Quarterly Report for Quarter Ending August 31, 2026 (Form 10-Q)

Management's Discussion and Analysis of Financial Condition and Results of Operations

References in this quarterly report on Form 10-Q (the "Quarterly Report") to "we," "us" or the "Company" refer to Byrna Technologies Inc. References to our "management" or our "management team" refer to our officers and directors. The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the financial statements and the notes thereto contained elsewhere in this Quarterly Report. Certain information contained in the discussion and analysis set forth below includes forward-looking statements that involve risks and uncertainties.

Special Note Regarding Forward-Looking Statements

This Quarterly Report includes "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933, as amended (the "Securities Act") and Section 21E of the Securities Exchange Act of 1934, as amended, (the "Exchange Act") that are not historical facts and involve risks and uncertainties that could cause actual results to differ materially from those expected and projected. All statements, other than statements of historical fact included in this Quarterly Report including, without limitation, statements in this "Management's Discussion and Analysis of Financial Condition and Results of Operations" regarding our financial position, business strategy and the plans and objectives of management for future operations, are forward-looking statements. Words such as "expect," "believe," "anticipate," "intend," "may," "estimate," "opportunity," "could," "seek" and variations and similar words and expressions are intended to identify such forward-looking statements. Such forward-looking statements relate to future events or future performance, but reflect management's current beliefs, based on information currently available. A number of factors could cause actual events, performance or results to differ materially from the events, performance and results discussed in the forward-looking statements. For information identifying important risk factors that could cause actual results to differ materially from those anticipated in the forward-looking statements, please refer to the Risk Factors section of our Annual Report on Form 10-K for the year ended November 30, 2025 filed with the U.S. Securities and Exchange Commission (the "SEC") on February 5, 2026, as amended on March 30, 2026 (the "2025 10-K"), and the Company's subsequent filings with the SEC, all of which can be accessed on the EDGAR section of the SEC's website at www.sec.gov. Except as expressly required by applicable securities law, we disclaim any intention or obligation to update or revise any forward-looking statements whether as a result of new information, future events or otherwise, including but not limited to our ability to design, introduce and sell new products, services and features, the impact of any regulatory proceedings or litigation, our ability to protect our intellectual property and compete with existing and new products, the impact of stock compensation expense, dividends, warrant exercises and related accounting, impairment expense and income tax expense on our financial results, our ability to manage our supply chain and avoid production delays, shortages or other factors, including product mix, cost of parts and materials and cost of labor that may impact our gross margins, our ability to retain and incentivize key management personnel, product defects, the success of our entry to new markets, customer purchase behavior and negative media publicity or public perception of our brand or products, restrictions or prohibitions imposed by advertising platforms, loss of customer data, breach of security or an extended outage related to our e-commerce storefronts, including a breach or outage by our third party cloud based storage providers, exposure to international operational risks, delayed cash collections or credit losses, determinations or audits by taxing authorities, changes in government regulations, including environmental and chemical regulation applicable to our chemical irritant products, the impact of existing or future regulation by the Bureau of Alcohol, Tobacco, and Firearms, import and export regulators, or other federal or state authority, or changes in international law in key jurisdictions including South America and South Africa or our inability to obtain needed exemptions from such existing or future regulation.

OVERVIEW

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

Byrna Technologies Inc. designs, manufactures, retails and distributes less-lethal personal security solutions intended for situations that do not require the use of lethal force. Our mission is to empower individuals to protect themselves and others, and our product strategy emphasizes ease of use, effectiveness, and reliability in both consumer and professional safety environments. We also develop tools intended to serve as alternatives to traditional firearms for law enforcement and private security customers with the goal of reducing firearm related incidents and supporting de-escalation practices. Our strategy includes positioning Byrna® as a consumer lifestyle brand associated with personal confidence and safety, while expanding our product portfolio to broaden market reach and drive sales growth from both new and existing customers.

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

We believe demand for less-lethal products in the United States and internationally continues to rise and that this category will remain a growing segment of the broader security market. We plan to meet this demand by manufacturing and distributing our Byrna® SD, Byrna LE and most recently our Byrna CL launchers, along with continued expansion of our accessory and ammunition offerings and our complementary personal safety products, including chemical irritant defense sprays and personal safety alarms.

