SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB
(Mark One)
(X) ANNUAL REPORT PURSUANT TO SECTION 13 OR
15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended November 30, 2007
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission File No. None
SECURITY DEVICES INTERNATIONAL INC.
-----------------------------------
(Name of Small Business Issuer in its charter)
Delaware Applied For
------------------------ ------------------------
(State of incorporation) (IRS Employer
Identification No.)
2171 Avenue Rd.
Suite 103
Toronto, Ontario Canada M5M 4B4
-------------------------------- ---------------
(Address of Principal Executive Office) Zip Code
Registrant's telephone number, including Area Code: (416) 787-1871 Securities
registered pursuant to Section 12(b) of the Act: None Securities registered
pursuant to Section 12(g) of the Act:
None
(Title of Class)
Indicate by check mark if the registrant is not required to file reports
pursuant to Section 13 or Section 15(d) of the Securities Exchange Act. [ ]
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
the definitions of "large accelerated filer," "accelerated filer" and "smaller
reporting company" in Rule 12b-2 of the Exchange Act. (Check One):
Large accelerated filer [ ] Accelerated filer [ ]
Non-accelerated filer [ ] Smaller reporting company [X]
(Do not check if a smaller reporting company)
Check whether the Registrant (1) has 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
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1
Check if disclosure of delinquent filers in response to Item 405 of Regulation
S-B is not contained in this form, and no disclosure will be contained, to the
best of the Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB. [X] Indicate by check mark whether the registrant
is a shell company (as defined in Rule 12b-2 of the Exchange Act):
Yes ____ No __X__
The Company's revenues during the year ended November 30, 2007 were $ -0- .
---------
The aggregate market value of the voting stock held by non-affiliates of the
Company (9,900,550 shares) on February 25, 2008 was approximately $13,860,000.
Documents incorporated by reference: None
As of February 25, 2008, the Company had 14,330,050 issued and outstanding
shares of common stock.
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION
This report includes "forward-looking statements". All statements other
than statements of historical facts included in this report, regarding the
Company's financial position, business strategy, plans and objectives, are
forward-looking statements. Although the Company believes that the expectations
reflected in the forward-looking statements and the assumptions upon which such
forward-looking statements are based are reasonable, it can give no assurance
that such expectations and assumptions will prove to have been correct.
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ITEM 1. BUSINESS
SDI 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 situations.
SDI's LEKTROX system was developed by Elad Engineering, Israel, assisted
by:
o Dr. Yoav Paz, a heart and chest surgery specialist at the Hadassah Medical
Center, Jerusalem, member of the European Society of Cardiology; and
o Emanuel Mendes, an electrical engineer at the forefront of Israel's R&D for
almost 50 years.
SDI's strategic collaboration with Elad resulted in the patent pending
LEKTROX system. Featuring the unique extended range Wireless Electro-Muscular
Disruption Technology, (or "W-EMDT"), SDI's first products, the LEKTROX 37/38mm
and 40mm round ammunition will be ready for the market in 3rd quarter 2008 with
a 12-guage version to be introduced later.
LEKTROX has been specially designed for use with standards issue riot
guns, M203 grenade launchers. 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 generation were the wired electric charge solutions. 3rd generation are the
wireless electric bullets. Currently, there is still no 3rd generation wireless
electric bullet on the market.
LEKTROX is being specifically developed to achieve the highest operational
success at the greatest distance of those known to be currently in development.
Causing instant target incapacitation up to distances of 60 yards, the LEKTOX
will give maximum field superiority to military personnel, law enforcement
officers and other security operatives in situations that do not call for the
use of lethal ammunition.
The LEKTROX Electric Bullet is totally safe in storage, transportation,
handling and loading. Locked in safe mode until its internal electric and
mechanical systems are activated by contact with the target, LEKTROX eliminates
any possibility of the round's accidental charging.
Exploiting proven technologies, the LEKTROX Electric Bullet maintains
excellent stability for the highest possible accuracy. In addition LEKTROX
achieves distances way beyond those reached by previous generation, wired
electric ammunition systems.
In addition to achieving a greater range, the LEKTROX delivers new levels
of effectiveness and safety through the use of
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o Unique mechanisms that reduce the projectile's kinetic energy
o W-EMDT that instantly incapacitates the target without causing serious
injury or lethality.
To reduce kinetic energy levels, the bullet's head is composed of a
collapsible material that enlarges the contact surface and absorbs part of the
impact. Additional energy is transferred to other absorption mechanisms that use
the energy to release the Multiple Mini-Harpoon mechanism and activate the
built-in electrical system.
When released, the mini-harpoons fix the bullet irremovably to the
target's clothing or body. At the same time, the bullet's electrical system
releases a W-EMDT charge that imitates the electro-neural impulses used by the
human body. Sending out a control signal to the muscles, this high voltage low
current pulse safely overrides the target's nervous system inducing a harmless
muscle spasm that causes them to fall to the ground helpless.
Operating at lower than critical cardio-fibrillation levels, the LEKTROX
W-EMDT electric output has been designed in line with stringent medical
equipment standards that protect patients from permanent injury. Enabling full
recovery with no clinical after effects, LEKTROX helps decreases liability for
wrongful injury or death.
When introduced, the Short Range LEKTROX will have a safe firing range of
2-10 yards and will be fired from a proprietary system powered by a pressurized
air cartridge. Simple to operate, this laser-aiming system will be point and
fire exactly as they would with a standard pistol trigger. The round will fire
with low recoil enabling a quick firing of a second or third round if necessary.
The cost of manufacturing a LEKTROX electrical round is estimated to be
between $20 and $30. SDI anticipates that its electric round will sell at a
retail price of approximately $100 per round. In comparison, rubber, smoke or
stun rounds typically sell for $20 to $28. A cartridge for the TASER(R) sells
for approximately $60.
As of February 25, 2008 SDI has completed the following steps in the
development of the LEKTROX:
o Design and testing of ballistic rounds.
o Production of various ballistic rounds.
o Design of `electrical arms' to adhere to clothing or skin. o Design of
safety/armed mechanism.
o Production of mechanical systems.
o Design of electrical system.
o Production of electrical system.
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o Integration and assembly of mechanical and electrical sub-systems for
electrical rounds.
o Testing of different ballistic rounds
o Powder loading
testing o Testing of complete electrical rounds
o Adjustment of electrical rounds based on test results
o Two clinical studies in European Clinics.
Additional steps to be completed include:
o Production of completed rounds.
o Testing with military and law enforcement organization of fully operational
Long Range LEKTROX for production.
See Item 6 of this report for information regarding the timing of the
remaining steps in the development of the LEKTROX.
The mechanical development of the LEKTROX is being completed by Elad
Engineering Ltd., an Israeli company which has designed weapons for the Israeli
Military.
During the period from its inception (March 1, 2005) to November 30, 2007
SDI paid $1,882,495 for research and development.
SDI does not have written agreements with Elad Engineering for work
relating to the development of the LEKTROX.
As of February 25, 2008 SDI has not entered into any joint venture or
licensing agreements.
SDI currently plans to manufacture market and sell all products on its own
behalf.
Competition
The primary competitive factors in the market for non-lethal weapons are a
weapon's cost, effectiveness, and ease of use.
In the military market a wide variety of weapon systems are used. Conducted
energy devices, such as the LEKTROX, have gained increased acceptance during the
last two years as a result of the increased role of military personnel in Iraq
and Afghanistan. Conducted energy weapons have gained limited acceptance in the
private citizen market for non-lethal weapons.
SDI's primary competitors will be Taser International, Inc. and Stinger
Systems, Inc. The LEKTROX will also compete indirectly with a variety of other
non-lethal alternatives, including pepper spray and impact weapons sold by
companies such as Armor Holdings, Inc. and Jaycor, Inc.
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SDI believes that its competitive advantage will be the ability of the
LEKTROX to effectively incapacitate offenders from a distance as far as 75
meters without a trail of wires leading back to the launcher. Stun Gun operators
must be in direct physical contact with combatants while the TASER(R) has a
range of less than seven meters. In contrast, the LEKTROX will be designed to
have a range which is over four times farther that TASER(R), providing a
significant safety advantage for enforcement officers and security personnel.
Patents
Four patent applications, one for the electrical mechanism and other three
for the mechanical mechanism of the LEKTROX, have been filed by SDI with the
U.S. Patent Office.
SDI does not hold any foreign patents.
SDI's patents may not protect its proprietary technology. In addition, other
companies may develop products similar to the LEKTROX or avoid patents held by
SDI. Disputes may arise between SDI and others as to the scope and validity of
its patents. Any defense of its patents could prove costly and time consuming
and SDI may not be in a position, or may not consider it advisable, to carry on
such a defense. In addition, others may acquire or independently develop the
same or similar unpatented proprietary technology used by SDI.
Government Regulation
Under current regulations the LEKTROX will be considered a crime control
product by the United States Department of Commerce and the export of the
LEKTROX will be regulated under export administration regulations. As a result,
export licenses from the Department of Commerce will be required for all
shipments to foreign countries other than Canada. In addition, the Department of
Commerce has regulations which may restrict the export of technology used in the
LEKTROX.
