Byrna Technologies Inc. (BYRN) FY 2021 MD&A

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our financial statements and the related notes to those statements which are included in Item 8 of this report.  In addition to historical financial information, the following discussion and analysis contains forward-looking statements that involve risks, uncertainties, and assumptions. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of many factors, including those discussed under “Cautionary Note Regarding Forward-Looking Statements” and “Risk Factors” and elsewhere in this report. Some of the numbers included herein have been rounded for the convenience of presentation.

OVERVIEW

Byrna Technologies is a designer, manufacturer, retailer and distributor of innovative technological solutions for security situations that do not require the use of lethal force. Our mantra is Live Safe, and our core mission is to empower individuals to safely and fully engage in life and adventure. Our design team’s directive is to build easy-to-use self-defense tools to enhance the safety of our customers and their loved ones at home and outdoors. We are also focused on developing tools that can be used instead of firearms by professional law enforcement and private security customers to reduce shootings and facilitate trust between police and the communities they seek to serve. Our strategy is to establish Byrna® as a consumer lifestyle brand associated with the confidence people can achieve by knowing they can protect themselves, their loved ones and those around them. We believe we have a significant opportunity to leverage the Byrna brand to expand our product line, broaden our user base and generate increasing sales from new and existing customers.

A number of events during the year ended November 30, 2021 impacted our results of operations. These included the exercise of all remaining outstanding warrants from our 2018 and 2019 private placements of convertible debt, the conversion of all outstanding Preferred Series A Stock for common stock, the acquisition of certain assets of the Mission Less Lethal brand from Kore Outdoor, the acquisition of Ballistipax®, our listing on the Nasdaq Capital Market and subsequent decision to delist from the Canadian Securities Exchange, the completion of a public offering of 2,875,000 shares of common stock, the introduction of a number of new products, new marketing endeavors, expanded awareness of our products and expanded sales volume, expansion of our brick and mortar outlets, and the onboarding of new talent at the Company’s highest management level. The impact of these events and associated expenses are highlighted below.

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 per year by 2023 (Statistics MRC. Non-Lethal Weapons – Global Market Outlook (2017-2023)). We plan to respond to this demand for less-lethal products through the serial production and distribution of the Byrna SD and expansion of the Byrna product line.

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RESULTS OF OPERATIONS

Results for the fiscal year ended November 30, 2021 demonstrate a continuing trend of rapid sales growth due to increasing demand for our Byrna SD personal security device and to growth of the production capacity and administrative and control structures necessary to supply that demand. Revenues of $42.2 million are significantly higher than in any past year. Most of the growth in revenue continues to be in high margin direct sales through our website. The increasing excess of revenue over fixed production costs drove improvement in our gross margin, which was 54.3% of net revenue for fiscal year 2021.

The COVID-19 pandemic continues to negatively affect efficiency in our production facilities and in some of our global supply lines. While the situation improved during the second half of the fiscal year in our U.S. manufacturing and corporate office facilities where there was no disruption of production or distribution and employees were not required to work remotely, increases in global shipping costs negatively impacted our gross margin, particularly in the fourth quarter.

Higher sales volumes, our efforts to increase brand awareness and accessibility, and introduction of new products and accessories, drove up certain variable operating expenses such as the cost of shipping product to customers and credit card sale transactions fees. Meanwhile the structural growth required to manage a larger company with higher sales volumes has required an increase in structural operating expenses such as payroll, insurance and marketing expenses. We also incur expenses associated with operating as a public company, including expenses related to compliance with the rules and regulations of the SEC and Nasdaq, insurance expenses, audit expenses, investor relations activities, Sarbanes-Oxley compliance expenses and other administrative expenses and professional services.

