TABLE OF CONTENTS

PART 1 – FINANCIAL INFORMATION

SECURITY DEVICES INTERNATIONAL,BYRNA TECHNOLOGIES INC.

InterimCondensed Consolidated Balance Sheets
As at August 31, 2017

(Amounts in thousands, except share and November 30, 2016
(Amounts expressed in US Dollars)per share data)

See condensedaccompanying notes to the interimunaudited condensed consolidated financial statements.

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SECURITY DEVICES INTERNATIONAL,BYRNA TECHNOLOGIES INC.

InterimCondensed Consolidated Statements of Operations and Comprehensive loss
For the Nine monthsLoss

(Amounts in thousands except share and Three months Ended August 31, 2017 and August 31, 2016
(Amounts expressed in US Dollars)
per share data)

(Unaudited)

See condensedaccompanying notes to the interimunaudited condensed consolidated financial statements.

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BYRNA TECHNOLOGIES INC.

SECURITY DEVICES INTERNATIONAL, INC.
InterimCondensed Consolidated Statements of Cash Flows
For the Nine Months Ended August 31, 2017 and August 31, 2016
(Amounts expressed in US Dollars)
(Unaudited)

See condensedaccompanying notes to the interimunaudited condensed consolidated financial statements.

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BYRNA TECHNOLOGIES INC.

SECURITY DEVICES INTERNATIONAL, INC.
InterimCondensed Consolidated StatementStatements of Changes in Stockholders’Stockholders’ Equity (Deficiency)

SECURITY DEVICES INTERNATIONAL,BYRNA TECHNOLOGIES INC.

Notes to InterimCondensed Consolidated Financial Statements
August (Unaudited)

For the three and six months ended May 31, 2017
(Amounts expressed2023 and 2022

Byrna Technologies Inc. (the “Company” or “Byrna”) is a non-lethal defense technology company, specializing in US Dollars)
(Unaudited)next generation solutions for security situations that do not require the use of lethal force. Byrna personal security devices are non-lethal self-defense devices that are powered by CO2 and fire .68 caliber spherical kinetic and chemical irritant projectiles. The Company added pepper sprays to its non-lethal defense product line with an acquisition in May 2022.  See Note 6, "Acquisitions" for additional information.  These products are sold in both the consumer and security professional markets. The Company operates two manufacturing facilities, a 30,000 square foot facility in located in Fort Wayne, Indiana and a 20,000 square foot manufacturing facility located in Pretoria, South Africa.

The Company was incorporated under the laws of the state of Delaware on March 1, 2005.  On February 3, 2014

From inception to May 31, 2023, the Company incorporated a wholly owned subsidiary in Canada “Security Devices International Canada Corp”. The interim unaudited consolidated financial statements for the period ended August 31, 2017 include the accountshad incurred an accumulated deficit of  Security Devices International, Inc. (the “Company” or “SDI” ), and its subsidiary Security Devices International Canada Corp. All material inter-company accounts and transactions have been eliminated.

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SECURITY DEVICES INTERNATIONAL, INC.
Notes to Interim Consolidated Financial Statements
August 31, 2017
(Amounts expressed in US Dollars)
(Unaudited)

In addition to raising funds in the prior years, the Company raised $649,750 by issuance of 2,165,834 common shares during the year ended November 30, 2012. On August 15, 2013, the Company filed an amended and restated final prospectus (the “Prospectus”) in Canada, in the provinces of Alberta, British Columbia and Ontario for listing its shares in these provinces in Canada. On August 27, 2013, the Company completed an initial public offering to raise gross proceeds of CAD $3,993,980 (US $3,794,280) through the issuance of 9,984,950 Common Shares at a price of CAD $0.40 (US $0.38) per Common Share (the “Issue Price”). During the year ended November 30, 2014, the Company issued $1,398,592 (CAD $1,549,000) face value 12% convertible debentures with a term to August 6, 2017 (the “Maturity Date”) and raised net $1,241,299. In 2015, the Company raised $2,500,000 through the issuance of 7,575,757 common shares and also issued 105,600 common shares on exercise of warrants for $16,775 and 35,000 common shares on exercise of options for $6,995. During the quarter ended February 28, 2017, the Company issued $1,500,000 face value 10% convertible debentures with a term to June 6, 2019 (the “Maturity Date”). The Company’s common shares commenced trading on the TSX Venture Exchange (“TSX”) under the symbol “SDZ”.

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SECURITY DEVICES INTERNATIONAL, INC.
Notes to Interim Consolidated Financial Statements
August 31, 2017
(Amounts expressed in US Dollars)
(Unaudited)

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:

100,000,000* 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 (refer to note 13-subsequent events).

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.

56,732,099 Common shares (November 30, 2016: 55,104,493 Common shares)

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SECURITY DEVICES INTERNATIONAL, INC.
Notes to Interim Consolidated Financial Statements
August 31, 2017
(Amounts expressed in US Dollars)
(Unaudited)

Year ended November 30, 2016

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 a Corporation in which the said director has an ownership interest. For the consultant services, the consultant was paid cash for $50,000 and issued a value of $200,000 in Company’s stock in four quarterly instalments over the 12-month period ending May 15, 2017. In September 2016, the Company issued 488,851 common stock to the consultant being the first quarterly instalment for a value of $50,000 which was due August 15, 2016.

