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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q

(Mark One)

[X]  QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended May 31, 2018

[   ]  TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from _______to _______

Commission File Number: 333-132456

SECURITY DEVICES INTERNATIONAL, INC.
(Exact Name of Registrant as Specified in its Charter)

Delaware	71-1050654
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)

107 Audubon Road, Bldg 2, Suite 201
Wakefield, MA 01880
(Address of Principal Executive Offices) (Zip Code)

Registrant's telephone number including area code: (905) 582-6402

N/A
Former name, former address, and former fiscal year, if changed since last report

Indicate by check mark whether the registrant (1) filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes [X]     No [   ]

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Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Yes [X]     No [   ]

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definition of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Larger accelerated filer [   ]	Accelerated filer [   ]
Non-accelerated filer    [   ]	Smaller reporting company [X]

Indicate by check mark whether registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes [   ]     No [X]

As of July 13, 2018, the Company had 94,195,208 issued and outstanding shares of common stock.

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SECURITY DEVICES INTERNATIONAL, INC.

CONDENSED INTERIM CONSOLIDATED FINANCIAL STATEMENTS

MAY 31, 2018

(Amounts expressed in US Dollars)

(Unaudited)

TABLE OF CONTENTS
	Page No
Condensed Interim Consolidated Balance Sheets as at May 31, 2018 and November 30, 2017	1
Condensed Interim Consolidated Statements of Operations and Comprehensive Loss for the six months and three months ended May 31, 2018 and 2017	2
Condensed Interim Consolidated Statements of Cash Flows for the six months ended May 31, 2018 and 2017	3
Condensed Interim Consolidated Statements of Changes in Stockholders’ Equity for the six months ended May 31, 2018 and 2017	4
Notes to Condensed Interim Consolidated Financial Statements	5-15

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SECURITY DEVICES INTERNATIONAL, INC.

Condensed Interim Consolidated Balance Sheets

As at May 31, 2018 and November 30, 2017

(Amounts expressed in US Dollars)

(Unaudited)

		May 31,			November 30,
		2018			2017
		$			$
ASSETS
CURRENT
Cash and cash equivalents		918,801			1,965,043
Accounts receivable		130,043			36,412
Inventory (Note 10)		179,151			157,303
Prepaid expenses and other receivables		138,870			6,648
Total Current Assets		1,366,865			2,165,406
Patents (Note 12)		110,000			-
Property and equipment (Note 3)		31,329			26,951
TOTAL ASSETS		1,508,194			2,192,357
LIABILITIES
CURRENT LIABILITIES
Accounts payable and accrued liabilities (Note 6)		285,867			393,341
Unsecured convertible debentures (Note 9)		-			40,357
Derivative liabilities (Note 9)		596,635			539,860
Total Current Liabilities		882,502			973,558
Long term secured convertible debentures (Note 9)		943,261			892,176
Total Liabilities		1,825,763			1,865,734
Going Concern (Note 2)
Related Party Transactions (Note 6)
Commitments (Note 7)
Subsequent Events (Note 14)
STOCKHOLDERS' (DEFICIENCY) EQUITY
Capital stock (Note 4)
Preferred stock, $0.001 par value, 5,000,000 shares authorized, Nil issued and           outstanding (November 30, 2017 - nil).
Common stock, $0.001 par value 200,000,000 shares authorized           (2017: 200,000,000), 94,195,208 issued and outstanding (November 30, 2017: 93,014,134)		94,195			93,014
Additional paid-in capital		31,561,998			31,365,097
Deficiency		(31,938,885	)		(31,098,864	)
Accumulated Other Comprehensive Loss		(34,877	)		(32,624	)
Total Stockholders' (Deficiency) Equity		(317,569	)		326,623
TOTAL LIABILITIES AND STOCKHOLDERS' (DEFICIENCY) EQUITY		1,508,194			2,192,357

See accompanying notes to the condensed interim consolidated financial statements.

1

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SECURITY DEVICES INTERNATIONAL, INC.

Condensed Interim Consolidated Statements of Operations and Comprehensive Loss

For the Six Months and Three Months Ended May 31, 2018 and 2017

(Amounts expressed in US Dollars)

(Unaudited)

		For the			For the			For the			For the
		six			six			three			three
		months			months			months			months
		ended			ended			ended			ended
		May 31,			May 31,			May 31,			May 31,
		2018			2017			2018			2017
					(Restated)						(Restated)
					(See Note 13)						(See Note 13)
		$			$			$			$
SALES		166,858			139,605			138,742			97,172
COST OF SALES		(119,213	)		(75,284	)		(98,472	)		(52,173	)
GROSS PROFIT		47,645			64,321			40,270			44,999
EXPENSES:
Depreciation (Note 3)		6,759			25,122			3,406			13,150
Foreign currency translation (gain) (Note 9)		(11,600	)		(6,811	)		(19,627	)		(20,633	)
Selling, general and administration		705,868			1,004,856			415,425			525,696
TOTAL OPERATING EXPENSES		701,027			1,023,167			399,204			518,213
LOSS FROM OPERATIONS		(653,382	)		(958,846	)		(358,934	)		(473,214	)
Accretion (Note 9)		(58,111	)		(155,271	)		(29,363	)		(86,609	)
Change in fair value of derivative liabilities (Note 9)		(61,349	)		595,700			(62,740	)		24,052
Other expense- Interest (Note 9)		(67,179	)		(303,139	)		(33,272	)		(145,817	)
LOSS BEFORE INCOME TAXES		(840,021	)		(821,556	)		(484,309	)		(681,588	)
Income taxes		-			-			-			-
NET LOSS		(840,021	)		(821,556	)		(484,309	)		(681,588	)
Foreign exchange translation adjustment for the period		(2,253	)		21,796			(1,679	)		(357	)
COMPREHENSIVE LOSS		(842,274	)		(799,760	)		(485,988	)		(681,945	)
Loss per share - basic and diluted		(0.009	)		(0.014	)		(0.005	)		(0.012	)
Weighted average number of common shares outstanding		93,156,427			55,802,386			93,295,626			56,188,187

See accompanying notes to the condensed interim consolidated financial statements.

2

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SECURITY DEVICES INTERNATIONAL, INC.

Condensed Interim Consolidated Statements of Cash Flows

For the Six Months Ended May 31, 2018 and 2017

(Amounts expressed in US Dollars)

(Unaudited)

		For the six			For the six
		months ended			months ended
		May 31,			May 31,
		2018			2017
					(Restated)
					(See Note13)
		$			$
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss for the period		(840,021	)		(821,556	)
Items not requiring an outlay of cash:
Value of issue of options (included in selling, general and administration expenses)		35,582			152,216
Amortization of deferred financing costs		-			55,598
Accretion		58,111			155,271
Foreign currency translation gain		(11,600	)		(6,811	)
Accrued interest converted to convertible debentures		-			26,809
Change in fair value of derivative liabilities		61,349			(595,700	)
Issue of common shares for services		162,500			150,000
Depreciation		6,759			25,122
Changes in non-cash working capital:
Accounts receivable		(95,443	)		10,171
Prepaid expenses and other receivables		(132,160	)		32,218
Inventory		(21,848	)		(225,377	)
Accounts payable and accrued liabilities		(107,361	)		11,015
NET CASH USED IN OPERATING ACTIVITIES		(884,132	)		(1,031,024	)
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of patents		(110,000	)		-
Purchase of property and equipment		(11,114	)		(21,703	)
NET CASH USED IN INVESTING ACTIVITIES		(121,114	)		(21,703	)
CASH FLOWS FROM FINANCING ACTIVITIES
Net proceeds from convertible debentures		-			1,433,716
Repayment of unsecured convertible debentures		(40,357	)		-
NET CASH (USED) PROVIDED BY FINANCING ACTIVITIES		(40,357	)		1,433,716
Effects of foreign currency exchange rate changes		(639	)		21,973
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS FOR THE PERIOD		(1,046,242	)		402,962
Cash and cash equivalents, beginning of period		1,965,043			192,826
CASH AND CASH EQUIVALENTS, END OF PERIOD		918,801			595,788
SUPPLEMENTAL DISCLOSURE OF CASH FLOWS:
INCOME TAXES PAID		-			-
INTEREST PAID		67,179			94,989

See accompanying notes to the condensed interim consolidated financial statements.

3

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SECURITY DEVICES INTERNATIONAL, INC.

Condensed Interim Consolidated Statement of Changes in Stockholders’ Equity

For the Six Months Ended May 31, 2018 and 2017

(Amounts expressed in US Dollars)

(Unaudited)

														Accumulated
		Number of			Common			Additional						Other
		Common			Shares			Paid-in			Accumulated			Comprehensive
		Shares			amount			Capital			Deficit			Loss			Total
		#			$			$			$			$			$
Balance as of November 30, 2016		55,104,493			55,105			27,307,274			(28,298,613	)		(57,358	)		(993,592	)
Issue of common shares for services		589,414			589			49,411			-			-			50,000
Issue of common shares for services		503,251			503			49,497			-			-			50,000
Issue of common shares for services		534,941			535			49,465			-			-			50,000
Stock based compensation for issue of options								152,216									152,216
Net loss for the period		-			-			-			(821,556	)		-			(821,556	)
Foreign currency translation		-			-			-			-			21,796			21,796
Balance as of May 31, 2017 (Restated-Note 13)		56,732,099			56,732			27,607,863			(29,120,169	)		(35,562	)		(1,491,136	)
Balance as of November 30, 2017		93,014,134			93,014			31,365,097			(31,098,864	)		(32,624	)		326,623
Stock based compensation		-			-			35,582			-			-			35,582
Issue of common shares for services		507,550			508			61,992			-			-			62,500
Issue of common shares for services		339,370			339			49,661			-			-			50,000
Issue of common shares for services		334,154			334			49,666			-			-			50,000
Net loss for the period		-			-			-			(840,021	)		-			(840,021	)
Foreign currency translation		-			-			-			-			(2,253	)		(2,253	)
Balance as of May 31, 2018		94,195,208			94,195			31,561,998			(31,938,885	)		(34,877	)		(317,569	)

See accompanying notes to the condensed interim consolidated financial statements.

4

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SECURITY DEVICES INTERNATIONAL, INC.

Notes to Condensed Interim Consolidated Financial Statements

May 31, 2018

(Amounts expressed in US Dollars)

(Unaudited)

1.	BASIS OF PRESENTATION

The accompanying condensed unaudited interim consolidated financial statements have been prepared in accordance with the instructions to Form 10-Q and therefore do not include all information and footnotes necessary for a fair presentation of financial position, results of operations and cash flows in conformity with accounting principles generally accepted in the United States of America (GAAP); however, such information reflects all adjustments (consisting solely of normal recurring adjustments), which are, in the opinion of management, necessary for a fair presentation of the results for the interim periods.

The condensed unaudited interim consolidated financial statements should be read in conjunction with the financial statements and notes thereto together with management’s discussion and analysis of financial condition and results of operations contained in Security Devices International Inc.’s (“SDI” or the “Company”) annual report on Form 10-K for the year ended November 30, 2017. In the opinion of management, the accompanying unaudited interim consolidated financial statements reflect all adjustments of a normal recurring nature considered necessary to fairly state the financial position of the Company at May 31, 2018 and November 30, 2017, the results of its operations for the six and three-month periods ended May 31, 2018 and May 31, 2017, and its cash flows for the six-month periods ended May 31, 2018 and May 31, 2017. The results of operations for the six -month period ended May 31, 2018 are not necessarily indicative of results to be expected for the full year.

