SECURITY DEVICES INTERNATIONAL, INC.
Condensed
Interim Consolidated Balance Sheets
As at May 31, 2019 and November
30, 2018
(Amounts expressed in US Dollars) (Unaudited)
|
|
May31,
|
|
|
November 30,
|
|
|
|
2019
|
|
|
2018
|
|
|
|
$
|
|
|
$
|
|
ASSETS
|
|
CURRENT ASSETS
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
738,714
|
|
|
1,182,387
|
|
Accounts receivable
|
|
71,008
|
|
|
18,914
|
|
Inventory (Note 10)
|
|
587,476
|
|
|
129,121
|
|
Prepaid expenses and other receivables (Note 13)
|
|
807,232
|
|
|
901,247
|
|
|
|
|
|
|
|
|
Total Current Assets
|
|
2,204,430
|
|
|
2,231,669
|
|
Patent rights (Note 12)
|
|
102,668
|
|
|
106,334
|
|
Deposit for equipment (Note 3)
|
|
227,781
|
|
|
205,664
|
|
Property and equipment (Note 3)
|
|
247,404
|
|
|
113,418
|
|
|
|
|
|
|
|
|
TOTAL ASSETS
|
|
2,782,283
|
|
|
2,657,085
|
|
LIABILITIES
|
|
CURRENT LIABILITIES
|
|
|
|
|
|
|
Accounts payable and accrued liabilities (Note 6)
|
|
928,103
|
|
|
397,309
|
|
Deferred revenue
|
|
38,776
|
|
|
-
|
|
Secured convertible debentures (Note 9)
|
|
-
|
|
|
978,361
|
|
Convertible debentures (Note 9)
|
|
1,590,757
|
|
|
-
|
|
Derivative liabilities (Note 9)
|
|
310,539
|
|
|
957,301
|
|
Total Current Liabilities
|
|
2,868,175
|
|
|
2,332,971
|
|
Long term convertible notes (Note 9)
|
|
-
|
|
|
167,077
|
|
Total Liabilities
|
|
2,868,175
|
|
|
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, 104,156,775
|
|
|
|
|
|
|
issued and outstanding (November 30, 2018:
101,976,900)
|
|
104,157
|
|
|
101,977
|
|
Additional paid-in capital
|
|
34,707,208
|
|
|
33,341,695
|
|
Shares to be issued
|
|
20,000
|
|
|
-
|
|
Accumulated deficit
|
|
(34,854,841
|
)
|
|
(33,252,338
|
)
|
Accumulated other comprehensive loss
|
|
(62,416
|
)
|
|
(34,297
|
)
|
|
|
|
|
|
|
|
Total Stockholders' (Deficiency) Equity
|
|
(85,892
|
)
|
|
157,037
|
|
|
|
|
|
|
|
|
TOTAL LIABILITIES AND STOCKHOLDERS'
(DEFICIENCY) EQUITY
|
|
2,782,283
|
|
|
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
For the Six Months and Three Months Ended May 31, 2019 and
2018
(Amounts expressed in US Dollars) (Unaudited)
|
|
For the
|
|
|
For the
|
|
|
For the
|
|
|
For the
|
|
|
|
six
|
|
|
six
|
|
|
three
|
|
|
three
|
|
|
|
months
|
|
|
months
|
|
|
months
|
|
|
months
|
|
|
|
ended
|
|
|
ended
|
|
|
ended
|
|
|
ended
|
|
|
|
May 31,
|
|
|
May 31,
|
|
|
May 31,
|
|
|
May 31,
|
|
|
|
2019
|
|
|
2018
|
|
|
2019
|
|
|
2018
|
|
|
|
$
|
|
|
$
|
|
|
$
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SALES
|
|
116,876
|
|
|
166,858
|
|
|
105,769
|
|
|
138,742
|
|
COST OF SALES
|
|
(80,833
|
)
|
|
(119,213
|
)
|
|
(75,284
|
)
|
|
(98,472
|
)
|
GROSS PROFIT
|
|
36,043
|
|
|
47,645
|
|
|
30,485
|
|
|
40,270
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EXPENSES:
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation (Note 3)
|
|
17,021
|
|
|
6,759
|
|
|
7,843
|
|
|
3,406
|
|
Amortization of patent rights (Note 12)
|
|
3,666
|
|
|
-
|
|
|
1,833
|
|
|
-
|
|
Foreign currency translation gain
|
|
(15,721
|
)
|
|
(11,600
|
)
|
|
(29,254
|
)
|
|
(19,627
|
)
|
Selling, general and administration
|
|
1,826,861
|
|
|
705,868
|
|
|
728,893
|
|
|
415,425
|
|
TOTAL OPERATING EXPENSES
|
|
1,831,827
|
|
|
701,027
|
|
|
709,315
|
|
|
399,204
|
|
LOSS FROM OPERATIONS
|
|
(1,795,784
|
)
|
|
(653,382
|
)
|
|
(678,830
|
)
|
|
(358,934
|
)
|
Accretion (Note 9)
|
|
(305,060
|
)
|
|
(58,111
|
)
|
|
(202,202
|
)
|
|
(29,363
|
)
|
Change in fair value of derivative
liabilities (Note 9)
|
|
645,767
|
|
|
(61,349
|
)
|
|
250,337
|
|
|
(62,740
|
)
|
Other expense- Interest (Note 9)
|
|
(147,426
|
)
|
|
(67,179
|
)
|
|
(88,036
|
)
|
|
(33,272
|
)
|
LOSS BEFORE INCOME TAXES
|
|
(1,602,503
|
)
|
|
(840,021
|
)
|
|
(718,731
|
)
|
|
(484,309
|
)
|
Income taxes
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
NET LOSS
|
|
(1,602,503
|
)
|
|
(840,021
|
)
|
|
(718,731
|
)
|
|
(484,309
|
)
|
Foreign exchange translation adjustment for the period
|
|
(28,119
|
)
|
|
(2,253
|
)
|
|
(24,379
|
)
|
|
(1,679
|
)
|
COMPREHENSIVE LOSS
|
|
(1,630,622
|
)
|
|
(842,274
|
)
|
|
(743,110
|
)
|
|
(485,988
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss per share - basic and diluted
|
|
(0.016
|
)
|
|
(0.009
|
)
|
|
(0.007
|
)
|
|
(0.005
|
)
|
Weighted average number of common shares
|
|
|
|
|
|
|
|
|
|
|
|
|
outstanding
|
|
103,040,621
|
|
|
93,156,427
|
|
|
103,632,174
|
|
|
93,295,626
|
|
See accompanying notes to the condensed interim consolidated
financial statements.
2
SECURITY DEVICES INTERNATIONAL, INC.
