SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(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, 2008
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 or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
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
Indicate by check mark if the registrant is a well-known seasoned issuer, as
defined in Rule 405 of the Securities Act. [ ]
Indicate by check mark if the registrant is not required to file reports
pursuant to Section 13 or Section 15(d) of the Act. [ ]
Indicate by check mark whether the registrant (1) has filed all reports to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
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.
Large accelerated filer [ ] Accelerated filer [ ]
Non-accelerated filer [ ] Smaller reporting company [X]
(Do not check if a smaller reporting company)
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Act): [ ] Yes [X] No
The aggregate market value of the voting stock held by non-affiliates of the
Company (9,901,050 shares) on May 31, 2008 was approximately $24,751,000.
As of February 25, 2009, the Company had 14,447,050 issued and outstanding
shares of common stock.
Documents incorporated by reference: None
ITEM 1. BUSINESS
- -----------------
Security Devices International, Inc. 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 is expected to be ready for the market in 2009 with a
12-guage version to be introduced later.
LEKTROX has been specially designed for use with standards issue riot guns
and 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 third generation electric solution. First generation solutions
were electric batons and hand-held stun guns which had a range of arm's length.
Second generation were the wired electric charge solutions. Third generation are
the wireless electric bullets. Currently, there is still no third 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
1
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, 2009 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.
o Integration and assembly of mechanical and electrical sub-systems for
electrical rounds.
o Testing of different ballistic rounds
2
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.
o Production of completed rounds.
o Testing with military and law enforcement organization of fully
operational Long Range LEKTROX for production.
o Completed the tooling and moulds for the 40MM LEKTROX
o Developed a fully operational Long Range LEKTROX prototype (37-38MM)
o Developed a fully operational Long Range LEKTROX prototype (40MM)
During the year ending November 30, 2009 SDI plans to complete the tooling
and moulds for the 37-38MM LEXTROX.
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.
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.
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
3
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 also holds several 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.
4
General
As of February 25, 2009 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 each of the two years
ending November 30, 2010, excluding SDI's share of operating and common area
expenses, will be $9,812. 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
February 2008 $2.10 $1.09
May 2008 $2.50 $1.10
August 2008 $2.51 $1.15
November 2008 $1.25 $0.31
5
As of February 25, 2008 SDI had approximately 200 shareholders and
14,447,050 outstanding shares of common stock.
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 5,000,000 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. SELECTED FINANCIAL DATA
-----------------------
Not applicable.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND PLAN OF
-----------------------------------------------------------------------
OPERATION
---------
Securities Devices International, Inc. was incorporated on March 1, 2005
and as of November 30, 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, 2008 substantially all of SDI's cash
expenses were related to the development of its LEKTROX technology.
During the year ended November 30, 2008:
o general and administrative expenses decreased primarily due to lower
expenses for the year ($1,231,056), which did not require the use of
cash, associated with the issuance of options to compensate SDI's
directors and consultants for services provided to SDI.
o SDI spent more on research and product development since the LEKTROX
37/38mm and 40mm rounds are nearing completion. The final steps in the
development of the LEXTROX rounds requires the design, production and
testing of moulds, dies, assembly equipment, testing equipment and
prototypes;
During the period from inception (March 1, 2005) through November 30, 2008
SDI's operations used $5,621,952 in cash. During this period SDI:
6
o purchased $36,699 of equipment,
o raised $7,719,650 from the sale of shares of its common stock,
o raised $106,700 from three of its officers and directors upon the
exercise of options to purchase 1,067,000 shares of common stock.
SDI did not have any material future contractual obligations or off balance
sheet arrangements as of November 30, 2008.
As of November 30, 2008 SDI had:
o completed the tooling and moulds for the 40MM LEKTROX
o developed a fully operational Long Range LEKTROX prototype (37-38MM)
o developed a fully operational Long Range LEKTROX prototype (40MM)
During the year ending November 30, 2009 SDI plans to complete the tooling
and moulds for the 37-38MM LEKTROX.
SDI anticipates that its capital requirements for the twelve-month period
ending November 30, 2009 will be:
Research and Development $ 1,900,000
General and Administrative Expenses 450,000
--------------
Total $ 2,350,000
==============
SDI does not anticipate that it will need to hire any employees prior to
November 30, 2009. SDI expects that it will need to raise approximately
$1,000,000 in additional capital prior to December 31, 2009.
SDI does not have any commitments or arrangements from any persons to
provide SDI with any additional capital it may need.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
---------------------------------------------------------
Not applicable.
ITEM 8 FINANCIAL STATEMENTS
--------------------
See the financial statements included with this report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS.
---------------------------------------------
Not applicable.
7
ITEM 9A. and 9A(T). CONTROLS AND PROCEDURES
-----------------------
Under the direction and with the participation of SDI's management, SDI
carried out an evaluation of the effectiveness of the design and operation of
its disclosure controls and procedures as of November 30, 2008. SDI maintains
disclosure controls and procedures that are designed to ensure that information
required to be disclosed in its periodic reports with the Securities and
Exchange Commission is recorded, processed, summarized and reported within the
time periods specified in the SEC's rules and regulations, and that such
information is accumulated and communicated to SDI's management, including its
principal executive officer and principal financial officer, as appropriate, to
allow timely decisions regarding required disclosure. SDI's disclosure controls
and procedures are designed to provide a reasonable level of assurance of
reaching its desired disclosure control objectives.
