SECURITY DEVICES INTERNATIONAL, INC.
Condensed
Interim Consolidated Balance Sheets
As at February 28, 2019 and
November 30, 2018
(Amounts expressed in US Dollars)
(Unaudited)
|
|
February 28,
|
|
|
November 30,
|
|
|
|
2019
|
|
|
2018
|
|
|
|
$
|
|
|
$
|
|
ASSETS
|
|
|
|
|
|
|
|
|
CURRENT
|
|
|
|
|
|
|
Cash and cash equivalent
|
|
350,929
|
|
|
1,182,387
|
|
Accounts receivable
|
|
17,868
|
|
|
18,914
|
|
Inventory (Note 10)
|
|
315,640
|
|
|
129,121
|
|
Prepaid expenses and other receivables
(Note 13)
|
|
678,494
|
|
|
901,247
|
|
|
|
|
|
|
|
|
Total Current Assets
|
|
1,362,931
|
|
|
2,231,669
|
|
Patent rights (Note 12)
|
|
104,501
|
|
|
106,334
|
|
Deposit for equipment (Note 3)
|
|
225,124
|
|
|
205,664
|
|
Property and equipment (Note 3)
|
|
201,704
|
|
|
113,418
|
|
|
|
|
|
|
|
|
TOTAL ASSETS
|
|
1,894,260
|
|
|
2,657,085
|
|
|
|
|
|
|
|
|
LIABILITIES
|
|
|
|
|
|
|
|
|
CURRENT LIABILITIES
|
|
|
|
|
|
|
Accounts payable and accrued liabilities
(Note 6)
|
|
460,946
|
|
|
397,309
|
|
Deferred revenue
|
|
52,525
|
|
|
-
|
|
Secured convertible debentures (Note 9)
|
|
1,019,374
|
|
|
978,361
|
|
Derivative liabilities (Note 9)
|
|
563,602
|
|
|
957,301
|
|
Total Current Liabilities
|
|
2,096,447
|
|
|
2,332,971
|
|
Long term convertible notes (Note 9)
|
|
239,149
|
|
|
167,077
|
|
Total Liabilities
|
|
2,335,596
|
|
|
2,500,048
|
|
Going Concern (Note 2)
|
|
|
|
|
|
|
Related Party Transactions (Note 6)
|
|
|
|
|
|
|
Commitments (Note 7)
|
|
|
|
|
|
|
Subsequent Events (Note 14)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
STOCKHOLDERS' (DEFICIENCY) EQUITY
|
|
|
|
|
|
|
|
|
Capital stock (Note 4)
|
|
|
|
|
|
|
Preferred stock, $0.001 par value, 5,000,000 shares authorized, Nil
issued and outstanding (November 30, 2018 - nil).
|
|
|
|
|
|
|
Common stock, $0.001 par value 300,000,000 shares authorized,
103,093,442 issued and outstanding (November 30,
2018: 101,976,900)
|
|
103,094
|
|
|
101,977
|
|
Additional paid-in capital
|
|
33,629,717
|
|
|
33,341,695
|
|
Accumulated deficit
|
|
(34,136,110
|
)
|
|
(33,252,338
|
)
|
Accumulated other comprehensive loss
|
|
(38,037
|
)
|
|
(34,297
|
)
|
|
|
|
|
|
|
|
Total Stockholders' (Deficiency) Equity
|
|
(441,336
|
)
|
|
157,037
|
|
|
|
|
|
|
|
|
TOTAL LIABILITIES AND STOCKHOLDERS'
(DEFICIENCY) EQUITY
|
|
1,894,260
|
|
|
2,657,085
|
|
See accompanying notes to the condensed interim consolidated
financial statements.
1
SECURITY DEVICES INTERNATIONAL, INC.
Condensed
Interim Consolidated Statements of Operations and Comprehensive
Loss
(Amounts expressed in US Dollars)
(Unaudited)
|
|
For the
|
|
|
For the
|
|
|
|
three months
|
|
|
three months
|
|
|
|
period ended
|
|
|
period ended
|
|
|
|
February 28,
|
|
|
February 28,
|
|
|
|
2019
|
|
|
2018
|
|
|
|
|
|
|
|
|
|
|
$
|
|
|
$
|
|
SALES
|
|
11,107
|
|
|
28,116
|
|
|
|
|
|
|
|
|
COST OF SALES
|
|
(5,549
|
)
|
|
(20,741
|
)
|
|
|
|
|
|
|
|
GROSS PROFIT
|
|
5,558
|
|
|
7,375
|
|
|
|
|
|
|
|
|
EXPENSES:
|
|
|
|
|
|
|
Depreciation (Note 3)
|
|
9,178
|
|
|
3,353
|
|
Amortization of patent rights
(Note 12)
|
|
1,833
|
|
|
-
|
|
Foreign currency translation loss (Note 9)
|
|
13,533
|
|
|
8,027
|
|
Selling, general and
administration
|
|
1,097,968
|
|
|
290,443
|
|
|
|
|
|
|
|
|
TOTAL OPERATING EXPENSES
|
|
1,122,512
|
|
|
301,823
|
|
LOSS FROM OPERATIONS
|
|
(1,116,954
|
)
|
|
(294,448
|
)
|
Accretion (Note 9)
|
|
(102,858
|
)
|
|
(28,748
|
)
|
Change in fair value of derivative liabilities
(Note 9)
|
|
395,430
|
|
|
1,391
|
|
Other expense-interest (Note
9)
|
|
(59,390
|
)
|
|
(33,907
|
)
|
|
|
|
|
|
|
|
LOSS BEFORE INCOME TAXES
|
|
(883,772
|
)
|
|
(355,712
|
)
|
Income taxes
|
|
-
|
|
|
-
|
|
NET LOSS
|
|
(883,772
|
)
|
|
(355,712
|
)
|
|
|
|
|
|
|
|
Foreign exchange translation adjustment for
the period
|
|
(3,740
|
)
|
|
(574
|
)
|
|
|
|
|
|
|
|
COMPREHENSIVE LOSS
|
|
(887,512
|
)
|
|
(356,286
|
)
|
|
|
|
|
|
|
|
Loss per share basic and
diluted
|
|
(0.009
|
)
|
|
(0.004
|
)
|
|
|
|
|
|
|
|
Weighted average common shares
outstanding during the period
|
|
102,435,923
|
|
|
93,014,134
|
|
See accompanying notes to the condensed interim consolidated
financial statements.
2
SECURITY DEVICES INTERNATIONAL, INC.
