UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, DC 20549 FORM 10-QSB [X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the quarterly period ended February 29, 2008 or [ ] Transition Report Pursuant to Section 13 or 15 (d) of the Securities Exchange Act of 1934 Commission file No. 0-33259 SECURITY DEVICES INTERNATIONAL INC. ----------------------------------- (Exact name of registrant as specified in its charter) Delaware Applied For (State of incorporation) (I.R.S. Employer Identification Number) 2171 Avenue Rd. Suite 103 Toronto, Ontario Canada M5M 4B4 (Address of Principal Executive Office) Zip Code (647) 388-1117 (Registrant's telephone number, including area code) Check whether the issuer: (1) filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the proceeding 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 is a shell company (as defined in Rule 12b-2 of the Exchange Act): Yes [ ] No [X] As of March 31, 2008, the Company had 14,330,050 issued and outstanding shares of common stock. SECURITY DEVICES INTERNATIONAL, INC. (A Development Stage Enterprise) INTERIM FINANCIAL STATEMENTS FEBRUARY 29, 2008 (Amounts expressed in US Dollars) (Unaudited) TABLE OF CONTENTS Page Balance Sheets as at February 29, 2008 (unaudited) and November 30, 2007 (audited) 1 Interim Statement of Operations for the three months ended February 29, 2008 and February 28, 2007 2 Interim Statement of Cash Flows for the three months ended February 29, 2008 and February 28, 2007 3 Interim Statements of changes in Stockholders' Equity for the three months ended February 29, 2008 and for the period from inception (March 1, 2005) to November 30, 2007 4 Condensed Notes to Unaudited Interim Financial Statements 5-11 SECURITY DEVICES INTERNATIONAL, INC. (A Development Stage Enterprise) Interim Balance Sheets As at February 29, 2008 and November 30, 2007 (Amounts expressed in US Dollars) February 29, November 30, 2008 2007 (unaudited) (audited) ASSETS CURRENT Cash and cash equivalents $ 4,765,535 $5,293,175 Prepaid expenses and other 20,903 36,788 ----------- ---------- Total Current Assets 4,786,438 5,329,964 Plant and Equipment, net (Note 4) 24,816 23,960 ----------- ---------- TOTAL ASSETS 4,811,254 5,353,924 LIABILITIES CURRENT LIABILITIES Accounts payable and accrued liabilities 291,198 174,842 ----------- ---------- Total Current Liabilities 291,198 174,842 ----------- ---------- Related Party Transactions (note 7) Commitments (note 8) STOCKHOLDERS' EQUITY Capital Stock (Note 5) 14,330 14,330 Additional Paid-In Capital 12,167,078 11,842,187 Deficit Accumulated During the Development Stage (7,661,352) (6,677,435) ----------- ---------- Total Stockholders' Equity 4,520,056 5,179,082 ----------- ---------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $4,811,254 $ 5,353,924 ----------- ---------- The accompanying condensed notes are an integral part of these unaudited interim financial statements. F-1 SECURITY DEVICES INTERNATIONAL, INC. (A Development Stage Enterprise) Interim Statement of Operations for the three months ended February 29, 2008 and February 28, 2007 (Amounts expressed in US Dollars) (Unaudited) For the three For the three Months ended Months ended Cumulative February 29, February 28, since inception 2008 2007 OPERATING EXPENSES: Research and Product Development Cost $ 2,444,504 $ 562,009 $ 310,586 Amortization 4,534 1,937 130 General and Administration 5,431,660 448,187 286,543 ----------- ---------- --------- TOTAL OPERATING EXPENSES 7,880,698 1,012,133 597,259 ----------- ---------- --------- LOSS FROM OPERATIONS (7,880,698) (1,012,133) (597,259) Other Income-Interest 219,346 28,216 21,022 ----------- ---------- --------- LOSS BEFORE INCOME TAXES (7,661,352) (983,917) (576,237) Income taxes - - - ----------- ---------- --------- NET LOSS $(7,661,352) $ (983,917) $(576,237) ----------- ---------- --------- Loss per share - basic and diluted $ (0.07) $ (0.04) ----------- ----------- Weighted average common shares outstanding $14,330,050 $13,415,518 The accompanying condensed notes are an integral part of these unaudited interim financial statements. F-2 SECURITY DEVICES INTERNATIONAL, INC. (A Development Stage Enterprise) Interim Statement of Cash Flows for the three months ended February 29, 2008 and February 28, 2007 (Amounts expressed in US Dollars) (Unaudited) For the three For the three months ended months ended Cumulative February 29, February 28, since inception 2008 2007 CASH FLOWS FROM OPERATING ACTIVITIES Net loss for the period $ (7,661,352) $ (983,917) $ (576,237) Items not requiring an outlay of cash: Issue of shares for professional services 154,000 - - Stock based compensation (included in general and administration expenses) 3,821,264 324,891 204,986 Compensation expense for warrants issued (Included in general and administration expenses) 357,094 - - Loss on cancellation of common stock 34,400 - - Amortization 4,534 1,937 130 Changes in non-cash working capital: Accounts payable and accrued liabilities 291,198 116,356 30,197 Prepaid expenses and other (20,903) 15,885 (6,213) ----------- ------------ ----------- NET CASH USED IN OPERATING ACTIVITIES (3,019,765) (524,848) (347,137) ----------- ------------ ----------- CASH FLOWS FROM INVESTING ACTIVITIES Acquisition of Plant and Equipment (29,350) (2,792) (8,379) ----------- ------------ ----------- NET CASH USED IN INVESTING ACTIVITIES (29,350) (2,792) (8,379) ----------- ------------ ----------- CASH FLOWS FROM FINANCING ACTIVITIES Loans from directors/shareholders - - 714 Net proceeds from issuance of common shares 7,769,650 - 1,170,670 Cancellation of common stock (50,000) - Exercise of stock options 95,000 - - ----------- ------------ ----------- NET CASH PROVIDED BY FINANCING ACTIVITIES 7,814,650 - 1,171,384 ----------- ------------ ----------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS FOR THE PERIOD 4,765,535 (527,640) 815,868 Cash and cash equivalents, beginning of period - 5,293,175 1,463,833 =========== ============ =========== CASH AND CASH EQUIVALENTS, END OF PERIOD 4,765,535 4,765,535 2,279,701 INCOME TAXES PAID - - - =========== ============ =========== The accompanying condensed notes are an integral part of these unaudited interim financial statements. F-3 SECURITY DEVICES INTERNATIONAL, INC. (A Development Stage Enterprise) Interim Statements of Changes in Stockholders' Equity for the three months ended February 29, 2008 and for the period from inception (March 1, 2005) to November 30, 2007 (Amounts expressed in US Dollars) (Unaudited) Number of Common Additional Common Shares Paid-in Deficit Shares amount Capital accumulated Total Balance as of March 1, 2005 - $ - $ - $ - $ - Issuance of Common shares for professional services 6,525,000 6,525 58,725 - 65,250 Issuance of common shares for cash 397,880 398 99,072 99,470 Net loss for the period - - - (188,699) (188,699) ---------- ------- -------- --------- -------- Balance as of November 30, 2005 (audited) 6,922,880 6,923 157,797 (188,699) (23,979) Issuance of common shares for cash 956,000 956 94,644 - 95,600 Issuance of common shares for cash 286,000 286 49,764 - 50,050 Issuance of common shares to consultant for services 50,000 50 8,700 - 8,750 Issuance of common shares for cash 2,000,000 2,000 398,000 - 400,000 Exercise of stock options 950,000 950 94,050 - 95,000 Issuance of common shares for cash (net of agent commission) 200,000 200 179,785 - 179,985 Stock subscriptions received 1,165,500 - 1,165,500 Stock based compensation - - 1,049,940 - 1,049,940 Net loss for the year - - - (1,660,799) (1,660,799) ---------- ------- -------- --------- -------- Balance as of November 30, 2006 (audited) 11,364,880 11,365 3,198,180 (1,849,498) 1,360,047 Issuance of common shares for stock subscriptions received in prior year 1,165,500 1,165 (1,165) - - Issuance of common shares for cash 1,170,670 1,171 1,169,499 1,170,670 Issuance of common shares for cash and services 50,000 50 154,950 155,000 Issuance of common shares for cash (net of expenses) 2,139,000 2,139 4,531,236 4,533,375 Cancellation of stock (1,560,000) (1,560) (14,040) (15,600) Stock based compensation 2,446,433 2,446,433 Issue of warrants 357,094 357,094 Net loss for the year ended November 30, 2007 - - - (4,827,937) (4,827,937) ---------- ------- -------- --------- -------- Balance as of November 30, 2007 (audited) 14,330,050 14,330 11,842,187 (6,677,435) 5,179,082 Stock based compensation - - 324,891 - 324,891 Net loss for the period - - - (983,917) (983,917) ---------- ------- -------- --------- -------- Balance as of February 29, 2008 (unaudited) 14,330,050 14,330 12,167,078 (7,661,352) 4,520,056
