Byrna Technologies Inc. - Quarter Report: 2019 February (Form 10-Q)

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q

(Mark One)

[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended February 28, 2019

[   ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from _______ to _______

Commission File Number: 333-132456

SECURITY DEVICES INTERNATIONAL, INC.
(Exact Name of Registrant as Specified in its Charter)

107 Audubon Road, Bldg 2, Suite 201
Wakefield, MA 01880
(Address of Principal Executive Offices) (Zip Code)

Registrant's telephone number including area code: (978) 868-5011

N/A
Former name, former address, and former fiscal year, if changed since last report

Indicate by check mark whether the registrant (1) filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes [X]      No [   ]

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Yes [X]      No [   ]

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definition of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Indicate by check mark whether registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes [   ]      No [X]

As of April 12, 2019, the Company had 103,856,775 issued and outstanding shares of common stock.

SECURITY DEVICES INTERNATIONAL, INC.

CONDENSED INTERIM CONSOLIDATED FINANCIAL STATEMENTS

FEBRUARY 28, 2019

(Amounts expressed in US Dollars)
(Unaudited)

TABLE OF CONTENTS

SECURITY DEVICES INTERNATIONAL, INC.
Condensed Interim Consolidated Balance Sheets
As at February 28, 2019 and November 30, 2018
(Amounts expressed in US Dollars)
(Unaudited)

See accompanying notes to the condensed interim consolidated financial statements.

1

SECURITY DEVICES INTERNATIONAL, INC.
Condensed Interim Consolidated Statements of Operations and Comprehensive Loss
(Amounts expressed in US Dollars)
(Unaudited)

See accompanying notes to the condensed interim consolidated financial statements.

2

SECURITY DEVICES INTERNATIONAL, INC.
Condensed Interim Consolidated Statements of Cash Flows
For the Three Months Ended February 28, 2019 and 2018
(Amounts expressed in US Dollars)
(Unaudited)

See accompanying notes to the condensed interim consolidated financial statements.

3

SECURITY DEVICES INTERNATIONAL, INC.
Condensed Interim Consolidated Statement of Changes in Stockholders’ (Deficiency) Equity
For the three-month period ended February 28, 2019 and 2018
(Amounts expressed in US Dollars)
(Unaudited)

See accompanying notes to the condensed interim consolidated financial statements.

4

5

As of February 28, 2019, the Company has deposits of $225,124 (November 30, 2018-$205,664) with vendors primarily for supply of moulds and equipment. As of February 28, 2019, the vendors had not completed the supply of these moulds and equipment.

6

300,000,000* Common shares, $0.001 par value

And

5,000,000 Preferred shares, $0.001 par value

* On October 6, 2017, the Company filed with the Secretary of the State of Delaware a certificate of amendment (the “Amendment”) to the Company’s certificate of incorporation. The Amendment increased the number of authorized shares of the Company’s common stock, par value $0.001, from 100,000,000 to 200,000,000 common shares.

* On March 21, 2019, the Company filed with the Secretary of the State of Delaware a certificate of amendment (the “Amendment”) to the Company’s certificate of incorporation. The Amendment increased the number of authorized shares of the Company’s common stock, par value $0.001, from 200,000,000 to 300,000,000 common shares.

The Company’s Articles of Incorporation authorize its Board of Directors to issue up to 5,000,000 shares of preferred stock having par value of $0.001. The provisions in the Articles of Incorporation relating to the preferred stock allow the directors to issue preferred stock with multiple votes per share and dividend rights, which would have priority over any dividends paid with respect to the holders of SDI’s common stock.

103,093,442 common shares (November 30, 2018: 101,976,900 common shares)

7

Three months ended February 28, 2019

In January 2019, the Company made a share issuance to Paul Jensen (“Jensen”) pursuant to his employment agreement. The Company issued 134,938 common shares at a price of $0.1482 per share to satisfy the payment of $20,000, due January 15, 2019.

In January 2019, the Company made a share issuance to Bryan Ganz (“Ganz”) pursuant to a consulting agreement. The Company issued 500,000 common shares at a price of $0.1482 for a total consideration of $74,100, due December 15, 2018.

In January 2019, the Company made a share issuance to a corporation owned and controlled by Dean Thrasher (Thrasher”), executive chairman of the Company, pursuant to a consulting agreement. The Company issued 180,000 common shares at a price of $0.1482 for a total consideration of $26,676 due January 15, 2018.

In January 2019, the Company made a share issuance to Lisa Wager (“Wager”), the Chief Legal Officer (“CLO”), pursuant to a consulting agreement. The Company issued 166,666 common shares at a price of $0.1482 for a total consideration of $24,700, due January 15, 2019.

In January 2019, the Company made a share issuance to André Buys (“Buys”), the Chief Technology Officer (“CTO”), pursuant to a consulting agreement. The Company issued 134,938 common shares at a price of $0.1482 per share to satisfy the payment of $19,998 due January 15, 2019.

Year ended November 30, 2018

In March 2018, the Company made a share issuance to Northeast Industrial Partners (“NEIP”) pursuant to a consulting agreement. SDI issued 507,550 common shares at a price of $0.1231 per share to satisfy the payment of $62,500 due in December 2017.

In March 2018, the Company made a share issuance to Jensen pursuant to his employment agreement. SDI issued 339,370 common shares at a price of $0.1473 per share to satisfy the payment of $50,000, due January 15, 2018.

In May 2018, the Company made a share issuance to Jensen pursuant to his employment agreement. SDI issued 334,154 common shares at a price of $0.1496 per share to satisfy the payment of $50,000, due April 15, 2018.

In July 2018, the Company made a share issuance to Jensen pursuant to his employment agreement. SDI issued 298,880 common shares at a price of $0.1673 per share to satisfy the payment of $50,000, due July 15, 2018.

In November 2018, the Company made a share issuance to Jensen pursuant to his employment agreement. SDI issued 136,146 common shares at a price of $0.1469 per share to satisfy the payment of $20,000, due October 15, 2018.

In November 2018, the Company made a share issuance to Ganz pursuant to a consulting agreement. SDI issued 500,000 common shares at a price of $0.1451 per share for a total consideration of $72,573 to satisfy the payment for services for the fiscal third quarter.

In November 2018, the Company made a share issuance to a corporation owned by Thrasher under the consulting agreement. SDI issued 180,000 common shares at a price of $0.1533 per share for a total consideration of $27,600 due September 15, 2018.

In November 2018, the Company made a share issuance of 6,666,666 common shares to FinTekk AP, LLC (“FinTekk”) at a price of $0.15 per share. The shares are issued pursuant to a debt settlement agreement, to retire certain debt owing by the Company to FinTekk, in connection with a sponsorship agreement (the “Sponsorship Agreement”). The Sponsorship Agreement details a marketing campaign for the launch of the Company’s new Byrna^TM HD product over the 2018 and 2019 fiscal years. The Company recognized $750,000 as a prepaid expense as at November 30, 2018 (See note 13).