Management's Report on Internal Control Over Financial Reporting
SDI's management is responsible for establishing and maintaining adequate
internal control over financial reporting and for the assessment of the
effectiveness of internal control over financial reporting. As defined by the
Securities and Exchange Commission, internal control over financial reporting is
a process designed by, or under the supervision of SDI's principal executive
officer and principal financial officer and implemented by SDI's Board of
Directors, management and other personnel, to provide reasonable assurance
regarding the reliability of financial reporting and the preparation of SDI's
financial statements in accordance with U.S. generally accepted accounting
principles.
Because of its inherent limitations, internal control over financial
reporting may not prevent or detect misstatements. Also, projections of any
evaluation of effectiveness to future periods are subject to the risk that
controls may become inadequate because of changes in conditions, or that the
degree of compliance with the policies or procedures may deteriorate.
SDI's management evaluated the effectiveness of its internal control over
financial reporting as of November 30, 2008 based on criteria established in
Internal Control - Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission, or the COSO Framework. Management's
assessment included an evaluation of the design of SDI's internal control over
financial reporting and testing of the operational effectiveness of those
controls.
Inherent in any small business is the pervasive problem involving
segregation of duties. Since SDI has a small accounting department, segregation
of duties cannot be completely accomplished at this stage in its corporate
lifecycle. Accordingly, SDI's management has added compensating controls to
reduce and minimize the risk of a material misstatement in SDI's annual and
interim financial statements.
Based on this evaluation, SDI's management concluded that SDI's internal
control over financial reporting was effective as of November 30, 2008.
8
There was no change in SDI's internal control over financial reporting that
occurred during the quarter ended November 30, 2008 that has materially
affected, or is reasonably likely to materially affect, SDI's internal control
over financial reporting.
This report does not include an attestation report of SDI's independent
registered public accounting firm regarding internal control over financial
reporting. Management's report was not subject to attestation by SDI's
independent registered public accounting firm pursuant to temporary rules of the
SEC that permit SDI to provide only management's report on internal control in
this report.
ITEM 9B. OTHER INFORMATION
-----------------
Not applicable.
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS
-------------------------------------------------------------
Name Age Position
---- --- --------
Sheldon Kales 52 Chief Executive Officer and a Director
Boaz Dor 54 Secretary and a Director
Rakesh Malhotra 52 Chief Financial Officer
Gregory Sullivan 42 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.
9
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
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 803 of the NYSE Alternext
U.S. Company Guide.
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 11. EXECUTIVE COMPENSATION
----------------------
The following table shows the compensation for the years ended November 30,
2008 and 2007 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, 2008 $155,948 -- $155,948
President 2007 -- -- -- $886,948 -- $886,948
(1) The dollar value of base salary (cash and non-cash) received.
10
(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.
On February 4, 2009 SDI's directors approved consulting agreements with
three of it's officers. The consulting agreements, which are effective
retroactive to January 1, 2009, provide that the officers will consult with SDI
in the areas of corporate operations and product development. The terms of the
consulting agreements are shown below. The consulting agreements terminate on
December 31, 2009.
Monthly
Monthly Automobile
Name of Officer Consulting Fee Allowance
- --------------- -------------- ----------
Sheldon Kales $10,000 $1,500
Boaz Dor $ 6,250 $1,000
Greg Sullivan $ 3,125 $1,000
The following shows the amounts which SDI expects to pay in cash as
consulting fees to its officers during the twelve month period ending November
30, 2009, and the time these persons plan to devote to SDI's business.
Proposed Time to be Devoted to the
Name Compensation Business of SDI
---- ------------ -------------------------
Sheldon Kales $110,000 80%
Boaz Dor $ 68,750 80%
Rakesh Malhotra $ 22,000 10%
Gregory Sullivan $ 34,375 25%
There are no sales, net income, or other thresholds which are required for
SDI's directors to increase the compensation which in the future may be paid to
SDI's officers. SDI may also issue shares of its common stock or options to
compensate its officers and directors for services provided to SDI.
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.
11
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, 2008
Awards of Options
Name Paid in Cash Stock Awards (1) or Warrants (2)
---- ------------ ---------------- -------------------
Boaz Dor -- -- $168,943
Gregory Sullivan -- -- --
(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.
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, 2009, the options granted
pursuant to the Plans. Each option represents the right to purchase one share of
SDI's common stock.
12
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 5,000,000 3,498,000 N/A 435,000
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, 2009,
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
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 Sullivan 10/29/05 200,000 $0.10 10/29/11 200,000 $100,000
Gregory Sullivan 10/29/05 100,000 $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 Sullivan 10/12/07 175,000 $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 01/24/13 117,000 $ 25,740
(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 (1) -- $0.25 10-29-11
Boaz Dor 100,000 (1) -- $0.25 10-29-11
Gregory Sullivan 100,000 (1) -- $0.25 10-29-11
Rakesh Malhotra 125,000 -- $1.50 (2) 1-17-12
13
Sheldon Kales 675,000 -- $1.20 (2) 10-12-12
Boaz Dor 300,000 -- $1.20 (2) 10-12-12
Rakesh Malhotra 175,000 -- $1.20 (2) 10-12-12
Gregory Sullivan 175,000 -- $1.20 (2) 10-12-12
Sheldon Kales 108,000 -- $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.