Year ended November 30, 2021, as compared to year ended November 30, 2020:

The following table summarizes the results of our operations for the years ended November 30, 2021 and 2020:

Revenue

Revenues were $42.2 million for the year ended November 30, 2021, a significant increase compared to the prior year period revenues of $16.6 million. This increase was primarily due to a growing market awareness of the Byrna HD product and its successor, the Byrna SD, and the introduction of new launcher products as well as new accessory and ammunition products. Revenue increased across all sales channels. E-commerce direct-to-customer sales in fiscal year 2021 were $32.6 million compared to $13.6 million in the prior fiscal year. Toward the end of the third quarter of fiscal year 2021, the Company began selling on the Amazon platform, resulting in revenues through that channel of $0.9 million for fiscal year 2021 compared to $0 in fiscal year 2020. Revenue from sales to other U.S. domestic customers, including dealers, distributors, private security and law enforcement, was $6.0 million and international sales revenue was $3.5 million for the year ended November 30, 2021, compared to $1.9 million and $1.1 million, respectively, in the prior fiscal year.

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Cost of Goods Sold

Cost of goods sold was $19.3 million in the fiscal year ended November 30, 2021 compared to $9.1 million in the fiscal year ended November 30, 2020. This $10.2 million increase is primarily due to the increase in sales volume.

Gross 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 profit was $22.9 million for the fiscal year ended November 30, 2021, a gross profit margin of 54.3%. Gross profit in the prior fiscal year ended November 30, 2020 was $7.5 million with a gross profit margin of 45.3%. The improvement in gross margin profitability is primarily due to increased production efficiency and the improved ratio of sales volume to fixed overhead costs. Introduction of new, higher margin products also contributed to the improvement in gross profit margin.

Operating Expenses / Loss from Operations

Operating expenses were $26.2 million in the fiscal year ended November 30, 2021, as compared to operating expenses in the prior fiscal year of $11.8 million. This increase is primarily due to the growth of the Company during fiscal year 2021. Growth in sales volumes resulted in higher variable expenses such as freight out, which increased from $0.9 million for the fiscal year ended November 30, 2020 to $1.8 million for the fiscal year ended November 30, 2021 and bank fees which are primarily transaction fees on customers' credit card orders and which grew from $0.5 million for the fiscal year ended November 30, 2020 to $1.0 million for the fiscal year ended November 30, 2021.

During fiscal year 2021, management made the strategic decision to support continued revenue growth through increased marketing expenditure which totaled $2.9 million for fiscal year 2021 as compared to $1.0 million in fiscal year 2020.

The structural growth required to manage a larger business with higher sales volumes drove up structural costs. Payroll related costs were $10.6 million, including $0.4 million of severance expense, and stock compensation costs were $3.2 million, including $0.9 million of severance expense, for the year ended November 30, 2021, compared to $5.3 million of payroll related costs and $1.3 million of stock compensation costs for the year ended November 30, 2020, in which there was no serverance expense. Insurance expense increased from $0.2 million in the fiscal year ended November 30, 2020 to $1.3 million for the fiscal year ended November 30, 2021, the cost increase being driven primarily by requirements for increased coverage and higher premium costs for directors and officers and general product liability policies. Attorneys' fees together with various regulatory and filing fees associated with being a publicly traded company increased by $1.1 million from $0.6 million in fiscal year 2020 to $1.7 million in fiscal year 2021 while other professional fees, including accounting, auditing, and general consulting fees increased by $0.3 million from $0.8 million in fiscal year 2020 to $1.1 million in fiscal year 2021. The cost of office facilities and office expenses increased from $0.8 million in fiscal year 2020 to $1.3 million in fiscal year 2021.

The increase in operating expenses resulted in a loss from operations of $3.3 million in the fiscal year ended November 30, 2021 as compared to a loss from operations of $4.3 million in the fiscal year ended November 30, 2020.

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Accretion of Debt Discounts

Accretion of debt discounts decreased by approximately $0.8 million in the fiscal year ended November 30, 2021 to $0 from $0.8 million in the fiscal year ended November 30, 2020. The 2020 charge resulted from the April 8, 2020 exchange of an aggregate of approximately $6.95 million outstanding convertible notes payable, representing principal and accrued interest through April 7, 2020, for 1,391 shares of Series A Convertible Preferred Stock. We no longer have any outstanding convertible notes payable. See Note 14, “Convertible Notes Payable,” in the Notes to Consolidated Financial Statements included in Item 8 of this Report for further discussion.