8

Effective May 31, 2013, the Company adopted an incentive stock option plan (the “2013 Stock Option Plan”) which replaced the prior stock option and stock bonus plans, as ratified by the Company’s shareholders at the Company’s 2015 annual meeting of shareholders. A maximum of 9,379,857 common shares were reserved for issuance under the 2013 Stock Option Plan.

The Board approved a revised stock option plan (the “Revised Stock Option Plan”) and received stockholder approval at the annual meeting held on December 19, 2017, that will increase the number of shares reserved for issuance under the stock option plan from 9,379,857 to 18,993,274.

The material terms of the Revised Stock Option Plan are as follows:

(a) While the shares are listed on the CSE, options may be granted to employees, senior officers, directors and consultants of the Company or a subsidiary of the Company and to corporations wholly-owned by such an employee, senior officer, director or consultant.

(b) The maximum number of common shares which can be issued under the Revised Stock Option Plan will be 18,993,274: provided that, so long as the Company is listed on the CSE, this maximum will be reduced to 20% of the issued and outstanding common shares on December 19, 2017.

(c) The term of any option granted under the Revised Stock Option Plan will be fixed by the board of directors at the time such option is granted, provided that options will not be permitted to exceed a term of ten years.

(d) The exercise price of any options granted under the Revised Stock Option Plan will be determined by the board of directors, in its sole discretion, but shall not be less than the closing price of the shares on the stock exchange on the day preceding the day on which the directors grant such options.

(e) While the shares are listed on the CSE, options will be non-assignable and non-transferable.

(f) So long as the shares are listed on the CSE, options on no more than 2% of the issued shares may be granted to any one consultant, or in aggregate to all persons performing investor relations activities, in any 12-month period.

(g) If the option holder ceases to be someone eligible to receive a grant of options under the Revised Stock Option Plan, then that holder’s existing options shall expire on the earlier of (i) the expiry date fixed at the time of the option grant, and (ii) ninety days after the date that the option holder ceases to be eligible to receive a grant of options under the Revised Stock Option Plan.

9

Stock Options

On March 27, 2017, the board of directors granted options to Dean Thrasher to acquire a total of 1,150,000 common shares. These options were issued at an exercise price of CAD $0.13 ($0.10) per share and vest thirty-three and one-third (33 1/3) percent every six months commencing January 1, 2017, with an expiry term of five years. The Company expensed stock-based compensation expense of $39,046 regarding the vesting of options during the year ended November 30, 2018, leaving a balance of $nil as unvested stock- based compensation expense.

On April 13, 2018, the board of directors granted 1,500,000 options for shares of the Company’s common stock to the Chief Technology officer (“CTO”), Buys, with exercise price of $0.16 and a trigger price of $0.30, $0.50 and $1.00 for each batch of 500,000 options, respectively. The Company’s stock price must close above the trigger price for 20 days in order for the option to be vested. The options shall have a seven-year life from grant date and Buys must remain employed by the Company for three years for the options to vest. The grant date fair value of the options used for the purpose of estimating the stock compensation is estimated using the Binomial Lattice option pricing model with the following assumptions:

10

On October 22, 2018, the board of directors granted 400,000 options to directors and 250,000 options to a consultant for a total of 650,000 options. These options were issued at an exercise price of CAD $0.19 ($0.14) per share and vest immediately with an expiry term of five years. The fair value of each option used for the purpose of estimating the stock compensation is estimated using the Black-Scholes option pricing model with the following assumptions:

As of November 30, 2018, there was $40,159 of unrecognized expense related to non-vested stock-based compensation arrangements granted.

Three months ended February 28, 2019

Warrants

On December 3, 2018, the Company issued 750,000 warrants each to two consultants (the “incentive warrants”) to purchase common shares of the Company at a strike price equal to the average trading price of the Company on the OTC QB during the 20 business days proceeding such approval. 50% of the incentive warrants vested upon issuance and the balance will vest upon December 31, 2019. The incentive warrants shall have a three-year life. These warrants were issued pursuant to the contracts executed with these two consultants. The fair value of each warrant used for the purpose of estimating the stock compensation is estimated using the Black-Scholes option pricing model with the following assumptions:

Stock Options:

On April 13, 2018, the board of directors granted 1,500,000 options for shares of the Company’s common stock to Buys, with an exercise price of $0.16 and a trigger price of $0.30, $0.50 and $1.00 for each batch of 500,000 options, respectively. The Company expensed stock-based compensation expense of $4,227 during the three-month period ended February 28, 2019.

As of February 28, 2019, there was $110,582 of unrecognized expense related to non-vested stock-based compensation arrangements granted.

11

The following transactions are in the normal course of operations and are measured at the amount of consideration established and agreed to by related parties.

Three months ended February 28, 2019

As of February 28, 2019, there are no amounts receivable from related parties.

As of February 28, 2019, the Company had a payable of $108,711 to related parties which is unsecured, non-interest bearing and due on demand. This payable is included in accounts payable and accrued liabilities.

Effective as of October 1, 2017, the Company entered into an employment agreement (the “Employment Agreement”) with Jensen pursuant to which Jensen serves as President and Chief Operating Officer (“COO”) and effective July 13, 2018 serves as Chief Executive Officer (“CEO”) of the Company. Jensen resigned as CEO of the Company effective April 1, 2019 (See note 14 (b)). By the terms of the Employment Agreement, Jensen will receive an annual salary of $200,000, payable as follows. For the period beginning on October 1, 2017 and ending on June 30, 2018, Jensen shall receive quarterly payments of the Company’s common stock, to be issued 15 days after the end of each three-month quarter. Commencing July 1, 2018, the Company will pay $10,000 per month in cash and the balance in Company common stock. At such time as the Company can pay the entire salary in cash and be cash positive on an operating basis, the entire monthly salary will be paid in cash. The Company expensed $50,000 for the services for the three months ended February 28, 2019, which includes $6,667 for issuance of 44,980 common shares for services and an accrual for $13,333 for issuance of proportionate shares, in accordance with the consulting contract (See notes 4 and 7).

The Company expensed $20,000 for services provided by Rakesh Malhotra, Chief Financial Officer (“CFO”) of the Company which was paid to a corporation in which the CFO has an ownership interest, pursuant to the consulting contract (See note 7).

The Company expensed $35,700, which includes an accrual for $25,200 for the issuance of 180,000 common shares for services, pursuant to a consulting contract, for services provided by Thrasher. This was paid to a corporation in which Thrasher has an ownership interest. (See notes 4 and 7).