(2) On December 17, 2008, SDI's directors approved the reduction of the exercise
price of these options to $0.50 per share.
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
(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, 2008, 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 -- -- 1,000,000
Non-Qualified Stock Option Plan 3,498,000 $1.26 435,000
14
Warrants
- --------
In addition to the options described above, SDI has granted warrants to its
officers and directors upon the terms shown below.
Shares Issuable
Grant Upon Exercise Exercise Expiration
Name Date of Options Price Date
---- ----- --------------- -------- ------------
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 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDERS MATTERS
The following table shows the ownership of SDI's common stock as of
February 25, 2009 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.
Number
Name of Shares (1) Percent of Class
---- ------------- ----------------
Sheldon Kales 2,540,910 17.6%
Boaz Dor 1,020,000 7.1%
Rakesh Malhotra -- --
Gregory Sullivan 400,000 2.8%
Dror Shachar (2) 1,200,000 8.3%
All Officers and Directors 3,960,910 27.5%
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 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
----------------------------------------------
The following lists all shares of SDI's common stock which have been issued
since its incorporation:
15
Consideration
Shareholder Date of Sale Shares 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 $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
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
Boaz Dor 11-08 117,000 $ 11,700 (2)
(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.
16
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 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
--------------------------------------
Schwartz Levitsky Feldman, LLP ("Schwartz Levitsky") audited SDI's
financial statements for the years ended November 30, 2008 and 2007.
The following table shows the aggregate fees billed and billable to SDI
during the years ended November 30, 2008 and 2007 by Schwartz Levitsky.
2008 2007
---- ----
Audit Fees $15,000 $17,000
Audit-Related Fees $ 8,600 $39,900
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 reviews of SDI's 10-Q reports and
reviews 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.
ITEM 15. 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 *
17
32 Section 1350 Certifications *
* Filed with this report.
18
SECURITY DEVICES INTERNATIONAL, INC.
(A Development Stage Enterprise)
FINANCIAL STATEMENTS
YEARS ENDED NOVEMBER 30, 2008 AND 2007
Together with Report of Independent Registered Public Accounting Firm
(Amounts expressed in US Dollars)
SECURITY DEVICES INTERNATIONAL, INC.
(A Development Stage Enterprise)
FINANCIAL STATEMENTS
YEARS ENDED NOVEMBER 30, 2008 AND 2007
(Amounts expressed in US Dollars)
TABLE OF CONTENTS
Page No
Report of Independent Registered Public Accounting Firm 1
Balance Sheets as at November 30, 2008 and November 30, 2007 2
Statements of Operations and Comprehensive loss for the years ended
November 30, 2008 and November 30, 2007 and the period from
inception (March 1, 2005) to November 30, 2008 3
Statements of Cash Flows for the years ended November 30, 2008 and
November 30, 2007 and the period from inception (March 1, 2005) to
November 30, 2008 4
Statements of Stockholders' Equity for the years ended November 30, 2008
and November 30, 2007 and the period from inception (March 1, 2005) to
November 30, 2008 5
Notes to Financial Statements 6-28
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. (the "Company") as at November 30, 2008 and 2007 and
the related statements of operations and comprehensive loss, cash flows
and stockholders' equity for the years ended November 30, 2008 and 2007
and the period from inception (March 1, 2005) to November 30, 2008. 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.
The company is not required to have, nor were we engaged to perform, an
audit of its internal control over financial reporting. Our audit
included consideration of internal control over financial reporting as a
basis for designing audit procedures that are appropriate in the
circumstances, but not for the purpose of expressing an opinion on the
effectiveness of the company's internal controls over financial
reporting. Accordingly, we express no such opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of the Company
as of November 30, 2008 and 2007, and the results of its operations and
its cash flows for the years ended November 30, 2008 and 2007 and the
period from inception (March 1, 2005) to November 30, 2008 in accordance
with generally accepted accounting principles in the United States of
America.
Schwartz Levitsky Feldman LLP
Toronto, Ontario, Canada Chartered Accountants
February 18, 2009 Licensed Public Accountants
SECURITY DEVICES INTERNATIONAL, INC.