The Company was incorporated under the laws of the state of Delaware on March 1, 2005. On February 3, 2014 the Company incorporated a wholly owned subsidiary in Canada, Security Devices International Canada Corp. The condensed unaudited interim consolidated financial statements for the period ended May 31, 2018 include the accounts of Security Devices International, Inc., and its subsidiary Security Devices International Canada Corp. All material inter-company accounts and transactions have been eliminated.

2.	NATURE OF OPERATIONS AND GOING CONCERN

The Company is a less-lethal defense technology company, specializing in the innovative next generation solutions for security situations that do not require the use of lethal force. SDI has implemented manufacturing partnerships to assist in the deployment of their patented and patent pending family of 40mm products. These products consist of the current manufacture of Blunt Impact Projectile 40mm (BIP) line of products, and the future Wireless Electric Projectile 40mm (WEP). The Company has also partnered with manufacturers of 12 gauge less-lethal products and .68 caliber impact and irritant rounds. All products are marketing under SDI brands.

These condensed unaudited interim consolidated financial statements have been prepared in accordance with generally accepted accounting principles applicable to a going concern, which assumes that the Company will be able to meet its obligations and continue its operations for its next fiscal year.

The Company’s activities are subject to risk and uncertainties including:

The Company has not earned adequate revenue and has used cash in its operations. Therefore, the Company will need additional financing to continue its operations if it is unable to generate substantial revenue growth.

The Company has incurred a cumulative loss of $31,938,885 from inception to May 31, 2018. The Company has funded operations through the issuance of capital stock, warrants and convertible debentures. The Company has started to generate revenue from operations. However, it still expects to incur significant losses before becoming profitable. The Company’s future success is dependent upon its ability to raise sufficient capital or generate adequate revenue, to cover its ongoing operating expenses, and also to continue to develop and be able to profitably market its products. There can be no assurance that such financing will be available at all or on favorable terms. These factors raise substantial doubt about the ability of the Company to continue as a going concern. The financial statements do not include any adjustments that might result from the outcome of this uncertainty; such adjustments could be material.

5

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SECURITY DEVICES INTERNATIONAL, INC.

Notes to Condensed Interim Consolidated Financial Statements

May 31, 2018

(Amounts expressed in US Dollars)

(Unaudited)

3.	PROPERTY AND EQUIPMENT

Property 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
	Leasehold improvements		straight line over period of lease
	Moulds	20%	straight line over 5 years

			May 31, 2018						November 30, 2017
						Accumulated						Accumulated
			Cost			Amortization			Cost			Amortization
			$			$			$			$
	Computer equipment		64,810			42,466			53,696			39,971
	Furniture and fixtures		20,998			18,284			20,998			17,805
	Leasehold improvements		26,471			26,471			26,471			26,471
	Moulds		209,515			203,244			209,515			199,482
			321,794			290,465			310,680			283,729
	Net carrying amount				$	31,329					$	26,951
	Depreciation expense for six- month period				$	6,759					$	25,122
						(May 31, 2018)						(May 31, 2017)

6

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SECURITY DEVICES INTERNATIONAL, INC.

Notes to Condensed Interim Consolidated Financial Statements

May 31, 2018

(Amounts expressed in US Dollars)

(Unaudited)

4.	CAPITAL STOCK

a)

Authorized

200,000,000* Common shares, $0.001 par value

And

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

* On October 6, 2017, the Company filed with the Secretary of the State of Delaware a certificate of amendment (the “Amendment”) to the Company’s certificate of incorporation. The Amendment increased the number of authorized shares of the Company’s common stock, par value $0.001, from 100,000,000 to 200,000,000 common shares.

The Company’s Articles of Incorporation authorize its Board of Directors to issue up to 5,000,000 shares of preferred stock having par value of $0.001. The provisions in the Articles of Incorporation relating to the preferred stock allow the directors to issue preferred stock with multiple votes per share and dividend rights, which would have priority over any dividends paid with respect to the holders of SDI’s common stock.

b)

Issued

94,195,208 Common shares (November 30, 2017: 93,014,134 Common shares)

7

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SECURITY DEVICES INTERNATIONAL, INC.

Notes to Condensed Interim Consolidated Financial Statements

May 31, 2018

(Amounts expressed in US Dollars)

(Unaudited)

4.	CAPITAL STOCK-Cont’d

c)

Changes to Issued Share Capital

Year ended November 30, 2017

In January 2017, the Company made the second share issuance to Northeast Industrial Partners LLP (“NEIP”) pursuant to a consulting agreement. The Company issued 589,414 common shares at a price of $0.0848 per share to satisfy the payment of $50,000 due on November 15, 2016.

In March 2017, the Company made the third share issuance to Northeast Industrial Partners pursuant to a consulting agreement. The Company issued 503,251 common shares at a price of $0.0994 per share to satisfy the payment of $50,000 due on February 15, 2017.

In June 2017, the Company made the fourth and final share issuance to Northeast Industrial Partners pursuant to a consulting agreement. The Company issued 534,941 common shares at a price of $0.0935 per share to satisfy the payment of $50,000 due on May 15, 2017.

In October 2017, the Company made a further share issuance to Northeast Industrial Partners under the consulting agreement announced on June 20, 2016 and extended as announced on June 16, 2017. The Company issued 498,423 common shares at a price of $0.1254 per share to satisfy the payment of $62,500 due in August 2017.

On November 28, 2017, the Company closed the sale of 35,783,612 units on a private placement basis for gross proceeds of $3,793,063 (net proceeds of $3,669,120). Share issue costs related to this issuance totaled $123,943. This includes the issuance of 17,648,258 units, issued to settle the 2016 secured convertible debt for $1,500,000 along with interest as well as additional $113,044 in debt which comprised of a promissory note for $72,585 (CAD $89,040) and unsecured convertible debentures for $39,159 (CAD$50,000) plus accrued interest of $1,300.

Each unit consists of one common share of Company stock and one-half of a warrant. Each whole warrant is exercisable for one common share of the Company stock on or before November 28, 2022 at an exercise price of $0.18. If the average closing price of the common shares is over $0.36 per share for a period of 20 consecutive trading days ending after November 28, 2019, the Company may give notice to the registered holders of the warrants accelerating the expiry date to a date not less than 30 days following the date of that notice.

J Streicher Capital, LLC (the “Agent”) acted as exclusive Agent for the brokered portion of the private placement which totaled $1,922,348. The Agent received a cash commission of $60,669 and 572,354 agent warrants. Each agent warrant is exercisable for one common share of the Company stock on or before November 28, 2022 at an exercise price of $0.15. If the closing price of the common shares is over $0.30 per share for a period of 20 consecutive trading days ending after November 28, 2019, the Company may give notice accelerating the expiry date of the agent warrants to a date not less than 30 days following the date of that notice.

Six months ended May 31, 2018

In May 2018, the Company made a share issuance to NEIP under the consulting agreement announced on June 16, 2017. SDI issued 507,550 common shares at a price of $0.1231 per share to satisfy the payment of $62,500 due in December 2017.

In May 2018, the Company made a share issuance to Paul Jensen under the employment agreement announced on August 28, 2017. SDI issued 339,370 common shares at a price of $0.1473 per share to satisfy the payment of $50,000, payable for the months of October to December 2017.

In May 2018, the Company made a share issuance to Paul Jensen under the employment agreement announced on August 28, 2017. SDI issued 334,154 common shares at a price of $0.1496 per share to satisfy the payment of $50,000, payable for the months of January to March 2018.

8

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SECURITY DEVICES INTERNATIONAL, INC.

Notes to Condensed Interim Consolidated Financial Statements

May 31, 2018

(Amounts expressed in US Dollars)

(Unaudited)

5.	STOCK BASED COMPENSATION AND WARRANTS

Effective May 31, 2013, the Company adopted an incentive stock option plan (the “2013 Stock Option Plan”) which replaced the prior stock option and stock bonus plans, as ratified by the Company’s shareholders at the Company’s 2015 annual meeting of shareholders. A maximum of 9,379,857 common shares were reserved for issuance under the 2013 Stock Option Plan.

The Board approved a revised stock option plan (the “Revised Stock Option Plan”) and received stockholder approval at the annual meeting held on December 19, 2017, that will increase the number of shares reserved for issuance under the stock option plan from 9,379,857 to 18,993,274.

The material terms of the Revised Stock Option Plan are as follows:

(a) While the shares are listed on the TSX Venture Exchange (“TSX-V”), options may be granted to employees, senior officers, directors and consultants of the Company or a subsidiary of the Company and to corporations wholly-owned by such an employee, senior officer, director or consultant. If the Revised Stock Option Plan becomes subject to NI 45-106, options may be granted to employees, executive officers, directors and consultants of the Company or any parent or subsidiary of the Company and corporations controlled by them.

(b) The maximum number of common shares which can be issued under the Revised Stock Option Plan will be 18,993,274: provided that, so long as the Company is listed on the TSX-V, this maximum will be reduced to 20% of the issued and outstanding common shares on December 19, 2017.

(c) The term of any option granted under the Revised Stock Option Plan will be fixed by the board of directors at the time such option is granted, provided that options will not be permitted to exceed a term of ten years.

(d) The exercise price of any options granted under the Revised Stock Option Plan will be determined by the board of directors, in its sole discretion, but shall not be less than the closing price of the shares on the stock exchange on the day preceding the day on which the directors grant such options.

(e) While the shares are listed on the TSX-V, options will be non-assignable and non-transferable. If the Revised Stock Option Plan becomes subject to NI 45-106, options will be non-assignable and non-transferable except to certain permitted assigns including a spouse, a holding company of the option holder or spouse and a trustee, custodian or administrator acting on behalf of the option holder or spouse.

(f) So long as the shares are listed on the TSX-V, options on no more than 2% of the issued shares may be granted to any one consultant, or in aggregate to all persons performing investor relations activities, in any 12-month period.

(g) If the option holder ceases to be someone eligible to receive a grant of options under the Revised Stock Option Plan, then that holder’s existing options shall expire on the earlier of (i) the expiry date fixed at the time of the option grant, and (ii) ninety days after the date that the option holder ceases to be eligible to receive a grant of options under the Revised Stock Option Plan.

Year ended November 30, 2017

Warrants

On November 28, 2017, the Company closed the sale of 35,783,612 units on a private placement basis for gross proceeds of $3,793,063. Each unit consists of one common share of Company stock and one-half of a warrant. The Company issued 35,783,612 common shares and 17,891,806 warrants. Each whole warrant is exercisable for one common share of the Company stock on or before November 28, 2022 at an exercise price of $0.18. In addition to cash compensation, the Agent received 572,354 agent warrants. Each agent warrant is exercisable for one common share of the Company stock on or before November 28, 2022 at an exercise price of $0.15. The fair value of these Agent warrants was estimated at $78,332 using the Binomial option pricing model and reflected in additional paid-in capital. The valuation considered the following assumptions- risk free rate of 2%; expected dividends of 0%; expected forfeiture rate of 0%; expected volatility of 131.59%; market price of the Company’s common stock of $0.17 and expected life of 5 years. If the closing price of the common shares is over $0.30 per share for a period of 20 consecutive trading days ending after November 28, 2019, the Company may give notice accelerating the expiry date of the agent warrants to a date not less than 30 days following the date of that notice.

