Item
2.
MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND PLAN OF
OPERATION
THREE MONTHS ENDED MAY 31, 2017
The following discussion and analysis of the financial
condition and results of Security Devices International, Inc. (also referred to
as "we", "us", "our", "SDI", or the "Company"), should be read in conjunction
with the Company's financial statements (and related notes) as at November 30,
2016.
The following discussion contains forward-looking
statements, which are subject to risks and uncertainties and other factors that
may cause SDIs results to differ materially from expectations. When reviewing
the Company's forward-looking statements, investors and others should carefully
consider the foregoing factors and other uncertainties and potential events.
These include risk relating to market fluctuations, performance, strength of the
North American and other world economies and foreign exchange fluctuations.
These forward-looking statements speak only as of the date hereof. Unless
otherwise required by applicable securities laws, the Company disclaims any
intention or obligation to update these forward-looking statements. The Company
does have an ongoing obligation to disclose material information as it becomes
available. The discussion also includes cautionary statements about these
matters. You should read the cautionary statements made below as being
applicable to all forward-looking statements wherever they appear in this
document.
ITEM 1.
BUSINESS
It is the Companys belief that the United States, along with
most parts of the world are in the very early stages of a significant spike in
the growth curve for less-lethal products. Most law enforcement agencies do
not have a proper working knowledge of a less-lethal program in place. Rather
they are using an assortment of less-lethal devices out of necessity for varying
degrees of effectiveness with little coordination or approved tactical plans for
their deployment. Law enforcement budget constraints usually play a role in this
behavior. It is for this reason that unintended deaths of unarmed suspects at
the hands of police departments throughout the country (and in fact throughout
the world) continue to happen.
With a rise in social and civil unrest both here and abroad and
with more and more of these incidents being caught on video and posted on social
media, the pressure on law enforcement and governments to find reasonable and
effective alternatives to lethal force is mounting daily. As a result, it is
managements opinion that the less-lethal market will be one of the faster
growing segment in the law enforcement, correctional services, crowd control and
security services markets over the next decade.
Less-lethal weapons include a wide variety of products designed
to disorient, slow down and stop would be assailants, rioters and other
malfeasants. In the Companys opinion, the less-lethal weapon that is growing
the fastest in popularity and adoption is the 40mm launcher along with the
various less-lethal munitions that can be fired from these launchers. These
munitions include both impact rounds designed to stop an individual without
causing permanent injury to payload rounds carrying a variety of powders and
liquids including tear gas, pepper spray, DNA marking liquids, mal-odorants and
other marking liquids and powders designed to identify instigators in a riot
situation.
Historically, these munitions were fired from 37mm launchers,
however, the industry has been moving to 40mm launchers due to the fact that the
40mm launcher barrel is rifled (while the 37mm is a smooth bore barrel less
accurate munition) which allows the operator to more accurately fire the rounds
at distances in excess of 100. This makes the 40mm launcher an effective tool
in a wide range of situations.
Additional less lethal munitions include 12 gauge and .68
caliber impact and chemical irritant projectiles. The 12 gauge has been a
long-standing tool for law enforcement and correctional services, as most all
domestic patrol cars carry a shotgun to fire the 12 gauge munitions when
required. The .68 caliber projectiles are fired from an air gun system for close
range incidents where impact force is not the main objective with a subject, but
chemical irritant munitions are necessary to stop an assailant.
23
Business
History
Security Devices International Inc. (the Company or the
Corporation) was incorporated on March 1, 2005. The Company began as a
research and development company focused on the development of 40mm less-lethal
ammunition.
The Company initiated with the development of a wireless
electric projectile (the WEP), named the Lektrox. The Company hired a
ballistics engineering firm to collaborate in the development of the WEP.
Commencing in December 2008, the Joint Non-Lethal Weapons
Directorate (JNLWD) of the US Department of Defense, an organization
responsible for the development and coordination of non-lethal weapons
activities within the United States, tested the WEP through its evaluation
facility at Penn State University. An executive summary was released to the
Company indicating a positive outcome.
In the fall of 2010 the Company underwent a change in the board
of directors and management. This precipitated a change in the direction of the
company as development of the WEP was discontinued and the company shifted its
focus to a new product the 40mm Blunt Impact Projectile (BIP). The Company
concluded that the cost and time required to complete development and testing of
the BIP were significantly less than that required to complete development and
testing of the WEP. The goal was to develop a product that it could bring to
market more quickly. The Company was able to exploit some of the patent pending
technology of the WEP into the BIP. In 2011, the Company moved its engineering,
intellectual property and production facilities to the operator (the BIP
Manufacturer) of an injection molding facility outside of Boston,
Massachusetts.
The Blunt Impact Projectile (BIP) A Transformative
Technology
When the less-lethal industry was dominated by the 37mm
launcher, a number of less-lethal companies developed impact munition rounds
designed to stop an assailant. These round were nothing more than a piece of
plastic, wood baton, rubber baton, or a piece of plastic with a piece of sponge
rubber or foam rubber affixed to the head of the round.
There were several problems with these 37mm rounds. First, they
were inaccurate due to the lack of barrel rifling. Since most SWAT teams carry
single shot launchers, a round that cannot be shot accurately is of little
value. Second, because of their lightweight, they did not have much stopping
power. Suspects that were committed would often shake off a direct hit.
Finally, the rounds would bounce off walls or other hard surfaces which made
them dangerous to use in confined areas such as a jail cell. Numerous
corrections officers have been hurt by impact rounds ricocheting off of jail
cell walls.
Security Devices International solved all three issues with the
development of its Blunt Impact Projectile (BIP). The BIP was developed as an
outgrowth of a research and development project to create a conductive electric
device bullet (project name WEP Wireless Electric Projectile).
In order to ensure that the projectile did not injure the
targeted individual, SDI needed to develop a way to cushion the impact of the
round upon contact with the target. The solution was a collapsible head that
compressed upon impact. (See below). When it became clear that SDI did not have
sufficient funds to complete development of the WEP, it was decided to use the
collapsible head design to create an impact round. The hope was that with this
new, state-of-the-art impact round, SDI could generate enough profitability that
it would be able to complete development of the WEP.
24
This collapsible head technology allowed SDI to build a heavier
projectile that did not require a rubber or foam tip. This meant that it could
take advantage of the rifling of the 40mm launcher. This made the BIP by far the
most accurate round on the market in comparison to previous 37mm projectiles.
The target for an impact round is to be a large muscle group such as the thigh
muscle.
The gel collapsible head of the BIP spreads out upon impact,
dispersing the energy over a larger area thus reducing blunt trauma to the
subject. This allows the BIP round to be fired at close range on a target.
The Company believes that its patented collapsible head
technology will transform the industry as law enforcement agencies recognize the
tactical advantages of a less-lethal weapon that can be safely, accurately and
effectively deployed at close range distances between 10 feet and 100 feet. SDI
has been in discussions several industry players about licensing SDIs
technology.
Early in 2011 the Company focused its attention on a new 40mm
product, the blunt impact projectile (BIP), and discontinued further
development work on the WEP.
2012
In June 2012, the Company contracted CRT Less Lethal Inc.
(CRT) to test the BIP. Based on data obtained from the three-stage evaluation,
the BIP passed the CRT testing protocol for accuracy, consistency, relative
safety and effectiveness.
In July 2012, the Company signed a five-year development,
supply and manufacturing agreement with a subcontractor to Manufacture the BIP.
In November 2012, the Company obtained a United States
Department of Transportation number (DOT#) required in order for the Company to
ship BIP rounds.
25
In 2012, the Company began the development of six new
less-lethal ammunition rounds. These new rounds will be a modified version of
the BIP, four of which carry a payload, including; BIP MP (temporary
powder-based marking agent), BIP ML (semi-permanent liquid marking agent), BIP
OC (Oleoresin Capsicum - a pepper spray powder), BIP CS (tear gas powder), BIP
MO (malodorant liquid), and the BIP TR (training round).