Condensed
Interim Consolidated Statements of Cash Flows
For the Six Months Ended
May 31, 2019 and 2018
(Amounts expressed in US Dollars)
(Unaudited)
|
|
For the six
|
|
|
For the six
|
|
|
|
months ended
|
|
|
months ended
|
|
|
|
May 31, 2019
|
|
|
May 31, 2018
|
|
|
|
$
|
|
|
$
|
|
CASH FLOWS FROM OPERATING ACTIVITIES
|
|
|
|
|
|
|
Net loss for the period
|
|
(1,602,503
|
)
|
|
(840,021
|
)
|
Items not involving cash:
|
|
|
|
|
|
|
Stock-based compensation expense (included
in selling, general and
|
|
|
|
|
|
|
administration expenses)
|
|
164,910
|
|
|
35,582
|
|
Accretion
|
|
305,060
|
|
|
58,111
|
|
Foreign currency translation gain
|
|
(15,721
|
)
|
|
(11,600
|
)
|
Change in fair value of derivative
liabilities
|
|
(645,767
|
)
|
|
61,349
|
|
Issue of common shares for services
|
|
314,339
|
|
|
162,500
|
|
Shares to be issued for services
|
|
20,000
|
|
|
-
|
|
Issue of convertible debentures for
services
|
|
35,000
|
|
|
-
|
|
Depreciation
|
|
17,021
|
|
|
6,759
|
|
Amortization of patent rights
|
|
3,666
|
|
|
-
|
|
Changes in non-cash working capital:
|
|
|
|
|
|
|
Accounts receivable
|
|
(52,656
|
)
|
|
(95,443
|
)
|
Prepaid expenses and other receivables
|
|
93,663
|
|
|
(132,160
|
)
|
Deferred revenue
|
|
38,776
|
|
|
-
|
|
Inventory
|
|
(460,053
|
)
|
|
(21,848
|
)
|
Accounts payable and accrued liabilities
|
|
532,820
|
|
|
(107,361
|
)
|
NET CASH USED IN OPERATING ACTIVITIES
|
|
(1,251,445
|
)
|
|
(884,132
|
)
|
|
|
|
|
|
|
|
CASH FLOWS FROM INVESTING ACTIVITIES
|
|
|
|
|
|
|
Purchase of patents
|
|
-
|
|
|
(110,000
|
)
|
Deposit for equipment
|
|
(22,117
|
)
|
|
-
|
|
Purchase of property and equipment
|
|
(150,956
|
)
|
|
(11,114
|
)
|
NET CASH USED IN INVESTING ACTIVITIES
|
|
(173,073
|
)
|
|
(121,114
|
)
|
|
|
|
|
|
|
|
CASH FLOWS FROM FINANCING ACTIVITIES
|
|
|
|
|
|
|
Proceeds from convertible debentures
|
|
2,045,265
|
|
|
-
|
|
Repayment of secured convertible debentures
|
|
(1,035,930
|
)
|
|
-
|
|
Repayment of unsecured convertible
debentures
|
|
-
|
|
|
(40,357
|
)
|
NET CASH PROVIDED (USED) BY FINANCING
ACTIVITIES
|
|
1,009,335
|
|
|
(40,357
|
)
|
Effects of foreign currency exchange rate
changes
|
|
(28,490
|
)
|
|
(639
|
)
|
NET DECREASE IN CASH AND CASH EQUIVALENTS
FOR THE PERIOD
|
|
(443,673
|
)
|
|
(1,046,242
|
)
|
Cash and cash equivalents, beginning of
period
|
|
1,182,387
|
|
|
1,965,043
|
|
CASH AND CASH EQUIVALENTS, END OF PERIOD
|
|
738,714
|
|
|
918,801
|
|
|
|
|
|
|
|
|
SUPPLEMENTAL DISCLOSURE OF CASH FLOWS:
|
|
|
|
|
|
|
INCOME TAXES PAID
|
|
-
|
|
|
-
|
|
INTEREST PAID
|
|
67,007
|
|
|
67,179
|
|
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 Six Months ended May 31, 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
|
|
-
|
|
|
-
|
|
|
35,582
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
35,582
|
|
Issue of common
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
shares for services
|
|
1,181,074
|
|
|
1,181
|
|
|
161,319
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
162,500
|
|
Net loss for the
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
period
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(840,021
|
)
|
|
-
|
|
|
(840,021
|
)
|
Foreign currency
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
translation
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(2,253
|
)
|
|
(2,253
|
)
|
Balance as of
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
May31,2018
|
|
94,195,208
|
|
|
94,195
|
|
|
31,561,998
|
|
|
-
|
|
|
(31,938,885
|
)
|
|
(34,877
|
)
|
|
(317,569
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
November
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
30,2018
|
|
101,976,900
|
|
|
101,977
|
|
|
33,341,695
|
|
|
-
|
|
|
(33,252,338
|
)
|
|
(34,297
|
)
|
|
157,037
|
|
Stock-based
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
compensation
|
|
-
|
|
|
-
|
|
|
164,910
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
164,910
|
|
Shares issued for
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
services
|
|
2,179,875
|
|
|
2,180
|
|
|
312,159
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
314,339
|
|
Shares to be issued
|
|
-
|
|
|
-
|
|
|
-
|
|
|
20,000
|
|
|
-
|
|
|
-
|
|
|
20,000
|
|
Issuance of
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
warrants
|
|
-
|
|
|
-
|
|
|
888,444
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
888,444
|
|
Net loss for the
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
period
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(1,602,503
|
)
|
|
-
|
|
|
(1,602,503
|
)
|
Foreign currency
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
translation
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(28,119
|
)
|
|
(28,119
|
)
|
Balance as of
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
May31,2019
|
|
104,156,775
|
|
|
104,157
|
|
|
34,707,208
|
|
|
20,000
|
|
|
(34,854,841
|
)
|
|
(62,416
|
)
|
|
(85,892
|
)
|
See accompanying notes to the condensed interim consolidated
financial statements.
4
SECURITY DEVICES INTERNATIONAL, INC.
