ITEM 7.
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND PLAN
OF
OPERATION
This management discussion and analysis ("MD&A") in respect
of the fiscal year ended November 30, 2017 includes information from, and should
be read in conjunction with, the audited annual financial statements and related
notes for SDI for the fiscal year ended November 30, 2017.
15
Comparison of Year Ended November 30, 2017 to Year Ended
November 30, 2016
i. Overview
The Corporation has $292,508 of revenue during the year ended
November 30, 2017 (2016: $154,015) and the Company continues to operate at a
loss. The Company expects their operating losses to continue for so long as the
Company does not generate adequate revenue. As of November 30, 2017, the Company
had accumulated losses of $31,098,864 (November 30, 2016 - $28,298,613). The
Companys ability to generate significant revenue and conduct business
operations is dependent, in large part, upon our raising additional equity
financing.
As described in greater detail below, the Companys major
financial endeavor over the years has been its effort to raise additional
capital.
ii. Assets
Total assets as of November 30, 2017, includes cash of
$1,965,043, accounts receivable of $36,412, prepaid expenses and other
receivables of $6,648, inventory of $157,303, and plant and equipment for
$26,951, net of depreciation. Total assets as of November 30, 2016, includes
cash of $192,826, accounts receivable of $32,534, prepaid expenses and other
receivables of $50,037, inventory of $7,323, Deferred financing costs for
$36,874 and plant and equipment for $50,496 net of depreciation. Total assets
increased from $370,090 on November 30, 2016 to $2,192,357 on November 30, 2017.
This increase is primarily the result of additional raise of funds during the
current year.
iii. Revenues
Revenue from operations during the year ended November 30, 2017
was $292,508 as compared to $154,015 during the year ended November 30, 2016.
iv. Net Loss
The Companys expenses are reflected in the consolidated
statements of operation and comprehensive loss under the category of operating
expenses. The significant components of expense that have contributed to the
total operating expense are discussed as follows:
(a) Selling, general and administration expense
Selling, general and administration expense represents
professional, consulting, office and general, stock- based compensation and
other miscellaneous costs incurred during the years covered by this report.
Selling, general and administration expense for the year ended
November 30, 2017 was $1,919,789, as compared with $1,723,310 for the year ended
November 30, 2016. General and administration expense increased by $196,479 in
the current year, as compared to the prior year. The primary reasons for the
change in general and administrative costs is as follows:
The Company expensed stock-based compensation expense (included
in general and administrative expenses) for issue of options for $214,112 during
the year ended November 30, 2017. In 2016, the Company expensed stock-based
compensation expense (included in general and administrative expenses) for issue
of options and modification of warrants for $77,936. Stock based compensation
expense does not require the use of cash (non-cash expenses), associated with
the issuance of options and modification of warrants.
v. Quarterly Results
The net loss and comprehensive loss (unaudited) of the Company
for the quarter ended November 30, 2017 as well as the seven quarterly periods
completed immediately prior thereto are set out below:
16
|
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For the
|
|
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For the
|
|
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For the
|
|
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For the
|
|
|
For the three
|
|
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For the
|
|
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For the
|
|
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For the
|
|
|
|
three
|
|
|
three
|
|
|
three
|
|
|
three
|
|
|
months
|
|
|
three
|
|
|
three
|
|
|
three
|
|
|
|
months
|
|
|
months
|
|
|
months
|
|
|
months
|
|
|
ended
|
|
|
months
|
|
|
months
|
|
|
months
|
|
|
|
ended
|
|
|
ended
|
|
|
ended
|
|
|
ended
|
|
|
November
|
|
|
ended
|
|
|
ended
|
|
|
ended
|
|
|
|
November
|
|
|
August
|
|
|
May 31,
|
|
|
February
|
|
|
30, 2016
|
|
|
August
|
|
|
May 31,
|
|
|
February
|
|
|
|
30, 2017
|
|
|
31, 2017
|
|
|
2017
|
|
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28, 2017
|
|
|
($)
|
|
|
31, 2016
|
|
|
2016
|
|
|
28, 2016
|
|
|
|
|
|
|
(restated)*
|
|
|
(restated)*
|
|
|
(restated)*
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
($)
|
|
|
($)
|
|
|
($)
|
|
|
($)
|
|
|
|
|
|
($)
|
|
|
($)
|
|
|
($)
|
|
Revenues
|
|
82,550
|
|
|
70,353
|
|
|
97,172
|
|
|
42,433
|
|
|
71,166
|
|
|
30,627
|
|
|
21,719
|
|
|
30,503
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Loss
|
|
(1,416,994
|
)
|
|
(561,701
|
)
|
|
(681,588
|
)
|
|
(139,968
|
)
|
|
(580,156
|
)
|
|
(491,928
|
)
|
|
(472,224
|
)
|
|
(379,802
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss per Weighted Average
Number of Shares
Outstanding Basic and
Fully Diluted
|
|
(0.02
|
)
|
|
(0.01
|
)
|
|
(0.001
|
)
|
|
(0.002
|
)
|
|
(0.02
|
)
|
|
(0.01
|
)
|
|
(0.01
|
)
|
|
(0.007
|
)
|
Quarterly activities and financial performance are impacted by
the Companys ability to raise capital for its activities and the change in fair
value of derivative liabilities.