2013
The Company moved its full manufacturing and supply chain
operations to the BIP manufacturer, a supply manufacturing and engineering
company, in the Boston, MA area.
The Company undertook an Initial Public Offering (IPO) in
January and became a public reporting issuer on the TSX-Venture Exchange in
September 2013.
2014
SDI began another globally recognized testing protocol with a
military agency called HECOE (the Human Effects Centre of Excellence). This
world-renowned agency is located in the Air Force Research Laboratory (AFRL), in
partnership with the US Joint Non-lethal Weapons Directorate (JNLWD). This group
conducts research to assist Non-lethal Weapon (NLW) Program Managers across the
U.S. Department of Defense (DoD) in assessing effectiveness and risks of NLWs.
The positive conclusion of this testing allows the DOD to purchase SDI
rounds.
April - SDI appointed Keith Morrison to the board of directors
as non-executive Chairman
May - SDIs BIP rounds were used at the Mock Prison Riot in
West Virginia. Law enforcement and correctional services officers provided
feedback on new technologies (such as SDIs products) to assist in the
effectiveness of their jobs.
August - The Company completed the issuance of 1,549
convertible unsecured debentures at $1,000 per debenture for gross proceeds of
$1,549,000 (the Private Placement).
October - Security Devices International Inc. announced that
the Company and a division of Abrams Airborne Manufacturing Inc. (AAMI), namely
Milkor USA (MUSA), have agreed to partner for a joint cross-selling / marketing
initiative.
November - The Company named Karim Kanji to the board of
directors as an independent member.
SDI has sold their BIP products into nine new agencies during
the fiscal year of 2014 including Sheriff Departments, Correctional Services,
and SWAT teams in; Saskatoon, SK, Watertown, SD, Abbotsford, BC, Sacramento, CA,
Kingston, ON, Rustburg, VA, Orlando, FL, Montreal, QC, and Bedford, VA. These
agencies are additions to SDIs customer base that have adopted its 40mm
less-lethal rounds.
2015
In January 2015, SDI commenced a public relations program and
through the year, SDI has been featured in over 800 media outlets globally,
including live interviews on FOX television, News One in New York, and CP24 in
Toronto.
26
During the second quarter, SDI attended the American Jail
Associations annual conference in North Carolina and performed a live fire
demonstration to numerous State and local Agencies while in North Carolina.
During Q2, SDI also attended the Canadian Tactical Conference
in Collingwood, Ontario as well as the New York Tactical Conference in Verona,
New York.
Through SDIs distributor (U.S. Tactical Supply GSA) the
Company was able to leverage their relationship to facilitate a live-fire
demonstration for the Pentagon Protection Force in Alexandria, Virginia.
In May - SDI participated in the Mock Prison Riot which takes
place annually at a decommissioned penitentiary in Moundsville, West Virginia.
The Mock Prison Riot is a four-day, comprehensive law enforcement and
corrections tactical and technology experience, including 40,000 square feet of
exhibit space, training scenarios, technology demonstrations, certification
workshops, a Skills Competition, and unlimited opportunities for feedback and
networking on a global scale.
SDI staff attended the Ohio Tactical officers conference in
June where the Company not only had a full exhibit booth set up to bring
awareness to SDIs full line of less lethal 40MM products but also conducted
live fire demonstrations to several agencies. These agencies had requested
seeing the projectiles fired to move forward with evaluation of SDIs products
for potential inclusion in their less lethal arsenal.
July - SDI was invited to present the companys full line of
products to the New York City Police Department. Representatives of SDI attended
the NYPD range and conducted in-class presentations followed by a live fire
demonstration showcasing the full line on 40MM products that SDI can offer for
Law Enforcement operational missions.
July - The Associated Press (AP), conducted interviews with
SDI management and attended SDIs manufacturing partners location for an in
depth look at the company and the technology. The AP completed a story on the
uniqueness of the product line and the increased element of safety that SDIs
products offer, and released the story to the newswire, where it was picked up
by over 800 media outlets, worldwide.
August - SDI was invited to present to the Toronto Police
Service (TPS), who are currently exploring less lethal options for front line
officers. A full presentation was given to decision makers of the TPS and a
follow-up live fire demonstration is to occur.
September SDI conducted their Annual General Meeting and
shareholders approved the following:
|
1)
|
The Board of Directors, as it stands today, was
re-elected.
|
|
2)
|
Schwartz Levitsky Feldman, LLP was re-appointed as SDIs
auditors.
|
|
3)
|
Approval of an amendment to Companys by-laws concerning
the quorum required to hold a meeting of shareholders.
|
|
4)
|
Approval of the Companys incentive stock option
plan.
|
|
5)
|
Approval of an amendment to the Companys articles to
prohibit the issuance of shares of preferred stock having multiple voting
attributes.
|
In FY2015, SDI added 24 new Law Enforcement and Correctional
Agencies to its paid customer base. The Company as at fiscal yearend holds 40
agencies as customers.
27
Q1 FY2016
In December 2015, SDI was invited to conduct a full product
briefing and live fire demonstration for key Management with the United Sates
Federal Bureau of Prisons. SDI was able to showcase the innovation of the BIP
family of products and demonstrate the clear difference between SDIs products
and other products on the market.
In January 2016, SDI management attended the SHOT show in Las
Vegas and met with numerous existing partners and explored future partnerships
with several other Industry leaders.
During the SHOT show SDIs rounds were used by AAMI, an
existing partner of SDI, during a new product innovation range day that was
attended by the majority of Companies in the firearms industry.
During Q1, SDI announced that it received its first sale of
40MM launchers to a Law Enforcement Agency. This is an important step for SDI to
be seen as having the availability to access other less lethal products to
fulfil customer requests.
In January, SDI and Clyde Armory, signed a distribution
agreement whereas Clyde will offer SDIs product line to Law Enforcement
customers in their catchment area. Clyde is a full service gun store which
supplies firearms, ammunition and accessories to Law Enforcement and Civilian
customers. They are based in Athens, Georgia.
During this quarter, the non-exclusive renewable Technology
License and Supply Agreement that was signed with United Tactical Solutions on
April 17, 2015, was terminated by SDI management effective February 25,
2016.
On February 29, 2016, SDI signed a term sheet with an existing
defense technology (less lethal) company to acquire that Company. This
acquisition, if completed, will give SDI a diversified line of less lethal
munitions, launchers and accessories as well as opening domestic and global
distribution channels.
Q2 FY2016
During the second quarter of 2016, the Company continued to
pursue the targeted acquisition through several funding sources, and financing
structures. Subsequent to the quarter, on July 8, 2016, the Company announced
that it had identified a number of items in the target companys (the Target)
financial statements that raised concerns in support of the negotiated price of
the transaction. SDI has terminated discussions with the Target at this time.
Subsequent to the quarter, the Company announced that Gregory
Sullivan had resigned as President and CEO to pursue other opportunities,
effective July 15, 2016. Dean Thrasher, the current COO and a member of the SDI
board of directors will assume the interim role of President and CEO. Mr.
Sullivan will remain on the board of directors until his replacement is
appointed and receives stock exchange clearance, or September 1, 2016, whichever
occurs first.
The Company signed a one-year consulting agreement with
Northeast Industrial Partners LLP (Northeast), which is headed up by Mr. Bryan
Ganz. Northeast will assist SDI with sales & marketing, expansion of the
Companys product range, review of operations, implementation of cost control
measures, development of strategic alliances and financial oversight. Mr. Ganz
brings more than 30 years of experience in sales management, manufacturing, new
product design and development as well as mergers & acquisitions. During his
career Mr. Ganz has bought, built and sold more than half a dozen global
businesses with combined sales in excess of $1.0 billion. Most recently, Mr.