Stock Options:

On March 27, 2017, the board of directors granted options to the CEO to acquire a total of 1,150,000 common shares. These options were issued at an exercise price of CAD $0.13 ($0.10) per share and vest thirty-three and one-third (33 1/3) percent every six months commencing January 1, 2017, with an expiry term of five years. The fair value of each option used for the purpose of estimating the stock compensation is estimated using the Black-Scholes option pricing model with the following assumptions:

	Risk free rate		2.00%
	Expected dividends		0%
	Expected forfeiture rate		0%
	Expected volatility		134.27%
	Expected life		5 years
	Market price of the Company’s common stock on date of grant of options	$	0.10
	Stock-based compensation cost expensed	$	61,358
	Unvested stock-based compensation expense	$	39,047

On May 26, 2017, the board of directors granted 895,000 options to directors and 75,000 options to a consultant to acquire a total of 970,000 common shares. These options were issued at an exercise price of CAD $0.20 ($0.15) per share and vested immediately with an expiry term of five years. The fair value of each option used for the purpose of estimating the stock compensation is estimated using the Black-Scholes option pricing model with the following assumptions:

	Risk free rate		2.00%
	Expected dividends		0%
	Expected forfeiture rate		0%
	Expected volatility		127.0 0%
	Expected life		5 years
	Market price of the Company’s common stock on date of grant of options	$	0.14
	Stock-based compensation cost expensed	$	124,326
	Unvested stock-based compensation expense	$	Nil

On June 19, 2017, the board of directors granted options to an employee to acquire a total of 150,000 common shares. These options were issued at an exercise price of CAD $0.20 ($0.15) per share and vest immediately with an expiry term of five years. The fair value of each option used for the purpose of estimating the stock compensation is estimated using the Black-Scholes option pricing model with the following assumptions:

	Risk free rate		2.00%
	Expected dividends		0%
	Expected forfeiture rate		0%
	Expected volatility		128.83%
	Expected life		5 years
	Market price of the Company’s common stock on date of grant of options	$	0.14
	Stock-based compensation cost expensed	$	17,795
	Unvested stock-based compensation expense	$	Nil

On August 10, 2017, the board of directors granted options to a new director to acquire a total of 96,667 common shares. These options were issued at an exercise price of CAD $0.20 ($0.16) per share and vest immediately with an expiry term of five years. The fair value of each option used for the purpose of estimating the stock compensation is estimated using the Black-Scholes option pricing model with the following assumptions:

	Risk free rate		2.00%
	Expected dividends		0%
	Expected forfeiture rate		0%
	Expected volatility		129.90 %
	Expected life		5 years
	Market price of the Company’s common stock on date of grant of options	$	0.13
	Stock-based compensation cost expensed	$	10,633
	Unvested stock-based compensation expense	$	Nil

As of November 30, 2017, there was $39,047 of unrecognized expense related to non-vested stock-based compensation arrangements granted.

Six months ended May 31, 2018

Warrants

The Company did not issue any warrants during the six- month period ended May 31, 2018.

Stock Options:

On March 27, 2017, the board of directors had granted options to the CEO to acquire a total of 1,150,000 common shares. These options were issued at an exercise price of CAD $0.13 ($0.10) per share and vest thirty-three and one-third (33 1/3) percent every six months commencing January 1, 2017, with an expiry term of five years. The Company expensed stock-based compensation expense of $33,468 regarding the vesting of options during the six-month period ended May 31, 2018 leaving a balance of $4,386 as unvested stock- based compensation expense.

On April 13, 2018, the Company issued 1,500,000 options for shares of the Company’s common stock to the CTO, Mr. André Buys, with a strike price equal to the Company’s stock price on April 13, 2018 and a trigger price of $0.30, $0.50 and $1.00 for each batch of 500,000 options, respectively. The Company’s stock price must close above the trigger price for 20 days in order for the option to be vested. The options shall have a seven-year life from grant date and Mr. Buys must remain employed by the Company for three years for the options to vest. The fair value of each option used for the purpose of estimating the stock compensation is estimated using the Binomial Lattice model with the following assumptions:

	Risk free rate		5.50%
	Expected dividends		0%
	Expected forfeiture rate		0%
	Expected volatility		188%
	Expected life		7 years
	Market price of the Company’s common stock on date of grant of options	$	0.16
	Stock-based compensation cost expensed	$	2,114
	Unvested stock-based compensation expense	$	48,613

As of May 31, 2018, there was $ 52,999 of unrecognized expense related to non-vested stock-based compensation arrangements granted.

9

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SECURITY DEVICES INTERNATIONAL, INC.

Notes to Condensed Interim Consolidated Financial Statements

May 31, 2018

(Amounts expressed in US Dollars)

(Unaudited)

6.	RELATED PARTY TRANSACTIONS

The following transactions are in the normal course of operations and are measured at the amount of consideration established and agreed to by related parties.

Six months ended May 31, 2018

As of May 31, 2018, there are no amounts receivable from related parties.

As of May 31, 2018, the Company had a payable of $33,333 to a related party to be settled by issuance of stock and $18,241 payable to related parties to be paid by cash.

Effective as of October 1, 2017, the Company entered into an employment agreement with Paul Jensen pursuant to which Mr. Jensen serves as President and Chief Operating Officer of the Company. By the terms of the employment agreement, Mr. Jensen will receive an annual salary of $200,000, payable as follows. For the period beginning on October 1, 2017 and ending on June 30, 2018, Mr. Jensen shall receive quarterly payments of the Company’s common stock, to be issued 15 days after the end of each three-month calendar quarter (see Note 7).

The Company expensed $27,000 for services provided by the CFO of the Company which was paid to a corporation in which the CFO has an ownership interest, in accordance with the consulting contract. The Company expensed $78,600 (CAD $100,000) for services provided by the CEO of the Company and which was paid to a corporation in which the CEO has an ownership interest, in accordance with the consulting contract.

On March 27, 2017, the board of directors had granted options to the CEO to acquire a total of 1,150,000 common shares. The Company expensed $33,468 for fair value of options which vested during this period.

On April 13, 2018, the Company employed Mr. André Buys as the CTO with compensation of $10,000 per month over a three-year period. The Company expensed $16,667 during the six- month period ended May 31, 2018. On April 13, 2018, the Company granted options to Mr. André Buys to acquire a total of 1,500,000 common shares. The Company expensed $2,114 for fair value of options which vested during this period.

Effective December 1, 2017, the Company leased office premises at Wakefield, Massachusetts, USA for rent of $700 per month from a corporation owned and controlled by a director of the Company. The Company expensed $4,200 as office rent for the six-months ended May 31, 2018.

Six months ended May 31, 2017

Effective July 21, 2016, Bryan Ganz was elected as a director of the Company. Prior to his appointment, effective May 1, 2016, the Company executed a one-year consulting agreement with Northeast Industrial Partners, LLC (“NEIP”), a Corporation in which the said director has an ownership interest. The annual compensation was $250,000 payable $50,000 in cash and $200,000 by issuance of common shares. Effective May 1, 2017, the Company and NEIP renewed the agreement for a quarterly compensation of $62,500 to be settled by issuance of common shares. The agreement was terminated on October 31, 2017. In January 2017, the Company issued 589,414 common shares at a deemed price of $0.1142 per share to satisfy the payment of USD $50,000 due on November 15, 2016. In March 2017, the Company made the third share issuance and issued 503,251 common shares at a deemed price of $0.0994 per share to satisfy the payment of USD $50,000 due on February 15, 2017. In May 2017, the Company made the fourth and final share issuance and issued 534,941 common shares at a deemed price of $0.0935 per share to satisfy the payment of USD $50,000 due on May 15, 2017. In addition, the Company executed a one-year back-office accounting and administration services agreement with NEIP effective January 1, 2017 to pay compensation of $7,500 per month. The Company expensed $37,500 for services provided during the six- month period ended May 31, 2017.

The Company expensed $15,000 for services provided by the CFO of the Company and $26,500 for services provided by a Corporation in which the CEO has an ownership interest, in accordance with the consulting contract (Note 7a). In addition, the CEO was paid a salary of $46,300 during the six- month period ended May 31, 2017 and the Company expensed $27,890 for fair value of options which vested during this period.

During the six-month period ended May 31, 2017, the Company issued options to directors. The Company expensed $114,713 for fair value of options which vested during this period.

10

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SECURITY DEVICES INTERNATIONAL, INC.

Notes to Condensed Interim Consolidated Financial Statements

May 31, 2018

(Amounts expressed in US Dollars)

(Unaudited)

7.	COMMITMENTS

a)

Consulting agreements:

The non-independent directors of the Company executed consulting agreements with the Company on the following terms:

The Company executed an employment agreement with the CEO of the Company which term extends to June 30, 2018. The CEO is to be paid an annual salary of CAD $200,000 ($156,000) plus benefits. In addition, the Company will pay a performance bonus of 3% of net profits before taxes and granted 1,150,000 stock options with a five- year expiry term (Note 5). The Company must pay four months’ pay for termination without cause or change of control.

Effective as of October 1, 2017, the Company entered into an employment agreement (the “Employment Agreement”) with Paul Jensen pursuant to which Mr. Jensen serves as President and Chief Operating Officer of the Company. By the terms of the Employment Agreement, Mr. Jensen will receive an annual salary of $200,000, payable as follows. For the period beginning on October 1, 2017 and ending on June 30, 2018, Mr. Jensen shall receive quarterly payments of the Company’s common stock, to be issued 15 days after the end of each three-month quarter. The shares issued shall be valued based upon the weighted average closing price of the Company’s shares for the twenty (20) trading days prior to the end of the applicable quarter. Commencing July 1, 2018, the Company will pay $10,000 per month in cash and the balance in Company stock. At such time as the Company can pay the entire salary in cash and be cash positive on an operating basis, the entire monthly salary will be paid in cash.

Effective December 1, 2017, the Company signed a twelve-month contract with a corporation owned and controlled by the CFO to pay annual compensation of $42,000 for CFO services. The Company paid a retainer of $10,500 and is committed to pay $2,625 on monthly basis. Early termination of the contract by the Company without cause or change in control will attract a termination payment of $20,000.

On April 13, 2018, the Company entered into a Purchase and Sale Agreement (the “Agreement”) with André Buys, a resident of South Africa, pursuant to which the Company purchased from Mr. Buys a portfolio of registered patents, provisional patents, and other intellectual property relating to air and/or gas fired long guns or pistols, including pump action launchers and munitions used with such pistols and long guns, including self-stabilizing shaped or “finned” rounds (the “Portfolio”). As consideration for the Portfolio, the Company (i) paid Mr. Buys $100,000, (ii) agreed to pay Mr. Buys either $500,000 in cash or $750,000 worth of Company stock within two years (the “Second Payment”), (iii) issued 1,500,000 options for shares of the Company’s common stock to Mr. Buys with a strike price equal to the Company’s stock price on April 13, 2018 and a trigger price of $0.30, $0.50 and $1.00 for each batch of 500,000 options, respectively. The Company’s stock price must close above the trigger price for 20 days in order for the option to be triggered. The options shall have a seven- year life from grant date and Andre Buys must remain employed by the Company for three years in order for the options or warrants to vest, and (iv) agreed to pay Mr. Buys certain royalty payments for sales of products by the Company using technology covered by the Portfolio. Until the earlier of, the second anniversary or the date the Second Payment is made, the royalty will be 10% of the Net Sales Price (“NSP”). The royalty will then be reduced to 4% till the sixth anniversary, 3% till the eighth anniversary, and 2% till the last expiration date of any of the intellectual property in the Portfolio. Until the royalty exceeds $25,000 per year, the Company is committed to a minimum payment of $25,000 per year effective on the earlier of one year from closing or upon Andre Buys relocation to Boston. In the event that the Company fails to make the Second Payment, the Portfolio would revert to Mr. Buys, but the Company would retain perpetual, irrevocable, exclusive and non-exclusive licenses to use technology with respect to the Portfolio and any technology developed within two years of April 13, 2018. In addition, the Company has hired Mr. Buys as its Chief Technology Officer at a starting salary of $10,000 per month. The Company agrees that it will not terminate Andre Buys except for cause prior to April 2021. As a result, the minimal commitment relating to the contract is $350,000 payable over a period of 35 months.

b)

Lease commitments

The Company has commitments for leasing office premises in Wakefield, Massachusetts, USA to June 27, 2019, at a monthly rent of $700.

