Byrna Technologies Inc. - Quarter Report: 2019 August (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 August 31, 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

Securities registered pursuant to Section 12(b) of the Act:

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 October 13, 2019, the Company had 104,177,837 issued and outstanding shares of common stock.

SECURITY DEVICES INTERNATIONAL, INC.

CONDENSED INTERIM CONSOLIDATED FINANCIAL STATEMENTS

AUGUST 31, 2019

(Amounts expressed in US Dollars)
(Unaudited)

TABLE OF CONTENTS

SECURITY DEVICES INTERNATIONAL, INC.
Condensed Interim Consolidated Balance Sheets
As at August 31, 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
For the Nine Months and Three Months Ended August 31, 2019 and 2018
(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 Nine Months Ended August 31, 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 Nine Months Ended August 31, 2019 and 2018
(Amounts expressed in US Dollars) (Unaudited)

See accompanying notes to the condensed interim consolidated financial statements.

4

SECURITY DEVICES INTERNATIONAL, INC.
Notes to Condensed Interim Consolidated Financial Statements
For the Periods Ended August 31, 2019 and 2018
(Amounts expressed in US Dollars) (Unaudited)

5

SECURITY DEVICES INTERNATIONAL, INC.
Notes to Condensed Interim Consolidated Financial Statements
For the Periods Ended August 31, 2019 and 2018
(Amounts expressed in US Dollars) (Unaudited)

As of August 31, 2019, the Company has deposits of $227,781 (November 30, 2018 - $205,664) with vendors primarily for supply of moulds and equipment. As of August 31, 2019, the vendors had not completed the supply of these moulds and equipment.

6

SECURITY DEVICES INTERNATIONAL, INC.
Notes to Condensed Interim Consolidated Financial Statements
For the Periods Ended August 31, 2019 and 2018
(Amounts expressed in US Dollars) (Unaudited)

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

And

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

* On October 6, 2017, the Company filed with the Secretary of the State of Delaware a certificate of amendment (the “Amendment”) to the 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.

104,021,837 common shares (November 30, 2018: 101,976,900 common shares)

7

SECURITY DEVICES INTERNATIONAL, INC.
Notes to Condensed Interim Consolidated Financial Statements
For the Periods Ended August 31, 2019 and 2018
(Amounts expressed in US Dollars) (Unaudited)

Nine months ended August 31, 2019

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

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

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

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

In January 2019, the Company made a share issuance to a consultant in South Africa, 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. These shares were cancelled in June 2019, and the Company subsequently paid the consultant $19,998 in cash.

On April 1, 2019, the Company made a share issuance to Ganz, pursuant to a consulting agreement. The Company issued 333,333 common shares at a price of $0.14 per share to satisfy payment for $46,665, due April 15, 2019.

On April 1, 2019, the Company made a share issuance to Wager for services, pursuant to board resolution. The Company issued 250,000 common shares at a price of $0.14 per share to satisfy payment for $35,000, due April 15, 2019.

On April 1, 2019, the Company made a share issuance to a corporation owned and controlled by Thrasher, pursuant to a consulting agreement. The Company issued 180,000 common shares at a price of $0.14 for a total consideration of $25,200, due April 15, 2019.

On May 22, 2019, the Company made a share issuance to a consultant pursuant to a consulting agreement for services. The Company issued 300,000 common shares at a price of $0.14 per share for a total consideration of $42,000.

8

SECURITY DEVICES INTERNATIONAL, INC.
Notes to Condensed Interim Consolidated Financial Statements
For the Periods Ended August 31, 2019 and 2018
(Amounts expressed in US Dollars) (Unaudited)

9

SECURITY DEVICES INTERNATIONAL, INC.
Notes to Condensed Interim Consolidated Financial Statements
For the Periods Ended August 31, 2019 and 2018
(Amounts expressed in US Dollars) (Unaudited)

10

SECURITY DEVICES INTERNATIONAL, INC.
Notes to Condensed Interim Consolidated Financial Statements
For the Periods Ended August 31, 2019 and 2018
(Amounts expressed in US Dollars) (Unaudited)

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:

11

SECURITY DEVICES INTERNATIONAL, INC.
Notes to Condensed Interim Consolidated Financial Statements
For the Periods Ended August 31, 2019 and 2018
(Amounts expressed in US Dollars) (Unaudited)

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

Nine months ended August 31, 2019

Warrants

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

12

SECURITY DEVICES INTERNATIONAL, INC.
Notes to Condensed Interim Consolidated Financial Statements
For the Periods Ended August 31, 2019 and 2018
(Amounts expressed in US Dollars) (Unaudited)

On July 22, 2019, the Company entered into a securities purchase agreement with several investors to sell a total of $2,282,500 of units at a price of $1,000 per unit, consisting of (i) $1,000 10% interest secured convertible promissory note, convertible into the Company’s common stock at a conversion price of $0.15 per share and (ii) four thousand warrants each exercisable for one share of common stock at an exercise price of $0.25 per share on or before January 22, 2024. The Company issued 9,130,000 warrants. The relative grant date fair value of these warrants was estimated at $1,038,081 using the Binomial lattice option pricing model and reflected in additional paid-in capital, 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 of $12,681 during the nine-month period ended August 31, 2019.