Ganz sold Maine Industrial Tire LLC to Trelleborg (based out of Sweden), for $67
million generating a 7.0x return to investors over a three-year period.
28
For their services and subject to stock exchange approval,
Northeast will be issued a value of US$200,000 in SDI stock in four quarterly
instalments over the 12-month period ending May 15, 2017. The first quarterly
instalment is due August 15, 2016. The stock will be priced at the volume
weighted average trading price per common share over the 20-day period preceding
the due date. The stock will vest at the end of the contract with Northeast.
NEIP is currently the controlling shareholder in two operating
businesses and a 250-unit residential real estate portfolio in the New England
area. Northeast also owns minority stakes in a number of public and private
businesses including a California company developing wireless electricity. Mr.
Ganz is a graduate of Columbia Law School in New York City and completed his
accounting designation at Georgetown University in Washington DC.
The Company wishes to inform the market that a Schedule 13D was
filed with the SEC on June 8, 2016 by SDIs largest group of shareholders in the
US, holding approximately 10,474,522 shares. The 13D filing by the reporting
persons relates to the maximizing of shareholder value with the intention of
engaging more substantively with management, the board of directors and other
relevant parties on matters concerning the business, assets, capitalization,
operations and strategy of SDI. The 13D filing says that the reporting person
may also discuss strategic alternatives with interested parties to propose or
consider extraordinary transactions including joint ventures, mergers or a sale
transaction of the Company.
Q3 FY2016
During Q3 2016 SDI announced that it has terminated its
proposed acquisition of a less-lethal company, as previously released on May 13,
2016, and April 21, 2016.
During the Companys due diligence process, SDI identified a
number of items in the target companys (the Target) financial statements that
raised concerns in support of the negotiated price of the transaction. SDI
terminated discussions with the Target during this quarter.
SDIs management continues to look for acquisitions and
strategic partnerships in the less-lethal sector, to broaden its product
offering and increase its distribution reach. SDI is currently in preliminary
discussions to license its collapsible technology to other less lethal market
participants. SDIs objective is to both (1) increase revenues and (2) gain
greater market acceptance for the BIP.
During Q3, SDI appointed Bryan Ganz to the board of directors.
With the appointment of Mr. Ganz to the board of directors, the previously
announced resignation of Greg Sullivan (previous CEO) as a director becomes
effective.
During Q3 SDI reported that it has made the first share
issuance to Northeast Industrial Partners under the consulting agreement
announced on June 20, 2016. SDI issued 488,851 common shares at a deemed price
of $ 0.1023 (CAD $0.1322) per share to satisfy the payment of USD $50,000 due on
August 15, 2016. The shares will be subject to a four-month hold period expiring
on January 13, 2017, and will not vest until May 2017.
The issuance of shares to Northeast Industrial Partners is the
first of four such issuances to occur over the period ending May 15, 2017, as
described in the June 20, 2016 news release.
29
Q4 FY2016
During Q4 the Company announced the signing of a sales and
distribution agreement with the Bob Barker Company (Bob Barker), the nations
preeminent correctional services supplier, for distribution of SDIs products
through their Officers Only distribution network.
A division of the Bob Barker Company, Officers Only is a
reliable source for quality apparel and offers a broad and diverse product
line-up of protective and essential equipment that are brand recognized and
trusted by law enforcement, corrections, military and public service office. SDI
will continue to look for qualified distributors as part of its new sales and
marketing strategy with a goal of tripling the number of SDI distributors by the
end of 2017.
On September 15, 2016 Allen Ezer resigned as Executive Vice
President to pursue other opportunities.
During the quarter, the Company appointed Karen Bowling to the
board of directors. Ms. Bowling brings more than 25 years of diverse executive
management experience to the board of SDI. Some of her skill-sets include;
government affairs, lobbying, public relations, government procurement,
marketing, communications, operations, and local and state level legislation.
Ms. Bowling has also spent part of her career in the less-lethal sector for a
long-range acoustic hailing device company.
Karen's recent positions include; Public Affairs Director at
Foley & Lardner LLP, CEO at WiseEye AI, (an artificial intelligence company
focussed on the healthcare sector for CT scan identification and
classification), Chief Administration Officer for the city of Jacksonville, FL
(with a budget in excess of one billion dollars and over 5,000 employees), and
Co-Founder and CEO of the Solantic Walk-In Urgent Care Centers. Ms. Bowling has
sat on and chaired numerous boards across a dozen sectors, and has recently been
Gubernatorial appointed to the board of the Florida State College in
Jacksonville.
Q1 2017
During the quarter, the Company completed the issuance of
senior secured convertible notes (the Senior Secured Notes) to raise USD
$1,500,000. This offering was announced and described in the Companys news
release of October 18, 2016.
It was a condition of the offering of Senior Secured Notes that
not less than 80% of SDIs outstanding unsecured debentures (the Unsecured
Debentures) be exchanged for subordinate convertible secured debentures (the
Subordinate Secured Debentures). Approximately 88% of the outstanding
Unsecured Debentures were exchanged for Subordinate Secured Debentures. The
issuances of Senior Secured Notes and Subordinate Secured Debentures were
non-brokered transactions.
During the quarter, SDI issued 589,414 common shares at a
deemed price of $0.0848 (CAD$0.1142) per share to satisfy the payment of USD
$50,000 due on November 15, 2016. The shares are subject to a four-month hold
period expiring on May 14, 2017. The issuance of shares to Northeast Industrial
Partners is the second of four such issuances to occur over the period ending
May 15, 2017, as described in the June 20, 2016 news release.
Northeast Industrial Partners is controlled by Bryan Ganz, who
was appointed to the board of directors of SDI after the consulting agreement
was entered into. As a condition of stock exchange approval, SDI was required to
obtain disinterested shareholder approval of the share issuance reported in this
news release. That approval was received on December 15, 2016 at the Annual
General Meeting of shareholders.
30
The Company hired a new Director of Sales, Marketing and
Training with over 24 years of extensive law enforcement experience. His duties
included: SWAT/SRT, patrol, criminal investigations, and various joint federal
task forces. He is an armorer for numerous weapon platforms. He has served as an
instructor for the following: Taser, defensive tactics/officer survival, impact
weapons, active shooter response, SWAT tactics, chemical munitions, handgun,
submachine gun, shotgun, and patrol rifle. Additionally, he worked as an
instructor training foreign law enforcement and Military personnel in
ant-terrorism operations. He has also developed training programs for the US
Military (Reserve, National Guard, and Coast Guard) , Federal Agencies, various
local and state agencies, as well as private security.
During Q1, SDI received their Federal Firearms and Federal
Explosives Licenses. The licensing allows the Company to house and travel with
40mm launchers and munitions for demonstrations globally. The licenses also
allow the Company to manufacture, distribute and ship firearms, ammunition and
ammunition components, as well as destructive devices. The newly acquired
licenses will assist SDI in augmenting new lines of less lethal munitions and
components in the coming quarters.
Over the last quarter, the Company signed five (5) new Master
Distributors. Master Distributors purchase product from SDI at the lowest price
but in exchange, commit to minimum annual purchases of $100,000 annually. This
is the first time SDI has signed Master Distributors. The company also signed
two (2) new Dealers. Dealers purchase from SDI at slightly higher pricing than
Master Distributors, however, Dealers have only a $25,000 annual commitment.
The new Master Distributors include: FACTA Global, Surplus Ammo
Arms, US Tactical Supply, Wolverine Supplies, and Eds Public Safety. SDIs new
Master Distributors and Dealers will increase the Companys presence and reach
in the northeast, northwest, and southeast corridors in the US, as well as
eastern and western Canada.
