We are providing the disclosure below and supplementing
the risk factors described in “Risk Factors” in Item 1A of 2020 10-K with the risk factors set forth below. The information
in this Quarterly Report should be read in conjunction with the risk factors described on our 2020 10-K and the information under “Forward-Looking
Statements” in this Quarterly Report and in our 2020 10-K.
Investing in our common stock involves a high
degree of risk. These risks include, but are not limited to, those described below, each of which may be relevant to an investment decision.
You should carefully consider the risks and uncertainties described below, together with all of the other information contained in this
prospectus, including the section titled “Management’s Discussion and Analysis of Financial Condition and Results of Operations”
and our consolidated financial statements and the related notes, before deciding whether to invest in shares of our common stock. If any
of the following risks or other risks actually occur, our business, financial condition, results of operations, and future prospects could
be materially harmed. In that event, the market price of our common stock could decline, and you could lose part or all of your investment.
The risks and uncertainties described below are not the only risks and uncertainties that we face. Additional risks and uncertainties
not presently known to us or that we currently deem immaterial may also impair our business operations. The risks discussed below also
include forward-looking statements, and our actual results may differ substantially from those discussed in these forward-looking statements.
See “Cautionary Note Regarding Forward-Looking Statements” above.
Risks Related
to Our Business
We have a limited
operating history on which you can evaluate our business.
We have a limited operating
history on which you can evaluate our business. Although our corporate entity has existed since 2005, we have only been manufacturing
and selling the Byrna HD, our largest source of revenue, since April 2019. Moreover, many members of our key senior management team are
relatively new to their positions. Our Chief Financial Officer (“CFO”), Chief Supply Chain Officer, and Chief People Officer
(“CPO”) began their current roles late in the third quarter in 2020, our Chief Marketing and Revenue Officer (“CMO”)
began his role in the first quarter of 2021, and our Chief Governmental Affairs Officer began his role in 2020. As a result, our business
may be subject to many of the problems, expenses, delays, and risks inherent in the rapid growth of a relatively new business and the
integration of key personnel and infrastructure.
We have a history
of operating losses and we cannot guarantee that we will be able to sustain profitability.
We have recorded a net
loss in all reporting periods since our inception through the fiscal quarter ended February 28, 2021. Our net loss for the years ended
November 30, 2020 and 2019 was $12.6 million and $4.4 million, respectively, our accumulated deficit at November 30, 2020 was $50.2 million.
We had a net income for the three months ended May 31, 2021 of $2.0 million compared to a net loss for the three months ended February
28, 2021 of $0.3 million. Our accumulated deficit at February 28, 2021 was $50.5 million and at May 31, 2021 was $48.5 million. There
can be no assurance that we will not experience net losses in the future and there can be no assurance of continued profitability.
We expect to require
additional financing in the future to generate substantial revenue growth. If we do not obtain such additional financing, our business
prospects, financial condition and results of operations could be adversely affected.
There can be no assurance
that such financing will be available at all or on favorable terms. Failure to significantly grow our revenues may result in us seeking
to obtain such additional financing which could result in delay of our development and sale of our products. Subsequent financing may
dilute the ownership interest of our stockholders at the time of the financing and may dilute the value of their stock.
If we are unable
to successfully implement our business plan for the sale of the Byrna HD, our revenue growth could be slower than we expect and our business,
operating results and financial condition could be adversely affected.
There can be no assurance
that our revenues or revenue growth can be sustained. Revenue growth that we have achieved or may achieve may not be indicative of future
operating results. The Byrna HD is a new product and its long-term adoption by the U.S. consumer market, and by potential other markets
including law enforcement, private security, and international markets, remains unknown. Among other things, production delays, including
as a result of the COVID-19 pandemic, excessive costs, performance failures, new legislation or regulation, competition, or negative publicity
could stall or prevent its success in the market and generation of revenue. In addition, we have increased and may increase further our
operating expenses in order to fund increases in our manufacturing, distribution, and sales and marketing efforts and increase our administrative
resources in anticipation of future growth. To the extent that increases in such expenses precede or are not subsequently followed by
increased revenues, our business, operating results and financial condition may be materially adversely affected.
We may not be able to effectively manage
our growth.
As we grow our business, slower growing or reduced
demand for our products, increased competition, a decrease in the growth rate of our overall market, failure to develop and successfully
market new products, or the maturation of our business or market could harm our business. We expect to make significant investments in
research and development and sales and marketing, expand our operations and infrastructure, design and develop or acquire new products,
and enhance our existing products. If our sales do not increase at a sufficient rate to offset these increases in our operating expenses,
our profitability may decline in future periods.
We have expanded our
operations rapidly since our inception. The scope and complexity of our business have increased substantially over the past several years.
We have only a limited history operating our business at its current scale. Key members of our management team do not have substantial
tenure working together. Consequently, if our operations continue to grow at a rapid pace, we may experience difficulties in managing
this growth and building the appropriate processes and controls. Continued growth may increase the strain on our resources, and we could
experience operating difficulties, including difficulties in sourcing, logistics, recruiting, maintaining internal controls, marketing,
designing innovative products, and meeting consumer needs. If we do not adapt to meet these evolving challenges, the strength of our brand
may erode, the quality of our products may suffer, we may not be able to deliver products on a timely basis to our customers, and our
corporate culture may be harmed.
Product liability
lawsuits against us could cause us to incur substantial liabilities and to limit commercialization of any products that we may develop.
We may be subject to
proceedings or claims that may arise in the ordinary course of the business, which could include product and service warranty claims,
which could be substantial. If our products fail to perform as warranted and we fail to quickly resolve product quality or performance
issues in a timely manner, our reputation may be tarnished, potential sales may be lost, and we may be forced to pay damages. The occurrence
of product defects and the inability to correct errors could result in the delay or loss of market acceptance of our products, material
warranty expense, diversion of technological and other resources from our product development efforts, and the loss of credibility with
customers, manufacturer’s representatives, distributors, dealers and end-users, any of which could have a material adverse effect
on our business, operating results and financial conditions.
Our products are used
in activities and situations that involve risk of personal injury. Our products expose us to potential product liability, warranty liability,
and personal injury claims and litigation relating to the use or misuse of our products, including allegations of defects in manufacturing,
defects in design, a failure to warn of dangers inherent in the product or activities associated with the product, negligence, and strict
liability. If successful, any such claims could have a material adverse effect on our business, operating results, and financial condition.
Defects in our products may result in a loss of sales, recall expenses, delay in market acceptance, and damage to our reputation and increased
warranty costs, which could have a material adverse effect on our business, operating results, and financial condition. In addition, our
reputation may be adversely affected by such claims, whether or not successful, including potential negative publicity about our products.
We issued a product safety
notice in February 2021 and, as a result, took a reserve of $195,000, which we believe to have been adequate. If the safety update fails
in the future, new issues arise, or a substantial number of consumers continue to seek exchanges we could also experience damage to our
reputation, business, operations (including production rate) and revenues.
We maintain general liability
insurance that includes product liability coverage in amounts that we believe are reasonable, but there is no assurance that we will be
able to maintain such insurance on acceptable terms, if at all, in the future and product liability claims may exceed the amount of insurance
coverage.
The failure to
attract and retain key personnel could have an adverse effect on our operating results.
Our success depends substantially
on the efforts and abilities of our senior management and key personnel. The competition for qualified management and key personnel is
intense. The loss of services of one or more of our key employees or the inability to hire, train, and retain additional key personnel
could delay the development and sale of our products, disrupt our business, and interfere with our ability to execute our business plan.
In addition, our ability
to maintain our competitive position is dependent to a large degree on the efforts and skills of our senior management team, including
Bryan Ganz, our President, Chief Executive Officer and Chairman of the Board of Directors. The loss of the services of one or more of
our key personnel could materially and adversely affect our operations.
We depend on the
sale of our personal security devices.