Condensed
Interim Consolidated Statements of Cash Flows
For the Three Months
Ended February 28, 2019 and 2018
(Amounts expressed in US Dollars)
(Unaudited)
|
|
For the three
|
|
|
For the three
|
|
|
|
months ended
|
|
|
months ended
|
|
|
|
February 28,
|
|
|
February 28,
|
|
|
|
2019
|
|
|
2018
|
|
|
|
|
|
|
|
|
|
|
$
|
|
|
$
|
|
CASH FLOWS FROM OPERATING ACTIVITIES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss for the period
|
|
(883,772
|
)
|
|
(355,712
|
)
|
Items not involving cash:
|
|
|
|
|
|
|
Stock-based compensation expense (included
in selling, general and
|
|
|
|
|
|
|
administration expenses)
|
|
123,667
|
|
|
16,734
|
|
Accretion
|
|
102,858
|
|
|
28,748
|
|
Foreign currency translation loss
|
|
13,533
|
|
|
8,027
|
|
Change in fair value of derivative
liabilities
|
|
(395,430
|
)
|
|
(1,391
|
)
|
Issue of common shares for services
|
|
165,472
|
|
|
-
|
|
Depreciation
|
|
9,178
|
|
|
3,353
|
|
Amortization of patent rights
|
|
1,833
|
|
|
-
|
|
Changes in non-cash working capital:
|
|
|
|
|
|
|
Accounts receivable
|
|
1,171
|
|
|
19,136
|
|
Prepaid expenses and other receivables
|
|
222,780
|
|
|
(151,753
|
)
|
Deferred revenue
|
|
52,525
|
|
|
-
|
|
Inventory
|
|
(186,519
|
)
|
|
(33,238
|
)
|
Accounts payable and accrued liabilities
|
|
63,154
|
|
|
(7,228
|
)
|
|
|
|
|
|
|
|
NET CASH USED IN OPERATING ACTIVITIES
|
|
(709,550
|
)
|
|
(473,324
|
)
|
|
|
|
|
|
|
|
CASH FLOWS FROM INVESTING ACTIVITIES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposit for equipment
|
|
(19,460
|
)
|
|
-
|
|
Purchase of property and equipment
|
|
(97,426
|
)
|
|
(2,456
|
)
|
NET CASH USED IN INVESTING ACTIVITIES
|
|
(116,886
|
)
|
|
(2,456
|
)
|
|
|
|
|
|
|
|
CASH FLOWS FROM FINANCING ACTIVITIES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Repayment of unsecured convertible debentures
|
|
-
|
|
|
(40,357
|
)
|
NET CASH USED BY FINANCING ACTIVITIES
|
|
-
|
|
|
(40,357
|
)
|
Effects of foreign currency exchange rate changes
|
|
(5,022
|
)
|
|
(11,319
|
)
|
NET DECREASE IN CASH AND CASH EQUIVALENTS
FOR THE PERIOD
|
|
(831,458
|
)
|
|
(527,456
|
)
|
Cash and cash equivalents, beginning of period
|
|
1,182,387
|
|
|
1,965,043
|
|
CASH AND CASH EQUIVALENTS, END OF PERIOD
|
|
350,929
|
|
|
1,437,587
|
|
|
|
|
|
|
|
|
SUPPLEMENTAL DISCLOSURE OF CASH FLOWS:
|
|
|
|
|
|
|
INCOME TAXES PAID
|
|
-
|
|
|
-
|
|
INTEREST PAID
|
|
-
|
|
|
2,574
|
|
See accompanying notes to the condensed interim consolidated
financial statements.
3
SECURITY DEVICES INTERNATIONAL, INC.
Condensed
Interim Consolidated Statement of Changes in Stockholders (Deficiency)
Equity
For the three-month period ended February 28, 2019 and 2018
(Amounts expressed in US Dollars)
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
Number of
|
|
|
Common
|
|
|
Additional
|
|
|
Shares
|
|
|
|
|
|
Other
|
|
|
|
|
|
|
Common
|
|
|
Shares
|
|
|
Paid-in
|
|
|
To be
|
|
|
Accumulated
|
|
|
Comprehensive
|
|
|
|
|
|
|
Shares
|
|
|
amount
|
|
|
Capital
|
|
|
Issued
|
|
|
Deficit
|
|
|
Loss
|
|
|
Total
|
|
|
|
#
|
|
|
$
|
|
|
$
|
|
|
$
|
|
|
$
|
|
|
$
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of November 30,
2017
|
|
93,014,134
|
|
|
93,014
|
|
|
31,365,097
|
|
|
-
|
|
|
(31,098,864
|
)
|
|
(32,624
|
)
|
|
326,623
|
|
Stock based compensation
|
|
-
|
|
|
-
|
|
|
16,734
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
16,734
|
|
Shares to be issued
|
|
-
|
|
|
-
|
|
|
-
|
|
|
112,500
|
|
|
-
|
|
|
-
|
|
|
112,500
|
|
Net loss for the period
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(355,712
|
)
|
|
-
|
|
|
(355,712
|
)
|
Foreign currency translation
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(574
|
)
|
|
(574
|
)
|
Balance as of February 28,
2018
|
|
93,014,134
|
|
|
93,014
|
|
|
31,381,831
|
|
|
112,500
|
|
|
(31,454,576
|
)
|
|
(33,198
|
)
|
|
99,571
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of November 30,
2018
|
|
101,976,900
|
|
|
101,977
|
|
|
33,341,695
|
|
|
-
|
|
|
(33,252,338
|
)
|
|
(34,297
|
)
|
|
157,037
|
|
Stock based compensation
|
|
-
|
|
|
-
|
|
|
123,667
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
123,667
|
|
Shares issued for services
|
|
1,116,542
|
|
|
1,117
|
|
|
164,355
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
165,472
|
|
Net loss for the period
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(883,772
|
)
|
|
-
|
|
|
(883,772
|
)
|
Foreign currency translation
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(3,740
|
)
|
|
(3,740
|
)
|
Balance as of February 28,
2019
|
|
103,093,442
|
|
|
103,094
|
|
|
33,629,717
|
|
|
-
|
|
|
(34,136,110
|
)
|
|
(38,037
|
)
|
|
(441,336
|
)
|
See accompanying notes to the condensed interim consolidated
financial statements.
4
SECURITY DEVICES INTERNATIONAL, INC.
|
Notes to Condensed Interim Consolidated Financial
Statements
|
For the Three Months Ended February 28, 2019 and
2018
|
(Amounts expressed in US Dollars)
|
(Unaudited)
|
1.
|
BASIS OF PRESENTATION
|
|
|
|
The accompanying condensed unaudited interim consolidated
financial statements have been prepared in accordance with the
instructions to Form 10-Q and therefore do not include all information and
footnotes necessary for a fair presentation of financial position, results
of operations and cash flows in conformity with accounting principles
generally accepted in the United States of America (GAAP); however, such
information reflects all adjustments (consisting solely of normal
recurring adjustments), which are, in the opinion of management, necessary
for a fair presentation of the results for the interim periods.
|
|
|
|
The condensed unaudited interim consolidated financial
statements should be read in conjunction with the financial statements and
notes thereto together with managements discussion and analysis of
financial condition and results of operations contained in Security
Devices International Inc.s (SDI or the Company) annual report on
Form 10-K for the year ended November 30, 2018. In the opinion of
management, the accompanying condensed unaudited interim consolidated
financial statements reflect all adjustments of a normal recurring nature
considered necessary to fairly state the financial position of the Company
at February 28, 2019 and November 30, 2018, the results of its operations
for the three-month periods ended February 28, 2019 and February 28, 2018,
and its cash flows for the three-month periods ended February 28, 2019 and
February 28, 2018. The results of operations for the three-month period
ended February 28, 2019 are not necessarily indicative of results to be
expected for the full year.
|
|
|
|
The Company was incorporated under the laws of the state
of Delaware on March 1, 2005. On February 3, 2014, the Company
incorporated a wholly owned subsidiary in Canada, Security Devices
International Canada Corp. On March 1, 2018, the Company acquired all the
shares of a company in South Africa, Byrna South Africa (Pty) Ltd. The
condensed unaudited interim consolidated financial statements for the
period ended February 28, 2019 include the accounts of Security Devices
International, Inc., and its subsidiary Security Devices International
Canada Corp. and Byrna South Africa (Pty) Ltd. All material inter-company
accounts and transactions have been
eliminated.
|
2.
|
NATURE OF OPERATIONS AND GOING CONCERN
|
|
|
|
The Company is a less-lethal defense technology company,
specializing in the innovative next generation solutions for security
situations that do not require the use of lethal force. SDI has
implemented manufacturing partnerships to assist in the deployment of
their patented and patent pending family of 40mm and .68 caliber products.
These products consist of the current manufacture of Blunt Impact
Projectile 40mm (BIP) line of products, a line of 12 gauge less-lethal
products, and a .68 caliber hand held personal security device called the
Byrna.
|
|
|
|
These condensed unaudited interim consolidated financial
statements have been prepared in accordance with generally accepted
accounting principles applicable to a going concern, which assumes that
the Company will be able to meet its obligations and continue its
operations for its next fiscal year.
|
|
|
|
The Companys activities are subject to risk and
uncertainties including:
|
|
|
|
The Company has not earned adequate revenue and has used
cash in its operations. Therefore, the Company will need additional
financing to continue its operations if it is unable to generate
substantial revenue growth.
|
|
|
|
The Company has incurred a cumulative loss of $34,136,110
from inception to February 28, 2019. The Company has funded operations
through the issuance of capital stock, warrants and convertible
debentures. The Company has started to generate revenue from operations.