SDI also signed a consulting agreement with Proxima Consulting,
a consulting firm based in Oman, that works with Ministries throughout the GCC
(Gulf Coast Countries) countries. The GCC countries include: Oman, Kuwait, Saudi
Arabia, United Arab Emirates, Qatar, and Bahrain. As a result of the Proxima
Consulting agreement, SDI was able to exhibit at IDEX (the International Defense
Exhibition & Conference) in Abu Dhabi on February 2017.
Subsequent to the quarter, the Company signed a multi-year OEM
agreement with Mission Less Lethal (Mission), headquartered in Fort Wayne, IN.
Under this agreement, SDI will be able to offer its customers a full line of .68
caliber chemical irritant projectiles and air-powered launchers produced by
Mission Less Lethal. Mission Less Lethal is the world leader in the design,
development, and manufacture of .68 caliber projectiles and launchers, currently
in use by thousands of law enforcement agencies in the U.S. and around the
world.
The .68 caliber launchers and projectiles are an important
addition to SDIs line of less lethal munitions. Currently, SDIs flagship
product line, the Blunt Impact Projectile (BIP) leads the 40mm (high-kinetic)
less lethal segment in range, accuracy, and most importantly safety. Capable of
delivering over 200 joules of kinetic energy the BIP is designed to stop an
assailant with a single shot. Similarly, SDIs extensive range of 12 gauge
munitions including bean bags, rubber finned rockets, rubber balls and door
breaching rounds provide law enforcement with a wide array of less lethal tools.
Producing between 110-150 joules of energy these products offer a complete
solution set in the mid-to-high kinetic segment. The .68 caliber line of
chemical irritant projectiles and launchers fills a critical gap in SDIs
offering by servicing the low kinetic impact segment. At only 15 joules of
energy these systems rely more on the dispersion of chemical irritants than on
impact energy.
SDI has begun marketing their OEM .68 caliber projectiles and
launchers under the Mini Ball brand with a full roll-out planned for Q2-2017.
The Companys goal is to provide its dealers, distributors and law enforcement
agencies with the widest possible array of less lethal options so that officers
always have the correct tool for the job when required.
Q2 2017
During Q2, SDI received the majority of its Department of
Transportation (DOT) approvals to ship 12 gauge chemical munitions, 37/40mm
launchable rounds, as well as specified hand thrown smoke and gas.
During the quarter, the company made its fourth and final
instalment share issuance to Northeast Industrial Partners under the consulting
agreement announced on June 20, 2016. SDI issued 534,941 common shares at a
deemed price of $0.0935 (CAD$0.1275) per share to satisfy the payment of USD
$50,000 due on May 15, 2017. The shares are subject to a four-month hold period
expiring on September 16, 2017.
SDI signed on two new dealers to distribute their lines of
munitions. The two dealers are located in Texas and Michigan, two strategic
States that the Company did not have presence.
Subsequent to the quarter, SDI announced the signing of a
multi-year agreement to provide its patented collapsible head blunt impact
projectiles (BIPs) and collapsible head payload projectiles including OC (pepper
spray), CS (tear gas), ML (marking liquid), MP (marking powder), MO
(malodorant), IN (inert powder) and DNA (plant based DNA forensic marking
rounds) to The Safariland Group (Safariland), headquartered in Jacksonville, FL.
31
SDI will supply BIPs and payload projectiles to Safariland for
integration with Safariland's proprietary propulsion system. These new rounds
will be marketed under the industry-leading Defense Technology brand name. The
first shipment of rounds were made as of the date of the press release.
Management believes that the agreement with Safariland
validates the more than five years of research and development that SDI has
invested in the creation of the collapsible head 40mm round. Management further
believes that by working in partnership with Safariland, together the companies
can reach a far larger market for the BIP than SDI would be able to reach on its
own.
The Safariland Group is a leading global provider of a broad
range of safety and survivability products designed for the public safety,
military, professional and outdoor markets. The Safariland Group offers a number
of recognized brand names in these markets including Safariland
®
,
Med-Eng
®
, ABA
®
, Second Chance
®
,
VIEVU
®
, Mustang Survival
®
, Bianchi
®
, Break
Free
®
, PROTECH
®
Tactical, Defense Technology
®
,
Hatch
®
, Monadnock
®
, Identicator
®
and
NIK
®
. The Safariland Group's mission, "Together, We Save Lives", is
inherent in the lifesaving and protective products it delivers. The Safariland
Group is headquartered in Jacksonville, Florida. The Safariland Group is a trade
name of Safariland, LLC.
On May 19, 2017 Public Works and Government Services Canada
issued a Request for a Standing Offer (Solicitation #M0077-16J101/A) on behalf
of the Royal Canadian Mounted Police (RCMP), for 40mm Blunt Impact Projectiles.
SDI has submitted their bid for this standing offer in the anticipation of
winning the 3 year tender (with two one year options totalling 5 years). The
standing offer for the Companys calls for 150,000 rounds for years 1 to 3, and
an additional 150,000 40mm Blunt Impact Projectiles for the 2 optional
years.
Operations
The Company has now launched three less lethal lines of
products including; the BIP 40mm line, the 12 gauge line of munitions, and the
.68 caliber chemical irritant projectiles and launchers.
Website Update
SDI continues to update its website to manage its digital
presence, as well as maintain its top positioning in search engines for the
less-lethal industry. New product lines have been added to the Companys
website. The Company has also revised its messaging to respond to recent global
law enforcement confrontations, such as incidents in the US, South America and
in Europe.
Products
SDIs business is the development, manufacture and sale of
less-lethal ammunition. This ammunition is used by the military, correctional
services, and police agencies for crowd control.
The Company has three product lines:
|
a)
|
The Company has developed the BIP, a blunt impact
projectile which uses pain compliance to control a target. The Company has
developed eight versions of the standard BIP, seven of which contain a
payload and one of which is a cheaper cost, training round. A payload is
an internal medium within the BIP, holding a liquid or powder
substance.
|
|
|
|
|
b)
|
The Company offers a line of 12 gauge less lethal
projectiles and irritants for law enforcement and correctional services
agencies. The projectiles come in impact form, rubber balls, chemical
irritants, flash bangs, and door breaching pellets.
|
|
|
|
|
c)
|
The Company offers a full line of .68 caliber impact and
chemical irritant projectiles for use by correctional services and law
enforcement agencies. The platform for these projectiles is an air gun
system that includes either a magazine or hopper to house the projectiles
for ease of use and rapid deployment.
|
|
|
|
|
d)
|
The Company has undertaken substantial work to develop
the WEP, a wireless electric projective which releases an electrical pulse
that induces a muscle spasm and causes the target to fall to the ground
helpless. This product is not fully complete at this
time.
|
32
Intellectual Property
Five patent applications, four non-provisional and one
provisional, have been filed by the Company with the U.S. Patent Office. The
Patents have been granted on the four non-provisional patents.
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 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.
Provisional Patent:
(e) Payload carrying arrangement for a non-lethal projectile:
This Provisional 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.
The Companys policy has been to write off cost incurred in
connection with non-provisional and provisional patent costs as they are
incurred as a recoverability of such expenditure is uncertain.
General
-
SDIs offices are located at 9325 Puckett Road, Perry, FL 32348 and 125
Lakeshore Road East, Unit 300, Oakville, Ontario L6J 1H3 Canada.
-
SDIs website is
www.securitydii.com
.
Going Concern
The Company has incurred a cumulative loss of $29,159,079 from
inception to May 31, 2017. The Company has funded operations through the
issuance of capital stock and convertible debentures. The company has started to
generate revenue from operations. However, it still expects to incur significant
expenses 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 its ability to continue as a going concern. The
financial statements do not include any adjustments that might result from the
outcome of this uncertainty.