11

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SECURITY DEVICES INTERNATIONAL, INC.

Notes to Condensed Interim Consolidated Financial Statements

May 31, 2018

(Amounts expressed in US Dollars)

(Unaudited)

8.	EXCLUSIVE SUPPLY AND PURCHASE AGREEMENTS

The Company entered a Development, Supply and Manufacturing Agreement with the BIP manufacturer on August 1, 2017. This agreement provides the Company to order and purchase only from the BIP manufacturer certain BIP assemblies and components for use by the Company to produce less-lethal and training projectiles as described in the agreement in North America.

The agreement is for a term of four years with an automatic extension for additional one- year terms if neither party has given written notice of termination at least sixty (60) days prior to the end of the then- current term.

The Company entered a License and Supply Agreement with Safariland, LLC on May 1, 2017. This agreement provides the Company to license and sell only to Safariland, LLC for certain BIP standard payloads for integration with and production of certain less-lethal impact munitions in North America. This agreement is for a term of four years with an automatic extension for an additional one-year term if neither party have given written notice of termination at least ninety (90) days prior to the end of the then-current term.

9.	CONVERTIBLE DEBENTURES AND DEFERRED FINANCING COSTS

a)

Unsecured Convertible Debentures

On August 6, 2014, the Company issued CAD $1,549,000 ($1,398,342) face value 12% convertible debentures with a term to August 6, 2017 (the “Maturity Date”).

On December 7, 2016, the Company entered into a Securities Purchase Agreement to sell $1,500,000 of 10% senior secured convertible debentures, convertible into shares of the Company’s common stock, in a private placement. The sale of the secured notes was closed on December 7, 2016. A condition to the sale of the secured notes was the exchange of at least 80% in principal amount of the Company’s outstanding 12% Unsecured Debentures, which mature on August 6, 2017 (the “Unsecured Debentures”) for an equal principal amount of Subordinate Secured Debentures. Concurrent with the sale of the Secured Notes, CAD$1,363,000 ($1,015,026) of the Company’s outstanding Unsecured Debentures, which represented approximately 88% of the outstanding Unsecured Debentures, were exchanged for an equal principal amount of the Subordinate Secured Debentures.

Unsecured convertible debentures

									Unsecured
			Unsecured			Deferred			convertible
			convertible			financing			debenture
			debentures			costs			(Net)
			$			$			$
	Balance as of November 30, 2016		(1,153,540	)		35,769			(1,117,771	)
	Exchanged for subordinate secured debentures		1,015,026			-			1,015,026
	Amortization of deferred financing costs		-			(35,769	)		(35,769	)
	Repayment of unsecured convertible debentures		66,640			-			66,640
	Conversion of unsecured convertible debentures to equity		39,159			-			39,159
	Foreign currency translation		(7,642	)		-			(7,642	)
	Balance as of November 30, 2017		(40,357	)		-			(40,357	)
	Repayment of unsecured convertible debentures		40,357			-			40,357
	Balance as of May 31, 2018		-			-			-

On August 6, 2017, the Company repaid CAD $84,000 ($66,640) of the convertible debentures and the remaining convertible debenture holders for $40,357 executed agreements for forbearance of their debt with a new repayment date of February 16, 2018. In February 2018, the Company repaid the convertible debt for $40,357 along with accrued interest. During the six- month period ended May 31, 2018, the Company recorded interest expense of $1,035.

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SECURITY DEVICES INTERNATIONAL, INC.

Notes to Condensed Interim Consolidated Financial Statements

May 31, 2018

(Amounts expressed in US Dollars)

(Unaudited)

9.	CONVERTIBLE DEBENTURES AND DEFERRED FINANCING COSTS-Cont’d

b)

Long-term Series B Secured Convertible Debentures $943,261

Series B secured convertible debentures

The CAD$1,363,000 ($1,015,026) of Series B Secured Convertible Debentures (Subordinate Secured Debentures) were issued pursuant to the Trust Indenture agreement dated December 7, 2016 (the “Indenture”) in exchange for the Unsecured Debentures in equal principal amount and an additional CAD$36,000 ($26,809) of Series B Secured Convertible Debentures were issued pursuant to the Indenture in payment of accrued interest. These debentures mature on June 6, 2019 and bear interest at 12% per annum, payable semi-annually. The debentures are secured by all the assets of the Company. The principal amount, plus accrued interest, may be converted at the option of the holder at any time during the term to maturity into shares of the Company’s common stock at a conversion price of $0.24 (CAD $0.31) per share subject to anti-dilution protection with a minimum conversion price of $0.13 (CAD $0.10) and for capital reorganization events. The debentures also embody certain traditional default provisions that are linked to credit or interest risks, such as bankruptcy proceedings, liquidation events and corporate existence. The Company has concluded that the embedded conversion option is not indexed to its stock because it did not pass all eight conditions of equity classification provided in ASC 815. Therefore, the embedded conversion option is subject to classification in the financial statements in liabilities at fair value both at inception and subsequently pursuant to ASC 480-10-25-14.

The Company has evaluated the terms and conditions of the debentures under the guidance of ASC 815. Because the economic characteristics and risks of the equity-linked conversion options are not clearly and closely related to a debt-type host, the conversion features require classification and measurement as derivative financial instruments. The other embedded derivative features (down-round protection) were also not considered clearly and closely related to the host debt instruments. Further, these features individually were not afforded the exemption normally available to derivatives indexed to a company’s own stock. Accordingly, the evaluation resulted in the conclusion that this compound derivative financial instrument requires bifurcation and liability classification, at fair value. The compound derivative financial instrument consists of (i) the embedded conversion features and the (ii) down-round protection features. Current standards contemplate that the classification of financial instruments requires evaluation at each report date.

The following table reflects the allocation of the purchase on December 7, 2016:

	Secured Convertible Notes		Face Value
	(CAD $1,399,000)	$	1,041,835
	Proceeds		1,041,835
	Compound embedded derivative		(285,612	)
	Carrying value	$	756,223

The carrying value of these debentures at May 31, 2018 is CAD $1,223,108 ($943,261) and at November 30, 2017 was CAD $1,149,563 ($892,176).

Discounts (premiums) on the convertible notes arise from (i) the allocation of basis to other instruments issued in the transaction, (ii) fees paid directly to the creditor and (iii) initial recognition at fair value, which is lower than face value. Discounts (premiums) are amortized through charges (credits) to interest expense over the term of the debt agreement. Amortization of debt discounts (premiums) amounted to CAD $73,545 ($58,111) during the six- month period ended May 31, 2018 (May 31, 2017 – CAD $207,166 ($155,271)). During the six- month period ended May 31, 2018, the Company recorded interest expense $66,144 (May 31, 2017 - $71,918).

Derivative Liabilities

The carrying value of the Compound Embedded Derivative Liability is reflected on the balance sheet, with changes in the carrying value being recorded as change in fair value of derivative liabilities on the statement of operations. The components of the compound embedded derivative as of November 30, 2017 are:

			Indexed
	Financings giving rise to derivative financial instruments		Shares			Fair Value
	Series B Convertible Secured Debentures December 7, 2016		8,044,853		$	539,860
			8,044,853		$	539,860

The components of the compound embedded derivative as of May 31, 2018 are:

			Indexed
	Financings giving rise to derivative financial instruments		Shares			Fair Value
	Series B Convertible Secured Debentures December 7, 2016		8,044,853		$	596,635
			8,044,853		$	596,635

The following table summarizes the effects on the gain (loss) associated with changes in the fair values of the derivative financial instruments by type of financing for the year ended November 30, 2017 and six- month period ended May 31, 2018:

	Financings giving rise to derivative financial instruments and the income effects:
	Compound embedded derivatives:
	Series B Convertible Secured Debentures
	December 7, 2016	$	(285,612	)
	Change in fair value of derivative liabilities		(239,802	)
	Foreign currency translation loss		(14,446	)
	Balance as of November 30, 2017	$	(539,860	)
	Change in fair value of derivative liabilities		(61,349	)
	Foreign currency translation gain		4,574
	Balance as of May 31, 2018	$	(596,635	)

Fair Value Considerations

GAAP establishes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. As presented in the tables below, this hierarchy consists of three broad levels:

	Level 1 valuations:	Quoted prices in active markets for identical assets and liabilities.
	Level 2 valuations:	Quoted prices for similar assets or liabilities in active markets; quoted prices for identical or similar assets or liabilities in markets that are not active; and model- derived valuations whose inputs or significant value drivers are observable.
	Level 3 valuations:	Significant inputs to valuation model are unobservable.

The Company follows the provisions of ASC 820 with respect to the financial instruments. As required by ASC 820, assets and liabilities measured at fair value are classified in their entirety based on the lowest level of input that is significant to their fair value measurement. Our derivative financial instruments which are required to be measured at fair value on a recurring basis under of ASC 815 as of May 31, 2018 are all measured at estimated fair value using Level 2 and 3 inputs.

The features embedded in the debentures were combined into one compound embedded derivative that were fair valued using the income valuation technique using the Lattice valuation model. The following table sets forth the inputs for each significant assumption:

			May 31, 2018			November 30, 2017			December 7, 2016
	Derivative financial instruments	$	596,635		$	539,860		$	285,612
	Conversion price	$	0.13		$	0.13		$	0.24
	Volatility		67%			106%			82%
	Remaining term (years)		1.02			1.52			2.50
	Risk free rate		2.50%			1.78%			1.10%

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SECURITY DEVICES INTERNATIONAL, INC.

Notes to Condensed Interim Consolidated Financial Statements

May 31, 2018

(Amounts expressed in US Dollars)

(Unaudited)

10.

INVENTORY

Inventory as of May 31, 2018 consists of finished goods of 40mm Blunt Impact Projectiles of $115,770 (November 30, 2017: $109,673) and inventory procured from other suppliers of $63,381 (November 30, 2017: $47,630). The Company values its inventory on a first-in, first-out basis. Inventory is valued at the lower of cost or net realizable value.

11.	SEGMENT DISCLOSURES

The Company is organized on two geographic areas in U.S.A. and Canada respectively. The U.S.A. and Canada operations are the Company’s operating segments and reportable segments, and each of those segments are led by the Company’s CEO. Performance is assessed and resources are allocated by the CEO, whom we have determined to be the Company’s Chief Operating Decision Maker (CODM). Management evaluates the segments based primarily upon revenue and assets. The tables below present segment sales and assets for the six-months ended May 31, 2018 and May 31, 2017:

Six-months ended May 31, 2018

			SDI USA			SDI Canada			Total
	Sales	$	139,705		$	99,769		$	239,474

Six-months ended May 31, 2017

			SDI USA			SDI Canada			Total
	Sales	$	111,473		$	74,123		$	185,596

			2018			2017
	Sales	$	239,474		$	185,596
	Elimination of intersegment revenue		(72,616	)		(45,991	)
	Consolidated sales	$	166,858			139,605

As at May 31, 2018

			SDI			SDI Canada			Total
	Assets	$	1,394,551		$	113,643		$	1,508,194

As at November 30, 2017

			SDI			SDI Canada			Total
	Assets	$	2,159,618		$	32,739		$	2,192,357

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SECURITY DEVICES INTERNATIONAL, INC.

Notes to Condensed Interim Consolidated Financial Statements

May 31, 2018

(Amounts expressed in US Dollars)

(Unaudited)

12.