On April 13, 2018, the Company employed Buys as the CTO with compensation of $10,000 per month over a three-year period. The Company expensed $30,000 during the three months ended February 28, 2019. On April 13, 2018, the Company granted options to Buys to acquire a total of 1,500,000 common shares. The Company expensed $4,227 for the value of options which vested during this period. (See notes 4, 5 and 7)

Effective June 1, 2018 the Company entered into a consulting agreement with Ganz pursuant to which Ganz serves as President of the Company. By the terms of the consulting agreement, Ganz will be paid annually $200,000 in the Company’s common shares for his services. The Company accrued expense for $50,000 for issuance of proportionate shares, in accordance with the consulting contract (See notes 4 and 7).

Effective December 1, 2017, the Company leased office premises at Wakefield, Massachusetts, USA for rent of $700 plus services per month from a corporation owned and controlled by a director of the Company. The Company expensed $4,383 as office rent plus services for the three months ended February 28, 2019. As of February 28, 2019, the Company has a payable for $1,595 for the rent.

12

Three months ended February 28, 2018

As of February 28, 2018, there are no amounts receivable from related parties.

As of February 28, 2018, the Company had payables of $9,816 to related parties to be settled in cash, $112,500 for shares pending issuance and an additional $33,333 payable to be settled by issuance of stock in April, 2018. Amounts due to related parties are unsecured, non-interest bearing and due on demand.

Effective as of October 1, 2017, the Company entered into an employment agreement with Paul Jensen pursuant to which Mr. Jensen serves as President and Chief Operating Officer of the Company. By the terms of the Employment Agreement, Mr. Jensen will receive an annual salary of $200,000, payable as follows. For the period beginning on October 1, 2017 and ending on June 30, 2018, Mr. Jensen shall receive quarterly payments of the Company’s common stock, to be issued 15 days after the end of each three-month calendar quarter.

The Company expensed $19,380 for services provided by the CFO of the Company which was paid to a corporation in which the CFO has an ownership interest, in accordance with the consulting contract. The Company expensed $40,380 (CAD $50,000) for services provided by the CEO of the Company and which was paid to a corporation in which the CEO has an ownership interest, in accordance with the consulting contract.

On March 27, 2017, the board of directors had granted options to the CEO to acquire a total of 1,150,000 common shares. The Company expensed $16,734 for fair value of options which vested during this period.

Effective December 1, 2017, the Company leased office premises at Wakefield, Massachusetts, USA for a rent of $700 per month from a corporation owned and controlled by a director of the Company. The Company expensed $2,100 as lease rent for the quarter ended February 28, 2018.

13

The non-independent directors of the Company executed consulting agreements with the Company on the following terms:

The Company executed a consulting agreement effective July 1, 2018 with a corporation owned by the executive chairman. The contract, unless renewed expires on March 31, 2019. During the service term, the Company will pay $3,500 per month and in addition, issue 180,000 common shares of the Company on a quarterly basis until the end of the term. Each quarterly installment is due the 15^th day of the following month after the quarter. The common shares will be priced at the volume weighted average trading price per common share over the 20-day period proceeding the due date.

Effective as of October 1, 2017, the Company entered into an employment agreement (the “Employment Agreement”) with Jensen pursuant to which Jensen serves as President and COO of the Company. By the terms of the Employment Agreement, Jensen will receive an annual salary of $200,000, payable as follows. For the period beginning on October 1, 2017 and ending on June 30, 2018, Jensen shall receive quarterly payments of the Company’s 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 Company’s shares for the twenty (20) trading days prior to the end of the applicable quarter. Commencing July 1, 2018, the Company will pay $10,000 per month in cash and the balance in Company stock. At such time as the Company can pay the entire salary in cash and be cash positive on an operating basis, the entire monthly salary will be paid in cash.

On April 13, 2018, the Company entered into a Purchase and Sale Agreement (the “Agreement”) with André Buys, (“Buys”) a resident of South Africa, pursuant to which the Company purchased from Buys a portfolio of registered patent rights and other intellectual property relating to air and/or gas fired long guns or pistols, including pump action launchers and munitions used with such pistols and long guns, including self-stabilizing shaped or “finned” rounds (the “Portfolio”). As consideration for the Portfolio, the Company (i) paid Buys $100,000, (ii) agreed to pay Buys either $500,000 in cash or $750,000 worth of Company stock within two years (the “Second Payment”) at Buys’ discretion and (iii) agreed to pay Buys certain royalty payments for sales of products by the Company using technology covered by the Portfolio. In addition, the Company employed Buys as the CTO and for services issued 1,500,000 options for shares of the Company’s common stock to Buys with a strike price of $0.16 and a trigger price of $0.30, $0.50 and $1.00 for each batch of 500,000 options, respectively. The Company’s stock price must close above the trigger price for 20 days in order for the option to be triggered. The options shall have a seven-year life from grant date and Buys must remain employed by the Company for three years in order for the options to vest. Until the earlier of, the second anniversary or the date the Second Payment is made, the royalty will be 10% of the Net Sales Price (“NSP”). The royalty will then be reduced to 4% till the sixth anniversary, 3% till the eighth anniversary, and 2% till the last expiration date of any of the intellectual property in the Portfolio. Until the royalty exceeds $25,000 per year, the Company is committed to a minimum payment of $25,000 per year effective on the earlier of one year from closing or upon Buys relocation to Boston. In the event that the Company fails to make the Second Payment, the Portfolio would revert to Buys, but the Company would retain perpetual, irrevocable, exclusive and non-exclusive licenses to use technology with respect to the Portfolio and any technology developed within two years of April 13, 2018. As the substance of the purchase and sale agreement has been determined to be an option agreement, the Company has not recorded any amount related to the Second Payment. The Company agrees that it will not terminate Buys except for cause prior to April 2021. As a result, the minimal commitment relating to the employment contract is $320,000 payable over a period of 32 months.

Effective June 1, 2018, the Company entered into a consulting agreement with Ganz pursuant to which Ganz serves as President of the Company. By the terms of the consulting agreement, Ganz will be paid annually $200,000 in the Company’s common shares for his service, subject to stock exchange approval. The common shares shall be issued quarterly, ending March 31, 2019. For the Company’s 2018 fiscal third and fourth quarter the President shall be paid 500,000 common shares for each quarter. Commencing in the three months ended February 28, 2019, Ganz will be issued an ongoing 250,000 common shares every quarter for his services.

Effective November 1, 2018, the Company entered into consulting agreements (the “Consulting Agreements”) with two consultants. The consultants will each be paid $7,500 per month commencing November 1, 2018 and to be increased to $10,000 per month subsequent to the month the Company begins shipping the Byrna HD product to customers. The term of the contracts with the consultants continue until December 31, 2019.