In addition to raising funds in the prior years, the Company
raised $649,750 by issuance of 2,165,834 common shares during the year ended
November 30, 2012. On August 15, 2013, the Company filed an amended and restated
final prospectus (the Prospectus) in Canada, in the provinces of Alberta,
British Columbia and Ontario for listing its shares in these provinces in
Canada. On August 27, 2013, the Company completed an initial public offering to
raise gross proceeds of CAD $3,993,980 (US $3,794,280) through
the issuance of 9,984,950 Common Shares at a price of CAD $0.40 (US $0.38) per
Common Share (the Issue Price). During the year ended November 30, 2014, the
Company issued $1,398,592 (CAD $1,549,000) face value 12% convertible debentures
with a term to August 6, 2017 (the Maturity Date) and raised net $1,241,299.
In 2015, the Company raised $2,500,000 through the issuance of 7,575,757 common
shares and also issued 105,600 common shares on exercise of warrants for $16,775
and 35,000 common shares on exercise of options for $6,995. During the quarter
ended February 28, 2017, the Company issued $1,500,000 face value 10%
convertible debentures with a term to June 6, 2019 (the Maturity Date). The
Companys common shares commenced trading on the TSX Venture Exchange (TSX)
under the symbol SDZ.
33
Significant Quarterly Information
The following represents selected information of the Company
for the most recently completed financial quarter ended May 31, 2016
|
|
Three- month
|
|
|
Three- month
|
|
|
|
period
|
|
|
period
|
|
|
|
May 31,
|
|
|
May 31,
|
|
|
|
2017
|
|
|
2016
|
|
|
|
(unaudited)
|
|
|
(unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss for the three- month period
|
|
595,104
|
|
|
472,224
|
|
Basic and diluted loss per share
|
|
(0.01
|
)
|
|
(0.01
|
)
|
|
As at
|
As at
|
|
May 31,
|
November
|
|
2017
|
30, 2016
|
Total assets
|
915,628
|
370,090
|
|
|
|
Total liabilities
|
2,445,674
|
1,363,682
|
Cash dividends per share
|
-
|
-
|
Results of Operations
SDI was incorporated on March 1, 2005 and for the period from
inception to May 31, 2017 has not realized significant revenues. The company has
started to generate revenue from operations. However, it still expects to incur
expenses before becoming profitable.
Financial highlights (unaudited) for the three- month and six-
month period ending May 31, 2017 with comparatives are as follows:
Operating Results
|
|
For the
three months
|
|
|
For the
three months
|
|
|
|
ended
|
|
|
ended
|
|
|
|
May 31,
|
|
|
May 31,
|
|
|
|
2017
|
|
|
2016
|
|
|
|
$
|
|
|
$
|
|
Sales
|
|
97,172
|
|
|
21,719
|
|
Cost of sales
|
|
(52,173
|
)
|
|
(11,703
|
)
|
Gross Profit
|
|
44,999
|
|
|
10,016
|
|
Operating Expenses
|
|
(580,286
|
)
|
|
(423,915
|
)
|
Change in fair value of
derivative liabilities
|
|
86,000
|
|
|
-
|
|
Other expenses -Interest
|
|
(145,817
|
)
|
|
(58,325
|
)
|
Net Loss for Period
|
|
(595,104
|
)
|
|
(472,224
|
)
|
(Loss) per Share
|
|
($0.01
|
)
|
|
($0.01
|
)
|
34
Operating Results
|
|
For the
six months
|
|
|
For the
six months
|
|
|
|
ended
|
|
|
ended
|
|
|
|
May 31,
|
|
|
May 31,
|
|
|
|
2017
|
|
|
2016
|
|
|
|
$
|
|
|
$
|
|
Sales
|
|
139,605
|
|
|
52,222
|
|
Cost of sales
|
|
(75,284
|
)
|
|
(32,337
|
)
|
Gross Profit
|
|
64,321
|
|
|
19,885
|
|
Operating Expenses
|
|
(1,112,293
|
)
|
|
(755,895
|
)
|
Change in fair value of derivative
liabilities
|
|
507,379
|
|
|
-
|
|
Other expenses -Interest
|
|
(303,139
|
)
|
|
(116,016
|
)
|
Net Loss for Period
|
|
(860,466
|
)
|
|
(852,026
|
)
|
|
|
|
|
|
|
|
(Loss) per Share
|
|
($0.02
|
)
|
|
($0.02
|
)
|
The Companys selected information for the six- month period
ended May 31, 2017 (unaudited) and November 30, 2016 (audited) are as follows:
|
|
May 31,
|
|
|
November
|
|
|
|
2017
|
|
|
30,
2016
|
|
Total current assets
|
|
868,625
|
|
|
282,720
|
|
Total assets
|
|
915,628
|
|
|
370,090
|
|
Total current liabilities
|
|
394,644
|
|
|
1,363,682
|
|
Total liabilities
|
|
2,445,674
|
|
|
1,363,682
|
|
Stockholders deficiency
|
|
(1,530,046
|
)
|
|
(993,592
|
)
|
Net loss for the three months ended May 31, 2017 was $595,104
($0.01 per share) as compared to net loss of $472,224 ($0.01 per share) for the
three- month period ended May 31, 2016. The major components of the change
relate to:
During the quarter ended May 31, 2017, the company recorded
stock based compensation expense for $152,216 (prior period $nil).
The Company recorded gain in change in fair value of derivative
liabilities for $86,000 in 2017 as compared to $nil for 2016.
Effective May 1, 2016, the Company executed a one-year
consulting agreement with Northeast Industrial Partners, LLC (NEIP), a
Corporation in which Bryan Ganz, a director has an ownership interest. In March
2017, the Company made the third share issuance and issued 503,251 common shares
at a deemed price of $0.0994 per share to satisfy the payment of USD $50,000 due
on February 15, 2017. In May 2017, the Company made the fourth and final share
issuance and issued 534,941 common shares at a deemed price of $0.0935 per share
to satisfy the payment of USD $50,000 due on May 15, 2017.
Cash Flows
Net cash used in operations for the six months ended May 31,
2017, was $1,031,024 as compared to $816,461 used for the six months ended May
31, 2016. The major components of change relate to:
The Companys Inventory increased by $225,377 in 2017 as
compared to a decrease of $31,061 in 2016. This increase in inventory represents
the investment in inventory available for sale in next period.
35
Net cash flow from investing activities was $(21,703) during
the six- month period ended May 31, 2017 as compared to $nil for the prior
period ended May 31, 2016. The Company acquired property and equipment for
$21,703 during the six- month period ended May 31, 2017.
Net Cash flow from financing activities was $1,433,716 in 2017
as compared to $nil in 2016. This increase in 2017 was the net cash from
convertible debentures raised during the quarter.
There was an overall increase in cash of $402,962 in 2017 as
compared to a decrease in cash of $836,855 during 2016.
Liquidity and Capital Resources
As at May 31, 2017, cash and cash equivalent was $595,788, as
compared to $192,826 at November 30, 2016. This increase is mainly attributable
to the combination of factors mentioned above under heading Cash Flows.
At May 31, 2017, the Company had a working capital of $473,981.
The major components are as follows; cash and cash equivalent $595,788; prepaid
expenses and other receivables $17,872; Inventory for $232,700; accounts
receivable for $22,265; Unsecured convertible debentures for $137,660 and
accounts payable and accrued liabilities of $256,984.
At November 30, 2016, the Company had a working capital deficit
of ($1,080,962). The major components are as follows; cash and cash equivalent
$192,826; prepaid expenses and other receivables $50,037; accounts receivable
for $32,534; Inventory for $7,323; Convertible debentures for $1,117,771 and
accounts payable and accrued liabilities of $245,911.
There are no assurances that the Company can continue to raise
equity financing to fund its operations. SDI does not have any commitments or
arrangements from any persons to provide SDI with any additional capital it may
need. Without additional capital SDI will not be able to fund its anticipated
capital requirements outlined above.
Off-balance sheet arrangements
The Company has no significant off-balance sheet arrangements
at this time.
Transactions with related parties
The following transactions are in the normal course of
operations and are measured at the exchange amount, which is the amount of
consideration established and agreed to by the related parties.
