Filing summary
Period and issuer: This is an unaudited Form 10-Q for the quarter and nine months ended August 31, 2014. The filing identifies the registrant as Security Devices International, Inc. (SDI), a developer and seller of non-lethal ammunition—not Byrna Technologies Inc. The supplied text does not explain the difference between the requested company name and the filing registrant. Financial amounts below are in U.S. dollars.
Business context and financial performance
SDI was an early-stage non-lethal defense technology company focused on its 40mm Blunt Impact Projectile (BIP); it reported that it had begun generating revenue but remained substantially dependent on outside financing. The filing says it had consultants and no full-time employees as of August 31, 2014.
| Metric | Three months ended August 31, 2014 | Nine months ended August 31, 2014 | Comparable 2013 period |
|---|---|---|---|
| Sales | $624 | $29,743 | $0 |
| Gross profit | $280 | $12,860 | $0 |
| Gross margin | 44.9% | 43.2% | Not applicable |
| Operating expenses | $429,027 | $1,557,182 | $387,676 / $1,332,765 |
| Net loss | $445,163 | $1,554,693 | $444,595 / $1,477,005 |
| Basic and diluted loss per share | $0.01 | $0.03 | $0.01 / $0.04 |
Nine-month operating expenses rose about 17% year over year, while the net loss increased about 5%. The three-month loss was broadly unchanged year over year. Nine-month interest expense was $16,416, compared with $144,240 in 2013; the 2014 period also included $6,045 of interest income. No income tax expense was recorded.
Cash flow, liquidity and debt
- Cash and cash equivalents were $1,706,381 at August 31, 2014, down from $1,842,149 at November 30, 2013. Cash used in operating activities was $1,336,586, versus $956,040 in the prior-year nine-month period; investing cash use was $37,625.
- Financing provided $1,253,799, principally net proceeds of $1,241,299 from a new debenture financing. Overall cash decreased by $135,768 during the nine months.
- Management reported working capital of $1,919,177. Current assets were $1,989,536 and current liabilities were $70,359; current assets included $210,803 in deferred financing costs.
- SDI issued debentures with $1,398,592 face value, bearing 12% annual interest and maturing August 6, 2017. Holders may convert at CAD $0.50 per share; the company may force conversion after February 6, 2015 if specified trading-price conditions are met. Net proceeds were $1,241,299. The balance sheet reports total liabilities of $1,468,951, including the debentures.
- Stockholders’ equity fell to $676,785 from $1,953,480 at November 30, 2013. The balance sheet’s total-liabilities figure includes the debentures, but a selected-information table in MD&A appears to repeat current liabilities as total liabilities ($70,359); this presentation is inconsistent.
Material changes, outlook and risks
- Revenue began to appear in 2014, but remained small relative to operating costs. SDI reported inventory of $32,886 and said it was for future sales.
- Management stated that cumulative losses were $22,875,050 and that significant expenses were expected before profitability. It concluded that the company’s need to raise capital or generate sufficient revenue raised substantial doubt about its ability to continue as a going concern. The statements contain no adjustments for the outcome of that uncertainty.
- The filing provides no quantified revenue, earnings or cash-flow guidance. Management said financing availability was uncertain and that the company had no commitments for additional capital.
- Management reported that a September 2014 Human Effects Centre of Excellence report found the BIP effective and safe and approved its use by the U.S. military. This is management’s account of an event after the quarter-end, not a quarter-end financial result.
- After quarter-end, directors and consultants were granted options for 1,875,000 shares; the company expected to record $529,188 of compensation expense in the quarter ending November 30, 2014.
- A former officer’s lawsuit sought, among other relief, $60,000 for wrongful dismissal and $35,000 for vacation pay, plus unspecified amounts. Management considered the claim without merit and recorded no provision.
- Other stated risks include further financing needs and dilution, uncertain product demand and market acceptance, competition, product-liability exposure, reliance on suppliers and manufacturing/distribution partners, regulation of ammunition, intellectual-property risks, and foreign-exchange and market risks.
- Management concluded disclosure controls were ineffective because the small accounting department could not fully segregate duties, identifying this as a material weakness. It cited audit-committee oversight and CFO expertise as compensating measures.
Important facts for investors to verify
- Confirm the issuer identity and corporate history linking the filing’s registrant, Security Devices International, Inc., to the requested Byrna Technologies Inc.
- Reconcile the conflicting total-liabilities disclosures in the balance sheet and MD&A; confirm the debenture’s carrying amount, interest obligations and conversion/redemption terms.
- Assess cash consumption against available liquidity and the company’s explicit going-concern warning, including whether additional financing was obtained.
- Verify actual sales, orders and repeat demand, and independently review the claimed military testing results and product approvals.
- Track the post-quarter option grant and its expected compensation expense, as well as the outcome and potential exposure of the former officer’s lawsuit.