13

SECURITY DEVICES INTERNATIONAL, INC.
Notes to Condensed Interim Consolidated Financial Statements
For the Periods Ended August 31, 2019 and 2018
(Amounts expressed in US Dollars) (Unaudited)

As of August 31, 2019, there was $57,337 of unrecognized expense related to non-vested stock-based compensation arrangements granted.

14

SECURITY DEVICES INTERNATIONAL, INC.
Notes to Condensed Interim Consolidated Financial Statements
For the Periods Ended August 31, 2019 and 2018
(Amounts expressed in US Dollars) (Unaudited)

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.

Nine months ended August 31, 2019

The Company expensed $66,667 for services provided by Jensen as CEO through March 31, 2019, which includes an obligation of the Company to issue shares for $20,000.

The Company expensed $50,000 for services provided by Malhotra, CFO of the Company, which was paid to a corporation in which the CFO has an ownership interest.

The Company expensed $43,200, which includes $25,200 for the issuance of 180,000 common shares for services, pursuant to a consulting contract, for services provided by Thrasher, a former director of the Company.

The Company expensed $90,000 for services provided by Andre Buys ("Buys"), CTO of the Company, and an additional $8,333 for royalties. The Company expensed $12,681 for the value of that portion of his 1,500,000 options that vested during this period. As at August 31, 2019, the Company owes Buys $16,333.

The Company expensed $136,374 for services provided by Ganz, President of the Company and, effective April 1, 2019, CEO of the Company, which includes $46,667 for issuance of 333,333 common shares and $52,500 for issuance of convertible notes.

The Company expensed $119,385 for services provided for Wager, CLO of the Company, which includes $35,000 for issuance of 250,000 common shares and $42,500 for issuance of convertible notes.

The Company expensed $16,200 for office rent including services to a corporation owned and controlled by Ganz, President and, effective April 1, 2019 CEO of the Company. As of August 31, 2019, the Company has a payable due to that corporation of $8,120.

Current directors and officers of the Company participated in the April 22, 2019, May 20, 2019 and July 22, 2019 financing for 316 units for total proceeds of $315,588, of which $70,000 was issued for services rendered.

Amounts owing to related parties are unsecured, non-interest bearing and due on demand.

15

SECURITY DEVICES INTERNATIONAL, INC.
Notes to Condensed Interim Consolidated Financial Statements
For the Periods Ended August 31, 2019 and 2018
(Amounts expressed in US Dollars) (Unaudited)

Nine months ended August 31, 2018

As of August 31, 2018, there were no amounts receivable from related parties.

As of August 31, 2018, the Company had a payable of $103,906 to related parties to be settled by issuance of stock.

The Company expensed $150,000 for services provided by Jensen, COO and President of the Company through July 13, 2018 and, CEO of the Company effective July 13, 2018.

The Company expensed $34,875 for services provided by Malhotra, CFO of the Company, which was paid to a corporation in which Malhotra has an ownership interest, in accordance with his consulting contract.

The Company expensed $116,575 which includes $18,000 for issuance of proportionate shares per his contract, for services provided by Dean Thrasher as CEO of the Company through July 13,2018 and as Executive Chairman of the Company effective July 13, 2018, which was paid to a corporation in which the CEO has an ownership interest, in accordance with the consulting contract (see also note 7). The Company also expensed $39,046 for the value of that portion of his 1,150,000 options that vested during this period.

The Company issued 507,550 common shares to NEIP at a price of $0.12 per share to satisfy the payment of $62,500 for services rendered due in December 2017.

On April 13, 2018, the Company employed Buys as the CTO with compensation of $10,000 per month over a three-year period and granted Buys options to acquire a total of 1,500,000 common shares. The Company expensed $46,667 paid to Buys, and expensed $6,341 for the value of that portion of his 1,500,000 options that vested during this period. See Note 7(a).

Effective June 1, 2018 the Company entered into a consulting agreement (the “Consulting Agreement”) with Bryan Ganz pursuant to which Mr. Ganz served as President of the Company. By the terms of the Consulting Agreement, Mr. Ganz was to be paid annually $200,000 in the Company’s common shares for his services and subject to stock exchange approval. For the Company’s fiscal third and fourth quarters Ganz was to be paid 500,000 common shares for each quarter, ending March 31, 2019. The Company accrued expenses of $72,573 as the cost of shares issued to Ganz for services.

Effective December 1, 2017, the Company leased office premises at Wakefield, Massachusetts, USA for rent of $700 per month from a corporation owned and controlled by a director of the Company. The Company expensed $6,300 as office rent for the nine-months ended August 31, 2018. As of August 31, 2018, the Company had a payable for $3,940 for the rent.