PATENTS

On April 13, 2018, the Company entered into a Purchase and Sale Agreement with André Buys, pursuant to which the Company agreed to purchase from Mr. Buys a portfolio of registered patents, provisional patents, and other intellectual property relating to air and/or gas fired long guns or pistols, including pump action launchers and munitions used with such pistols and long guns, including self-stabilizing shaped or “finned” rounds. As consideration for the portfolio, the Company paid Mr. Buys $100,000, and incurred $10,000 in legal costs to transfer these patents. This consideration of $110,000 has been capitalized. These patents have a maximum life of 20 years, expiring on various dates beginning in November 2033 to 2038, and will be amortized straight-line commencing June 2018. As at May 31, 2018, no amortization was recorded on the patents during the six-month ended May 31, 2018 and 2017. See Note 7(a).

13.	PRIOR PERIOD RESTATEMENT

The financial statements for the prior quarter ended May 31, 2017 are revised to record the bifurcation of the derivative liability from the host Series B Secured Convertible Debentures issued on December 7, 2016, following further analysis of convertible debt instrument issued by the Company in Canadian dollars. The analysis was conducted during the preparation of annual financial statements for 2017.

The effect of changes in the financial statements is summarized as follows:

14.	SUBSEQUENT EVENTS

On July 10, 2018, the Company entered into an employment agreement (the “Employment Agreement”) pursuant to which the employee will serve as Director of Sales and Marketing of the Company. By the terms of the Employment Agreement, the said employee will receive an annual salary of $80,000 plus 3% commission override on all Company sales until June 30, 2019, payable quarterly. The Company agreed to issue 1,500,000 stock options for shares of the Company’s common stock, with the stock options having the following exercise prices; 750,000 options are exercisable at the 20-day trialing volume weighted average price as of July 10, 2018; 250,000 options exercisable at $0.50; 250,000 options exercisable at $0.75; and 250,000 options exercisable at $1.00. The stock options will vest over a 3-year period, with the first 500,000 stock options vesting on June 30, 2019, 500,000 stock options vesting on June 30, 2020, and the remaining 500,000 stock options vesting on June 30, 2021.

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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND PLAN OF OPERATION

THREE MONTHS ENDED MAY 31, 2018

The following discussion and analysis of the financial condition and results of Security Devices International, Inc. (also referred to as "we", "us", "our", "SDI", or the "Company"), should be read in conjunction with the Company's financial statements (and related notes) as at November 30, 2017.

The following discussion contains forward-looking statements, which are subject to risks and uncertainties and other factors that may cause SDI’s results to differ materially from expectations. When reviewing the Company's forward-looking statements, investors and others should carefully consider the foregoing factors and other uncertainties and potential events. These include risk relating to market fluctuations, performance, strength of the North American and other world economies and foreign exchange fluctuations. These forward-looking statements speak only as of the date hereof. Unless otherwise required by applicable securities laws, the Company disclaims any intention or obligation to update these forward-looking statements. The Company does have an ongoing obligation to disclose material information as it becomes available. The discussion also includes cautionary statements about these matters. You should read the cautionary statements made below as being applicable to all forward-looking statements wherever they appear in this document.

ITEM 1. BUSINESS

It is the Company’s belief that the United States, along with most parts of the world are in the very early stages of a significant spike in the growth curve for “less-lethal” products. Most law enforcement agencies do not have a proper working knowledge of a less-lethal program in place. Rather they are using an assortment of less-lethal devices out of necessity for varying degrees of effectiveness with little coordination or approved tactical plans for their deployment. Law enforcement budget constraints usually play a role in this behavior. It is for this reason that unintended deaths of unarmed suspects at the hands of police departments throughout the country (and in fact throughout the world) continue to happen.

With a rise in social and civil unrest both here and abroad and with more and more of these incidents being caught on video and posted on social media, the pressure on law enforcement and governments to find reasonable and effective alternatives to lethal force is mounting daily. As a result, it is management’s opinion that the less-lethal market will be one of the faster growing segment in the law enforcement, correctional services, crowd control and security services markets over the next decade.

Less-lethal weapons include a wide variety of products designed to disorient, slow down and stop would be assailants, rioters and other malfeasants. In the Company’s opinion, the less-lethal weapon that is growing the fastest in popularity and adoption is the 40mm launcher along with the various less-lethal munitions that can be fired from these launchers. These munitions include both impact rounds designed to stop an individual without causing permanent injury to payload rounds carrying a variety of powders and liquids including tear gas, pepper spray, DNA marking liquids, mal-odorants and other marking liquids and powders designed to identify instigators in a riot situation.

Historically, these munitions were fired from 37mm launchers, however, the industry has been moving to 40mm launchers due to the fact that the 40mm launcher barrel is rifled (while the 37mm is a smooth bore barrel less accurate munition) which allows the operator to more accurately fire the rounds at distances in excess of 100’. This makes the 40mm launcher an effective tool in a wide range of situations.

Additional less lethal munitions include 12 gauge and .68 caliber impact and chemical irritant projectiles. The 12 gauge has been a long-standing tool for law enforcement and correctional services, as almost all domestic patrol cars carry a shotgun to fire the 12 gauge munitions when required. The .68 caliber projectiles are fired from an air gun system for close range incidents where impact force is not the main objective with a subject, but chemical irritant munitions are necessary to stop an assailant.

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History

Security Devices International Inc. (the “Company” or the “Corporation”) was incorporated on March 1, 2005. The Company began as a research and development company focused on the development of 40mm less-lethal ammunition.

The Company initiated with the development of a Wireless Electric Projectile (the “WEP”), named the Lektrox. The Company hired a ballistics engineering firm to collaborate in the development of the WEP.

Commencing in December 2008, the Joint Non-Lethal Weapons Directorate (“JNLWD”) of the US Department of Defense, an organization responsible for the development and coordination of non-lethal weapons activities within the United States, tested the WEP through its evaluation facility at Penn State University. An executive summary was released to the Company indicating a positive outcome.

The Blunt Impact Projectile (BIP) – A Transformative Technology

When the less-lethal industry was dominated by the 37mm launcher, a number of less-lethal companies developed “impact munition rounds” designed to “stop” an assailant. These rounds were nothing more than a piece of plastic, wood baton, rubber baton, or a piece of plastic with a piece of sponge rubber or foam rubber affixed to the head of the round.

There were several problems with these 37mm rounds. First, they were inaccurate due to the lack of barrel rifling. Since most SWAT teams carry single shot launchers, a round that cannot be shot accurately is of little value. Second, because of their lightweight, they did not have much stopping power. Suspects that were “committed” would often “shake off” a direct hit. Finally, the rounds would bounce off walls or other hard surfaces which made them dangerous to use in confined areas such as a jail cell. Numerous corrections officers have been hurt by impact rounds ricocheting off of jail cell walls.

Security Devices International solved all three issues with the development of its “Blunt Impact Projectile” (BIP). The BIP was developed as an outgrowth of a research and development project to create a conductive electric device bullet (project name WEP – Wireless Electric Projectile).

In order to ensure that the projectile did not injure the targeted individual, SDI needed to develop a way to cushion the impact of the round upon contact with the target. The solution was a collapsible head that compressed upon impact. (See below). When it became clear that SDI did not have sufficient funds to complete development of the WEP, it was decided to use the collapsible head design to create an impact round. The hope was that with this new, state-of-the-art impact round, SDI could generate enough profitability that it would be able to complete development of the WEP.

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This collapsible head technology allowed SDI to build a heavier projectile that did not require a rubber or foam tip. This meant that it could take advantage of the rifling of the 40mm launcher. This made the BIP by far the most accurate round on the market in comparison to previous 37mm projectiles. The target for an impact round is to be a large muscle group such as the thigh muscle.

The gel collapsible head of the BIP spreads out upon impact, dispersing the energy over a larger area thus reducing blunt trauma to the subject. This allows the BIP round to be fired at close range on a target.

The Company believes that its patented collapsible head technology will transform the industry as law enforcement agencies recognize the tactical advantages of a less-lethal weapon that can be safely, accurately and effectively deployed at close range distances between 10 to 100 feet. SDI has been in discussions several industry players about licensing SDI’s technology.

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Q2 2018

During the quarter, the Company had sales of $138,742 as compared to $97,172 for the second quarter last year (+43%). Growth was driven primarily by adoption of our rounds by local and provincial authorities in Montreal for security operations surrounding the G7 Summit held on June 2018, in La Malbaie, Quebec, Canada, increased activity on our e-commerce platform (signed up over 50 agencies since it went live in the fourth quarter of last year) and general market recognition of the superiority of SDI’s Blunt Impact Projectile (BIP).

On April 16, 2018, the Company announced the signing of a Definitive Agreement with André Buys of South Africa to purchase certain registered patents and designs, provisional patents and designs, drawings, testing results, molds, prototype products and other intellectual property in exchange for cash and/or stock in the Company, as well as a stream of royalty payments to Mr. Buys. As part of the agreement, Mr. Buys joined the Company as Chief Technology Officer (“CTO”) and will head up our Product Development & Test Center in South Africa.

These patents and related Intellectual Property (“IP”) focus on a new less lethal delivery system that delivers chemical irritants from handgun-like ‘Personal Security Devices (PSDs)’. Employing a shaped (finned) projectile, rather than a round ball, SDI expects to offer less lethal security devices that have the same or better accuracy than comparable conventional firearms. These new products will bring the same kind of less lethal options currently available only to the military, corrections and law enforcement agencies to a much broader range of users, including homeowners, private security guards and potentially schools. Management feels that there is significant market potential for these types of products in home defense and private security.

During the quarter, the Company received an additional patent for the payload carrying arrangement for a non-lethal projectile. This brings the total patents under the portfolio to seven.

Subsequent Events

On June 4-6, 2018, the Company attended the LD MicroCap Conference in Bel Air, CA to garner market awareness. The conference is an exclusive event dedicated to connecting small and micro-cap companies with high-level, institutional and retail investors and included 234 companies and over 1,000 participants. The response of the event was positive towards the Company’s market space, product offerings, and growth prospects. SDI Executive Chairman Bryan Ganz interview with Proactive Investors can be viewed here.

On July 10, 2018, the Company entered into an employment agreement (the “Employment Agreement”) pursuant to which the employee will serve as Director of Sales and Marketing of the Company. By the terms of the Employment Agreement, the said employee will receive an annual salary of $80,000 plus 3% commission override on all Company sales until June 30, 2019, payable quarterly. The Company agreed to issue 1,500,000 stock options for shares of the Company’s common stock, with the stock options having the following exercise prices; 750,000 options are exercisable at the 20-day trialing volume weighted average price as of July 10, 2018; 250,000 options exercisable at $0.50; 250,000 options exercisable at $0.75; and 250,000 options exercisable at $1.00. The stock options will vest over a 3-year period, with the first 500,000 stock options vesting on June 30, 2019, 500,000 stock options vesting on June 30, 2020, and the remaining 500,000 stock options vesting on June 30, 2021.

Products

SDI’s business is the development, manufacture and sale of less-lethal ammunition. This ammunition is used by the military, correctional services, police agencies, and private security for crowd control.

The Company has two commercial product lines:

a)	The Company has developed the BIP, a blunt impact projectile which uses pain compliance to control a target. The Company has developed eight versions of the standard BIP, seven of which contain a payload and one of which is a cheaper cost, training round. A payload is an internal medium within the BIP, holding a liquid or powder substance.
b)	The Company offers a specified line of 12 gauge less lethal projectiles and irritants for law enforcement and correctional services agencies. The projectiles come in impact forms such as, rubber fins and a bean bag version.