The LEKTROX will be controlled, restricted or its use prohibited by
several state and local governments. In many cases, the law enforcement and
corrections market is subject to different regulations than the private citizen
market. Many states have regulations restricting the sale of stun guns and
hand-held shock devices, such as the LEKTROX, to private citizens or security
personnel.
Foreign regulations pertaining to non-lethal weapons are numerous and
often unclear
and a number of countries prohibit devices similar to the LEKTROX.
Employees
The LEXTROX will be controlled, restricted or its use prohibited by
several state and local governments. In many cases, the law enforcement and
corrections market is subject to different regulations than the private citizen
market. Many states have regulations restricting the sale of stun guns and
hand-held shock devices, such as the LEXTROX, to private citizens or security
personnel.
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General
As of February 25, 2008 SDI did not have any full-time employees.
SDI's offices are located at 2171 Avenue Rd., Suite 103, Toronto, Ontario,
Canada M5M 4B4. SDI's rental costs on this space for the three years ending
November 30, 2010, excluding SDI's share of operating and common area expenses,
are $11,705 (2008), $12,138 (2009) and $12,138 (2010). SDI's offices are
expected to be adequate to meet SDI's foreseeable future needs.
SDI's website is www.lektrox.com.
ITEM 2. DESCRIPTION OF PROPERTY
See Item 1 of this report.
ITEM 3. LEGAL PROCEEDINGS.
SDI is not involved in any legal proceedings and SDI does not know of any
legal proceedings which are threatened or contemplated.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Not Applicable
ITEM 5. MARKET PRICE OF AND DIVIDENDS ON THE REGISTRANT'S COMMON EQUITY AND
OTHER SHAREHOLDER MATTERS.
On August 28, 2006 SDI's common stock was listed on the OTC Bulletin Board
under the symbol "SDEV". The following shows the high and low closing prices for
SDI's common stock for the periods indicated:
Three Months Ended High Low
November 2006 $2.65 $0.15
February 2007 $3.80 $1.75
May 2007 $3.25 $2.65
August 2007 $3.20 $2.00
November 2007 $1.95 $1.20
As of February 25, 2008 SDI had approximately 200 shareholders and
14,330,050 outstanding shares of common stock.
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Holders of common stock are entitled to receive dividends as may be
declared by the Board of Directors. SDI's Board of Directors is not restricted
from paying any dividends but is not obligated to declare a dividend. No
dividends have ever been declared and it is not anticipated that dividends will
ever be paid.
SDI's Articles of Incorporation authorize its Board of Directors to issue up
to 50,000,000 shares of preferred stock. The provisions in the Articles of
Incorporation relating to the preferred stock allow SDI's 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. The issuance of preferred stock with these rights may make the
removal of management difficult even if the removal would be considered
beneficial to shareholders generally, and will have the effect of limiting
shareholder participation in certain transactions such as mergers or tender
offers if these transactions are not favored by SDI's management.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND PLAN OF
OPERATION
SDI was incorporated on March 1, 2005 and as of February 25, 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 year ended November 30, 2006 substantial all of SDI's cash
expenses were related to the development of its LEKTROX technology.
During the year ended November 30, 2007:
o general and administrative expenses increased primarily 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 November 30, 2007
SDI's operations used ($2,494,917) in cash. During this period SDI:
o purchased $26,557 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 November 30, 2007.
8
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 37MM
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.
ITEM 7. FINANCIAL STATEMENTS
See the financial statements attached to this report.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS.
Not applicable
ITEM 8A. 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 defined in Rule 13a-15(e)
of the Securities Exchange Act of 1934) as of the end of the period covered by
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this report, and in their opinion the Company's disclosure controls and
procedures are effective. There were no changes in the Company's internal
controls over financial reporting that occurred during the fiscal quarter that
have materially affected, or are reasonably likely to materially affect, the
Company's internal controls over financial reporting.
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS
Name Age Position
Sheldon Kales 51 Chief Executive Officer and a Director
Boaz Dor 53 Secretary and a Director
Rakesh Malhotra 51 Chief Financial Officer
Gregory Sullivan 41 Director
The directors of SDI serve until the first annual meeting of its
shareholders and until their successors have been duly elected and qualified.
The officers serve at the discretion of SDI's directors.
Sheldon Kales has been an officer and director of SDI since March 2005. Since
February 2004 Mr. Kales has been working on the development of the LEKTROX.
Between January 2000 and February 2004 Mr. Kales was the President of Yangtze
Telecom, a company which provides messaging and related services for cell phone
users in China. Mr. Kales founded, and between 1985 and 2001, operated Argus
Investigation Services.
Boaz Dor has been a director of SDI since April 2005 and its Secretary since
March 15, 2006. Mr. Dor served in the Israeli Defense Forces from 1972 to 1975.
Recruited by the Israeli Secret Services, Mr. Dor was assigned to the
International Security Division for Aviation Security for the Israeli
Government, eventually assuming the position of Head of Security for the Embassy
of Israel and El Al Israel Airlines in Cairo, Egypt, and later, as Vice-Consul
and Head of Security for the Israeli Consulate in Toronto and Western Canada and
El Al Israel Airlines. In 1989, Mr. Dor resigned from the public sector to open
a security consulting firm. In 1991, he was appointed executive director of
security for the Seabeco Group of Companies where Mr. Dor oversaw international
operations in Switzerland, Belgium, Russia, New York and Toronto. Since 2000 Mr.
Dor has owned and operated Ozone Water Systems Inc., a water purification
company.
Rakesh Malhotra has been SDI's Chief Financial Officer since January 7, 2007.
Mr. Malhotra is a United States Certified Public Accountant (CPA) and a Canadian
Chartered Accountant (CA). Mr. Malhotra graduated with Bachelor of Commerce
(Honors) degree from the University of Delhi (India) and worked for A.F Ferguson
& Co. (the Indian correspondent for KPMG) and obtained his CA designation in
India. Having practiced as an accountant for over ten years in New Delhi, Mr.
Malhotra moved to the Middle East and worked for five years with the
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International Bahwan Group in a senior finance position. During 2000 and 2001,
Mr. Malhotra worked as a chartered accountant with a mid-sized accounting firm
in Toronto performing audits of public companies. Since 2005 Mr. Malhotra has
been a consultant to a number of public companies. Mr. Malhotra has more than 20
years experience in accounting and financing.
Gregory Sullivan has been a director of SDI since April 2005. Mr. Sullivan has
been a law enforcement officer for the past 20 years. During his law enforcement
career, Mr. Sullivan has trained with federal, state and municipal agencies in
the United States, Canada and the Caribbean and has gained extensive experience
in the use of lethal and non-lethal weapons. Mr. Sullivan has also trained
personnel employed by both public and private agencies in the use of force and
firearms. Mr. Sullivan served four years with the military reserves in Canada.
None of SDI's directors are independent as that term is defined in section
121(A) of the listing standards of the American Stock Exchange.
SDI does not have a compensation committee or an audit committee. Rakesh
Malhotra is SDI's financial expert. However, since he is an officer of SDI Mr.
Malhotra is not independent as that term is defined in section 121(A) of the
listing standards of the American Stock Exchange.
SDI has not adopted a Code of Ethics applicable to its principal
executive, financial, and accounting officers and persons performing similar
functions. SDI does not believe a Code of Ethics is needed at this time since
SDI has only four officers.
ITEM 10. EXECUTIVE COMPENSATION
The following table shows the compensation for the years ended November
30, 2007 and 2006 paid or accrued, to Sheldon Kales, the Principal Executive
Officer of SDI. None of the executive officers of SDI received compensation in
excess of $100,000 during this period.
All
Other
Annual
Stock Option Compen-
Name and Principal Fiscal Salary Bonus Awards Awards sation
Position Year (1) (2) (3) (4) (5) Total
- ----------------- ----- ------ ----- ----- ------ ------ -----
Sheldon Kales, 2007 -- -- -- $886,948 -- $886,948
President 2006 -- -- -- $386,302 -- $386,302
(1) The dollar value of base salary (cash and non-cash) received. (2) The
dollar value of bonus (cash and non-cash) received.
(3) The fair value of stock issued for services computed in accordance with
FAS 123R on the date of grant.
(4) The fair value of options and warrants granted computed in accordance with
FAS 123R on the date of grant.
(5) All other compensation received that SDI could not properly report in any
other column of the table. SDI does not have an employment agreement with
any of its officers.
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The following shows the amounts which SDI expects to pay in cash to its
officers during the twelve month period ending November 30, 2008, and the time
these persons plan to devote to SDI's business.
Proposed Time to be Devoted
Name Compensation to the Business of SDI
Sheldon Kales * 100%
Boaz Dor * 50%
Rakesh Malhotra $18,000 10%
Gregory Sullivan * 10%
* These officers/directors have agreed to serve without cash compensation until
SDI has accumulated gross revenues of $500,000. In lieu of cash compensation,
these persons have received shares of SDI's common stock as well as options.
Once accumulated revenue reaches $500,000, SDI's directors may compensate
its officers depending upon a variety of factors, including past sales volume
and the anticipated results of its future operations. However, there are no
sales, net income, or other thresholds which are required for SDI's directors to
increase the compensation paid to SDI's officers. SDI may issue shares of its
common stock to its officers in payment of compensation owed to its officers.