16

SECURITY DEVICES INTERNATIONAL, INC.
Notes to Condensed Interim Consolidated Financial Statements
For the Periods Ended August 31, 2019 and 2018
(Amounts expressed in US Dollars) (Unaudited)

On April 13, 2018, the Company entered into a Purchase and Sale Agreement (the “Agreement”) with André Buys, (“Buys”) a resident of South Africa, pursuant to which the Company purchased from Buys a portfolio of registered patent rights and other intellectual property relating to air and/or gas fired long guns or pistols, including pump action launchers and munitions used with such pistols and long guns, including self-stabilizing shaped or “finned” rounds (the “Portfolio”). As consideration for the Portfolio, the Company (i) paid Buys $100,000, (ii) agreed to pay Buys either $500,000 in cash or $750,000 worth of Company stock within two years (the “Second Payment”) at Buys’ discretion and (iii) agreed to pay Buys certain royalty payments for sales of products by the Company using technology covered by the Portfolio. In addition, the Company employed Buys as the CTO and for services issued 1,500,000 options for shares of the 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 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.

17

SECURITY DEVICES INTERNATIONAL, INC.
Notes to Condensed Interim Consolidated Financial Statements
For the Periods Ended August 31, 2019 and 2018
(Amounts expressed in US Dollars) (Unaudited)

            a)        Secured Convertible Debentures $Nil (November 30, 2018: $978,361)

The CAD$1,363,000 ($1,015,026) of Series B Secured Convertible Debentures (Subordinate Secured Debentures) were issued pursuant to the Trust Indenture agreement dated December 7, 2016 (the “Indenture”) in exchange for the Unsecured Debentures in equal principal amount and an additional CAD$36,000 ($26,640) of Series B Secured Convertible Debentures were issued pursuant to the Indenture in payment of accrued interest. These debentures mature on June 6, 2019 and bear interest at 12% per annum, payable semi-annually. The debentures are secured by all the assets of the Company. The principal amount, plus accrued interest, may be converted at the option of the holder at any time during the term to maturity into shares of the 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.

18

SECURITY DEVICES INTERNATIONAL, INC.
Notes to Condensed Interim Consolidated Financial Statements
For the Periods Ended August 31, 2019 and 2018
(Amounts expressed in US Dollars) (Unaudited)

The carrying value of these debentures at November 30, 2018 was CAD $1,301,359 ($978,361). Effective May 31, 2019, the Company repaid these debentures for CAD $1,399,000 ($1,035,930) plus accrued interest.

Discounts (premiums) on the convertible debentures arise from (i) the allocation of basis to other instruments issued in the transaction, (ii) fees paid directly to the creditor and (iii) initial recognition at fair value, which is lower than face value. Discounts (premiums) are amortized through charges (credits) to interest expense over the term of the debt agreement. Amortization of debt discounts (premiums) amounted to CAD $98,924 ($73,201) during the nine months ended August 31, 2019 and CAD$112,064 ($88,102) during the prior nine months ended August 31, 2018. During the nine months ended August 31, 2019, the Company recorded interest expense for $67,007 (August 31, 2018: $99,090).

b)        Convertible Notes - $3,202,633, (November 30, 2018: $167,077)

1. On October 22, 2018, the Company entered into a Securities Purchase Agreement with several accredited investors to sell $1,275,000 of units, with each $1,000 of unit consisting of (i) a $1,000 10% interest 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. As a result of the repayment of the November 2016 Subordinate Secured Debentures on May 31, 2019, these convertible notes entered senior security position. 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.

19

SECURITY DEVICES INTERNATIONAL, INC.
Notes to Condensed Interim Consolidated Financial Statements
For the Periods Ended August 31, 2019 and 2018
(Amounts expressed in US Dollars) (Unaudited)

In conjunction with the October 22, 2018 note placement, 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 $322,897 during the nine months ended August 31, 2019 (August 31, 2018: $Nil) resulting in the carrying value of convertible notes at $489,974 as at August 31, 2019 (November 30, 2018: $167,077). During the nine months ended August 31, 2019, the Company recorded interest expense for $93,115 (August 31, 2018: $Nil).

2. On April 22, 2019 and May 20, 2019, the Company entered into a securities purchase agreement with several accredited investors to sell a total of $2,080,265 of units, with each $1,000 unit consisting of (i) a $1,000 10% interest 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 October 22, 2023. The notes are secured secondary by all of the Company assets and accrue interest at 10% per annum, payable in cash at maturity. The principal amount, plus accrued interest, may be converted at the option of the holder at any time during the term to maturity into shares of common stock at a conversion price of $0.15 per share. The note embodies certain traditional default provisions that are linked to credit or interest risks, such as bankruptcy proceedings, liquidation events and corporate existence. The Company concluded that the Notes meet the definition of conventional convertible debt provided in ASC 815 and the embedded conversion option is not subject to bifurcation and classification in the financial statements in liabilities at fair value. In connection with the issuance of the Notes, the Company issued the holders warrants to purchase the common stock. The warrant is exercisable until October 23, 2023 for 8,321,058 of shares at a purchase price of $0.25 per share. The Company concluded that the warrants are indexed to the stock and, accordingly, the analysis resulted in the conclusion that these warrants achieved equity classification in the financial statements. As a result of the repayment of the November 2016 Subordinate Secured Debentures on May 31, 2019, these convertible notes entered senior security position.