On July 31, 2024, our Board of Directors approved a plan to buy back up to $10 million worth of shares of our common stock (the "Stock Buyback Program"). The Stock Buyback Program is intended to return capital to shareholders and to minimize the dilutive impact of stock options and other share-based awards. The Stock Buyback Program expired by its own terms on July 31, 2026, the two-year anniversary of its initiation. As of its expiration, an aggregate of 0.5 million shares had been repurchased under the program for $5.8 million.

Beginning with our Annual Report on Form 10-K for fiscal 2025, we report our operations through two reportable sales channels, Direct-to-Consumer ("DTC") and Wholesale (dealer/distributor), to align with our expanded omnichannel strategy, the opening of Company operated retail stores, and increased penetration into national retail chains and international distributors.

We operate primarily in the United States and, through a wholly owned subsidiary, in Canada. Our wholly owned South Africa subsidiary ceased manufacturing operations during the third quarter of fiscal 2025 and no longer conducts significant operating activities.

Recent Developments

In late September 2026, we determined that certain of our Fox Labs branded chemical irritant defense sprays are formulated by our contract filler with trichloroethylene, a solvent whose processing and distribution for consumer use has been prohibited under an Environmental Protection Agency ("EPA") rule since June 2025. We suspended shipments of the affected Fox Labs products, instructed our dealers and distributors to suspend sales of them. On October 6, 2026, we voluntarily disclosed this matter to the EPA and we also intend to file a report with the Consumer Product Safety Commission (the "CPSC"). We expect to reformulate the affected products, and we expect revenue from those products to be reduced or eliminated until reformulated products are available. These products represented approximately 1.3% of our net revenue for the nine months ended August 31, 2026. We are not able to estimate at this time the costs of reformulation or any penalties or claims that may result from this matter. See Note 21 to the condensed consolidated financial statements and Part II, Item 1A of this Quarterly Report.

RESULTS OF OPERATIONS

Three months ended August 31, 2026 as compared to three months ended August 31, 2025:

Net Revenue

We present revenue net of returns, allowances, and discounts. Net revenues were $15.3 million in the third fiscal quarter of 2026 which represents a decrease of $12.9 million, or 45.7%, as compared to the prior year period revenues of $28.2 million. The decrease was primarily driven by lower Web (DTC) sales, via Amazon and the Company's website, which decreased by $6.3 million, or 38.6%, from $16.3 million in the third fiscal quarter of 2025 to $10.0 million in the same fiscal quarter of 2026, as well as lower domestic wholesale dealer and distributor sales, which decreased by $4.3 million, or 53.8%, from $7.9 million in the third fiscal quarter of 2025 to $3.7 million in the same fiscal quarter of 2026. International sales, including Canada (International (DTC) and International (Wholesale)), decreased from $2.9 million in the three months ended August 31, 2025 to $1.1 million in the three months ended August 31, 2026. In addition, we recognized no royalty revenue related to the LATAM Licensing Agreement in the third fiscal quarter of 2026, compared to $0.3 million in the prior year period. Revenue by reportable sales channel, discussed below, differs from the Web (DTC) and domestic wholesale amounts above because DTC revenue also includes International (DTC) sales and Company-operated retail store sales, and Wholesale revenue also includes International (Wholesale) sales and royalty revenue.

Segment Results

Direct-to-Consumer (DTC)

DTC revenue, which includes Web (DTC), Company-operated retail store, and International (DTC) sales, decreased to $11.1 million in the third fiscal quarter of 2026 compared to $17.4 million in the prior year period, primarily driven by a decline in online conversion rates across the Company's direct-to-consumer channels, including both Amazon and the Company's website.

Wholesale (Dealer/Distributor)

Wholesale revenue, which includes royalty revenue, decreased $6.6 million, or 61.1%, to $4.2 million in the third fiscal quarter of 2026 compared to $10.8 million in the prior year period, primarily reflecting a $4.3 million decrease in sales to Byrna dedicated dealers, including chain store and distributor customers, a $2.0 million decrease in International (Wholesale) sales, and a $0.3 million decrease in royalty revenue. The prior year period included approximately $3.2 million of shipments to national chain store customers in August 2025 that did not recur in the current year period. The decrease in International (Wholesale) sales primarily reflects a $1.0 million decrease in sales to customers in South Africa and lower orders from international distributors in Europe, South America and Asia.