Long-Term Incentive Plans. SDI does not provide its officers or employees with
pension, stock appreciation rights, long-term incentive or other plans and has
no intention of implementing any of these plans for the foreseeable future.
Employee Pension, Profit Sharing or other Retirement Plans. SDI does not have a
defined benefit, pension plan, profit sharing or other retirement plan, although
it may adopt one or more of such plans in the future.
Compensation of Directors During Year Ended November 30, 2007
Awards of Options
Name Paid in Cash Stock Awards (1) or Warrants (2)
---- ------------ ---------------- -----------------
Boaz Dor -- -- $304,987
Gregory Sullivan -- -- $213,867
(1) The fair value of stock issued for services computed in accordance with FAS
123R on the date of grant.
(2) The fair value of options or warrants granted computed in accordance with
FAS 123R on the date of grant.
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Stock Option and Bonus Plans
SDI has adopted stock option and stock bonus plans. A summary description
of these plans follows. In some cases these Plans are collectively referred to
as the "Plans".
Incentive Stock Option Plan. SDI's Incentive Stock Option Plan authorizes
the issuance of shares of SDI's Common Stock to persons that exercise options
granted pursuant to the Plan. Only SDI employees may be granted options pursuant
to the Incentive Stock Option Plan. The option exercise price is determined by
SDI's directors but cannot be less than the market price of SDI's common stock
on the date the option is granted.
Non-Qualified Stock Option Plan. SDI's Non-Qualified Stock Option Plan
authorizes the issuance of shares of SDI's Common Stock to persons that exercise
options granted pursuant to the Plans. SDI's employees, directors, officers,
consultants and advisors are eligible to be granted options pursuant to the
Plans, provided however that bona fide services must be rendered by such
consultants or advisors and such services must not be in connection with the
offer or sale of securities in a capital-raising transaction.
Stock Bonus Plan. SDI's Stock Bonus Plan allows for the issuance of shares
of common stock to it's employees, directors, officers, consultants and
advisors. However bona fide services must be rendered by the consultants or
advisors and such services must not be in connection with the offer or sale of
securities in a capital-raising transaction.
Summary. The following lists, as of February 25, 2008, the options granted
pursuant to the Plans. Each option represents the right to purchase one share of
SDI's common stock.
Total Shares
Shares Reserved for Shares Remaining
Reserved Outstanding Issued as Options/Shares
Name of Plan Under Plans Options Stock Bonus Under Plans
- ------------ ----------- ---------- ----------- -------------
Incentive Stock Option Plan 1,000,000 -- N/A 1,000,000
Non-Qualified Stock Option
Plan 4,500,000 2,225,000 N/A 1,325,000
Stock Bonus Plan 150,000 N/A -- 150,000
The following tables show all options granted and exercised by SDI's
officers and directors since the inception of SDI and through February 25, 2008,
and the options held by the officers and directors named below. All of the
options listed below were granted pursuant to SDI's Non-Qualified Stock Option
Plan.
Options Granted/Exercised
Shares
Grant Options Exercise Expiration Acquired on Value
Name Date Granted (#) Price Date Exercise (1) Realized (2)
- ---- ------ ---------- -------- --------- ------------ -----------
Sheldon Kales 10/29/05 550,000 $0.10 10/29/11 550,000 $275,000
Sheldon Kales 10/29/05 100,000 $0.25 10/29/11
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Boaz Dor 10/29/05 200,000 $0.10 10/29/11 200,000 $100,000
Boaz Dor 10/29/05 100,000 $0.25 10/29/11
Gregory Sullivan10/29/05 200,000 $0.10 10/29/11 200,000 $100,000
Gregory Sullivan10/29/05 100,000 $0.25 10/29/11
Rakesh Malhotra 1/07/07 125,000 $1.50 01/07/12
Sheldon Kales 10/12/07 675,000 $1.20 10/12/12
Boaz Dor 10/12/07 300,000 $1.20 10/12/12
Rakesh Malhotra 10/12/07 175,000 $1.20 10/12/12
Gregory Sullivan10/12/07 175,000 $1.20 10/12/12
Sheldon Kales 1/24/08 108,000 $0.10 01/24/13
Boaz Dor 1/24/08 117,000 $0.10 01/24/13
(1) The number of shares received upon exercise of options.
(2) With respect to options exercised, the dollar value of the difference
between the option exercise price and the market value of the option shares
purchased on the date of the exercise of the options.
Shares underlying
unexercised options which are:
----------------------------- Exercise Expiration
Name Exercisable Unexercisable Price Date
Sheldon Kales 100,000 -- $0.25 10-29-11
Boaz Dor 100,000 -- $0.25 10-29-11
Gregory Sullivan 100,000 -- $0.25 10-29-11
Rakesh Malhotra 125,000 -- $1.50 1-17-12
Sheldon Kales 675,000 -- $1.20 10-12-12
Rakesh Malhotra 175,000 -- $1.20 10-12-12
Gregory Sullivan 175,000 -- $1.20 10-12-12
Sheldon Kales 108,000 -- $0.10 1-24-13
Boaz Dor 117,000 -- $0.10 1-24-13
(1) These options will expire on the first to occur of the following: (i) the
expiration date of the option, (ii) the date the option holder is removed
from office for cause, or (iii) the date the option holder resigns as an
officer of the Company.
For the purpose of these options "Cause" means any action by the Option
Holder or any inaction by the Option Holder which constitutes:
(i) fraud, embezzlement, misappropriation, dishonesty or breach of trust;
(ii) a willful or knowing failure or refusal by the Option Holder to
perform any or all of his material duties and responsibilities as an
officer of SDI, other than as the result of the Option Holder's death
or Disability; or
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(iii) gross negligence by the Option Holder in the performance of any or
all of his material duties and responsibilities as an officer of SDI,
other than as a result of the Option Holder's death or Disability;
For purposes of these options "Disability" means any mental or physical
illness, condition, disability or incapacity which prevents the Option Holder
from reasonably discharging his duties and responsibilities as an officer of SDI
for a minimum of twenty hours per week.
The following table shows the weighted average exercise price of the
outstanding options granted pursuant to SDI's stock option plans as of November
30, 2007, SDI's most recent fiscal year end. SDI's stock option plans have not
been approved by its shareholders.
Number of Securities
Number Remaining Available
of Securities For Future Issuance
to be Issued Weighted-Average Under Equity
Upon Exercise Exercise Price of Compensation Plans,
of Outstanding of Outstanding Excluding Securities
Plan category Options (a) Options Reflected in Column (a)
- -------------- -------------- --------------- ----------------------
Incentive Stock
Option Plan -- --
Non-Qualified Stock
Option Plan
Warrants
In addition to the options described above, SDI has granted warrants to the
persons and upon the terms shown below.
Shares Issuable
Grant Upon Exercise Exercise Expiration
Name Date of Options Price Date
---- ----- ---------------- --------- ----------
Broker warrants 4-25-07 106,950 $2.81 4-25-09
Boaz Dor 9-06-07 17,000 $0.50 5-31-17
Sheldon Kales 10-05-07 250,000 $0.50 10-05-14
Gregory Sullivan 10-05-07 50,000 $0.50 10-05-14
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table shows the ownership of SDI's common stock as of
February 25, 2008 by each shareholder known by SDI to be the beneficial owner of
more than 5% of SDI's outstanding shares, each director and executive officer
and all directors and executive officers as a group. Except as otherwise
indicated, each shareholder has sole voting and investment power with respect to
the shares they beneficially own.
15
Number
Name of Shares (1) Percent of Class
Sheldon Kales 2,884,000 20.1%
Boaz Dor 1,140,500 8.0%
Rakesh Malhotra -- --
Gregory Sullivan 405,000 2.8%
Dror Shachar (2) 1,200,000 8.4%
All Officers and Directors 4,429,500 30.9%
as a group (four persons)
(1) Does not reflect shares issuable upon the exercise of options.
(2) Dror Shachar holds these shares for the benefit of his father, Mark
Shachar.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The following lists all shares of SDI's common stock which have been
issued since its incorporation:
Date Shares Consideration
Shareholder of Sale Issued Paid for Shares
Sheldon Kales 3-03-05 2,300,000 Services rendered, valued
at $23,000
Sheldon Kales 3-04-05 200,000 Services rendered, valued
at $2,000
Boaz Dor 3-03-05 900,000 Services rendered, valued
at $9,000
Gregory Sullivan 3-03-05 40,000 Services rendered, valued
at $400
Gregory Sullivan 3-04-05 200,000 Services rendered, valued
at $2,000
Alexander Blaunshtein(1) 3-03-05 1,560,000 Services rendered, valued
at $15,600
Consultant 3-03-05 1,200,000 Services rendered, valued
at $12,000
Consultants 3-04-05 125,000 Services rendered, valued
at $1,250
Private Investors 4-15-05 397,880 $ 99,470
Private Investors 12-31-05 486,000 $ 48,600
Private Investors 1-31-06 470,000 $ 47,000
Private Investors 3-08-06 286,000 $ 50,050
Consultant 3-08-06 50,000 Services rendered, valued
at $8,750
16
Date Shares Consideration
Shareholder of Sale Issued Paid for Shares
Public Investors 5-06/7-06 2,000,000 $ 400,000
Sheldon Kales 11-06 550,000 $ 55,000 (2)
Boaz Dor 11-06 200,000 $ 20,000 (2)
Gregory Sullivan 11-06 200,000 $ 20,000 (2)
Private Investors 12-06 2,536,170 $2,536,170
Consultant 3-12-07 50,000 Services rendered, valued at
$155,000
Private Investors 4-07/5-07 2,139,000 $4,812,750
(1) Alexander Blaunshtein is the son of Natan Blaunstein, who was a former
director of SDI. In March 2007 these shares were purchased by SDI for
$50,000, cancelled, and returned to the status of authorized but unissued
shares.