Although we do sell certain
other products (such as our 40mm product line) and we expect to introduce new products, including products acquired in connection with
the acquisition of Mission Less Lethal assets in May 2021, our revenue is derived almost exclusively from the sale of the Byrna HD. The
sale of such personal security devices is influenced by a variety of economic, social, and political factors, including without limitation
the level of confidence of consumers in our products and in the security and reliability of online shopping and e-commerce on which we
significantly rely, which may result in volatile sales. Sales of the Byrna HD, including its ammunition and accessories, represented 99%
of our total revenue for the year ended November 30, 2020 and for the six months ended May 31, 2021. There can be no assurances of continued
demand for the Byrna HD, and any change in the factors that impact demand and sales that are likely to materially and adversely affect
our prospects.
Sale of our
personal security devices and kits depends on the continued availability of our ammunition, some of which is dependent on sole
source suppliers.
Our introductory product
is purchased most often as a “kit “including the Byrna HD launcher and samples of our various projectiles. Unavailability
of projectiles could delay shipment of kits and materially and adversely affect our operations. Moreover, our “razor/razor
blade model” which anticipates future orders of ammunition from the owners of our personal security devices could be materially
impacted by the unavailability of projectiles. See Dependence on Sole Suppliers below.
Our business depends on maintaining and
strengthening our brand and generating and maintaining demand for our products, and a reduction in such demand could harm our results
of operations.
The Byrna name and brand image are integral to
the growth of our business, as well as to the implementation of our strategies for expanding our business. Our success depends on the
value and reputation of our brand, which, in turn, depends on factors such as the quality, design, performance, functionality, and durability
of our products, the image of our e-commerce platform and retail presence, our communication activities, including advertising, social
media, and public relations, and our management of the customer experience, including direct interfaces through customer service. Maintaining,
promoting, and positioning our brand are important to expanding our customer base, and will depend largely on the success of our marketing
and merchandising efforts and our ability to provide consistent, high quality customer experiences. We intend to make substantial investments
in these areas in order to maintain and enhance our brand, however such investments may not be successful. Ineffective marketing, negative
publicity, product diversion to unauthorized distribution channels, product or manufacturing defects, counterfeit products, unfair labor
practices, failure to protect the intellectual property rights in our brand, and inability to provide satisfactory customer service experience
as we rapidly expand our business, are some of the potential threats to the strength of our brand, and those and other factors could rapidly
and severely diminish customer confidence in us. Furthermore, these factors could cause our customers to lose the personal connection
they feel with the Byrna brand. We believe that maintaining and enhancing our brand image in our current markets and in new markets where
we have limited brand recognition is important to expanding our customer base. If we are unable to maintain or enhance our brand in current
or new markets, our growth strategy and results of operations could be harmed.
We are dependent on our relationships with
key third-party suppliers for our business.
We rely on certain
third-party suppliers for our business, including sole source suppliers. Sole source suppliers account for approximately 35-40%
of the components in our Byrna HD and 100% of the chemical irritant projectiles we sell as well as certain accessories. Moreover
the supplier of our chemical irritant and inert rounds is in South Africa, an area seriously impacted by the pandemic, and
personnel at their factory, including key personnel, have been affected. Our future operating results depend upon our ability to
obtain timely delivery of a sufficient amount and a reliable quality of all components on commercially reasonable terms. Failure
of a supplier’s business or consolidation within the industry could further limit our ability to purchase key components
at all (in the case of sole source suppliers) or in sufficient quantities and on commercially reasonable terms. Demands of competitors,
including those with larger operations and stronger bargaining power or willing to pay a higher price or to lower standards, could
also limit our ability to purchase key components in sufficient quantities on commercially reasonable terms. Failure of our suppliers
to provide sufficient quantities of components on favorable terms, meet quality standards, or deliver components on a timely basis
has occurred due to industry shortages of certain raw materials or for reasons related to the COVID-19 pandemic, and could occur
in the future for similar or other reasons. Such failures could delay or stop our production, result in possible lost sales and
seriously threaten our liquidity and revenues.
We are dependent
on the quality of parts supplied by and quality controls of our third-party suppliers.
The Byrna HD contains
over 100 parts and we rely on third-party suppliers to deliver parts and materials that comply with our specifications. While we test
100% of our finished products, we do not test 100% of the components and materials they contain. We use randomized statistical inspection
for components and materials and these protocols, while we believe them to be reliable, have inherent limitations and may miss parts that
do not meet specifications. If those parts pass our completed launcher testing but subsequently cause failures of the products in which
they are installed, we may need to undertake product recalls or implement protocols for improved performance or safety, which could negatively
impact our reputation and business. Moreover, if any such part failure resulted in a physical injury, it could also subject us to the
risks of potential product liability actions and, if our stock price were impacted, security class actions.
Higher costs or
unavailability of components, freight, materials and accessories, including ammunition, could adversely affect our financial results.
Delays caused by industry
allocations, material shortages (such as plastic or resins), or obsolescence have occurred as a result of the COVID-19 pandemic, may continue
and could occur in the future (due to the COVID-19 pandemic or other reasons). Such delays may take weeks or months to resolve and may
result in increased costs as well as production and product fulfillment delays. In addition, in some cases, parts obsolescence may require
a product re-design to ensure quality replacement components. These delays could cause significant delays in manufacturing and loss of
sales, leading to adverse effects significantly impacting our financial condition or results of operations and could injure our reputation.
Our freight and import
costs and the timely delivery of our products could be adversely impacted by a number of factors which could reduce the profitability
of our operations, including: higher fuel costs; potential port closures; theft in transit; permit or customs clearance issues; increased
government regulation or changes for imports of foreign products into the United States; delays created by terrorist attacks or threats,
public health issues and pandemics and epidemics, national disasters or work stoppages; and other matters. Any interruption of supply
for any material components of our products could significantly delay the shipment of our products and have a material adverse effect
on our revenues, profitability and financial condition. International or domestic geopolitical or other events, including the imposition
of new or increased tariffs and/or quotas by the U.S. government on any of these raw materials or components, could adversely impact the
supply and cost of these raw materials or components, and could adversely impact the profitability of our operations. Significantly, the
COVID-19 pandemic has, and may continue to, adversely impact our costs and product delivery timing and the availability and favorable
pricing of materials used in our products. In addition, due to rapidly increasing demand for our products, we have faced significant challenges,
including production backlogs and resulting customer complaints. All of the forgoing could negatively impact our financial results.
If we are unable to successfully design
and develop or acquire new products, our business may be harmed.
To maintain and increase sales we must continue
to introduce new products and improve or enhance our existing products or new products. The success of our new and enhanced products depends
on many factors, including anticipating consumer preferences, finding innovative solutions to consumer problems or acquiring new solutions
through mergers and acquisitions, differentiating our products from those of our competitors, and maintaining the strength of our brand.
The design and development of our products as well as acquisitions of other businesses are costly and we typically have several products
in development at the same time. Problems in the design or quality of our products, or delays in product introduction, may harm our brand,
business, financial condition, and results of operations.
Our business could be harmed if we are unable
to accurately forecast demand for our products or our results of operations.
To ensure adequate inventory supply, we forecast
inventory needs and often place orders with our manufacturers before we receive firm orders from our retail partners or customers. If
we fail to accurately forecast demand, we may experience excess inventory levels or a shortage of product.
If we underestimate the demand for our products,
we or our suppliers may not be able to scale to meet our demand, and this could result in delays in the shipment of our products and our
failure to satisfy demand, as well as damage to our reputation and retail partner relationships. If we overestimate the demand for our
products, we could face inventory levels in excess of demand, which could result in inventory write-downs or write-offs and the sale of
excess inventory at discounted prices, which would harm our gross margins. For example, driven by strong customer demand and a shortage
of product in 2020, we experienced a product backlog. In addition, failures to accurately predict the level of demand for our products
could cause a decline in sales and harm our results of operations and financial condition.
