Defense Technologies International Corp.
Notes to
Condensed Consolidated Financial Statements
As
of July 31, 2020
(Unaudited)
NOTE -1: BASIS OF PRESENTATION AND ORGANIZATION
Defense Technologies International Corp. (the "Company ") was
incorporated in the State of Delaware on May 27, 1998.
Effective June 15, 2016, the Company changed its name to Defense
Technologies International Corp. from Canyon Gold Corp. to more
fully represent the Company's expansion goals into the advanced
technology sector.
On October 19, 2016, the Company
entered into a Definitive Agreement with Controlled Capture
Systems, LLC (“CCS”), representing the inventor of the technology
and assets previously acquired by DTC, that included a new
exclusive Patent License Agreement and Independent Contractor
agreement. Under the license agreement with CCS, the Company
acquired the world-wide exclusive rights and privileges to the CCS
security technology, patents, products and improvements. The
Company agreed to pay CCS an initial licensing fee of $25,000 and
to pay ongoing royalties as defined in the Definitive
Agreement. On May 30, 2018 the
Company and Control Capture Systems, LLC amended their license
agreement as follows (1) Royalty payments of 5% of gross sale from
the license agreement will be calculated and paid quarterly with a
minimum of $12,500 paid each quarter (2) All payment will be in US
dollars or stock of the Company and or its subsidiary. The
value of the stock will be a discount to market of 25% of the
average trading price for the 10 days prior to conversion. The
number of shares received by Control Capture prior to any reverse
split are anti-dilutive (3) Invoices for parts and materials will
be billed separate of the license fees noted above.
Effective January 12, 2017, Passive Security Scan, Inc. ("PSSI")
was incorporated in the state of Utah as subsidiary controlled by
the Company. The Company transferred to PSSI its
exclusive world-wide license to the defense, detection and
protection security products previously acquired by the
Company. The Company currently owns 76.28% of PSSI with
23.72% acquired by several individuals and entities. The
Company plans to continue the development of the technology and
conduct all sales and marketing activities in PSSI.
Basis of
Presentation
These condensed consolidated financial statements have been
prepared in accordance with accounting principles generally
accepted in the United States. The Company’s fiscal year end
is April 30.
The interim condensed consolidated financial statements have been
prepared without audit in accordance with accounting principles
generally accepted in the United States for interim financial
information and with the instructions to Securities and Exchange
Commission (“SEC”) Form 10-Q. They do not include all the
information and footnotes required by generally accepted accounting
principles for complete financial statements. Therefore, these
unaudited interim condensed consolidated financial statements
should be read in conjunction with the Company’s audited financial
statements and notes thereto for the year ended April 30, 2020
included in its Annual Report on Form 10-K filed with the SEC.
The interim condensed consolidated financial statements included
herein are unaudited; however, they contain all normal recurring
accruals and adjustments that, in the opinion of management, are
necessary to present fairly the Company’s consolidated financial
position as of July 31, 2020, the consolidated results of its
operations and its consolidated cash flows for the three months
ended July 31, 2020 and 2019 The results of operations for any
interim period are not necessarily indicative of the results to be
expected for the full fiscal year.
8
Consolidation and
Non-Controlling Interest
These
consolidated financial statements include the accounts of the
Company, and its majority-owned subsidiary, PSSI, from its
formation on January 12, 2017 to date. All inter-company
transactions and balances have been eliminated.
Inventory
Inventories are stated at the lower of cost using the first-in,
first-out (FIFO) cost method of accounting. Inventories as of July
31, 2020 consist of parts used in assembly of the units being sold
with no work in progress or finished goods. As of July 31, 2020 and
April 30, 2020 the value of the inventory was $23,235 and $21,368,
respectively.
Equipment
Equipment is carried at the cost of acquisition and depreciated
over the estimated useful lives of the assets. Costs associated
with repair and maintenance is expensed as incurred. Costs
associated with improvements which extend the life, increase the
capacity or improve the efficiency of our property and equipment
are capitalized and depreciated over the remaining life of the
related asset. Gains and losses on dispositions of equipment are
reflected in operations. Depreciation is provided using the
straight-line method over the estimated useful lives of the assets
of three years. As of July 31, 2020 had fixed assets net of
depreciation of $29,080 compared to $31,996 as of April 30,
2020.
Use of
Estimates
The preparation of financial statements in conformity with
accounting principles generally accepted in the United States of
America requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities at the date
of the financial statements and the reported amounts of revenue and
expenses during the reporting period. Actual results could differ
from those estimates.
Impairment
of Long-Lived Assets
We continually monitor events and
changes in circumstances that could indicate carrying amounts of
long-lived assets may not be recoverable. When such events or
changes in circumstances are present, we assess the recoverability
of long-lived assets by determining whether the carrying value of
such assets will be recovered through undiscounted expected future
cash flows. If the total of the future cash flows is less than the
carrying amount of those assets, we recognize an impairment loss
based on the excess of the carrying amount over the fair value of
the assets. Assets to be disposed of are reported at the lower of
the carrying amount or the fair value less costs to sell. On
April 30, 2019, the Company elected to impair its licenses
agreement of $378,600 so as
of July 31, 2020, no impairment of asset was necessary.