(2) Shares were issued upon the exercise of stock options.
With the exception of the shares issued upon the exercise of shares issued
upon the exercise of options, SDI relied upon the exemption provided by Section
4(2) of the Securities Act of 1933 in connection with the issuance of these
shares.
Sheldon Kales, Natan Blaunstein, Boaz Dor and Gregory Sullivan are the
promoters and parents of SDI.
The services relating to the shares issued in March 2005 were provided for
the development of the LEKTROX and were valued at $0.01 per share. The 50,000
shares issued in March 2006 to a consultant were issued as compensation for
introducing investors to SDI and were valued at $0.175 per share which is the
price, per share, received by SDI for the shares sold for cash in March 2006.
ITEM 13. EXHIBITS
Exhibit
Number Description of Exhibit
3.1 Articles of Incorporation (Incorporated by reference to the same
exhibit filed with the Company's
registration statement on Form SB-2 (File
No. 333-12456).
3.2 Bylaws (Incorporated by reference to the same
exhibit filed with the Company's
registration statement on Form SB-2 (File
No. 333-132456).
31 Rule 13a-14(a) Certifications *
32 Section 1350 Certifications *
* Filed with this report.
17
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
Schwartz Levitsky Feldman, LLP ("Schwartz Levitsky") audited SDI's
financial statements for the years ended November 30, 2007 and 2006.
The following table shows the aggregate fees billed and billable to SDI
during the years ended November 30, 2007 and 2006 by Schwartz Levitsky.
2007 2006
---- ----
Audit Fees $17,000 $16,800
Audit-Related Fees $39,900 $ 1,000
Financial Information Systems -- --
Design and Implementation Fees -- --
Tax Fees -- --
All Other Fees -- --
Audit fees represent amounts billed for professional services rendered for
the audit of SDI's annual financial statements. Audit-Related fees represent
amounts billed for the services related to the filing of SDI's registration
statements on Form SB-2 and Form S-8. Before Schwartz Levitsky was engaged by
Security Devices to render audit services, the engagement was approved by
Security Device's Directors.
18
SECURITY DEVICES INTERNATIONAL, INC.
(A Development Stage Enterprise)
FINANCIAL STATEMENTS
YEARS ENDED NOVEMBER 30, 2007 AND 2006
Together with Report of Independent Registered Public Accounting Firm
(Amounts expressed in US Dollars)
TABLE OF CONTENTS
Page No
Report of Independent Registered Public Accounting Firm 1
Balance Sheets as at November 30, 2007 and November 30, 2006 2
Statements of Operations and Comprehensive loss for the years
ended November 30, 2007 and November 30, 2006 and the period
from inception (March 1, 2005) to November 30, 2007 3
Statements of Cash Flows for the years ended November 30, 2007
and November 30, 2006 and the period from inception (March 1, 2005)
to November 30, 2007 4
Statements of Stockholders' Equity for the years ended November 30,
2007 and November 30, 2006 and the period from inception (March 1, 2005)
to November 30, 2007 5
Notes to Financial Statements 6-30
Schwartz Levitsky Feldman llp
CHARTERED ACCOUNTANTS
TORONTO. MONTREAL
1167 Caledonia Road
Toronto, Ontario M6A 2X1
Tel: 416 785 5353
Fax: 416 785 5663
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of
Security Devices International, Inc.
(A Development Stage Enterprise)
We have audited the accompanying balance sheets of Security Devices
International, Inc. (incorporated in Delaware, United States of America) as
at November 30, 2007 and 2006 and the related statements of operations and
comprehensive loss, cash flows and stockholders' equity for the years ended
November 30, 2007 and 2006 and the period from inception to November 30,
2007. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with the standards of the Public
Company Accounting Oversight Board (United States). Those standards require
that we plan and perform the audits to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts
and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Security Devices
International, Inc. as of November 30, 2007 and 2006, and the results of
its operations and its cash flows for the years ended November 30, 2007 and
2006 and the period from inception to November 30, 2007 in accordance with
generally accepted accounting principles in the United States of America.
"SCHWARTZ LEVITSKY FELDMAN LLP"
Toronto, Ontario, Canada Chartered Accountants
February 25, 2008 Licensed Public Accountants
SECURITY DEVICES INTERNATIONAL, INC.
(A Development Stage Enterprise)
Balance Sheets
As at November 30, 2007 and 2006
(Amounts expressed in US Dollars)
2007 2006
ASSETS $ $
CURRENT
Cash and cash equivalents 5,293,176 1,463,833
Prepaid expenses and other 36,788 4,452
- ------------------------------------------------------------------------------
Total Current Assets 5,329,964 1,468,285
Plant and Equipment, net (Note 9) 23,960 -
- ------------------------------------------------------------------------------
TOTAL ASSETS 5,353,924 1,468,285
- ------------------------------------------------------------------------------
LIABILITIES
CURRENT LIABILITIES
Accounts payable and accrued
liabilities (Note 4) 174,842 104,011
Loans from Directors/Shareholders (Note 8) - 4,227
- ------------------------------------------------------------------------------
Total Current Liabilities 174,842 108,238
- ------------------------------------------------------------------------------
Related Party Transactions (note 8)
Commitments and Contingencies (note 11)
STOCKHOLDERS' EQUITY
Capital Stock (Note 5) 14,330 11,365
Additional Paid-In Capital 11,842,187 3,198,180
Deficit Accumulated During the Development Stage (6,677,435) (1,849,498)
- -------------------------------------------------------------------------------
Total Stockholders' Equity 5,179,082 1,360,047
- -------------------------------------------------------------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY 5,353,924 1,468,285
===============================================================================
The accompanying notes are an integral part of these financial statements.
2
SECURITY DEVICES INTERNATIONAL, INC.
(A Development Stage Enterprise)
Statements of Operations and Comprehensive loss
Years Ended November 30, 2007 and 2006 and the Period from Inception (March 1,
2005) to November 30, 2007 (Amounts expressed in US Dollars)
Cumulative
since inception 2007 2006
EXPENSES: $ $ $
Research and Product Development 1,882,495 1,344,195 458,300
Amortization 2,597 2,597 -
General and administration 4,983,473 3,672,275 1,202,499
---------- ----------- -----------
TOTAL OPERATING EXPENSES 6,868,565 5,019,067 1,660,799
---------- ----------- ------------
LOSS FROM OPERATIONS (6,868,565) (5,019,067) (1,660,799)
Other Income-Interest 191,130 191,130 -
---------- ---------- ----------
LOSS BEFORE INCOME TAXES (6,677,435) (4,827,937) (1,660,799)
Income taxes (note 10) - - -
---------- ---------- ----------
NET LOSS AND COMPREHENSIVE LOSS (6,677,435) (4,827,937) (1,660,799)
----------- ----------- -----------
Loss per share - basic and diluted (0.35) (0. 19)
----------- -----------
Weighted average common shares outstanding 13,815,317 8,623,258
----------- -----------
The accompanying notes are an integral part of these financial statements.
3
SECURITY DEVICES INTERNATIONAL, INC.
(A Development Stage Enterprise)
Statement of Cash Flows
Years Ended November 30, 2007 and 2006 and the Period from Inception (March 1,
2005) to November 30, 2007 (Amounts expressed in US Dollars)
Cumulative
Since inception 2007 2006
--------------- ---- ----
$ $ $
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss for the period (6,677,435) (4,827,937)(1,660,799)
Items not requiring an outlay of cash:
Issue of shares for professional services 154,000 80,000 8,750
Stock based compensation (included in
general and administration expenses) 3,496,373 2,446,433 1,049,940
Compensation expense for warrants issued
(included in general and administration
expenses) 357,094 357,094 -
Loss on cancellation of common stock 34,400 34,400 -
Amortization 2,597 2,597 -
Changes in non-cash working capital:
Prepaid expenses and other (36,788) (32,336) (4,452)
Accounts payable and accrued liabilities 174,842 70,831 87,935
------- ------ ------
NET CASH USED IN OPERATING ACTIVITIES (2,494,917) (1,868,918) (518,626)
--------- --------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Acquisition of Plant and Equipment (26,557) (26,557) -
--------- --------- --------
NET CASH USED IN INVESTING ACTIVITIES (26,557) (26,557) -
--------- --------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Loans/ (Repayments) from directors/
shareholders - (4,227) (3,802)
Net Proceeds from issuance of common
shares 7,769,650 5,779,045 1,891,135
Cancellation of common stock (50,000) (50,000) -
Exercise of stock options 95,000 - 95,000
NET CASH PROVIDED BY FINANCING ACTIVITIES 7,814,650 5,724,818 1,982,333
--------- --------- --------
NET INCREASE IN CASH AND CASH
EQUIVALENTS FOR THE PERIOD 5,293,176 3,829,343 1,463,707
Cash and cash equivalents, beginning
of period - 1,463,833 126
--------- --------- - --------
CASH AND CASH EQUIVALENTS, END OF PERIOD 5,293,176 5,293,176 1,463,833
========= ========= =========
INCOME TAXES PAID - - -
========= ========= =========
INTEREST PAID - - -
========= ========= =========
The accompanying notes are an integral part of these financial statements.