*REVISIONS TO QUARTERLY FINANCIAL STATEMENTS
The financial statements for the quarters ended February 28,
2017, May 31, 2017 and August 31, 2017 are revised to record the bifurcation of
the derivative liability from the host Series B Secured Convertible Debentures
issued on December 7, 2016, following further analysis of convertible debt
instrument issued by the Company in Canadian dollars. The analysis was conducted
during the preparation of annual financial statements for 2017.
17
The effect of changes in the financial statements is summarized
as follows:
|
Quarter ended
|
Quarter ended
|
Quarter ended
|
|
February 28,
2017
|
May 31, 2017
|
August 31,
2017
|
|
|
|
|
|
|
|
|
Prior to
|
|
Prior to
|
|
Prior to
|
|
|
Restatement
|
Restated
|
Restatement
|
Restated
|
Restatement
|
Restated
|
|
$
|
$
|
$
|
$
|
$
|
$
|
Consolidated Balance Sheet:
|
|
|
|
|
|
|
Secured convertible debentures, net of
deferred financing costs
|
1,615,201
|
1,350,487
|
1,669,359
|
1,433,593
|
1,821,807
|
1,596,083
|
Derivative liabilities
|
467,671
|
606,991
|
381,671
|
579,775
|
224,637
|
472,592
|
Total Liabilities
|
2,523,621
|
2,398,227
|
2,445,674
|
2,408,012
|
2,525,321
|
2,547,552
|
Accumulated deficit
|
(28,563,975)
|
(28,438,581)
|
(29,159,079)
|
(29,121,417)
|
(29,659,794)
|
(29,682,025)
|
Total Stockholders' Deficiency
|
(1,186,801)
|
(1,061,407)
|
(1,530,046)
|
(1,492,384)
|
(1,983,537)
|
(2,005,768)
|
|
|
|
|
|
|
|
Consolidated Statement of
operations
and Comprehensive loss:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation (gain) loss
|
13,156
|
13,822
|
(20,445)
|
(20,633)
|
79,535
|
80,021
|
General and administration
|
523,613
|
547,822
|
587,581
|
612,305
|
433,759
|
460,192
|
Total Operating Expenses
|
548,741
|
573,616
|
580,286
|
604,822
|
530,768
|
557,687
|
Loss from Operations
|
(529,419)
|
(554,294)
|
(535,287)
|
(559,823)
|
(507,120)
|
(534,036)
|
Change in fair value of derivative
liabilities
|
421,379
|
571,648
|
86,000
|
24,052
|
157,034
|
122,967
|
Loss before Income Taxes
|
(265,362)
|
(139,968)
|
(595,104)
|
(681,588)
|
(500,715)
|
(561,701)
|
Net Loss
|
(265,362)
|
(139,968)
|
(595,104)
|
(681,588)
|
(500,715)
|
(561,701)
|
Comprehensive Loss
|
(243,209)
|
(117,815)
|
(595,461)
|
(681,945)
|
(498,653)
|
(559,639)
|
Loss per share-basic and diluted
|
(0.004)
|
(0.002)
|
(0.010)
|
(0.001)
|
(0.010)
|
(0.010)
|
|
|
|
|
|
|
|
Consolidated Statement of
Cash
Flows
|
Three months
ended
|
Six months ended
|
Nine months ended
|
|
February 28, 2017
|
May 31, 2017
|
August 31, 2017
|
Net Loss
|
(265,362)
|
(139,968)
|
(860,466)
|
(821,556)
|
(1,361,181)
|
(1,383,257)
|
Adjustment for: Foreign currency translation
|
13,156
|
13,822
|
(7,289)
|
(6,811)
|
72,246
|
73,210
|