Intellectual Property

Seven patent applications, six non-provisional and one provisional, have been filed by the Company with the U.S. Patent Office. The Patents have been granted on the six non-provisional patents. The Company also owns the trademark for the ‘BIP’.

As previously reported, on April 13, 2018, the Company acquired a portfolio of registered patents, provisional patents, and other intellectual property relating to air and/or gas fired long guns or pistols, including pump action launchers and munitions used with such pistols and long guns, including self-stabilizing shaped or “finned” rounds (the “Portfolio”). The Company is filing an additional series of non-provisional patents related to on-going development of these products and plans to file trademarks for both the devices and the projectile in Q3 2018.

Non-Provisional (granted patents):

(a) Less-lethal Projectile: This issued patent relates to the Company’s distinctive collapsible ammunition head technology that absorbs kinetic energy of the projectile upon impact. The Corporation’s collapsible head is used in both the BIP and the WEP.

(b) Electronic Circuitry for Incapacitating a Living Target: This issued patent relates to the electronic circuitry incapacitation system which forms part of the WEP. The patent describes an electronic circuit which provides an electrical incapacitation current to a living target.

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(c) Less-lethal Wireless Stun Projectile System for Immobilizing a Target by Neuro-Muscular Disruption: This issued patent describes the process by which the WEP operates with its attachment system to halt a target through a neuro-muscular-disruption system.

(d) Autonomous Operation of a Less-lethal Projectile: This patent describes a motion sensing system within the WEP. The sensor will monitor movement of the target and enable the electrical output until the target is subdued. The electrical pulse is programmed for an exact time-frame to specifications of the user.

(e) Projectile: This invention relates to a non-lethal projectile to be fired using a paintball gun, and more particularly, but not exclusively, to an aerodynamic non-lethal projectile which is used for marking, inhibiting or administering medicinal or other chemical substances to live targets.

(f) Payload carrying arrangement for a non-lethal projectile: This Provisional patent relates to the process of carrying liquid and powder payloads in the head of the BIP munitions that upon impact release from the head and are dispersed upon the target.

Trademark:

(g) A trademark for the ‘BIP’ trade name has been issued from the United States Patent and Trademark Office under the number Reg. No. 5,339,826.

General

	•	As of May 31, 2018, SDI had both consultants and employees.
	•	SDI’s offices are located at 107 Audubon Road, Bldg. 2, Suite 201 Wakefield, MA 01880.
	•	SDI’s website is www.securitydii.com.

Going Concern

The Company has incurred a cumulative loss of $31,938,885 from inception to May 31, 2018. The Company has funded operations through the issuance of capital stock, warrants and convertible debentures. The Company has started to generate revenue from operations. However, it still expects to incur significant losses before becoming profitable. The Company’s future success is dependent upon its ability to raise sufficient capital or generate adequate revenue, to cover its ongoing operating expenses, and also to continue to develop and be able to profitably market its products. There can be no assurance that such financing will be available at all or on favorable terms. These factors raise substantial doubt about the ability of the Company to continue as a going concern. The financial statements do not include any adjustments that might result from the outcome of this uncertainty; such adjustments could be material.

Significant Quarterly Information

The following represents selected information of the Company for the most recently completed financial quarter ended May 31, 2018

		Three-			Three-
		month			month
		period			period
		May 31,			May 31,
		2018			2017
		(unaudited)			(unaudited)
					(restated)
		$			$
Net loss for the three- month period		(484,309	)		(681,588	)
Basic and diluted loss per share		(0.005	)		(0.012	)
Total assets		1,508,194			915,628
Total liabilities		1,825,763			2,408,012
Cash dividends per share		-			-

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Results of Operations

SDI was incorporated on March 1, 2005 and for the period from inception to May 31, 2018 has not realized significant revenues. The company has started to generate revenue from operations. However, it still expects to incur significant expenses before becoming profitable.

Financial highlights (unaudited) for the period ending May 31, 2018 with comparatives are as follows:

Operating Results		For the three months			For the three months
		ended			ended
		May 31,			May 31,
		2018			2017(Restated)
Sales	$	138,742		$	97,172
Cost of sales	$	(98,472	)	$	(52,173	)
Gross profit	$	40,270		$	44,999
Operating expenses	$	(399,204	)	$	(518,213	)
Other expenses -interest	$	(33,272	)	$	(145,817	)
Accretion	$	(29,363	)	$	(86,609	)
Change in fair value of derivative liabilities	$	(62,740	)	$	24,052
Net Loss for Period	$	(484,309)		$	(681,588)
Loss per Share	$	(0.005)		$	(0.012)

Operating Results		For the six months			For the six months
		ended			ended
		May 31,			May 31,
		2018			2017(Restated)
Sales	$	166,858		$	139,605
Cost of sales	$	(119,213	)	$	(75,284	)
Gross profit	$	47,645		$	64,321
Operating peExpenses	$	(701,027	)	$	(1,023,167	)
Other expenses -interest	$	(67,179	)	$	(303,139	)
Accretion	$	(58,111	)	$	(155,271	)
Change in fair value of derivative liabilities	$	(61,349	)	$	595,700
Net Loss for Period	$	(840,021	)	$	(821,556	)
Loss per Share		($0.009	)		($0.014	)

The Company’s selected information for the quarter ended May 31, 2018 (unaudited) and November 30, 2017 (audited) are as follows:

		May			November
		31, 2018			30, 2017
Total current assets		1,366,865			2,165,406
Total assets		1,508,194			2,192,357
Total current liabilities		882,502			973,558
Total liabilities		1,825,763			1,865,734
Stockholders’ (deficiency) equity		(317,569	)		326,623

Net loss for the three months ended May 31, 2018 was $484,309 ($0.005 per share) as compared to net loss of $681,588 ($0.012 per share) for the three-month period ended May 31, 2017. The major components of the change relate to:

During the quarter ended May 31, 2018, the Company expensed selling, general and administration expenses for $415,425 in the three-month period ended May 31, 2018 as compared to $525,696 for the three-month period ended May 31, 2017, thereby reflecting reduction in costs primarily in payroll and consulting.

Cash Flows

Net cash used in operations for the six months ended May 31, 2018, was $884,132 as compared to $1,031,024 used for the six months ended May 31, 2017. The major components of change relate to:

The Company’s inventory increased by $21,848 in 2018 as compared to an increase of $225,377 in 2017. This increase in inventory in prior year represents the investment in inventory available for sale in next period. Prepaid expenses and other receivables increased by $132,232 during the six-month period ended May 31, 2018 as compared to a decrease of $32,218 for six-month period ended May 31, 2017. Prepayments in current period were made to its product manufacturer and additionally for insurance.

Net cash flow from investing activities was $(121,114) during the six-month period ended May 31, 2018 as compared to $(21,703) for the six-month period ended May 31, 2017. The Company acquired patents for $110,000 and property and equipment for $11,114 during the six-month period ended May 31, 2018 and $21,703 for the six-month period ended May 31, 2017.

Net Cash flow from financing activities was outflow of $(40,357) during the six-month period ended May 31, 2018 as compared to inflow of $1,433,716 for the six-month period ended May 31, 2017. This increase in financing activities in 2017 was the net cash from convertible debentures raised during the prior period. The reduction in 2018 was the repayment of unsecured convertible debentures when they became due for repayment.

There was an overall decrease in cash of $(1,046,242) during the six-month period ended May 31, 2018 as compared to an increase in cash of $402,962 during the six-month period ended May 31, 2017.

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Liquidity and Capital Resources

As at May 31, 2018, cash and cash equivalents was $918,801, as compared to $1,965,043 at November 30, 2017. This decrease is mainly attributable to the combination of factors mentioned above under heading “Cash Flows”.

At May 31, 2018, the Company had a working capital of $484,363. The major components are as follows: cash and cash equivalents $918,801; prepaid expenses and other receivables $138,870; inventory for $179,151; accounts receivable for $130,043; derivative liabilities for $596,635 and accounts payable and accrued liabilities of $285,867.

At November 30, 2017, the Company had a working capital of $1,191,848. The major components are as follows; cash and cash equivalents $1,965,043; prepaid expenses and other receivables $6,648; accounts receivable for $36,412; inventory for $157,303; derivative liability for $539,860; unsecured convertible debentures for $40,357 and accounts payable and accrued liabilities of $393,341.

There are no assurances that the Company can continue to raise equity financing to fund its operations. SDI does not have any commitments or arrangements from any persons to provide SDI with any additional capital it may need. Without additional capital SDI will not be able to fund its anticipated capital requirements outlined above.

Off-balance sheet arrangements

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

Transactions with related parties

The following transactions are in the normal course of operations and are measured at the amount of consideration established and agreed to by related parties.

Six months ended May 31, 2018

As of May 31, 2018, there are no amounts receivable from related parties.

As of May 31, 2018, the Company had payable of $33,333 to a related party to be settled by issuance of stock and $18,241 payable to related parties to be paid by cash.

Effective as of October 1, 2017, the Company entered into an employment agreement with Paul Jensen pursuant to which Mr. Jensen serves as President and Chief Operating Officer of the Company. By the terms of the employment agreement, Mr. Jensen will receive an annual salary of $200,000, payable as follows. For the period beginning on October 1, 2017 and ending on June 30, 2018, Mr. Jensen shall receive quarterly payments of the Company’s common stock, to be issued 15 days after the end of each three-month calendar quarter (see Note 7).

The Company expensed $27,000 for services provided by the CFO of the Company which was paid to a corporation in which the CFO has an ownership interest, in accordance with the consulting contract. The Company expensed $78,600 (CAD $100,000) for services provided by the CEO of the Company and which was paid to a corporation in which the CEO has an ownership interest, in accordance with the consulting contract.

On March 27, 2017, the board of directors had granted options to the CEO to acquire a total of 1,150,000 common shares. The Company expensed $33,468 for fair value of options which vested during this period.

On April 13, 2018, the Company employed Mr. André Buys as the CTO with compensation of $10,000 per month over a three- year period. The Company expensed $16,667 during the six- month period ended May 31, 2018. On April 13, 2018, the Company granted options to Mr. André Buys to acquire a total of 1,500,000 common shares. The Company expensed $2,114 for fair value of options which vested during this period.

Effective December 1, 2017, the Company leased office premises at Wakefield, Massachusetts, USA for a rent of $700 per month from a corporation owned and controlled by a director of the Company. The Company expensed $4,200 as office rent for the six-months ended May 31, 2018.

Six months ended May 31, 2017

Effective July 21, 2016, Bryan Ganz was elected as a director of the Company. Prior to his appointment, effective May 1, 2016, the Company executed a one-year consulting agreement with Northeast Industrial Partners, LLC (“NEIP”), a Corporation in which the said director has an ownership interest. The annual compensation was $250,000 payable $50,000 in cash and $200,000 by issuance of common shares. Effective May 1, 2017, the Company and NEIP renewed the agreement for a quarterly compensation of $62,500 to be settled by issuance of common shares. The agreement was terminated on October 31, 2017. In January 2017, the Company issued 589,414 common shares at a deemed price of $0.1142 per share to satisfy the payment of USD $50,000 due on November 15, 2016. In March 2017, the Company made the third share issuance and issued 503,251 common shares at a deemed price of $0.0994 per share to satisfy the payment of USD $50,000 due on February 15, 2017. In May 2017, the Company made the fourth and final share issuance and issued 534,941 common shares at a deemed price of $0.0935 per share to satisfy the payment of USD $50,000 due on May 15, 2017. In addition, the Company executed a one-year back-office accounting and administration services agreement with NEIP effective January 1, 2017 to pay compensation of $7,500 per month. The Company expensed $37,500 for services provided during the six- month period ended May 31, 2017.