4
SECURITY DEVICES INTERNATIONAL, INC.
(A Development Stage Enterprise)
Statement of Changes in Stockholders' Equity
For the years ended November 30, 2007 and 2006 and from the period from
inception (March 1, 2005) to November 30, 2007.
(Amounts expressed in US Dollars)
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 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 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 14,330,050 14,330 11,842,187 (6,677,435) 5,179,082
---------- -------- --------- --------- ---------
The accompanying notes are an integral part of these financial statements.
5
SECURITY DEVICES INTERNATIONAL, INC.
(A Development Stage Enterprise)
Notes to Financial Statements
November 30, 2007 and 2006
(Amounts expressed in US Dollars)
1. BASIS OF PRESENTATION
The financial statements, which include the accounts of Security Devices
International Inc. (the "Company"), were prepared in accordance with
United States Generally Accepted Accounting Principles. The Company was
incorporated under the laws of the state of Delaware on March 1, 2005.
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 standard
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
$ 4,827,937 during the year ended November 30, 2007. At November 30,
2007, the Company had an accumulated deficit during the development
stage of $6,677,435 which includes a non- cash stock based compensation
expense of $3,496,373 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, 2006 the
Company raised $1,982,333 substantially through issue of common stock.
(See note 5). During the first quarter of 2007, the company raised
$1,170,670 through issue of common stock. During the second quarter of
2007, the Company raised an additional $4,688,375 (net of expenses of
$279,375) through the issue of Common stock.
The company has a working capital of $ 5,155,122 and stockholders'
equity of $5,179,082 as at November 30, 2007. Management's plan is to
continue raising additional funds through future equity or debt
financing until it achieves profitable operations.
6
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
a) Use of Estimates
These financial statements have been prepared in accordance with
generally accepted accounting principles in the United States of
America. As the precise determination of assets and liabilities, and
correspondingly revenues and expenses, depends on future events, the
preparation of financial statements for any period necessarily
involves the use of estimates. Actual amounts may differ from these
estimates. Significant estimates include accruals, valuation
allowance and estimates for calculation for stock based
compensation.
b) Income Taxes
The Company accounts for income taxes under the provisions of SFAS
No. 109, which requires recognition of deferred tax assets and
liabilities for the expected future tax consequences of events that
have been included in the financial statements or tax returns.
Deferred income taxes are provided using the liability method. Under
the liability method, deferred income taxes are recognized for all
significant temporary differences between the tax and financial
statement bases of assets and liabilities.
Current income tax expense (recovery) is the amount of income taxes
expected to be payable (recoverable) for the current period. A
deferred tax asset and/or liability is computed for both the expected
future impact of differences between the financial statement and tax
bases of assets and liabilities and for the expected future tax
benefit to be derived from tax losses. Valuation allowances are
established when necessary to reduce deferred tax asset to the amount
expected to be "more likely than not" realized in future tax returns.
Tax law and rate changes are reflected in income in the period such
changes are enacted. Due to valuation allowance for deferred tax
assets, no deferred tax benefits or expenses were recorded for the
years ended November 30, 2007 and 2006.
c) Revenue Recognition
The Company's revenue recognition policies are expected to follow
common practice in the manufacturing industry.
7
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (cont'd)
d) Loss per Share
The Company has adopted FAS No. 128, "Earnings per Share", which
requires disclosure on the financial statements of "basic" and
"diluted" loss per share. Basic loss per share is computed by
dividing net loss by the weighted average number of common shares
outstanding for the year. Diluted loss per share is computed by
dividing net loss by the weighted average number of common shares
outstanding plus common stock equivalents (if dilutive) related to
stock options and warrants for each year. There were no common
equivalent shares outstanding at November 30, 2007 and 2006 that have
been included in dilutive loss per share calculation as the effects
would have been anti-dilutive. At November 30, 2007, there were
2,890,000 options and 423,950 warrants outstanding, which were
convertible into equal number of common shares of the Company. At
November 30, 2006, there were 700,000 options outstanding convertible
into equal number of common shares and no warrants outstanding.
e) Fair Values
The Company's financial instruments as defined by SFAS No. 107,
"Disclosures about Fair Value of Financial Instruments", includes
cash, accounts payable and accrued liabilities. All instruments are
accounted for on a historical cost basis, which, due to the short
maturity of these financial instruments, approximates fair value.
f) 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.
g) Stock-Based Compensation
In December 2004, the Financial Accounting Standards Board (FASB)
issued Statement of Financial Accounting Standards No. 123 (Revised
2004), "Share-Based Payment" (SFAS 123 (R)). SFAS 123 (R) requires
companies to recognize compensation cost for employee and
non-employee services received in exchange for an award of equity
instruments based on the grant-date fair value of the award. All
awards granted to employees and non-employees are valued at fair
value in accordance with the provisions of SFAS 123 (R) by using the
Black-Scholes option pricing model and recognized on a straight-line
basis over the service periods of each award.
8
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (cont'd)
The Company accounts for equity instruments issued in exchange for
the receipt of goods or services from other than employees in
accordance with SFAS No. 123 and the conclusions reached by the
Emerging Issues Task Force ("EITF") in Issue No. 96-18, "Accounting
for Equity Instruments That Are Issued to Other Than Employees for
Acquiring or in Conjunction with Selling Goods or Services". Costs
are measured at the estimated fair market vconsideration received or
the estimated fair value of the equity instruments issued, whichever
is more reliably measurable. The value of equity instruments issued
for consideration other than employee services is determined on the
earlier of a performance commitment or completion of performance by
the provider of goods or services as defined by EITF No. 96-18.
h) Foreign Currency
The Company maintains its books, records and banking transactions in
U.S. dollars which is its functional and reporting currency. Foreign
currency transactions are translated at the transaction date into
functional currency by the use of the exchange rate in effect at that
date.
i) Comprehensive Income
The Company has adopted SFAS No. 130, "Reporting Comprehensive
Income." This statement establishes standards for reporting
comprehensive income and its components in a financial statement.
Comprehensive income as defined includes all changes in equity (net
assets) during a period from non-owner sources. Examples of items to
be included in comprehensive income, which are excluded from net
income, include foreign currency translation adjustments and
unrealized gains and losses on available-for-sale securities.
j) Impairment of Long-lived Assets
In accordance with Statement of Financial Accounting Standards
("SFAS") No. 144, "Accounting for the Impairment or Disposal of
Long-Lived Assets", long-lived assets to be held and used are
analyzed for impairment whenever events or changes in circumstances
indicate that the related carrying amounts may not be recoverable.
The Company evaluates at each balance sheet date whether events and
circumstances have occurred that indicate possible impairment. If
there are indications of impairment, the Company uses future
undiscounted cash flows of the related asset or asset grouping over
the remaining life in measuring whether the assets are recoverable.
In the event such cash flows are not expected to be sufficient to
recover the recorded asset values, the assets are written down to
their estimated fair value. Long-lived assets to be disposed of are
reported at the lower of carrying amount or fair value of asset less
cost to sell.
9
SECURITY DEVICES INTERNATIONAL, INC.
(A Development Stage Enterprise)
Notes to Financial Statements
November 30, 2007 and 2006
(Amounts expressed in US Dollars)
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (cont'd)
k) Asset Retirement Obligation
The Company accounts for asset retirement obligations in accordance
with Financial Accounting Standards Board ("FASB") Statement No. 143,
"Accounting for Asset Retirement Obligations" ("Statement 143"),
which requires that the fair value of an asset retirement obligation
be recorded as a liability in the period in which a company incurs
the obligation.
l) Concentration of Credit Risk
SFAS No. 105, "Disclosure of Information about Financial Instruments
with Off-Balance Sheet Risk and Financial Instruments with
Concentration of Credit Risk", requires disclosure of any significant
off-balance sheet risk and credit risk concentration. The Company
does not have significant off-balance sheet risk or credit
concentration.
m) Cash and Cash Equivalents
Cash consists of cash and cash equivalents, which are short-term,
highly liquid investments with original terms to maturity of 90 days
or less.
n) Intellectual Property with Respect to Pending Patent Applications
Four patent applications, one for the electrical mechanism and the
other three for the mechanical mechanism of the LEKTROX, have been
filed by the Company with the U.S. Patent Office. Expenditures for
patent applications as a result of research activity are not
capitalized due to the uncertain value of the benefits that may
accrue.
o)Plant and Equipment
Plant and equipment are recorded at cost less accumulated
depreciation. Depreciation 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
10
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (cont'd)
p) Recent Accounting Pronouncements
In February 2006, the FASB issued SFAS No. 155, "Accounting for
Certain Hybrid Financial Instruments - an amendment of FASB
Statements No. 133 and 140". This Statement permits fair value of
re-measurement for any hybrid financial instrument that contains an
embedded derivative that otherwise would require bifurcation;
clarifies which interest-only strips and principal-only strips are
not subject to the requirements of SFAS No. 133, "Accounting for
Derivative Instruments and Hedging Activities"; establishes a
requirement to evaluate interests in securitized financial assets to
identify interests that are freestanding derivatives or that are
hybrid financial instruments that contain an embedded derivative
requiring bifurcation; clarifies that concentrations of credit risk
in the form of subordination are not embedded derivatives; and
amended SFAS No. 140, "Accounting for Transfers and Servicing of
Financial Assets and Extinguishments of Liabilities", to eliminate
the prohibition on a qualifying special-purpose entity from holding a
derivative financial instrument that pertains to a beneficial
interest other than another derivative financial instrument. SFAS No.