20

SECURITY DEVICES INTERNATIONAL, INC.
Notes to Condensed Interim Consolidated Financial Statements
For the Periods Ended August 31, 2019 and 2018
(Amounts expressed in US Dollars) (Unaudited)

21

SECURITY DEVICES INTERNATIONAL, INC.
Notes to Condensed Interim Consolidated Financial Statements
For the Periods Ended August 31, 2019 and 2018
(Amounts expressed in US Dollars) (Unaudited)

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 nine months ended August 31, 2019 and 2018:

22

SECURITY DEVICES INTERNATIONAL, INC.
Notes to Condensed Interim Consolidated Financial Statements
For the Periods Ended August 31, 2019 and 2018
(Amounts expressed in US Dollars) (Unaudited)

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 August 31, 2019 and November 30, 2018 are all measured at estimated fair value using Level 2 and 3 inputs.

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:

23

SECURITY DEVICES INTERNATIONAL, INC.
Notes to Condensed Interim Consolidated Financial Statements
For the Periods Ended August 31, 2019 and 2018
(Amounts expressed in US Dollars) (Unaudited)

Nine months ended August 31, 2018

As at August 31, 2019

As at November 30, 2018

24

SECURITY DEVICES INTERNATIONAL, INC.
Notes to Condensed Interim Consolidated Financial Statements
For the Periods Ended August 31, 2019 and 2018
(Amounts expressed in US Dollars) (Unaudited)

25

SECURITY DEVICES INTERNATIONAL, INC.
Notes to Condensed Interim Consolidated Financial Statements
For the Periods Ended August 31, 2019 and 2018
(Amounts expressed in US Dollars) (Unaudited)

26

SECURITY DEVICES INTERNATIONAL, INC.
Notes to Condensed Interim Consolidated Financial Statements
For the Periods Ended August 31, 2019 and 2018
(Amounts expressed in US Dollars) (Unaudited)

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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 less-lethal projectiles and the Byrna™ line of personal security devices, the Company's first products designed to be used by civilians as well as private security professionals. The Company also sells accessories and third-party products compatible with its Byrna line of personal security devices, and projectiles to be used with the launchers. The Company sells its products in the United States, Canada, and South Africa. In the United States and in Canada, the Company sells products through its online stores and through historic dealer relationships. In South Africa, the Company sells the Byrna™ HD and related products directly and through an authorized manufacturer’s distributor.

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 market segments over the next decade. The less lethal market has been projected to approach 12 billion dollars per year by 2023 (Statistics MRC. Non-Lethal Weapons – Global Market Outlook (2017-2023).

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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, military and security services markets, and (2) to provide civilians – including homeowners, campers, boaters, retirees, and others whose work or daily activities may put them at risk of being a victim – with easy access to an effective, non-lethal way to protect themselves and their loved ones from threats to their person or property.

Less-lethal Munitions

In the law enforcement, correctional services, and private security markets, the Company sells less-lethal munitions designed for 40mm rifled launchers. These less-lethal munitions include impact rounds designed to stop an individual without causing permanent injury or death and "payload" rounds carrying a variety of payload packages such as tear gas, pepper spray, DNA marking liquids, mal-odorants and other marking products designed to identify instigators in riot situations. The Company's flagship product in this market is its 40mm blunt impact projectile ("BIP"), which uses patented collapsible gel head technology. The Company believes its product is by far the best 40mm kinetic energy impact round currently on the market. The Company sells its 40mm munitions through distributors in the US and Canada and maintains an online store for sales to government agencies. The Company also has entered into a licensing agreement with Safariland to market the SDI patented 40mm piston driven collapsible head projectile mated to a Safariland and aluminum casing. The parties are still in the testing phase for the resulting product; however, testing to date has not been successful. If the SDI patented 40mm piston driven collapsible head projectile mated to a Safariland casing passes the testing regime, the Company would expect Safariland to market this product under the Def-Tec brand. The Company also has entered into an Agreement with Airtronics to supply the BIP® as the standard round to be sold with Airtronic's "Sonis" brand less lethal launcher. Airtronics focuses on military sales around the world. The Company is working on the development of new munitions for the law enforcement market.