The Company expensed $15,000 for services provided by the CFO of the Company and $26,500 for services provided by a Corporation in which the CEO has an ownership interest, in accordance with the consulting contract (Note 7a). In addition, the CEO was paid a salary of $46,300 during the six-month period ended May 31, 2017 and the Company expensed $27,890 for fair value of options which vested during this period.

During the six-month period ended May 31, 2017, the Company issued options to directors. The Company expensed $114,713 for fair value of options which vested during this period.

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Compensation of Directors for six months period ended May 31, 2018 and May 31, 2017.

Six months ended May 31, 2018:

								Awards of
								Options
								or
		Paid/Payable			Stock			Warrants
Non-Independent Directors		in Cash			Awards			(1	)
Dean Thrasher (1)	$	78,600			-			33,468
Bryan Ganz	$	-			-			-
Independent Directors
Karen Bowling	$	-			-			-
Don Levantin	$	-			-			-

(1)	The fair value of options or warrants granted computed in accordance with ASC 718 on the date of grant.

Six months ended May 31, 2017:

								Awards of
								Options
								or
		Paid/Payable			Stock			Warrants
Non-Independent Directors		in Cash			Awards			(2)
Dean Thrasher (1)	$	72,800			-			27,890
Bryan Ganz (3)	$				150,000
Independent Directors
Keith Morrison	$	-			-			43,578
Karim Kanji	$	-			-			37,170
Karen Bowling	$	-			-			33,965

(1)	This includes payment to Level 4 Capital Corp., a company in which Mr. Thrasher owns a 50% interest
(2)	The fair value of options or warrants granted computed in accordance with ASC 718 on the date of grant.
(3)	Issuance of common shares to satisfy the payment of $150,000 issued to NEIP, a Corporation in which Mr. Ganz has an ownership interest.

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COMMITMENTS

a)	Consulting agreements:

The non-independent directors of the Company executed consulting agreements with the Company on the following terms:

The Company executed an employment agreement with the CEO of the Company which term extends to June 30, 2018. The CEO is to be paid an annual salary of CAD $200,000 ($156,000) plus benefits. In addition, the Company will pay a performance bonus of 3% of net profits before taxes and granted 1,150,000 stock options with a five- year expiry term (Note 5). The Company must pay four months’ pay for termination without cause or change of control.

Effective as of October 1, 2017, the Company entered into an employment agreement (the “Employment Agreement”) with Paul Jensen pursuant to which Mr. Jensen serves as President and Chief Operating Officer of the Company. By the terms of the Employment Agreement, Mr. Jensen will receive an annual salary of $200,000, payable as follows. For the period beginning on October 1, 2017 and ending on June 30, 2018, Mr. Jensen shall receive quarterly payments of the Company’s common stock, to be issued 15 days after the end of each three-month quarter. The shares issued shall be valued based upon the weighted average closing price of the Company’s shares for the twenty (20) trading days prior to the end of the applicable quarter. Commencing July 1, 2018, the Company will pay $10,000 per month in cash and the balance in Company stock. At such time as the Company can pay the entire salary in cash and be cash positive on an operating basis, the entire monthly salary will be paid in cash.

Effective December 1, 2017, the Company signed a twelve-month contract with a corporation owned and controlled by the CFO to pay annual compensation of $42,000 for CFO services. The Company paid a retainer of $10,500 and is committed to pay $2,625 on monthly basis. Early termination of the contract by the Company without cause or change in control will attract a termination payment of $20,000.

On April 13, 2018, the Company entered into a Purchase and Sale Agreement (the “Agreement”) with André Buys, a resident of South Africa, pursuant to which the Company purchased from Mr. Buys a portfolio of registered patents, provisional patents, and other intellectual property relating to air and/or gas fired long guns or pistols, including pump action launchers and munitions used with such pistols and long guns, including self-stabilizing shaped or “finned” rounds (the “Portfolio”). As consideration for the Portfolio, the Company (i) paid Mr. Buys $100,000, (ii) agreed to pay Mr. Buys either $500,000 in cash or $750,000 worth of Company stock within two years (the “Second Payment”), (iii) issued 1,500,000 options for shares of the Company’s common stock to Mr. Buys with a strike price equal to the Company’s stock price on April 13, 2018 and a trigger price of $0.30, $0.50 and $1.00 for each batch of 500,000 options, respectively. The Company’s stock price must close above the trigger price for 20 days in order for the option to be triggered. The options shall have a seven- year life from grant date and Andre Buys must remain employed by the Company for three years in order for the options or warrants to vest, and (iv) agreed to pay Mr. Buys certain royalty payments for sales of products by the Company using technology covered by the Portfolio. Until the earlier of, the second anniversary or the date the Second Payment is made, the royalty will be 10% of the Net Sales Price (“NSP”). The royalty will then be reduced to 4% till the sixth anniversary, 3% till the eighth anniversary, and 2% till the last expiration date of any of the intellectual property in the Portfolio. Until the royalty exceeds $25,000 per year, the Company is committed to a minimum payment of $25,000 per year effective on the earlier of one year from closing or upon Andre Buys relocation to Boston. In the event that the Company fails to make the Second Payment, the Portfolio would revert to Mr. Buys, but the Company would retain perpetual, irrevocable, exclusive and non-exclusive licenses to use technology with respect to the Portfolio and any technology developed within two years of April 13, 2018. In addition, the Company has hired Mr. Buys as its Chief Technology Officer at a starting salary of $10,000 per month. The Company agrees that it will not terminate Andre Buys except for cause prior to April 2021. As a result, the minimal commitment relating to the contract is $350,000 payable over a period of 35 months.

b)	Lease commitments

The Company has commitments for leasing office premises in Wakefield, Massachusetts, USA to June 27, 2019, at a monthly rent of $700.

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EXCLUSIVE SUPPLY AND PURCHASE AGREEMENTS

The Company entered a Development, Supply and Manufacturing Agreement with the BIP manufacturer on August 1, 2017. This agreement provides the Company to order and purchase only from the BIP manufacturer certain BIP assemblies and components for use by the Company to produce less-lethal and training projectiles as described in the agreement in North America. The agreement is for a term of four years with an automatic extension for additional one- year terms if neither party has given written notice of termination at least sixty (60) days prior to the end of the then- current term.

The Company entered a License and Supply Agreement with Safariland, LLC on May 1, 2017. This agreement provides the Company to license and sell only to Safariland, LLC for certain BIP standard payloads for integration with and production of certain less-lethal impact munitions in North America. This agreement is for a term of four years with an automatic extension for an additional one-year term if neither party have given written notice of termination at least ninety (90) days prior to the end of the then-current term.

Mine Safety Disclosures

Not applicable.

Revenue Recognition

The Company’s revenue recognition policies follow common practice in the manufacturing industry. The Company records revenue when it is realized, or realizable and earned. The Company considers revenue to be realized, or realizable and earned, when the following revenue recognition requirements are met: persuasive evidence of an arrangement exists; the products or services have been accepted by the customer via delivery or installation acceptance; the sales price is fixed or determinable; and collectability is probable. For product sales, the Company determines that the earnings process is complete when title, risk of loss and the right to use product has transferred to the customer.

Outstanding share data

As of July 13, 2018, the Company had 94,195,208 issued and outstanding shares of common stock.

Risk Factors

Series B secured convertible debentures (Subordinate Secured Convertible Debentures)

On December 7, 2016, the Company entered a securities purchase agreement with several accredited investors to sell $1,500,000 of 10% senior secured convertible notes, convertible into shares of the Company’s common stock, in a private placement pursuant to Regulation D under the Securities Act of 1933. Concurrent with the sale of the Secured Notes, CAD$1,363,000 ($1,015,026) of the Company’s outstanding Unsecured Debentures, were exchanged for an equal principal amount of the Subordinate Secured Debentures and an additional CAD$36,000 ($26,809) of Subordinated Secured Debentures were issued in satisfaction of a portion of the accrued interest on the Unsecured Debentures. The Company settled the debt with the Senior Secured Notes during the year and the Subordinated Secured Debentures remain outstanding and mature on June 6, 2019, unless converted or extended and are secured against the undertaking, property and assets of the Company including its patents. Inability to repay the secured debt on maturity, if the debt is neither converted nor extended, will result in the financial condition of the Company to be materially adversely affected.

Additional Financing

The Company does not have adequate revenue to fund all of its operational needs and may require additional financing to continue its operations if it is unable to generate substantial revenue growth. There can be no assurance that such financing will be available at all or on favorable terms. Failure to generate substantial revenue growth may result in the Company looking to obtain such additional financing could result in delay or indefinite postponement of the Company’s deployment of its products, resulting in the possible dilution. Any such financing will dilute the ownership interest of the Company’s shareholders at the time of the financing and may dilute the value of their shareholdings.

General Venture Company Risks

The common shares must be considered highly speculative due to the nature of the Company’s business, the early stage of its deployment, its current financial position and ongoing requirements for capital. An investment in the common shares should only be considered by those persons who can afford a total loss of investment and is not suited to those investors who may need to dispose of their investment in a timely fashion. Investors should consult with their own professional advisors to assess the legal, financial and other aspects of an investment in common shares.

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Uncertainty of Revenue Growth

There can be no assurance that the Company can generate substantial revenue growth, or that any revenue growth that is achieved can be sustained. Revenue growth that the Company has achieved or may achieve may not be indicative of future operating results. In addition, the Company may increase further its operating expenses in order to fund increase its sales and marketing efforts and increase its administrative resources in anticipation of future growth. To the extent that increases in such expenses precede or are not subsequently followed by increased revenues, the Company’s business, operating results and financial condition will be materially adversely affected.

Dependence on Management and Key Personnel

The Company is dependent on certain members of its management. The loss of the services of one or more of them could adversely affect the Company. The Company’s ability to maintain its competitive position is dependent upon its ability to attract and retain highly qualified managerial, specialized technical, manufacturing, sales and marketing personnel. There can be no assurance that the Company will be able to continue to recruit and retain such personnel. The inability of the Company to recruit and retain such personnel would adversely affect the Company’s operations and product development.

Dependence on Key Suppliers

The Company may be able to purchase certain key components of its products from a limited number of suppliers. Failure of a supplier to provide sufficient quantities on favorable terms or on a timely basis could result in possible lost sales.

Product Liability

The Company may be subject to proceedings or claims that may arise in the ordinary conduct of the business, which could include product and service warranty claims, which could be substantial. If its products fail to perform as warranted and it fails to quickly resolve product quality or performance issues in a timely manner, sales may be lost and it may be forced to pay damages. Any failure to meet customer requirements could materially affect its business, results of operations and financial condition. The occurrence of product defects and the inability to correct errors could result in the delay or loss of market acceptance of its products, material warranty expense, diversion of technological and other resources from its product development efforts, and the loss of credibility with customers, manufacturer’s representatives, distributors, value added resellers, systems integrators, original equipment manufacturers and end-users, any of which could have a material adverse effect on the Company’s business, operating results and financial conditions.

The Company currently has general liability insurance that includes product liability coverage. There is no assurance this insurance policy will cover all potential claims which may have a material adverse effect on the business or financial condition of the Company. A product recall could have a material adverse effect on the business or financial condition of the Company.

Strategic Alliances

The Company relies upon, and expects to rely upon, strategic alliances with original equipment manufacturers for the manufacturing and distribution of its products. There can be no assurance that such strategic alliances can be achieved or will achieve their goals.