(A Development Stage Enterprise)
Balance Sheets
As at November 30, 2008 and 2007
(Amounts expressed in US Dollars)
2008 2007
ASSETS $ $
CURRENT
Cash and cash equivalents 2,167,699 5,293,176
Prepaid expenses and other 45,984 36,788
------------ ------------
Total Current Assets 2,213,683 5,329,964
Plant and Equipment, net (Note 9) 25,450 23,960
------------ ------------
TOTAL ASSETS 2,239,133 5,353,924
------------ ------------
LIABILITIES
CURRENT LIABILITIES
Accounts payable and accrued liabilities (Note 4) 219,081 174,842
------------ ------------
Total Current Liabilities 219,081 174,842
------------ ------------
Related Party Transactions (Note 8)
Commitments (Note 11)
STOCKHOLDERS' EQUITY
Capital Stock (Note 5) 14,447 14,330
Additional Paid-In Capital 13,084,826 11,842,187
Deficit Accumulated During the Development Stage (11,079,221) (6,677,435)
------------ ------------
Total Stockholders' Equity 2,020,052 5,179,082
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY 2,239,133 5,353,924
------------ ------------
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, 2008 and 2007 and
the Period from Inception (March 1, 2005) to November 30, 2008
(Amounts expressed in US Dollars)
Cumulative
since inception 2008 2007
--------------- ---- ----
EXPENSES:
Research and Product Development $ 4,515,043 $ 2,632,548 $ 1,344,195
Amortization 11,249 8,652 2,597
General and administration 6,817,710 1,834,237 3,672,275
------------- ------------- -------------
TOTAL OPERATING EXPENSES 11,344,002 4,475,437 5,019,067
------------- ------------- -------------
LOSS FROM OPERATIONS (11,344,002) (4,475,437) (5,019,067)
Other Income-Interest 264,781 73,651 191,130
------------- ------------- -------------
LOSS BEFORE INCOME TAXES (11,079,221) (4,401,786) (4,827,937)
Income taxes (Note 10) - - -
------------- ------------- -------------
NET LOSS AND COMPREHENSIVE LOSS $(11,079,221) $(4,401,786) $(4,827,937)
------------- ------------- -------------
Loss per share - basic and diluted $ (0.31) $ (0. 35)
------------- -------------
Weighted average common shares
outstanding $ 14,335,179 $13,815,317
------------- -------------
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, 2008 and 2007 and
the Period from Inception (March 1, 2005) to
November 30, 2008
(Amounts expressed in US Dollars)
Cumulative
since inception 2008 2007
--------------- ---- ----
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss for the period $(11,079,221) $ (4,401,786) $ (4,827,937)
Items not requiring an outlay of cash:
Issue of shares for professional services 154,000 - 80,000
Stock based compensation (included in
general and administration expenses) 4,727,429 1,231,056 2,446,433
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 11,249 8,652 2,597
Changes in non-cash working capital:
Prepaid expenses and other (45,984) (9,196) (32,336)
Accounts payable and accrued liabilities 219,081 44,239 70,831
-------------- -------------- --------------
NET CASH USED IN OPERATING ACTIVITIES (5,621,952) (3,127,035) (1,868,918)
-------------- -------------- --------------
CASH FLOWS FROM INVESTING ACTIVITIES
Acquisition of Plant and Equipment (36,699) (10,142) (26,557)
-------------- -------------- --------------
NET CASH USED IN INVESTING ACTIVITIES (36,699) (10,142) (26,557)
-------------- -------------- --------------
CASH FLOWS FROM FINANCING ACTIVITIES
Loans/ (Repayments) from directors/shareholders - - (4,227)
Net Proceeds from issuance of common shares 7,769,650 - 5,779,045
Cancellation of common stock (50,000) - (50,000)
Exercise of stock options 106,700 11,700 -
-------------- -------------- --------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 7,826,350 11,700 5,724,818
-------------- -------------- --------------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS FOR THE PERIOD 2,167,699 (3,125,477) 3,829,343
Cash and cash equivalents, beginning
of period - 5,293,176 1,463,833
-------------- -------------- --------------
CASH AND CASH EQUIVALENTS, END OF PERIOD 2,167,699 2,167,699 5,293,176
============== ============== ==============
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, 2008 and 2007 and
the period from inception (March 1, 2005) to November 30, 2008.
(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, 200 611,364,880 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
Exercise of stock options 117,000 117 11,583 11,700
Stock based compensation - - 1,231,056 - 1,231,056
Net loss for the period - - - (4,401,786) (4,401,786)
----------- ----------- ----------- ----------- -----------
Balance as of November 30, 2008 $14,447,050 $ 14,447 $13,084,826 $(11,079,221) $2,020,052
----------- ----------- ----------- ----------- -----------
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, 2008 and 2007
(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 US GAAP. 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 standards issue riot guns, M203 grenade
launchers and regular 12-guage shotguns. This will allow military, law
enforcement agencies etc. to quickly deploy LEKTROX without the need for
lengthy, complex training methods or significant functional adjustments to
vehicles or personal equipment. Simplicity of use is also a key benefit for the
home security market where most users have little or no specialized training.
LEKTROX is a 3rd generation electric solution. First generation solutions were
electric batons and hand-held stun guns which had a range of arm's length. 2nd
generations were the wired electric charge solutions. 3rd generations are the
wireless electric bullets. Currently, there is still no 3rd generation wireless
electric bullet on the market.
The Company is in the development stage and has not yet realized revenues from
its planned operations. The Company has incurred a loss of $ 4,401,786 during
the year ended November 30, 2008 which includes a non-cash stock based
compensation cost of $1,231,056 . At November 30, 2008, the Company had an
accumulated deficit during the development stage of $11,079,221 which includes a
non- cash stock based compensation expense of $4,727,429. The Company has funded
operations through the issuance of capital stock. 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. Further, during the
last quarter of 2008, the Company received $11,700 due to the exercise of stock
options.
The Company has a working capital of $ 1,994,602 and stockholders' equity of
2,020,052 as at November 30, 2008. Management's plan is to continue raising
additional funds through future equity or debt financing until it achieves
profitable operations.
6
SECURITY DEVICES INTERNATIONAL, INC.
(A Development Stage Enterprise)
Notes to Financial Statements
November 30, 2008 and 2007
(Amounts expressed in US Dollars)
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 for deferred tax assets, estimates for calculation of stock based
compensation and estimating the useful life of its plant and equipment.