Nine- months ended August 31, 2017

In January 2017, the Company made the second share issuance to Northeast Industrial Partners under the consulting agreement announced on June 20, 2016. The Company issued 589,414 common shares at a price of $0.1142 per share to satisfy the payment of USD $50,000 due on November 15, 2016. The issuance of shares to Northeast Industrial Partners is the second of four such issuances to occur over the period ending May 15, 2017. (See note 7)

In March 2017, the Company made the third share issuance to Northeast Industrial Partners under the consulting agreement announced on June 20, 2016. The Company issued 503,251 common shares at a price of $0.0994 per share to satisfy the payment of USD $50,000 due on February 15, 2017. The issuance of shares to Northeast Industrial Partners is the third of four such issuances to occur over the period ending May 15, 2017. (See note 7)

In May 2017, the Company made the fourth and final share issuance to Northeast Industrial Partners under the consulting agreement announced on June 20, 2016. The Company issued 534,941 common shares at a price of $0.0935 per share to satisfy the payment of USD $50,000 due on May 15, 2017. The issuance of shares to Northeast Industrial Partners is the fourth and final of four such issuances to occur over the period ending May 15, 2017. (See note 7)

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SECURITY DEVICES INTERNATIONAL, INC.
Notes to Interim Consolidated Financial Statements
August 31, 2017
(Amounts expressed in US Dollars)
(Unaudited)

Year ended November 30, 2016

Warrants:

On June 9, 2016, the board of directors extended the expiry dates of 400,000 warrants issued in 2012 to a director at exercise price of $0.20, from original expiry date of August 9, 2016 to August 7, 2020. The change in the terms of the warrants was determined to be a modification and not a cancellation and issuance of a new warrant. As a result of these modifications, the fair value of 400,000 warrants increased by $49,912.

Fair value of warrants was calculated using the Black Scholes option pricing model with the following assumptions:

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SECURITY DEVICES INTERNATIONAL, INC.
Notes to Interim Consolidated Financial Statements
August 31, 2017
(Amounts expressed in US Dollars)
(Unaudited)

Stock Options:

On August 18, 2016, the board of directors granted options to a consultant to acquire a total of 25,000 common shares. These options were issued at an exercise price of $0.11 (CAD $0.14) 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 calculated using the Black-Scholes option pricing model with the following assumptions:

On October 20, 2016, the board of directors granted options to a new director to acquire a total of 350,000 common shares. These options were issued at an exercise price of $0.08 (CAD $0.11) 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 calculated using the Black-Scholes option pricing model with the following assumptions:

As of November 30, 2016, there was $Nil of unrecognized expense related to non-vested stock-based compensation arrangements granted.

Nine- month period ended August 31, 2017

Warrants:

The Company did not issue any warrants during the nine- month period ended August 31, 2017.

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SECURITY DEVICES INTERNATIONAL, INC.
Notes to Interim Consolidated Financial Statements
August 31, 2017
(Amounts expressed in US Dollars)
(Unaudited)

Nine- month period ended August 31, 2017-Cont’d

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 $0.10 (CAD $0.13) 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 calculated using the Black-Scholes option pricing model with the following assumptions:

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 $0.15 (CAD $0.20) 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 calculated using the Black-Scholes option pricing model with the following assumptions:

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 $0.16 (CAD $0.20) 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 calculated using the Black-Scholes option pricing model with the following assumptions:

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 $0.16 (CAD $0.20) per share and vest immediately and expire August 16, 2022. The fair value of each option used for the purpose of estimating the stock compensation is calculated using the Black-Scholes option pricing model with the following assumptions:

As of August 31, 2017, there was $55,781 of unrecognized expense related to non-vested stock-based compensation arrangements granted.

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SECURITY DEVICES INTERNATIONAL, INC.
Notes to Interim Consolidated Financial Statements
August 31, 2017
(Amounts expressed in US Dollars)
(Unaudited)

The Company expensed $27,000 for services provided by the CFO of the Company and $32,300 for services provided by two Corporations in which the CEO has an ownership interest, in accordance with the consulting contract. In addition, the CEO was paid a salary of $78,500 during the nine- month period ended August 31, 2017.

During the nine- month period ended August 31, 2017, the Company issued options to directors. The Company expensed $169,970 for fair value of options which vested during this period.

Nine months ended August 31, 2016

The directors were compensated as per their consulting agreements with the Company. The Company expensed a total of $208,400 as management fees to two of its directors in their role as officers in accordance with their consulting contracts, which included $57,600 paid on full and final settlement to one director in his role as CEO on his resignation and termination effective July 15, 2016, and also expensed a total of $5,900 as automobile allowance. In addition, the Company expensed $42,200 as a consulting fee to an independent director for services provided.

The Company expensed $16,400 for services provided by the CFO of the Company and $154,900 for services provided by a Corporation in which the Chief Operating Officer (who was later elected interim CEO and President effective July 16, 2016) has an ownership interest, in accordance with the consulting contract.

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 a Corporation in which the said director has an ownership interest. The said Corporation was paid cash of $25,000 in May, 2016 and $25,000 in June, 2016.

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SECURITY DEVICES INTERNATIONAL, INC.
Notes to Interim Consolidated Financial Statements
August 31, 2017
(Amounts expressed in US Dollars)
(Unaudited)

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 $150,000 (CAD $200,000) 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. The Company must pay 4 months of pay for termination without cause.

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. In January, 2017, the Company issued 589,414 common shares at a 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 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 price of $0.0935 per share to satisfy the payment of USD $50,000 due on May 15, 2017. Effective May 1, 2017, the Company and NEIP renewed the agreement for the period of time until such date as either of them terminates the original contract on not less than 15 days prior written notice to the other party. For services rendered by NEIP during the extension, SDI shall pay NEIP $62,500 within 15 days following every consecutive three-month period during the extension. All payments of the consulting fee during the extension shall be made by the issuance of common shares in the capital of SDI. The number of shares issued is calculated by dividing the volume weighted average trading price per SDI common shares for the 20 day period proceeding the due date.  (see also Note 13-subsequent events)

Effective January 1, 2017, the Company executed a one-year service agreement with NEIP a Corporation in which Bryan Ganz, Director has an ownership interest to pay compensation of $7,500 per month. The said Corporation will assist the Company with administrative services which will include accounting, production, inventory management and human resources. The agreement is for a period of one year and can be terminated by either party by giving 60 days’ notice in writing.