14

The CAD$1,363,000 ($1,015,026) of Series B Secured Convertible Debentures (Subordinate Secured Debentures) were issued pursuant to the Trust Indenture agreement dated December 7, 2016 (the “Indenture”) in exchange for the Unsecured Debentures in equal principal amount and an additional CAD$36,000 ($26,809) of Series B Secured Convertible Debentures were issued pursuant to the Indenture in payment of accrued interest. These debentures mature on June 6, 2019 and bear interest at 12% per annum, payable semi-annually. The debentures are secured by all the assets of the Company. The principal amount, plus accrued interest, may be converted at the option of the holder at any time during the term to maturity into shares of the Company’s common stock at a conversion price of $0.24 (CAD $0.31) per share subject to anti-dilution protection with a minimum conversion price of $0.135 and for capital reorganization events. The debentures also embody certain traditional default provisions that are linked to credit or interest risks, such as bankruptcy proceedings, liquidation events and corporate existence. The Company has concluded that the embedded conversion option is not indexed to its stock because it did not pass all eight conditions of equity classification provided in ASC 815. The embedded conversion option is subject to classification in the financial statements in liabilities at fair value both at inception and subsequently.

The Company has evaluated the terms and conditions of the debentures under the guidance of ASC 815. All three criteria under ASC 815-15-25-1 are met, therefore, the conversion feature requires classification and measurement as derivative financial instruments. Accordingly, the evaluation resulted in the conclusion that this derivative financial instrument requires bifurcation and liability classification, at fair value. Current standards contemplate that the classification of financial instruments requires evaluation at each report date.

The following table reflects the allocation of the purchase on December 7, 2016:

The carrying value of these debentures at February 28, 2019 is CAD $1,342,342 ($1,019,374) and at November 30, 2018 is CAD $1,301,359 ($978,361).

Discounts (premiums) on the convertible notes arise from (i) the allocation of basis to other instruments issued in the transaction, (ii) fees paid directly to the creditor and (iii) initial recognition at fair value, which is lower than face value. Discounts (premiums) are amortized through charges (credits) to interest expense over the term of the debt agreement. Amortization of debt discounts (premiums) amounted to CAD $40,983 ($30,786) during the three months ended February 28, 2019 and CAD$36,202 ($28,748) during the prior three months ended February 28, 2018. During the three months ended February 28, 2019, the Company recorded interest expense for $31,096 (February 28, 2018: $32,872).

15

On October 22, 2018, the Company entered into a Securities Purchase Agreement with several accredited investors to sell $1,275,000 of units, with each $1,000 of unit consisting of (i) a $1,000 10% interest unsecured convertible promissory note (collectively the “Notes”) due April 15, 2020, convertible into the Company’s common stock at a conversion price of $0.15 per share, and (ii) four thousand (4,000) warrants each exercisable for one share of common stock at an exercise price of $0.25 per share on or before the five year anniversary of the issuance. The notes are secured secondary by all of the Company assets and accrue interest at 10% per annum, payable in cash at maturity. However, the principal amount, plus accrued interest, may be converted at the option of the holder at any time during the term to maturity into shares of common stock at a conversion price of $0.15 per share subject to anti-dilution protection. The note embodies certain traditional default provisions that are linked to credit or interest risks, such as bankruptcy proceedings, liquidation events and corporate existence. The Company concluded that the embedded conversion option is not indexed to the Company’s stock because it did not pass all eight conditions of equity classification provided in ASC 815. Therefore, the embedded conversion option is subject to classification in the financial statements in liabilities at fair value both at inception and subsequently.

The Company evaluated the terms and conditions of the Notes under the guidance of ASC 815. All three criteria under ASC 815-15-25-1 are met, therefore, the conversion feature requires classification and measurement as derivative financial instruments. Accordingly, the evaluation resulted in the conclusion that this derivative financial instrument requires bifurcation and liability classification, at fair value. Current standards contemplate that the classification of financial instruments requires evaluation at each report date.

The following table reflects the allocation of the purchase on October 22, 2018:

The Company issued 5,100,000 warrants. The relative fair value of these warrants was estimated at $524,089 using the Binomial Lattice option pricing model and reflected in additional paid-in capital. Discounts (premiums) on the convertible notes arise from (i) the allocation of basis to other instruments issued in the transaction, (ii) fees paid directly to the creditor and (iii) initial recognition at fair value, which is lower than face value. Discounts (premiums) are amortized through charges (credits) to interest expense over the term of the debt agreement. Amortization of debt discounts (premiums) amounted to $72,072 during the three months ended February 28, 2019 (February 28, 2018: $Nil) resulting in the carrying value of convertible notes at $239,149 as at February 28, 2019 (November 30, 2018: $167,077). During the three months ended February 28, 2019, the Company recorded interest expense for $28,294 (February 28, 2018: $Nil).

16

Derivative Liabilities

The carrying values of the embedded derivative liabilities is reflected on the balance sheet, with changes in the carrying value being recorded as a change in fair value of derivative liabilities on the statement of operations.

The components of the embedded derivative as of February 28, 2019 are:

The components of the embedded derivative as of November 30, 2018 are:

The following table summarizes the effects on gain (loss) associated with changes in the fair values of derivative financial instruments by type of financing for the three months ended February 28, 2019 and 2018:

Fair Value Considerations

GAAP establishes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. As presented in the tables below, this hierarchy consists of three broad levels:

The Company follows the provisions of ASC 820 with respect to the financial instruments. As required by ASC 820, assets and liabilities measured at fair value are classified in their entirety based on the lowest level of input that is significant to their fair value measurement. The derivative financial instruments which are required to be measured at fair value on a recurring basis under of ASC 815 as of February 28, 2019 and November 30, 2018 are all measured at estimated fair value using Level 2 and 3 inputs.

17

The embedded derivative was fair valued using the income valuation technique using the Lattice valuation model. The following table sets forth the inputs for each significant assumption:

18

Quarter ended February 28, 2018

As at February 28, 2019

As at November 30, 2018

19

Seven patent applications, six non-provisional and one provisional, have been filed by the Company with the U.S. Patent Office. The Patents have been granted on the six non-provisional patents. The Company also owns the trademark for ‘BIP’.

Non-Provisional (Granted Patents):

(a) Less-lethal Projectile: This issued patent relates to the Company’s distinctive collapsible ammunition head technology that absorbs kinetic energy of the projectile upon impact. The Corporation’s collapsible head is used in both the BIP and the Wireless Electric Projectile (“WEP”).

(b) Electronic Circuitry for Incapacitating a Living Target: This issued patent relates to the electronic circuitry incapacitation system which forms part of the WEP. The patent describes an electronic circuit which provides an electrical incapacitation current to a living target.

(c) Less-lethal Wireless Stun Projectile System for Immobilizing a Target by Neuro-Muscular Disruption: This issued patent describes the process by which the WEP operates with its attachment system to halt a target through a neuro-muscular-disruption system.

(d) Autonomous Operation of a Less-lethal Projectile: This patent describes a motion sensing system within the WEP. The sensor will monitor movement of the target and enable the electrical output until the target is subdued. The electrical pulse is programmed for an exact time-frame to specifications of the user.

(e) Projectile: This invention relates to a non-lethal projectile to be fired using a paintball gun, and more particularly, but not exclusively, to an aerodynamic non-lethal projectile which is used for marking, inhibiting or administering medicinal or other chemical substances to live targets.