However, it still expects to incur significant losses before becoming
profitable. The Companys future success is dependent upon its ability to
raise sufficient capital or generate adequate revenue, to cover its
ongoing operating expenses, and also to continue to develop and be able to
profitably market its products. There can be no assurance that such
financing will be available at all or on favorable terms. These factors
raise substantial doubt about the ability of the Company to continue as a
going concern. The financial statements do not include any adjustments
that might result from the outcome of this uncertainty; such adjustments
could be material.
|
5
SECURITY DEVICES INTERNATIONAL, INC.
|
Notes to Condensed Interim Consolidated Financial
Statements
|
For the Three Months Ended February 28, 2019 and
2018
|
(Amounts expressed in US Dollars)
|
(Unaudited)
|
3.
|
PROPERTY AND EQUIPMENT
|
|
|
|
Property and equipment are recorded at cost less
accumulated depreciation. Depreciation is provided commencing in the month
following acquisition using the following annual rate and
method:
|
Computer Equipment and software
|
30%
|
declining balance method
|
Furniture and Fixtures
|
30%
|
declining balance method
|
Leasehold Improvements
|
|
straight line over period of
lease
|
Moulds
|
20%
|
straight line over 5 years
|
|
|
|
February 28, 2019
|
|
|
November 30, 2018
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
Accumulated
|
|
|
|
|
Cost
|
|
|
Amortization
|
|
|
Cost
|
|
|
Amortization
|
|
|
|
|
$
|
|
|
$
|
|
|
$
|
|
|
$
|
|
|
Computer equipment and software
|
|
80,270
|
|
|
49,370
|
|
|
77,382
|
|
|
46,837
|
|
|
Furniture and fixtures
|
|
20,998
|
|
|
18,930
|
|
|
20,998
|
|
|
18,763
|
|
|
Leasehold Improvements
|
|
26,471
|
|
|
26,471
|
|
|
26,471
|
|
|
26,471
|
|
|
Moulds
|
|
386,206
|
|
|
217,470
|
|
|
291,599
|
|
|
210,961
|
|
|
|
|
513,945
|
|
|
312,241
|
|
|
416,450
|
|
|
303,032
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net carrying amount
|
|
|
|
$
|
201,704
|
|
|
|
|
$
|
113,418
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation expense for three- month period
|
$
|
9,178
|
|
|
(February 28, 2019)
|
|
$
|
3,353
|
|
|
(February 28, 2018)
|
|
As of February 28, 2019, the Company
has deposits of $225,124 (November 30, 2018-$205,664) with vendors primarily for
supply of moulds and equipment. As of February 28, 2019, the vendors had not
completed the supply of these moulds and equipment.
6
SECURITY DEVICES INTERNATIONAL, INC.
|
Notes to Condensed Interim Consolidated Financial
Statements
|
For the Three Months Ended February 28, 2019 and
2018
|
(Amounts expressed in US Dollars)
|
(Unaudited)
|
300,000,000* Common shares, $0.001 par
value
And
5,000,000 Preferred shares, $0.001 par
value
* On October 6, 2017, the Company
filed with the Secretary of the State of Delaware a certificate of amendment
(the Amendment) to the Companys certificate of incorporation. The Amendment
increased the number of authorized shares of the Companys common stock, par
value $0.001, from 100,000,000 to 200,000,000 common shares.
* On March 21, 2019, the Company filed
with the Secretary of the State of Delaware a certificate of amendment (the
Amendment) to the Companys certificate of incorporation. The Amendment
increased the number of authorized shares of the Companys common stock, par
value $0.001, from 200,000,000 to 300,000,000 common shares.
The Companys Articles of
Incorporation authorize its Board of Directors to issue up to 5,000,000 shares
of preferred stock having par value of $0.001. The provisions in the Articles of
Incorporation relating to the preferred stock allow the directors to issue
preferred stock with multiple votes per share and dividend rights, which would
have priority over any dividends paid with respect to the holders of SDIs
common stock.
103,093,442 common shares (November
30, 2018: 101,976,900 common shares)
7
SECURITY DEVICES INTERNATIONAL, INC.
|
Notes to Condensed Interim Consolidated Financial
Statements
|
For the Three Months Ended February 28, 2019 and
2018
|
(Amounts expressed in US Dollars)
|
(Unaudited)
|
|
c)
|
Changes to Issued Share Capital
|
Three months ended February 28,
2019
In January 2019, the Company made a
share issuance to Paul Jensen (Jensen) pursuant to his employment agreement. The Company
issued 134,938 common shares at a price of $0.1482 per share to satisfy the
payment of $20,000, due January 15, 2019.
In January 2019, the Company made a
share issuance to Bryan Ganz (Ganz) pursuant to a consulting agreement. The Company issued
500,000 common shares at a price of $0.1482 for a total consideration of
$74,100, due December 15, 2018.
In January 2019, the Company made a
share issuance to a corporation owned and controlled by Dean Thrasher
(Thrasher), executive
chairman of the Company, pursuant to a consulting agreement. The Company issued
180,000 common shares at a price of $0.1482 for a total consideration of $26,676
due January 15, 2018.
In January 2019, the Company made a
share issuance to Lisa Wager (Wager), the Chief Legal Officer (CLO), pursuant to a consulting
agreement. The Company issued 166,666 common shares at a price of $0.1482 for a
total consideration of $24,700, due January 15, 2019.
In January 2019, the Company made a
share issuance to André Buys (Buys), the Chief Technology Officer (CTO), pursuant to a consulting
agreement. The Company issued 134,938 common shares at a price of $0.1482 per
share to satisfy the payment of $19,998 due January 15, 2019.
Year ended November 30, 2018
In March 2018, the Company made a share
issuance to Northeast Industrial Partners (NEIP) pursuant to a consulting
agreement. SDI issued 507,550 common shares at a price of $0.1231 per share to
satisfy the payment of $62,500 due in December 2017.
In March 2018, the Company made a share
issuance to Jensen pursuant to his employment agreement. SDI
issued 339,370 common shares at a price of $0.1473 per share to satisfy the
payment of $50,000, due January 15, 2018.
In May 2018, the Company made a share
issuance to Jensen pursuant to his employment agreement. SDI issued 334,154
common shares at a price of $0.1496 per share to satisfy the payment of $50,000,
due April 15, 2018.
In July 2018, the Company made a share
issuance to Jensen pursuant to his employment agreement. SDI issued 298,880
common shares at a price of $0.1673 per share to satisfy the payment of $50,000,
due July 15, 2018.
In November 2018, the Company made a
share issuance to Jensen pursuant to his employment agreement. SDI issued
136,146 common shares at a price of $0.1469 per share to satisfy the payment of
$20,000, due October 15, 2018.
In November 2018, the Company made a
share issuance to Ganz pursuant to a consulting agreement. SDI
issued 500,000 common shares at a price of $0.1451 per share for a total
consideration of $72,573 to satisfy the payment for services for the fiscal
third quarter.
In November 2018, the Company made a
share issuance to a corporation owned by Thrasher under the
consulting agreement. SDI issued 180,000 common shares at a price of $0.1533 per
share for a total consideration of $27,600 due September 15, 2018.
In November 2018, the Company made a
share issuance of 6,666,666 common shares to FinTekk AP, LLC (FinTekk) at a
price of $0.15 per share. The shares are issued pursuant to a debt settlement
agreement, to retire certain debt owing by the Company to FinTekk, in connection
with a sponsorship agreement (the Sponsorship Agreement). The Sponsorship
Agreement details a marketing campaign for the launch of the Companys new
Byrna
TM
HD product over the 2018 and 2019 fiscal years. The Company
recognized $750,000 as a prepaid expense as at November 30, 2018 (See note 13).