Notes to
Condensed Interim Consolidated Financial Statements
For the Period
Ended May 31, 2019 and 2018
(Amounts expressed in US
Dollars)(Unaudited)
The accompanying unaudited condensed
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 unaudited condensed 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 unaudited condensed interim consolidated financial statements
reflect all adjustments of a normal recurring nature considered necessary to
fairly state the financial position of the Company at May 31, 2019 and November
30, 2018, the results of its operations for the six and three month periods ended
May 31, 2019 and May 31, 2018, and its cash flows for the six month periods ended
May 31, 2019 and May 31, 2018. The results of operations for the six and
three month periods ended May 31, 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 May 31, 2019 include the
accounts of Security Devices International, Inc., and its subsidiaries 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 handheld 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 $34,854,841 from inception to May 31, 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 revenue will be generated or
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 Period
Ended May 31, 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
|
|
|
|
May 31, 2019
|
|
|
November 30,
2018
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
Accumulated
|
|
|
|
|
Cost
|
|
|
Amortization
|
|
|
Cost
|
|
|
Amortization
|
|
|
|
|
$
|
|
|
$
|
|
|
$
|
|
|
$
|
|
|
Computer equipment and software
|
|
80,091
|
|
|
50,978
|
|
|
77,382
|
|
|
46,837
|
|
|
Furniture and fixtures
|
|
22,722
|
|
|
19,098
|
|
|
20,998
|
|
|
18,763
|
|
|
Leasehold improvements
|
|
26,471
|
|
|
26,471
|
|
|
26,471
|
|
|
26,471
|
|
|
Moulds
|
|
438,122
|
|
|
223,455
|
|
|
291,599
|
|
|
210,961
|
|
|
|
|
567,406
|
|
|
320,002
|
|
|
416,450
|
|
|
303,032
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net carrying amount
|
|
|
|
$
|
247,404
|
|
|
|
|
$
|
113,418
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation expense for six- month
|
$
|
17,021
|
|
|
(May 31,
|
|
$
|
6,759
|
|
|
(May 31,
|
|
|
period
|
|
|
|
|
2019
|
)
|
|
|
|
|
2018
|
)
|
As of May 31, 2019, the Company has
deposits of $227,781 (November 30, 2018-$205,664) with vendors primarily for
supply of moulds and equipment. As of May 31, 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 Period
Ended May 31, 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.
104,156,775 common shares (November
30, 2018: 101,976,900 common shares)
7
SECURITY DEVICES INTERNATIONAL, INC.
Notes to
Condensed Interim Consolidated Financial Statements
For the Period
Ended May 31, 2019 and 2018
(Amounts expressed in US
Dollars)
(Unaudited)
|
c)
|
Changes to Issued Share Capital
|
Six months ended May 31,
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, 2019.
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 Andre J. Buys Sr. (Buys), 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.
On April 1, 2019, the Company made a
share issuance to Ganz, pursuant to a consulting agreement. The Company issued
333,333 common shares at a price of $0.14 per share to satisfy payment for
$46,665, due April 15, 2019.
On April 1, 2019, the Company made a
share issuance to Wager. The Company issued 250,000 common shares at a price of
$0.14 per share to satisfy payment for $35,000, due April 15, 2019.
On April 1, 2019, the Company made a
share issuance to a corporation owned and controlled by Thrasher, pursuant to a
consulting agreement. The Company issued 180,000 common shares at a price of
$0.14 for a total consideration of $25,200, due April 15, 2019.
On May 22, 2019, the Company made a
share issuance to a consultant pursuant to a consulting agreement for services.
The Company issued 300,000 common shares at a price of $0.14 per share for a
total consideration of $42,000.
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 Period
Ended May 31, 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 Period
Ended May 31, 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 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 warrants
|
$
|
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 Period
Ended May 31, 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
during the year
|
$
|
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.
Six months ended May 31,
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 on 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 grant date 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
|
$
|
141,835
|
|
|
Unvested stock-based compensation expense
|
$
|
52,255
|
|
On April 22, 2019 and May 20, 2019, the
Company entered into a securities purchase agreement with several accredited
investors to sell a total of $2,080,265 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 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 8,321,058 warrants. The relative
grant date fair value of these warrants was estimated at $888,444 using the
Binomial lattice option pricing model and reflected in additional paid-in
capital, with the following assumptions:
|
Risk free rate
|
|
2.21-2.39%
|
|
|
Expected forfeiture rate
|
|
0%
|
|
|
Expected dividends
|
|
0%
|
|
|
Expected volatility
|
|
155-156%
|
|
|
Expected life
|
|
5 years
|
|
|
Market price of the Companys common stock on date of grant
of warrants
|
$
|
0.15
|
|
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 of $8,454 during the six-month period ended May 31,
2019.
On May 21, 2019, the Company granted
120,000 options to an employee. These options were issued at an exercise price
of CAD $0.19 ($0.14) per share and vested immediately with an expiry term of
five years. The grant date 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
|
$
|
14,621
|
|
|
Unvested stock-based compensation expense
|
$
|
Nil
|
|
As of May 31, 2019, there was $83,959
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 Period
Ended May 31, 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.
Six months ended May 31, 2019
As of May 31, 2019, there are no amounts receivable from
related parties.
As of May 31, 2019, the Company had an amount payable of
$45,000 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. 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 Company's 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. Jensen resigned effective April 1, 2019. The Company expensed $66,667
for the services for the six months ended May 31, 2019 which includes an
obligation of the Company to issue shares for $20,000 (see notes 4 and 7).
The Company expensed $30,000 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 $43,200, which includes $25,200 for the
issuance of 180,000 common shares for services, pursuant to a consulting
contract, for services provided by Thrasher (see note 4).
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
$60,000 during the six months ended May 31, 2019. On April 13, 2018, the Company
granted options to Buys to acquire a total of 1,500,000 common shares. The
Company expensed $8,454 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 expensed $76,374 which
includes $46,667 for issuance of 333,333 common shares and $12,500 for issuance
of convertible debentures (see note 4).
The Company expensed $74,385 for services provided for Wager,
which includes $35,000 for issuance of 250,000 common shares and $12,500 for
issuance of convertible debentures (see note 4).
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 $8,665 as office rent plus services for the six months ended May 31,
2019. As of May 31, 2019, the Company has a payable for $6,997 for the rent.
Current directors and officers of the Company participated in
the April 22, 2019 and May 20, 2019 financing for 271 units for total proceeds
of $270,588, of which $35,000 was issued for services rendered.
12
SECURITY DEVICES INTERNATIONAL, INC.
Notes to
Condensed Interim Consolidated Financial Statements
For the Period
Ended May 31, 2019 and 2018
(Amounts expressed in US
Dollars)
(Unaudited)
6.
|
RELATED PARTY TRANSACTIONS-Contd
|
Six months ended May 31, 2018
As of May 31, 2018, there are no amounts receivable from
related parties.
As of May 31, 2018, the Company had a payable of $33,333 to a
related party to be settled by issuance of stock and $18,241 payable to related
parties to be paid by cash. The payable 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 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 (see note 7).
The Company expensed $27,000 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
$78,600 (CAD $100,000) 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
$33,468 for fair value of options which vested during this period.