(f) Payload Carrying Arrangement for a Non-Lethal Projectile: This patent relates to the process of carrying liquid and powder payloads in the head of the BIP munitions that upon impact release from the head and are dispersed upon the target.

On April 13, 2018, the Company entered into a purchase and sale agreement with André Buys, pursuant to which the Company agreed to purchase from Mr. Buys a portfolio of registered patent rights, provisional patent rights, and other intellectual property relating to air and/or gas fired long guns or pistols, including pump action launchers and munitions used with such pistols and long guns, including self-stabilizing shaped or “finned” rounds (the “Portfolio”). As consideration for the portfolio, the Company paid Buys $100,000, and incurred $10,000 in legal costs to transfer these patent rights. This consideration of $110,000 has been capitalized. The Company also agreed to pay Buys either $500,000 in cash or $750,000 worth of Company stock within two years (the “Second Payment”) at Buys’ discretion. In the event that the Company fails to make the Second Payment, the Portfolio would revert to Buys, but the Company would retain perpetual, irrevocable, exclusive and non-exclusive licenses to use technology with respect to the Portfolio and any technology developed within two years of April 13, 2018. As the substance of the purchase and sale agreement has been determined to be an option agreement, The Company has not recorded any amount related to the Second Payment. These patent rights have a maximum life of 20 years, expiring on various dates beginning in November 2033 to 2038, and are amortized straight-line commencing June 2018 over a period of 15 years being the estimated useful life, as determined by management. The Company amortized $1,833 during the three months ended February 28, 2019 (February 28, 2018: $nil). As the full arrangement included an option for full acquisition of the rights, conditional upon certain future events taking place, the Company has recorded the minimum rights to a licence arrangement as patent rights. As at February 28, 2019, the amount recorded as Patent rights refer to the perpetual, irrevocable, exclusive and non-exclusive license to use technology with respect to the portfolio.

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Prepaid expenses and other receivables as of February 28, 2019, include the prepayment of $583,333 (November 30, 2018: $750,000) by the issuance of common shares to FinTekk AP LLC, being the issuance relating to the marketing campaign for the launch of the Company’s new Byrna^TM HD product to occur in fiscal 2019.

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Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

This section and other parts of this Quarterly Report on Form 10-Q (“Form 10-Q”) contain forward-looking statements, within the meaning of the Private Securities Litigation Reform Act of 1995, that involve risks and uncertainties. Forward-looking statements provide current expectations of future events based on certain assumptions and include any statement that does not directly relate to any historical or current fact. Forward-looking statements can also be identified by such words as “future,” “anticipates,” “believes,” “estimates,” “expects,” “intends,” “plans,” “predicts,” “will,” “would,” “could,” “can,” “may,” and similar terms. Forward-looking statements do not guarantee future performance and the Company’s actual results may differ significantly from the results discussed in the forward-looking statements. Factors that might cause such differences include, but are not limited to, those discussed in Part II, Item 1A of this Form 10-Q under the heading “Risk Factors,” which are incorporated herein by reference. The following discussion should be read in conjunction with the Company’s Annual Report on Form 10-K for the year ended November 30, 2018 (the “2018 Form 10-K”) filed with the U.S. Securities and Exchange Commission (the “SEC”) and the condensed consolidated financial statements and notes thereto included in Part I, Item 1 of this Form 10-Q. All information presented herein is based on the Company’s fiscal calendar. Unless otherwise stated, references to particular years, quarters, months or periods refer to the Company’s fiscal years ended in November and the associated quarters, months and periods of those fiscal years. Each of the terms the “Company” and “SDI” as used herein refers collectively to Security Devices International Inc. and its wholly-owned subsidiaries, unless otherwise stated. The Company assumes no obligation to revise or update any forward-looking statements for any reason, except as required by law.

Available Information

Information on the Company is available free of charge on the Company’s websites at ir.securitydii.com and by clicking “Investors” at www.byrna.com. The SEC maintains an internet site that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC at www.sec.gov. The Company periodically provides other information for investors at ir.securitydii.com and through the Investors link at www.byrna.com. This includes press releases and other information about financial performance, information on corporate governance, and details related to the Company’s annual meeting of shareholders. The information contained on the websites referenced in this Form 10-Q is not incorporated by reference into this filing. Further, the Company’s references to website URLs are intended to be inactive textual references only.

Overview and Highlights

The Company is a defense technology firm specializing in the development, production, procurement, and sale of innovative non-lethal technologies and products to the consumer, military, law enforcement and private security end markets. The Company's main product lines are its 40MM non-lethal projectiles and the Byrna HD™, the Company's first product designed to be used by civilians as well as private security professionals. The Company also makes available for sale third party products compatible with its Byrna HD as well as projectiles to be used with the launcher.  The Company primarily sells its products in the United States and Canada, and recently has begun offering its products for sale in South Africa.  In the United States and in Canada, the Company primarily sells products through its online stores and through historic relationships. In South Africa, the Company has begun to take orders for the Byrna HD through Dave Sheer Guns, the leading distributor of firearms and accessories in South Africa.  Dave Sheer Guns is marketing the Byrna HD to private security companies, law enforcement, gun stores and consumers.

Business Strategy

Less-lethal weapons include a wide variety of products designed to disorient, disarm, disable and deter would-be assailants, rioters, and other malfeasants. It is the Company’s belief that the United States, along with many other parts of the world is experiencing a significant spike in the demand for less-lethal products and that the less-lethal market will be one of the faster growing segments over the next decade. The less lethal market has been projected to approach 12 billion dollars per year by 2023 (Statistics MRC. Non-Lethal Weapons – Global Market Outlook (2017-2023).

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

In the law enforcement, correctional services, and private security markets, the Company previously focused on development, production and sale of less-lethal munitions to be used in a 40mm launcher with a rifled barrel.  These launchers can fire a variety of less-lethal munitions including impact rounds designed to stop an individual without causing permanent injury and "payload" rounds carrying a variety of powders and liquids such as tear gas, pepper spray, DNA marking liquids, mal-odorants and other marking liquids and powders designed to identify instigators in riot situations. The Company focused on munitions for a 40mm launcher because, in the Company's opinion, its ability to fire accurately at distances in excess of 100 feet, has led to its rapid and growing adoption in the law enforcement, correctional services, crowd control and private security markets. The Company's flagship product in this market is its 40mm blunt impact projectile ("BIP"), which uses patented collapsible gel head technology.  The Company believes its product is by far the best 40mm kinetic energy impact round currently on the market.  However, management believes that  the customer acquisition cost associated with selling the 40mm projectiles is unacceptably high due to: (1) the law enforcement market is highly fragmented with over 18,500 different law enforcement organizations in the United States, each making their own procurement decisions; (2) most procurement personnel require a live fire demonstration prior to making a decision, which can be prohibitively expensive for a company that does not have a large range of products as orders for individual products tend to be small as most organizations do not stock munitions except to replenish; and (3) in the Company's opinion law enforcement organizations with established relationships do not easily change suppliers or products. 

