys Portfolio, where the payment is due in the second quarter of 2020 and included in accrued liabilities as of February 29, 2020. 

Investing Activities

Cash used in investing activities was $44,032 in the first quarter of 2020 as compared to $116,886 in the prior year period. Deposits for and purchases of property and equipment of $44,032 in the first quarter of 2020 as compared to $116,886 in the first quarter of 2019, were for production in South Africa, including molds and tooling as well as furniture deposits for the new MA lease. We currently expect that capital expenditures for 2020 will be approximately $400,000. Due to COVID-19, our estimate may be subject to change.

Financing Activities

We did not have cash flows from financing activities in the first quarter of 2020 and 2019, respectively. Our capital structure was as follows:

See Note 13, "Convertible Notes Payable and Derivative Liabilities," in the Notes to Consolidated Financial Statements included in Item 1 of this report for information on the debt obligations.

We also had $391,751 and $1,173,900 of cash and restricted cash at February 29, 2020 and November 30, 2019, respectively.

We were in compliance with all applicable financial and non-financial covenants under our financing arrangements as of February 29, 2020.

On February 20, 2020, the October 2018 Notes, April/May 2019 Notes, July 2019 Notes and September 2019 Notes were amended by consent of all holders (the "Amendment") to waive all rights to receive interest in cash and to accept payment in kind of accrued interest.

During March 2020, the Company raised approximately $3.2 million through early warrant exercises, where 19,979,107 warrants were exercised for 19,979,107 shares of common stock. The warrant exercise price was reduced from $0.25 to $0.16 per warrant to induce warrant holders to exercise

Effective April 8, 2020, we exchanged an aggregate of approximately $6.95 million of all its outstanding October 2018 Notes, April/May 2019 Notes, July 2019 Notes and September 2019 Notes (collectively the "Notes"), representing principal and accrued interest, for 1,391 shares Series A Convertible Preferred Stock ("Preferred Stock"). We no longer have any outstanding notes payable. At the closing, in accordance with the Amendment and the Security Purchase Agreements pursuant to which the Notes were issued, we also issued 1,000,000 warrants to the holders reflecting 4,000 warrants for each $1,000 (US dollars) of unpaid interest accrued on the Notes.

Each share of Preferred Stock has a $5,000 issue price. Dividends accrue on the issue price at a rate of 10.0% per annum and are payable to holders of Preferred Stock as, when and if declared by our Board of Directors. Each share of Preferred Stock, is convertible into such number of shares of common stock equal to the issue price divided by the conversion price of $0.15. Upon conversion of the Preferred Stock, all accrued and unpaid dividends will be converted to common stock utilizing the same conversion formula. The conversion price is subject to proportional adjustment for certain transactions relating to our common stock, including stock splits, stock dividends and similar transactions. Holders of Preferred Stock are entitled to a liquidation preference in the event of any liquidation, dissolution or winding up of the Corporation based on their shares' aggregate issue price and accrued and unpaid dividends. Holders may convert their shares of Preferred Stock into common stock at any time and we have the right to cause each holder to convert their shares of Preferred Stock at any time after the eighteen (18) month anniversary of the original issue date if the common stock has traded for more than twenty (20) consecutive trading days above $0.50 (as adjusted for stock splits, stock dividends and similar transactions). Holders of shares of Preferred Stock are not entitled to vote with the holders of common stock, however, for so long as there are 423 shares of Preferred Stock outstanding, we are required to obtain the consent of the holders of the Preferred Stock to take certain corporate actions, including to incur indebtedness in excess of $250,000 in the aggregate. In addition, we agreed to use our reasonable best efforts to register the shares of common stock issuable upon conversion of the Preferred Stock in due course following the exchange.

On May 4, 2020, we received a loan in the amount of $190,000 from the Paycheck Protection Program ("PPP"). We anticipate this loan will be forgiven under the rules of the PPP.

Off-Balance Sheet Arrangements

The Company had no off-balance sheet arrangements as of February 29, 2020 and November 30, 2019.