Effective April 2014, SDI executed an agreement with a non-related consultant to set up its social media sites and optimization of search engines for the Company, at a start- up fee for $2,250 (CAD$3,000) (Phase 1) and payment of $2,250 (CAD$3,000) per month and issued 150,000 stock options at $0.32 (CAD$0.38) when Phase 2 of the project was implemented. Either party can terminate the agreement by giving 30 days’ notice.

b) The Company has commitments for leasing office premises in Oakville, Ontario, Canada to April 30, 2018 at a monthly rent of $4,800 (CAD $6,399).

c) Effective January 1, 2017, the Company executed a commercial lease for leasing warehouse space in Perry, Florida. The lease is for an initial three-year term at a monthly lease payment of $3,250. The said lease can be renewed for an additional three-year term with a 10% increase. Effective August 31, 2017, both parties terminated this lease.

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SECURITY DEVICES INTERNATIONAL, INC.
Notes to Interim Consolidated Financial Statements
August 31, 2017
(Amounts expressed in US Dollars)
(Unaudited)

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. 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.

On August 6, 2014, the Company issued a Canadian $1,549,000 face value 12% convertible debentures with a term to August 6, 2017 (the “Maturity Date”). At any time while the debentures are outstanding, the holder has the option to convert the outstanding principal of the debentures into common shares of the Company at a fixed conversion price of CAD $0.50 per share. At any time after February 6, 2015, the Company has the right to force the conversion of the debentures into common shares at a price of at least CAD$0.65 per common share for a period of at least 20 consecutive trading days. If the common shares do not trade on any trading day and the bid price of the common Shares is CAD $0.65 or greater, the common shares shall be deemed to have traded at a price of at least CAD $0.65 on that trading day. Additionally, the Company has the right to redeem the debentures, in whole or in part, (a) during the 12 months ending August 6, 2015, at a premium of 15% to the principal amount being redeemed plus any accrued interest, (b) during the 12 months ending August 6, 2016, at a premium of 5% to the principal amount being redeemed plus any accrued interest, (c) during the 12 months ending August 6, 2017, at a premium of 2% to the principal amount being redeemed plus any accrued interest. In connection with the financing, the Company issued warrants to placement agents to purchase 151,900 shares of common stock at an exercise price of CAD $0.50 per share. Additionally, the Company incurred $157,293 (CAD $174,209) in financing fees.

The Company evaluated the terms and conditions of the convertible debentures and placement agent warrants under the guidance of ASC 815. The conversion feature met the definition of conventional convertible for purposes of applying the conventional convertible exemption. The definition of conventional contemplates a fixed number of shares issuable under the arrangement. The instrument was convertible into a fixed number of shares and there were no down round anti-dilution protection features contained in the contracts. The Company was required to consider whether the hybrid contract embodied a beneficial conversion feature (“BCF”). The debentures did not result in a BCF because the conversion price was not in the money on the inception date. There were no terms or features contained in the warrant agreement that would preclude the warrants from achieving equity classification.

The following table reflects the allocation of the purchase on the financing date:

As of November 30, 2016, these unsecured convertible debentures, net of unamortized deferred financing costs, were recorded at $ 1,117,771 on exchange rate conversion.

On December 7, 2016, the Company entered 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, $1,015,026 (CAD$1,363,000) 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.

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SECURITY DEVICES INTERNATIONAL, INC.
Notes to Interim Consolidated Financial Statements
August 31, 2017
(Amounts expressed in US Dollars)
(Unaudited)

Unsecured convertible debentures

On August 6, 2017, the Company repaid $66,640 of convertible debentures and balance convertible debenture holders for $76,125 executed agreements for forbearance of their debt with new repayment date to February 16, 2018.

The $1,015,026 (CAD$1,363,000) of Subordinate Secured Debentures were issued pursuant to the Indenture in exchange for the Unsecured Debentures in equal principal amount and an additional $26,809 (CAD$36,000) of Subordinate Secured Debentures were issued pursuant to the Indenture in payment of accrued interest. The Subordinate Secured Debentures mature on June 6, 2019 and bear interest at 12% per annum payable, semiannually.

The Subordinate Secured Debentures are convertible into common shares of the Company’s Common Stock at the Note Conversion Price so long as any Secured Notes are outstanding, and thereafter, subject to adjustment as set forth in the Indenture.

On December 7, 2016, the Company issued a $1,500,000 10% secured convertible debenture with a term to June 9, 2019 (the “Maturity Date”). The holder has the option to convert the outstanding principal and interest into common stock at a conversion price of $0.24 per share. The conversion price is subject to adjustments in the event of subsequent equity issuances at a price per share below $0.24.

The Company has evaluated the terms and conditions of the convertible bridge loan and detachable warrants under the guidance of ASC 815. Even though the instrument's conversion price used to calculate the settlement amount is not fixed the embedded conversion feature is still considered “indexed to an entity's own stock” under the guidance of ASC 815 because the only variables that could affect the settlement amount are inputs to the fair value of a fixed-for-fixed forward or option on equity shares. However, the conversion feature did not meet the conditions for equity classification provided in paragraphs 11 through 35 of ASC 815-40-25 because due the contracts contain a security agreement which requires the posting of collateral. Therefore, the conversion feature requires bifurcation and liability classification.

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SECURITY DEVICES INTERNATIONAL, INC.
Notes to Interim Consolidated Financial Statements
August 31, 2017
(Amounts expressed in US Dollars)
(Unaudited)

The following table reflects the allocation of the purchase on the financing date:

For the nine months ended August 31, 2017 the Company recorded amortization of debt discount in the amount of $174,038, amortization of deferred financing costs in the amount of $30,146, and accrued interest of $109,727.

The interest due and payable on May 31, 2017 remained unpaid. The Company and the holder agreed that the unpaid installment of interest will accrue and be paid on October 31, 2017.