In addition, we may not be able to accurately
forecast our results of operations and growth rate. Forecasts may be particularly challenging as we expand into new markets and geographies
and develop and market new products for which we have no or limited historical data. Our historical sales, expense levels, and profitability
may not be an appropriate basis for forecasting future results. Our lack of historical data related to new products makes it particularly
difficult to make forecasts related to such products. The lead times and reliability of our suppliers has been inconsistent as a result
of the COVID-19 pandemic, and may be affected by global events in the future. These effects are expected to last through the remainder
of the pandemic. Pandemic related variances require a very quick pivot and adjustments to the supply chain, production and marketing.
If we are unable to make these changes quickly or at all our inventory, production and sales may be materially affected.
Failure to accurately
forecast our results of operations and growth rate could cause us to make poor operating decisions that we may not be able to correct
in a timely manner. Consequently, actual results could be materially different than anticipated. Even if the markets in which we compete
expand, we cannot assure you that our business will grow at similar rates, if at all. Forecasting has been particularly challenging during
the COVID-19 pandemic.
We rely on a limited
number of third parties for shipping, transportation, logistics, marketing and sales of our products and components. A loss of any of
such third-party relationships would have a material adverse effect on our operating results.
We rely on third parties
to ship, transport, and provide logistics for our products and components. Our dependence on a limited number of third parties for these
services leaves us particularly vulnerable due to our need to secure these parties’ services on favorable terms. Loss of, or an
adverse effect on, any of these relationships or failure of any of these third parties to perform as expected could have a material and
adverse effect on our operations, sales, revenue, margins, liquidity, reputation and financial and operating results.
We are dependent
on our relationships with third parties for assistance in the preparation of our financial statements, which allow us to meet our financial
reporting obligations.
We utilize third-party
consultants to assist management in the preparation of our financial statements. Our ability to meet our future financial reporting obligations
will continue to depend in part on such services provided by these third parties. Changes in such third-party relationships, personnel,
or capacity may impact our ability to timely file our financial statements, which could impact our ability to maintain our listings on
the Nasdaq Capital Market and CSE. Failure to maintain such listings could materially adversely affect our ability to raise capital. We
have encountered challenges meeting reporting timelines in the past, and we may experience additional challenges in the future.
Any future litigation
could have a material adverse impact on our results of operations, financial condition and liquidity.
From time to time, we
may be subject to litigation including product liability claims, intellectual property claims, employment-related claims, commercial disputes,
regulatory and enforcement action and stockholder class and derivative actions. Risks associated with legal liability are difficult to
assess and quantify, and their existence and magnitude can remain unknown for significant periods of time. In addition, our reputation
could be adversely affected by negative publicity surrounding such events regardless of whether or not claims against us are successful.
A successful claim brought against us in excess of available insurance or not covered by insurance or indemnification agreements, or any
claim that results in significant adverse publicity against us, could have a material adverse effect on our business and our reputation.
Furthermore, the litigation process can put material or excessive demands on the time of management and employees, interfering with performance
of regular responsibilities and stressing or delaying business operations, and the outcome of litigation is inherently uncertain. We can
provide no assurances that these matters will not have a material adverse effect on our business.
If we deliver products
with defects, we may be subject to product recalls or negative publicity, our credibility may be harmed, market acceptance of our products
may decline, and we may be exposed to liability.
We sell complex products
including products that are new to the market and without a long performance history. These products may contain certain design and manufacturing
defects including defects in materials and components that we purchase from third parties. There can be no assurance we will be able to
detect and fix all defects in the products we sell. Accordingly, our products may experience quality and service problems from time to
time that could result in decreased sales and operating margin and harm to our reputation.
We issued a product safety
notice in February 2021 and, in connection therewith, took a reserve of $195,000 which we believe to have been adequate. If the safety
update fails in the future, new issues arise, or a substantial number of consumers continue to seek an updated product, we could also
experience damage to our reputation, business, operations (including production rate) and revenues.
Seasonality may
in the future cause our operating results to vary from quarter to quarter.
The seasonality of our
sales is unknown and may cause our operating results to vary in the future. Seasonal variations in our operating results may reduce our
cash on hand, increase our inventory levels, and extend our accounts receivable collection periods. This in turn may cause us to increase
our debt levels and interest expense to fund our working capital requirements.
Our business relationships
with third parties could cause us to expend significant resources and incur substantial business risk with no assurance of financial return.
We rely upon business
relationships for the manufacturing and distribution of certain products. Our business depends upon our ability to manufacture and sell
our products to our customers. We currently do not have the capabilities to manufacture some of our products and product components on
our own and are required to enter into agreements with third parties for certain of such services. Additionally, due to the introduction
of the Byrna HD in the fiscal year ended November 30, 2019, we only began recently to establish a sales team for our product and utilize
third-party manufacturer’s representatives and a third party e-commerce shopping platform to facilitate sales most sales of such
product. We also rely upon third parties for materials and components, as well as shipping, certain marketing and sales-related services.
There can be no assurance that such business relationships can be maintained, will be extended or renewed, or will achieve their goals.
If we are unable to enter into business relationships for distribution and sales or if any of our current business relationships are terminated
or fail to achieve their goals, our business, operating results and financial condition will be materially adversely affected.
To the extent that we
internally develop a sales force, the cost of establishing and maintaining a sales force would be substantial and may exceed our cost
effectiveness. The acquisition or development of a sales and distribution infrastructure could require substantial resources, which may
divert the attention of our management and key personnel and defer our product development and deployment efforts. In addition, in marketing
our products, we would likely compete with companies that currently have extensive and well-funded marketing and sales operations. Despite
marketing and sales efforts, we may be unable to compete successfully against these companies. We may not be able to do so on favorable
terms. We could rely on third parties to market and sell our products in certain territories, rather than establishing an internal sales
force. When we contract with third parties, including entering into collaborations with partners, for the sale and marketing of our products,
revenues depend upon the efforts of these third parties, which may not be successful. If we fail to establish successful marketing and
sales capabilities or to make arrangements with third parties for such purposes, our business, financial condition, results of operations
and prospects will be materially adversely affected.
Our business depends
on our ability to prevent or mitigate the effects of a cybersecurity attack.
Our information technology systems, including
third party run e-commerce and payment service systems, may be subject to cyber-attacks, security breaches or computer hacking including
a ransomware attack encrypting corporate information technology equipment, a directed attack against us or a data breach or cyber incident
happening to a third-party network and affecting us. Regardless of our efforts, there may still be a breach, and the costs to eliminate,
mitigate or address the threats and vulnerabilities before or after a cyber-incident could be significant. Any such breaches or attacks
could result in interruptions, delays or cessation of operations and loss of existing or potential suppliers or customers. In addition,
breaches of our information technology systems or security measures (including those of our third party partners) and the unauthorized
dissemination of sensitive personal, proprietary or confidential information about our business, our business partners, customers or other
third parties could expose us to significant potential liability and reputational harm, materially damage our customer and business partner
relationships, and subject us to significant reputational, financial, legal, and operational consequences. Moreover, any such breach or
attack could result in litigation against us by customers or other third parties whose data is compromised by any such attack. At this
time, we do not carry insurance coverage against losses resulting from a breach of our information technology systems or those of our
third party partners.
Our business depends
on our ability to prevent or mitigate the effects of commercial crime including theft by employees, forgery and electronic crime
Our internal protocols and controls cannot prevent
all instances of theft, forgery, electronic crime or other criminal activity by dishonest employees or external fraudsters. Our money,
securities and other property may be vulnerable to theft, damage, and manipulation both on our premises and in transit through a variety
of criminal acts including forgery of authorized signatures on business checks, fraudulent manipulation of our computer systems, those
of our third party partners (including e-commerce and payment service systems), or those of third party financial institution. Such activities
could include an employee or hacker transferring unauthorized funds to an outside account, fraudulent electronic funds transfer instructions
sent to our bank, receipt of counterfeit currency, social engineering fraud, or mismanagement or theft by persons handling funds of our
qualified employee benefit plan. While we have limited coverage against forgery and employee dishonesty under our general liability policy
and persons handling funds for our qualified employee benefit plan will be bonded, we do not currently have a comprehensive commercial
crime insurance policy to provide broad protection from financial losses related to business-related crime. Moreover, insofar as we have
limited coverage in our general insurance policy, deductibles may apply separately to related losses, a single limit may apply to a series
of related losses, such coverage is likely to be inadequate to cover a material theft of this nature, particularly if a series of acts
occurs over time prior to being discovered, and such coverage may not cover or be inadequate to cover certain types of losses including
such indirect or consequential losses as investigative expense coverage, business interruption, loss of potential income, and legal fees,
fines and penalties.
