| SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES [Text Block] |
| 3. |
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES |
| a) |
Use of Estimates |
| |
|
| |
The preparation of the accompanying consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions about future events. These estimates and the underlying assumptions affect the amounts of assets and liabilities reported and reported amount of revenues and expenses, and disclosure of contingent assets and liabilities as of the date of the consolidated financial statements. Significant estimates include accruals, valuation allowance for deferred tax assets, inventory, determination of the Company's ability to continue as a going concern, estimates in the fair value of derivative liabilities, estimates for calculations of stock-based compensation and warrants issued, estimates of the useful life of (1) property and equipment and (2) patent rights, and accounting for conversion features on convertible debt transactions. These estimates are based on management's best estimates and judgment. Management will adjust such estimates and assumptions when facts and circumstances dictate. As future events and their effects cannot be determined with certainty, actual results could differ significantly from these estimates. |
| b) |
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 consolidated 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 recognizes interest and penalties related to unrecognized tax benefits on the income tax expense line in the accompanying consolidated statement of operations. As of November 30, 2019, no accrued interest or penalties related to unrecognized tax benefits are included in the consolidated balance sheet. See Note 11.
|
| c) |
Revenue Recognition |
| |
|
| |
Revenue is recognized upon the transfer of control of products to the Company's customers in an amount that reflects the consideration to which it expects to be entitled in exchange for those products or services. Revenue is generally recognized at the time title to the goods is passed and the risk of loss is transferred to the customer. Depending on the contract terms, transfer of control is upon shipment of goods ("free on truck") to or upon the customer's pick-up of the goods. The amount of revenue is recognized net of actual returns and discounts offered to its customers. The Company's returns to date through November 30, 2019 have been immaterial and the Company will recognize an estimated reserve, when material, based on its analysis of historical experience and an evaluation of current market conditions.
Sales to customers are generally based on net 30-60-day credit terms, unless otherwise stated. Online sales are processed by credit cards. Cash receipts recorded in deferred revenue are recorded as revenues when the Company satisfies its performance obligation.
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 selling, general and administrative ("SG&A") expenses and are recognized when the product is shipped to the customer. Shipping and handling costs included in SG&A were $21,487 and $13,936 during the years ended November 30, 2019 and 2018, respectively. Costs to obtain a contract consist of commissions paid to employees. As product revenue is recognized at a point in time, the practical expedient stated in ASC 340-40-25-4, Contracts with Customers, is met, and the Company may expense commissions as incurred.
The Company's products come with a standard assurance type warranty which cannot be purchased separately and accounted for pursuant to ASC 460, Guarantees. As historical warranty claims have been immaterial, the Company has recognized expenses in cost of goods sold as incurred. The Company will recognize an estimated reserve, when material, based on its analysis of historical experience.
|
| d) |
Loss Per Share |
| |
|
| |
Basic loss per share is computed by dividing net loss by the weighted-average number of common shares outstanding for the year. Diluted loss per share is computed by dividing net loss by the weighted-average number of common shares outstanding plus common stock equivalents (if dilutive) related to stock options and warrants for each year and the conversion feature of convertible notes payable. There were no common stock equivalent shares outstanding during the years ended November 30, 2019 and 2018 that have been included in dilutive loss per share calculation as the effects would have been anti-dilutive. At November 30, 2019, there are 2,911,667 options and 45,787,219 warrants outstanding, which are convertible into equal number of common stock shares of the Company. At November 30, 2018, there were 6,376,667 options and 26,041,160 warrants outstanding, which were convertible into equal number of common stock shares of the Company. |
| e) |
Stock-Based Compensation |
| |
|
| |
The Company accounts for all stock-based payment awards granted to employees and non-employees as stock-based compensation expense at fair value. The Company's stock-based payments include stock options and grants of 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 generally the date the services were completed, resulting in financial reporting period adjustments to stock-based compensation during the vesting terms for changes in the fair value of the awards. 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 statements of operations based on the function to which the related services are provided, which is in SG&A expenses. The Company recognizes stock-based compensation expense over the contractual term of the options. Forfeitures are accounted for as they occur. |
| |
|
| |
The fair value of each stock option grant is estimated on the date of grant by using either the Black-Scholes or Binomial Lattice option pricing models. The Company estimates its expected stock volatility based on the historical volatility of its stock. 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. See Note 7. |
| f) |
Foreign Currency |
| |
|
| |
The Company maintains its books and records in US dollars which is its functional and reporting currency. The Company's two operating subsidiaries are foreign private companies. SDI Canada and Byrna South Africa maintain their books and records in their functional currency, Canadian dollars and South African rand, respectively. Both subsidiaries' financial statements are converted to US dollars for consolidation purposes. The translation method used is the current rate method. Under the current rate method, all assets and liabilities are translated at the current rate, stockholders' equity accounts are translated at historical rates, and revenues and expenses are translated at average rate for the year. The resulting translation adjustment has been included in accumulated other comprehensive loss. Gains or losses resulting from transactions in currencies other than the functional currency are reflected in the consolidated statement of operations and comprehensive loss for the related reporting periods. |
| g) |
Comprehensive Loss |
| |
|
| |