On April 13, 2018, the Company employed Mr. André Buys as the
CTO with compensation of $10,000 per month over a three-year period. The Company
expensed $16,667 during the six- month period ended May 31, 2018. On April 13,
2018, the Company granted options to Mr. André Buys to acquire a total of
1,500,000 common shares. The Company expensed $2,114 for fair value of options
which vested during this period.
Effective December 1, 2017, the Company leased office premises
at Wakefield, Massachusetts, USA for rent of $700 per month from a corporation
owned and controlled by a director of the Company. The Company expensed $4,200
as office rent for the six-months ended May 31, 2018.
13
SECURITY DEVICES INTERNATIONAL, INC.
Notes to
Condensed Interim Consolidated Financial Statements
For the Period
Ended May 31, 2019 and 2018
(Amounts expressed in US
Dollars)
(Unaudited)
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 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.
|
b)
|
Lease commitments
|
|
|
|
|
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 Period
Ended May 31, 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 has 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 $Nil (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 ($26,640) 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 notes
|
|
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 November 30, 2018 was CAD $1,301,359 ($978,361). Effective May 31, 2019, the
Company repaid these debentures for CAD $1,399,000 ($1,035,930) plus accrued
interest.
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
$98,924 ($73,201) during the six months ended May 31, 2019 and CAD$73,545
($58,111) during the prior six months ended May 31, 2018. During the six months
ended May 31, 2019, the Company recorded interest expense for $67,007 (May 31,
2018: $66,179).
15
SECURITY DEVICES INTERNATIONAL, INC.
Notes to
Condensed Interim Consolidated Financial Statements
For the Period
Ended May 31, 2019 and 2018
(Amounts expressed in US
Dollars)
(Unaudited)
9.
|
CONVERTIBLE DEBENTURES AND DEFERRED FINANCING
COSTS-Contd
|
b)
Convertible Notes $1,590,757 (November 30, 2018: $167,077)
1. 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 $175,234 during the six months ended May 31, 2019 (May 31, 2018:
$Nil) resulting in the carrying value of convertible notes at $342,311 as at May
31, 2019 (November 30, 2018: $167,077). During the six months ended May 31,
2019, the Company recorded interest expense for $60,992 (May 31, 2018: $Nil).
2. On April 22, 2019 and May 20, 2019, the Company entered into
a securities purchase agreement with several accredited investors to sell a
total of $2,080,265 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. 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 Notes meet the
definition of conventional convertible debt provided in ASC 815 and the embedded
conversion option is not subject to bifurcation and classification in the
financial statements in liabilities at fair value.In connection with the
issuance of the Notes, the Company issued the holders warrants to purchase the
common stock. The warrant is exercisable until October 23, 2023 for 8,321,058 of
shares at a purchase price of $0.25 per share. The Company concluded that the
warrants are indexed to the stock and, accordingly, the analysis resulted in the
conclusion that these warrants achieved equity classification in the financial
statements. See note 6.
The Company accounted for this transaction as a financing
transaction, wherein the net proceeds received were allocated to the financial
instruments issued which resulted in a discount. The warrants were valued at
$888,444 and the balance of the convertible debt for $1,191,821. The discount is
being charged to interest and is being accreted over the term of the note using
the effective interest method. During the period ended May 31, 2019 (May 31, 2018:
$Nil) the Company recorded $56,625 in interest from the accretion of the
discount. In addition, the Company recorded interest expense for $19,427 for the
period ended May 31, 2019 (May 31, 2018: $Nil). Prior to making the accounting
allocation, the Company evaluated for proper classification under ASC 480
Distinguishing Liabilities from Equity
(ASC 480) and ASC 815
Derivatives and Hedging
(ASC 815). This debt agreement did not contain
any embedded terms or features that require classification as derivatives. The
Company was required to consider whether the hybrid contract embodied a
beneficial conversion feature (BCF). The calculation of the effective
conversion amount did not result in a BCF because the effective conversion price
was equal to the Companys stock price on the date of issuance.
16
SECURITY DEVICES INTERNATIONAL, INC.
Notes to
Condensed Interim Consolidated Financial Statements
For the Period
Ended May 31, 2019 and 2018
(Amounts expressed in US
Dollars)
(Unaudited)
9.
|
CONVERTIBLE DEBENTURES AND DEFERRED FINANCING
COSTS-Contd
|
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 May 31, 2019
are:
|
|
Indexed
|
|
|
|
|
Financings
giving rise to derivative financial instruments
|
|
Shares
|
|
|
Fair Value
|
|
Convertible Notes October 22, 2018
|
|
8,500,000
|
|
$
|
310,539
|
|
|
|
8,500,000
|
|
$
|
310,539
|
|
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 six months ended May 31, 2019 and 2018:
|
|
Six Months
|
|
|
Six Months
|
|
|
|
Ended
|
|
|
Ended
|
|
|
|
May 31, 2019
|
|
|
May 31, 2018
|
|
Financings giving
rise to derivative financial instruments and the income effects:
|
|
|
|
|
|
|
Convertible Secured Debentures December 7,
2016
|
$
|
425,020
|
|
$
|
61,349
|
|
Convertible Notes October 22, 2018
|
$
|
220,747
|
|
|
-
|
|
|
$
|
645,767
|
|
$
|
61,349
|
|
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:
|
Level1valuations
:
|
Quoted prices in active markets for identical
assets and liabilities.
|
|
|
|
|
Level2valuations
:
|
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.
|
|
|
|
|
Level3valuations
:
|
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 May 31, 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 Period
Ended May 31, 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
|
|
May 31, 2019
|
|
|
November 30,
|
|
|
|
|
|
|
2018
|
|
|
|
|
|
|
|
|
Derivative financial instruments
|
$
|
-
|
|
$
|
426,016
|
|
Conversion price
|
$
|
-
|
|
$
|
0.135
|
|
Volatility
|
|
-
|
|
|
91%
|
|
Remaining term (years)
|
|
-
|
|
|
0.52
|
|
Risk free rate
|
|
-
|
|
|
2.52%
|
|
Convertible notes, October 22, 2018
|
|
May 31, 2019
|
|
|
November 30,
|
|
|
|
|
|
|
2018
|
|
|
|
|
|
|
|
|
Derivative financial instruments
|
$
|
310,539
|
|
$
|
531,285
|
|
Conversion price
|
$
|
0.15
|
|
$
|
0.15
|
|
Volatility
|
|
76%
|
|
|
79%
|
|
Remaining term (years)
|
|
0.88
|
|
|
1.38
|
|
Risk free rate
|
|
2.21%
|
|
|
2.70%
|
|
18
SECURITY DEVICES INTERNATIONAL, INC.