The following tables summarize the components of our derivative liabilities and linked common shares as of August 31, 2017:

The following table summarizes the amounts that were reflected in our income related to our derivatives for the nine months ended August 31, 2017:

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SECURITY DEVICES INTERNATIONAL, INC.
Notes to Interim Consolidated Financial Statements
August 31, 2017
(Amounts expressed in US Dollars)
(Unaudited)

Current accounting principles that are provided in ASC 815 -Derivatives and Hedgingrequire derivative financial instruments to be classified in liabilities and carried at fair value with changes recorded in income. In addition, the standards do not permit an issuer to account separately for individual derivative terms and features embedded in hybrid financial instruments that require bifurcation and liability classification as derivative financial instruments. Rather, such terms and features must be bundled together and fair valued as a single, compound embedded derivative. We have selected the Monte Carlo Simulations valuation technique to fair value the compound embedded derivative because we believe that this technique is reflective of all significant assumption types, and ranges of assumption inputs, that market participants would likely consider in transactions involving compound embedded derivatives. Such assumptions include, among other inputs, interest risk assumptions, credit risk assumptions and redemption behaviors in addition to traditional inputs for option models such as market trading volatility and risk- free rates. We have selected Binomial Lattice to fair value our warrant derivatives because we believe this technique is reflective of all significant assumption types market participants would likely consider in transactions involving freestanding warrants derivatives. The Monte Carlo Simulations (“MCS”) technique is a level three valuation technique because it requires the development of significant internal assumptions in addition to observable market indicators.

Significant inputs and results arising from the Monte Carlo Simulations process are as follows for the share purchase options that have been bifurcated from our debentures and classified in liabilities as of August 31, 2017 and December 7, 2016 (Inception):

The following table reflects the issuances of compound embedded derivatives during the nine months ended August 31, 2017.

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SECURITY DEVICES INTERNATIONAL, INC.
Notes to Interim Consolidated Financial Statements
August 31, 2017
(Amounts expressed in US Dollars)
(Unaudited)

Nine months ended August 31, 2016

Nine months ended August 31, 2017

Nine months ended August 31, 2016

On August 10, 2017, the Company issued a promissory note to a director of the Company for cash advance receipt for $70,640 (CAD $89,040). Interest is payable on the said note at 12% per annum. Both the principal and interest are due and payable on February 16, 2018. The Company accrued $490 as interest for the period ended August 31, 2017.

In September 2017, the Company made the first share issuance to NEIP under the renewed consulting agreement effective May 1, 2017. The Company issued 498,423 common shares at a price of $0.125 per share to satisfy the payment of $62,500 due for the period May1, 2017 to July 31, 2017, on August 15, 2017. The shares are subject to a four-month hold period. Northeast Industrial Partners is controlled by Bryan Ganz, who was appointed to the board of directors of SDI after the consulting agreement was entered.

Effective September 7, 2017, Keith Morrison and Karim Kanji resigned as members of the Board of directors.

Effective October 1, 2017, the Company appointed Paul Jensen as President and COO of the Company at a compensation of $200,000 per annum. From October 1, 2017 through June 30, 2018, the salary is payable entirely by issue of Company stock, to be issued 15 days after the end of each calendar quarter. Commencing July 1, 2018, the Company will pay $10,000 per month in cash and the balance in Company stock. At such time the Company can pay the entire salary in cash and be cash positive, the entire monthly salary will be paid in cash.

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.

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PART II

Item2.MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND PLAN OFOPERATION

THREE MONTHS ENDED AUGUST 31, 2017

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, 2016.

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 most 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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Business

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.

In the fall of 2010 the Company underwent a change in the board of directors and management. This precipitated a change in the direction of the company as development of the WEP was discontinued and the company shifted its focus to a new product – the 40mm Blunt Impact Projectile (BIP). The Company concluded that the cost and time required to complete development and testing of the BIP were significantly less than that required to complete development and testing of the WEP. The goal was to develop a product that it could bring to market more quickly. The Company was able to exploit some of the patent pending technology of the WEP into the BIP. In 2011, the Company moved its engineering, intellectual property and production facilities to the operator (the “BIP Manufacturer”) of an injection molding facility outside of Boston, Massachusetts.

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 round 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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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 feet and 100 feet. SDI has been in discussions several industry players about licensing SDI’s technology.

Early in 2011 the Company focused its attention on a new 40mm product, the blunt impact projectile (“BIP”), and discontinued further development work on the WEP.

2012

In June 2012, the Company contracted CRT Less Lethal Inc. (“CRT”) to test the BIP. Based on data obtained from the three-stage evaluation, the BIP passed the CRT testing protocol for accuracy, consistency, relative safety and effectiveness.

In July 2012, the Company signed a five-year development, supply and manufacturing agreement with a subcontractor to Manufacture the BIP.

In November 2012, the Company obtained a United States Department of Transportation number (DOT#) required in order for the Company to ship BIP rounds.

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In 2012, the Company began the development of six new less-lethal ammunition rounds. These new rounds will be a modified version of the BIP, four of which carry a payload, including; BIP MP (temporary powder-based marking agent), BIP ML (semi-permanent liquid marking agent), BIP OC (Oleoresin Capsicum - a pepper spray powder), BIP CS (tear gas powder), BIP MO (malodorant liquid), and the BIP TR (training round).

2013

The Company moved its full manufacturing and supply chain operations to the BIP manufacturer, a supply manufacturing and engineering company, in the Boston, MA area.

The Company undertook an Initial Public Offering (IPO) in January and became a public reporting issuer on the TSX-Venture Exchange in September 2013.

2014

SDI began another globally recognized testing protocol with a military agency called HECOE (the Human Effects Centre of Excellence). This world-renowned agency is located in the Air Force Research Laboratory (AFRL), in partnership with the US Joint Non-lethal Weapons Directorate (JNLWD). This group conducts research to assist Non-lethal Weapon (NLW) Program Managers across the U.S. Department of Defense (DoD) in assessing effectiveness and risks of NLWs. The positive conclusion of this testing allows the DOD to purchase SDI rounds.

April - SDI appointed Keith Morrison to the board of directors as non-executive Chairman

May - SDI’s BIP rounds were used at the Mock Prison Riot in West Virginia. Law enforcement and correctional services officers provided feedback on new technologies (such as SDI’s products) to assist in the effectiveness of their jobs.

August - The Company completed the issuance of 1,549 convertible unsecured debentures at $1,000 per debenture for gross proceeds of $1,549,000 (the “Private Placement”).