Comprehensive loss includes all changes in equity (deficit) during a period from non-owner sources. Items included in comprehensive loss, which are excluded from net loss, include foreign currency translation adjustments relating to its Canadian and South African subsidiaries. |
| |
|
| h) |
Financial Instruments |
| |
|
| |
The carrying amount of accounts receivable and accounts payable and accrued liabilities, approximated their fair value because of the relatively short maturity of these instruments. The Company determines fair value based on its accounting policy for fair value measurement (i.e. exit price that would be recovered for an asset or paid to transfer a liability in an orderly transaction between market participants on the measurement date). The Company has not used derivative financial instruments such as forwards to hedge foreign currency exposures. Convertible debt issued is initially recognized at fair value. Derivative liabilities are measured at fair value at each reporting period and convertible debt is subsequently measured at amortized cost. |
| i) |
Fair Value Measurement |
| |
|
| |
The Company follows ASC 820-10, Fair Value Measurements and Disclosures, which among other things, defines fair value, establishes a consistent framework for measuring fair value and expands disclosure for each major asset and liability category measured at fair value on either a recurring or nonrecurring basis. Fair value is an exit price, representing the amount that would be received to sell an asset or paid to settle a liability in an orderly transaction between market participants. As such, fair value is a market-based measurement that should be determined based on assumptions that market participants would use in pricing an asset or liability. As a basis for considering such assumptions, a three-tier fair value hierarchy has been established, which prioritizes the inputs used in measuring fair value as follows: |
• Level 1—Inputs are unadjusted, quoted prices in active markets for identical assets or liabilities at the measurement date.
• Level 2—Inputs (other than quoted prices included in Level 1) are either directly or indirectly observable for the asset or liability through correlation with market data at the measurement date and for the duration of the instrument's anticipated life.
• Level 3—Inputs reflect management's best estimate of what market participants would use in pricing the asset or liability at the measurement date. Consideration is given to the risk inherent in the valuation technique and the risk inherent in the inputs to the model.
The carrying values of cash, restricted cash, accounts receivable, accounts payable and accrued liabilities approximate their fair values because of the short-term nature of these instruments. The Company's derivative liability which had a balance of $Nil and $957,301 at November 30, 2019 and 2018, respectively, was classified within Level 3 of the fair value hierarchy as it was valued using pricing models that incorporate management assumptions that cannot be corroborated with observable market data. See Note 15.
| j) |
Convertible Debt Instruments |
| |
|
| |
When the Company has determined that the embedded conversion options should not be bifurcated from their host instruments the Company accounts for convertible debt instruments in accordance with ASC 470-20, Debt with Conversion and Other Options. The Company records, when necessary, discounts to convertible notes for the intrinsic value of conversion options embedded in debt instruments based upon the differences between the fair value of the underlying common stock at the commitment date of the note transaction and the effective conversion price embedded in the note. The Company amortizes any debt discount over the term of the notes, using the straight-line method, which approximates the effective interest method. The Company records, when necessary, any induced conversion expense, at the time of conversion for the difference between the reduced conversion price per share and the original conversion price per share. |
| k) |
Intellectual Property |
| |
|
| |
The perpetual, irrevocable, exclusive and non-exclusive license to use technology with respect to the cost of patent rights acquired in 2018 is capitalized and amortized over the estimated useful life, currently estimated to be 15 years. |
| l) |
Property and Equipment |
| |
|
| |
Property and equipment are recorded at cost less accumulated depreciation. Depreciation is provided commencing in the month following acquisition using the following annual rate and method: |
| |
Computer equipment and software |
30% declining balance method |
| |
Furniture and fixtures |
30% declining balance method |
| |
Leasehold improvements |
Straight line over period of lease |
| |
Molds |
20% straight line over 5 years |
| m) |
Restricted Cash |
| |
|
| |
Cash that is subject to legal restrictions or unavailable for use in operations is classified as restricted cash. |
| n) |
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. There were no impairments of long-lived assets during the years ended November 30, 2019 and 2018, respectively. |
| o) |
Inventories |
| |
|
| |
Inventories are principally comprised of raw materials and finished goods, and are valued at the lower of cost or net realizable value with cost being determined on the first-in, first-out basis. The Company reviews inventories for slow-moving items to determine adjustments that it estimates will be needed to record inventory at lower of cost or net realizable value. Inventory costs include subcontracted manufacturing costs. Inbound freight costs, inclusive of freight between distribution facilities, are included in costs of goods sold. |
| p) |
Advertising |
| |
|
| |
Advertising related costs are expensed as incurred and are included in SG&A expenses. Advertising expenses were $366,786 and $262,248 during the years ended November 30, 2019 and 2018, respectively. Prepaid advertising expenses recorded in prepaid expenses and other current assets were $Nil and $750,000 at November 30, 2019 and 2018, respectively. |
| q) |
Research and development |
| |
|
| |
Research and development (“R&D”) costs are expensed as incurred and are included in SG&A expenses. R&D costs were $158,105 and $164,162 during the years ended November 30, 2019 and 2018, respectively. |
| r) |
Consolidation |
| |
|
| |
These consolidated financial statements include the accounts of the Company and the entities it controls. Control exists when the Company has the power, directly or indirectly, to govern the financial and operating policies of an entity or arrangement to obtain benefit from its activities. In assessing control, potential voting rights that currently are exercisable are considered. The financial statements of the subsidiary are included in the consolidated financial statements from the date that control commences until the date that control ceases. These consolidated financial statements include the results of the Company and its wholly owned subsidiaries, SDI Canada, and Byrna South Africa.