Interest Expense

Interest expense for the fiscal year ended November 30, 2021 was $0.01 million. This represents expense and amortization of debt issuance cost for the asset-based line of credit, net of interest income on cash balances. Interest expense for the year ended November 30, 2020 was $0.2 million and was related to the interest accrued on convertible notes payable. We no longer have any outstanding convertible notes payable.

Loss on Extinguishment of Debt

Loss on extinguishment of debt was $6.0 million for the year ended November 30, 2020 and relates to the April 8, 2020 exchange of convertible notes payable for preferred stock. See Note 13, “Convertible Notes Payable” in the Notes to Consolidated Financial Statements included in Item 8 of this Report for further discussion.

Forgiveness of Paycheck Protection Program Loan

Income on extinguishment of debt was $0.2 million for the year ended November 30, 2021 and relates to the forgiveness of the $0.2 million of funding under the Paycheck Protection Program (“PPP”).

Warrant Inducement Expense

Warrant inducement expense was $0 million and $0.8 during the fiscal years ended November 30, 2021 and 2020, respectively, and relates to the difference in fair value of warrants exercised at the reduced price of $0.16 per warrant as compared to the $0.25 contractual exercise price. See Note 14, “Stockholders’ Equity” in the Notes to Consolidated Financial Statements included in Item 8 of this Report for further discussion.

Other Expense

Other expenses in the year ended November 30, 2021 includes a loss on disposal of fixed assets of $0.07 million, and other financing costs of $0.01 million. These costs were all $0 in the year ended November 30, 2020.

Income Tax (Benefit) Provision

Our effective income tax rate was 4.60% and (2.39)% for the fiscal years ended November 30, 2021 and 2020, respectively. Our income tax benefit was $0.2 million for the fiscal year ended November 30, 2021. Our income tax provision was $0.3 million for the fiscal year ended November 30, 2020. Our tax rate differs from the statutory rate of 21.0% due to the foreign tax rate differential as a result of Byrna South Africa, effects of permanent non-deductible expenses, the recording of a valuation allowance against the deferred tax assets generated in the past period, and other effects.

We are subject to income tax in the U.S., as well as various state and international jurisdictions. The federal and state tax authorities can generally reduce a net operating loss (but not create taxable income) for a period outside the statute of limitations in order to determine the correct amount of net operating loss which may be allowed as a deduction against income for a period within the statute of limitations.

Non-GAAP Financial Measures

In addition to providing financial measurements based on generally accepted accounting principles in the United States (GAAP), we provide the following additional financial metrics that are not prepared in accordance with GAAP (non-GAAP): adjusted EBITDA, non-GAAP net loss, and non-GAAP net loss per share. Management uses these non-GAAP financial measures, in addition to GAAP financial measures, to understand and compare operating results across accounting periods, for financial and operational decision making, for planning and forecasting purposes and to evaluate our financial performance. We believe that these non-GAAP financial measures help us to identify underlying trends in our business that could otherwise be masked by the effect of certain expenses that we exclude in the calculations of the non-GAAP financial measures.

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Accordingly, we believe that these non-GAAP financial measures reflect our ongoing business in a manner that allows for meaningful comparisons and analysis of trends in the business and provides useful information to investors and others in understanding and evaluating our operating results, enhancing the overall understanding of our past performance and future prospects.

These non-GAAP financial measures do not replace the presentation of our GAAP financial results and should only be used as a supplement to, not as a substitute for, our financial results presented in accordance with GAAP. There are limitations in the use of non-GAAP measures, because they do not include all the expenses that must be included under GAAP and because they involve the exercise of judgment concerning exclusions of items from the comparable non-GAAP financial measure. In addition, other companies may use other non-GAAP measures to evaluate their performance, or may calculate non-GAAP measures differently, all of which could reduce the usefulness of our non-GAAP financial measures as tools for comparison.