8
SECURITY DEVICES INTERNATIONAL, INC.
|
Notes to Condensed Interim Consolidated Financial
Statements
|
For the Three Months Ended February 28, 2019 and
2018
|
(Amounts expressed in US Dollars)
|
(Unaudited)
|
5.
|
STOCK BASED COMPENSATION AND
WARRANTS
|
Effective May 31, 2013, the Company
adopted an incentive stock option plan (the 2013 Stock Option Plan) which
replaced the prior stock option and stock bonus plans, as ratified by the
Companys shareholders at the Companys 2015 annual meeting of shareholders. A
maximum of 9,379,857 common shares were reserved for issuance under the 2013
Stock Option Plan.
The Board approved a revised stock
option plan (the Revised Stock Option Plan) and received stockholder approval
at the annual meeting held on December 19, 2017, that will increase the number
of shares reserved for issuance under the stock option plan from 9,379,857 to
18,993,274.
The material terms of the Revised Stock
Option Plan are as follows:
(a) While the shares are listed on the
CSE, options may be granted to employees, senior officers, directors and
consultants of the Company or a subsidiary of the Company and to corporations
wholly-owned by such an employee, senior officer, director or consultant.
(b) The maximum number of common shares
which can be issued under the Revised Stock Option Plan will be 18,993,274:
provided that, so long as the Company is listed on the CSE, this maximum will be
reduced to 20% of the issued and outstanding common shares on December 19, 2017.
(c) The term of any option granted
under the Revised Stock Option Plan will be fixed by the board of directors at
the time such option is granted, provided that options will not be permitted to
exceed a term of ten years.
(d) The exercise price of any options
granted under the Revised Stock Option Plan will be determined by the board of
directors, in its sole discretion, but shall not be less than the closing price
of the shares on the stock exchange on the day preceding the day on which the
directors grant such options.
(e) While the shares are listed on the
CSE, options will be non-assignable and non-transferable.
(f) So long as the shares are listed on
the CSE, options on no more than 2% of the issued shares may be granted to any
one consultant, or in aggregate to all persons performing investor relations
activities, in any 12-month period.
(g) If the option holder ceases to be
someone eligible to receive a grant of options under the Revised Stock Option
Plan, then that holders existing options shall expire on the earlier of (i) the
expiry date fixed at the time of the option grant, and (ii) ninety days after
the date that the option holder ceases to be eligible to receive a grant of
options under the Revised Stock Option Plan.
9
SECURITY DEVICES INTERNATIONAL, INC.
|
Notes to Condensed Interim Consolidated Financial
Statements
|
For the Three Months Ended February 28, 2019 and
2018
|
(Amounts expressed in US Dollars)
|
(Unaudited)
|
5.
|
STOCK BASED COMPENSATION AND WARRANTS-Contd
|
|
|
|
Year ended November 30, 2018
|
|
|
|
Warrants
|
|
|
|
On October 22, 2018, the Company entered into a
securities purchase agreement with several accredited investors to sell
$1,275,000 of units at a price of $1,000 per unit, consisting of (i)
$1,000 10% interest unsecured convertible promissory note, convertible
into the Companys common stock at a conversion price of $0.15 per share
(see note 14(c)), and (ii) four thousand warrants each exercisable for one
share of common stock at an exercise price of $0.25 per share on or before
the five year anniversary of the issuance. The Company issued 5,100,000
warrants. The relative grant date fair value of these warrants was
estimated at $524,089 using the Binomial lattice option pricing model and
reflected in additional paid-in capital, with the following
assumptions:
|
|
Risk free rate
|
|
3.05%
|
|
|
Expected dividends
|
|
0%
|
|
|
Expected volatility
|
|
159%
|
|
|
Expected life
|
|
5 years
|
|
|
Market price of the Companys common stock
on date of grant of options
|
$
|
0.14
|
|
Stock Options
On March 27, 2017, the board of
directors granted options to Dean Thrasher to acquire a total of 1,150,000
common shares. These options were issued at an exercise price of CAD $0.13
($0.10) per share and vest thirty-three and one-third (33 1/3) percent every six
months commencing January 1, 2017, with an expiry term of five years. The
Company expensed stock-based compensation expense of $39,046 regarding the
vesting of options during the year ended November 30, 2018, leaving a balance of
$nil as unvested stock- based compensation expense.
On April 13, 2018, the board of
directors granted 1,500,000 options for shares of the Companys common stock to
the Chief Technology officer (CTO), Buys, with exercise price
of $0.16 and a trigger price of $0.30, $0.50 and $1.00 for each batch of 500,000
options, respectively. The Companys stock price must close above the trigger
price for 20 days in order for the option to be vested. The options shall have a
seven-year life from grant date and Buys must remain employed by the Company for
three years for the options to vest. The grant date fair value of the options
used for the purpose of estimating the stock compensation is estimated using the
Binomial Lattice option pricing model with the following assumptions:
|
Risk free rate
|
|
2.77%
|
|
|
Expected dividends
|
|
0%
|
|
|
Expected forfeiture rate
|
|
0%
|
|
|
Expected volatility
|
|
190%
|
|
|
Expected life
|
|
7 years
|
|
|
Market price of the Companys common stock on date of grant
of options
|
$
|
0.15
|
|
|
Stock-based compensation cost expensed
during the year
|
$
|
10,568
|
|
|
Unvested stock-based compensation expense
|
$
|
40,159
|
|
10
SECURITY DEVICES INTERNATIONAL, INC.
|
Notes to Condensed Interim Consolidated Financial
Statements
|
For the Three Months Ended February 28, 2019 and
2018
|
(Amounts expressed in US Dollars)
|
(Unaudited)
|
5.
|
STOCK BASED COMPENSATION AND
WARRANTS-Contd
|
On October 22, 2018, the board of
directors granted 400,000 options to directors and 250,000 options to a
consultant for a total of 650,000 options. These options were issued at an
exercise price of CAD $0.19 ($0.14) per share and vest immediately with an
expiry term of five years. The fair value of each option used for the purpose of
estimating the stock compensation is estimated using the Black-Scholes option
pricing model with the following assumptions:
|
Risk free rate
|
|
2.00%
|
|
|
Expected dividends
|
|
0%
|
|
|
Expected forfeiture rate
|
|
0%
|
|
|
Expected volatility
|
|
133%
|
|
|
Expected life
|
|
5 years
|
|
|
Market price of the Companys common stock on date of grant
of options
|
$
|
0.14
|
|
|
Stock-based compensation cost expensed
|
$
|
79,185
|
|
|
Unvested stock-based compensation expense
|
$
|
Nil
|
|
As of November 30, 2018, there was
$40,159 of unrecognized expense related to non-vested stock-based compensation
arrangements granted.
Three months ended February 28,
2019
Warrants
On December 3, 2018, the Company issued
750,000 warrants each to two consultants (the incentive warrants) to purchase
common shares of the Company at a strike price equal to the average trading
price of the Company on the OTC QB during the 20 business days proceeding such
approval. 50% of the incentive warrants vested upon issuance and the balance
will vest upon December 31, 2019. The incentive warrants shall have a three-year
life. These warrants were issued pursuant to the contracts executed with these
two consultants. The fair value of each warrant used for the purpose of
estimating the stock compensation is estimated using the Black-Scholes option
pricing model with the following assumptions:
|
Risk free rate
|
|
2.00%
|
|
|
Expected dividends
|
|
0%
|
|
|
Expected forfeiture rate
|
|
0%
|
|
|
Expected volatility
|
|
149%
|
|
|
Expected life
|
|
3 years
|
|
|
Market price of the Companys common stock on date of grant
of warrants
|
$
|
0.16
|
|
|
Stock-based compensation cost expensed
|
$
|
119,440
|
|
|
Unvested stock-based compensation expense
|
$
|
74,650
|
|
Stock Options:
On April 13, 2018, the board of
directors granted 1,500,000 options for shares of the Companys common stock to
Buys, with an exercise price of $0.16 and a trigger price of $0.30, $0.50 and
$1.00 for each batch of 500,000 options, respectively. The Company expensed
stock-based compensation expense of $4,227 during the three-month period ended
February 28, 2019.