Cost of Goods Sold

Cost of goods sold was $3.1 million in the third fiscal quarter of 2026 compared to $11.3 million in the prior year period, a decrease of $8.1 million, or 72.1%, compared to a 45.7% decline in revenue over the same period. The decrease in cost of goods sold was primarily driven by lower sales volumes across the Company's web, wholesale, Amazon, and international channels, the receipt of refunds of previously paid tariffs during the period (described below), and lower labor and overhead variances compared to the prior year period. Cost of goods sold attributable to Direct-to-Consumer ("DTC") was $2.0 million in the third fiscal quarter of 2026, compared to $5.9 million in the prior year period. Cost of goods sold attributable to Wholesale was $1.1 million in the third fiscal quarter of 2026, compared to $5.4 million in the prior year period. During the three months ended August 31, 2026, we received tariff refunds of approximately $2.3 million related to previously paid tariffs, which are reflected as a reduction of cost of goods sold in the current period. We may be entitled to additional tariff refunds for prior period tariff payments; however, as such amounts are not yet determinable or realizable, they have not been recognized in the financial statements.

Gross Profit

Gross profit is calculated as total revenue less cost of goods sold, and gross margin is calculated as gross profit divided by total revenue. Cost of goods sold includes costs associated with the production and procurement of products, including labor and overhead, inbound freight, manufacturing depreciation, purchasing and receiving costs, and inspection costs. Gross profit was $12.2 million during the third fiscal quarter of 2026, or 79.5% of net revenue, compared to gross profit of approximately $16.9 million, or 60.1% of net revenue, in the prior-year period. The 19.4 percentage point increase in gross margin was primarily driven by approximately $2.3 million of refunds of previously paid tariffs recorded as a reduction of cost of goods sold during the period (see Note 11, Inventory), which contributed approximately 15.0 percentage points. The remaining increase primarily reflects lower freight and purchase price variances, excluding the tariff refunds, which contributed approximately 2.6 percentage points; lower labor and fixed overhead variances, which contributed approximately 1.9 percentage points, primarily reflecting the elimination of labor and overhead variances associated with in-house ammunition production following the cessation of those operations in the second fiscal quarter of 2026; and lower product costs as a percentage of net revenue, which contributed approximately 0.5 percentage points and include the effect of a shift in sales mix toward the Company's higher-margin direct-to-consumer channel, which represented 72.5% of net revenue in the third fiscal quarter of 2026 compared to 61.7% in the prior year period. These favorable impacts were partially offset by higher scrap, rework and inventory reserve charges, including incremental inventory reserve provisions of $0.2 million, which reduced gross margin by approximately 0.7 percentage points. The decrease in gross profit dollars was primarily driven by lower sales volume across the Company's web, wholesale, Amazon, and international channels.

Operating Expenses

Operating expenses were $15.1 million in the third fiscal quarter of 2026, an increase of $1.0 million, as compared to the prior year period expenses of $14.1 million. The increase was primarily driven by an increase of $1.7 million in bad debt expense, primarily reflecting full reserves recorded against the royalty receivable from Byrna LATAM and the outstanding receivables of two other customers, an increase of $1.2 million in marketing expenses, primarily reflecting increased broadcast, audio and connected TV advertising and fees for marketing agencies engaged during the quarter, and an increase of $0.2 million in professional fees largely attributable to higher accounting, audit, and recruitment-related costs, partially offset by a decrease of $1.2 million in variable expenses, which decreased in proportion to sales volume, a decrease of $0.5 million in employee compensation costs, a decrease of $0.1 million in stock-based compensation expense, and a net gain of $0.2 million related to the termination of the Company's Scottsdale, Arizona retail lease.

Other Income (Expense)

We recorded less than $0.1 million of foreign currency transaction loss during the three months ended August 31, 2026, compared to $0.1 million of foreign currency transaction loss during the three months ended August 31, 2025. We recorded less than $0.1 million of interest income during the three months ended August 31, 2026, compared to $0.1 million in the three months ended August 31, 2025.