Risks Related
to Our Industry
The markets for
security products and non-lethal defense technology are in a state of technological change which could have a material adverse impact
on our business, financial condition and results of operations.
The markets for security
products and non-lethal defense technology, in which our products and services are characterized, are associated with rapidly changing
technology, which could result in product obsolescence or short product life cycles. Accordingly, our success is dependent upon our ability
to anticipate technological and other changes and to successfully identify, obtain, develop and market new products that satisfy evolving
customer requirements. There can be no assurance that we will successfully develop new products or enhance and improve our existing products
or that any new products and enhanced and improved existing products will achieve market acceptance. Further, there can be no assurance
that competitors will not market products that have perceived advantages over our products or which render the products currently sold
by us obsolete or less marketable.
We must commit significant
resources to developing new products before knowing whether our investments will result in products the market will accept. To remain
competitive, we may be required to invest significantly greater resources then currently anticipated in research and development and product
enhancement efforts.
The non-lethal
defense technology industry and security products markets are highly competitive and our success depends upon our ability to effectively
compete with numerous worldwide business.
We face competition from
a number of businesses, including worldwide businesses, many of which have substantially greater financial resources, operating scale,
and a broader range of product offerings than we do. In the law enforcement market, in particular, we face competitors who have long-term,
established relationships with security professionals who subscribe to an integrated suite of their products, some of which offer features
that our current products do not support, and who may have made substantial investments in their hardware, creating an entry barrier to
introduction of our competing product. Such competition could adversely affect our ability to win new contracts and sales and renew existing
contracts. We operate in a period of intense competition in some key markets, which could affect the profitability of the contracts and
sales we do win. If we cannot successfully compete in our industry and business segments, our business, financial condition and results
of operations could suffer.
Expansion of sales of our product to schools,
law enforcement and other governmental or quasi-governmental entities may require expenditure of resources and lengthen our sales cycle.
Generally, entities such as schools, law enforcement
and other governmental or quasi-governmental entities consider a wide range of issues before committing to purchase non-lethal defense
products, including product benefits, training costs, the cost to use our products in addition to, or in place of, other products, budget
constraints and product reliability, safety and efficacy. Such considerations may result in a sales cycle that is longer than and different
from sales process related to dealers and consumers. Adverse publicity surrounding our products or the safety of such products also could
lengthen our sales cycle with these customers. In addition, if we successfully expand sales of our products to these customers, we could
encounter challenges related to funding of law enforcement and other governmental and quasi-governmental entities generally, the economic
impact of the COVID-19 pandemic on the operating budgets of agencies, states and municipalities that fund such entities and the recent
changes in public sentiment around police funding. We may incur substantial selling costs and expend significant effort in connection
with the evaluation of our products by such potential customers before they place an order. If these potential customers do not ultimately
purchase our products, we will have expended significant resources and received no revenue in return.
Epidemic and pandemic
diseases (including the COVID-19 pandemic) could have a material adverse effect on our business, financial condition, results of operations,
cash flows, and ability to comply with regulatory requirements.
Outbreaks of epidemic,
pandemic, or contagious diseases, such as COVID-19, could cause disruptions in our business and the businesses of third parties who we
depend upon for materials and manufacturing, marketing and other services. These disruptions could include disruptions in our ability
to receive materials, manufacture our products, distribute our products, market our products, or obtain services. These disruptions have
caused, and could cause further, closures of our facilities or the facilities of our suppliers, manufacturers and dealers, as well as
cancellation of events that present significant marketing opportunities such as industry conventions, and trade shows. Any disruption
of the businesses of our suppliers, manufacturers or dealers would likely impact our sales and operating results. In addition, a significant
outbreak of epidemic, pandemic, or contagious diseases in the human population could result in a widespread health crisis that could adversely
affect the economies and financial markets of many countries, resulting in an economic downturn that could affect demand for our products.
Any of these events could have a material adverse effect on our business, financial condition, results of operations, or cash flows. Additionally,
such outbreaks could disrupt our ability to timely file periodic reports required by the Securities and Exchange Commission or the stock
exchanges on which our common stock is listed, which may lead to the delisting or downgrading of our common stock on such stock exchanges.
In particular, the COVID-19
pandemic restrictions intended to prevent and mitigate its spread, challenges related to vaccination rollout and new variants of the virus
have impacted, and may continue to (and the future outbreak of other highly infectious or contagious diseases likely would), significantly
and negatively impact our business, for reasons including without limitation: the shut-down of production facilities and distribution
facilities as a result of government restrictions, illness and special cleaning; slow-down in production and increased costs due to COVID-19-related
health and safety protocols; limited availability of plastic and other components of our products which cause price pressures as well
as impair our ability to meet production demand; and shipping challenges. Since March 2020, many of our employees worked remotely for
an extended period of time and some continue to do so. Additional extended periods of remote work arrangements could strain our business
continuity plans, introduce operational risk, including but not limited to cybersecurity risks, and impair our ability to manage our business.
Remote work conditions, including challenges in coordinating with third parties and lack of access to certain records and documents, have
caused administrative issues and contributed to our inability in some cases to timely file certain reports required by the SEC. Moreover,
the COVID-19 pandemic has had and is expected to continue to have a significant negative impact on general economic conditions, which
could adversely impact the sales of our products. All of the forgoing may adversely impact our future financial results.
In addition to the impacts
the COVID-19 pandemic has had and may continue to have on our operations and administrative functions and those of our third-party suppliers
and manufacturers, the demands the pandemic is placing on government agencies, law enforcement and potentially military organizations
may impact the ability of customers and potential customers to purchase our 40mm products, products acquired from Kore, or future products
directed at those sectors. Similarly, the overall economic downturn, loss of jobs, loss of savings, and loss of disposable income and
liquidity on the part of consumers could adversely affect the market for our Byrna HD and other consumer directed products we may introduce.
Moreover, policies instituted to reduce the transmission of COVID-19 may impact or interrupt components and products moving through our
supply chain. If facilities close or produce low volume due to the COVID-19 pandemic, we may have difficulty sourcing products to sell
in the future and may incur additional costs and lost revenue. Any of these events could have a material adverse effect on our business,
financial condition, results of operations, or cash flows.
Our revenues and profits depend on the level
of customer spending for our products, which is sensitive to general economic conditions and other factors.
Our products are discretionary
items for customers. Therefore, the success of our business depends significantly on economic factors and trends in consumer spending.
There are a number of factors that influence consumer spending, including actual and perceived economic conditions, consumer confidence,
disposable consumer income, consumer credit availability, unemployment, and tax rates in the markets where we sell our products. Consumers
also have discretion as to where to spend their disposable income and may choose to purchase other items or services if we do not continue
to provide high-quality products at appropriate price points. As global economic conditions continue to be volatile and economic uncertainty
remains, trends in consumer discretionary spending also remain unpredictable and subject to declines. Any of these factors could harm
discretionary consumer spending, resulting in a reduction in demand for our products, decreased prices for our products, and harm to our
business and results of operations.
Our performance
is influenced by a variety of economic, social, and political factors.
Our performance is influenced
by a variety of economic, social, and political factors. General economic conditions and consumer spending patterns can negatively impact
our operating results. Economic uncertainty, unfavorable employment levels, declines in consumer confidence, increases in consumer debt
levels, increased commodity prices, and other economic factors may affect consumer spending on discretionary items and adversely affect
the demand for our products. In times of economic uncertainty, consumers tend to defer expenditures for discretionary items, which could
negatively affect demand for our products. Any substantial deterioration in general economic conditions that diminish consumer confidence
or discretionary income could reduce our sales and adversely affect our operating results.