The Byrna HD

Earlier this year the Company launched the Byrna HD, the first product in its highly anticipated Byrna™ line of handheld personal security devices intended to fill a perceived need in both the civilian and professional markets. The Byrna HD, which utilizes several of the Company's proprietary patents and has over 60 custom designed parts, is designed specifically for the consumer (home defense) and private security markets. The Byrna HD is compact, ergonomic, attractive, and easy to use. It uses proprietary CO2 cartridges to accurately fire .68 caliber impact and chemical irritant projectiles. The Byrna HD provides a non-lethal alternative to a firearm that is extremely effective at deterring, disabling, and temporarily incapacitating an intruder or would be assailant at safe stand-off distances up to 60 feet. Its small size (similar to popular lethal handguns on the market today), ease of obtaining and accessible price point should be appealing to individuals who want protection, but don’t want to apply for a gun license, don't want the risk of having a lethal weapon in their home, or want to avoid the potential liability that may follow the use of a lethal weapon. It also appeals to gun enthusiasts who appreciate a precision piece of equipment and want something in their collection that is both effective and non-lethal.

The Byrna HD comes with multiple easily reloadable magazines that can hold five .68 caliber highly effective payload rounds designed to burn an assailant's eyes and respiratory system upon contact. The Byrna also comes with inert and impact rounds that can be used for training. Accurate up to 60 feet, the Byrna™ HD is fitted with a picatinny rail that allows owners to mount either a laser sight or flashlight making it easy for novices to fire it accurately. The Byrna HD provides 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. It also is ideal for boaters, truckers, RV owners, campers and gun enthusiasts around the world.

In February of 2019, the Company launched its online store for the Byrna HD and held its official product launch, in conjunction with Daytona Speedweek, where the Company was an associate sponsor of a race car driven by Cody Ware. Visitors to our display booth had the opportunity to see and hold Byrna prototypes, take pictures with the #52 Byrna Ford, meet Cody Ware, win Byrna logo apparel, and place pre-orders. Management was very encouraged by the conversion rate at Daytona Speedweek, selling the Byrna HD or a product bundle to approximately one out of every six people that visited the Company's booth. Deliveries of the Byrna HD began in late March when the Company began shipping to Dave Sheer Guns in South Africa. At the end of May the Company began shipments to customers in the U.S.

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Q3 Developments

Nearly 1,000 Byrna HD launchers have now been shipped (approximately 85% in the quarter ended August 31, 2019), and retail customers have begun to post reviews on our website. Reviews have been extremely positive, and the Company is receiving orders of additional cartridges and projectiles from existing customers as well as new orders from returning customers of accessories and additional launchers. In response to inquiries from residents of California, where the Byrna HD could not be sold, the Company has begun work on a launcher for that market.

On July 15, 2019, Sootch00, a well-known gun reviewer with over 850,000 YouTube subscribers, posted a review of the Byrna HD on his YouTube channel. The video demonstrates the incapacitating effects of the Byrna Black chemical irritant round. Sales spurred following the posting of the Sootch00 video, supporting management's belief that the Byrna appeals to gun owners as well as those who would never own a firearm. The Company sells two types of chemical irritant projectiles for the Byrna, one of which was formulated specifically to comply with certain states' regulations where PAVA is prohibited. Management believes both are more effective than traditional pepper projectiles in use by law enforcement and prison guards, because they were formulated to immediately incapacitate an attacker rather than to disperse crowds or control riots.

The Company's primary focus through July was to get the Byrna HD into serial production, fulfill backorders, and build its inventory of Byrnas available for delivery. In July, production was moved to Roboro Industries Pty LTD ("Roboro"). Although changing the final assembly supplier mid-quarter was somewhat disruptive and production during the quarter was somewhat constrained by insufficient inventory of certain components and minor design changes to reduce testing failures, the change has resulted in a better production rate with a more reliable supply chain process and substantially lower rejection rate of completed launchers than before. SDI projects that production will exceed 3,000 units in the fourth quarter.

Q3 Capital Raise

The Company raised USD $2,282,500 during the quarter in a non-brokered private placement of $1,000 units of secured convertible notes and warrants (the “Units”) pursuant to Regulation D under the U.S. Securities Act of 1933 (the “Securities Act”) that closed a first tranche on July 22, 2019 and a second tranche in September. See Subsequent Events below. The net proceeds from the sale of the Units will be used for general corporate purposes and working capital.

Subsequent Events

On September 16, 2019 the Company closed the second tranche of the private placement commenced in July, raising an additional $818,000, and bringing the total amount raised in this offering to $3,100,500. Management expects the funds raised through September 16 will be sufficient for working capital needs for the upcoming 9 months as the Company builds sales and brand awareness.

On September 18, 2019, in conjunction with announcing the closing of a record quarter and the capital raise discussed above, the Company announced that it has entered into a binding agreement with Roboro (which will be operating under the name “Byrna Africa”) to serve as its authorized manufacturer’s distributor (“AMD”) in South Africa. In conjunction with its negotiation of the AMD agreement, management terminated negotiations of an anticipated exclusive dealership with Dave Sheer Guns (“DSG”) and cancelled the balance of an outstanding DSG purchase order at lower pricing than the AMD agreement provides. Management believes the new agreement with Roboro will result in a stronger sales effort for the ByrnaHD in South Africa and higher profit margins in the region. Following the cancellation of the purchase order DSG took delivery of an additional shipment of 100 launchers at the higher wholesaler price and continues to offer the Byrna HD for sale in its retail stores and to private security.