Income Tax Provision

For the three months ended August 31, 2026 and August 31, 2025, we recorded no material income tax provision or benefit and $0.6 million of income tax expense, respectively. For the three months ended August 31, 2026 and 2025, the effective tax rate was 0.0% and 21.9%, respectively. The 0.0% effective tax rate for the three months ended August 31, 2026 reflects that no material income tax benefit was recognized on the third quarter pre-tax loss, as described in Note 20, Income Taxes. Our tax rate differs from the statutory rate of 21.0% due to the effects of state income taxes net of the federal benefit, foreign tax rate differentials related to the Company's South Africa operations, permanent non deductible expenses, discrete items related to share based compensation, and other items.

Net Loss

Net loss was $2.9 million for the three months ended August 31, 2026, a decrease of $5.1 million compared to net income of $2.2 million for the three months ended August 31, 2025.

Non-GAAP Financial Measures

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

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

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

Adjusted EBITDA

Adjusted EBITDA is defined as net (loss) income as reported in our Condensed Consolidated Statements of Operations and Comprehensive (Loss) Income excluding the impact of (i) depreciation and amortization; (ii) income tax provision (benefit); (iii) interest income (expense); (iv) stock-based compensation expense, (v) impairment loss and (vi) one-time, non-recurring other expenses or income. Our Adjusted EBITDA measure eliminates potential differences in performance caused by variations in capital structures (affecting finance costs), tax positions, the cost and age of tangible assets (affecting relative depreciation expense) and the extent to which intangible assets are identifiable (affecting relative amortization expense). We also exclude certain one-time and non-cash costs. Reconciliation of Adjusted EBITDA to net (loss) income, the most directly comparable GAAP measure, is as follows (in thousands):

		For the Three Months Ended
		August 31,
		2026				2025
Net (loss) income		$	(2,911	)		$	2,235
Adjustments:
Interest income			(37	)			(97	)
Income tax expense			-				628
Depreciation and amortization			466				618
Non-GAAP EBITDA			(2,482	)			3,384
Stock-based compensation expense			601				734
Severance/Officer recruiting			521				(36	)
Non-GAAP adjusted EBITDA		$	(1,360	)		$	4,082

Nine months ended August 31, 2026 as compared to nine months ended August 31, 2025:

Net Revenue

We present revenue net of returns, allowances, and discounts. Net revenues were $60.7 million in the nine months ended of August 31, 2026 which represents a decrease of $22.1 million, or 26.7%, as compared to the prior year period revenues of $82.9 million. The decrease was driven by lower domestic wholesale dealer and distributor sales, which decreased by $3.0 million, or 15.1%, from $19.8 million to $16.8 million. Web (DTC) sales, via Amazon and our website, declined in the nine months ended August 31, 2026, decreasing by $14.2 million, or 27.1%, to $38.1 million from $52.3 million in the nine months ended August 31, 2025. International sales, including Canada (International (DTC), International (Wholesale) and royalties), decreased from $9.0 million in the nine months ended August 31, 2025 to $4.0 million in the nine months ended August 31, 2026, which includes a net reduction of less than $0.1 million related to the reversal of previously recognized royalty revenue under the LATAM Licensing Agreement, which unfavorably impacted international revenue for the period.

Segment Results

Direct-to-Consumer (DTC)

DTC revenue, which includes Web (DTC), Company-operated retail store, and International (DTC) sales, decreased to $41.5 million in the nine months ended August 31, 2026 compared to $55.2 million in the prior year period, primarily driven by a decline in online conversion rates across our direct-to-consumer channels, including Amazon and our website.

Wholesale (Dealer/Distributor)

Wholesale revenue, which includes royalty revenue, decreased $8.5 million, or 30.8%, to $19.2 million in the nine months ended August 31, 2026 compared to $27.7 million in the prior year period, primarily reflecting a $4.3 million decrease in International (Wholesale) sales, a $3.1 million decrease in sales to Byrna dedicated dealers, and a $1.2 million decrease in royalty revenue, which reflects the net reversal of previously accrued LATAM royalty revenue recorded in the second quarter of fiscal 2026 (see Note 10).