Six months ended May 31, 2017
Effective July 21, 2016, Bryan Ganz was elected as a director
of the Company. Prior to his appointment, effective May 1, 2016, the Company
executed a one-year consulting agreement with Northeast Industrial Partners, LLC
(NEIP), a Corporation in which the said director has an ownership interest. In
January, 2017, the Company issued 589,414 common shares at a deemed price of
$0.1142 per share to satisfy the payment of USD $50,000 due on November 15,
2016. In March 2017, the Company made the third share issuance and issued
503,251 common shares at a deemed price of $0.0994 per share to satisfy the
payment of USD $50,000 due on February 15, 2017. In May 2017, the Company made
the fourth and final share issuance and issued 534,941 common shares at a deemed
price of $0.0935 per share to satisfy the payment of USD $50,000 due on May 15,
2017. In addition, the Company executed a one-year back-office accounting and
administration services agreement with NEIP effective January 1, 2017 to pay
compensation of $7,500 per month. The Company expensed $37,500 for services
provided during the six- month period ended May 31, 2017.
The Company expensed $15,000 for services provided by the CFO
of the Company and $26,500 for services provided by a Corporation in which the
CEO has an ownership interest, in accordance with the consulting contract. In
addition, the CEO was paid a salary of $46,300 during the six- month period
ended May 31, 2017and the Company expensed $27,890 for fair value of options
which vested during this period.
36
During the six- month period ended May 31, 2017, the Company
issued options to directors. The Company expensed $114,713 for fair value of
options which vested during this period.
Six months ended May 31, 2016
The directors were compensated as per their consulting
agreements with the Company. The Company expensed a total of $106,600 as
management fees to two of its directors, in their role as officers in accordance
with their consulting contracts and expensed a total of $2,680 as automobile
allowance. In addition, the Company expensed $42,200 as a consulting fee to an
independent director for services provided.
The Company expensed $12,400 for services provided by the CFO
of the Company and $107,200 for services provided by a Corporation in which the
Chief Operating Officer has an ownership interest, in accordance with the
consulting contract.
Compensation of Directors for six months period ended May
31, 2017 and May 31, 2016.
Six months ended May 31, 2017:
|
|
|
|
|
|
|
|
Awards of
|
|
|
|
|
|
|
|
|
|
Options
|
|
|
|
|
|
|
|
|
|
or
|
|
|
|
Paid/Payable
|
|
|
Stock
|
|
|
Warrants
|
|
Non-Independent Directors
|
|
in
Cash
|
|
|
Awards
|
|
|
(2)
|
|
Dean Thrasher (1)
|
$
|
72,800
|
|
|
--
|
|
|
27,890
|
|
Bryan Ganz (3)
|
$
|
|
|
|
150,000
|
|
|
|
|
Independent Directors
|
|
|
|
|
|
|
|
|
|
Keith Morrison
|
$
|
-
|
|
|
-
|
|
|
43,578
|
|
Karim Kanji
|
$
|
-
|
|
|
-
|
|
|
37,170
|
|
Karen Bowling
|
$
|
-
|
|
|
-
|
|
|
33,965
|
|
(1)
|
This includes payment to Level 4 Capital Corp., a company
in which Mr. Thrasher owns a 50% interest
|
|
|
(2)
|
The fair value of options or warrants granted computed in
accordance with ASC 718 on the date of grant.
|
|
|
(3)
|
Issuance of common shares to satisfy the payment of
$150,000 issued to NEIP, a Corporation in which Mr. Ganz has an ownership
interest,
|
Six months ended May 31, 2016:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Awards of
|
|
|
|
|
|
|
|
|
|
Options
|
|
|
|
|
|
|
|
|
|
or
|
|
|
|
Paid/Payable
|
|
|
Stock
|
|
|
Warrants
|
|
Non-Independent Directors
|
|
in
Cash
|
|
|
Awards
|
|
|
(2)
|
|
Gregory Sullivan
|
$
|
67,825
|
|
|
--
|
|
|
-
|
|
Allen Ezer
|
$
|
41,455
|
|
|
--
|
|
|
-
|
|
Dean Thrasher (1)
|
$
|
107,200
|
|
|
--
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
Independent Directors
|
|
|
|
|
|
|
|
|
|
Keith Morrison
|
$
|
-
|
|
|
-
|
|
|
-
|
|
David Goodbrand
|
$
|
-
|
|
|
-
|
|
|
-
|
|
Karim Kanji
|
$
|
42,200
|
|
|
-
|
|
|
-
|
|
(1)
|
Mr. Thrasher is contracted through Level 4 Capital Corp.,
a company in which Mr. Thrasher owns a 50% interest
|
|
|
(2)
|
The fair value of options or warrants granted computed in
accordance with ASC 718 on the date of grant.
|
37
COMMITMENTS
a) Consulting agreements:
The non-independent directors of the Company executed
consulting agreements with the company on the following terms:
The Company executed an employment agreement with the CEO of
the Company which term extends to June 30, 2018. The CEO is to be paid an annual
salary of $150,000 (CAD $200,000) plus benefits. In addition, the Company will
pay a performance bonus of 3% of net profits before taxes and granted 1,150,000
stock options with a five- year expiry term. The Company must pay 4 months of
pay for termination without cause.
Effective July 21, 2016, Bryan Ganz was elected as a director
of the Company. Prior to his appointment, effective May 1, 2016, the Company
executed a one-year consulting agreement with Northeast Industrial Partners, LLC
(NEIP), a Corporation in which the said director has an ownership interest. In
January, 2017, the Company issued 589,414 common shares at a deemed price of
$0.1142 per share to satisfy the payment of USD $50,000 due on November 15,
2016. In March 2017, the Company made the third share issuance and issued
503,251 common shares at a deemed price of $0.0994 per share to satisfy the
payment of USD $50,000 due on February 15, 2017. In May 2017, the Company made
the fourth and final share issuance and issued 534,941 common shares at a deemed
price of $0.0935 per share to satisfy the payment of USD $50,000 due on May 15,
2017. Effective May 1, 2017, the Company and NEIP renewed the agreement for the
period of time until such date as either of them terminates the original
contract on not less than 15 days prior written notice to the other party. For
services rendered by NEIP during the extension, SDI shall pay NEIP $62,500
within 15 days following every consecutive three- month period during the
extension. All payments of the consulting fee during the extension shall be made
by the issuance of common shares in the capital of SDI.
Effective January 1, 2017, the Company executed a one-year
service agreement with NEIP a Corporation in which Bryan Ganz, Director has an
ownership interest to pay compensation of $7,500 per month. The said Corporation
will assist the Company with administrative services which will include
accounting, production, inventory management and human resources. The agreement
is for a period of one year and can be terminated by either party by giving 60
days notice in writing.
Effective April 2014, SDI executed an agreement with a
non-related consultant to set up its social media sites and optimization of
search engines for the Company, at a start- up fee for $2,250 (CAD$3,000) (Phase
1) and payment of $2,250 (CAD$3,000) per month and issued 150,000 stock options
at $0.32 (CAD$0.38) when Phase 2 of the project was implemented. Either party
can terminate the agreement by giving 30 days notice.
b) The Company has commitments for leasing office premises in
Oakville, Ontario, Canada to April 30, 2018 at a monthly rent of $4,800 (CAD
$6,399).
c) Effective January 1, 2017, the Company executed a commercial
lease for leasing warehouse space in Perry, Florida. The lease is for an initial
three-year term at a monthly lease payment of $3,250. The said lease can be
renewed for an additional three-year term with a 10% increase.
EXCLUSIVE SUPPLY AGREEMENT
The Company entered a Development, Supply and Manufacturing
Agreement with the BIP Manufacturer on July 25, 2012. This Agreement provides
the Company to order and purchase only from the BIP Manufacturer certain 40MM
assemblies and components for use by the Company to produce less-lethal and
training projectiles as described in the Agreement. The Agreement is for a term
of five years with an automatic extension for an additional year if neither
party has given written notice of termination prior to the end of the five-year
period.