The accompanying condensed notes are an integral part of these unaudited interim financial statements. F-4 SECURITY DEVICES INTERNATIONAL, INC. (A Development Stage Enterprise) Condensed Notes to Interim Financial Statements February 29, 2008 (Amounts expressed in US Dollars) (Unaudited) 1. BASIS OF PRESENTATION The accompanying unaudited interim financial statements do not include all the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of all recurring accruals) considered necessary for fair presentation have been included. Operating results for the interim period are not necessarily indicative of the results that may be expected for the year ended November 30, 2008. Interim financial statements should be read in conjunction with the company's annual audited financial statements for the year ended November 30, 2007. The Company was incorporated under the laws of the state of Delaware on March 1, 2005. The interim financial statements include the accounts of Security Devices International Inc. (the "Company"). 2. NATURE OF OPERATIONS The Company is currently in the advanced stages of developing LEKTROX, a unique line of wireless electric ammunition for use in military, homeland security, law enforcement, and professional and home security scenarios. LEKTROX has been specially designed for use with standards issue riot guns, M203 grenade launchers and regular 12-guage shotguns. This will allow military, law enforcement agencies etc. to quickly deploy LEKTROX without the need for lengthy, complex training methods or significant functional adjustments to vehicles or personal equipment. Simplicity of use is also a key benefit for the home security market where most users have little or no specialized training. LEKTROX is a 3rd generation electric solution. First generation solutions were electric batons and hand-held stun guns which had a range of arm's length. 2nd generations were the wired electric charge solutions. 3rd generations are the wireless electric bullets. Currently, there is still no 3rd generation wireless electric bullet on the market. The Company is in the development stage and has not yet realized revenues from its planned operations. The Company has incurred a loss of $ 983,917 during the three month period ended February 29, 2008. At February 29, 2008, the Company had an accumulated deficit incurred during the development stage of $7,661,352 which includes a non-cash stock based compensation expense of $3,821,264 and non-cash compensation expense on issue of warrants for $357,094. The Company has funded operations through the issuance of capital stock. During the year ended November 30, 2007 the Company raised $5,779,045 (net of expenses of $279,375) through issue of common stock. F-5 SECURITY DEVICES INTERNATIONAL, INC. (A Development Stage Enterprise) Condensed Notes to Interim Financial Statements February 29, 2008 (Amounts expressed in US Dollars) (Unaudited) 2. NATURE OF OPERATIONS (continued) The Company has working capital of $ 4,495,240 and stockholders' equity of $4,520,056 as at February 29, 2008. Management's plan is to continue raising additional funds through future equity or debt financing until it achieves profitable operations. 3. RESEARCH AND PRODUCT DEVELOPMENT Research and Product Development costs, other than capital expenditures but including acquired research and product development costs, are charged against income in the period incurred. 4. PLANT AND EQUIPMENT, NET Plant and equipment are recorded at cost less accumulated amortization. Amortization is provided commencing in the month following acquisition using the following annual rate and method: Computer equipment 30% declining balance method Furniture and Fixtures 30% declining balance method Feb 29, 2008 Nov 30, 2007 Accumulated Accumulated Cost Amortization Cost Amortization Computer equipment $21,180 $ 3,921 $18,387 $ 2,597 Furniture and fixtures 8,170 613 8,170 - ------ -------- ------- -------- 29,350 4,534 26,557 2,597 Net carrying amount $24,816 $23,960 ======= ======= 5. ISSUANCE OF CAPITAL STOCK Year ended November 30, 2007 On December 12, 2006 the Company completed the sale of 2,536,170 shares of its common stock to a group of private investors. The shares were sold in the private offering at a price of $1.00 per share and are restricted securities as that term is defined in Rule 144 of the Securities and Exchange Commission. F-6 SECURITY DEVICES INTERNATIONAL, INC. (A Development Stage Enterprise) Condensed Notes to Interim Financial Statements February 29, 2008 (Amounts expressed in US Dollars) (Unaudited) 5. ISSUANCE OF CAPITAL STOCK (continued) The Company had already issued 200,000 common shares on November 29, 2006 and it issued the balance 2,336,170 shares on December 12, 2006. The Company relied upon the exemption provided by Section 4(2) of the Securities Act of 1933 for the sale of these shares. On March 12, 2007, the Company authorized