Cost of Goods Sold

Cost of goods sold was $29.4 million in the nine months ended August 31, 2026, compared to $32.5 million in the prior year period. This decrease of $3.1 million, or 9.5%, compared to a 26.7% decline in revenue over the same period. The smaller decrease in cost of goods sold relative to the decline in revenue was primarily driven by a $6.0 million inventory write-down and a $3.5 million impairment charge related to the write-off of ammunition production machinery, equipment, and production-specific leasehold improvements, both recorded in the second fiscal quarter of 2026 in connection with our decision to permanently cease in-house ammunition production at its Fort Wayne, Indiana facility. Of the $6.0 million inventory write-down, $3.6 million related to ammunition raw materials associated with the Fort Wayne plant shutdown and the remainder related to launcher components that due to a strategic decision, will either not be reworked and therefore scrapped, or for which expected future demand and marketability had declined, as well as other slow-moving inventory. Excluding the inventory write-down and impairment charge, cost of goods sold decreased compared to the prior year period, driven by lower sales volumes across our web, international, and wholesale channels, as well as improved freight costs compared to the prior year period, which included elevated air freight usage and tariff impacts, and improved labor and fixed cost absorption. These favorable impacts were partially offset by lower average selling prices, driven primarily by a shift in sales mix toward lower-priced channels. Cost of goods sold attributable to Direct-to-Consumer ("DTC") was $17.4 million in the nine months ended August 31, 2026, compared to $18.8 million in the prior year period. Cost of goods sold attributable to Wholesale was $12.0 million in the nine months ended August 31, 2026, compared to $13.6 million in the prior year period. During the nine months ended August 31, 2026, we received cash refunds of previously paid tariffs of approximately $3.3 million, of which approximately $2.3 million was received during the three months ended August 31, 2026, which are reflected as a reduction of cost of goods sold in the current period (see Note 11, Inventory). We may be entitled to additional tariff refunds for prior period tariff payments; however, as such amounts are not yet determinable or realizable, they have not been recognized in the financial statements.

Gross Profit

Gross profit is calculated as total revenue less cost of goods sold, and gross margin is calculated as gross profit divided by total revenue. Cost of goods sold includes costs associated with the production and procurement of products, including labor and overhead, inbound freight, manufacturing depreciation, purchasing and receiving costs, and inspection costs. Gross profit was $31.3 million during the nine months ended August 31, 2026, or 51.6% of net revenue, compared to gross profit of approximately $50.4 million, or 60.8% of net revenue, in the prior-year period. The decrease in gross margin was primarily driven by a $6.0 million inventory write-down and a $3.5 million impairment charge related to the write-off of ammunition production machinery, equipment, and production-specific leasehold improvements, both recorded in the second fiscal quarter of 2026 in connection with our decision to permanently cease in-house ammunition production at its Fort Wayne, Indiana facility. Of the $6.0 million inventory write-down, $3.6 million related to ammunition raw materials associated with the Fort Wayne plant shutdown and the remainder related to launcher components that due to a strategic decision, will either not be reworked and therefore scrapped, or for which expected future demand and marketability had declined, as well as other slow-moving inventory. These decreases to gross profit were partially offset by $3.3 million of refunds of previously paid tariffs, recorded as a reduction of cost of goods sold during the period (see Note 11, Inventory). Excluding the inventory write-down and impairment charge, the decrease in gross margin was driven by lower sales volume across our web, international, and wholesale channels, as well as a shift in sales mix toward lower-priced wholesale channels and lower average selling prices. These unfavorable impacts were partially offset by improved freight costs compared to the prior year period, which included elevated air freight usage and tariff impacts, and improved labor and fixed cost absorption.

Operating Expenses

Operating expenses were $46.2 million in the nine months ended August 31, 2026, an increase of $3.7 million, as compared to the prior year period expenses of $42.5 million. The current period includes a $1.0 million charge related to the write-off of deposits for equipment associated with the Fort Wayne ammunition production facility that had not yet been placed in service at the time we committed to permanently cease in-house ammunition production. Excluding this charge, operating expenses increased by $2.6 million compared to the prior year period, primarily driven by an increase of $3.6 million in marketing expenses, primarily reflecting increased national television, connected TV and audio advertising and fees for marketing agencies engaged in the third quarter of fiscal 2026, an increase of $2.0 million in bad debt expense, primarily reflecting reserves recorded against the remaining trade receivables of the Company's South Africa subsidiary and certain domestic customer receivables, and an increase of $1.1 million in professional fees largely attributable to higher accounting, audit, legal, and recruitment-related costs, partially offset by a decrease of $1.9 million in variable expenses, which decreased in proportion to sales volume, a decrease of $1.4 million in employee compensation costs, a decrease of $0.3 million in stock-based compensation expense, and a net gain of $0.2 million related to the termination of our Scottsdale, Arizona retail lease.