As a result, the Company has not devoted significant resources to the sales and marketing of the 40mm BIP over the last two years and sales of the 40mm BIP have remained stagnant.  The Company remains to utilize a distributor in the US and Canada for some of their 40mm sales as well as an online store for government agencies. As an alternative to direct sales, the Company has explored licensing the Company's 40mm BIP technology. The Company has entered into an agreement with Safariland to market the SDI patented 40mm piston driven collapsible head projectile mated to a Safariland aluminum casing.  The parties are still in the testing phase for the resulting product.  If the SDI patented 40mm piston driven collapsible head projectile mated to a Safariland casing passes the testing regime, the Company expects Safariland to market this product under the Safariland brand.  The Company has also entered into an Agreement with Airtronics to supply the BIP as the standard round to be sold with Airtronic's "Sonis" brand less lethal launcher.  Airtronics focuses on military sales around the world.

To fill a perceived need in both the civilian and professional markets the Company has expended significant resources over the last year developing a hand-held self-defense launcher that fires .68 caliber impact and chemical irritant projectiles.  This launcher, called the Byrna HD, is designed to deter, disorient, disarm and disable an attacker efficiently and effectively at stand-off distances up to 60 feet. The Byrna HD, which utilizes several of the Company's proprietary patents and over 60 custom designed parts, is a compact, ergonomic, attractive personal security device designed specifically for the consumer (home defense) market and for the private security market, as most private security guards are not licensed to carry a firearm.

Introduction of the Byrna HD™

In December of 2018, the Company displayed the first 3-D prototypes of the Byrna HD at the 11th Annual LD Micro Conference Main Event in Los Angeles, California. Shortly thereafter, the Company completed testing of the Byrna HD prototypes, which resulted in certain modifications to the device to improve performance and durability. Additionally, the Company decided to offer the Byrna in black, desert-tan and camouflage in addition to safety orange. Validation testing commenced in December 2018 with factory production parts, but its completion was delayed by the holiday calendar and the unavailability of several custom parts until January 2019. Subsequently the Company has completed internal validation testing using production parts and models, resulting in additional improvements. The modifications to the Byrna delayed the commencement of serial production as the Company awaited modified parts to effect certain improvements made during the final stages of validation testing.

In February of 2019, the Company launched its online store for the Byrna HD and held its official product launch, in conjunction with Daytona Speedweek, where it had a display booth, hosted an investor day, and was an Associate Sponsor of a race car driven by Cody Ware. Management was very encouraged by the conversion rate at Daytona Speedweek, selling the Byrna  HD or a product bundle to approximately one out of every six people that visited the Company's booth.  Management is working with Rick Ware Racing to improve the location of the Company's display booths at NASCAR events to maximize exposure. The Company also is exploring other marketing strategies for the Byrna HD including both social media and traditional advertising. The Company expects to introduce additional products in the Byrna family, including a cold weather version and a professional edition with a longer range of accuracy using its patented fin-tail projectiles, and various accessories and companion products.

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Subsequent Events

On March 27, 2019, the Company began serial production of the Byrna HD with back orders of approximately 3,200 units, including 3,000 units that were ordered by Dave Sheer Guns (DSG) in South Africa. DSG intends to sell these launchers to both private security companies and the general public. In South Africa, the waiting period for a handgun license is six months to one-year. DSG hopes to convince customers who are awaiting a handgun license to leave with a Byrna so that they do not walk out empty handed and are able to take with them some form of self defense. The Company is planning to deliver all 3,000 units ordered by DSG within three months. DSG has advised the Company that it already has pre-orders from private security companies for more than 500 of the units on back order.

The Company is implementing changes to its supply chain process to ensure its parts inventory is maintained to maximize its production rate, fulfill backorders, and have Byrnas available for immediate delivery. It anticipates production at a rate of 50 units per day.

First Quarter Highlights

Cash on hand is down $831,458, from $1,182,387 on November 30, 2018 to $350,929 on February 28, 2019, due primarily to the costs associated with preparing to go into serial production on the Byrna HD. This included the costs to set up the assembly line in South Africa and the distribution center in Fort Wayne, IN, research, development and testing costs required to finalize the Byrna design in preparation of production, and marketing costs associated with the launch of the Byrna, including both building out the Company’s e-commerce capabilities and the costs of the Byrna HD product launch at the Daytona 500. The Company is also in the process of implementing a new ERP system and hired additional accounting and administrative personnel necessary to handle the increased transaction volume expected in 2019.

There were no sales of the Byrna HD during Q1 to offset these costs. The company expects to begin shipping against back orders in April 2019 and anticipates fulfilling all current backorders by early June 2019. Management estimates that such shipments would generate approximately $550,000 in sales during the second fiscal quarter of 2019.

SG&A jumped substantially in Q1 from the prior quarter from $290,443 to $1,097,968. This was due to many of the same reasons cited above for the reduction in cash. Much of the additional SG&A represented one-time costs associated with the Byrna HD product launch including the NASCAR sponsorship, testing and R&D costs, as well as, the costs associated with the implementation of a new ERP system and the opening of the Company’s Fort Wayne, IN distribution center. SG&A is projected to be approximately $500,000 in the second quarter of 2019, slightly less than half of what was expended in during the first quarter of 2019.

The weighted average common shares outstanding increased 9.4 million between February 28, 2018 and February 28, 2019, largely due to the shares issued to FinTekk in exchange for the cost of the NASCAR sponsorship and other marketing support and assistance including social media marketing assistance. Additionally, shares were issued to several senior executives including the Executive Chairman, CEO, President, and General Counsel, in lieu of cash.

Going Concern

The Company has incurred a cumulative loss of $34,136,110 from inception to February 28, 2019. The Company has funded operations through the issuance of capital stock, warrants and convertible debentures. The Company has started to generate revenue from operations. However, it still expects to incur significant losses before becoming profitable. The Company’s future success is dependent upon its ability to raise sufficient capital or generate adequate revenue, to cover its ongoing operating expenses, and also to continue to develop and be able to profitably market its products. There can be no assurance that such financing will be available at all or on favorable terms. These factors raise substantial doubt about the ability of the Company to continue as a going concern. The financial statements do not include any adjustments that might result from the outcome of this uncertainty; such adjustments could be material.

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Significant Quarterly Information

The following represents selected information of the Company for the most recently completed financial quarter ended February 28, 2019

Results of Operations

Financial highlights (unaudited) for the period ending February 28, 2019 with comparatives are as follows:

The Company’s selected information for the quarter ended February 28, 2019 (unaudited) and November 30, 2018 (audited) are as follows:

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Net loss for the three months ended February 28, 2019 was $883,772 ($0.009 per share) as compared to net loss of $355,712 ($0.004 per share) for the three-month period ended February 28, 2018. For major components of the change, refer to First Quarter Highlights as detailed above.