the issuance of 50,000 common shares at $1.50 per share for a total cash consideration of $75,000 to a consultant who rendered investor relation services to the Company during the quarter ended May 31, 2007. The market price of the total stock on the date of issuance was $155,000. The difference of $80,000 between the market price of the total stock ($155,000) and the issued price ($75,000) represents the estimated fair value of the consultant's services. The par value of the shares in the amount of $50 was credited to share capital and the balance of $154,950 credited to additional paid-in capital and shown as issuance of common shares for cash and services in the statement of changes in stockholder's equity. The Company had entered into an amended agreement in February 2007, with a director regarding development of its "Electrical Shocker" ("ES") technology. Pursuant to the original agreement executed in November 2006, the director was paid a total of $38,000 which included $22,000 during the last quarter of 2006 and an additional $16,000 in January 2007. The Company has expensed this payment of $22,000 as Research and Product Development during 2006 and also expensed the balance $16,000 to Research and Product Development in the first quarter of 2007. In addition, the director was paid $62,000 in February, 2007 upon signing the amended agreement. The Company expensed this payment of $62,000 to Research and Product Development in the first quarter of 2007. The director in return had released the Company from a prior obligation to pay royalty from the sale of any product developed using this technology. In the absence of acceptance of the ES technology by the Company, the Company cancelled 1,560,000 shares and the director was paid $50,000 on March 12, 2007 in accordance with the amended agreement. The Company accounted for this transaction under the constructive retirement method in the second quarter of 2007. The cancelled shares reverted to authorized but unissued status. The stock and additional paid-in-capital amounts were reduced with a total of $15,600 and the Company recognized a loss of $34,400, being the excess of purchase cost over the original issuance. F-7 SECURITY DEVICES INTERNATIONAL, INC. (A Development Stage Enterprise) Condensed Notes to Interim Financial Statements February 29, 2008 (Amounts expressed in US Dollars) (Unaudited) 5. ISSUANCE OF CAPITAL STOCK (continued) On April 25, 2007 the Company sold 1,998,500 shares of its common stock to a group of private investors. As part of this same financing the Company sold an additional 140,500 shares to private investors on May 4, 2007. The shares were sold at a price of $2.25 per share and are restricted securities as that term is defined in Rule 144 of the Securities and Exchange Commission. In connection with the sale of these 2,139,000 shares, the Company paid a commission of $240,638 to the sales agent for the offering and incurred legal and other expenditure of $38,737. The sales agent also received 106,950 warrants which allow them to purchase 106,950 shares of the Company's Common stock at a price of $2.81 per share. The warrants expire in 2009. The Company agreed to file a registration statement with the Securities and Exchange Commission registering the resale of the shares sold to the investors, as well as the shares issuable upon the exercise of the warrants issued to the sales agent. The registration statement was declared effective on September 20, 2007. The Company relied upon the exemption provided by Section 4(2) of the Securities Act of 1933 for the sale of these securities. Three months ended February 29, 2008 The Company did not issue any shares of its common stock during the three month period ended February 29, 2008. 6. STOCK BASED COMPENSATION Per SEC Staff Accounting Bulletin 107, Topic 14.F, "Classification of Compensation Expense Associated with Share-Based Payment Arrangements" stock based compensation expense is being presented in the same lines as cash compensation paid. Effective January 24, 2008 the board of directors granted the following options under its Non-Qualified Stock Option Plan: 1. Options to one director to acquire 108,000 common shares. The exercise price was set at $0.10 per share. 