Other Income (Expense)

We recorded $0.2 million and $0.3 million of foreign currency transaction loss during the nine months ended August 31, 2026 and 2025, respectively. We recorded $0.2 million of interest income during the nine months ended August 31, 2026 compared to $0.4 million in the nine months ended August 31, 2025.

Income Tax Provision

For the nine months ended August 31, 2026 and August 31, 2025, we recorded $2.7 million of income tax benefit and $1.7 million of income tax expense, respectively. For the nine months ended August 31, 2026 and August 31, 2025, the effective tax rate was 17.9% and 20.9%, respectively. The effective tax rate for the nine months ended August 31, 2026 reflects the income tax benefit recognized primarily on the third quarter pre-tax loss, including the impairment and inventory charges described above. Our tax rate differs from the statutory rate of 21.0% due to the effects of state income taxes net of the federal benefit, foreign tax rate differentials related to our South Africa operations, permanent non deductible expenses, discrete items related to share based compensation, and other items.

Net Loss

Net loss was $12.2 million for the nine months ended August 31, 2026, a decrease of $18.5 million compared to net income of $6.3 million for the nine months ended August 31, 2025.

Non-GAAP Financial Measures

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

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

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

Adjusted EBITDA

Adjusted EBITDA is defined as net (loss) income as reported in our Condensed Consolidated Statements of Operations and Comprehensive (Loss) Income excluding the impact of (i) depreciation and amortization; (ii) income tax provision (benefit); (iii) interest income (expense); (iv) stock-based compensation expense, (v) impairment loss and (vi) one-time, non-recurring other expenses or income. Our Adjusted EBITDA measure eliminates potential differences in performance caused by variations in capital structures (affecting finance costs), tax positions, the cost and age of tangible assets (affecting relative depreciation expense) and the extent to which intangible assets are identifiable (affecting relative amortization expense). We also exclude certain one-time and non-cash costs. Reconciliation of Adjusted EBITDA to net (loss) income, the most directly comparable GAAP measure, is as follows (in thousands):

		For the Nine Months Ended
		August 31,
		2026				2025
Net (loss) income		$	(12,198	)		$	6,324
Adjustments:
Interest income			(167	)			(400	)
Income tax (benefit) expense			(2,666	)			1,666
Depreciation and amortization			1,828				1,617
Non-GAAP EBITDA		$	(13,203	)			9,207
Stock-based compensation expense			1,972				2,297
Impairment loss on property and equipment			4,506				-
Write-down of ammunition inventory			3,605				-
Inventory reserve - strategic product rationalization			2,324				-
Severance/Officer recruiting			1,041				210
Non-GAAP adjusted EBITDA		$	245			$	11,714

Adjusted EBITDA for the three and nine months ended August 31, 2026 includes the benefit of approximately $2.3 million and $3.3 million, respectively, of refunds of previously paid tariffs recorded as a reduction of cost of goods sold, and a net gain of $0.2 million on the termination of our Scottsdale, Arizona retail lease, none of which are expected to recur. These items have not been excluded from Adjusted EBITDA because the related tariff payments and lease costs were not excluded from Adjusted EBITDA in the periods in which they were incurred. Excluding these items, Adjusted EBITDA would have been a loss of approximately $3.8 million and $3.3 million for the three and nine months ended August 31, 2026, respectively. Severance/officer recruiting for the three months ended August 31, 2025 reflects the reversal of $0.1 million of previously accrued severance, partially offset by $0.1 million of executive search fees.

LIQUIDITY AND CAPITAL RESOURCES

Cash Flow Summary

Cash and cash equivalents as of August 31, 2026 totaled $8.4 million, a decrease of $5.3 million from $13.7 million of cash and cash equivalents as of November 30, 2025.