Notes to
Condensed Interim Consolidated Financial Statements
For the Period
Ended May 31, 2019 and 2018
(Amounts expressed in US
Dollars)
(Unaudited)
Inventory as of May 31, 2019 consists
of raw materials for Byrna for $464,089 (November 30, 2018: $Nil) finished goods
of Byrna for $14,197 (November 30, 2018: $Nil), finished goods of Blunt Impact
Projectiles 40mm for $71,974 (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.
The Company is organized on three
geographic areas in U.S.A., South Africa (SA) and Canada respectively. The
U.S.A., South Africa 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 six months ended May31,
2019 and May 31, 2018:
Six months ended May 31,
2019
|
|
|
SDI USA
|
|
|
SDI SA
|
|
|
SDI Canada
|
|
|
Total
|
|
|
Sales
|
$
|
74,570
|
|
|
56,695
|
|
$
|
36,084
|
|
$
|
167,349
|
|
Six months ended May 31, 2018
|
|
|
SDI USA
|
|
|
SDI SA
|
|
|
SDI Canada
|
|
|
Total
|
|
|
Sales
|
$
|
139,705
|
|
|
-
|
|
$
|
99,769
|
|
$
|
239,474
|
|
|
|
|
2019
|
|
|
2018
|
|
|
Sales
|
$
|
167,349
|
|
$
|
239,474
|
|
|
Elimination of intersegment revenue
|
|
(50,473
|
)
|
|
(72,616
|
)
|
|
|
|
|
|
|
|
|
|
Consolidated sales
|
$
|
116,876
|
|
|
166,858
|
|
As at May 31, 2019
|
|
|
SDI
USA
|
|
|
SDI
SA
|
|
|
SDI
Canada
|
|
|
Total
|
|
|
Assets
|
$
|
2,155,355
|
|
|
570,643
|
|
$
|
56,285
|
|
$
|
2,782,283
|
|
As at November 30, 2018
|
|
|
SDI
USA
|
|
|
SDI
SA
|
|
|
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 Period
Ended May 31, 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 $3,666 during the six months ended May 31, 2019 (May 31, 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 May
31, 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 Period
Ended May 31, 2019 and 2018
(Amounts expressed in US
Dollars)
(Unaudited)
13.
|
PREPAID EXPENSES AND OTHER
RECEIVABLES
|
Prepaid expenses and other receivables as of May 31, 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 the last half of fiscal 2019.
14.
|
SUBSEQUENT EVENTS
|
|
|
|
|
a)
|
Effective July 9, 2019, the Company appointed William B.
Richards, Beatrice Mitchell and Herbert Hughes as directors of the
Company. Effective July 9, 2019, Thrasher resigned from the board of
directors.
|
|
|
|
|
b)
|
On July 22, 2019, the Company entered into a Securities
Purchase Agreement (the Agreement) with several investors (the
Purchasers) and Northeast Industrial Partners, LLC as collateral agent
for the Purchasers (the Collateral Agent) to sell a total of $2,282,500
units, with each $1,000 of units consisting of (i) a $1,000 unsecured
convertible promissory note (collectively the Notes), 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 January
22, 2024.
|
The outstanding principal amount of
the Notes accrues interest at a rate of 10% per annum, provided that, in the
event of default on the Notes, the interest rate will be 15% during the period
of default. The maturity date of the Notes is June 30, 2021, which date is
subject to optional extension by each Purchaser if a change of control of the
Company is announced prior to such date. Interest on the Notes is payable in
arrears on the last day of each January and July while the Notes are
outstanding. The Company has the option to redeem the Notes by paying the
Purchasers the optional redemption price as described in the Notes. Each Note is
convertible into common stock, at the option of the Purchaser. Upon such
optional conversion, the outstanding principal amount of the Note converts into
shares of common stock at a conversion price of $0.15 per share, subject to
adjustment upon issuance of other securities as set forth in the Notes. The Notes
contain restrictive covenants which, among other things, restrict the Companys
ability to incur additional indebtedness, grant security interests on its
assets, or make distributions on or repurchase its common stock. The Notes are
secured, pursuant to the Agreement, with a security interest in substantially
all of the Companys assets.
21
Item 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION ANDRESULTS
OF OPERATIONS
This section and other parts of this Quarterly Report on
Form 10-Q (Form 10-Q) contain forward-looking statements, within the meaning
of the Private Securities Litigation Reform Act of 1995, that involve risks and
uncertainties. Forward-looking statements provide current expectations of future
events based on certain assumptions and include any statement that does not
directly relate to any historical or current fact. Forward-looking statements
can also be identified by such words as future, anticipates, believes,
estimates, expects, intends, plans, predicts, will, would,
could, can, may, and similar terms. Forward-looking statements do not
guarantee future performance and the Companys actual results may differ
significantly from the results discussed in the forward-looking statements.
Factors that might cause such differences include, but are not limited to, those
discussed in Part II, Item 1A of this Form 10-Q under the heading Risk
Factors, which are incorporated herein by reference. The following discussion
should be read in conjunction with the Companys Annual Report on Form 10-K for
the year ended November 30, 2018 (the 2018 Form 10-K) filed with the U.S.
Securities and Exchange Commission (the SEC) and the condensed consolidated
financial statements and notes thereto included in Part I, Item 1 of this Form
10-Q. All information presented herein is based on the Companys fiscal
calendar. Unless otherwise stated, references to particular years, quarters,
months or periods refer to the Companys fiscal years ended in November and the
associated quarters, months and periods of those fiscal years. Each of the terms
the Company and SDI as used herein refers collectively to Security Devices
International Inc. and its wholly-owned subsidiaries, unless otherwise stated.
The Company assumes no obligation to revise or update any forward-looking
statements for any reason, except as required by law.
Available Information
Information on the Company is available free of charge on the
Companys websites at ir.securitydii.com and by clicking Investors at
www.byrna.com. The SEC maintains an internet site that contains reports, proxy
and information statements, and other information regarding issuers that file
electronically with the SEC at www.sec.gov. The Company periodically provides
other information for investors at ir.securitydii.com and through the Investors
link at www.byrna.com. This includes press releases and other information about
financial performance, information on corporate governance, and details related
to the Companys annual meeting of shareholders. The information contained on
the websites referenced in this Form 10-Q is not incorporated by reference into
this filing. Further, the Companys references to website URLs are intended to
be inactive textual references only.