2. Options to one director to acquire 117,000 common shares. The exercise price was set at $0.10 per share. F-8 SECURITY DEVICES INTERNATIONAL, INC. (A Development Stage Enterprise) Condensed Notes to Interim Financial Statements February 29, 2008 (Amounts expressed in US Dollars) (Unaudited) 6. STOCK BASED COMPENSATION (continued) All of the above options vest immediately and have an expiry date of January 24, 2013. Stock based compensation cost of $324,891 has been expensed to general and administration expense . The fair value of each grant was estimated at the grant date using the Black-Scholes option-pricing model. The Black-Scholes option pricing model requires the use of certain assumptions, including expected terms, expected volatility, expected dividends and risk-free interest rate to calculate the fair value of stock-based payment awards. The estimated volatility was determined by comparing the volatility of similar Companies within the industry sector. The expected term calculation is based upon the expected term the option is to be held, which is the full term of the option. The risk-free interest rate is based upon the U.S. Treasury yield in effect at the time of grant for an instrument with a maturity that is commensurate with the expected term of the stock options. The dividend yield of zero is based on the fact that we have never paid cash dividends on our common stock and we have no present intention to pay cash dividends. The expected forfeiture rate of 0% is based on immediate vesting of options. For the three month period ended February 28, 2008, the Company has recognized in the financial statements, stock-based compensation costs as per the following details. The fair value of each option used for the purpose of estimating the stock compensation is based on the grant date using the Black-Scholes option pricing model with the following weighted average assumptions: Risk free rate 5% Volatility factor 101.27% Expected dividends 0% Forfeiture rate 0% Expected life 5 years Exercise price $0.10 Grant date fair value of options $1.44 Market price of Company's common stock on date of grant $1.50 Total number of options granted 225,000 Stock-based compensation cost expense $324,891 Unexpended stock-based compensation deferred over to next period nil F-9 SECURITY DEVICES INTERNATIONAL, INC. (A Development Stage Enterprise) Condensed Notes to Interim Financial Statements February 29, 2008 (Amounts expressed in US Dollars) (Unaudited) 6. STOCK BASED COMPENSATION (continued) As of February 28, 2007 there was $Nil of unrecognized expense related to non-vested stock-based compensation arrangements granted. 7. RELATED PARTY TRANSACTIONS a) A Company director has charged the Company a total amount of $1,500 for providing office space during the quarter ended February 29, 2008. b) The following transactions are in the normal course of operations and are measured at the exchange amount, which is the amount of consideration established and agreed to by the related parties. During the quarter ended February 29, 2008, no director was paid any compensation in cash. All out of pocket expenses of directors were expensed. The directors were compensated for their services by issue of Stock Options (Refer to note 6). Effective January 24, 2008 the board of directors granted the following options under its Non-Qualified Stock Option Plan: 1. Options to one director to acquire 108,000 common shares. The exercise price was set at $0.10 per share. 2. Options to one director to acquire 117,000 common shares. The exercise price was set at $0.10 per share. All of the above options vest immediately and have an expiry date of January 24, 2013. Stock based compensation cost of $324,891 has been expensed to general and administration expense. 8. COMMITMENTS Effective October 25, 2007 the Company entered into a contract with a consultant for a period of one year which can be terminated by 30 days written notice to either party. The consultant is to provide investor relation services. The Company granted 150,000 options to purchase restricted common shares, exercisable at a price of $1.20 per share and expires on January 31, 2010. These options vested immediately and the Company expensed $104,874 to general and administration during the year ended November 30, 2007. In addition, the Company may grant options to purchase an additional 250,000 shares of the Company's common stock if the closing price of the F-10 SECURITY DEVICES INTERNATIONAL, INC. (A Development Stage Enterprise) Condensed Notes to Interim Financial Statements February 29, 2008 (Amounts expressed in US Dollars) (Unaudited) 8. COMMITMENTS (continued) Company's common stock maintains at $3.00 per share for 30 calendar days prior to March 15, 2008. No options were