Marketing and Distribution Capabilities

In order to commercialize its technology, the Company must either acquire or develop an internal marketing and sales force with technical expertise and with supporting distribution capabilities or arrange for third parties to perform these services. In order to market any of its products, the Company must either acquire or develop a sales and distribution infrastructure. The acquisition or development of a sales and distribution infrastructure would require substantial resources, which may divert the attention of its Management and key personnel and defer its product development and deployment efforts. To the extent that the Company enters into marketing and sales arrangements with other companies, its revenues will depend on the efforts of others. These efforts may not be successful. If the Company fails to develop substantial sales, marketing and distribution channels, or to enter into arrangements with third parties for those purposes, it will experience delays in product sales and incur increased costs.

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Rapid Technological Development

The markets for the Company’s products and services are characterized by rapidly changing technology and evolving industry standards, which could result in product obsolescence or short product life cycles. Accordingly, the Company’s success is dependent upon its ability to anticipate technological changes in the industries it serves and to successfully identify, obtain, develop and market new products that satisfy evolving industry requirements. There can be no assurance that the Company will successfully develop new products or enhance and improve its existing products or that any new products and enhanced and improved existing products will achieve market acceptance. Further, there can be no assurance that competitors will not market products that have perceived advantages over the Company’s products or which render the products currently sold by the Company obsolete or less marketable. Regardless of the Industry as a whole, the less lethal sector moves somewhat slower in the adaptation and integration of new products.

The Company must commit significant resources to developing new products before knowing whether its investments will result in products the market will accept. To remain competitive, the Company may be required to invest significantly greater resources then currently anticipated in research and development and product enhancement efforts and result in increased operating expenses.

Competition

The Company’s industry is highly competitive and composed of many domestic and foreign companies. The Company has experienced and expects to continue to experience, substantial competition from numerous competitors whom it expects to continue to improve their products and technologies. Competitors may announce and introduce new products, services or enhancements that better meet the needs of end-users or changing industry standards, or achieve greater market acceptance due to pricing, sales channels or other factors. Competitors may be able to respond more quickly than the Company to changes in end-user requirements and devote greater resources to the enhancement, promotion and sale of their products.

Regulation

The Company is subject to numerous federal, provincial, state and local environmental, health and safety legislation and measures relating to the manufacture of ammunition. There can be no assurance that the Company will not experience difficulties with its efforts to comply with applicable regulations as they change in the future or that its continued compliance efforts (or failure to comply with applicable requirements) will not have a material adverse effect on the Company’s results of operations, business, prospects and financial condition. The Company’s continued compliance with present and changing future laws could restrict the Company’s ability to modify or expand its facilities or continue production and could require the Company to acquire costly equipment or to incur other significant expense.

Intellectual Property

The Company’s ability to compete effectively will depend, in part, on its ability to maintain the proprietary nature of its technology and manufacturing processes. Although the Company considers certain of its product designs as well as manufacturing processes involving certain of its products to be proprietary, patents or copyrights do not protect all design and manufacturing processes. The Company has adopted procedures to protect its intellectual property and maintain secrecy of its confidential business information and trade secrets. However, there can be no assurance that such procedures will afford complete protection of such intellectual property, confidential business information and trade secrets. There can be no assurance that the Company’s competitors will not independently develop technologies that are substantially equivalents or superior to the Company’s technology.

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To protect the Company’s intellectual property, it may become involved in litigation, which could result in substantial expenses, divert the attention of its management, cause significant delays and materially disrupt the conduct of its business.

Infringement of Intellectual Property Rights

While the Company believes that its products and other intellectual property do not infringe upon the proprietary rights of third parties, its commercial success depends, in part, upon the Company not infringing intellectual property rights of others. A number of the Company’s competitors and other third parties have been issued or may have filed patent applications or may obtain additional patents and proprietary rights for technologies similar to those utilized by the Company. Some of these patents may grant very broad protection to the owners of the patents. The Company has not undertaken a review to determine whether any existing third- party patents or the issuance of any third- party patents would require the Company to alter its technology, obtain licenses or cease certain activities. The Company may become subject to claims by third parties that its technology infringes their intellectual property rights due to the growth of products in its target markets, the overlap in functionality of those products and the prevalence of products. The Company may become subject to these claims either directly or through indemnities against these claims that it provides to end-users, manufacturer’s representatives, distributors, value added resellers, system integrators and original equipment manufacturers.

Litigation may be necessary to determine the scope, enforceability and validity of third party proprietary rights or to establish the Company’s proprietary rights. Some of its competitors have, or are affiliated with companies having, substantially greater resources than the Company and these competitors may be able to sustain the costs of complex intellectual property litigation to a greater degree and for a longer period of time than the Company. Regardless of their merit, any such claims could be time consuming to evaluate and defend, result in costly litigation, cause product shipment delays or stoppages, divert management’s attention and focus away from the business, subject the Company to significant liabilities and equitable remedies, including injunctions, require the Company to enter into costly royalty or licensing agreements and require the Company to modify or stop using infringing technology.

The Company may be prohibited from developing or commercializing certain technologies and products unless it obtains a license from a third party. There can be no assurance that it will be able to obtain any such license on commercially favorable terms or at all. If it does not obtain such a license, it could be required to cease the sale of certain of its products.

Health and Safety

Health and safety issues related to its products may arise that could lead to litigation or other action against the Company or to regulation of certain of its product components. The Company may be required to modify its technology and may not be able to do so. It may also be required to pay damages that may reduce its profitability and adversely affect its financial condition. Even if these concerns prove to be baseless, the resulting negative publicity could affect the Company’s ability to market certain of its products and, in turn, could harm its business and results from operations.

Stress in the global financial system may adversely affect the Company’s operations in ways that may be hard to predict or to defend against

Recent events have demonstrated that businesses and industries throughout the world are very tightly connected to each other. Thus, events seemingly unrelated to the Company, or to its industry, may adversely affect its finances or operations in ways that are hard to predict or defend against. For example, credit contraction in financial markets may hurt the Company’s ability to access credit when it is needed or rapid changes in foreign exchange rates may adversely affect financial results. Finally, a reduction in credit, combined with reduced economic activity, may adversely affect businesses and industries that collectively constitute a significant portion of the Company’s customer base. As a result, these customers may need to reduce their purchases of the Company’s products, or there may be greater difficulty in receiving payment for the products that these customers purchase from the Company. Any of these events, or any other events caused by turmoil in world financial markets, may have a material adverse effect on the business, operating results, and financial condition.

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Insurance and Uninsured Risks

The Company’s business is subject to a number of risks and hazards including industrial accidents, labor disputes and changes in the regulatory environment. Such occurrences could result in damage to equipment, personal injury or death, monetary losses and possible legal liability. Although the Company maintains liability insurance in amounts which it considers adequate, the nature of these risks is such that liabilities might exceed policy limits, the liabilities and hazards might not be insurable, or the Company may elect not to insure against such liabilities due to high premium costs or other reasons, in which event the Company could incur significant costs that could have a materially adverse effect upon its financial position.

Conflicts of Interest

Certain directors and officers of the Company are or may become associated with other companies in the same or related industries which may give rise to conflicts of interest. Directors who have a material interest in any person who is a party to a material contract or a proposed material contract with the Company are required, subject to certain exceptions, to disclose that interest and generally abstain from voting on any resolution to approve the contract. In addition, the directors and the officers are required to act honestly and in good faith with a view to the best interests of the Company. The directors and officers of the Company have either other full-time employment or other business, or time restrictions placed on them and accordingly, the Company will not be the only business enterprise of these directors and officers.

Dividend Policy

The Company has not paid dividends in the past and has no plans to pay dividends for the foreseeable future. The future dividend policy of the Company will be determined by its directors.

Lack of Active Market

There can be no assurance that an active market for the common shares will continue and any increased demand to buy or sell the common shares can create volatility in price and volume.

Market Price of Common Shares

There can be no assurance that an active market for the common shares will be sustained. Securities of small and midcap companies have experienced substantial volatility in the past, often based on factors unrelated to the financial performance or prospects of the companies involved. These factors include global economic developments and market perceptions of the attractiveness of certain industries. The price per common share is also likely to be affected by change in the Company’s financial condition or results of operations as reflected in its quarterly filings. Other factors unrelated to the performance of the Company that may have an effect on the price of common shares include the following: the extent of analytical coverage available to subscribers concerning the business of the Company may be limited if investment banks with research capabilities do not follow the Company’s securities; lessening in trading volume and general market interest in the Company’s securities may affect a subscriber’s ability to trade significant numbers of common shares, the size of the Company’s public float may limit the ability of some institutions to invest in the Company’s securities; a substantial decline in the price of the common shares that persists for a significant period of time could cause the Company’s securities to be delisted from the exchange, further reducing market liquidity. If an active market for the common shares does not continue, the liquidity of a subscriber’s investment may be limited, and the price of the common shares may decline. If such a market does not develop, subscribers may lose their entire investment in the common shares.

Political Regulatory Risks

Any changes in government policy may result in changes to laws affecting the sale of the Company’s products. This may affect the Company’s ability to ship product in the future. The possibility that future governments may adopt substantially different policies, may also affect the Company’s operations. Local governments in all countries the Company deals with issue end user certificates to purchase or receive live ammunition from the Company. It is the decision of these countries in the Middle East, the United States, Canada, Europe, and the Baltics whether or not they will take possession or purchase such munitions.

Dividends

The Company has not, since the date of its in Company, declared or paid any dividends on its Common Shares and does not currently intend to pay dividends. Earnings, if any, will be retained to finance further growth and development of the business of the Company.

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PART II

Legal proceedings

None

Item 4. Controls and Procedures.

(a) SDI maintains a system of controls and procedures designed to ensure that information required to be disclosed in reports filed or submitted under the Securities Exchange Act of 1934, as amended (“1934 Act”), is recorded, processed, summarized and reported, within time periods specified in the SEC’s rules and forms and to ensure that information required to be disclosed by SDI in the reports that it files or submits under the 1934 Act, is accumulated and communicated to SDI’s management, including its Principal Executive Officer and Principal Financial Officer, as appropriate to allow timely decisions regarding required disclosure. As of May 31, 2018, SDI’s Principal Executive Officer and Principal Financial Officer evaluated the effectiveness of the design and operation of SDI’s disclosure controls and procedures. Based on that evaluation, SDI’s Principal Executive Officer and Principal Financial Officer concluded that SDI’s disclosure controls and procedures were not effective due to the following material weakness:

Inherent in any small business is the pervasive problem involving segregation of duties. Since SDI has a small accounting department, segregation of duties cannot be completely accomplished at this stage in its corporate lifecycle.

In order to correct the foregoing material weakness, we have taken and are taking the following remediation measures that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting:

	•	We have several Directors with business experience and spending time with the business.
	•	We have established an audit committee of our board of directors. The audit committee will provide oversight of our accounting and financial reporting;

Accordingly, SDI’s management has added compensating controls to reduce and minimize the risk of a material misstatement in SDI’s annual and condensed interim consolidated financial statements.

(b) Changes in Internal Controls. There were no changes in SDI’s internal control over financial reporting during the quarter ended May 31, 2018 that materially affected, or are reasonably likely to materially affect, its internal control over financial reporting.

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Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

None

Item 3. Defaults Upon Senior Securities

None

Item 4. Mine Safety Disclosures

Not applicable

Item 5. Other Information

None

Item 6. Exhibits

Exhibits
10.1	Purchase and sale agreement
31.1	Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 for Dean Thrasher.
31.2	Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 for Rakesh Malhotra.
32	Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 for Dean Thrasher and Rakesh Malhotra.

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

SECURITY DEVICES INTERNATIONAL, INC.

Date: July 13, 2018
	By: /s/ Dean Thrasher
	Dean Thrasher, Principal Executive Officer
Date: July 13, 2018
	By: /s/ Rakesh Malhotra
	Rakesh Malhotra, Principal
	Financial and Accounting Officer

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