Adjusted EBITDA

Adjusted EBITDA is defined as comprehensive (loss) income as reported in our consolidated statements of operations and comprehensive (loss) income excluding the impact of (i) depreciation and amortization; (ii) income tax provision (benefit); (iii) interest (income) expense; (iv) stock-based compensation expense; ; (v) severance expense; (vi) accretion of debt discounts; (vii) loss on extinguishment of debt; (viii) warrant inducement expense; (ix) other income (forgiveness of PPP loan); and (x) other financing costs. Our Adjusted EBITDA measure eliminates potential differences in performance caused by variations in capital structures (affecting finance costs), tax positions, the cost and age of tangible assets (affecting relative depreciation expense) and the extent to which intangible assets are identifiable (affecting relative amortization expense). The adjustment for other income (forgiveness of PPP loan) was not included in our Adjusted EBITDA metric for the year ended November 30, 2020 because it was not applicable to such period. We also exclude certain one-time and non-cash costs. Reconciliation of Adjusted EBITDA to comprehensive (loss) income the most directly comparable GAAP measure, is as follows (in thousands):

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Non-GAAP net loss and non-GAAP comprehensive loss per share

Non-GAAP comprehensive (loss) income is defined as comprehensive (loss) income as reported in our consolidated statements of operations and comprehensive (loss) income excluding the impact of (i) stock-based compensation expense; (ii) severance expense (iii) accretion of debt discounts; (iv) loss on extinguishment of debt; and (v) warrant inducement expense. (vi) other income (forgiveness of PPP loan); and (vii) other financing costs. Our non-GAAP net income (loss) measure eliminates potential differences in performance caused by certain non-cash and one-time costs. We also provide non-GAAP net income (loss) per share by dividing non-GAAP net income (loss) by the average basic or diluted shares outstanding for the period. Reconciliation of Non-GAAP comprehensive (loss) income to comprehensive (loss) income, the most directly comparable GAAP measure, is as follows (in thousands):

LIQUIDITY AND CAPITAL RESOURCES

Cash and cash equivalents and restricted cash as of November 30, 2021 was approximately $56.4 million, an increase of approximately $46.7 million from the balance as of November 30, 2020 of $9.7 million. Approximately $0.1 million of the cash on hand on November 30, 2021 was restricted in the form of a short term letter of credit security deposit on a leased office space. Approximately $6.4 million of the cash on hand as of November 30, 2020 was restricted due to holds placed on its use by the Company’s merchant services vendor pending fulfillment of backorders prepaid by credit cards. These funds were released during fiscal year 2021 as the orders were fulfilled.

Cash used in operating activities was $4.4 million for the fiscal year ended November 30, 2021, compared to $2.5 million cash provided by operating activities for the fiscal year ended November 30, 2020. The reduction was primarily due to increases in net working capital balances, net of acquisitions, of $4.9 million, driven by the growth of the Company, during the year ended November 30, 2020. In comparison, net working capital balances decreased by $4.7 million in the fiscal year ended November 30, 2020.

During the fiscal year ended November 30, 2021, $5.9 million was used for investing activities, including $0.1 million for the purchase of patent rights, $4.0 million paid for acquisitions and $1.7 million to purchase property and equipment. In comparison, $2.0 million was used for investing activities during the fiscal year ended November 30, 2020, including $0.1 million for the purchase of patent rights, $0.5 million paid for an acquisition and $1.4 million to purchase property and equipment.

Cash flows from financing activities provided $57.2 million during the fiscal year ended November 30, 2021, including $55.9 million from the sale of common stock net of underwriting discounts and offering costs and $1.4 million in proceeds from the exercise of warrants and stock options. In comparison, financing activities provided $7.8 million during the fiscal year ended November 30, 2021, including $7.2 million in proceeds from the exercise of warrants and stock options, $0.5 million in proceeds from Roboro sellers of common stock and $0.2 million proceeds from a Paycheck Protection loan less $0.1 million repayment of notes payable.