granted due to failure of the consultant to meet these requirements. In addition, the Company may grant an option to purchase an additional 100,000 shares of the Company's common stock if the closing price of the Company's common stock maintains at $4.00 per share during any consecutive 30-day calendar period beginning on March 15, 2008. All options are exercisable at a price of $1.20 per share and expire January 31, 2010. F-11 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND PLAN OF OPERATIONS Securities Devices International, Inc. was incorporated on March 1, 2005 and as of February 29, 2008 has not yet generated any revenue. SDI is a defense technology company which is developing LEKTROX, a unique line of wireless electric ammunition for use in military, homeland security, law enforcement, and professional and home security situations. During the three months ended February 28, 2007 substantial all of SDI's cash expenses were related to the development of its LEKTROX technology. During the three months ended February 29, 2008: o general and administrative expenses increased primarily due to increased activity as well as the result of expenses (which did not require the use of cash) associated with the issuance of options and warrants. o more capital was available to SDI and as a result SDI was able to spend more on research and product development; During the period from inception (March 1, 2005) through February 29, 2008 SDI's operations used ($3,019,765) in cash. During this period SDI: o purchased $29,350 of equipment, o raised $7,719,650 from the sale of shares of its common stock, o raised $95,000 from three of its officers and directors upon the exercise of options to purchase 950,000 shares of common stock. SDI did not have any material future contractual obligations or off balance sheet arrangements as of February 29, 2008. SDI's plan of operation during the twelve-month-period ending February 28, 2009 is as follows: Projected Activity Completion Date Completion of fully operational Long Range LEKTROX 3rd quarter 2008 prototype (37-38MM) up to production file: Completion of fully operational Long Range LEKTROX prototype (40MM) up to production file: 3rd quarter 2008 Completion of mechanical aspects of Long Range LEKTROX prototype (12 GUAGE) 2009 Completion of tooling and moulds for 37-38MM and 40MM LEKTROX 3rd quarter 2008 SDI anticipates that its capital requirements for the twelve-month period ending February 28, 2009 will be: Research and Development $ 2,100,000 General and administrative expenses 250,000 ------------ Total $ 2,350,000 ============ SDI does not anticipate that it will need to hire any employees prior to September 30, 2008. SDI does not expect that it will need to raise additional capital during the twelve months ending February 28, 2009. SDI believes that its cash on hand will satisfy its working capital needs until sale of its products have commenced. SDI does not have any commitments or arrangements from any persons to provide SDI with any additional capital it may need. Controls and Procedures Sheldon Kales, the Company's Chief Executive Officer and Rakesh Malhotra, the Company's Principal Financial Officer, have evaluated the effectiveness of the Company's disclosure controls and procedures as of the end of the period covered by this report; and in their opinion the Company's disclosure controls and procedures are effective to ensure that material information relating to the Company is made known to them by others within those entities, particularly during the period in which this report is being prepared, so as to allow timely decisions regarding required disclosure. There have been no changes in the Company's internal controls over financial reporting that occurred during the quarter ended February 29, 2008 that have affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting. As a result, no corrective actions with regard to significant deficiencies or material weakness in the Company's internal controls were required. PART II ITEM 6. EXHIBITS The following exhibits are filed with this report: Number Description 31 Rule 13a-14(a)/15d-14(a) certifications 32 Section 1350 certifications SIGNATURES Pursuant to the requirements of Section 12 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. April 10, 2008 By /s/ Sheldon Kales ------------------------------ Sheldon Kales, President April 14, 2008 By /s/ Rakesh Malhotra ------------------------------ Rakesh Malhotra, Principal Accounting and Financial Officer