Amortization of debt discount
|
44,453
|
68,662
|
106,338
|
155,271
|
174,038
|
249,404
|
Change in fair value of derivative
liabilities
|
(421,379)
|
(571,648)
|
(507,379)
|
(595,700)
|
(664,413)
|
(718,667)
|
Net cash used in operating activities
|
(477,651)
|
(477,651)
|
(1,031,024)
|
(1,031,024)
|
(1,380,962)
|
(1,380,962)
|
Series B secured convertible debentures
The CAD$1,363,000 ($1,015,026) of Series B Secured Convertible
Debentures (Subordinate Secured Debentures) were issued pursuant to the Trust
Indenture agreement dated December 7, 2016 (the Indenture) in exchange for the
Unsecured Debentures in equal principal amount and an additional CAD$36,000
($26,809) of Series B Secured Convertible Debentures were issued pursuant to the
Indenture in payment of accrued interest. These debentures mature on June 6,
2019 and bear interest at 12% per annum, payable semiannually. 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 $0.13 (CAD $0.10) 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. Therefore,
the embedded conversion option is subject to classification in the financial
statements in liabilities at fair value both at inception and subsequently
pursuant to ASC 480-10-25-14.
18
The Company has evaluated the terms and conditions of the
debentures under the guidance of ASC 815. Because the economic characteristics
and risks of the equity-linked conversion options are not clearly and closely
related to a debt-type host, the conversion features require classification and
measurement as derivative financial instruments. The other embedded derivative
features (down-round protection) were also not considered clearly and closely
related to the host debt instruments. Further, these features individually were
not afforded the exemption normally available to derivatives indexed to a
companys own stock. Accordingly, the evaluation resulted in the conclusion that
this compound derivative financial instrument requires bifurcation and liability
classification, at fair value. The compound derivative financial instrument
consists of (i) the embedded conversion features and the (ii) down-round
protection features. 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
|
|
Compound embedded derivative
|
|
|
(285,612
|
)
|
Carrying value
|
|
$
|
756,223
|
|
The carrying value of the debentures at November 30, 2017 is
CAD$1,149,563 ($892,176).
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$134,089 ($103,034)
during the period from inception to November 30, 2017. In addition, the closing
balance was converted at the year-end exchange rate which resulted in a foreign
currency translation loss of $32,919.
During the year ended November 30, 2017, the Company recorded
$125,079 in interest expense.