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, 2008 and 2007.
c) Revenue Recognition
The Company's revenue recognition policies are expected to follow common
practice in the manufacturing industry.
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
7
SECURITY DEVICES INTERNATIONAL, INC.
(A Development Stage Enterprise)
Notes to Financial Statements
November 30, 2008 and 2007
(Amounts expressed in US Dollars)
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (cont'd)
and warrants for each year. There were no common equivalent shares outstanding
at November 30, 2008 and 2007 that have been included in dilutive loss per share
calculation as the effects would have been anti-dilutive. At November 30, 2008,
there were 3,768,000 options and 423,950 warrants outstanding, which were
convertible into equal number of common shares of the Company. 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.
e) Fair Values
The Company's financial instruments as defined by SFAS No. 107, "Disclosures
about Fair Value of Financial Instruments", includes cash and 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.
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 value of the consideration 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.
8
SECURITY DEVICES INTERNATIONAL, INC.
(A Development Stage Enterprise)
Notes to Financial Statements
November 30, 2008 and 2007
(Amounts expressed in US Dollars)
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (cont'd)
h) Foreign Currency
The Company maintains its books, records and banking transactions in U.S.
dollars which is its functional and reporting currency.
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.
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.
9
SECURITY DEVICES INTERNATIONAL, INC.
(A Development Stage Enterprise)
Notes to Financial Statements
November 30, 2008 and 2007
(Amounts expressed in US Dollars)
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (cont'd)
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
p) Recent Accounting Pronouncements
In December 2007, the FASB issued SFAS No. 141(R), "Business Combinations". This
Statement replaces SFAS No. 141, Business Combinations.
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 May 1, 2009. The Company is currently assessing the impact of FAS
141(R).
10
SECURITY DEVICES INTERNATIONAL, INC.
(A Development Stage Enterprise)
Notes to Financial Statements
November 30, 2008 and 2007
(Amounts expressed in US Dollars)
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (cont'd)
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. SFAS No. 160 is effective for the fiscal years beginning
May 1, 2009. The Company is currently assessing the impact of FAS 160.
In March 2008, the FASB issued SFAS No. 161, "Disclosures about Derivative
Instruments and Hedging Activities--an amendment of FASB Statement No. 133"
("FAS 161"). FAS 161 changes the disclosure requirements for derivative
instruments and hedging activities. Entities are required to provide enhanced
disclosures about (a) how and why an entity uses derivative instruments, (b) how
derivative instruments and related hedged items are accounted for under
Statement 133 and its related interpretations, and (c) how derivative
instruments and related hedged items affect an entity's financial position,
financial performance, and cash flows. The guidance in FAS 161 is effective for
financial statements issued for fiscal years and interim periods beginning after
November 15, 2008, with early application encouraged. This Statement encourages,
but does not require, comparative disclosures for earlier periods at initial
adoption. The Company is currently assessing the impact of FAS 161.
In May 2008, the FASB issued SFAS No. 162, "The Hierarchy of Generally Accepted
Accounting Principles" ("SFAS 162"). SFAS 162 is intended to improve financial
reporting by identifying a consistent framework, or hierarchy, for selecting
accounting principles to be used in preparing financial statements that are
presented in conformity with U.S. GAAP for nongovernmental entities. SFAS 162 is
effective 60 days following the Securities and Exchange Commission's approval of
the Public Company Accounting Oversight Board auditing amendments to AU Section
411, "The Meaning of Present Fairly in Conformity with Generally Accepted
Accounting Principles." The Company does not expect SFAS 162 to have a material
effect on its consolidated financial statements.
In May 2008, the FASB issued Statement of Financial Accounting Standards No. 163
("SFAS 163"), "Accounting for Financial Guarantee Insurance Contracts - an
interpretation of FASB Statement No. 60." SFAS 163 prescribes accounting for
insures of financial obligations, bringing consistency to recognizing and
recording premiums and to loss recognition. SFAS 163 also requires expanded
disclosures about financial guarantee insurance contracts. Except for some
disclosures, SFAS 163 is effective for financial statements issued for fiscal
years beginning after December 15, 2008. The adoption of SFAS 163 will not have
an impact on the results of operations or financial position of the Company.
11
SECURITY DEVICES INTERNATIONAL, INC.
(A Development Stage Enterprise)
Notes to Financial Statements
November 30, 2008 and 2007
(Amounts expressed in US Dollars)
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (cont'd)
In May 2008, FASB issued FASB Staff Position ("FSP") APB 14-1, "Accounting for
Convertible Debt Instruments That May Be Settled in Cash upon Conversion
(Including Partial Cash Settlement)" ("FSP APB 14-1"). FSP APB 14-1 clarifies
that convertible debt instruments that may be settled in cash upon either
mandatory or optional conversion (including partial cash settlement) are not
addressed by paragraph 12 of APB Opinion No. 14, "Accounting for Convertible
Debt and Debt issued with Stock Purchase Warrants." Additionally, FSP APB 14-1
specifies that issuers of such instruments should separately account for the
liability and equity components in a manner that will reflect the entity's
nonconvertible debt borrowing rate when interest cost is recognized in
subsequent periods. FSP APB 14-1 is effective for financial statements issued
for fiscal years beginning after December 15, 2008, and interim periods within
those fiscal years. The adoption of APB 14-1 will not have an impact on the
results of operations or financial position of the Company.