Overview and Highlights
The Company is a defense technology firm specializing in the
development, production, procurement and sale of innovative non-lethal
technologies and products to the consumer, military, law enforcement and private
security end markets. The Company's main product lines are its 40MM less-lethal
projectiles and the Byrna line of personal security devices, the Company's first
products designed to be used by civilians as well as private security
professionals. The Company also sells accessories and third-party products
compatible with its Byrna line of personal security devices, and projectiles to
be used with the launchers. The Company primarily sells its products in the
United States and Canada, and recently has begun offering its products for sale
in South Africa. In the United States and in Canada, the Company sells products
through its online stores and through historic dealer relationships. In South
Africa, the Company sells the Byrna HD and related products through Dave Sheer
Guns, the leading distributor of firearms and accessories in South Africa. Dave
Sheer Guns markets the Byrnaproducts to private security companies, gun stores
and consumers.
Business Strategy
Less-lethal weapons include a wide variety of products designed
to disorient, disarm, disable and deter would-be assailants, rioters, and other
malfeasants. It is the Companys belief that the United States, along with many
other parts of the world is experiencing a significant spike in the demand for
less-lethal products and that the less-lethal market will be one of the faster
growing market segments over the next decade. The less lethal market has been
projected to approach 12 billion dollars per year by 2023 (Statistics MRC.
Non-Lethal Weapons Global Market Outlook (2017-2023).
22
The Companys business strategy is twofold: (1) to fulfill the
growing demand for less-lethal products in the law enforcement, correctional
services, military and security services markets, and (2) to provide civilians
including homeowners, campers, boaters, retirees, and others whose work or daily
activities may put them at risk of being a victim with easy access to an
effective, non-lethal way to protect themselves and their loved ones from
threats to their person or property.
Less-lethal Munitions
In the law enforcement, correctional services, and private
security markets, the Company sells less-lethal munitions designed for 40mm
rifled launchers. These less-lethal munitions include impact rounds designed to
stop an individual without causing permanent injury or death and "payload"
rounds carrying a variety of payload packages such as tear gas, pepper spray,
DNA marking liquids, mal-odorants and other marking products designed to
identify instigators in riot situations. The Company's flagship product in this
market is its 40mm blunt impact projectile ("BIP"), which uses patented
collapsible gel head technology. The Company believes its product is by far the
best 40mm kinetic energy impact round currently on the market. The Company sells
its 40mm munitions through distributors in the US and Canada and maintains an
online store for sales to government agencies. The Company also has entered into
a licensing agreement with Safariland to market the SDI patented 40mm piston
driven collapsible head projectile mated to a Safaril and aluminum casing. The
parties are still in the testing phase for the resulting product. If the SDI
patented 40mm piston driven collapsible head projectile mated to a Safariland
casing passes the testing regime, the Company expects Safariland to market this
product under the Def-Tec brand. The Company has also entered into an Agreement
with Airtronics to supply the BIP as the standard round to be sold with
Airtronic's "Sonis" brand less lethal launcher. Airtronics focuses on military
sales around the world. The Company is working on the development of new
munitions for the law enforcement market.
The Byrna HD
The Company recently launched the Byrna HD, the first product
in its highly anticipated Byrna line of handheld personal security devices
intended to fill a perceived need in both the civilian and professional markets.
The Byrna HD, which utilizes several of the Company's proprietary patents and has
over 60 custom designed parts, is designed specifically for the consumer (home
defense) and private security markets. The Byrna HD is compact, ergonomic,
attractive, and easy to use.It uses proprietary CO2 cartridges to accurately
fire .68 caliber impact and chemical irritant projectiles. The Byrna HD is
extremely effective at deterring, disabling, and temporarily incapacitating an
intruder or would be assailant at safe stand-off distances up to 60 feet.
In February of 2019, the Company launched its online store for
the Byrna HD and held its official product launch, in conjunction with Daytona
Speedweek, where the Company was an Associate Sponsor of a race car driven by
Cody Ware. Visitors to our display booth had the opportunity to see and hold
Byrna prototypes, take pictures with the Byrna Ford, meet Cody Ware, win Byrna
logo apparel, and place pre-orders. Management was very encouraged by the
conversion rate at Daytona Speedweek, selling the Byrna HD or a product bundle
to approximately one out of every six people that visited the Company's
booth
The Companys primary focus this quarter has been to get the
Byrna HD into serial production, fulfill backorders, and build its inventory of
Byrnas available for immediate delivery.In late March the Company began shipping
limited quantities of the Byrna HD to Dave Sheer Guns in South Africa, which is
marketing the launchers to both private security companies and the general
public. At the very end of May the Company began shipments to customers in the
U.S. The initial feedback from customers who received their launchers was
overwhelmingly positive. As soon as its first U.S. deliveries began, the Company
began receiving re-orders of its practice rounds and CO2 cartridges.
Q2 Capital Raise
The Company raised USD $2,080,000 during the quarter in a
private placement of convertible notes and warrants in a non-brokered private
placement pursuant to Regulation D under the U.S. Securities Act of 1933 (the
Securities Act). No sales commission or placement fees were paid in connection
with the offering. The sale of the Units was closed in two tranches, with the
first tranche closing on April 22, 2019 with the issuance of USD $1,715,265.71
in Units and the second tranche, with the issuance of USD $364,734.29 in Units
closing on May 20, 2019. The net proceeds from the sale of the Units were used
to repay at maturity US$1,035,260 (CAD $1,399,000) plus accrued interest of the
Companys Series B Convertible Secured Debentures, repaid on May 31, 2019, and for
general corporate purposes and working capital.
23
Subsequent Events
On June 18
th
the Company hit a production milestone
of 1,000 units and shipped its 500
th
launcher to the United States.
Production in South Africa has been moved to a new facility, Roboro Industries
(PTY) LTD, and 700 launchers were produced in June. The Company expects to
produce at least 2000 additional launchers by the end of the quarter. This
should allow the Company to work through its back orders and focus on new
business development.
The first reviews of the Byrna HD by customers who posted on
our website have been extremely positive. On July 16th, Don Porter (aka
Sootch00) released a17 minute review of the Byrna HD which included impressive
live fire demonstrations illustrating the effect of the Companys chemical
irritant rounds. Since the airing of that review on YouTube it has had over
100,000 views, and the Company has seen a notable increase in visits to the
Byrna website and a significant uptick in orders. Management is encouraged by
consumer response to the product and is in the process of planning and beginning
a nation-wide marketing campaign. The Company expects to introduce additional
products in the Byrna family, including a law enforcement version and a
professional edition with a longer range of accuracy using its patented fin-tail
projectiles, as well as various accessories and companion products.
Another capital raise similar to the private placement that
closed in April and May is under way, with a first tranche of $2,282,500.00 of
Units closed on July 22, 2019. The Company has received expressions of interest
to purchase to purchase up to USD $717,500 of additional Units and expects to
close on the sale of any such additional Units on or about August 31, 2019. The
net proceeds from the sale of the Units will be used for general corporate
purposes and working capital. The Company believes the cash raised during and
subsequent to the quarter (including that anticipated to be raised by August 31)
will be sufficient for working capital needs for the upcoming twelve (12) months
as the company builds sales and brand awareness.