Derivative Liabilities
The carrying value of the Compound Embedded Derivative
Liability is reflected on the balance sheet, with changes in the carrying value
being recorded as derivative gain (loss) on the income statement. The components
of the compound embedded derivative as of November 30, 2017 are:
Financings giving rise to derivative financial instruments
|
|
Indexed Shares
|
|
|
Fair Value
|
|
Series B Convertible Secured
Debentures December 7, 2016
|
|
8,044,853
|
|
$
|
539,860
|
|
|
|
|
|
|
|
|
|
|
8,044,853
|
|
$
|
539,860
|
|
19
The following table summarizes the effects on the gain (loss)
associated with changes in the fair values of the derivative financial
instruments by type of financing for the year ended November 30, 2017:
|
|
|
Year ended
|
|
Our financings giving rise to derivative financial instruments
and the income effects:
|
|
|
November 30, 2017
|
|
Compound embedded
derivatives:
|
|
|
|
|
Series B Convertible Secured Debentures
December 7, 2016
|
|
$
|
(285,612
|
)
|
Change in fair value of
derivative liabilities
|
|
|
(239,802
|
)
|
Foreign currency translation loss
|
|
|
(14,446
|
)
|
|
|
$
|
(539,860
|
)
|
vi. Liquidity and Capital Resources
The following table summarizes the Companys cash flows and
cash in hand:
|
|
Year ended
|
|
|
Year ended
|
|
|
|
November
|
|
|
November
|
|
|
|
30,
|
|
|
30,
|
|
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
|
|
Cash and cash equivalent
|
$
|
1,965,043
|
|
$
|
192,826
|
|
Working capital (deficit)
|
$
|
1,191,848
|
|
$
|
(1,080,962
|
)
|
Cash used in operating
activities
|
$
|
(1,471,031
|
)
|
$
|
(1,660,139
|
)
|
Cash used in investing activities
|
$
|
(21,844
|
)
|
$
|
-
|
|
Cash provided (used) by
financing activities
|
$
|
3,238,066
|
|
$
|
(36,874
|
)
|
As of November 30, 2017, the Company had working capital of
$1,191,848 as compared to working capital deficit of $(1,080,962) as of November
30, 2016. Working capital increased primarily as a result of raising additional
funds during the year. Refer to the note on capital raise.
Net cash used in operations for the year ended November 30,
2017, was $1,471,031 as compared to $1,660,139 used for the year ended November
30, 2016. The major components of change relate to:
1) Items not affecting cash:
Stock based compensation of $214,112 in 2017, as compared to
$77,936 in 2016.
November 30, 2017
On March 27, 2017, the board of directors granted options to
the CEO 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 for $61,358.
On May 26, 2017, the board of directors granted 895,000 options
to directors and 75,000 options to a consultant to acquire a total of 970,000
common shares. These options were issued at an exercise price of CAD $0.20
($0.15) per share and vest immediately with an expiry term of five years. The
Company expensed stock- based compensation expense for $124,326.
On June 19, 2017, the board of directors granted options to an
employee to acquire a total of 150,000 common shares. These options were issued
at an exercise price of CAD $0.20 ($0.15) per share and vest immediately with an
expiry term of five years. The Company expensed stock- based compensation
expense for $17,795.
20
On August 10, 2017, the board of directors granted options to a
new director to acquire a total of 96,667 common shares. These options were
issued at an exercise price of CAD $0.20 ($0.16) per share and vest immediately
with an expiry term of five years. The Company expensed stock- based
compensation expense for $10,633.
November 30, 2016
On June 9, 2016, the board of directors extended the expiry
dates of 400,000 warrants issued in 2012 to a director at exercise price of
$0.20, from original expiry date of August 9, 2016 to August 7, 2020. The change
in the terms of the warrants was determined to be a modification and not a
cancellation and issuance of a new warrant. Because of these modifications, the
fair value of 400,000 warrants increased by $49,912.
On August 18, 2016, the board of directors granted options to a
consultant to acquire a total of 25,000 common shares. These options were issued
at an exercise price of $0.11 (CAD $0.14) per share and vest immediately with an
expiry term of five years. The Company expensed stock- based compensation
expense for $2,574.
On October 20, 2016, the board of directors granted options to
a new director to acquire a total of 350,000 common shares. These options were
issued at an exercise price of $0.08 (CAD $0.11) per share and vest immediately
with an expiry term of five years. The Company expensed stock- based
compensation expense for $25,450.
2) Changes in non- cash balances relating to operations:
The Companys inventory increased by $149,980 as compared to a
decrease of $36,996 in 2016. The increase in inventory resulted in an increase
in the Companys investment in Inventory. Prepaid expenses and other receivables
reduced by $44,021 in 2017 as compared to an increase by $22,754 in 2016.
Net cash outflow from investing activities was $21,844 in 2017
as compared to $nil during the year ended November 30, 2016. The Company
acquired property and equipment for $21,844 during the current year.
Net Cash flow from financing activities was an inflow of
$3,238,066 for the year ended November 30, 2017 as compared to an outflow of
$36,874 for the year ended November 30, 2016.The inflow in 2017 reflected the
raise during the year from both convertible debt and equity.
vii. Off-Balance Sheet Arrangement.