October - Security Devices International Inc. announced that the Company and a division of Abrams Airborne Manufacturing Inc. (AAMI), namely Milkor USA (MUSA), have agreed to partner for a joint cross-selling / marketing initiative.

November - The Company named Karim Kanji to the board of directors as an independent member.

SDI has sold their BIP products into nine new agencies during the fiscal year of 2014 including Sheriff Departments, Correctional Services, and SWAT teams in; Saskatoon, SK, Watertown, SD, Abbotsford, BC, Sacramento, CA, Kingston, ON, Rustburg, VA, Orlando, FL, Montreal, QC, and Bedford, VA. These agencies are additions to SDI’s customer base that have adopted its 40mm less-lethal rounds.

2015

In January 2015, SDI commenced a public relations program and through the year, SDI has been featured in over 800 media outlets globally, including live interviews on FOX television, News One in New York, and CP24 in Toronto.

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During the second quarter, SDI attended the American Jail Association’s annual conference in North Carolina and performed a live fire demonstration to numerous State and local Agencies while in North Carolina.

During Q2, SDI also attended the Canadian Tactical Conference in Collingwood, Ontario as well as the New York Tactical Conference in Verona, New York.

Through SDI’s distributor (U.S. Tactical Supply– GSA) the Company was able to leverage their relationship to facilitate a live-fire demonstration for the Pentagon Protection Force in Alexandria, Virginia.

In May - SDI participated in the “Mock Prison Riot” which takes place annually at a decommissioned penitentiary in Moundsville, West Virginia. The Mock Prison Riot is a four-day, comprehensive law enforcement and corrections tactical and technology experience, including 40,000 square feet of exhibit space, training scenarios, technology demonstrations, certification workshops, a Skills Competition, and unlimited opportunities for feedback and networking on a global scale.

SDI staff attended the Ohio Tactical officers conference in June where the Company not only had a full exhibit booth set up to bring awareness to SDI’s full line of less lethal 40MM products but also conducted live fire demonstrations to several agencies. These agencies had requested seeing the projectiles fired to move forward with evaluation of SDI’s products for potential inclusion in their less lethal arsenal.

July - SDI was invited to present the company’s full line of products to the New York City Police Department. Representatives of SDI attended the NYPD range and conducted in-class presentations followed by a live fire demonstration showcasing the full line on 40MM products that SDI can offer for Law Enforcement operational missions.

July - The Associated Press (“AP”), conducted interviews with SDI management and attended SDI’s manufacturing partners’ location for an in depth look at the company and the technology. The AP completed a story on the uniqueness of the product line and the increased element of safety that SDI’s products offer, and released the story to the newswire, where it was picked up by over 800 media outlets, worldwide.

August - SDI was invited to present to the Toronto Police Service (“TPS”), who are currently exploring less lethal options for front line officers. A full presentation was given to decision makers of the TPS and a follow-up live fire demonstration is to occur.

September – SDI conducted their Annual General Meeting and shareholders approved the following:

In FY2015, SDI added 24 new Law Enforcement and Correctional Agencies to its paid customer base. The Company as at fiscal yearend holds 40 agencies as customers.

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Q1 FY2016

In December 2015, SDI was invited to conduct a full product briefing and live fire demonstration for key Management with the United Sates Federal Bureau of Prisons. SDI was able to showcase the innovation of the BIP family of products and demonstrate the clear difference between SDI’s products and other products on the market.

In January 2016, SDI management attended the SHOT show in Las Vegas and met with numerous existing partners and explored future partnerships with several other Industry leaders.

During the SHOT show SDI’s rounds were used by AAMI, an existing partner of SDI, during a new product innovation range day that was attended by the majority of Companies in the firearms industry.

During Q1, SDI announced that it received its first sale of 40MM launchers to a Law Enforcement Agency. This is an important step for SDI to be seen as having the availability to access other less lethal products to fulfil customer requests.

In January, SDI and Clyde Armory, signed a distribution agreement whereas Clyde will offer SDI’s product line to Law Enforcement customers in their catchment area. Clyde is a full service gun store which supplies firearms, ammunition and accessories to Law Enforcement and Civilian customers. They are based in Athens, Georgia.

During this quarter, the non-exclusive renewable Technology License and Supply Agreement that was signed with United Tactical Solutions on April 17, 2015, was terminated by SDI management effective February 25, 2016.

On February 29, 2016, SDI signed a term sheet with an existing defense technology (less lethal) company to acquire that Company. This acquisition, if completed, will give SDI a diversified line of less lethal munitions, launchers and accessories as well as opening domestic and global distribution channels.

Q2 FY2016

During the second quarter of 2016, the Company continued to pursue the targeted acquisition through several funding sources, and financing structures. Subsequent to the quarter, on July 8, 2016, the Company announced that it had identified a number of items in the target company’s (the “Target”) financial statements that raised concerns in support of the negotiated price of the transaction. SDI has terminated discussions with the Target at this time.

Subsequent to the quarter, the Company announced that Gregory Sullivan had resigned as President and CEO to pursue other opportunities, effective July 15, 2016. Dean Thrasher, the current COO and a member of the SDI board of directors will assume the interim role of President and CEO. Mr. Sullivan will remain on the board of directors until his replacement is appointed and receives stock exchange clearance, or September 1, 2016, whichever occurs first.

The Company signed a one-year consulting agreement with Northeast Industrial Partners LLP (“Northeast”), which is headed up by Mr. Bryan Ganz. Northeast will assist SDI with sales & marketing, expansion of the Company’s product range, review of operations, implementation of cost control measures, development of strategic alliances and financial oversight. Mr. Ganz brings more than 30 years of experience in sales management, manufacturing, new product design and development as well as mergers & acquisitions. During his career Mr. Ganz has bought, built and sold more than half a dozen global businesses with combined sales in excess of $1.0 billion. Most recently, Mr. Ganz sold Maine Industrial Tire LLC to Trelleborg (based out of Sweden), for $67 million generating a 7.0x return to investors over a three-year period.