Cash Flows

Net cash used in operations for the three months ended February 28, 2019, was $709,550 as compared to $473,324 used for the three months ended February 28, 2018. The major components of change relate to:

The Company incurred a net loss of $883,772 for the three months ended February 28, 2019, as compared to a net loss of $473,324 for the prior period ended February 28, 2018. For major components of this change, refer to First Quarter Highlights as detailed above.

In addition, the Company’s closing inventory increased by $186,519 in the first quarter of 2019 as compared to an increase of $33,238 in 2018. This increase in inventory represents the investment in inventory required for production of Byrna HD devices in the subsequent period.

Net cash flow from investing activities was $(116,886) during the three- month period ended February 28, 2019 as compared to $(2,456) for the prior period ended February 28, 2018. The Company acquired property and equipment for $97,495 during the three- month period ended February 28, 2019 as compared to $2,456 for the three-month period ended February 28, 2018.

Net Cash flow from financing activities was $Nil in the first quarter of 2019 as compared to outflow of cash for $40,357 in 2018. This increase in cash usage in financing activities in 2018 was the repayment of unsecured convertible when they became due for repayment during the quarter.

There was thus an overall decrease in cash of $(831,458) in 2019 as compared to a decrease in cash of $(527,456) during 2018.

Liquidity and Capital Resources

As at February 28, 2019, cash and cash equivalent was $350,929, as compared to $1,182,387 at November 30, 2018. This decrease is mainly attributable to the combination of factors mentioned above under heading First Quarter Highlights.

At February 28, 2019, the Company had a working capital deficit of $(733,516). The major components are: cash and cash equivalent $350,929; prepaid expenses and other receivables $678,494; inventory for $315,640; accounts receivable for $17,868; derivative liabilities for $563,602; secured convertible debentures for $1,019,374; deferred revenue for $52,525 and accounts payable and accrued liabilities of $460,946.

At November 30, 2018, the Company had a working capital deficit of $(101,302). The major components are: cash and cash equivalent $1,182,387; prepaid expenses and other receivables $901,247; accounts receivable for $18,914; inventory for $129,121; derivative liabilities for $957,301, secured convertible debentures for $978,361 and accounts payable and accrued liabilities of $397,309.

Management is currently exploring capital resources to satisfy future debt obligations. Without additional capital SDI will not be able to fund its anticipated capital requirements outlined above.

Related party transactions

The following transactions are in the normal course of operations and are measured at the amount of consideration established and agreed to by related parties.

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Three months ended February 28, 2019

As of February 28, 2019, there are no amounts receivable from related parties.

As of February 28, 2019, the Company had a payable of $108,711 to related parties which is unsecured, non-interest bearing and due on demand. This payable is included in accounts payable and accrued liabilities.

Effective as of October 1, 2017, the Company entered into an employment agreement (the “Employment Agreement”) with Paul Jensen (“Jensen”) pursuant to which Jensen serves as President and Chief Operating Officer (“COO”) and effective July 13, 2018 serves as Chief Executive Officer (“CEO”) of the Company. Jensen resigned as CEO of the Company effective April 1, 2019. By the terms of the Employment Agreement, Jensen will receive an annual salary of $200,000, payable as follows. For the period beginning on October 1, 2017 and ending on June 30, 2018, Jensen shall receive quarterly payments of the Company’s common stock, to be issued 15 days after the end of each three-month quarter. Commencing July 1, 2018, the Company will pay $10,000 per month in cash and the balance in Company common stock. At such time as the Company can pay the entire salary in cash and be cash positive on an operating basis, the entire monthly salary will be paid in cash. The Company expensed $50,000 for the services for the three months ended February 28, 2019 which includes $6,667 for issuance of 44,980 common shares for services and an accrual for $13,333 for issuance of proportionate shares, in accordance with the consulting contract.

The Company expensed $20,000 for services provided by Rakesh Malhotra, Chief Financial Officer (“CFO”) of the Company which was paid to a corporation in which the CFO has an ownership interest, pursuant to the consulting contract.

The Company expensed $35,700, which includes an accrual for $25,200 for the issuance of 180,000 common shares for services, pursuant to a consulting contract, for services provided by Thrasher. This was paid to a corporation in which Thrasher has an ownership interest.

On April 13, 2018, the Company employed Buys as the CTO with compensation of $10,000 per month over a three-year period. The Company expensed $30,000 during the three months ended February 28, 2019. On April 13, 2018, the Company granted options to Buys to acquire a total of 1,500,000 common shares. The Company expensed $4,227 for the value of options which vested during this period.

Effective June 1, 2018 the Company entered into a consulting agreement with Ganz pursuant to which Ganz serves as President of the Company. By the terms of the consulting agreement, Ganz will be paid annually $200,000 in the Company’s common shares for his services. The Company accrued expense for $50,000 for issuance of proportionate shares, in accordance with the consulting contract.

Effective December 1, 2017, the Company leased office premises at Wakefield, Massachusetts, USA for rent of $700 plus services per month from a corporation owned and controlled by a director of the Company. The Company expensed $4,383 as office rent plus services for the three months ended February 28, 2019. As of February 28, 2019, the Company has a payable for $1,595 for the rent.

Three months ended February 28, 2018

As of February 28, 2018, there are no amounts receivable from related parties.

As of February 28, 2018, the Company had payables of $9,816 to related parties to be settled in cash, $112,500 for shares pending issuance and an additional $33,333 payable to be settled by issuance of stock in April 2018.

Effective as of October 1, 2017, the Company entered into an employment agreement with Jensen pursuant to which Mr. Jensen serves as President and Chief Operating Officer of the Company. By the terms of the 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 Company’s common stock, to be issued 15 days after the end of each three-month calendar quarter.

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The Company expensed $19,380 for services provided by the CFO of the Company which was paid to a corporation in which the CFO has an ownership interest, in accordance with the consulting contract. The Company expensed $40,380 (CAD $50,000) for services provided by the CEO of the Company and which was paid to a corporation in which the CEO has an ownership interest, in accordance with the consulting contract.

On March 27, 2017, the board of directors had granted options to the CEO to acquire a total of 1,150,000 common shares. The Company expensed $16,734 for fair value of options which vested during this period.

Effective December 1, 2017, the Company leased office premises at Wakefield, Massachusetts, USA for a rent of $700 per month from a corporation owned and controlled by a director of the Company. The Company expensed $2,100 as lease rent for the quarter ended February 28, 2018.

Off-balance sheet arrangements

The Company has no significant off-balance sheet arrangements at this time.

Subsequent Events

Outstanding share data

As of April 12, 2019, the Company had 103,856,775 issued and outstanding shares of common stock.

Dividends

The Company has not, since the date of its inception, declared or paid any dividends on its Common Shares and does not currently intend to pay dividends. Earnings, if any, will be retained to finance further growth and development of the business of the Company.