The Company had no off-balance sheet arrangements as of
November 30, 2017 and 2016.
viii. 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 CAD $200,000 ($156,000) 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 four months of pay for termination without cause or change of
control.
Effective as of October 1, 2017, the
Company entered into an employment agreement (the 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 quarter. The shares issued shall be valued based upon the weighted average closing price
of the Companys shares for the twenty (20) trading days prior to the end of the
applicable quarter. Commencing July 1, 2018, the Company will pay $10,000 per
month in cash and the balance in Company stock. At such time as the Company can
pay the entire salary in cash and be cash positive on an operating basis, the
entire monthly salary will be paid in cash.
21
The Company has commitments for leasing
office premises in Oakville, Ontario, Canada to April 30, 2018 at a monthly rent
of CAD $6,399 ($4,800).
EXCLUSIVE SUPPLY AND PURCHASE AGREEMENTS
The Company entered a Development, Supply and Manufacturing
Agreement with the BIP manufacturer on August 1, 2017. This agreement provides
the Company to order and purchase only from the BIP manufacturer certain BIP
assemblies and components for use by the Company to produce less-lethal and
training projectiles as described in the agreement in North America. The
agreement is for a term of four years with an automatic extension for additional
one-year terms if neither party has given written notice of termination at least
sixty (60) days prior to the end of the then-current term.
The Company entered a License and Supply Agreement with
Safariland, LLC on May 1, 2017. This agreement provides the Company to license
and sell only to Safariland, LLC for certain BIP standard payloads for
integration with and production of certain less-lethal impact munitions in North
America. This agreement is for a term of four years with an automatic extension
for an additional one-year term if neither party have given written notice of
termination at least ninety (90) days prior to the end of the then-current term.
Cash Requirements
At November 30, 2017, the Company had cash of $1,965,043,
accounts receivable of $36,412, inventory of $157,303 and prepaid expense and
other receivables of $6,648. Current liabilities comprise accounts payable and
accrued liabilities for $393,341, unsecured convertible debentures for $40,357
and derivative liability for $539,860. For the year ended November 30, 2017, the
Companys cash outflow from operations was $1,471,031. As such, the Company has
cash to meet its expenses over the next twelve months of its operations.
Capital Stock
Year ended November 30, 2017
In January 2017, the Company made the second share issuance to
Northeast Industrial Partners pursuant to a consulting agreement. The Company
issued 589,414 common shares at a price of $0.0848 per share to satisfy the
payment of $50,000 due on November 15, 2016.
In March 2017, the Company made the third share issuance to
Northeast Industrial Partners pursuant to a consulting agreement. The Company
issued 503,251 common shares at a price of $0.0994 per share to satisfy the
payment of $50,000 due on February 15, 2017.
In June 2017, the Company made the fourth and final share
issuance to Northeast Industrial Partners pursuant to a consulting agreement.
The Company issued 534,941 common shares at a price of $0.0935 per share to
satisfy the payment of $50,000 due on May 15, 2017.
In October 2017, the Company made a further share issuance to
Northeast Industrial Partners under the consulting agreement announced on June
20, 2016 and extended as announced on June 16, 2017. The Company issued 498,423
common shares at a price of $0.1254 per share to satisfy the payment of $62,500
due in August 2017.
On November 28, 2017, the Company closed the sale of 35,783,612
units on a private placement basis for gross proceeds of $3,793,063 (net
proceeds of $3,669,120). Share issue costs related to this issuance totaled
$123,943. This includes the issuance of 17,648,258 units, issued to settle the
2016 secured convertible debt for $1,500,000 along with interest as well as
additional $113,044 in debt which comprised of a promissory note for
$72,585 (CAD $89,040) and unsecured convertible debentures for $39,159
(CAD$50,000) plus accrued interest of $1,300.
22
Each unit consists of one common share of Company stock and
one-half of a warrant. Each whole warrant is exercisable for one common share of
the Company stock on or before November 28, 2022 at an exercise price of $0.18.
If the average closing price of the common shares is over $0.36 per share for a
period of 20 consecutive trading days ending after November 28, 2019, the
Company may give notice to the registered holders of the warrants accelerating
the expiry date to a date not less than 30 days following the date of that
notice.