Political and social
factors can affect our performance. Concerns about elections, as well as firearm-related incidents and social reaction thereto, and legislature
and policy shifts resulting from those elections can affect the demand for our products. In addition, speculation about control of firearms,
firearm products, and ammunition at the federal, state, and local level and heightened fears of terrorism and crime can affect consumer
demand for our products. Often, such concerns result in an increase in near-term consumer demand and subsequent softening of demand when
such concerns subside. Inventory levels in excess of customer demand may negatively impact operating results and cash flow.
Federal and state legislatures
may consider legislation relating to the regulation of CO2 powered launchers or the use of chemical irritants by some or all of our customer
bases. If such legislation develops, we could find it difficult, expensive, or even impossible to comply with them, impeding new product
development and distribution of existing products. Conversely, new legislation could increase the demand for non-lethal weapons like the
Byrna HD beyond our current forecasts and strain or exceed production capability, which could harm our reputation and adversely impact
our business.
Risks Related to Regulation
We are subject
to extensive regulation and could incur fines, penalties and other costs and liabilities under such requirements.
We are subject to numerous
federal, state and local environmental, health and safety legislation and other applicable regulations, laws, and measures relating to
the manufacture and sale of our products. There can be no assurance that we will not experience difficulties with our efforts to comply
with applicable regulations as they change in the future or that our continued compliance efforts (or failure to comply with applicable
requirements) will not have a material adverse effect on our results of operations, business, prospects and financial condition. Our continued
compliance with present and changing future laws could restrict our ability to sell our products and expand our operations.
Changes in government
policies and legislation could adversely affect our financial results.
The manufacture, sale,
purchase, possession and use of weapons (including CO2 powered launchers and chemical irritant devices), ammunitions, firearms, and explosives
are subject to federal, state, local, and foreign laws. If such regulation becomes more expansive in the future, it could have a material
adverse effect on our business, operating results, financial condition, and cash flows. The Byrna HD is a relatively new product. that
may be subject to certain law and regulations, including those related to CO2 powered launchers, “pepper spray” or “tear
gas” devices, and future legislation or regulation. New legislation, regulations, or changes to or new interpretations of existing
regulation could impact our ability to manufacture or sell the Byrna HD and our projectiles, or limit their market, which could impact
our cost of sales and demand for Byrna products. Similarly changes in laws related to the domestic or international use of chemical irritants
by civilians or law enforcement could impact both our cost of sales and the size of the reachable market.
We may be subject, both
directly and indirectly, to the adverse impact of existing and potential future government regulation of our products, technology, operations
and markets. For example, the development, production, (re-)exportation, importation, and transfer of our products and technology is subject
to U.S. and foreign export control, sanctions, customs, import and anti-boycott laws and regulations, including the Export Administration
Regulations (the “EAR”) (collectively, “Trade Control Laws”). If one or more of our products or technology, or
the parts and components we buy from others, is or becomes subject to the International Traffic in Arms Regulations (the “ITAR”)
or national security controls or other controls under the EAR, this could significantly impact our operations, for example by severely
limiting our ability to sell, (re-)export, or otherwise transfer our products and technology, or to release controlled technology to foreign
person employees or others in the United States or abroad. We may not be able to obtain licenses and other authorizations required under
the applicable Trade Control Laws. The failure to satisfy the requirements under the Trade Control Laws, including the failure or inability
to obtain necessary licenses or qualify for license exceptions, could delay or prevent the development, production, (re-)export, import,
and/or in-country transfer of our products and technology, which could adversely affect our revenues and profitability.
Failure by us, our employees,
or others working on our behalf to comply with the applicable Trade Control Laws could result in administrative, civil, or criminal liabilities,
including fines, suspension, debarment from bidding for or performing government contracts, or suspension of our export privileges, which
could have a material adverse effect on us. We transact with suppliers and others who are exposed to similar risks. Violations of the
Trade Control Laws or other applicable laws and regulations could materially adversely affect our products, technology, brand, growth
efforts, employees, and business.
Health and safety
risks could expose us to potential liability and adversely affect our operating results and financial condition.
Health and safety issues
related to our products may arise that could lead to litigation or other action against us, to regulation of certain of its product components,
or to negative publicity. We may be required to modify our technology and may not be able to do so. We may also be required to pay damages
that may adversely affect our financial condition. Even if these concerns prove to be baseless, the resulting negative publicity could
affect our ability to market certain of our products and, in turn, could harm our business and results from operations.
We are exposed
to operating hazards and uninsured risks that could adversely impact our operating results and financial condition.
Our business is subject
to a number of risks and hazards including loss of parts or finished goods in inventory or shipment, labor disputes and changes in the
regulatory environment. Such occurrences could delay or halt production or sale of goods, result in damage to equipment, personal injury
or death, monetary losses and possible legal liability. Although we currently maintain freight and inventory insurance and general liability
insurance in amounts which we consider adequate, the nature of these risks is such that liabilities might exceed policy limits, the liabilities
and hazards might not be insurable, or we may elect in the future not to insure against such liabilities due to high premium costs or
other reasons, in which event we could incur significant costs that could have a materially adverse effect upon our financial position.
Tariffs, sanctions,
restrictions on imports or other trade barriers between the United States and various countries, most significantly China, may impact
our revenue and results of operations.
Political changes and
trends such as populism, protectionism, economic nationalism and sentiment toward internationally operating companies, and resulting tariffs,
export controls, trade sanctions, sanctions blocking statutes, or other trade barriers, or changes to tax or other laws and policies,
have been and may continue to be disruptive and costly to our business, and these can interfere with our expanding international sales,
supply chain, production costs, customer relationships, and competitive position. For example, general trade tensions between the United
States and China began escalating in 2018, with multiple rounds of U.S. tariffs on Chinese-made goods taking effect. These tariffs currently
affect some of the components of our products we import from China, and we may be required to raise our prices on those products due to
the tariffs or share the cost of such tariffs with our customers, which could harm our operating performance. We work closely with third
parties who monitor, evaluate and keep us informed about the potential impact of the effective and proposed tariffs as well as other recent
changes in foreign trade policy on our supply chain, costs, sales and profitability and seek to implement strategies to mitigate such
impact, including reviewing sourcing options and working with our vendors and merchants to seek to minimize product coming from China
both in existing and new product development and select suppliers in low cost regions where tariff issues are less challenging. Notwithstanding
these efforts, it is possible that further tariffs may be imposed on our other imports, or that our business will be impacted by retaliatory
trade measures taken by China or other countries in response to existing or future tariffs, causing us to raise prices or make changes
to our operations, any of which could materially harm our revenue or operating results. Further escalation of specific trade tensions,
such as those between the United States and China, or in global trade conflict more broadly could be harmful to global economic growth,
and related decreases in confidence or investment activity in the global markets would adversely affect our business performance. We do
business in emerging market jurisdictions, such as South Africa, where economic, political and legal risks are heightened.
Data privacy and
security laws and regulations in the jurisdictions in which we do business could increase the cost of our operations and subject us to
possible sanctions and other penalties.
Our business is subject
to a number of federal, state, local and foreign laws and regulations governing data privacy and security, including with respect to the
collection, storage, use, transmission and protection of personal information.
In addition, a number
of U.S. states have enacted data privacy and security laws and regulations that govern the collection, use, disclosure, transfer, storage,
disposal, and protection of sensitive personal information, such as social security numbers, financial information and other personal
information. For example, all 50 states now have data breach laws that require timely notification to individual victims, and at times
regulators, if a company has experienced the unauthorized access or acquisition of sensitive personal data. State law developments, which
may impose substantial penalties for violations, could impose significant costs for investigations and compliance, allow private class-action
litigation and carry significant potential liability for our business. We do not currently have insurance to cover us in the event of
a data breach.