Item 3. Quantitative and Qualitative Disclosures About Market Risk.

Not applicable

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Item 4. Controls and Procedures.

             (a) SDI maintains a system of controls and procedures designed to ensure that information required to be disclosed in reports filed or submitted under the Securities Exchange Act of 1934, as amended (“1934 Act”), is recorded, processed, summarized and reported, within time periods specified in the SEC’s rules and forms and to ensure that information required to be disclosed by SDI in the reports that it files or submits under the 1934 Act, is accumulated and communicated to SDI’s management, including its Principal Executive Officer and Principal Financial Officer, as appropriate to allow timely decisions regarding required disclosure. As of February 28, 2019, SDI’s Principal Executive Officer and Principal Financial Officer evaluated the effectiveness of the design and operation of SDI’s disclosure controls and procedures. Based on that evaluation, SDI’s Principal Executive Officer and Principal Financial Officer concluded that SDI’s disclosure controls and procedures were not effective due to the following significant deficiency:

Inherent in any small business is the pervasive problem involving segregation of duties. Since SDI has a small accounting department, segregation of duties cannot be completely accomplished at this stage in its corporate lifecycle.

In order to correct the foregoing significant deficiency, we have taken and are taking the following remediation measures that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting:

• We have several Directors with business experience and spending time with the business.
• We have established an audit committee of our board of directors. The audit committee will provide oversight of our accounting and financial reporting. Transactions that are complex are being referred to an outside consultant.

Accordingly, SDI’s management has added compensating controls to reduce and minimize the risk of a material misstatement in SDI’s annual and condensed interim consolidated financial statements.

            (b) Changes in Internal Controls. There were no changes in SDI’s internal control over financial reporting during the quarter ended February 28, 2019 that materially affected, or are reasonably likely to materially affect, its internal control over financial reporting.

Part 11. Other Information

Item 1. Legal Proceedings

None

Item 1A. Risk Factors

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 Company’s 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 Company’s 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.

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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 Company’s deployment of its products, resulting in the possible dilution. Any such financing will dilute the ownership interest of the Company’s 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 Company’s 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.

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 Company’s 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 Company’s 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 Company’s 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, manufacturer’s representatives, distributors, value added resellers, systems integrators, original equipment manufacturers and end-users, any of which could have a material adverse effect on the Company’s 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.

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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 certain of its products, the Company must either acquire or develop a sales and distribution infrastructure. In order to maximize sales of other products, the Company may determine that it needs to 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.

Rapid Technological Development

The markets for the Company’s 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 Company’s 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 Company’s 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 Company’s 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 Company’s results of operations, business, prospects and financial condition. The Company’s continued compliance with present and changing future laws could restrict the Company’s 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.

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Intellectual Property

The Company’s 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 Company’s competitors will not independently develop technologies that are substantially equivalent or superior to the Company’s technology.

To protect the Company’s 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 Company’s 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, manufacturer’s 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 Company’s 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 management’s 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 Company’s ability to market certain of its products and, in turn, could harm its business and results from operations.

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Stress in the global financial system may adversely affect the Company’s 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 Company’s 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 Company’s customer base. As a result, these customers may need to reduce their purchases of the Company’s 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.

Insurance and Uninsured Risks

The Company’s 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 certain 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. Accounting for the Company's wholly owned subsidiary, Byrna South Africa Pty Ltd, is handled by a firm whose principal is related to the Company's CTO.

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 Company’s 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 Company’s securities; lessening in trading volume and general market interest in the Company’s securities may affect a subscriber’s ability to trade significant numbers of common shares, the size of the Company’s public float may limit the ability of some institutions to invest in the Company’s securities; a substantial decline in the price of the common shares that persists for a significant period of time could cause the Company’s 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 subscriber’s 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.

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Political Regulatory Risks

Any changes in government policy may result in changes to laws affecting the sale of the Company’s products. This may affect the Company’s ability to ship product in the future. The possibility that future governments may adopt substantially different policies, may also affect the Company’s 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.

Risks related to the Launch of the Byrna HD and related marketing, publicity and sales

The Byrna HD is a brand new product. Management’s statements about the anticipated production, delivery, effectiveness, legality, performance, sales, and marketing of the Byrna™ HD, and the anticipated market response are all forward-looking. These statements involve risks and uncertainties, and actual results may differ from current expectations. Risks and uncertainties bearing on expectations for the Byrna HD and related NASCAR sponsorship, partnership with Rick Ware Racing, and sales to Dave Sheer Guns include without limitation: design flaws uncovered during testing; production problems that may cause manufacturing or shipping delays, quality problems, or cost overruns; the Company’s dependence in part or in whole on the performance of third parties including those located outside the United States in connection with sourcing of components, distribution and resale, and logistic and assembly services; the dependency of the Company on proprietary and other intellectual property, which may not be available to the Company on commercially reasonable terms or at all; the impact of unfavorable legal proceedings, including intellectual property disputes; the impact of state and local laws and regulation or changes to laws and regulations including licensing, registration, and certification laws related to sale, possession or use of Byrna products or pepper-based defense products; the ability of the Company to manage risks associated with its activities at a manageable cost, including complying with applicable laws and regulations, and renewing and maintaining adequate insurance; and competition from less expensive or superior products that may be developed.

Except as required by law, SDI disclaims any intention and assumes no obligation to update or revise any forward-looking statements to reflect actual results, whether as a result of new information, future events, changes in assumptions, changes in factors affecting such forward-looking statements or otherwise.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

In January 2019, the Company made a share issuance to Jensen pursuant to his employment agreement. The Company issued 134,938 common shares at a price of $0.1482 per share to satisfy the payment of $20,000, due January 15, 2019.

In January 2019, the Company made a share issuance to Ganz pursuant to a consulting agreement. The Company issued 500,000 common shares at a price of $0.1482 for a total consideration of $74,100, due December 15, 2018.

In January 2019, the Company made a share issuance to a corporation owned and controlled by Thrasher, executive chairman of the Company, pursuant to a consulting agreement. The Company issued 180,000 common shares at a price of $0.1482 for consideration of $26,676 due January 15, 2018.

In January 2019, the Company made a share issuance to the Chief Legal Officer (“CLO”) pursuant to a consulting agreement. The Company issued 166,666 common shares at a price of $0.1482 for a total consideration of $24,700, due January 15, 2019.

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In January 2019, the Company made a share issuance to the Chief Technology Officer (“CTO”) pursuant to a consulting agreement. The Company issued 134,938 common shares at a price of $0.1482 per share to satisfy the payment of $19,998 due January 15, 2019.

Item 3. Defaults Upon Senior Securities

None

Item 4. Mine Safety Disclosures

Not applicable.

Item 5. Other Information

None

Item 6. Exhibits

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

SECURITY DEVICES INTERNATIONAL, INC.

Date: April 15, 2019

Date: April 15, 2019

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