J Streicher Capital, LLC (the Agent) acted as exclusive Agent
for the brokered portion of the private placement which totaled $1,922,348. The
Agent received a cash commission of $60,669 and 572,354 agent warrants. Each
agent warrant is exercisable for one common share of the Company stock on or
before November 28, 2022 at an exercise price of $0.15. If the closing price of
the common shares is over $0.30 per share for a period of 20 consecutive trading
days ending after November 28, 2019, the Company may give notice accelerating
the expiry date of the agent warrants to a date not less than 30 days following
the date of that notice.
Related Parties
As of year-end, there are no amounts
receivable from related parties.
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 price of $0.1142 per share to satisfy the payment of $50,000 due on
November 15, 2016. In March 2017, the Company issued 503,251 common shares at a
price of $0.0994 per share to satisfy the payment of $50,000 due on February 15,
2017. In May 2017, the Company made the final share issuance and issued 534,941
common shares at a price of $0.0935 per share to satisfy the payment of $50,000
due on May 15, 2017. Effective May 1, 2017, the Company and NEIP renewed the
agreement. 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. The payment shall be made by issuance of stock.
In
September 2017, the Company made a further share issuance to NEIP and issued
498,423 common shares at a price of $0.1254 per share to satisfy the payment of
$62,500 due in August 2017. The agreement was terminated on October 31, 2017.
The Company accrued a payable for $62,500 as of year-end and this expense was
subsequently settled and paid by issuance of shares after the year end. 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. As at November 30, 2017, the Company has an
outstanding payable to NEIP of $15,000 under this back-office accounting and
administration services agreement. The Company expensed $82,500 for services
provided during the year ended November 30, 2017.
On December 7, 2016, NEIP participated
in the 10% senior secured convertible debt issuance by investing $100,000 in a
private placement along with outside investors. This debt along with interest of
$17,178 was settled in November 2017 by issuance of 1,105,454 units at $0.106
per unit being the same terms as the private placement.
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
quarter (see Note 11). The Company accrued a payable for $33,333 for the months
of October and November as of year-end and this expense was subsequently settled
and paid by the issue of shares after the year end .
On November 28, 2017, Paul Jenson and
Don Levintin participated in the issuance of units by investing $100,000 and
$7,500, respectively, in the private placement along with
outside investors.
23
On August 10, 2017, the Company issued
a promissory note to Don Levintin, a director of the Company for cash advance
receipt for $72,585 (CAD $89,040) at 12% per annum and repayable on February 16,
2018. In November 2017, the said note was settled, and the director was issued
684,762 units at $0.106 per unit being the same terms as the private
placement.
The Company expensed $37,000 for services provided by the CFO
of the Company which was paid to a corporation in which the CFO has an ownership
interest. The Company expensed $156,000 (CAD$200,000) for services provided by
the CEO of the Company and which was paid part in salary and part to two
corporations in which the CEO has an ownership interest, in accordance with the
consulting contract.
During the year ended November 30, 2017, the Company issued
2,141,667 options to directors. The Company expensed $186,704 for fair value of
options which vested during this period.
x. Critical Accounting Policies
The preparation of financial statements in accordance with
accounting principles generally accepted in the United States requires us to
make estimates and assumptions that affect reported amounts of assets and
liabilities at the date of the financial statements, the reported amount of
revenues and expenses during the reporting period and related disclosure of
contingent assets and liabilities. These estimates are based on our best
knowledge of current events and actions the Company may undertake in the future.
On an ongoing basis, we evaluate our estimates and judgments. To the extent
actual results differ from those estimates; our future results of operations may
be affected.