155 is effective for all financial instruments acquired, issued, or
subject to a re-measurement (new basis) event occurring after the
beginning of an entity's first fiscal year that begins after
September 15, 2006. The Company believes that adoption of the
standard will not have a material effect on its financial position or
result of operation.
In March 2006, the FASB issued SFAS No. 156, "Accounting for Servicing
of Financial Assets", which amends SFAS No. 140, "Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of
Liabilities". In a significant change to current guidance, SFAS No.
156 permits an entity to choose either of the following subsequent
measurement methods for each class of separately recognized servicing
assets and servicing liabilities: (1) Amortization Method or (2) Fair
Value Measurement Method. SFAS No. 156 is effective as of the
beginning of an entity's first fiscal year that begins after September
15, 2006. The Company believes that adoption of the standard will not
have a material effect on its financial position or result of
operation.
In July 2006, the FASB issued Interpretation No. 48, "Accounting for
Uncertainty in Income Taxes" ("FIN 48"). FIN 48 clarifies the
accounting for uncertainty in income taxes recognized in an
enterprises' financial statements in accordance with SFAS No. 109,
"Accounting for Income Taxes". FIN 48 prescribes a recognition
threshold and measurement attributable for the financial statement
recognition and measurement of a tax position taken or expected to be
taken in a tax return. FIN 48 also provides
11
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (cont'd)
guidance on derecognizing, classification, interest and penalties,
accounting in interim periods, disclosures and transitions. FIN 48 is
effective for fiscal years beginning after December 15, 2006. The
Company believes that adoption of the standard will not have a material
effect on its financial position or result of operation.
In September 2006, the FASB issued SFAS No. 157, "Fair Value Measures"
("SFAS No. 157"). SFAS No. 157 defines fair value, establishes a
framework for measuring fair value in generally accepted accounting
principles ("GAAP"), expands disclosures about fair value measurements,
and applies under other accounting pronouncements that require or permit
fair value measurements. SFAS No. 157 does not require any new fair
value measurements, however the FASB anticipates that for some entities,
the application of SFAS No. 157 will change current practice. SFAS No.
157 is effective for financial statements issued for fiscal years
beginning after November 15, 2007. The Company is currently reviewing
the effect, if any, SFAS 157 will have on its financial position and
operations.
In September 2006, the Financial Accounting Standards Board ("FASB")
issued SFAS No. 158, Employers' Accounting for Defined Benefit Pension
and Other Postretirement Plans - an amendment of FASB Statements No. 87,
88, 106, and 132(R)". This statement requires employers to recognize the
overfunded or underfunded status of a defined benefit postretirement
plan (other than a multi employer plan) as an asset or liability in its
statement of financial position and to recognize changes in that funded
status in the year in which the changes occur through comprehensive
income of a business entity or changes in unrestricted net assets of a
not-for-profit organization. This statement also requires an employer to
measure the funded status of a plan as of the date of its year-end
statement of financial position, with limited exceptions. The provisions
of SFAS No. 158 are effective for employers with publicly traded equity
securities as of the end of the fiscal year ending after December 15,
2006. The adoption of this statement is not expected to have a material
effect on the Company's future reported financial position or results of
operations.
In February 2007, the FASB issued SFAS No. 159 ("SFAS 159") - the fair
value option for financial assets and liabilities including in amendment
of SFAS 115.
12
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (cont'd)
This Statement permits entities to choose to measure many financial
instruments and certain other items at fair value. The objective is to
improve financial reporting by providing entities with the opportunity
to mitigate volatility in reported earnings caused by measuring related
assets and liabilities differently without having to apply complex hedge
accounting provisions. This Statement is expected to expand the use of
fair value measurement objectives for accounting for financial
instruments. This Statement is effective as of the beginning of an
entity's first fiscal year that begins after November15, 2007, and
interim periods within those fiscal years. Early adoption is permitted
as of the beginning of a fiscal year that begins on or before November
15, 2007, provided the entity also elects to apply the provisions of
FASB Statement No. 157, Fair value measurements. The Company is
currently evaluating the impact of SFAS No. 159 on its financial
statements.
In September 2006, the Securities and Exchange Commission ("SEC") issued
Staff Accounting Bulletin No. 108 (Topic 1N), "Quantifying Misstatements
in Current Year Financial Statements" ("SAB No. 108"). SAB No. 108
addresses how the effect of prior year uncorrected misstatements should
be considered when quantifying misstatements in current year financial
statements. SAB No. 108 requires SEC registrants (i) to quantify
misstatements using a combined approach which considers both the balance
sheet and income statement approaches; (ii) to evaluate whether either
approach results in quantifying an error that is material in light of
relevant quantitative and qualitative factors; and (iii) to adjust their
financial statements if the new combined approach results in a
conclusion that an error is material. SAB No. 108 addresses the
mechanics of correcting misstatements that include effects from prior
years. It indicates that the current year correction of a material error
that includes prior year effects may result in the need to correct prior
year financial statements even if the misstatement in the prior year or
years is considered immaterial. Any prior year financial statements
found to be materially misstated in years subsequent to the issuance of
SAB No. 108 would be restated in accordance with SFAS No. 154,
"Accounting Changes and Error Corrections." Because the combined
approach represents a change in practice, the SEC staff will not require
registrants that followed an acceptable approach in the past to restate
prior years' historical financial statements. Rather, these registrants
can report the cumulative effect of adopting the new approach as an
adjustment to the current year's beginning balance of retained earnings.
If the new approach is adopted in a quarter other than the first
quarter, financial statements for prior interim periods within the year
of adoption may need to be restated. SAB No. 108 is effective for fiscal
years ending after November 15, 2006. The implementation of SAB No. 108
is not expected to have a material impact on the Company's results of
operations and financial condition.
In December 2007, the FASB issued SFAS No. 141(R), "Business
Combinations". This Statement replaces SFAS No. 141, Business
Combinations.
13
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (cont'd)
This Statement retains the fundamental requirements in Statement 141
that the acquisition method of accounting (which Statement 141 called
the purchase method) be used for all business combinations and for an
acquirer to be identified for each business combination. This Statement
also establishes principles and requirements for how the acquirer: a)
recognizes and measures in its financial statements the identifiable
assets acquired, the liabilities assumed, and any non-controlling
interest in the acquiree; b) recognizes and measures the goodwill
acquired in the business combination or a gain from a bargain purchase
and c) determines what information to disclose to enable users of the
financial statements to evaluate the nature and financial effects of the
business combination. SFAS No. 141(R) will apply prospectively to
business combinations for which the acquisition date is on or after
Company's fiscal year beginning December 1, 2009.
In December 2007, the FASB issued SFAS No. 160, "Non-controlling
Interests in Consolidated Financial Statements". This Statement amends
ARB 51 to establish accounting and reporting standards for the
non-controlling (minority) interest in a subsidiary and for the
deconsolidation of a subsidiary. It clarifies that a non-controlling
interest in a subsidiary is an ownership interest in the consolidated
entity that should be reported as equity in the consolidated financial
statements. The Company has not yet determined the impact, if any, that
SFAS No. 160 will have on its consolidated financial statements. SFAS
No. 160 is effective for the Company's fiscal year beginning December 1,
2009
4. ACCOUNTS PAYABLE AND ACCRUED LIABILITIES
2007 2006
----- ----
Accounts payable and accrued liabilities
are comprised of the following:
Trade payables $ 17,973 $ 7,689
Accrued liabilities 156,869 96,322
------------ ---------
$ 174,842 $ 104,011
========= ==========
14
5. CAPITAL STOCK
Accrued liabilities relate primarily to research and development and
legal and accounting expenses.
a) Authorized
50,000,000 Common shares, $0.001 par value
And
5,000,000 Preferred shares, $0.001 par value
The Company's Articles of Incorporation authorize its Board of Directors
to issue up to 5,000,000 shares of preferred stock. 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.
b) Issued
14,330,050 Common shares (2006: 11,364,880 Common shares)
c) Changes to Issued Share Capital.