In addition to cash, the Company has an available $5.0 million revolving line of credit and an available $1.5 million equipment financing line of credit with a bank. As of November 30, 2021, there was no outstanding balance on the revolving line of credit and the Company had not drawn on the nonrevolving equipment line of credit. See Note 12, "Lines of Credit", in the Notes to Consolidated Financial Statements included in Item 8 of this Report for further discussion.

MATERIAL CASH REQUIREMENTS FROM CONTRACTUAL OBLIGATIONS

Leases

As of November 30, 2021, we reported current and long-term operating lease liabilities of $0.5 million and $0.6 million, respectively. These balances represent our contractual obligation to make future payments on our leases, discounted to reflect our cost of borrowing. The majority of these leases are for real estate. In the event that we vacate a location, we may be obliged to continue making lease payments. Where possible, we mitigate this risk by including clauses allowing for the termination of lease agreements if the contract the location covers is terminated by our customer. See Note 18, “Leases”, in the Notes to Consolidated Financial Statements included in Item 8 of this Report for further discussion

We believe that existing cash and cash expected to be provided by future operating activities, are adequate to satisfy our working capital, capital expenditure requirements and other contractual obligations for at least the next 18 months.

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OFF-BALANCE SHEET ARRANGEMENTS

The Company had no off-balance sheet arrangements as of November 30, 2021 and 2020.

RECENT ACCOUNTING PRONOUNCEMENTS

See Note 4, “Summary of Significant Accounting Policies,” in the Notes to Consolidated Financial Statements included in Item 8 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 4, “Summary of Significant Accounting Policies,” in the Notes to Consolidated Financial Statements included in Item 8 of this report. We believe that the following are the more critical judgmental areas in the application of our accounting policies that currently affect our financial position and results of operations:

Revenue Recognition

Product Sales

The Company generates revenue through the wholesale distribution of its products and accessories to dealers/distributors, large end-users such as security companies and law enforcement agencies, and through an e-commerce portal to consumers. Revenue is recognized upon transfer of control of goods to the customer, which generally occurs when title to goods is passed and risk of loss transfers to the customer. Depending on the contract terms, transfer of control is upon shipment of goods to or upon the customer’s pick-up of the goods. Payment terms to customers other than e-commerce customers are generally 30-60 days for established customers, whereas new wholesale and large end-user customers have prepaid terms for their first order. The amount of revenue recognized is net of returns and discounts that the Company offers to its customers. Products purchased include a standard warranty that cannot be purchased separately. This allows customers to return defective products for repair or replacement within one year of sale. The Company also sells an extended warranty for the same terms over three years. The extended 3-year warranty can be purchased separately from the product and therefore, must be classified as a service warranty. Since a warranty for the first year after sale is included and non-separable from all launcher purchases, the Company considers this extended warranty to represent a service obligation during the second and third years after sale. Therefore, the Company accumulates billings of these transactions on the balance sheet as deferred revenue, to be recognized on a straight-line basis during the second and third year after sale. The Company recognizes an estimated reserve based on its analysis of historical experience, and an evaluation of current market conditions.

The Company also has a 60-day money back guarantee, which allows for a full refund of the purchase price, excluding shipping charges, within 60 days from the date of delivery. The right of return creates a variable component to the transaction price and needs to be considered for any possible constraints. The Company estimates returns using the expected value method, as there will likely be a range of potential return amounts. The Company’s returns under the 60-day money back guarantee for the year ended November 30, 2021 were $0.2 million. Returns under the 60-day money back guarantee during the year ended November 30, 2020 were immaterial.

The Company accounts for shipping and handling activities related to contracts with customers as costs to fulfill the promise to transfer the associated products. Shipping and handling costs associated with the distribution of finished products to customers, are recorded in operating expenses in the accompanying Consolidated Statements of Operations and Comprehensive Loss and are recognized when the product is shipped to the customer.