Recent Accounting Pronouncements
In May 2014, the FASB issued ASU No. 2014-09,
Revenue from
Contracts with Customers
(ASU 2014-09). Subsequently, the FASB issued
several updates to ASU 2014-09, which are codified in Accounting Standards
Codification (ASC) Topic 606 (ASC 606). ASC 606 also includes new guidance
on costs related to a contract, which is codified in ASC Subtopic 340-40 (ASC
340-40). In applying ASC 606, revenue is recognized when control of promised
goods or services transfers to a customer and is recognized in an amount that
reflects the consideration which the entity expects to receive in exchange for
those goods or services. The major provisions of the new standard include: the
determination of enforceable rights and obligations between parties; the
identification of performance obligations including those related to material
right obligations; the allocation of consideration based upon relative
standalone selling price; accounting for variable consideration; the
determination of whether performance obligations are satisfied over time or at a
point in time; and enhanced disclosure requirements. ASC 606 will be effective
for the Company beginning December 1, 2018 and permits two methods of adoption:
retrospectively to each prior reporting period presented (full retrospective
method) or retrospectively with the cumulative effect of the initial
application recognized at the date of initial application (modified
retrospective method). The Company is in the process of evaluating the
amendments to determine if they have a material impact on the Companys
financial position, results of operations or cash flow.
In January 2017, the FASB issued ASU No. 2017-01,
Clarifying
the Definition of a Business
(ASU 2017-01), which requires an evaluation
of whether substantially all of the fair value of assets acquired is
concentrated in a single identifiable asset or a group of similar identifiable
assets. If so, the transaction does not qualify as a business. The guidance also
requires an acquired business to include at least one substantive process and
narrows the definition of outputs. The Company is required to apply this
guidance to annual periods beginning after December 15, 2017, including interim
periods within those periods. The Company is currently evaluating the impact of
the provisions of ASU 2017-01.
In May 2017, the FASB issued ASU No. 2017-09, "Compensation -
Stock Compensation: Scope of Modification Accounting," which provides guidance
about which changes to the terms or conditions of a share-based payment award
require an entity to apply modification accounting. An entity will account for the
effects of a modification unless the fair value of the modified award is the
same as the original award, the vesting conditions of the modified award are the
same as the original award and the classification of the modified award as an
equity instrument or liability instrument is the same as the original award. The
update is effective for fiscal year 2019. The update is to be adopted
prospectively to an award modified on or after the adoption date. Early adoption
is permitted. The Company is in the process of evaluating the amendments to
determine if they have a material impact on the Companys financial position,
results of operations or cash flow.
24
In November 2016, the FASB issued ASU 2016-18,
Statement of
Cash Flows
(
Topic 230): Restricted Cash.
This update requires that a
statement of cash flows explain the change during the period in the total of
cash, cash equivalents, and amounts generally described as restricted cash or
restricted cash equivalents. Therefore, amounts generally described as
restricted cash would be included with cash and cash equivalents when
reconciling the beginning-of-period and end-of-period total amounts shown on the
statement of cash flows. This amendment is effective for public companies for
fiscal years beginning after December 15, 2017, including interim periods. Early
adoption is permitted. The adoption of ASU 2016-18 is not expected to have a
material impact on the Company.
In August 2016, the FASB issued ASU 2016-15,
Statement of
Cash Flows
(Topic 230):
Classification of Certain Cash Receipts and Cash
Payments
. ASU 2016-15 provides guidance for targeted changes with respect to
how cash receipts and cash payments are classified in the statements of cash
flows, with the objective of reducing diversity in practice. ASU 2016-15 is
effective for public companies for interim and annual periods beginning after
December 15, 2017, with early adoption permitted. The adoption of ASU 2016-15 is
not expected to have a material impact on the Company.
Risk Factors
Series B secured convertible debentures (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$1,363,000
($1,015,026) of the Companys outstanding Unsecured Debentures, were exchanged
for an equal principal amount of the Subordinate Secured Debentures and an
additional CAD$36,000 ($26,809) of Subordinated Secured Debentures were issued
in satisfaction of a portion of the accrued interest on the Unsecured
Debentures. The Company settled the debt with the Senior Secured Notes during
the year and the Subordinated Secured Debentures remain outstanding and mature
on June 6, 2019, unless converted or extended and are 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 Company 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 Company looking
to obtain such additional financing could result in delay or indefinite
postponement of the Companys deployment of its products, resulting in the
possible dilution. Any such financing will dilute the ownership interest of the
Companys 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 Companys 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.