Year ended November 30, 2006
i) On December 31, 2005 the Company authorized the issuance of 486,000
common shares for cash for a total consideration of $48,600.
ii) On January 31, 2006 the Company authorized the issuance of 470,000
common shares for cash for a total consideration of $ 47,000.
iii) On March 8, 2006 the Company authorized the issuance of 286,000
common shares for cash @ $0.175 per share for a total
consideration of $50,050. On the same day, the Company authorized
the issuance of 50,000 shares to a consultant for the services
rendered as finder's fees. These services were valued @$0.175 per
common share and expensed as consulting fees in the amount of
$8,750.
iv) By means of a prospectus dated May 5, 2006 the Company offered to
the public up to 2,000,000 shares of its common stock at a price
of $0.20 per share. The Company closed the offering on July 31,
2006 after receiving consideration of $400,000 and issued
2,000,000 common shares in August, 2006.
15
5. CAPITAL STOCK (cont'd)
v) The company directors exercised 950,000 stock options to purchase
950,000 common shares for a total consideration of $95,000 on
November 1, 2006.
vi) On November 29, 2006 the company authorized the issuance of
200,000 common shares for cash @$1.00 per common share. A
commission of $20,015 was paid to the agent and this amount is
netted with additional paid in capital. The proceeds received
were part of the Private offering effective November 20, 2006.
vii) As at November 30, 2006 the company received stock subscription
for $1,165,500. This was also part of the private offering
effective November 20, 2006. The Company closed this private
offering on December 12, 2006 when it had completed the sale of
2,536,170 shares of its common stock to a group of private
investors.
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.
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.
16
5. CAPITAL STOCK (cont'd)
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 a debit
of $34,400 to retained earnings, being the excess of purchase cost over
the original issuance.
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.
17
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 October 30, 2006 the Company adopted the following stock
option and stock bonus plans.
Incentive Stock Option Plan. The Company's Incentive Stock Option Plan
authorizes the issuance of shares of its Common Stock to persons that
exercise options granted pursuant to the Plan. Only employees may be
granted options pursuant to the Incentive Stock Option Plan. The option
exercise price is determined by its directors but cannot be less than
the market price of its common stock on the date the option is granted.
The Company has reserved 1,000,000 common shares under this plan. No
options have been issued under this plan as at November 30, 2007.
Non-Qualified Stock Option Plan. SDI's Non-Qualified Stock Option Plan
authorizes the issuance of shares of its Common Stock to persons that
exercise options granted pursuant to the Plans. SDI's employees,
directors, officers, consultants and advisors are eligible to be granted
options pursuant to the Plans, provided however that bona fide services
must be rendered by such consultants or advisors and such services must
not be in connection with the offer or sale of securities in a
capital-raising transaction. By a resolution of the Board of Directors,
the Company amended this plan to increase the number of common shares
available under this plan from 2,250,000 to 4,500,000 effective October
10, 2007.
Stock Bonus Plan. SDI's Stock Bonus Plan allows for the issuance of
shares of common stock to its employees, directors, officers,
consultants and advisors. However bona fide services must be rendered by
the consultants or advisors and such services must not be in connection
with the offer or sale of securities in a capital-raising transaction.
The Company has reserved 150,000 common shares under this plan. No
options have been issued under this plan as at November 30, 2007.
18
6. STOCK BASED COMPENSATION (cont'd)
Year ended November 30, 2006
On October 31, 2006 the board of directors granted the following options
under its Non-Qualified Stock Option Plan:
1. Options to one director to acquire 650,000 common shares. The
exercise price for 550,000 options was set at $0.10 per share and
balance 100,000 options were set at $0.25 per share.
2. Options to one director to acquire 300,000 common shares. The
exercise price for 200,000 options was set at $0.10 per share and
balance 100,000 options were set at $0.25 per share.
3. Options to one director to acquire 300,000 common shares. The
exercise price for 200,000 options was set at $0.10 per share and
balance 100,000 options were set at $0.25 per share.
4. Options to two consultants to acquire 150,000 common share each
for a total of 300,000 shares. The exercise price for 300,000
options was set at $0.50 per share.
All of the above options vest immediately and have an expiry date of
October 29, 2011.
On November 14, 2006 the board of directors granted the following
options under its Non-Qualified Stock Option Plan:
Options to one consultant to acquire 100,000 common shares. The exercise
price for 100,000 options was set at $1.00 per share. These options vest
immediately and expire on November 14, 2011.
For the year ended November 30, 2006, 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:
19
6. STOCK BASED COMPENSATION (cont'd)
October 31, November 14,
2006 2006 Total
---------- ----------- ------
Risk free rate 3.50% 3.50%
Volatility factor 100% 100%
Expected dividends 0% 0%
Stock-based compensation cost
expensed for year ended
November 30, 2006 $892,214 $157,726 $1,049,940
Unexpended stock-based
compensation deferred over
to next year $nil $nil $nil
As of November 30, 2006 there was $Nil of unrecognized expense related
to non-vested stock-based compensation arrangements granted. The total
stock-based compensation expense relating to employees and non employees
for the year ended November 30, 2006 was $1,049,940.
Year ended November 30, 2007
Effective January 7, 2007 the company granted stock options to one
officer to acquire 125,000 common shares under its Non-Qualified Stock
Option Plan. The exercise price for the options was set at $1.50 per
share. These options vest immediately and expire on January 17, 2012.
The stock based compensation cost of $204,986 has been expensed to
general and administration.
Effective April 23, 2007, the board of directors granted the following
options under its Non-Qualified Stock Option Plan:
1. Options to two consultants to acquire 150,000 common share each
for a total of 300,000 shares. The exercise price for 300,000
options was set at $2.75 per share. These options vest
immediately and expire on April 23, 2012. Stock based
compensation cost of $622,074 has been expensed to general and
administration expense.
2. Options to two consultants to acquire 20,000 common share each
for a total of 40,000 shares. The exercise price for 40,000
options was set at $3.60 per share. These options vest
immediately and expire on January 29, 2012. Stock based
compensation cost of $78,224 has been expensed to general and
administration expense.
20
6. STOCK BASED COMPENSATION (cont'd)
Effective October 12, 2007 the board of directors granted the following
options under its Non-Qualified Stock Option Plan:
1. Options to one director to acquire 675,000 common shares. The
exercise price was set at $1.20 per share.
2. Options to one director to acquire 300,000 common shares. The
exercise price was set at $1.20 per share.
3. Options to one director to acquire 175,000 common shares. The
exercise price was set at $1.20 per share.
4. Options to one officer to acquire 175,000 common shares. The
exercise price was set at $1.20 per share.
5. Options to two consultants to acquire 125,000 common shares each
for a total of 250,000 options. The exercise price was set at
$1.20 per share.
All of the above options vest immediately and have an expiry date of
October 12, 2012. Stock based compensation cost of $1,436,275 has been
expensed to general and administration expense.
Effective October 25, 2007, the board of directors granted under its
Non-Qualified Stock Option Plan, options to a consultant to acquire
150,000 common shares. The exercise price was set at $1.20 per share.
These options vest immediately and have an expiry date of January 31,
2010. Stock based compensation cost of $104,874 has been expensed to
general and administration expense.
21
6. STOCK BASED COMPENSATION (cont'd)
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 year ended November 30, 2007, 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:
Date of grant 7-Jan 23-Apr 12-Oct 25-Oct
2007 2007 2007 2007 Total
------------------------------------------------------
Risk free rate 3.50% 4.25% 5% 5%
Volatility factor 122.84% 106.04% 98.76% 102.37%
Expected dividends 0% 0% 0% 0%
Forfeiture rate 0% 0% 0% 0%
Expected life 5 years 5 years 5 years 2.3 years
Exercise price $1.50 $2.75-3.60 $1.20 $1.20
Total number of options
granted 125,000 340,000 1,575,000 150,000 2,190,000
Grant date fair value of
options $1.64 $1.96 $0.91 $0.70
Market price of $1.90 $2.65 $1.20 $1.20
Company's common stock
on date of grant $1.90 $2.65 $1.20 $1.20
Stock-based compensation
cost expensed during the
year ended November 30,
2007 $204,986 $700,298 $1,436,275 $104,874 2,446,433
Unexpended Stock-based
compensation cost
deferred over the
vesting period $nil $nil $nil $nil $nil
22
6. STOCK BASED COMPENSATION (cont'd)
The following table summarizes the options outstanding under its
Non-Qualified Stock Option Plan:
Number of shares
2007 2006
---- ----
Outstanding, beginning of year 700,000 -
Granted 2,190,000 1,650,000
Expired - -
Exercised - (950,000)
Cancelled - -
Outstanding, end of year 2,890,000 700,000
----------- ---------
Exercisable, end of year 2,890,000 700,000
------------ ---------
Option price Number of shares
Expiry date per share 2007 2006
----------- --------- ---- ----
January 31, 2010 $1.20 150,000 -
October 29, 2011 $0.25 300,000 300,000
October 29, 2011 $0.50 300,000 300,000
November 14, 2011 $1.00 100,000 100,000
January 7, 2012 $1.50 125,000 -
January 29, 2012 $3.60 40,000 -
April 23, 2012 $2.75 300,000 -
October 12, 2012 $1.20 1,575,000
--------- ---------
TOTAL 2,890,000 700,000
--------- --------
Weighted average exercise
price at end of year $1.22 0.46
At November 30, 2007, the weighted average contractual term of the total
outstanding, and the total exercisable options under the Non-Qualified
Stock Option Plan were as follows:
Weighted-Average
Remaining Contractual
Term
Total outstanding options 4.4 years
Total exercisable options 4.4 years
23
7. STOCK PURCHASE WARRANTS
During the year ended November 30, 2007 the Company granted the following
stock purchase warrants:
Effective September 6, 2007, the Company issued 17,000 common share
purchase warrants to a director. Each warrant is exercisable into one
common share of the Company at the price of $0.50 until May 31, 2017.