Operating Activities

Net cash used in operating activities was $3.5 million for the nine months ended August 31, 2026, compared to $11.5 million for the nine months ended August 31, 2025. Net loss was $12.2 million for the nine months ended August 31, 2026, compared to net income of $6.3 million for the prior year period. Significant non-cash and working capital items were as follows:

Non-cash items included stock-based compensation expense of $2.0 million, compared to $2.3 million in the prior year period. The decrease primarily reflects forfeitures related to employee departures. Depreciation and amortization was $1.8 million, compared to $1.6 million. In connection with our decision to permanently cease in-house ammunition production at its Fort Wayne, Indiana facility, we recorded a $4.5 million impairment charge, consisting primarily of $3.5 million of production machinery and equipment and $1.0 million of construction in progress. We also recorded $6.0 million of inventory write-downs and reserves, including a $3.6 million write-down of ammunition inventory associated with the Fort Wayne shutdown and a $2.4 million provision for slow-moving and excess inventory. The provision for expected credit losses was $2.0 million, compared to less than $0.1 million in the prior year period. The provision primarily reflects fully reserving the remaining trade receivables of our South Africa subsidiary from international distributors, together with reserves against certain domestic customer receivables. We recognized a deferred tax benefit of $2.7 million, compared to a deferred tax provision of $1.7 million in the prior year period. The benefit was recognized primarily on the second quarter pre-tax loss, including the impairment and inventory charges described above.

Accounts receivable decreased $6.3 million, compared to an increase of $6.3 million in the prior year period. The decrease reflects collection of fourth quarter fiscal 2025 chain store and international shipments, lower wholesale sales volume in the current period, and the reversal of $0.3 million of royalty receivables in connection with an adjustment to royalty revenue. Accounts payable and accrued liabilities decreased $8.6 million, compared to a decrease of $0.4 million in the prior year period. Accrued payroll decreased $3.7 million, reflecting the payment of fiscal 2025 bonuses in the first quarter of 2026 and the reversal of the fiscal 2026 bonus accrual in the third quarter. Trade payables and goods-received-not-invoiced balances decreased a combined $5.7 million as inventory purchasing declined significantly in the third quarter. These decreases were partially offset by $1.1 million of higher accrued media costs. Inventory used cash of $3.2 million, compared to $14.6 million in the prior year period. The current period use reflects first-half inventory purchases, including higher finished goods on slower sell-through, with purchasing sharply reduced in the third quarter; it excludes the non-cash write-downs and reserves described above and inventory acquired in the Hero acquisition. Inventory, net was $30.0 million as of August 31, 2026, compared to $32.7 million as of November 30, 2025. Finished goods increased from $9.6 million to $15.1 million, while raw materials decreased from $18.7 million to $10.7 million, including the effect of the $3.6 million write-down of ammunition inventory. The increase in finished goods primarily reflects slower sell-through as net revenue declined, with launcher unit sales decreasing approximately 28% in the nine months ended August 31, 2026 compared to the prior year period. Days in inventory, based on average inventory and cost of goods sold, increased to approximately 292 days for the nine months ended August 31, 2026 from approximately 228 days in the prior year period. We updated our excess and obsolescence analysis for the third quarter of fiscal 2026 based on inventory on hand, recent sales, and production consumption data, and recorded incremental reserves of $0.2 million during the three months ended August 31, 2026. During the same period, we utilized $0.6 million of previously established reserves upon the scrapping or disposal of the related inventory. Prepaid expenses and other current assets decreased $0.9 million, compared to an increase of $1.9 million in the prior year period. The decrease was primarily due to fewer vendor deposits with reduced purchasing, collections on a loan receivable, and lower prepaid marketing, partially offset by insurance policy renewals and higher prepaid income and franchise taxes. Operating lease liabilities decreased $1.2 million, compared to $0.4 million, reflecting lease payments and the August 2026 termination of our Scottsdale, Arizona retail store lease. Deferred revenue decreased $0.3 million, compared to $1.5 million. The decrease in cash used in operating activities compared to the prior year period was primarily attributable to the $6.3 million decrease in accounts receivable and approximately $3.3 million of cash refunds of previously paid tariffs, neither of which is expected to recur at comparable levels. Accounts receivable, net, was $2.5 million as of August 31, 2026.