25
Uncertainty of Revenue Growth
There can be no assurance that the Company can generate
substantial revenue growth, or that any revenue growth that is achieved can be
sustained. Revenue growth that the Company has achieved or may achieve may not
be indicative of future operating results. In addition, the Company 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 Companys business, operating
results and financial condition will be materially adversely affected.
Dependence on Management and Key Personnel
The Company is dependent on certain members of its management.
The loss of the services of one or more of them could adversely affect the
Company. The Companys 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 Company will be able to continue to recruit and retain such
personnel. The inability of the Company to recruit and retain such personnel
would adversely affect the Companys operations and product development.
Dependence on Key Suppliers
The Company 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 Company 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 Companys business, operating results and financial conditions.
The Company 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 Company. A product recall could have a
material adverse effect on the business or financial condition of the
Company.
Strategic Alliances
The Company 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 Company 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
Company 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 Company
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 Company 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.
26
Rapid Technological Development
The markets for the Companys 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 Companys 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 Company 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 Companys products or which
render the products currently sold by the Company 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 Company 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 Company 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 Companys industry is highly competitive and composed of
many domestic and foreign companies. The Company 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 Company to changes in end-user
requirements and devote greater resources to the enhancement, promotion and sale
of their products.
Regulation
The Company 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 Company 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 Companys results of operations, business,
prospects and financial condition. The Companys continued compliance with
present and changing future laws could restrict the Companys ability to modify
or expand its facilities or continue production and could require the Company to
acquire costly equipment or to incur other significant expense.
Intellectual Property
The Companys ability to compete effectively will depend, in
part, on its ability to maintain the proprietary nature of its technology and
manufacturing processes. Although the Company 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 Company 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 Companys competitors will not independently develop technologies that
are substantially equivalent or superior to the Companys technology.
27
To protect the Companys 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 Company 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 Company not
infringing intellectual property rights of others. A number of the Companys
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 Company. Some of these patents may
grant very broad protection to the owners of the patents. The Company has not
undertaken a review to determine whether any existing third- party patents or
the issuance of any third- party patents would require the Company to alter its
technology, obtain licenses or cease certain activities. The Company 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 Company 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 Companys proprietary rights. Some of its competitors have, or are
affiliated with companies having, substantially greater resources than the
Company 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 Company. 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 Company to significant liabilities and equitable
remedies, including injunctions, require the Company to enter into costly
royalty or licensing agreements and require the Company to modify or stop using
infringing technology.
The Company 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 Company or to regulation of
certain of its product components. The Company 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 Companys 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 Companys 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 Company, 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 Companys 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 Companys customer
base. As a result, these customers may need to reduce their purchases of the
Companys products, or there may be greater difficulty in receiving payment for
the products that these customers purchase from the Company. 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.
28
Insurance and Uninsured Risks
The Companys 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 Company 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 Company may
elect not to insure against such liabilities due to high premium costs or other
reasons, in which event the Company could incur significant costs that could
have a materially adverse effect upon its financial position.
Conflicts of Interest
Certain directors and officers of the Company 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 Company 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 Company. The
directors and officers of the Company have either other full-time employment or
other business or time restrictions placed on them and accordingly, the Company
will not be the only business enterprise of these directors and officers.
Dividend Policy
The Company has not paid dividends in the past and has no plans
to pay dividends for the foreseeable future. The future dividend policy of the
Company 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 Companys financial condition or results of
operations as reflected in its quarterly filings. Other factors unrelated to the
performance of the Company 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 Company may be limited if investment
banks with research capabilities do not follow the Companys securities;
lessening in trading volume and general market interest in the Companys
securities may affect a subscribers ability to trade significant numbers of
common shares, the size of the Companys public float may limit the ability of
some institutions to invest in the Companys securities; a substantial decline
in the price of the common shares that persists for a significant period of time
could cause the Companys 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.
Political Regulatory Risks
Any changes in government policy may result in changes to laws
affecting the sale of the Companys products. This may affect the Companys
ability to ship product in the future. The possibility that future governments
may adopt substantially different policies, may also affect the Companys
operations. Local governments in all countries the Company deals with issue end
user certificates to purchase or receive live ammunition from the Company. 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.
29
Dividends
The Company has not, since the date of its in Company, 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.