These warrants vest immediately (Refer to note 8-related party
transactions)
The fair value of the warrant was estimated on the grant date using the
Black-Scholes option-pricing model. For the year ended November 30, 2007,
the Company expensed $31,411 as compensation expense on issue of warrants.
The fair value of the warrant was calculated using the following weighted
average assumptions: Risk free rate of 5%, volatility factor 96.85%,
expected dividends 0% and forfeiture rate 0%. The grant date fair value of
each warrant was $ 1.85.
Effective October 5, 2007, the Company issued 250,000 common share
purchase warrants to one director and another 50,000 common share purchase
warrants to another director. Each warrant is exercisable into one common
share of the Company at the price of $0.50 until October 5, 2014. These
warrants vest immediately. The fair value of the warrant was estimated on
the grant date using the Black-Scholes option-pricing model. For the year
ended November 30, 2007, the Company expensed $325,683 as compensation
expense on issue of warrants. (Refer to note 8-related party transactions)
The fair value of the warrant was calculated using the following weighted
average assumptions:
Risk free rate of 5%, volatility factor 100.56%, expected dividends 0% and
forfeiture rate 0%. The grant date fair value of each warrant was $ 1.09.
24
7. STOCK PURCHASE WARRANTS (cont'd)
Number of
Warrants Exercise
Granted Prices Expiry Date
Outstanding at December 1,
2005 and average exercise price - -
Granted in year 2006 - - -
------ ------ --------
Outstanding at November
30, 2006 and average
exercise price - - -
Granted in year 2007 17,000 0.50 5/31/2017
Granted in year 2007 250,000 0.50 10/5/2014
Granted in year 2007 50,000 0.50 10/5/2014
Granted in year 2007 106,950 2.81 4/25/2009
Exercised - -
Forfeited - -
Cancelled
------ ------ --------
Outstanding at November 423,950 1.08
30,2007 and average
exercise price
======= ======
Exercisable at November 423,950
30, 2007
At November 30, 2007, the weighted average contractual term of the total
outstanding, and the total exercisable warrants were as follows:
Weighted-Average
Remaining Contractual
Term
Total outstanding options 5.7 years
Total exercisable options 5.7 years
25
8. RELATED PARTY TRANSACTIONS
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 years ended November 30, 2007 and 2006, no director was paid
any compensation in cash. All out of pocket expenses of
directors/promoters were expensed. During the year ended November 30,
2007 and November 30, 2006, the Directors were compensated for their
services by issue of Stock Options (Refer to note 6).
Year ended November 30, 2006
a) Options to one director to acquire 650,000 common shares. The
exercise price for 550,000 options was set at $0.10 per share and
balance 100,000 options were set at $0.25 per share. The Company
recognized stock based compensation expense of $386,302. The
director exercised the options to acquire 550,000 common shares
at $0.10 per share.
b) Options to one director to acquire 300,000 common shares. The
exercise price for 200,000 options was set at $0.10 per share and
balance 100,000 options were set at $0.25 per share. The Company
recognized stock based compensation expense of $176,028. The
director exercised the option to acquire 200,000 common shares at
$0.10 per share.
c) Options to one director to acquire 300,000 common shares. The
exercise price for 200,000 options was set at $0.10 per share and
balance 100,000 options were set at $0.25 per share. The Company
recognized stock based compensation expense of $176,028. The
director exercised the option to acquire 200,000 common shares at
$0.10 per share.
Year ended November 30, 2007
Effective January 7, 2007 the company granted stock options to one
officer to acquire 125,000 common shares under its Non-Qualified Stock
Option Plan. The exercise price for the options was set at $1.50 per
share. These options vest immediately and expire on January 17, 2012.
The stock based compensation cost of $204,986 has been expensed to
general and administration.
26
8. RELATED PARTY TRANSACTIONS (cont'd)
Effective October 12, 2007 the board of directors granted the following
options under its Non-Qualified Stock Option Plan:
1. Options to one director to acquire 675,000 common shares. The
exercise price was set at $1.20 per share.
2. Options to one director to acquire 300,000 common shares. The
exercise price was set at $1.20 per share.
3. Options to one director to acquire 175,000 common shares. The
exercise price was set at $1.20 per share.
4. Options to one officer to acquire 175,000 common shares. The
exercise price was set at $1.20 per share.
5. Options to two consultants to acquire 125,000 common shares each
for a total of 250,000 options. The exercise price was set at
$1.20 per share.
All of the above options vest immediately and have an expiry date of
October 12, 2012. Stock based compensation cost of $1,436,275 has been
expensed to general and administration expense.
Effective September 6, 2007, the Company issued 17,000 common share
purchase warrants to a director. Each warrant is exercisable into one
common share of the Company at the price of $0.50 until May 31, 2017.
These warrants vest immediately. The fair value of the warrant was
estimated on the grant date using the Black-Scholes option-pricing
model. For the year ended November 30, 2007, the Company expensed
$31,411 as compensation expense on issue of warrants.
Effective October 5, 2007, the Company issued 250,000 common share
purchase warrants to one director and another 50,000 common share
purchase warrants to another director. Each warrant is exercisable into
one common share of the Company at the price of $0.50 until October 5,
2014. These warrants vest immediately. The fair value of the warrant was
estimated on the grant date using the Black-Scholes option-pricing
model. For the year ended November 30, 2007, the Company expensed
$325,683 as compensation expense on issue of warrants.
The Directors also made advances to the Company to meet the operating
expenses. These advances of $nil (2006 $4,227) are unsecured and bear
interest at 4% p.a. Further, a Company Director has charged the Company
a total amount of $1,500 (2006: $2,250) for providing office space
during the year.
27
8. RELATED PARTY TRANSACTIONS (cont'd)
A company controlled by a 13.7% (as of November 30, 2006) shareholder,
who is also the son of a director (since resigned) was paid $16,000
during the year ended November 30, 2007 (2006: $90,100) for research and
development.
9. PLANT AND EQUIPMENT, NET
Plant and equipment are recorded at cost less accumulated depreciation.
Depreciation 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
Nov 30, 2007 Nov 30, 2006
Accumulated Accumulated
Cost Amortization Cost Amortization
$ $ $ $
Computer equipment 18,387 2,597 - -
Furniture and fixtures 8,170 - - -
26,557 2,597 - -
------ ----- --- ---
Net carrying amount $23,960 $nil
------- ----
10. INCOME TAXES
The Company has certain non-capital losses of approximately $2,823,968
(2006: $799,558) available, which can be applied against future taxable
income and which expire as follows:
2025 $ 188,699
2026 $ 610,859
2027 $2,024,410
$2,823,968
These losses have not been assessed by the tax authorities.
Reconciliation of statutory tax rate to the effective income tax rate is
as follows:
Federal statutory income tax rate (34.0) %
State income taxes, net of tax benefit (3.5) %
---------
Deferred tax asset valuation allowance (37.5) %
Effective rate (0.0) %
28
10. INCOME TAXES-Cont'd
Deferred tax asset components as of November 30, 2007 and 2006 are as
follows:
2007 2006
Operating losses available to offset future
income-taxes $2,823,968 $799,558
---------- --------
Expected Income tax recovery at statutory
rate of 37.5% ($1,058,988) ($299,834)
Valuation Allowance $1,058,988 $299,834
---------- --------
Net deferred tax assets - -
---------- --------
As the company is in the development stage, it has provided a 100 per
cent valuation allowance on the net deferred tax asset as of November
30, 2007 and 2006.
11. COMMITMENTS
1. The company has commitments for leasing office premises in Toronto to
November 30, 2010. The annual commitments, excluding proportionate realty
and maintenance costs and taxes are as follows:
Year ended November 30,
2008 $11,705
2009 $12,138
2010 $12,138
$35,981
2. 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. 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 Company's common stock maintains at $3.00 per share
for 30 calendar days prior to March 15, 2008. 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.
29
12. SUBSEQUENT EVENTS
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 will be
expensed to general and administration expense during the quarter ended
January 31, 2008.
30
SIGNATURES
In accordance with Section 13 or 15(a) of the Exchange Act, the Registrant
has caused this Report to be signed on its behalf by the undersigned, thereunto
duly authorized on the 26th day of February 2008.
SECURITY DEVICES INTERNATIONAL INC.
By /s/ Sheldon Kales
------------------------------------
Sheldon Kales, President and Chief
Executive Officer
By /s/ Rakesh Malhotra
------------------------------------
Rakesh Malhotra, Principal Financial
and Accounting Officer
Pursuant to the requirements of the Securities Act of l934, this Report
has been signed below by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated.
Title Date
/s/ Sheldon Kales
- ----------------------------
Sheldon Kales Director February 26, 2008
/s/ Boaz Dor
- --------------------------
Boaz Dor Director February 26, 2008
/s/ Gregory Sullivan
- ---------------------------
Gregory Sullivan Director February 26, 2008