RECENT ACCOUNTING PRONOUNCEMENTS

See Note 18, "Recent Accounting Guidance," in the Notes to Consolidated Financial Statements included in Item 1 of this report for a discussion of recently issued and adopted accounting standards.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

Our consolidated financial statements are based on the selection and application of significant accounting policies, which require management to make significant estimates and assumptions. Our significant accounting policies are outlined in Note 3, “Summary of Significant Accounting Policies,” in the Notes to Consolidated Financial Statements included in Item 8 of our Annual Report on Form 10-K for the year ended November 30, 2019. We adopted, effective the first quarter of 2020, accounting guidance related to the accounting for leases. See accounting policy below, Note 18, “Recent Accounting Guidance,” and Note 9, “Leases,” in the Notes to Consolidated Financial Statements included in Part I, Item 1 of this report for further discussion. During the three months ended February 29, 2020, there were no significant changes to our critical accounting policies from those described in our Annual Report on Form 10-K for the year ended November 30, 2019, except for the item mentioned above.

In February 2016, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2016-02, Leases ("ASU 2016-02"), to enhance the transparency and comparability of financial reporting related to leasing arrangements. We adopted ASU 2016-02 on December 1, 2019, or the effective date, and used the effective date as its date of initial application.

At the inception of an arrangement, we determine whether the arrangement is or contains a lease based on the unique facts and circumstances present. Most leases with a term greater than one year are recognized on the balance sheet as right-of-use assets and lease liabilities. We have elected not to recognize on the balance sheet leases with terms of one year or less. Operating lease liabilities and corresponding right-of-use assets are recorded based on the present value of lease payments over the expected remaining lease term. However, certain adjustments to the right-of-use asset may be required for items such as prepaid rent. The interest rate implicit in lease contracts is typically not readily determinable. As a result, we utilize our incremental borrowing rates, which are the rates incurred to borrow on a collateralized basis over a similar term an amount equal to the lease payments in a similar economic environment.

In accordance with the guidance in ASU 2016-02, components of a lease should be separated into three categories: lease components (e.g., building), non-lease components (e.g., common area maintenance), and non-components (e.g., property taxes and insurance). Then the fixed and in-substance fixed contract consideration (including any related to non-components) must be allocated based on fair values to the lease components and non-lease components.

Although separation of lease and non-lease components is required, certain practical expedients are available. Entities may elect the practical expedient to not separate lease and non-lease components. Rather, they would account for each lease component and the related non-lease component together as a single component. We have elected to account for the lease and non-lease components of each of its operating leases as a single lease component and allocate all of the contract consideration to the lease component only. The lease component results in an operating right-of-use asset being recorded on the balance sheet and amortized on a straight-line basis as lease expense.

Not applicable.

Evaluation of Disclosure Controls and Procedures

Our management, with the participation of our Principal Executive Officer ("PEO") and Principal Financial Officer ("PFO"), evaluated the effectiveness of our disclosure controls and procedures as of February 29, 2020 pursuant to Rule 13a-15(b) of the Securities Exchange Act of 1934, as amended (the "Exchange Act"). Disclosure controls and procedures are designed to ensure that material information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission's (the "SEC") rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that material information is accumulated and communicated to our management, including our PEO and PFO, as appropriate to allow timely decisions regarding required disclosure. Management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives. Management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Our PEO and PFO concluded that as of February 29, 2020, our disclosure controls and procedures were not effective.

Changes in Internal Control Over Financial Reporting

During the most recently completed fiscal quarter, there has been no change in our internal control over financial reporting that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

PART II - OTHER INFORMATION

To the knowledge of our management, there is no litigation currently pending against us, any of our officers or directors in their capacity as such or against any of our property.

Factors that could cause our actual results to differ materially from those in this report include the risk factors described in our Annual Report on Form 10-K for the year ended November 30, 2019 filed with the SEC on May 18, 2020. As of the date of this Report, there have been no material changes to the risk factors disclosed in our Annual Report filed with the SEC.

On December 18, 2019, we and Andre Buys (“Buys’), our CTO, agreed to certain amendments to the terms of the previously announced purchase and sale agreement entered into on April 13, 2018 pursuant to which Buys sold and assigned certain intellectual property rights (the “Buys Portfolio”) to the Company. Pursuant to the amended terms, which were approved by the Board on December 19, 2019, the Company (i) issued 3,866,810 shares of common stock in exchange for Patent Rights and (ii) must make an additional cash payment to Buys of $80,000 which is included in accrued liabilities as of February 29, 2020. The issuance of the shares of common stock was made pursuant to the exemption from registration contained in Section 4(a)(2) of the Securities Act.  

None.

Not applicable.

None.

The following exhibits are filed as part of, or incorporated by reference into, this Quarterly Report on Form 10-Q.

SIGNATURES

Pursuant to the requirements of Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.