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For their services and subject to stock exchange approval, Northeast will be issued a value of US$200,000 in SDI stock in four quarterly instalments over the 12-month period ending May 15, 2017. The first quarterly instalment is due August 15, 2016. The stock will be priced at the volume weighted average trading price per common share over the 20-day period preceding the due date. The stock will vest at the end of the contract with Northeast.

NEIP is currently the controlling shareholder in two operating businesses and a 250-unit residential real estate portfolio in the New England area. Northeast also owns minority stakes in a number of public and private businesses including a California company developing wireless electricity. Mr. Ganz is a graduate of Columbia Law School in New York City and completed his accounting designation at Georgetown University in Washington DC.

The Company wishes to inform the market that a Schedule 13D was filed with the SEC on June 8, 2016 by SDI’s largest group of shareholders in the US, holding approximately 10,474,522 shares. The 13D filing by the “reporting persons” relates to the maximizing of shareholder value with the intention of engaging more substantively with management, the board of directors and other relevant parties on matters concerning the business, assets, capitalization, operations and strategy of SDI. The 13D filing says that the reporting person may also discuss strategic alternatives with interested parties to propose or consider extraordinary transactions including joint ventures, mergers or a sale transaction of the Company.

Q3 FY2016

During Q3 2016 SDI announced that it has terminated its proposed acquisition of a less-lethal company, as previously released on May 13, 2016, and April 21, 2016.

During the Company’s due diligence process, SDI identified a number of items in the target company’s (the “Target”) financial statements that raised concerns in support of the negotiated price of the transaction. SDI terminated discussions with the Target during this quarter.

SDI’s management continues to look for acquisitions and strategic partnerships in the less-lethal sector, to broaden its product offering and increase its distribution reach. SDI is currently in preliminary discussions to license its collapsible technology to other less lethal market participants. SDI’s objective is to both (1) increase revenues and (2) gain greater market acceptance for the BIP.

During Q3, SDI appointed Bryan Ganz to the board of directors. With the appointment of Mr. Ganz to the board of directors, the previously announced resignation of Greg Sullivan (previous CEO) as a director becomes effective.

During Q3 SDI reported that it has made the first share issuance to Northeast Industrial Partners under the consulting agreement announced on June 20, 2016. SDI issued 488,851 common shares at a price of $ 0.1023 (CAD $0.1322) per share to satisfy the payment of USD $50,000 due on August 15, 2016. The shares will be subject to a four-month hold period expiring on January 13, 2017, and will not vest until May 2017.

The issuance of shares to Northeast Industrial Partners is the first of four such issuances to occur over the period ending May 15, 2017, as described in the June 20, 2016 news release.

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Q4 FY2016

During Q4 the Company announced the signing of a sales and distribution agreement with the Bob Barker Company (“Bob Barker”), the nation’s preeminent correctional services supplier, for distribution of SDI’s products through their Officers Only distribution network.

A division of the Bob Barker Company, “Officers Only” is a reliable source for quality apparel and offers a broad and diverse product line-up of protective and essential equipment that are brand recognized and trusted by law enforcement, corrections, military and public service office. SDI will continue to look for qualified distributors as part of its new sales and marketing strategy with a goal of tripling the number of SDI distributors by the end of 2017.

On September 15, 2016 Allen Ezer resigned as Executive Vice President to pursue other opportunities.

During the quarter, the Company appointed Karen Bowling to the board of directors. Ms. Bowling brings more than 25 years of diverse executive management experience to the board of SDI. Some of her skill-sets include; government affairs, lobbying, public relations, government procurement, marketing, communications, operations, and local and state level legislation. Ms. Bowling has also spent part of her career in the less-lethal sector for a long-range acoustic hailing device company.

Karen's recent positions include; Public Affairs Director at Foley & Lardner LLP, CEO at WiseEye AI, (an artificial intelligence company focussed on the healthcare sector for CT scan identification and classification), Chief Administration Officer for the city of Jacksonville, FL (with a budget in excess of one billion dollars and over 5,000 employees), and Co-Founder and CEO of the Solantic Walk-In Urgent Care Centers. Ms. Bowling has sat on and chaired numerous boards across a dozen sectors, and has recently been Gubernatorial appointed to the board of the Florida State College in Jacksonville.

Q1 2017

During the quarter, the Company completed the issuance of senior secured convertible notes (the “Senior Secured Notes”) to raise USD $1,500,000. This offering was announced and described in the Company’s news release of October 18, 2016.

It was a condition of the offering of Senior Secured Notes that not less than 80% of SDI’s outstanding unsecured debentures (the “Unsecured Debentures”) be exchanged for subordinate convertible secured debentures (the “Subordinate Secured Debentures”). Approximately 88% of the outstanding Unsecured Debentures were exchanged for Subordinate Secured Debentures. The issuances of Senior Secured Notes and Subordinate Secured Debentures were non-brokered transactions.

During the quarter, SDI issued 589,414 common shares at a price of $0.0848 (CAD$0.1142) per share to satisfy the payment of USD $50,000 due on November 15, 2016. The shares are subject to a four-month hold period expiring on May 14, 2017. The issuance of shares to Northeast Industrial Partners is the second of four such issuances to occur over the period ending May 15, 2017, as described in the June 20, 2016 news release.

Northeast Industrial Partners is controlled by Bryan Ganz, who was appointed to the board of directors of SDI after the consulting agreement was entered into. As a condition of stock exchange approval, SDI was required to obtain disinterested shareholder approval of the share issuance reported in this news release. That approval was received on December 15, 2016 at the Annual General Meeting of shareholders.

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The Company hired a new Director of Sales, Marketing and Training with over 24 years of extensive law enforcement experience. His duties included: SWAT/SRT, patrol, criminal investigations, and various joint federal task forces. He is an armorer for numerous weapon platforms. He has served as an instructor for the following: Taser, defensive tactics/officer survival, impact weapons, active shooter response, SWAT tactics, chemical munitions, handgun, submachine gun, shotgun, and patrol rifle. Additionally, he worked as an instructor training foreign law enforcement and Military personnel in ant-terrorism operations. He has also developed training programs for the US Military (Reserve, National Guard, and Coast Guard) , Federal Agencies, various local and state agencies, as well as private security.