As of February 28, 2019, there was
$110,582 of unrecognized expense related to non-vested stock-based compensation
arrangements granted.
11
SECURITY DEVICES INTERNATIONAL, INC.
|
Notes to Condensed Interim Consolidated Financial
Statements
|
For the Three Months Ended February 28, 2019 and
2018
|
(Amounts expressed in US Dollars)
|
(Unaudited)
|
6.
|
RELATED PARTY TRANSACTIONS
|
The following transactions are in the normal course of
operations and are measured at the amount of consideration established and
agreed to by related parties.
Three months ended February 28, 2019
As of February 28, 2019, there are no amounts receivable from
related parties.
As of February 28, 2019, the Company had a payable of $108,711
to related parties which is unsecured, non-interest bearing and due on demand.
This payable is included in accounts payable and accrued liabilities.
Effective as of October 1, 2017, the Company entered into an
employment agreement (the Employment Agreement) with Jensen pursuant to which
Jensen serves as President and Chief Operating Officer (COO) and effective
July 13, 2018 serves as Chief Executive Officer (CEO) of the Company. Jensen
resigned as CEO of the Company effective April 1, 2019 (See note 14 (b)). By the
terms of the Employment Agreement, Jensen will receive an annual salary of
$200,000, payable as follows. For the period beginning on October 1, 2017 and
ending on June 30, 2018, Jensen shall receive quarterly payments of the
Companys common stock, to be issued 15 days after the end of each three-month
quarter. Commencing July 1, 2018, the Company will pay $10,000 per month in cash
and the balance in Company common stock. At such time as the Company can pay the
entire salary in cash and be cash positive on an operating basis, the entire
monthly salary will be paid in cash. The Company expensed $50,000 for the
services for the three months ended February 28, 2019, which includes $6,667 for
issuance of 44,980 common shares for services and an accrual for $13,333 for
issuance of proportionate shares, in accordance with the consulting contract
(See notes 4 and 7).
The Company expensed $20,000 for services provided by Rakesh
Malhotra, Chief Financial Officer (CFO) of the Company which was paid to a
corporation in which the CFO has an ownership interest, pursuant to the
consulting contract (See note 7).
The Company expensed $35,700, which includes an accrual for
$25,200 for the issuance of 180,000 common shares for services, pursuant to a
consulting contract, for services provided by Thrasher. This was paid to a
corporation in which Thrasher has an ownership interest. (See notes 4 and 7).
On April 13, 2018, the Company employed Buys as the CTO with
compensation of $10,000 per month over a three-year period. The Company expensed
$30,000 during the three months ended February 28, 2019. On April 13, 2018, the
Company granted options to Buys to acquire a total of 1,500,000 common shares.
The Company expensed $4,227 for the value of options which vested during this
period. (See notes 4, 5 and 7)
Effective June 1, 2018 the Company entered into a consulting
agreement with Ganz pursuant to which Ganz serves as President of the Company.
By the terms of the consulting agreement, Ganz will be paid annually $200,000 in
the Companys common shares for his services. The Company accrued expense for
$50,000 for issuance of proportionate shares, in accordance with the consulting
contract (See notes 4 and 7).
Effective December 1, 2017, the Company leased office premises
at Wakefield, Massachusetts, USA for rent of $700 plus services per month from a
corporation owned and controlled by a director of the Company. The Company
expensed $4,383 as office rent plus services for the three months ended February
28, 2019. As of February 28, 2019, the Company has a payable for $1,595 for the
rent.
12
SECURITY DEVICES INTERNATIONAL, INC.
|
Notes to Condensed Interim Consolidated Financial
Statements
|
For the Three Months Ended February 28, 2019 and
2018
|
(Amounts expressed in US Dollars)
|
(Unaudited)
|
6.
|
RELATED PARTY TRANSACTIONS-Contd
|
Three months ended February 28, 2018
As of February 28, 2018, there are no amounts receivable from
related parties.
As of February 28, 2018, the Company had payables of $9,816 to
related parties to be settled in cash, $112,500 for shares pending issuance and
an additional $33,333 payable to be settled by issuance of stock in April, 2018.
Amounts due to related parties are unsecured, non-interest bearing and due on
demand.
Effective as of October 1, 2017, the Company entered into an
employment agreement with Paul Jensen pursuant to which Mr. Jensen serves as
President and Chief Operating Officer of the Company. By the terms of the
Employment Agreement, Mr. Jensen will receive an annual salary of $200,000,
payable as follows. For the period beginning on October 1, 2017 and ending on
June 30, 2018, Mr. Jensen shall receive quarterly payments of the Companys
common stock, to be issued 15 days after the end of each three-month calendar
quarter.
The Company expensed $19,380 for services provided by the CFO
of the Company which was paid to a corporation in which the CFO has an ownership
interest, in accordance with the consulting contract. The Company expensed
$40,380 (CAD $50,000) for services provided by the CEO of the Company and which
was paid to a corporation in which the CEO has an ownership interest, in
accordance with the consulting contract.
On March 27, 2017, the board of directors had granted options
to the CEO to acquire a total of 1,150,000 common shares. The Company expensed
$16,734 for fair value of options which vested during this period.
Effective December 1, 2017, the Company leased office premises
at Wakefield, Massachusetts, USA for a rent of $700 per month from a corporation
owned and controlled by a director of the Company. The Company expensed $2,100
as lease rent for the quarter ended February 28, 2018.
13
SECURITY DEVICES INTERNATIONAL, INC.
|
Notes to Condensed Interim Consolidated Financial
Statements
|
For the Three Months Ended February 28, 2019 and
2018
|
(Amounts expressed in US Dollars)
|
(Unaudited)
|
|
a)
|
Consulting agreements:
|
The non-independent directors of the
Company executed consulting agreements with the Company on the following terms:
The Company executed a consulting
agreement effective July 1, 2018 with a corporation owned by the executive
chairman. The contract, unless renewed expires on March 31, 2019. During the
service term, the Company will pay $3,500 per month and in addition, issue
180,000 common shares of the Company on a quarterly basis until the end of the
term. Each quarterly installment is due the 15
th
day of the following
month after the quarter. The common shares will be priced at the volume weighted
average trading price per common share over the 20-day period proceeding the due
date.
Effective as of October 1, 2017, the
Company entered into an employment agreement (the Employment Agreement) with
Jensen pursuant to which Jensen serves as President and COO of the Company. By
the terms of the Employment Agreement, Jensen will receive an annual salary of
$200,000, payable as follows. For the period beginning on October 1, 2017 and
ending on June 30, 2018, Jensen shall receive quarterly payments of the
Companys common stock, to be issued 15 days after the end of each three-month
quarter. The shares issued shall be valued based upon the weighted average
closing price of the Companys shares for the twenty (20) trading days prior to
the end of the applicable quarter. Commencing July 1, 2018, the Company will pay
$10,000 per month in cash and the balance in Company stock. At such time as the
Company can pay the entire salary in cash and be cash positive on an operating
basis, the entire monthly salary will be paid in cash.