Investing Activities

Net cash used in investing activities was $1.0 million for the nine months ended August 31, 2026, compared to net cash provided by investing activities of $0.6 million for the nine months ended August 31, 2025. Current period investing activities consisted of $1.2 million of purchases of property and equipment and $0.5 million of cash paid for the acquisition of Hero Defense Systems, LLC ("Hero"), net of cash acquired. These outflows were partially offset by $0.8 million of proceeds from the maturity of marketable debt securities. Prior period investing activities consisted of $5.8 million of purchases of property and equipment, more than offset by $6.4 million of proceeds from the sale of marketable debt securities. On August 6, 2026, we acquired Hero for total consideration of $1.7 million. The consideration consisted of cash, $0.5 million of our common stock, $0.6 million of contingent consideration payable in the form of royalties, and a $0.1 million holdback payable. The stock, contingent consideration and holdback are non-cash and are excluded from investing activities. See Note 6 for additional information.

Financing Activities

Cash flows used in financing activities was $1.1 million for the nine months ended August 31, 2026, compared to cash provided by financing activities of $0.1 million for the nine months ended August 31, 2025. The current year amount was primarily composed of taxes paid on issuances of restricted stock units of $0.2 million and payments of $1.0 million for repurchases of common stock. The prior year amount was primarily composed of proceeds from stock option exercises of $0.3 million, taxes paid on issuances of restricted stock units of $0.1 million, and payments of $0.1 million for repurchases of common stock.

We require significant capital to meet our obligations as they become due. Throughout the next twelve months, we expect to fund our operations primarily from existing cash and cash equivalents and cash generated from operations. We also have access to a $5.0 million revolving line of credit under our Credit Agreement, as discussed in Note 24, Credit Facility, which may be used, but is not currently anticipated to be drawn, to provide additional liquidity if needed. The $15.0 million delayed draw term loan under the Credit Agreement may be used only to finance permitted acquisitions, and the Credit Agreement's financial covenants are tested quarterly regardless of amounts outstanding. We may pursue additional equity offerings or debt financings to provide working capital and satisfy debt obligations. There can be no assurance as to the availability or terms upon which such financing and capital might be available in the future. We are also evaluating additional sources of liquidity, including a potential asset-based credit facility. In addition, the voluntary reporting of the regulatory matter relating to our chemical irritant defense spray products described in Note 21 to the condensed consolidated financial statements and in Part II, Item 1A of this Quarterly Report may require the use of cash for product reformulation, inventory disposition, penalties or claims in amounts we are not presently able to estimate. If we are required to raise additional capital to support our operations and are unable to secure additional funding, we may be forced to curtail or suspend our business plans.

Off-Balance Sheet Arrangements

We do not have any off-balance sheet arrangements that have, or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that are material to investors.

RECENT ACCOUNTING PRONOUNCEMENTS

See Note 5, "Recent Accounting Guidance," in the Notes to unaudited condensed consolidated financial statements included in Item 1 of this report for a discussion of recently issued and adopted accounting standards.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

Our unaudited condensed consolidated financial statements are based on the selection and application of significant accounting policies, which require management to make significant estimates and assumptions. Our significant accounting policies are outlined in Note 4, "Summary of Significant Accounting Policies," in the Notes to Consolidated Financial Statements included in Item 8 of the 2025 10-K. Except as described below, there were no significant changes during the three and nine months ended August 31, 2026 to our critical accounting policies and estimates from those described in our 2025 10-K. During the nine months ended August 31, 2026, the following areas involved significant judgment and estimates: (i) business combinations, including the preliminary allocation of the purchase price of the Hero Acquisition to the assets acquired and the measurement of contingent royalty consideration using significant unobservable (Level 3) inputs, including projected net sales, scenario probabilities, and discount rates (see Notes 6 and 7); (ii) goodwill, including the evaluation of whether events or changes in circumstances indicated that the fair value of the reporting unit was less than its carrying amount (see Note 6); (iii) the allowance for expected credit losses, including the full reserve recorded against the royalty receivable from Byrna LATAM and the evaluation of the collectability of the loan receivable from Byrna LATAM (see Notes 8 and 10); (iv) inventory write-downs and reserves to net realizable value (see Note 11); and (v) income taxes, including the application of the estimated annual effective tax rate in interim periods and the realizability of deferred tax assets, including the valuation allowance established against certain state tax credits (see Note 20). Changes in the assumptions underlying these estimates could have a material effect on our condensed consolidated financial statements.