During Q1, SDI received their Federal Firearms and Federal Explosives Licenses. The licensing allows the Company to house and travel with 40mm launchers and munitions for demonstrations globally. The licenses also allow the Company to manufacture, distribute and ship firearms, ammunition and ammunition components, as well as destructive devices. The newly acquired licenses will assist SDI in augmenting new lines of less lethal munitions and components in the coming quarters.

Over the last quarter, the Company signed five (5) new Master Distributors. Master Distributors purchase product from SDI at the lowest price but in exchange, commit to minimum annual purchases of $100,000 annually. This is the first time SDI has signed Master Distributors. The company also signed two (2) new Dealers. Dealers purchase from SDI at slightly higher pricing than Master Distributors, however, Dealers have only a $25,000 annual commitment.

The new Master Distributors include: FACTA Global, Surplus Ammo Arms, US Tactical Supply, Wolverine Supplies, and Ed’s Public Safety. SDI’s new Master Distributors and Dealers will increase the Company’s presence and reach in the northeast, northwest, and southeast corridors in the US, as well as eastern and western Canada.

SDI also signed a consulting agreement with Proxima Consulting, a consulting firm based in Oman, that works with Ministries throughout the GCC (Gulf Coast Countries) countries. The GCC countries include: Oman, Kuwait, Saudi Arabia, United Arab Emirates, Qatar, and Bahrain. As a result of the Proxima Consulting agreement, SDI was able to exhibit at IDEX (the International Defense Exhibition & Conference) in Abu Dhabi on February 2017.

Subsequent to the quarter, the Company signed a multi-year OEM agreement with Mission Less Lethal (Mission), headquartered in Fort Wayne, IN. Under this agreement, SDI will be able to offer its customers a full line of .68 caliber chemical irritant projectiles and air-powered launchers produced by Mission Less Lethal. Mission Less Lethal is the world leader in the design, development, and manufacture of .68 caliber projectiles and launchers, currently in use by thousands of law enforcement agencies in the U.S. and around the world.

The .68 caliber launchers and projectiles are an important addition to SDI’s line of less lethal munitions. Currently, SDI’s flagship product line, the Blunt Impact Projectile (BIP) leads the 40mm (high-kinetic) less lethal segment in range, accuracy, and most importantly safety. Capable of delivering over 200 joules of kinetic energy the BIP is designed to stop an assailant with a single shot. Similarly, SDI’s extensive range of 12 gauge munitions including bean bags, rubber finned rockets, rubber balls and door breaching rounds provide law enforcement with a wide array of less lethal tools. Producing between 110-150 joules of energy these products offer a complete solution set in the mid-to-high kinetic segment. The .68 caliber line of chemical irritant projectiles and launchers fills a critical gap in SDI’s offering by servicing the low kinetic impact segment. At only 15 joules of energy these systems rely more on the dispersion of chemical irritants than on impact energy.

SDI has begun marketing their OEM .68 caliber projectiles and launchers under the Mini Ball™ brand with a full roll-out planned for Q2-2017. The Company’s goal is to provide its dealers, distributors and law enforcement agencies with the widest possible array of less lethal options so that officers always have the correct tool for the job when required.

Q2 2017

During Q2, SDI received the majority of its Department of Transportation (DOT) approvals to ship 12 gauge chemical munitions, 37/40mm launchable rounds, as well as specified hand thrown smoke and gas.

During the quarter, the company made its fourth and final instalment share issuance to Northeast Industrial Partners under the consulting agreement announced on June 20, 2016. SDI issued 534,941 common shares at a price of $0.0935 (CAD$0.1275) per share to satisfy the payment of USD $50,000 due on May 15, 2017. The shares are subject to a four-month hold period expiring on September 16, 2017.

SDI signed on two new dealers to distribute their lines of munitions. The two dealers are located in Texas and Michigan, two strategic States that the Company did not have presence.

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On May 19, 2017 Public Works and Government Services Canada issued a Request for a Standing Offer (Solicitation #M0077-16J101/A) on behalf of the Royal Canadian Mounted Police (RCMP), for 40mm Blunt Impact Projectiles. SDI has submitted their bid for this standing offer in the anticipation of winning the 3 year tender (with two one year options totaling 5 years). The standing offer for the Company’s calls for 150,000 rounds for years 1 to 3, and an additional 150,000 40mm Blunt Impact Projectiles for the 2 optional years.

Q3 2017

During the quarter, SDI agreed to extend the consulting agreement between the Company and Northeast Industrial Partners LLC (“Northeast”) first announced on June 20, 2016. SDI and Northeast have agreed to extend the consulting agreement that will automatically renew each quarter until either party gives notice of cancellation. For its services and subject to stock exchange approval, Northeast will be issued SDI common shares for its services on August 15, 2017 and quarterly thereafter while the consulting agreement is in effect. Payments will be prorated if the consulting agreement is terminated during any quarterly period.

During Q3, SDI announced the signing of a multi-year agreement to provide its patented collapsible head blunt impact projectiles (BIPs) and collapsible head payload projectiles including OC (pepper spray), CS (tear gas), ML (marking liquid), MP (marking powder), MO (malodorant), IN (inert powder) and DNA (plant based DNA forensic marking rounds) to The Safariland Group (Safariland), headquartered in Jacksonville, FL.

SDI will supply BIPs and payload projectiles to Safariland for integration with Safariland's proprietary propulsion system. These new rounds will be marketed under the industry-leading Defense Technology brand name. The first shipment of rounds were made as of the date of the press release.

Management believes that the agreement with Safariland validates the more than five years of research and development that SDI has invested in the creation of the collapsible head 40mm round. Management further believes that by working in partnership with Safariland, together the companies can reach a far larger market for the BIP than SDI would be able to reach on its own.