4. ACCOUNTS PAYABLE AND ACCRUED LIABILITIES
2008 2007
----- ----
Accounts payable and accrued liabilities
are comprised of the following:
Trade payables $ 2,950 $ 17,973
Accrued liabilities 216,131 156,869
---------- ----------
$ 219,081 $ 174,842
--------- ---------
Accrued liabilities relate primarily to research and development and legal and
accounting expenses.
5. CAPITAL STOCK
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
12
SECURITY DEVICES INTERNATIONAL, INC.
(A Development Stage Enterprise)
Notes to Financial Statements
November 30, 2008 and 2007
(Amounts expressed in US Dollars)
5. CAPITAL STOCK (Cont'd)
dividend rights which would have priority over any dividends paid with respect
to the holders of SDI's common stock.
b) Issued
14,447,050 Common shares (2007: 14,330,050 Common shares)
c) Changes to Issued Share Capital
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.
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.
13
SECURITY DEVICES INTERNATIONAL, INC.
(A Development Stage Enterprise)
Notes to Financial Statements
November 30, 2008 and 2007
(Amounts expressed in US Dollars)
5. CAPITAL STOCK (Cont'd)
In the absence of acceptance of the ES technology by the Company, the Company
cancelled 1,560,000 shares and the director was paid $50,000 on March 12, 2007
in accordance with the amended agreement. The Company accounted for this
transaction under the constructive retirement method in the second quarter of
2007. The cancelled shares reverted to authorized but unissued status. The stock
and additional paid-in-capital amounts were reduced with a total of $15,600 and
the Company recognized a loss of $34,400, being the excess of purchase cost over
the original issuance.
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.
Year ended November 30, 2008
- ----------------------------
The Company received $11,700 and issued 117,000 common shares on exercise of
stock options by a director of the Company.
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 line as cash
compensation paid.
Effective October 31, 2006 the Company adopted the following stock option and
stock bonus plans.
14
SECURITY DEVICES INTERNATIONAL, INC.
(A Development Stage Enterprise)
Notes to Financial Statements
November 30, 2008 and 2007
(Amounts expressed in US Dollars)
6. STOCK BASED COMPENSATION (cont'd)
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, 2008.
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. The Company further amended its Non-Qualified Stock Option
Plan to increase the number of Common Shares available under this plan to
5,000,000 and filed an S-8 registration statement on April 10, 2008.
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,
2008.
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 vested
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.
15
SECURITY DEVICES INTERNATIONAL, INC.
(A Development Stage Enterprise)
Notes to Financial Statements
November 30, 2008 and 2007
(Amounts expressed in US Dollars)
6. STOCK BASED COMPENSATION (cont'd)
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.
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. The contract with the consultant was subsequently amended on April 10,
2008 whereby these options were reduced to 120,000 options exercisable at $1.20
per share and expire January 31, 2010. The company and the consultant agreed
that no further options would be issued by the company.
16
SECURITY DEVICES INTERNATIONAL, INC.
(A Development Stage Enterprise)
Notes to Financial Statements
November 30, 2008 and 2007
(Amounts expressed in US Dollars)
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 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 the Company has never paid cash dividends on its
common stock and has 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 interest 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
Weighted average grant date fair
value of options granted during
the year
Market price of Company's common
stock on date of grant $1.90 $2.65 $1.20 $1.20 $1.10
17
SECURITY DEVICES INTERNATIONAL, INC.
(A Development Stage Enterprise)
Notes to Financial Statements
November 30, 2008 and 2007
(Amounts expressed in US Dollars)
6. STOCK BASED COMPENSATION (cont'd)
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
Year ended November 30, 2008
- ----------------------------
Effective January 24, 2008 the board of directors granted the following options
under its Non-Qualified Stock Option Plan:
1. Options to one director to acquire 108,000 common shares. The exercise
price was set at $0.10 per share.
2. Options to one director to acquire 117,000 common shares. The exercise
price was set at $0.10 per share.
All of the above options vest immediately and have an expiry date of January 24,
2013. Stock based compensation cost of $324,891 has been expensed to general and
administration expense.
Effective April 11, 2008 the board of directors granted the following options
under its Non-Qualified Stock Option Plan:
1. Options to two consultants to each acquire 300,000 common shares for a
total of 600,000 common shares. The exercise price was set at $1.50 per share.
2. Options to one consultant to acquire 150,000 common shares. The exercise
price was set at $1.50 per share
All of the above options vest immediately and have an expiry date of April 11,
2013. Stock based compensation cost of $850,067 has been expensed to general and
administration expense.
Effective May 21, 2008, the board of directors granted options to an Investor
Relation consultant to acquire 50,000 common shares at an exercise price of
$2.25 per share. All of these options vested immediately and have an expiry of
May 21, 2010. Stock based compensation cost of $56,098 has been expensed to
general and administration expense.
18
SECURITY DEVICES INTERNATIONAL, INC.
(A Development Stage Enterprise)
Notes to Financial Statements
November 30, 2008 and 2007
(Amounts expressed in US Dollars)
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 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.