The interpretation and
enforcement of these laws and regulations are uncertain and subject to change, and it may require substantial costs to assess, monitor
and implement compliance with any additional requirements. Failure to comply with applicable law, including international data protection
laws and regulations could result in government enforcement actions (which could include substantial civil or criminal penalties), private
litigation or adverse publicity and could negatively affect our operating results and business.
Failure to comply
with the U.S. Foreign Corrupt Practices Act or other applicable anti-corruption legislation, and export controls and trade sanctions,
could result in fines or criminal penalties if we expand our business abroad.
We, our business partners,
and the industries in which we operate are subject to continuing scrutiny by regulators, other governmental authorities and private sector
entities or individuals in the United States, South Africa, the European Union, China, and other jurisdictions, which may lead to enforcement
actions, adverse changes to our business practices, fines and penalties, or the assertion of private litigation claims and damages that
could be material. For example, the expansion of our business internationally exposes us to export controls, trade sanctions import and
export clearance requirements, customs, tariffs, anti-corruption legislation, anti-boycott requirements and other obligations and restrictions
imposed by the United States and other governments. The U.S. Departments of Justice, Commerce, Treasury, State, U.S. Customs and Border
Protection, and other U.S. and foreign agencies and authorities have a broad range of civil and criminal penalties they may seek to impose
against companies for violations of export controls, trade sanctions, import and export clearance requirements, customs regulations, anti-corruption
legislation, including the Foreign Corrupt Practices Act, anti-boycott requirements and other federal statutes, sanctions and regulations
and, increasingly, similar or more restrictive foreign laws, rules and regulations, which may also apply to us. By virtue of these laws
and regulations, and under laws and regulations in other jurisdictions, we may be obliged to limit our business activities, we may incur
costs for becoming and staying compliant, and we may be subject to enforcement actions or penalties for noncompliance, including fines,
suspension, debarment from bidding for or performing government contracts, or suspension of our export privileges, which could materially
adversely affect our business, operations, products, technology, brand, growth efforts, employees, and business partners. In recent years,
U.S. and foreign governments have increased their oversight and enforcement activities with respect to these laws and we expect the relevant
agencies to continue to increase these activities. A violation of these laws, sanctions or regulations could result in restrictions on
our exports, civil and criminal fines or penalties and could adversely impact our business, operating results, and financial condition.
There can be no assurance that the risk management and compliance programs we adopt will mitigate legal and compliance risks.
If our independent suppliers and manufacturing
partners do not comply with ethical business practices or with applicable laws and regulations, our reputation, business, and results
of operations would be harmed.
Our reputation and our
customers’ willingness to purchase our products depend in part on our suppliers’, manufacturers’, and retail partners’
compliance with ethical employment practices, such as with respect to child labor, wages and benefits, forced labor, discrimination, safe
and healthy working conditions, and with all legal and regulatory requirements relating to the conduct of their businesses. We do not
exercise control over our suppliers, manufacturers, and retail partners and cannot guarantee their compliance with ethical and lawful
business practices. If our suppliers, manufacturers, or retail partners fail to comply with applicable laws, regulations, safety codes,
employment practices, human rights standards, quality standards, environmental standards, production practices, or other obligations,
norms, or ethical standards, our reputation and brand image could be harmed and we could be exposed to litigation and additional costs
that would harm our business, reputation, and results of operations.
Risks Related to our
Intellectual Property
If we are unable
to protect our intellectual property, we may lose a competitive advantage or incur substantial litigation costs to protect our rights.
Our future success depends
upon our proprietary technology. Our protective measures, including patent and trade secret protection and nondisclosure agreements, may
prove inadequate to protect our proprietary rights. The right to stop others from misusing our trademarks, service marks, patents, designs
and copyright in commerce depends to some extent on our ability to show evidence of enforcement of our rights against such misuse in commerce.
Our efforts to stop improper use, if insufficient, may lead to loss of trademark and service mark rights, brand loyalty, and notoriety
among our customers and prospective customers. The scope of any patent that we have or may obtain may not prevent others from developing
and selling competing products. The validity and breadth of claims covered in technology patents involve complex legal and factual questions,
and the resolution of such claims may be highly uncertain, and expensive. In addition, our patents may be held invalid upon challenge,
or others may claim rights in or ownership of our patents.
We may be subject
to intellectual property infringement claims, which could cause us to incur litigation costs and divert management attention from our
business.
While we believe that
our products and intellectual property do not infringe upon the proprietary rights of third parties, and undertake efforts to design around
existing third-party patents or designs that we are aware of, a substantial portion of our commercial success depends upon us not infringing
the intellectual property rights of others. We may become subject to claims by third parties that our technology infringes their intellectual
property rights. Although all reasonable efforts are made to avoid third-party patents, there is no assurance that were a lawsuit to be
brought by a third party, we would prevail. We may also become subject to these claims through indemnities that we provide to manufacturer’s
representatives, distributors, dealers, retail partners, and certain service providers and consultants.
Any intellectual property
infringement claims against us, with or without merit, could be costly and time-consuming to defend and divert our management’s
attention from our business. If our products were found to infringe a third party’s proprietary rights, we could be required to
enter into costly royalty or licensing agreements to be able to sell our products, and any allegation of infringement could cause certain
reputational damage for us and the Byrna brand. Royalty and licensing agreements, if required, may not be available on terms acceptable
to us or at all.
Risks Related to
our Securities
Our trading market
is limited, and the trading market for our common stock may not develop or be sustained.
Our common stock is listed
in the United States on the Nasdaq Capital Market (since May 5, 2021, prior to which date our common stock was listed for quotation on
the OTCQB marketplace operated by OTC Markets Group Inc.) and in Canada on the CSE; trading has been limited, a substantial amount of
our outstanding shares of common stock were issued in private placement and subject to resale restrictions under federal securities laws,
and we cannot predict the trading volume in our common stock. In the absence of an active trading market:
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investors may have difficulty buying and selling or obtaining market quotations;
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market visibility for shares of our common stock may be limited; and
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a lack of visibility for shares of our common stock may have a depressive effect on the market price for shares of our common stock.
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A limited trading market
could impair your ability to sell your shares at the time you wish to sell them or at a price that you consider reasonable. A limited
trading market may also reduce the fair market value of your shares and may also impair our ability to raise capital to continue to fund
operations by selling shares.
We may not maintain
qualification for listing on Nasdaq, which may impair your ability to sell your shares.
Our common stock is currently
listed on the Nasdaq Capital Market and in Canada on the CSE. The Nasdaq Capital Market requires listed companies to meet certain listing
criteria including total number of stockholders, Board of Directors independence, minimum stock price, total value of public float, and
in some cases total stockholders’ equity and market capitalization requirements. If for any reason our common stock does not maintain
eligibility for listing on the Nasdaq Capital Market, we may list our common stock elsewhere, such as one of the OTC markets, which are
generally considered less liquid and more volatile than a national securities exchange, and could mean that certain institutional investors
could no longer hold or purchase our stock, and as a result, a purchaser of our common stock may find it more difficult to dispose of,
or to obtain accurate quotations as to the price of their shares. This would materially and adversely affect the liquidity of our common
stock.
The market price
of our common stock may be volatile, which could result in substantial losses for purchasers.
The market price for
our common stock may be volatile in response to factors including the following:
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actual or anticipated fluctuations in our quarterly or annual operating results;
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changes in our financial or operational estimates or projections;
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conditions in markets generally;
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changes in the economic performance or market valuations of companies similar to ours; and
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general economic or political conditions in the United States or elsewhere.
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In addition, if we are
unable to successfully meet investor expectations, even if by only a small margin, there could be significant impact on the market price
of our common stock.
In some cases, following
periods of volatility in the market price of a company’s securities, stockholders have often instituted class action securities
litigation against those companies. Such litigation, if instituted, could result in substantial costs and diversion of management attention
and resources, which could significantly harm our business operations and reputation.