The Safariland Group is a leading global provider of a broad range of safety and survivability products designed for the public safety, military, professional and outdoor markets. The Safariland Group offers a number of recognized brand names in these markets including Safariland^®, Med-Eng^®, ABA^®, Second Chance^®, VIEVU^®, Mustang Survival^®, Bianchi^®, Break Free^®, PROTECH^® Tactical, Defense Technology^®, Hatch^®, Monadnock^®, Identicator^® and NIK^®. The Safariland Group's mission, "Together, We Save Lives", is inherent in the lifesaving and protective products it delivers. The Safariland Group is headquartered in Jacksonville, Florida. The Safariland Group is a trade name of Safariland, LLC.

During Q3, the Company appointed Don Levantin to the board of directors as an independent member.

Mr. Levantin is a senior executive with a proven record of positioning companies for growth, profitability and acquisition. He is currently the chief executive officer and a board member of Amphora Inc., the leading global software solution and service provider for energy and commodity trading, risk management, and logistics execution. With over 30 years experience, he is an accomplished strategist in conceptualizing, building and operating corporations on a global level in the commodity sector. Prior to leading Amphora, he was a co-founder of Commoditrack, a real-time mark-to-market and risk management platform for commodities, which was acquired by the Intercontinental Exchange (ICE) and later by Sungard Financial Systems. Prior to building and leading companies in the software sector, Mr. Levantin was a commodity trader with Philipp Brothers Commodity Corp. and Phibro Energy. He holds a BS in business and economics from Lehigh University.

Effective October 1, 2017 the Company appointed Paul Jensen as the company’s new President and Chief Operating Officer.

Mr. Jensen is a seasoned, global executive with direct experience in developing high performance teams, managing complex projects, and building a global network of trusted advisers and business partners. His experiences have been focused on plastics contract manufacturing, the defence sector, technology licensing and managing intricate, multinational programs. Mr. Jensen has extensive business experience in the Middle East in both the public and private sectors of defence.

Mr. Jensen’s tenures include: co-founding Halo Maritime Defense Systems, an award-winning technology company offering the world’s most advanced marine automated security system with 13 patents and over $300-million in naval and defence opportunities; Nypro Inc., a billion-dollar plastics injection molding contract manufacturer, where Mr. Jensen held senior management positions for nearly two decades (directed a business unit with $150-million in sales); and positions with Kodak and GE, as well as the U.S. Army (nine years of active duty serving in command positions with the 82nd Airborne Division and XVIIIth Airborne Corps, leading up to Operation Urgent Fury, and on the staff and faculty of the U.S. Military Academy as an assistant professor of chemistry. Mr. Jensen was twice awarded the Meritorious Service Medal.

A distinguished graduate of the U.S. Military Academy at West Point (1977), Mr. Jensen received his MS in chemistry from MIT (1979 — Fannie and John Hertz Fellow) and holds an MBA with honours from Golden Gate University (1982). He is a graduate of the senior executive program at the University of Tennessee and has served on the adjunct faculty at the Fuqua School of Business, Duke University.

During the quarter, the Royal Canadian Mounted Police (the “RCMP”) awarded its request for standing offer tender for 150,000 40mm less-lethal rounds to SDI’s North American licensee partner, for the Company’s collapsible-head technology under the brand Defense Technology - 40mm BIP Collapsible Gel Round.

The tender is for 150,000 rounds over a three-year period with an option for an additional 150,000 rounds over an additional two-year period. SDI has supplied rounds to various RCMP departments over the last few years. The Company began supplying the first rounds under its agreement with Safariland in August 2017.

The Company continues to look to partner with and license its intellectual property to large global technology companies that have established defense manufacturing capabilities and in-place distribution networks allowing SDI to reduce its retail effort that currently focuses on direct sales to local police departments and correctional facilities. SDI is in talks with groups in the Middle East as well as the Far East for such partnerships.

In the coming quarter, direct sales efforts for the Company will be moving to an e-commerce platform that will garner increased margins for product sales, and streamline efforts in serving customers. The Company is also looking to develop alternative 40mm launcher solutions to meet the needs of markets that are not serviced within the law enforcement and home defense sectors.

Subsequent to the quarter, Bryan Ganz was appointed executive chairman of the company from his current position as President.

Keith Morrison has resigned from the Company’s board of directors as Chairman, and Karim Kanji has also resigned from the board of directors.

Subsequent to the quarter SDI has closed its warehouse in Perry, FL where it housed its 12g and Mini Ball line of products. This move is to streamline operations and focus on the Company’s 40mm BIP line of products for e-commerce and licensing sales, as well as international licensing opportunities.

Operations

The Company has restructured to reduce its overhead and operating expenses with its new e-commerce and licensing model.

Website Update

SDI continues to update its website to manage its digital presence, as well as maintain its top positioning in search engines for the less-lethal industry. The e-commerce initiative will roll-out in the current quarter for its line of less-lethal products.

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 three product lines:

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Intellectual Property

Five patent applications, four non-provisional and one provisional, have been filed by the Company with the U.S. Patent Office. The Patents have been granted on the four non-provisional patents.

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.

(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.

Provisional Patent:

(e) 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.

The Company’s policy has been to write off cost incurred in connection with non-provisional and provisional patent costs as they are incurred as a recoverability of such expenditure is uncertain.

General

Going Concern

The Company has incurred a cumulative loss of $29,659,794 from inception to August 31, 2017.$64.7 million.  The Company has funded operations through the issuance of capital stockcommon stock.  The Company generated $19.9 million in revenue and convertible debentures.net loss of $3.3 million for the six months ended May 31, 2023.  The company has started to generate revenue from operations. However, it still expectsCompany is expected to incur significant expenseslosses before becoming profitable.the Company's revenues sustain its operations. The Company’s future success is dependent upon its ability to continue to raise sufficient capital or generate adequate revenue,revenues, 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

Management projects that such financingall cash needs will be available at all or on favorable terms. These factors raise substantial doubt about its ability to continue as a going concern. Themet beyond one year from the time these financial statements are issued.