On April 13, 2018, the Company entered
into a Purchase and Sale Agreement (the Agreement) with André Buys, (Buys) a
resident of South Africa, pursuant to which the Company purchased from Buys a
portfolio of registered patent rights and other intellectual property relating
to air and/or gas fired long guns or pistols, including pump action launchers
and munitions used with such pistols and long guns, including self-stabilizing
shaped or finned rounds (the Portfolio). As consideration for the Portfolio,
the Company (i) paid Buys $100,000, (ii) agreed to pay Buys either $500,000 in
cash or $750,000 worth of Company stock within two years (the Second Payment)
at Buys discretion and (iii) agreed to pay Buys certain royalty payments for
sales of products by the Company using technology covered by the Portfolio. In
addition, the Company employed Buys as the CTO and for services issued 1,500,000
options for shares of the Companys common stock to Buys with a strike price of
$0.16 and a trigger price of $0.30, $0.50 and $1.00 for each batch of 500,000
options, respectively. The Companys stock price must close above the trigger
price for 20 days in order for the option to be triggered. The options shall
have a seven-year life from grant date and Buys must remain employed by the
Company for three years in order for the options to vest. Until the earlier of,
the second anniversary or the date the Second Payment is made, the royalty will
be 10% of the Net Sales Price (NSP). The royalty will then be reduced to 4%
till the sixth anniversary, 3% till the eighth anniversary, and 2% till the last
expiration date of any of the intellectual property in the Portfolio. Until the
royalty exceeds $25,000 per year, the Company is committed to a minimum payment
of $25,000 per year effective on the earlier of one year from closing or upon
Buys relocation to Boston. In the event that the Company fails to make the
Second Payment, the Portfolio would revert to Buys, but the Company would retain
perpetual, irrevocable, exclusive and non-exclusive licenses to use technology
with respect to the Portfolio and any technology developed within two years of
April 13, 2018. As the substance of the purchase and sale agreement has been
determined to be an option agreement, the Company has not recorded any amount
related to the Second Payment. The Company agrees that it will not terminate
Buys except for cause prior to April 2021. As a result, the minimal commitment
relating to the employment contract is $320,000 payable over a period of 32
months.
Effective June 1, 2018, the Company
entered into a consulting agreement with Ganz pursuant to which Ganz serves as
President of the Company. By the terms of the consulting agreement, Ganz will be
paid annually $200,000 in the Companys common shares for his service, subject
to stock exchange approval. The common shares shall be issued quarterly, ending
March 31, 2019. For the Companys 2018 fiscal third and fourth quarter the
President shall be paid 500,000 common shares for each quarter. Commencing in
the three months ended February 28, 2019, Ganz will be issued an ongoing 250,000
common shares every quarter for his services.
Effective November 1, 2018, the Company
entered into consulting agreements (the Consulting Agreements) with two
consultants. The consultants will each be paid $7,500 per month commencing
November 1, 2018 and to be increased to $10,000 per month subsequent to the
month the Company begins shipping the Byrna HD product to customers. The term of
the contracts with the consultants continue until December 31, 2019.
|
1.
|
The Company has commitments for leasing office premises
in Wakefield, Massachusetts, USA to June 27, 2019, at a monthly rent of
$700 (See note 6).
|
|
2.
|
The Company has commitments for leasing warehouse space
in Fort Wayne, Indiana, USA to February 28, 2020, at a monthly rent of
$2,472.
|
|
3.
|
The Company has commitments for leasing office premises
in Pretoria East, South Africa to December 19, 2020, at a monthly rent of
$1,050 (Rand 14,750).
|
14
SECURITY DEVICES INTERNATIONAL, INC.
|
Notes to Condensed Interim Consolidated Financial
Statements
|
For the Three Months Ended February 28, 2019 and
2018
|
(Amounts expressed in US Dollars)
|
(Unaudited)
|
8.
|
EXCLUSIVE SUPPLY AND PURCHASE AGREEMENTS
|
|
|
|
The Company entered a Development, Supply and
Manufacturing Agreement with the BIP manufacturer on August 1, 2017. This
agreement provides the Company to order and purchase only from the BIP
manufacturer certain BIP assemblies and components for use by the Company
to produce less-lethal and training projectiles as described in the
agreement in North America. The agreement is for a term of four years with
an automatic extension for additional one- year terms if neither party has
given written notice of termination at least sixty (60) days prior to the
end of the then- current term.
|
|
|
|
The Company entered a License and Supply Agreement with
Safariland, LLC on May 1, 2017. This agreement provides the Company to
license and sell only to Safariland, LLC for certain BIP standard payloads
for integration with and production of certain less-lethal impact
munitions in North America. This agreement is for a term of four years
with an automatic extension for an additional one-year term if neither
party have given written notice of termination at least ninety (90) days
prior to the end of the then-current term.
|
|
|
9.
|
CONVERTIBLE DEBENTURES AND DEFERRED FINANCING
COSTS
|
|
a)
|
Secured Convertible Debentures $1,019,374 (November
30, 2018: $978,361)
|
The CAD$1,363,000 ($1,015,026) of
Series B Secured Convertible Debentures (Subordinate Secured Debentures) were
issued pursuant to the Trust Indenture agreement dated December 7, 2016 (the
Indenture) in exchange for the Unsecured Debentures in equal principal amount
and an additional CAD$36,000 ($26,809) of Series B Secured Convertible
Debentures were issued pursuant to the Indenture in payment of accrued interest.
These debentures mature on June 6, 2019 and bear interest at 12% per annum,
payable semi-annually. The debentures are secured by all the assets of the
Company. The principal amount, plus accrued interest, may be converted at the
option of the holder at any time during the term to maturity into shares of the
Companys common stock at a conversion price of $0.24 (CAD $0.31) per share
subject to anti-dilution protection with a minimum conversion price of $0.135
and for capital reorganization events. The debentures also embody certain
traditional default provisions that are linked to credit or interest risks, such
as bankruptcy proceedings, liquidation events and corporate existence. The
Company has concluded that the embedded conversion option is not indexed to its
stock because it did not pass all eight conditions of equity classification
provided in ASC 815. The embedded conversion option is subject to classification
in the financial statements in liabilities at fair value both at inception and
subsequently.
The Company has evaluated the terms and
conditions of the debentures under the guidance of ASC 815. All three criteria
under ASC 815-15-25-1 are met, therefore, the conversion feature requires
classification and measurement as derivative financial instruments. Accordingly,
the evaluation resulted in the conclusion that this derivative financial
instrument requires bifurcation and liability classification, at fair value.
Current standards contemplate that the classification of financial instruments
requires evaluation at each report date.
The following table reflects the
allocation of the purchase on December 7, 2016:
|
Secured convertible cotes
|
|
Face Value
|
|
|
(CAD $1,399,000)
|
$
|
1,041,835
|
|
|
Proceeds
|
|
1,041,835
|
|
|
Embedded derivative
|
|
(285,612
|
)
|
|
Carrying value
|
$
|
756,223
|
|
The carrying value of these debentures
at February 28, 2019 is CAD $1,342,342 ($1,019,374) and at November 30, 2018 is
CAD $1,301,359 ($978,361).
Discounts (premiums) on the convertible
notes arise from (i) the allocation of basis to other instruments issued in the
transaction, (ii) fees paid directly to the creditor and (iii) initial
recognition at fair value, which is lower than face value. Discounts (premiums)
are amortized through charges (credits) to interest expense over the term of the
debt agreement. Amortization of debt discounts (premiums) amounted to CAD
$40,983 ($30,786) during the three months ended February 28, 2019 and CAD$36,202
($28,748) during the prior three months ended February 28, 2018. During the
three months ended February 28, 2019, the Company recorded interest expense for
$31,096 (February 28, 2018: $32,872).