Date of grant January 24, April 11, May 21,
2008 2008 2008 Total
----------- ----------- ----------- -----------
Risk free rate 5% 5% 5%
Volatility factor 101.27% 97.80% 100.15%
Expected dividends 0% 0% 0%
Forfeiture rate 0% 0% 0%
Expected life 5 years 5 years 2 years
Exercise price $ 0.10 $ 1.50 $ 2.25
Total number of options granted 225,000 750,000 50,000 1,025,000
Grant date fair value of options $ 1.44 $ 1.13 $ 1.12
Weighted average grant date fair value
of options granted during the year $ 1.20
Market price of Company's common
stock on date of grant $ 1.50 $ 1.50 $ 2.12
Stock-based compensation cost
expensed during the year ended
November 30, 2008 and credited
to Additional Paid in Capital $324,891 $850,067 $56,098 $1,231,056
Unexpended Stock-based
compensation cost deferred
over the vesting period $ nil $ nil $ nil $ nil
19
SECURITY DEVICES INTERNATIONAL, INC.
(A Development Stage Enterprise)
Notes to Financial Statements
November 30, 2008 and 2007
(Amounts expressed in US Dollars)
6. STOCK BASED COMPENSATION (Cont'd)
As of November 30, 2008 there was $Nil of unrecognized expense related to
non-vested stock-based compensation arrangements granted.
The following table summarizes the options outstanding under its Non-Qualified
Stock Option Plan:
Number of shares
-------------------------
2008 2007
---- ----
Outstanding, beginning of year 2,890,000 700,000
Granted 1,025,000 2,190,000
Expired - -
Exercised (117,000)
Cancelled (30,000) -
----------- -----------
Outstanding, end of year 3,768,000 2,890,000
----------- -----------
Exercisable, end of year 3,768,000 2,890,000
----------- -----------
Number of shares Option price
Expiry date per share 2008 2007
----------- ------------ ---- ----
January 31, 2010 $1.20 120,000 150,000
May 21, 2010 $2.25 50,000 --
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 $1.50 125,000 125,000
January 29, 2012 $3.60 40,000 40,000
April 23, 2012 $2.75 300,000 300,000
October 12, 2012 $1.20 1,575,000 1,575,000
January 24, 2013 $0.10 108,000 --
April 11, 2013 $1.50 750,000 --
------------ ------------
TOTAL 3,768,000 2,890,000
------------ ------------
Weighted average exercise price :
Options outstanding at end of year $1.27 1.22
Options granted during the year $1.23 1.47
Options exercised during the year $0.10 -
Options cancelled during the year $1.20 -
20
SECURITY DEVICES INTERNATIONAL, INC.
(A Development Stage Enterprise)
Notes to Financial Statements
November 30, 2008 and 2007
(Amounts expressed in US Dollars)
The weighted average remaining contractual term of the total outstanding, and
the total exercisable options under the Non-Qualified Stock Option Plan were as
follows:
2008 2007
------- -------
(Years) (Years)
Total outstanding options 3.7 4.4
Total exercisable options 3.7 4.4
7. STOCK PURCHASE WARRANTS
Year ended November 30, 2007
- ----------------------------
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.
21
SECURITY DEVICES INTERNATIONAL, INC.
(A Development Stage Enterprise)
Notes to Financial Statements
November 30, 2008 and 2007
(Amounts expressed in US Dollars)
7. STOCK PURCHASE WARRANTS (cont'd)
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. 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.
Year ended November 30, 2008
- ----------------------------
The Company did not issue any warrants during the year ended November 30, 2008
Number of
Warrants Exercise Expiry
Granted Prices Date
--------- -------- -------
Outstanding at November 30, 2006 and
average exercise price - - -
Granted in year 2007 17,000 0.5 5/31/2017
Granted in year 2007 250,000 0.5 10/5/2014
Granted in year 2007 50,000 0.5 10/5/2014
Granted in year 2007 106,950 2.81 4/25/2009
Exercised - -
Forfeited - -
Cancelled - -
Outstanding at November 30, 2007 423,950 1.08
and weighted average exercise price
Weighted average exercise price of
options granted during the year 2007 1.08
Granted in year 2008 - -
Exercised - -
Forfeited - -
Cancelled - -
---------- ----------
Outstanding at November 30, 2008 and
weighted average exercise price 423,950 1.08
---------- ----------
Exercisable at November 30, 2008 423,950
Exercisable at November 30, 2007 423,950
22
SECURITY DEVICES INTERNATIONAL, INC.
(A Development Stage Enterprise)
Notes to Financial Statements
November 30, 2008 and 2007
(Amounts expressed in US Dollars)
7. STOCK PURCHASE WARRANTS (cont'd)
The weighted average remaining contractual term of the total outstanding, and
the total exercisable warrants were as follows:
2008 2007
-------- --------
(Years) (Years)
Total outstanding options 4.7 5.7
Total exercisable options 4.7 5.7
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, 2008 and 2007, no director was paid
any compensation in cash. All out of pocket expenses of directors/promoters were
expensed. During the year ended November 30, 2008 and November 30, 2007, the
Directors were issued stock options and warrants (Refer to note 6 and 7).
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 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.
23
SECURITY DEVICES INTERNATIONAL, INC.
(A Development Stage Enterprise)
Notes to Financial Statements
November 30, 2008 and 2007
(Amounts expressed in US Dollars)
8. RELATED PARTY TRANSACTIONS-Cont'd
All of the above options vest immediately and have an expiry date of October 12,
2012. Stock based compensation cost of $1,208,295 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.
A Director has charged the Company a total amount of $1,500 for providing office
space during the year.