Quarter Highlights
The Companys operating expenses increased to $709,315 for
the three month period ended May 31, 2019 due primarily to the costs associated with preparing to go into serial
production on the Byrna HD. This included the costs of setting up the assembly
line in South Africa and the distribution center in Fort Wayne, IN, research,
development and testing costs, improvements to the Byrna design and
performance, preparation and printing of packaging materials and enclosures, and
marketing costs, including continuing to build out the Companys e-commerce
capabilities. The Company also continued to implement a new ERP systems in the
U.S., implemented new accounting software in South Africa, and hired additional
accounting and administrative support necessary to facilitate use of the new
systems.
During this period inventory rose to $587,476 and accounts
payable and accrued liabilities rose to $928,103. These increases were due
largely to the Companys preparation for serial production and shipping of the
Byrna HD launcher that began at the end of the quarter. In addition, the Company
invested $151,066 during the six months ending May 31, 2019 in equipment for use
in the manufacture of the Byrna HD. The Companys capital raise during the
quarter offset a portion of these expenses and brought the cash balance to
$738,714.
There were limited sales of the Byrna HD during Q2 to offset
the costs associated with bringing the product to market. The company began
shipping against back orders in April 2019 and now anticipates fulfilling all
current backorders by the end of August 2019.
Going Concern
The Company has incurred a cumulative loss of $ 34,854,841 from
its inception in 2005 to May 31, 2019. The Company has funded operations
through the issuance of capital stock, warrants and convertible debentures. The
Company has started to generate revenue from the sale of the Byrna HD and
associated products. 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.
24
Significant Quarterly Information
The following represents selected information of the Company
for the most recently completed financial quarter ended May 31, 2019.
|
|
Three-
|
|
|
Three-
|
|
|
|
month
|
|
|
month
|
|
|
|
period
|
|
|
period
|
|
|
|
May 31,
|
|
|
May 31,
|
|
|
|
2019
|
|
|
2018
|
|
|
|
(unaudited)
|
|
|
(unaudited)
|
|
|
|
|
|
|
|
|
|
$
|
|
|
$
|
|
|
|
|
|
|
|
|
|
Net loss for the three- month period
|
|
(718,731
|
)
|
|
(484,309
|
)
|
|
|
|
|
|
|
|
Basic and diluted loss per share
|
|
(0.007
|
)
|
|
(0.005
|
)
|
Total assets
|
|
2,782,283
|
|
|
1,508,194
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
2,868,175
|
|
|
1,825,763
|
|
Cash dividends per share
|
|
-
|
|
|
-
|
|
Results of Operations
Financial highlights (unaudited) for the period ending May 31,
2019 with comparatives are as follows:
Operating Results
|
|
For the three
|
|
|
For the three
|
|
|
|
months
|
|
|
months
|
|
|
|
ended
|
|
|
ended
|
|
|
|
May 31,
|
|
|
May 31,
|
|
|
|
2019
|
|
|
2018
|
|
|
|
|
|
|
|
|
Sales
|
$
|
105,769
|
|
$
|
138,742
|
|
Cost of sales
|
$
|
(75,284
|
)
|
$
|
(98,472
|
)
|
Gross profit
|
$
|
30,485
|
|
$
|
40,270
|
|
Operating expenses
|
$
|
(709,315
|
)
|
$
|
(399,204
|
)
|
Other expenses -interest
|
$
|
(88,036
|
)
|
$
|
(33,272
|
)
|
Accretion
|
$
|
(202,202
|
)
|
$
|
(29,363
|
)
|
Change in fair value of derivative
liabilities
|
$
|
250,337
|
|
|
(62,740
|
)
|
Net loss for
period
|
$
|
(718,731
|
)
|
$
|
(484,309
|
)
|
|
|
|
|
|
|
|
Loss per share
|
|
($0.007
|
)
|
|
($0.005
|
)
|
Operating Results
|
|
For the six months
|
|
|
For the six months
|
|
|
|
ended
|
|
|
ended
|
|
|
|
May 31,
|
|
|
May 31,
|
|
|
|
2019
|
|
|
2018
|
|
|
|
|
|
|
|
|
Sales
|
$
|
116,876
|
|
$
|
166,858
|
|
Cost of sales
|
$
|
(80,833
|
)
|
$
|
(119,213
|
)
|
Gross profit
|
$
|
36,043
|
|
$
|
47,645
|
|
Operating expenses
|
$
|
(1,831,827
|
)
|
$
|
(701,027
|
)
|
Other expenses -interest
|
$
|
(147,426
|
)
|
$
|
(67,179
|
)
|
Accretion
|
$
|
(305,060
|
)
|
$
|
(58,111
|
)
|
Change in fair value of derivative
liabilities
|
$
|
645,767
|
|
$
|
(61,349
|
)
|
Net Loss for
Period
|
$
|
(1,602,503
|
)
|
$
|
(840,021
|
)
|
|
|
|
|
|
|
|
Loss per Share
|
|
($0.016
|
)
|
|
($0.009
|
)
|
The Companys selected information for the quarter ended May
31, 2019 (unaudited) and November 30, 2018 (audited) are as follows:
|
|
May 31, 2018
|
|
|
November 30, 2018
|
|
Total current assets
|
|
2,204,430
|
|
|
2,231,669
|
|
Total assets
|
|
2,782,283
|
|
|
2,657,085
|
|
Total current liabilities
|
|
2,868,175
|
|
|
2,332,971
|
|
Total liabilities
|
|
2,868,175
|
|
|
2,500,048
|
|
Stockholders (deficiency) equity
|
|
(85,892
|
)
|
|
157,037
|
|
25
Net loss for the three months ended May 31, 2019 was $718,731
($0.007 per share) as compared to net loss of $484,309 ($0.005 per share) for
the three-month period ended May 31, 2018.
During the quarter ended May 31, 2019, the Company expensed
selling, general and administration expenses for $728,893 as compared to
$415,425 for the three-month period ended May 31, 2018, thereby reflecting
increase in costs primarily in research and development, payroll and consulting.
Also refer to
Quarter Highlights
as detailed above.
Cash Flows
Net cash used in operations for the six months ended May 31,
2019, was $(1,251,445) as compared to $(884,132) used for the six months ended
May 31, 2018. The major components of change relate to:
The Company incurred a net loss of $1,602,503 for the six
months ended May 31, 2019, as compared to a net loss of $840,021for the prior
period ended May 31, 2018. For major components of this change, refer to
Quarter Highlights
as detailed above.
