| INCOME TAXES |
For
the three months ended May 31, 2021 and 2020, the Company recorded an income tax expense of $0.2 million and $0, respectively. For the
six months ended May 31, 2021 and 2020, the Company recorded an income tax expense of $0.2 million and $0, respectively. For the three
months ended May 31, 2021 and 2020, the effective tax rate was 8.2% and 0%, respectively. For the six months ended May 31, 2021 and 2020,
the effective tax rate was 9.4% and 0%, respectively. The Company’s tax rate differs from the statutory rate of 21.0% due to the
effects of state taxes net of federal benefit, 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 prior period, utilization
of Net Operating Loss (“NOL”) and other effects.
The
Company is 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. Additional information regarding the statutes of limitations can be found in Note 23, “Income Taxes,” 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, 2020.
On
March 27, 2020, Congress 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.
|
Loss
before income taxes consists of the following:
| |
|
Year
Ended November 30, |
|
| |
|
2020 |
|
|
2019 |
|
| United
States |
|
$ |
(13,572,909 |
) |
|
$ |
(4,199,856 |
) |
| Foreign |
|
|
1,312,113 |
|
|
|
(209,929 |
) |
| Total |
|
$ |
(12,260,796 |
) |
|
$ |
(4,409,785 |
) |
The
components of the provision for income taxes is as follows:
| |
|
Year
Ended November 30, |
|
| |
|
2020 |
|
|
2019 |
|
| Current
expense (benefit): |
|
|
|
|
|
|
|
|
| Federal |
|
$ |
— |
|
|
$ |
— |
|
| State |
|
|
— |
|
|
|
— |
|
| Foreign |
|
|
292,529 |
|
|
|
— |
|
| Total
current expense (benefit): |
|
|
292,529 |
|
|
|
— |
|
| |
|
|
|
|
|
|
|
|
| Deferred
expense (benefit): |
|
|
|
|
|
|
|
|
| Federal |
|
|
— |
|
|
|
— |
|
| State |
|
|
— |
|
|
|
— |
|
| Foreign |
|
|
— |
|
|
|
— |
|
| Total
deferred expense (benefit) |
|
|
— |
|
|
|
— |
|
| |
|
|
|
|
|
|
|
|
| Total
income tax expense (benefit) |
|
$ |
292,529 |
|
|
$ |
— |
|
A
reconciliation of the Company’s statutory income tax rate to the Company’s effective income tax rate is as follows:
| |
|
Year
Ended November 30, |
|
| |
|
2020 |
|
|
2019 |
|
| Income
at US statutory rate |
|
|
21.00 |
% |
|
|
21.00. |
% |
| State taxes, net
of Federal benefit |
|
|
6.58 |
% |
|
|
9.24. |
% |
| Permanent differences |
|
|
(13.60 |
%) |
|
|
(5.44 |
%) |
| Foreign rate differential |
|
|
(0.75 |
%) |
|
|
0.34. |
% |
| Valuation allowance |
|
|
(12.30 |
%) |
|
|
(24.34 |
%) |
| Other |
|
|
(3.32 |
%) |
|
|
(0.79 |
%) |
| Total |
|
|
(2.39 |
%) |
|
|
0.00 |
% |
The
net deferred income tax asset balance related to the following:
| |
|
November
30, |
|
| |
|
2020 |
|
|
2019 |
|
| Depreciation
and amortization |
|
$ |
(270,488 |
) |
|
$ |
(88,502 |
) |
| Stock compensation |
|
|
334,898 |
|
|
|
96,033 |
|
| Inventory reserve |
|
|
28,533 |
|
|
|
15,611 |
|
| Bad debt reserve |
|
|
3,331 |
|
|
|
— |
|
| Accrued payroll |
|
|
183,044 |
|
|
|
— |
|
| Warranty reserve |
|
|
89,578 |
|
|
|
— |
|
| Net
operating loss (“NOL”) carryforwards |
|
|
5,951,914 |
|
|
|
5,845,058 |
|
| Total deferred tax
assets |
|
|
6,320,808 |
|
|
|
5,868,199 |
|
| Valuation
allowance |
|
|
(6,320,808 |
) |
|
|
(5,868,199 |
) |
| Net
deferred tax assets (liabilities) |
|
$ |
— |
|
|
$ |
— |
|
| |
As of November 30, 2020, the Company had federal and state NOL carryforwards of approximately $24.9 million and $11.4 million, respectively, which begin to expire in 2025 for federal and state purposes. The federal NOL carryforwards include approximately $8.6 million, which do not expire.
|
| |
|
| |
Future realization
of the tax benefits of existing temporary differences and NOL carryforwards ultimately depends on the existence of sufficient
taxable income within the carryforward period. As of November 30, 2020 and 2019, respectively, the Company performed an evaluation
to determine whether a valuation allowance was needed. The Company considered all available evidence, both positive and negative,
which included the results of operations for the current and preceding years. The Company determined that it was not possible
to reasonably quantify future taxable income and determined that it is more likely than not that all of the deferred tax assets
will not be realized. Accordingly, the Company maintained a full valuation allowance as of November 30, 2020 and 2019. At
November 30, 2020 and 2019, the Company recognized valuation allowances of $6.3 million and $5.9 million, respectively, related
to its deferred tax assets created in those respective years. The net increase of $0.4 million in the valuation allowance
reflects the net in increase in gross deferred tax asset between those periods. |
| |
Pursuant to Internal
Revenue Code Section 382, use of NOL carryforwards may be limited if the Company experiences a cumulative change in ownership
of greater than 50% in a moving three-year period. Ownership changes could impact the Company’s ability to utilize the
NOL carryforwards remaining at an ownership change date. The Company has completed a Section 382 study and determined that
there were multiple ownership changes of 50% or more during the period from March 5, 2020 through November 30, 2020. These
ownership changes occurred around March 10, 2007, August 27, 2013, and March 27, 2020. As of the last testing date covered
in the testing period, the cumulative ownership change is 11.06%. The resulting limitation of NOL carryforwards has been considered
in determining the full valuation allowance against the related deferred tax assets as noted above. |
|