Our common stock
is listed on two separate stock markets, and investors seeking to take advantage of price differences between such markets may create
unexpected volatility in our stock price; in addition, investors may not be able to move stocks for trading between such markets.
Our common stock is listed
on both the Nasdaq Capital Market and the CSE. Price levels for our ordinary shares could fluctuate significantly on either market, independent
of our share price on the other market. Investors could seek to sell or buy our shares to take advantage of any price differences between
the two markets through a practice referred to as arbitrage. Any arbitrage activity could create unexpected volatility on either exchange
with respect to both our share price and the volume of shares available for trading.
Exercise of options
or warrants or vesting of restricted stock units may have a dilutive effect on your percentage ownership and may result in a dilution
of your voting power and an increase in the number of shares of common stock eligible for future resale in the public market, which may
negatively impact the trading price of our shares of common stock.
The exercise of some
or all of our outstanding options and warrants, and the vesting of restricted stock units, could result in significant dilution in the
percentage ownership interest of our existing stockholders and in a significant dilution of voting rights and earnings per share.
As of May 31, 2021,
we had outstanding (i) warrants to purchase up to 99,055 shares of our common stock at a weighted exercise price of approximately
$1.91 per share, (ii) options for the issuance of up to 642,050 shares of our common stock upon exercise at a weighted average
exercise price of $2.20 under our 2020 Equity Incentive Plan, and (iii) 1,747,993 restricted stock units.
A failure of our
control systems to prevent error or fraud may materially harm our company.
Proper systems of internal
controls over financial accounting and disclosure are critical to the operation of a public company. Given the size of our company and
the limited number of fulltime employees that we have employed, there may continue to be certain limitations on the effectiveness of our
internal controls. Moreover, we do not expect that disclosure controls or internal control over financial reporting will prevent all errors
and all fraud, if any. A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance
that the control system’s objectives will be met. Further, the design of a control system must reflect the fact that there are resource
constraints and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control
systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, have been detected.
Failure of our control systems to prevent error or fraud could materially and adversely impact us.
Our directors, executive officers, and significant
stockholders may be able to influence us.
Our directors, executive officers, and other
holders of more than 5% of our common stock, together with their affiliates, currently own, in the aggregate, 34.6% of our outstanding
common stock. As a result, these stockholders, acting together, may have the ability to influence the outcome of matters submitted to
our stockholders for approval, including the election of directors and any merger, consolidation, or sale of all or substantially all
of our assets. In addition, these stockholders, acting together, may be able to influence the management and affairs of our company.
Accordingly, this concentration of ownership might decrease the market price of our common stock by:
● delaying, deferring, or preventing a change in control
of the company;
● impeding a merger, consolidation, takeover, or other
business combination involving us; or
● discouraging a potential acquirer from making a tender
offer or otherwise attempting to obtain control of the company.
If securities or industry analysts do not
publish research or reports about our business, or publish negative reports about our business, our stock price and trading volume could
decline.
The trading market for our common stock will be
influenced to some extent by the research and reports that industry or financial analysts publish about us and our business. We do not
control these analysts. We may be slow to attract research coverage and the analysts who publish information about our common stock could
have had relatively little experience with us or our industry, which could affect their ability to accurately forecast our results and
could make it more likely that we fail to meet their estimates. In the event we obtain securities or industry analyst coverage, if any
of the analysts who cover us provide inaccurate or unfavorable research or issue an adverse opinion regarding our stock price, our stock
price could decline. If one or more of these analysts cease to regularly cover us or fail to publish reports, we could lose visibility
in the market, which in turn could cause our stock price or trading volume to decline.
Substantial future sales, or the perception
or anticipation of future sales, of shares of our common stock could cause our stock price to decline.
Our stock price could decline as a result of substantial
sales of our common stock, or the perception or anticipation that such sales could occur, particularly sales by our directors, executive
officers, and significant stockholders, a large number of shares of our common stock becoming available for sale, or the perception in
the market that holders of a large number of shares intend to sell their shares.
In connection with our prospective public offering
(described below in “Investors may not be able to resell their shares at or above the public offering price in our prospective
public offering”), subject to certain exceptions, our executive officers and directors, and certain shareholders, are expected
to enter into lock-up agreements that restrict their ability to sell or transfer shares of our capital stock for 180 days following the
offering. The representatives may, in their sole discretion, permit our shareholders who are subject to these lock-up agreements to sell
shares prior to the expiration of the lock-up agreements.
We may in the future register shares of common
stock that we have issued or may issue under our equity compensation plans and shares of common stock that have been issued upon the conversion
of certain convertible securities. Accordingly, these shares will be able to be freely sold in the public market upon issuance as permitted
by any applicable securities laws, applicable vesting requirements, and the lock-up agreements described above to the extent such shares
are held by our executive officers and directors.
Our charter documents
and Delaware law could make it more difficult for a third party to acquire us and discourage a takeover.
Our Certificate of Incorporation,
as amended, Bylaws, as amended, and Delaware law contain certain provisions that may have the effect of deterring or discouraging, among
other things, a non-negotiated tender or exchange offer for shares of common stock, a proxy contest for control of our company, the assumption
of control of our company by a holder of a large block of common stock, and the removal of the management of our company. Such provisions
also may have the effect of deterring or discouraging a transaction which might otherwise be beneficial to stockholders. Our certificate
of incorporation also may authorize our board of directors, without stockholder approval, to issue one or more series of preferred stock,
which could have voting and conversion rights that adversely affect or dilute the voting power of the holders of common stock. Delaware
law also imposes conditions on certain business combination transactions with “interested stockholders.” Our certificate of
incorporation authorizes our Board of Directors to fill vacancies or newly created directorships. A majority of the directors then in
office may elect a successor to fill any vacancies or newly created directorships. Such provisions cold limit the price that investors
might be willing to pay in the future for shares of our common stock and impede the ability of the stockholders to replace management.
The elimination of monetary liability against
our directors, officers, and employees under Delaware law and the existence of indemnification rights to our directors, officers, and
employees may result in substantial expenditures by us and may discourage lawsuits against our directors, officers, and employees. We
also expect to enter into contractual indemnification obligations under employment agreements with our executive officers. The foregoing
indemnification obligations could result in our incurring substantial expenditures to cover the cost of settlement or damage awards against
directors and officers, which we may be unable to recoup. These provisions and resultant costs may also discourage us from bringing a
lawsuit against our directors and officers for breaches of their fiduciary duties and may similarly discourage the filing of derivative
litigation by our stockholders against our directors and officers even though such actions, if successful, might otherwise benefit our
company and our stockholders.
Our Bylaws, as amended, provide exclusive
forum provisions applicable to substantially all disputes between us and our stockholders as well as claims brought under the Securities
Act of 1933, which could limit our stockholders’ ability to obtain a favorable judicial forum for disputes with us or our directors,
officers, or employees.
Our Bylaws, as amended, provide that the Court
of Chancery of the State of Delaware (or, if the Court of Chancery does not have jurisdiction, the federal district court for the District
of Delaware) is the sole and exclusive forum for (a) any derivative action or proceeding brought on behalf of the Corporation; (b) any
action asserting a claim for breach of a fiduciary duty owed by any director, officer, employee, or agent of the Corporation to the Corporation
or the Corporation’s stockholders; (c) any action asserting a claim arising pursuant to any provision of the Delaware General Corporation
Law, the Certificate of Incorporation, or these by-laws; or (d) any action asserting a claim governed by the internal affairs doctrine.
In addition, unless we consent in writing to the
selection of an alternative forum, the federal district courts of the United States of America shall be the exclusive forum for the resolution
of any complaint against us asserting a cause of action arising under the Securities Act of 1933, as amended. These choice of forum provisions
may limit a stockholder’s ability to bring a claim in a judicial forum that it finds favorable for disputes with us or our directors,
officers, or other employees, which may discourage such lawsuits against us and our directors, officers, and other employees. Alternatively,
if a court were to find the choice of forum provision contained in our amended and restated certificate of incorporation to be inapplicable
or unenforceable in an action, we may incur additional costs associated with resolving such action in other jurisdictions or multiple
jurisdictions, which could result in expensive and protracted litigation with potentially conflicting outcomes that could exhaust our
insurance coverage leaving us exposed to substantial legal expenses and judgments, or otherwise harm our business, results of operations,
and financial condition.