In addition, the Companys closing inventory increased by
$460,053 for the six months ended May 31, 2019 as compared to an increase of
$21,848 in 2018. This increase in inventory represents the investment in
inventory required for production of Byrna HD devices in the subsequent
period.
Net cash flow from investing activities was $(173,183) during
the six-month period ended May 31, 2019 as compared to $(121,114) for the
six-month period ended May 31, 2018. The Company acquired property and equipment
for $151,066 and deposited $22,117 for equipment during the six-month period
ended May 31, 2019. The Company acquired patents for $110,000 and property and
equipment for $11,114 during the six-month comparative period ended May 31,
2018.
Net Cash flow from financing activities was net inflow of
$1,009,335 during the six-month period ended May 31, 2019 as compared to net
outflow of $(40,357) for the six-month period ended May 31, 2018. The increase
in financing activities in 2019 was the result of cash raised from issuance of
convertible debentures for $2,045,265and repayment of ($1,035,930) of secured
convertible debentures due for repayment during the period.
There was an overall decrease in cash of $(443,673) during the
six-month period ended May 31, 2019 as compared to a decrease in cash of
$(1,046,242) during the six-month period ended May 31, 2018.
Liquidity and Capital Resources
As at May 31, 2019, cash and cash equivalent was $738,714, as
compared to $1,182,387 at November 30, 2018. This decrease is mainly
attributable to the combination of factors mentioned above under heading
Quarter Highlights.
At May 31, 2019, the Company had a working capital deficit of
$(663,745). The major components are: cash and cash equivalent $738,714; prepaid
expenses and other receivables $807,232; inventory for $587,476; accounts
receivable for $71,008; derivative liabilities for $310,539; convertible
debentures for $1,590,757; deferred revenue for $38,776 and accounts payable and
accrued liabilities of $928,103.
At November 30, 2018, the Company had a working capital deficit
of $(101,302). The major components are: cash and cash equivalent $1,182,387;
prepaid expenses and other receivables $901,247; accounts receivable for
$18,914; inventory for $129,121; derivative liabilities for $957,301, secured
convertible debentures for $978,361 and accounts payable and accrued liabilities
of $397,309.
Management is currently exploring capital resources to satisfy
future debt obligations. Without additional capital SDI will not be able to fund
its anticipated capital requirements outlined above.
26
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.
Six months ended May 31, 2019
As of May 31, 2019, there are no amounts receivable from
related parties.
As of May 31, 2019, the Company had an amount payable of
$45,000 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. 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 Company's 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. Jensen resigned effective April 1, 2019. The Company expensed $66,667
for the services for the six months ended May 31, 2019 which includes an
obligation of the Company to issue shares for $20,000 (see notes 4 and 7).
The Company expensed $30,000 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 $43,200, which includes $25,200 for the
issuance of 180,000 common shares for services, pursuant to a consulting
contract, for services provided by Thrasher (see note 4).
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
$60,000 during the six months ended May 31, 2019. On April 13, 2018, the Company
granted options to Buys to acquire a total of 1,500,000 common shares. The
Company expensed $8,454 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 expensed $76,374 which
includes $46,667 for issuance of 333,333 common shares and $12,500 for issuance
of convertible debentures (see note 4).
The Company expensed $74,385 for services provided for Wager,
which includes $35,000 for issuance of 250,000 common shares and $12,500 for
issuance of convertible debentures (see note 4).
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 $8,665 as office rent plus services for the six months ended May 31,
2019. As of May 31, 2019, the Company has a payable for $6,997 for the rent.
Current directors and officers of the Company participated in
the April 22, 2019 and May 20, 2019 financing for 271 units for total proceeds
of $270,588, of which $35,000 was issued for services rendered.
Six months ended May 31, 2018
As of May 31, 2018, there are no amounts receivable from
related parties.
As of May 31, 2018, the Company had a payable of $33,333 to a
related party to be settled by issuance of stock and $18,241 payable to related
parties to be paid by cash.
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.
27
The Company expensed $27,000 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
$78,600 (CAD $100,000) 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
$33,468 for fair value of options which vested during this period.
On April 13, 2018, the Company employed Mr. André Buys as the
CTO with compensation of $10,000 per month over a three-year period. The Company
expensed $16,667 during the six- month period ended May 31, 2018. On April 13,
2018, the Company granted options to Mr. André Buys to acquire a total of
1,500,000 common shares. The Company expensed $2,114 for fair value of options
which vested during this period.
Effective December 1, 2017, the Company leased office premises
at Wakefield, Massachusetts, USA for rent of $700 per month from a corporation
owned and controlled by a director of the Company. The Company expensed $4,200
as office rent for the six-months ended May 31, 2018.
Off-balance sheet arrangements
The Company has no significant off-balance sheet arrangements
at this time.
Subsequent events
Effective July 9, 2019, the Company appointed William B.
Richards, Beatrice Mitchell and Herbert Hughes as directors of the Company.
Effective July 9, 2019, Thrasher resigned from the board of directors.
On July 22, 2019, the Company entered into a Securities
Purchase Agreement (the Agreement) with several investors (the Purchasers)
and Northeast Industrial Partners, LLC as collateral agent for the Purchasers
(the Collateral Agent) to sell a total of $2,282,500 units, with each $1,000
of units consisting of (i) a $1,000 unsecured convertible promissory note
(collectively the Notes), 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 January 22, 2024.
The outstanding principal amount of the Notes accrues interest
at a rate of 10% per annum, provided that, in the event of default on the Notes,
the interest rate will be 15% during the period of default. The maturity date of
the Notes is June 30, 2021, which date is subject to optional extension by each
Purchaser if a change of control of the Company is announced prior to such date.
Interest on the Notes is payable in arrears on the last day of each January and
July while the Notes are outstanding. The Company has the option to redeem the
Notes by paying the Purchasers the optional redemption price as described in the
Notes. Each Note is convertible into common stock, at the option of the
Purchaser. Upon such optional conversion, the outstanding principal amount of
the Note converts into shares of common stock at a conversion price of $0.15 per
share, subject to adjustment upon issuance of other securities as set forth in
the Notes. The Notes contain restrictive covenants which, among other things,
restrict the Companys ability to incur additional indebtedness, grant security
interests on its assets, or make distributions on or repurchase its common
stock. The Notes are secured, pursuant to the Agreement, with a security
interest in substantially all of the Companys assets.
Outstanding share data
As of August 2, 2019, the Company had 104,156,775 issued and
outstanding shares of common stock.
Dividends
The Company has not, since the date of its inception, declared
or paid any dividends on its Common Shares and does not currently intend to pay
dividends. Earnings, if any, will be retained to finance further growth and
development of the business of the Company.