On September 21, 2019, SDI was the primary sponsor of the Rick Ware Racing #52 Byrna Ford Mustang, in the Federated Auto Parts 400 NASCAR Monster Energy Cup series at the Richmond Raceway in Richmond, VA where triple crown winner J.J. Yeley drove and made two appearances, with other Rick Ware drivers, at the Byrna display booth in the midway. Several hundred race fans checked out the Byrna booth and entered raffle drawings for J.J. Yeley signed memorabilia and a free Byrna HD kit.

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Q3 Highlights

For the quarter ended August 31, 2019 ("Q3 2019"), SDI produced 1,675 launchers, up from 204 launchers produced at the end of the prior quarter. Management expects production rates will continue to increase as the new manufacturer gains experience with SDI products, new quality control and inventory procedures are implemented, and minor design changes are completed.

Sales for the third quarter of 2019 totaled $307,101, up from $105,769 in the second quarter of 2019 and compared to total sales of $53,257 in the third quarter of 2018. Over ninety percent of Q3 2019 sales came from sales of the Byrna HD and accessories, with the balance attributed to SDI’s line of 40mm Blunt Impact Projectiles. Of the $277,623 in Byrna sales, 81% were for the launcher and 19% came from sales of accessories and projectiles. SDI expects the percentage of sales derived from accessories and projectiles to increase as its customer base grows.

Net loss for Q3 2019 was $1,086,843 compared with a net loss in in the prior quarter of $718,731 and a net loss in the comparable quarter of the prior fiscal year of $118,651. The largest items accounting for the increase in net loss over this period was differences in the respective quarters in total interest expense plus accretion plus changes in fair value of derivative liabilities. These three items (interest, accretion and changes in fair value of derivative liabilities) totaled $380,690 in Q3 2019, up from $39,901 in Q2 2019. In comparison, these items contributed $244,264 towards net income in Q3 2018. These items thus account for a $624,954 increase of expenses impacting net loss for Q3 2019 compared with the same quarter in 2018.

Gross profit for Q3 2019 was $59,422 (19.3%), which included inventory charges as SDI transitioned from a prior contract manufacturing firm to SDI’s current supplier which has proven to produce reliable product. Excluding the Q3 2019 inventory charges, gross profit was $94,622 (30.8% margin) compared with Q2 2019 gross profit of 30,485 (28.8% margin) and Q3 2018 gross profit of $23,955 (45.0% margin). Selling, general and administration expenses totaled $755,545 in Q3 2019 compared with $728,893 in Q2 2019 and $385,556 for Q3 2018. Increases in cost of sales as well as selling, general and administrative expenses in 2019 reflect the Company’s investment in operations and professional staff, research and development, and initial marketing and advertising campaigns to increase and improve production and establish SDI’s brand and position in the non-lethal market.

During this period inventory rose to $666,912 and accounts payable plus accrued liabilities to $862,400. These changes were due largely to investment in manufacturing operations and ramp up of production. During the nine months ending August 31, 2019 the Company has invested $207,677 in equipment for use in the manufacture of the Byrna HDand related products. The Company’s capital raise during the quarter offset a portion of these expenses and brought the cash balance to $1,881,377.

Going Concern

The Company has incurred a cumulative loss of $35,941,684 from its inception in 2005 through August 31, 2019. The Company has funded operations through the issuance of capital stock, warrants, convertible debentures and convertible notes. The Company has started to generate revenue from the sale of the Byrna HD and associated products. However, it still expects to incur significant losses before becoming profitable. The 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 August 31, 2019.

Results of Operations

Financial highlights (unaudited) for the period ending August 31, 2019 with comparatives are as follows:

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The Company’s selected information for the quarter ended August 31, 2019 (unaudited) and November 30, 2018 (audited) are as follows:

Net loss for the three months ended August 31, 2019 was $1,086,843 ($0.010 per share) as compared to net loss of $118,651 ($0.001 per share) for the three-month period ended August 31, 2018.

During the quarter ended August 31, 2019, the Company expensed selling, general and administration expenses for $755,545 as compared to $385,556 for the three-month period ended August 31, 2018, thereby reflecting increase in costs primarily in research and development, payroll and consulting. Also refer to Quarter Highlights as detailed above.

Cash Flows

Net cash used in operations for the nine months ended August 31, 2019, was $2,244,482 as compared to $1,057,996 used for the nine months ended August 31, 2018. For major components of this change, refer to Q3 Highlights as detailed above.

The Company incurred a net loss of $2,689,346 for the nine months ended August 31, 2019, as compared to a net loss of $958,672 for the prior period ended August 31, 2018. For major components of this change, refer to Q3 Highlights as detailed above.

In addition, the Company’s closing inventory increased by $559,197 for the nine months ended August 31, 2019 as compared to an increase of $2,435 in 2018. This increase in inventory represents the investment in inventory required for production and sale of Byrna HD devices in the subsequent period.