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 for research and development.
The Company expensed $ 24,300 being cost for services rendered by the CFO for
the year ended November 30, 2007.
Year ended November 30, 2008
- ----------------------------
Effective January 24, 2008 the board of directors granted the following options
under its Non-Qualified Stock Option Plan:
3. Options to one director to acquire 108,000 common shares. The exercise
price was set at $0.10 per share.
4. Options to one director to acquire 117,000 common shares. The exercise
price was set at $0.10 per share.
24
SECURITY DEVICES INTERNATIONAL, INC.
(A Development Stage Enterprise)
Notes to Financial Statements
November 30, 2008 and 2007
(Amounts expressed in US Dollars)
All of the above options vest immediately and have an expiry date of January 24,
2013. Stock based compensation cost of $324,891 has been expensed to general and
administration expense.
A Director has charged the Company a total amount of $6,000 for providing office
space during the year ended November 30, 2008.
The Company expensed $ 20,850 being cost for services rendered by the CFO for
the year ended November 30, 2008.
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 30,2008 Nov 30, 2007
Accumulated Accumulated
Cost Amortization Cost Amortization
$ $ $ $
--------------------------------------------
Computer equipment 22,958 8,102 18,387 2,597
Furniture and fixtures 13,741 3,147 8,170 -
------ ----- ------
36,699 11,249 26,557 2,597
------ ------ ------- ------
Net carrying amount $25,450 $23,960
------- -------
Amortization expense $ 8,652 $ 2,597
------- -------
10. INCOME TAXES
The Company has certain non-capital losses of approximately $5,700,710
(2007: $2,823,968) available, which can be applied against future
taxable income and which expire as follows:
2025 $ 188,494
2026 $ 609,991
2027 $ 1,731,495
2028 $ 3,170,730
$ 5,700,710
25
SECURITY DEVICES INTERNATIONAL, INC.
(A Development Stage Enterprise)
Notes to Financial Statements
November 30, 2008 and 2007
(Amounts expressed in US Dollars)
Reconciliation of statutory tax rate to the effective income tax rate is as
follows:
Federal statutory income tax rate (34.0) %
--------
Deferred tax asset valuation allowance (34.0) %
--------
Effective rate (0.0) %
10. INCOME TAXES-Cont'd
Deferred tax asset components as of November 30, 2008 and 2007 are as
follows:
2008 2007
Operating losses available to offset future
income-taxes $5,700,710 $2,529,980
---------- ----------
Expected Income tax recovery at statutory
rate of 34.0% ($1,938,241) ($860,193)
Valuation Allowance $1,938,241 $860,193
----------- ----------
Net deferred tax assets - -
----------- ----------
As the company is in the development stage and has not yet earned any revenue,
it has provided a 100 per cent valuation allowance on the net deferred tax asset
as of November 30, 2008 and 2007.
11. COMMITMENTS
The company has commitments for leasing office premises in Toronto,Ontario,
Canada to November 30, 2010. The annual commitments, excluding proportionate
realty and maintenance costs and taxes are as follows:
Year ended November 30,
2009 $ 9,812
2010 $ 9,812
-------
$19,624
12. SEGMENT DISCLOSURES
The Company, after reviewing its reporting systems, has determined that it has
one reportable segment and geographic segment. The Company's operations are all
related to the research and product development for its wireless electric
ammunition. All assets of the business are located in Canada.
26
SECURITY DEVICES INTERNATIONAL, INC.
(A Development Stage Enterprise)
Notes to Financial Statements
November 30, 2008 and 2007
(Amounts expressed in US Dollars)
13. SUBSEQUENT EVENTS
On December 17, 2008, the Company approved the reduction of the exercise price
of 2,940,000 outstanding options which had earlier been issued at prices ranging
from $1.00 to $3.60 to a new option price of $0.50 per share, with all other
terms of the original grant remaining the same. The Company will expense this
additional non-cash stock based compensation expense relating to this
modification for $ 114,688 in the first quarter of 2009.
On February 4, 2009 the Company's directors approved consulting agreements with
three of the Company's officers. The consulting agreements, which are effective
retroactive to January 1, 2009, provide that the officers will consult with the
Company in the areas of corporate operations and product development. The terms
of the consulting agreements are shown below. The consulting agreements
terminate on December 31, 2009.
Monthly
Monthly Automobile
Name of Officer Consulting Fee Allowance
--------------- -------------- ----------
Sheldon Kales $10,000 $1,500
Boaz Dor $ 6,250 $1,000
Greg Sullivan $ 3,125 $1,000
27
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 20 day of February 2009.
SECURITY DEVICES INTERNATIONAL INC.
February 20, 2009 By /s/ Sheldon Kales
------------------------------------
Sheldon Kales, President and Chief
Executive Officer
February 27, 2009 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/ Sheoldon Kales
- -------------------------
Sheldon Kales Director February 20, 2009
/s/ Boaz Dor
- -------------------------
Boaz Dor Director February 20, 2009
/s/ Gregory Sullivan
- -------------------------
Gregory Sullivan Director February 20, 2009
SECURITY DEVICES INTERNATIONAL, INC.
ANNUAL REPORT ON FORM 10-K
EXHIBITS