On March 1, 2018, the Company purchased all the shares of a South African entity Rephit (Pty) Ltd., an inactive company, for $300 (South African rand 4,000) and subsequently changed the name of the subsidiary to Byrna South Africa. The Company acquired Byrna South Africa to facilitate the development of the Byrna® HD and other projects related to the patent portfolio purchased from Andre Buys ("Buys"), the Company's Chief Technology Officer ("CTO").
|
| s) |
Recent Accounting Pronouncements |
| |
|
| |
In May 2017, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2017-09, Compensation - Stock Compensation: Scope of Modification Accounting, which provides guidance about which changes to the terms or conditions of a share-based payment award require an entity to apply modification accounting. An entity will account for the effects of a modification unless the fair value of the modified award is the same as the original award, the vesting conditions of the modified award are the same as the original award and the classification of the modified award as an equity instrument or liability instrument is the same as the original award. This update became effective for the Company on December 1, 2018, including interim periods. The Company adopted and will apply the update prospectively to any award modifications as there were no modifications to share-based payment awards during 2018 and 2019.
In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers ("ASC 606"). Subsequently, the FASB issued several updates to ASC 606. ASC 606 also includes new guidance on costs related to a contract, which is codified in ASC Subtopic 340-40. In applying ASC 606, revenue is recognized when control of promised goods or services transfers to a customer and is recognized in an amount that reflects the consideration which the entity expects to receive in exchange for those goods or services. The major provisions of the new standard include: the determination of enforceable rights and obligations between parties; the identification of performance obligations including those related to material right obligations; the allocation of consideration based upon relative standalone selling price; accounting for variable consideration; the determination of whether performance obligations are satisfied over time or at a point in time; and enhanced disclosure requirements. The Company adopted ASC 606 during the first quarter of 2019 by applying the modified retrospective method to all contracts which resulted in (a) no impact to the financial statements and (b) additional financial statement disclosures. See Note 5 for additional information.
In February 2016, the FASB issued ASU 2016-02, Leases ("ASC 842"). The FASB issued the update to require the recognition of lease assets and liabilities on the balance sheet of lessees. ASU 2016-02 requires adoption using a modified retrospective approach, with the option apply the guidance either at the beginning of the earliest period presented or at the beginning of the period in which it is adopted. The Company adopted ASC 842 in the first quarter of 2020 and is in process of evaluating the impact of this guidance on its financial statements and related disclosures.
In July 2017, the FASB issued ASU 2017-11, Earnings Per Share (Topic: 260), Distinguishing Liabilities from Equity (Topic: 480), Derivatives and Hedges (Topic 815). FASB issued the update to simplify the accounting for certain financial instruments with down round features. The Company adopted ASU 2017-11 in the first quarter of 2020. Currently, the Company does not have financial instruments with down round features but will apply this update prospectively.
In June 2018, the FASB issued ASU 2018-07, Compensation - Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting. FASB issued the update to include share-based payment transaction for acquiring goods or services from nonemployees in Topic 718, Compensation - Stock Compensation. The Company adopted ASU 2018-07 in the first quarter of 2020 prospectively, and the Company does not expect this to have a material impact on its financial statements for share-based payments issued to nonemployees during fiscal 2020.
In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic: 820): Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement. FASB issued the update to modify the disclosure requirements in Topic 820. ASU 2018-07 will be effective for the Company in the first quarter of 2021. Early adoption is permitted. The Company is currently evaluating the impact of this update on its disclosures.
In 2016, the FASB issued ASU 2016-13, Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. The guidance changes the impairment model used to measure credit losses for most financial assets. A new forward-looking expected credit loss model will replace the existing incurred credit loss model and will impact the Company's accounts and other receivables. This is expected to generally result in earlier recognition of allowances for credit losses. ASU 2016-13 will be effective for the Company in the first quarter of 2021. Early adoption is permitted. The Company is currently evaluating the impact of adopting this update on the consolidated financial statements.
In 2019, the FASB issued ASU 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes. The guidance simplifies the accounting for income taxes by primarily addressing the following: recognition of a deferred tax liability after transition to/from the equity method, evaluation when a step-up in the tax basis of goodwill should be related to a business combination or when it should be considered a separate transaction, inclusion of the amount of tax based on income in the income tax provision and any incremental amount as a tax not based on income, and recognition of the effect of an enacted change in tax laws or annual effective tax rates in the period the change was enacted, The guidance is effective for the Company in the first quarter of 2022. Early adoption is permitted. Several of the amendments in the update are required to be adopted using a prospective approach, while other amendments are required to be adopted using a modified-retrospective approach or retrospective approach. The Company is currently evaluating the impact of adopting this update on the consolidated financial statements.
|
|