15
SECURITY DEVICES INTERNATIONAL, INC.
|
Notes to Condensed Interim Consolidated Financial
Statements
|
For the Three Months Ended February 28, 2019 and
2018
|
(Amounts expressed in US Dollars)
|
(Unaudited)
|
9.
|
CONVERTIBLE DEBENTURES AND DEFERRED FINANCING
COSTS-Contd
|
|
b)
|
Convertible Notes $239,149 (November 30, 2018:
$167,077)
|
On October 22, 2018, the Company entered into a Securities
Purchase Agreement with several accredited investors to sell $1,275,000 of
units, with each $1,000 of unit consisting of (i) a $1,000 10% interest
unsecured convertible promissory note (collectively the Notes) due April 15,
2020, convertible into the Companys common stock at a conversion price of $0.15
per share, and (ii) four thousand (4,000) warrants each exercisable for one
share of common stock at an exercise price of $0.25 per share on or before the
five year anniversary of the issuance. The notes are secured secondary by all of
the Company assets and accrue interest at 10% per annum, payable in cash at
maturity. However, the principal amount, plus accrued interest, may be converted
at the option of the holder at any time during the term to maturity into shares
of common stock at a conversion price of $0.15 per share subject to
anti-dilution protection. The note embodies certain traditional default
provisions that are linked to credit or interest risks, such as bankruptcy
proceedings, liquidation events and corporate existence. The Company concluded
that the embedded conversion option is not indexed to the Companys stock
because it did not pass all eight conditions of equity classification provided
in ASC 815. Therefore, the embedded conversion option is subject to
classification in the financial statements in liabilities at fair value both at
inception and subsequently.
The Company evaluated the terms and conditions of the Notes
under the guidance of ASC 815. All three criteria under ASC 815-15-25-1 are met,
therefore, the conversion feature requires classification and measurement as
derivative financial instruments. Accordingly, the evaluation resulted in the
conclusion that this derivative financial instrument requires bifurcation and
liability classification, at fair value. Current standards contemplate that the
classification of financial instruments requires evaluation at each report
date.
The following table reflects the allocation of the purchase on
October 22, 2018:
Proceeds
|
$
|
1,275,000
|
|
|
|
|
|
Convertible notes
|
$
|
(131,547
|
)
|
|
|
|
|
Derivative liability-convertible promissory
notes
|
$
|
(619,364
|
)
|
|
|
|
|
Additional paid in capital (equity
warrants)
|
$
|
(524,089
|
)
|
The Company issued 5,100,000 warrants. The relative fair value
of these warrants was estimated at $524,089 using the Binomial Lattice option
pricing model and reflected in additional paid-in capital. Discounts (premiums)
on the convertible notes arise from (i) the allocation of basis to other
instruments issued in the transaction, (ii) fees paid directly to the creditor
and (iii) initial recognition at fair value, which is lower than face value.
Discounts (premiums) are amortized through charges (credits) to interest expense
over the term of the debt agreement. Amortization of debt discounts (premiums)
amounted to $72,072 during the three months ended February 28, 2019 (February
28, 2018: $Nil) resulting in the carrying value of convertible notes at $239,149
as at February 28, 2019 (November 30, 2018: $167,077). During the three months
ended February 28, 2019, the Company recorded interest expense for $28,294
(February 28, 2018: $Nil).
16
Derivative Liabilities
The carrying values of the embedded derivative liabilities is
reflected on the balance sheet, with changes in the carrying value being
recorded as a change in fair value of derivative liabilities on the statement of
operations.
The components of the embedded derivative as of February 28,
2019 are:
SECURITY DEVICES INTERNATIONAL, INC.
|
Notes to Condensed Interim Consolidated Financial
Statements
|
For the Three Months Ended February 28, 2019 and
2018
|
(Amounts expressed in US Dollars)
|
(Unaudited)
|
9.
|
CONVERTIBLE DEBENTURES AND DEFERRED FINANCING
COSTS-Contd
|
|
|
|
Indexed
|
|
|
|
|
Financings giving rise to derivative financial instruments
|
|
|
Shares
|
|
|
Fair
Value
|
|
Convertible Secured
Debentures December 7, 2016
|
|
|
8,044,853
|
|
$
|
191,596
|
|
Convertible Notes October 22, 2018
|
|
|
8,500,000
|
|
|
372,006
|
|
|
|
|
16,544,853
|
|
$
|
563,602
|
|
The components of the embedded derivative as of November 30,
2018 are:
|
|
|
Indexed
|
|
|
|
|
Financings giving rise to derivative financial instruments
|
|
|
Shares
|
|
|
Fair
Value
|
|
Convertible Secured
Debentures December 7, 2016
|
|
|
8,044,853
|
|
$
|
426,016
|
|
Convertible Notes October 22, 2018
|
|
|
8,500,000
|
|
|
531,285
|
|
|
|
|
16,544,853
|
|
$
|
957,301
|
|
The following table summarizes the effects on gain (loss)
associated with changes in the fair values of derivative financial instruments
by type of financing for the three months ended February 28, 2019 and 2018:
|
|
|
Three Months
|
|
|
Three Months
|
|
|
|
|
Ended
|
|
|
Ended
|
|
|
|
|
February 28, 2019
|
|
|
February 28, 2018
|
|
Financings giving rise to derivative financial instruments
and the income effects:
|
|
|
|
|
|
|
|
Convertible Secured
Debentures December 7, 2016
|
|
$
|
236,150
|
|
$
|
1,391
|
|
Convertible Notes October 22, 2018
|
|
$
|
159,280
|
|
|
-
|
|
|
|
$
|
395,430
|
|
$
|
1,391
|
|
Fair Value Considerations
GAAP establishes a fair value hierarchy that prioritizes the
inputs to valuation techniques used to measure fair value. As presented in the
tables below, this hierarchy consists of three broad levels:
|
Level
1
valuations
:
|
Quoted prices in active markets
for identical assets and liabilities.
|
|
Level
2
valuations
:
|
Quoted prices for similar assets or liabilities in active
markets; quoted prices for identical or similar assets or liabilities in
markets that are not active; and model- derived valuations whose inputs or
significant value drivers are observable.
|
|
|
|
|
Level
3
valuations
:
|
Significant inputs to valuation
model are unobservable.
|
The Company follows the provisions of ASC 820 with respect to
the financial instruments. As required by ASC 820, assets and liabilities
measured at fair value are classified in their entirety based on the lowest
level of input that is significant to their fair value measurement. The
derivative financial instruments which are required to be measured at fair value
on a recurring basis under of ASC 815 as of February 28, 2019 and November 30,
2018 are all measured at estimated fair value using Level 2 and 3 inputs.
17
SECURITY DEVICES INTERNATIONAL, INC.
|
Notes to Condensed Interim Consolidated Financial
Statements
|
For the Three Months Ended February 28, 2019 and
2018
|
(Amounts expressed in US Dollars)
|
(Unaudited)
|
9.
|
CONVERTIBLE DEBENTURES AND DEFERRED FINANCING
COSTS-Contd
|
The embedded derivative was fair valued using the income
valuation technique using the Lattice valuation model. The following table sets
forth the inputs for each significant assumption:
Convertible secured debentures December 7, 2016
|
|
|
February 28, 2019
|
|
|
November 30, 2018
|
|
|
|
|
|
|
|
|
|
Derivative financial instruments
|
|
$
|
191,596
|
|
$
|
426,016
|
|
Conversion price
|
|
$
|
0.135
|
|
$
|
0.135
|
|
Volatility
|
|
|
66%
|
|
|
91%
|
|
Remaining term (years)
|
|
|
0.27
|
|
|
0.52
|
|
Risk free rate
|
|
|
2.45%
|
|
|
2.52%
|
|
Convertible notes October 22, 2018
|
|
|
February 28, 2019
|
|
|
November 30, 2018
|
|
|
|
|
|
|
|
|
|
Derivative financial instruments
|
|
$
|
372,006
|
|
$
|
531,285
|
|
Conversion price
|
|
$
|
0.15
|
|
$
|
0.15
|
|
Volatility
|
|
|
79%
|
|
|
79%
|
|
Remaining term (years)
|
|
|
1.13
|
|
|
1.38
|
|
Risk free rate
|
|
|
2.54%
|
|
|
2.70%
|
|
18
SECURITY DEVICES INTERNATIONAL, INC.
|
Notes to Condensed Interim Consolidated Financial
Statements
|
For the Three Months Ended February 28, 2019 and
2018
|
(Amounts expressed in US Dollars)
|
(Unaudited)
|
10.