Net cash flow from investing activities was an outflow of $207,677 during the nine-month period ended August 31, 2019 as compared to $388,349 for the nine-month period ended August 31, 2018. The Company acquired property and equipment for $185,560 and deposited $22,117 for equipment during the nine-month period ended August 31, 2019. The Company acquired patents for $110,000, property and equipment for $98,349 and deposited $180,000 for equipment during the nine-month comparative period ended August 31, 2018.

Net Cash flow from financing activities was a net inflow of $3,214,335 during the nine-month period ended August 31, 2019 as compared to net outflow of $40,357 for the nine-month period ended August 31, 2018. The increase in financing activities in 2019 was the result of cash raised from issuance of convertible notes for $4,250,265 and repayment of $1,035,930 of secured convertible debentures due for repayment during the period.

There was an overall increase in cash of $698,990 during the nine-month period ended August 31, 2019 as compared to a decrease in cash of $1,491,142 during the nine-month period ended August 31, 2018.

Liquidity and Capital Resources

As at August 31, 2019, cash and cash equivalent was $1,881,377, as compared to $1,182,387 at November 30, 2018. Through August 31, 2019 the Company raised $2,080,265 through the sale of convertible notes (see note 9). Proceeds have been used to extinguish previously issued secured convertible debentures as well as to retain cash on hand to fund operations. As the Company prepares to grow and build stocking inventories, credit terms with suppliers have been negotiated to help fund investment in inventories and working capital.

At August 31, 2019, the Company had a working capital of $494,834. The major components are cash and cash equivalent $1,881,377; prepaid expenses and other receivables $793,420; inventory for $666,912; accounts receivable for $112,140; deferred costs for $55,862; derivative liabilities for $214,200; convertible notes for $1,924,957; deferred revenue for $13,320 and accounts payable and accrued liabilities of $862,400.

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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 notes for $978,361 and accounts payable and accrued liabilities of $397,309.

Management has in the third quarter raised capital to help satisfy future debt obligations. This capital is essential to fund future operations, additional capital will likely be required in order to fund future operations.

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.

Nine months ended August 31, 2019

As of August 31, 2019, there are no amounts receivable from related parties.

The Company expensed $66,667 for services provided by Jensen as CEO through March 31, 2019, which includes an obligation of the Company to issue shares for $20,000.

The Company expensed $50,000 for services provided by Malhotra, CFO of the Company, which was paid to a corporation in which the CFO has an ownership interest.

The Company expensed $43,200, which includes $25,200 for the issuance of 180,000 common shares for services, pursuant to a consulting contract, for services provided by Thrasher, a former director of the Company.

The Company expensed $90,000 for services provided by Buys, CTO of the Company, and an additional $8,333 for royalties. The Company expensed $12,681 for the value of that portion of 1,500,000 options granted to Buys that vested during this period. As at August 31, 2019, the Company owes Buys $16,333.

The Company expensed $136,374 for services provided by Ganz, President of the Company and, effective April 1, 2019, CEO of the Company, which includes $46,667 for issuance of 333,333 common shares and $52,500 for issuance of convertible notes.

The Company expensed $119,385 for services provided for Wager, CLO of the Company, which includes $35,000 for issuance of 250,000 common shares and $42,500 for issuance of convertible notes.

The Company expensed $16,200 for office rent including services to a corporation owned and controlled by Ganz, President and, effective April 1, 2019 CEO of the Company. As of August 31, 2019, the Company has a payable due to that corporation of $8,120.

Current directors and officers of the Company participated in the April 22, 2019, May 20, 2019 and July 22, 2019 financing for 316 units for total proceeds of $315,588, of which $70,000 was issued for services rendered.

Amounts owing to related parties are unsecured, non-interest bearing and due on demand.

Nine months ended August 31, 2018

As of August 31, 2018, there were no amounts receivable from related parties.

As of August 31, 2018, the Company had a payable of $103,906 to related parties to be settled by issuance of stock.

The Company expensed $150,000 for services provided by Jensen, COO and President of the Company through July 13, 2018 and, CEO of the Company effective July 13, 2018.

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The Company expensed $34,875 for services provided by Malhotra, CFO of the Company, which was paid to a corporation in which Malhotra has an ownership interest, in accordance with his consulting contract.

The Company expensed $116,575 which includes $18,000 for issuance of proportionate shares per his contract, for services provided by Dean Thrasher as CEO of the Company through July 13,2018 and as Executive Chairman of the Company effective July 13, 2018, which was paid to a corporation in which the CEO has an ownership interest, in accordance with the consulting contract (See also note 7). The Company also expensed $39,046 for the value of that portion of the 1,150,000 options granted to Thrasher that vested during this period.

The Company issued 507,550 common shares to NEIP at a price of $0.12 per share to satisfy the payment of $62,500 for services rendered due in December 2017.