We do not intend to pay dividends on our
common stock for the foreseeable future.
We currently intend to retain any future earnings
and do not expect to pay any dividends on our common stock in the foreseeable future. Any future determination to declare cash dividends
will be made at the discretion of our Board of Directors, subject to applicable laws, and will depend on a number of factors, including
our financial condition, results of operations, capital requirements, contractual restrictions, general business conditions, and other
factors that our Board of Directors may deem relevant. Accordingly, investors must rely on sales of their common stock after price appreciation,
which may never occur, as the only way to realize any future gains on their investment.
The ongoing requirements of being a public
company may strain our resources, divert management’s attention, and affect our ability to attract and retain executive management
and qualified board members.
As a public company, we are subject to the reporting
requirements of the Exchange Act, the Sarbanes-Oxley Act, the Dodd-Frank Act, the Nasdaq Capital Market listing standards and other applicable
securities laws, rules, and regulations. Our recent required compliance with these laws, rules, and regulations since our listing on Nasdaq
on May 5, 2021 increased our legal and financial compliance costs, make some activities more difficult, time-consuming, or costly, and
increase demand on our systems and resources. The Exchange Act requires, among other things, that we file annual, quarterly, and current
reports with respect to our business and results of operations. The Sarbanes-Oxley Act requires, among other things, that we maintain
effective disclosure controls and procedures and our internal control over financial reporting. In order to maintain and, if required,
improve our disclosure controls and procedures, and our internal control over financial reporting to meet this standard, significant resources
and management oversight may be required. Further, we are subject to the CSE listing standards and applicable law, rules and regulations
in Canada, all of which makes some activities even more difficult, time-consuming, or costly, and increase demand on our systems and resources.
As a result, management’s attention may be diverted from other business concerns and our costs and expenses will increase, which
could harm our business and results of operations. Although we have already hired additional employees to comply with these requirements,
we will need to hire more employees in the future or engage outside consultants, which will increase our costs and expenses.
In addition, changing laws, regulations, and standards
relating to corporate governance and public disclosure are creating uncertainty for public companies, increasing legal and financial compliance
costs, and making some activities more time consuming. These laws, regulations, and standards are subject to varying interpretations,
in many cases due to their lack of specificity and, as a result, their application in practice may evolve over time as new guidance is
provided by regulatory and governing bodies. This could result in continuing uncertainty regarding compliance matters and higher costs
necessitated by ongoing revisions to disclosure and governance practices. We intend to invest resources to comply with evolving laws,
regulations, and standards, and this investment may result in increased general and administrative expenses and a diversion of management’s
time and attention from sales-generating activities to compliance activities. If our efforts to comply with new laws, regulations, and
standards differ from the activities intended by regulatory or governing bodies due to ambiguities related to their application and practice,
regulatory authorities may initiate legal, administrative, or other proceedings against us and our business may be harmed.
As a result of disclosure of information in filings
required of us as a public company, our business and financial condition will become more visible, which could be advantageous to, or
harm our relationships with, our competitors, suppliers, manufacturers, retail partners, and customers. These disclosures may also make
it more likely that we will experience an increase in threatened or actual litigation, including by competitors and other third parties.
If such claims are successful, our business and results of operations could be harmed, and even if the claims are resolved in our favor
the time and resources necessary to resolve them could divert the resources of our management and harm our business and results of operations.
Risks Related
to our Prospective Public Offering
Investors may not be able to resell their
shares at or above the public offering price in our prospective public offering.
We listed our common stock on the Nasdaq Capital
Market on May 5, 2021, prior to which date our common stock was traded on the OTCQB. Our stock is also traded on the CSE. On June 1, 2021,
we filed a Registration Statement on Form S-1 for a prospective underwritten offering of our common stock (our “prospective public
offering”). The price for our common stock in our prospective public offering will be determined through negotiations between the
underwriters and us, and may vary substantially from the market price of our common stock following the prospective public offering. Stockholders
may be unable to sell shares at or above the public offering price or the price at which their shares were purchased.
Our stock price may be volatile or may decline,
including due to factors beyond our control, resulting in substantial losses for stockholders.
The market price of our common stock may fluctuate
significantly in response to numerous factors, many of which are beyond our control, including:
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actual or anticipated fluctuations in our results of operations;
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the financial projections we may provide to the public, any changes in these projections, or our failure to meet these projections;
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failure of securities analysts to initiate or maintain coverage of our company, changes in financial estimates by any securities analysts
who follow our company, or our failure to meet these estimates or the expectations of investors;
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ratings changes by any securities analysts who follow our company;
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sales or potential sales of shares by our stockholders, or the filing of a registration statement for these sales;
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adverse market reaction to any indebtedness we may incur or equity we may issue in the future;
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announcements by us or our competitors of significant innovations, acquisitions, strategic partnerships, joint ventures, or capital
commitments;
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publication of adverse research reports about us, our industry, or individual companies within our industry;
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publicity related to problems in our manufacturing or the real or perceived quality of our products, as well as the failure to timely
launch new products that gain market acceptance;
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changes in operating performance and stock market valuations of companies in our industry;
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price and volume fluctuations in the overall stock market, including as a result of trends in the U.S. or global economy;
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any major change in our Board of Directors or management;
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lawsuits threatened or filed against us or negative results of any lawsuits;
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security breaches or cyberattacks;
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legislation or regulation of our business;
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new products introduced by us or our competitors;
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developments with respect to our trademarks, patents, or proprietary rights;
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general market conditions; and
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other events or factors, including those resulting from war, incidents of terrorism, pandemics, or responses to these events, which
could be unrelated to us or outside of our control.
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In addition, stock markets have experienced price
and volume fluctuations that have affected and continue to affect the market prices of equity securities of many companies in our industry.
In the past, stockholders of other public companies have instituted securities class action litigation following periods of market volatility.
If we were to become involved in securities litigation, it could subject us to substantial costs, divert resources and the attention of
management from our business, and harm our business, results of operations, financial condition, reputation, and cash flows. As a result,
you may be unable to resell your shares of common stock at or above the price at which you purchased your shares.
We may invest or spend the proceeds of our
prospective public offering in ways with which stockholders may not agree or in ways which may not yield a return.
We have not yet determined the net proceeds from
the sale of shares of our common stock in our prospective public offering, or if the offering will occur. We expect to use the net proceeds
from our prospective public offering for working capital and other general corporate purposes. We may also use a portion of the net proceeds
from our prospective public offering for acquisitions or strategic investments in complementary businesses or technologies. We do not
currently have any plans for any such acquisitions or investments. We have not allocated specific amounts of net proceeds for any of these
purposes. Our management will have considerable discretion in the application of the net proceeds, and stockholders will not have the
opportunity, as part of your investment decision, to assess whether the proceeds will be used appropriately or to influence our decisions
regarding the use of proceeds. Because of the number and variability of factors that will determine our use of the net proceeds from our
prospective public offering, if any, their ultimate use may vary substantially from the intended uses. The net proceeds may be used for
purposes that do not result in an increase in the value of our business, which could cause our stock price to decline.
Purchasers in our prospective public offering
will experience immediate and substantial dilution.
Our prospective public offering price per share
is likely to be substantially higher than the pro forma net tangible book value per share of our common stock outstanding prior to the
offering. As a result, investors purchasing common stock in our prospective public offering will experience immediate dilution. In addition,
we previously have issued options and warrants to acquire common stock at prices likely to be significantly below the public offering
price. To the extent outstanding options and warrants are ultimately exercised, there will be further dilution to investors in our prospective
public offering. In addition, if we issue additional equity securities in other offerings, our stockholders will experience additional
dilution.