SUBSEQUENT EVENTS
38
On June 19, 2017, the Company issued 150,000 stock options to
an employee of the Company at an exercise price of US $0.15 (CAD $0.20) and
which expire on June 18, 2022.
Revenue Recognition
The Companys revenue recognition policies follow common
practice in the manufacturing industry. The Company records revenue when it is
realized, or realizable and earned. The Company considers revenue to be
realized, or realizable and earned, when the following revenue recognition
requirements are met: persuasive evidence of an arrangement exists; the products
or services have been accepted by the customer via delivery or installation
acceptance; the sales price is fixed or determinable; and collectability is
probable. For product sales, the Company determines that the earnings process is
complete when title, risk of loss and the right to use product has transferred
to the customer.
Outstanding share data
As of June 28, 2017, the Company had 56,732,099 issued and
outstanding shares of common stock.
Risk Factors
Senior and Subordinate Secured Convertible Debentures
On December 7, 2016, the Company entered a Securities Purchase
Agreement with several accredited investors to sell $1,500,000 of 10% senior
secured convertible notes, convertible into shares of the Companys common
stock, in a private placement pursuant to Regulation D under the Securities Act
of 1933. Concurrent with the sale of the Secured Notes, CAD$1,364,000 of the
Companys outstanding Unsecured Debentures, were exchanged for an equal
principal amount of the Subordinate Secured Debentures and an additional
CAD$37,000 of Subordinated Secured Debentures were issued in satisfaction of a
portion of the accrued interest on the Unsecured Debentures. Both senior and
subordinated secured debentures mature on June 6, 2019 unless converted or
extended and are fully secured against the undertaking, property and assets of
the Company including its patents. Inability to repay the secured debt on
maturity, if the debt is neither converted nor extended, will result in the
financial condition of the Company to be materially adversely affected.
Additional Financing
The Corporation does not have adequate revenue to fund all of
its operational needs and may require additional financing to continue its
operations if it is unable to generate substantial revenue growth. There can be
no assurance that such financing will be available at all or on favorable terms.
Failure to generate substantial revenue growth may result in the Corporation
looking to obtain such additional financing could result in delay or indefinite
postponement of the Corporations deployment of its products, resulting in the
possible dilution. Any such financing will dilute the ownership interest of the
Corporations shareholders at the time of the financing, and may dilute the
value of their shareholdings.
General Venture Company Risks
The Common Shares must be considered highly speculative due to
the nature of the Corporations business, the early stage of its deployment, its
current financial position and ongoing requirements for capital. An investment
in the Common Shares should only be considered by those persons who can afford a
total loss of investment, and is not suited to those investors who may need to
dispose of their investment in a timely fashion. Investors should consult with
their own professional advisors to assess the legal, financial and other aspects
of an investment in Common Shares.
39
Uncertainty of Revenue Growth
There can be no assurance that the Corporation can generate
substantial revenue growth, or that any revenue growth that is achieved can be
sustained. Revenue growth that the Corporation has achieved or may achieve may
not be indicative of future operating results. In addition, the Corporation may
increase further its operating expenses in order to fund increase its sales and
marketing efforts and increase its administrative resources in anticipation of
future growth. To the extent that increases in such expenses precede or are not
subsequently followed by increased revenues, the Corporations business,
operating results and financial condition will be materially adversely affected.
Dependence on Management and Key Personnel
The Corporation is dependent on certain members of its
management. The loss of the services of one or more of them could adversely
affect the Corporation. The Corporations ability to maintain its competitive
position is dependent upon its ability to attract and retain highly qualified
managerial, specialized technical, manufacturing, sales and marketing personnel.
There can be no assurance that the Corporation will be able to continue to
recruit and retain such personnel. The inability of the Corporation to recruit
and retain such personnel would adversely affect the Corporations operations
and product development.
Dependence on Key Suppliers
The Corporation may be able to purchase certain key components
of its products from a limited number of suppliers. Failure of a supplier to
provide sufficient quantities on favorable terms or on a timely basis could
result in possible lost sales.
Product Liability
The Corporation may be subject to proceedings or claims that
may arise in the ordinary conduct of the business, which could include product
and service warranty claims, which could be substantial. If its products fail to
perform as warranted and it fails to quickly resolve product quality or
performance issues in a timely manner, sales may be lost and it may be forced to
pay damages. Any failure to meet customer requirements could materially affect
its business, results of operations and financial condition. The occurrence of
product defects and the inability to correct errors could result in the delay or
loss of market acceptance of its products, material warranty expense, diversion
of technological and other resources from its product development efforts, and
the loss of credibility with customers, manufacturers representatives,
distributors, value added resellers, systems integrators, original equipment
manufacturers and end-users, any of which could have a material adverse effect
on the Corporations business, operating results and financial conditions.
The Corporation currently has general liability insurance that
includes product liability coverage. There is no assurance this insurance policy
will cover all potential claims which may have a material adverse effect on the
business or financial condition of the Corporation. A product recall could have
a material adverse effect on the business or financial condition of the
Corporation.
Strategic Alliances
The Corporation relies upon, and expects to rely upon,
strategic alliances with original equipment manufacturers for the manufacturing
and distribution of its products. There can be no assurance that such strategic
alliances can be achieved or will achieve their goals.
Marketing and Distribution Capabilities
In order to commercialize its technology, the Corporation must
either acquire or develop an internal marketing and sales force with technical
expertise and with supporting distribution capabilities or arrange for third
parties to perform these services. In order to market any of its products, the
Corporation must either acquire or develop a sales and distribution infrastructure. The acquisition or development
of a sales and distribution infrastructure would require substantial resources,
which may divert the attention of its Management and key personnel, and defer
its product development and deployment efforts. To the extent that the
Corporation enters into marketing and sales arrangements with other companies,
its revenues will depend on the efforts of others. These efforts may not be
successful. If the Corporation fails to develop substantial sales, marketing and
distribution channels, or to enter into arrangements with third parties for
those purposes, it will experience delays in product sales and incur increased
costs.
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Rapid Technological Development
The markets for the Corporations products and services are
characterized by rapidly changing technology and evolving industry standards,
which could result in product obsolescence or short product life cycles.
Accordingly, the Corporations success is dependent upon its ability to
anticipate technological changes in the industries it serves and to successfully
identify, obtain, develop and market new products that satisfy evolving industry
requirements. There can be no assurance that the Corporation will successfully
develop new products or enhance and improve its existing products or that any
new products and enhanced and improved existing products will achieve market
acceptance. Further, there can be no assurance that competitors will not market
products that have perceived advantages over the Corporations products or which
render the products currently sold by the Corporation obsolete or less
marketable. Regardless of the Industry as a whole, the less lethal sector moves
somewhat slower in the adaptation and integration of new products.
The Corporation must commit significant resources to developing
new products before knowing whether its investments will result in products the
market will accept. To remain competitive, the Corporation may be required to
invest significantly greater resources then currently anticipated in research
and development and product enhancement efforts, and result in increased
operating expenses.
Competition
The Corporations industry is highly competitive and composed
of many domestic and foreign companies. The Corporation has experienced and
expects to continue to experience, substantial competition from numerous
competitors whom it expects to continue to improve their products and
technologies. Competitors may announce and introduce new products, services or
enhancements that better meet the needs of end-users or changing industry
standards, or achieve greater market acceptance due to pricing, sales channels
or other factors. Competitors may be able to respond more quickly than the
Corporation to changes in end-user requirements and devote greater resources to
the enhancement, promotion and sale of their products.