On April 13, 2018, the Company employed Mr. André Buys (“Buys”) as the CTO with compensation of $10,000 per month over a three-year period and granted Buys options to acquire a total of 1,500,000 common shares. The Company expensed $46,667 paid to Buys, and expensed $6,341 for the value of that portion of his 1,500,000 options that vested during this period. See Note 7(a).

Effective June 1, 2018 the Company entered into a consulting agreement (the “Consulting Agreement”) with Bryan Ganz pursuant to which Mr. Ganz served as President of the Company. By the terms of the Consulting Agreement, Mr. Ganz was to be paid annually $200,000 in the Company’s common shares for his services, subject to stock exchange approval. The common shares were to be issued quarterly, ending March 31, 2019. For the Company’s fiscal third and fourth quarters Ganz was to be paid 500,000 common shares for each quarter. The Company accrued expenses of $72,573 as the cost of shares issued to Ganz for services.

Effective December 1, 2017, the Company leased office premises at Wakefield, Massachusetts, USA for rent of $700 per month from a corporation owned and controlled by a director of the Company. The Company expensed $6,300 as office rent for the nine-months ended August 31, 2018. As of August 31, 2018, the Company had a payable for $3,940 for the rent.

Off-balance sheet arrangements

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

Subsequent events

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Outstanding share data

As of October 13, 2019, the Company had 104,177,837 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

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 August 31, 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, the Company has taken and is taking the following remediation measures that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting:

• The Company has had several directors with business experience who have spent time with the business.
• The Company has established an audit committee of its board of directors. The audit committee will provide oversight of the Company's accounting and financial reporting. Transactions that are complex are being referred to an outside consultant.
• The Company is implementing SAP, a new accounting integrated software to facilitate centralized collection of financial data.

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 August 31, 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

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Item 1A. Risk Factors

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. The Byrna HD is a brand new Gen 1 product and its adoption by the market remains unknown. Among other things, production delays, excessive costs, performance failures, or negative publicity could stall or prevent its success in the market and generation of revenue. Anticipated licensing alliances for the Company’s collapsible head projectile may fail if testing of the mated Safariland product is not successful. 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, Sufficient Quantities of Components, and Commercially Reasonable Terms

Future operating results depend upon the Company's ability to obtain components in sufficient quantities on commercially reasonable terms. The Company may be able to purchase certain key components of its products from a limited number of suppliers, subjecting it to supply and pricing risks. Failure of a supplier's business or consolidation within the industry could further limit the Company's ability to purchase key components in sufficient quantities on commercially reasonable terms. Failure of suppliers to provide sufficient quantities of components on favorable terms, meet quality standards, or deliver components on a timely basis could delay or stop production and result in possible lost sales.

Dependence on Third Parties for Product Manufacturing, Logistics and other Services

The Company also relies on third parties, including businesses located outside of the U.S., to source and inspect components, assure adequate and quality parts inventory, to assemble, kit and ship its products, to provide warranty repair services, and to market and sell the Byrna HD in certain territories. These arrangements lessen the Company's direct control over production, distribution, and some customer service functions. Loss of any of these relationships or failure of any of these third parties to perform as expected would adversely affect the Company's operations, sales, revenue, margins, and reputation.

Risk of Quality Problems

The Company sells complex products including products that are new to the market and do not have a long performance history. These products may contain certain design and manufacturing defects including defects in materials and components that the Company purchases from third parties. There can be no assurance the Company will be able to detect and fix all defects in the products it sells. Accordingly, the Company's products may experience quality and service problems from time to time that could result in decreased sales and operating margin and harm to the Company's reputation.

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 the Company 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 and others for the manufacturing, licensing, and distribution of its products. There can be no assurance that such strategic alliances can be achieved, will be extended or renewed, 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, to regulation of certain of its product components, or to negative publicity. 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

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, loss of parts or finished goods in inventory or shipment, labor disputes and changes in the regulatory environment. Such occurrences could delay or halt production, 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. The Company does not currently carry freight, inventory or auto insurance among other things, which could result in uninsured losses in those areas.

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.

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 total 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.

In January 2019, the Company made a share issuance to a consultant 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.These shares were cancelled in June 2019, and the Company subsequently paid the consultant $19,998 in cash.

On April 1, 2019 the Company made a share issuance to Ganz, pursuant to his consulting agreement dated June 1, 2018. The Company issued 333,333 common shares at a price of $0.14 per share to satisfy payment for $46,665.

On April 1, 2019 the Company made a share issuance to Wager for her services pursuant to board resolution. The Company issued 250,000 common shares at a price of $0.14 per share to satisfy payment for $35,000.

On April 1, 2019 the Company made a share issuance to a corporation owned and controlled by Thrasher, pursuant to a consulting agreement. The Company issued 180,000 common shares at a price of $0.14 for a total consideration of $25,200.

On May 22, 2019, the Company made a share issuance to a consultant for services pursuant to the consulting agreement. The Company issued 300,000 common shares at a price of $0.14 per share for a total consideration of $42,000

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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: October 13, 2019

Date: October 13, 2019

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