Included as cost of goods sold are costs associated with the production and procurement of products, such as labor and overhead, inbound freight costs, manufacturing depreciation, purchasing and receiving costs, and inspection costs.

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Income Taxes

The Company accounts for income taxes under the asset and liability method, which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the financial statements. Under this method, the Company determines deferred tax assets and liabilities on the basis of the differences between the financial statement and tax bases of assets and liabilities by using enacted tax rates in effect for the year in which the differences are expected to reverse. The effect of a change in tax rates on deferred tax assets and liabilities is recognized in income in the period that includes the enactment date.

Deferred tax assets are recognized to the extent the Company believes that these assets are more likely than not to be realized. In making such a determination, the Company considers all available positive and negative evidence, including future reversals of existing taxable temporary differences, projected future taxable income, tax-planning strategies, and results of recent operations. If the Company determines that it would be able to realize its deferred tax assets in the future in excess of their net recorded amount, it would make an adjustment to the deferred tax asset valuation allowance, which would reduce the provision for income taxes.

The Company records uncertain tax positions in accordance with Accounting Standards Codification (“ASC”) 740, Income Taxes, on the basis of a two-step process in which (1) it determines whether it is more likely than not that the tax positions will be sustained on the basis of the technical merits of the position and (2) for those tax positions that meet the more-likely-than-not recognition threshold, the Company recognizes the largest amount of tax benefit that is more than 50 percent likely to be realized upon ultimate settlement with the related tax authority. The Company records uncertain tax positions as liabilities and adjusts these liabilities when its judgment changes as a result of the evaluation of new information not previously available. Because of the complexity of some of these uncertainties, the ultimate resolution may result in a payment that is materially different from the Company’s current estimate of the unrecognized tax benefit liabilities. These differences will be reflected as increases or decreases to income tax expense in the period in which new information is available. As of November 30, 2021 and 2020, the Company has not recorded any uncertain tax positions in our financial statements.

The Company recognizes interest and penalties related to unrecognized income taxes on the income tax expense line in the accompanying Consolidated Statement of Operations and Comprehensive Loss. As of November 30, 2021 and 2020, no accrued interest or penalties related to unrecognized income taxes are included in the Consolidated Balance Sheets.

The Company files tax returns as prescribed by the tax laws of the jurisdictions in which it operates. In the normal course of business, the Company is subject to examination by federal and state jurisdictions, where applicable. There are currently no pending tax examinations. The Company’s tax years are still open under statute from November 30, 2018, to the present. The resolution of tax matters is not expected to have a material effect on the Company’s consolidated financial statements.

On March 27, 2020, former President Trump signed into law the $2 trillion bipartisan Coronavirus Aid Relief and Economic Security (“CARES”) Act. The CARES Act includes a variety of economic and tax relief measures intended to stimulate the economy, including loans for small businesses, payroll tax credits/deferrals, and corporate income tax relief. Due to the Company’s history of net operating losses and full valuation allowance, the CARES Act did not have a significant effect to the income tax provision, as the corporate income tax relief was directed towards cash taxpayers.

Business Combination

Assets and liabilities acquired in a business combinations are accounted for at fair value. The Company records the tangible assets acquired, liabilities assumed and intangible assets acquired based on their estimated fair values at the acquisition dates. The excess, if any, of the fair value of purchase consideration over the fair values of these identifiable assets and liabilities is recorded as goodwill. If the fair value of the assets and liabilities acquired exceed the fair value of the purchase consideration, negative goodwill is recognized in the statement of operations. Such valuations require management to make significant estimates and assumptions, especially with respect to intangible assets. Significant estimates in valuing certain intangible assets include, but are not limited to, future expected cash flows from the utilization of trade names from a market participant perspective, useful lives and discount rates. Management’s estimates of fair value are based upon assumptions believed to be reasonable, but which are inherently uncertain and unpredictable and, as a result, actual results may differ from estimates. During the measurement period, which is not to exceed one year from the acquisition date, the Company may record adjustments to the assets acquired and liabilities assumed, with the corresponding offset to goodwill. Upon the conclusion of the measurement period, any subsequent adjustments are recorded to earnings.