Regulation
The Corporation is subject to numerous federal, provincial,
state and local environmental, health and safety legislation and measures
relating to the manufacture of ammunition. There can be no assurance that the
Corporation will not experience difficulties with its efforts to comply with
applicable regulations as they change in the future or that its continued
compliance efforts (or failure to comply with applicable requirements) will not
have a material adverse effect on the Corporations results of operations,
business, prospects and financial condition. The Corporations continued
compliance with present and changing future laws could restrict the
Corporations ability to modify or expand its facilities or continue production
and could require the Corporation to acquire costly equipment or to incur other
significant expense.
Intellectual Property
The Corporations ability to compete effectively will depend,
in part, on its ability to maintain the proprietary nature of its technology and
manufacturing processes. Although the Corporation considers certain of its
product designs as well as manufacturing processes involving certain of its
products to be proprietary, patents or copyrights do not protect all design and
manufacturing processes. The Corporation has adopted procedures to protect its
intellectual property and maintain secrecy of its confidential business
information and trade secrets. However, there can be no assurance that such procedures will afford complete protection
of such intellectual property, confidential business information and trade
secrets. There can be no assurance that the Corporations competitors will not
independently develop technologies that are substantially equivalent or superior
to the Corporations technology.
41
To protect the Corporations intellectual property, it may
become involved in litigation, which could result in substantial expenses,
divert the attention of its management, cause significant delays and materially
disrupt the conduct of its business.
Infringement of Intellectual Property Rights
While the Corporation believes that its products and other
intellectual property do not infringe upon the proprietary rights of third
parties, its commercial success depends, in part, upon the Corporation not
infringing intellectual property rights of others. A number of the Corporations
competitors and other third parties have been issued or may have filed patent
applications or may obtain additional patents and proprietary rights for
technologies similar to those utilized by the Corporation. Some of these patents
may grant very broad protection to the owners of the patents. The Corporation
has not undertaken a review to determine whether any existing third party
patents or the issuance of any third- party patents would require the
Corporation to alter its technology, obtain licenses or cease certain
activities. The Corporation may become subject to claims by third parties that
its technology infringes their intellectual property rights due to the growth of
products in its target markets, the overlap in functionality of those products
and the prevalence of products. The Corporation may become subject to these
claims either directly or through indemnities against these claims that it
provides to end-users, manufacturers representatives, distributors, value added
resellers, system integrators and original equipment manufacturers.
Litigation may be necessary to determine the scope,
enforceability and validity of third party proprietary rights or to establish
the Corporations proprietary rights. Some of its competitors have, or are
affiliated with companies having, substantially greater resources than the
Corporation and these competitors may be able to sustain the costs of complex
intellectual property litigation to a greater degree and for a longer period of
time than the Corporation. Regardless of their merit, any such claims could be
time consuming to evaluate and defend, result in costly litigation, cause
product shipment delays or stoppages, divert managements attention and focus
away from the business, subject the Corporation to significant liabilities and
equitable remedies, including injunctions, require the Corporation to enter into
costly royalty or licensing agreements and require the Corporation to modify or
stop using infringing technology.
The Corporation may be prohibited from developing or
commercializing certain technologies and products unless it obtains a license
from a third party. There can be no assurance that it will be able to obtain any
such license on commercially favorable terms or at all. If it does not obtain
such a license, it could be required to cease the sale of certain of its
products.
Health and Safety
Health and safety issues related to its products may arise that
could lead to litigation or other action against the Corporation or to
regulation of certain of its product components. The Corporation may be required
to modify its technology and may not be able to do so. It may also be required
to pay damages that may reduce its profitability and adversely affect its
financial condition. Even if these concerns prove to be baseless, the resulting
negative publicity could affect the Corporations ability to market certain of
its products and, in turn, could harm its business and results from operations.
Stress in the global financial system may adversely affect
the Corporations operations in ways that may be hard to predict or to defend
against
Recent events have demonstrated that businesses and industries
throughout the world are very tightly connected to each other. Thus, events
seemingly unrelated to the Corporation, or to its industry, may adversely affect
its finances or operations in ways that are hard to predict or defend against.
For example, credit contraction in financial markets may hurt the Corporations
ability to access credit when it is needed or rapid changes in foreign exchange
rates may adversely affect financial results. Finally, a reduction in
credit, combined with reduced economic activity, may adversely affect businesses
and industries that collectively constitute a significant portion of the
Corporations customer base. As a result, these customers may need to reduce
their purchases of the Corporations products, or there may be greater
difficulty in receiving payment for the products that these customers purchase
from the Corporation. Any of these events, or any other events caused by turmoil
in world financial markets, may have a material adverse effect on the business,
operating results, and financial condition.
42
Insurance and Uninsured Risks
The Corporations business is subject to a number of risks and
hazards including industrial accidents, labor disputes and changes in the
regulatory environment. Such occurrences could result in damage to equipment,
personal injury or death, monetary losses and possible legal liability. Although
the Corporation maintains liability insurance in amounts which it considers
adequate, the nature of these risks is such that liabilities might exceed policy
limits, the liabilities and hazards might not be insurable, or the Corporation
may elect not to insure against such liabilities due to high premium costs or
other reasons, in which event the Corporation could incur significant costs that
could have a materially adverse effect upon its financial position.
Conflicts of Interest
Certain directors and officers of the Corporation are or may
become associated with other companies in the same or related industries which
may give rise to conflicts of interest. Directors who have a material interest
in any person who is a party to a material contract or a proposed material
contract with the Corporation are required, subject to certain exceptions, to
disclose that interest and generally abstain from voting on any resolution to
approve the contract. In addition, the directors and the officers are required
to act honestly and in good faith with a view to the best interests of the
Corporation. The directors and officers of the Corporation have either other
full-time employment or other business or time restrictions placed on them and
accordingly, the Corporation will not be the only business enterprise of these
directors and officers.
Dividend Policy
The Corporation has not paid dividends in the past and has no
plans to pay dividends for the foreseeable future. The future dividend policy of
the Corporation will be determined by its directors.
Lack of Active Market
There can be no assurance that an active market for the Common
Shares will continue and any increased demand to buy or sell the Common Shares
can create volatility in price and volume.
Market Price of Common Shares
There can be no assurance that an active market for the Common
Shares will be sustained. Securities of small and midcap companies have
experienced substantial volatility in the past, often based on factors unrelated
to the financial performance or prospects of the companies involved. These
factors include global economic developments and market perceptions of the
attractiveness of certain industries. The price per Common Share is also likely
to be affected by change in the Corporations financial condition or results of
operations as reflected in its quarterly filings. Other factors unrelated to the
performance of the Corporation that may have an effect on the price of Common
Shares include the following: the extent of analytical coverage available to
subscribers concerning the business of the Corporation may be limited if
investment banks with research capabilities do not follow the Corporations
securities; lessening in trading volume and general market interest in the
Corporations securities may affect a subscribers ability to trade significant
numbers of Common Shares, the size of the Corporations public float may limit
the ability of some institutions to invest in the Corporations securities; a
substantial decline in the price of the Common Shares that persists for a
significant period of time could cause the Corporations securities to be
delisted from the exchange, further reducing market liquidity. If an active
market for the Common Shares does not continue, the liquidity of a subscribers investment may be
limited and the price of the Common Shares may decline. If such a market does
not develop, subscribers may lose their entire investment in the Common Shares.
43
Political Regulatory Risks
Any changes in government policy may result in changes to laws
affecting the sale of the Corporations products. This may affect the
Corporations ability to ship product in the future. The possibility that future
governments may adopt substantially different policies, may also effect the
Corporations operations. Local governments in all countries the Corporation
deals with issue end user certificates to purchase or receive live ammunition
from the Corporation. It is the decision of these countries in the Middle East,
the United States, Canada, Europe, and the Baltics whether or not they will take
possession or purchase such munitions.
Dividends
The Corporation has not, since the date of its incorporation,
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 Corporation.
Legal proceedings
None