|
INVENTORY
|
|
|
|
Inventory as of February 28, 2019 consists of raw
materials for Byrna for $196,756 (November 30, 2018: $Nil) finished goods
of Blunt Impact Projectiles 40mm for $81,668 (November 30, 2018: $90,329)
and inventory procured from other suppliers for $37,216 (November 30,
2018: $38,792). The Company values its inventory on a first-in, first-out
basis. Inventory is valued at the lower of cost or net realizable
value.
|
|
|
11.
|
SEGMENT DISCLOSURES
|
|
|
|
The Company is organized on two geographic areas in
U.S.A. and Canada respectively. The U.S.A. and Canada operations are the
Companys operating segments and reportable segments, and each of those
segments are led by the Companys CEO. Performance is assessed and
resources are allocated by the CEO, whom we have determined to be the
Companys Chief Operating Decision Maker (CODM). Management evaluates the
segments based primarily upon revenue and assets. The tables below present
segment sales and assets for the quarters ended February 28, 2019 and
February 28, 2018:
|
|
|
|
Quarter ended February 28,
2019
|
|
|
|
SDI
USA
|
|
|
SDI
Canada
|
|
|
Total
|
|
|
Sales
|
$
|
11,146
|
|
$
|
1,177
|
|
$
|
12,323
|
|
Quarter ended February 28, 2018
|
|
|
SDI
USA
|
|
|
SDI
Canada
|
|
|
Total
|
|
|
Sales
|
$
|
28,108
|
|
$
|
230
|
|
$
|
28,338
|
|
|
|
|
2019
|
|
|
2018
|
|
|
Sales
|
$
|
12,323
|
|
$
|
28,338
|
|
|
Elimination of intersegment revenue
|
|
(1,216
|
)
|
|
(222
|
)
|
|
|
|
|
|
|
|
|
|
Consolidated sales
|
$
|
11,107
|
|
|
28,116
|
|
As at February 28, 2019
|
|
|
SDI
|
|
|
SDI
Canada
|
|
|
Total
|
|
|
Assets
|
$
|
1,861,010
|
|
$
|
33,250
|
|
$
|
1,894,260
|
|
As at November 30, 2018
|
|
|
SDI
|
|
|
SDI
Canada
|
|
|
Total
|
|
|
Assets
|
$
|
2,629,315
|
|
$
|
27,770
|
|
$
|
2,657,085
|
|
19
SECURITY DEVICES INTERNATIONAL, INC.
|
Notes to Condensed Interim Consolidated Financial
Statements
|
For the Three Months Ended February 28, 2019 and
2018
|
(Amounts expressed in US Dollars)
|
(Unaudited)
|
Seven patent applications, six non-provisional and one
provisional, have been filed by the Company with the U.S. Patent Office. The
Patents have been granted on the six non-provisional patents. The Company also
owns the trademark for BIP.
Non-Provisional (Granted Patents):
(a) Less-lethal Projectile: This issued patent relates to the
Companys distinctive collapsible ammunition head technology that absorbs
kinetic energy of the projectile upon impact. The Corporations collapsible head
is used in both the BIP and the Wireless Electric Projectile (WEP).
(b) Electronic Circuitry for Incapacitating a Living Target:
This issued patent relates to the electronic circuitry incapacitation system
which forms part of the WEP. The patent describes an electronic circuit which
provides an electrical incapacitation current to a living target.
(c) Less-lethal Wireless Stun Projectile System for
Immobilizing a Target by Neuro-Muscular Disruption: This issued patent describes
the process by which the WEP operates with its attachment system to halt a
target through a neuro-muscular-disruption system.
(d) Autonomous Operation of a Less-lethal Projectile: This
patent describes a motion sensing system within the WEP. The sensor will monitor
movement of the target and enable the electrical output until the target is
subdued. The electrical pulse is programmed for an exact time-frame to
specifications of the user.
(e) Projectile: This invention relates to a non-lethal
projectile to be fired using a paintball gun, and more particularly, but not
exclusively, to an aerodynamic non-lethal projectile which is used for marking,
inhibiting or administering medicinal or other chemical substances to live
targets.
(f) Payload Carrying Arrangement for a Non-Lethal Projectile:
This patent relates to the process of carrying liquid and powder payloads in the
head of the BIP munitions that upon impact release from the head and are
dispersed upon the target.
On April 13, 2018, the Company entered into a purchase and sale
agreement with André Buys, pursuant to which the Company agreed to purchase from
Mr. Buys a portfolio of registered patent rights, provisional patent rights, and
other intellectual property relating to air and/or gas fired long guns or
pistols, including pump action launchers and munitions used with such pistols
and long guns, including self-stabilizing shaped or finned rounds (the
Portfolio). As consideration for the portfolio, the Company paid Buys
$100,000, and incurred $10,000 in legal costs to transfer these patent rights.
This consideration of $110,000 has been capitalized. The Company also agreed to
pay Buys either $500,000 in cash or $750,000 worth of Company stock within two
years (the Second Payment) at Buys discretion. In the event that the Company
fails to make the Second Payment, the Portfolio would revert to Buys, but the
Company would retain perpetual, irrevocable, exclusive and non-exclusive
licenses to use technology with respect to the Portfolio and any technology
developed within two years of April 13, 2018. As the substance of the purchase
and sale agreement has been determined to be an option agreement, The Company
has not recorded any amount related to the Second Payment. These patent rights
have a maximum life of 20 years, expiring on various dates beginning in November
2033 to 2038, and are amortized straight-line commencing June 2018 over a period
of 15 years being the estimated useful life, as determined by management. The
Company amortized $1,833 during the three months ended February 28, 2019
(February 28, 2018: $nil). As the full arrangement included an option for full
acquisition of the rights, conditional upon certain future events taking place,
the Company has recorded the minimum rights to a licence arrangement as patent
rights. As at February 28, 2019, the amount recorded as Patent rights refer to
the perpetual, irrevocable, exclusive and non-exclusive license to use
technology with respect to the portfolio.
20
SECURITY DEVICES INTERNATIONAL, INC.
|
Notes to Condensed Interim Consolidated Financial
Statements
|
For the Three Months Ended February 28, 2019 and
2018
|
(Amounts expressed in US Dollars)
|
(Unaudited)
|
13.
|
PREPAID EXPENSES AND OTHER
RECEIVABLES
|
Prepaid expenses and other receivables as of February 28, 2019,
include the prepayment of $583,333 (November 30, 2018: $750,000) by the issuance
of common shares to FinTekk AP LLC, being the issuance relating to the marketing
campaign for the launch of the Companys new Byrna
TM
HD product to
occur in fiscal 2019.
|
a)
|
On April 1, 2019 the Company made a share issuance to
Ganz, the Company's President pursuant to his consulting agreement dated
June 1, 2018. The Company issued 333,333 common shares for the term
December 1, 2018 to March 31, 2019 for his services. The Company also
issued shares to a corporation controlled by Thrasher, pursuant to his
consulting agreement dated June 1, 2018. The Company issued 180,000 common
shares for the term January 1, 2019 to March 31, 2019 for his services.
The Company also issued 250,000 shares to Wager, for her services from
January through March of 2019.
|
|
|
|
|
b)
|
The Company announced the following management changes.
Jensen resigned effective April 1, 2019 as CEO. He will remain a director.
Thrasher, who served as Executive Chairman and Corporate Secretary of the
Board resigned effective April 1, 2019 from these positions. He will
remain a director. Ganz, the Company's President, assumed the title and
responsibilities of CEO effective April 1, 2019, and will continue to
serve as Chairman of the Board. Wager, who was appointed effective October
29, 2018 as the Company's General Counsel and Chief Legal Officer, will
continue to serve in those capacities and is also appointed as Corporate
Secretary to take over those responsibilities from Thrasher effective
April 1, 2019.
|
|
|
|
|
c)
|
See note 4.
|
21