Goodwill resulting from a business combination is not amortized but is reviewed for impairment annually or more frequently when events or changes in circumstances indicate that the carrying value may not be recoverable. The Company has the option to perform a qualitative assessment over goodwill when events occur or circumstances change that would, more likely than not, reduce the fair value of a reporting unit. If the Company concludes, based on the qualitative assessment, that the carrying value of a reporting unit would more likely than not exceed its fair value, a quantitative assessment is performed which is based upon a comparison of the reporting unit’s fair value to its carrying value. The fair values used in this evaluation are estimated by the Company based upon future discounted cash flow projections for the reporting unit. An impairment charge is recognized for any amount by which the carrying amount of goodwill exceeds its fair value.

The Company performs its review for impairment during the third quarter of each year. The Company assesses goodwill for impairment at the reporting unit level, which is defined as an operating segment or one level below an operating segment, referred to as a component. The Company’s operations constitute a single reporting unit and goodwill is assessed for impairment at the Company as a whole.  At August 31, 2021, the Company determined that there was no impairment of goodwill.

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Asset Acquisition

Acquisitions of the assets of a business are accounted for at cost based on their allocated fair value. The Company allocates the fair value of purchase consideration to the tangible assets acquired, liabilities assumed and intangible assets acquired based on their estimated fair values at the acquisition dates. Such valuations require management to make significant estimates and assumptions, especially with respect to intangible assets. Significant estimates in valuing certain intangible assets include, but are not limited to, future expected cash flows from the utilization of trade names from a market participant perspective, useful lives and discount rates. Management’s estimates of fair value are based upon assumptions believed to be reasonable, but which are inherently uncertain and unpredictable and, as a result, actual results may differ from estimates. Goodwill is not recognized in accounting for an asset acquisition. Acquisition related expenses are capitalized as part of the cost and allocated with the purchase consideration.

Stock-Based Compensation

The Company accounts for all stock-based payment awards granted to employees and non-employees as stock-based compensation expense at their grant date fair value. The Company’s stock-based payments include stock options, restricted stock units, and incentive warrants. The measurement date for employee awards is the date of grant, and stock-based compensation costs are recognized as expense over the employees’ requisite service period, on a straight-line basis. The measurement date for non-employee awards is the date of grant and stock -based compensation costs for non-employees are recognized as expense over the vesting period on a straight-line basis. Stock-based compensation is classified in the accompanying Consolidated Statements of Operations and Comprehensive Loss based on the function to which the related services are provided, which is included in operating expenses in the accompanying Consolidated Statements of Operations and Comprehensive Loss. Forfeitures are accounted for as they occur.

To determine the grant-date fair value of our stock-based payment awards, we use a Black-Scholes, Binomial Lattice model or the quoted stock price on the date of grant, unless the awards are subject to market conditions, in which case we use the Monte Carlo simulation model. Due to our limited history, the expected term of the Company’s stock options granted to employees has been determined utilizing the method as prescribed by the SEC’s Staff Accounting Bulletin, Topic 14. The expected term for stock options granted to non-employees is equal to the contractual term of the options. The risk-free interest rate is determined by reference to the US Treasury yield curve in effect at the time of grant of the award for time periods approximately equal to the expected term of the award. Expected dividend yield is based on the fact that the Company has never paid cash dividends on common stock and does not expect to pay any cash dividends in the foreseeable future.

Impairment of Long-lived Assets

Long-lived assets to be held and used are analyzed for impairment whenever events or changes in circumstances indicate that the related carrying amounts may not be recoverable. The Company evaluates at each balance sheet date whether events and circumstances have occurred that indicate possible impairment. If there are indications of impairment, the Company uses future undiscounted cash flows of the related asset or asset group over the remaining life in measuring whether the assets are recoverable. In the event such cash flows are not expected to be sufficient to recover the recorded asset values, the assets are written down to their estimated fair value.

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