Net Income (Loss) per
Common Share
Basic net income or loss per common share is calculated by dividing
the Company’s net income or loss by the weighted average number of
common shares outstanding during the period. Diluted net income or
loss per common share is calculated by dividing the Company’s net
income or loss by sum of the weighted average number of common
shares outstanding and the dilutive potential common share
equivalents then outstanding. Potential dilutive common share
equivalents consist of shares issuable upon exercise of outstanding
stock options and warrants, using the treasury stock method and the
average market price per share during the period, and conversion of
convertible debt, using the if converted method. As of July 31,
2020, the Company had potential shares issuable under convertible
preferred shares, outstanding options, warrants and convertible
debt for a total of 95,542,005. With the loss in operations for the
three-month period ended July 31, 2020, the additional shares were
determined to be non-dilutive.
9
Recent Accounting
Pronouncements
In February 2016, the Financial Accounting Standards Board ("FASB")
issued Accounting Standards Update ("ASU") No. 2016-02, "Leases
(Topic 842)". The amendments in this ASU revise the accounting
related to lessee accounting. Under the new guidance, lessees is
required to recognize a lease liability and a right-of-use asset
for all leases. The new lease guidance also simplifies the
accounting for sale and leaseback transactions primarily because
lessees must recognize lease assets and lease liabilities. The
amendments in this ASU are effective for public companies for
fiscal years beginning after December 15, 2018 and are to be
applied through a modified retrospective transition approach for
leases existing at, or entered into after, the beginning of the
earliest comparative period presented in the financial statements.
Early adoption is permitted. The Company has adopted the new
accounting pronouncement and is recording a lease use asset and
lease liability as of May 31, 2019.
NOTE - 2: GOING CONCERN
These condensed consolidated financial statements have been
prepared in accordance with accounting principles generally
accepted in the United States of America applicable to a going
concern. Through July 31, 2020, the Company has no revenues,
has accumulated deficit of $10,486,631 and a working capital
deficit of $4,018,451 and expects to incur further losses in the
development of its business. The Company has not yet established an
ongoing source of revenue sufficient to cover operating costs,
which raises substantial doubt about its ability to continue as a
going concern. The financial statements do not include any
adjustment that might result from the outcome of this
uncertainty.
Management plans to continue to provide for the Company's capital
needs during the year ending April 30, 2020 by issuing debt and
equity securities and by the continued support of its related
parties. The condensed consolidated financial statements do
not include any adjustments relating to the recoverability and
classification of recorded asset amounts or amounts and
classification of liabilities that might be necessary should the
Company be unable to continue in existence.
NOTE – 3: INVESTMENTS
Effective January 12, 2017, Passive Security Scan, Inc. ("PSSI")
was incorporated in the state of Utah as subsidiary controlled by
the Company. The Company transferred to PSSI its
exclusive world-wide license to the defense, detection and
protection security products previously acquired by the Company for
17,500 shares of PSSI valued at $378,600 for 76.28% of PSSI. The
balance of PSSI was acquired by four individuals and
entities. The Company plans to continue the development of
the technology and conduct all sales and marketing activities in
PSSI. The investment was impaired as of April 30, 2019.
NOTE - 4: RELATED
PARTY TRANSACTIONS
Management and administrative services are currently compensated as
per a Service Agreement between the Company and its Chief Executive
Officer and Director executed on April 25, 2016 and a Service
Agreement with the subsidiary PSSI executed on January 12, 2017, a
Service Agreement between the Company and a Director executed on
May 20, 2016, and an Administration Agreement with a related party
executed on March 15, 2011 and renewed on May 1, 2017 plus the
assumption of a Service Agreement with the subsidiary PSSI assumed
on January 12, 2017, whereby the fee is based on services provided
and invoiced by the related parties on a monthly basis and the fees
are paid in cash when possible or with common stock. The
Company also, from time to time, has some of its expenses paid by
related parties with the intent to repay. These types of
transactions, when incurred, result in payables to related parties
in the Company’s consolidated financial statements as a necessary
part of funding the Company’s operations.
As of July 31, 2020, and April 30, 2020, the Company had payable
balances due to related parties totaling $1,028,122 and $970,547,
respectively, which resulted from transactions with these related
parties and other significant shareholders.
10
NOTE – 5: NOTES PAYABLE
On July 6, 2018, the Company signed
an investment agreement with a third party. Under the terms of the
agreement the Company received $250,000 through the Company
attorney’s trust account. On July 12, 2018, the Company received
the $250,000 less wire and legal payment of $10,045. In addition
the note holder will receive a royalty of 5% up to $250,000 and
then a royalty of 3.5% for two years thereafter. The note holder
will receive 150,000 shares of the Company’s common stock plus
100,000 warrants to purchase common shares within three years at
$2.50 per share.
On January 26, 2019, the Company approved a loan from Brian McLain
of $275,000. The note is convertible into common stock of the
Company and is non-dilutive for 2 years from date of the note. In
addition the Company granted the lender 100,000 warrants
convertible into common shares at $1.00 per share. As of July 31,
2020, $25,000 of the loan was funded by the lender.
As of
July 31, 2020 and April 30, 2020 the outstanding balances of notes
payable was $424,226, respectively.
NOTE – 6: CONVERTIBLE DEBT
On May 22, 2018, the Company signed an agreement with an investor
for a loan of $25,000. The note is convertible 180 days after the
date of the note to shares of the Company’s common stock at $0.75
per share or a 25% discount to the 10 day trading average prior to
conversion; whichever is lower. The total amount of the loan must
be converted on the date of conversion. The note has an
annual interest rate of 6%.
On July 10, 2018 RAB Investments AG agreed to buy the outstanding
convertible debt from Jabro Funds for $35,000. The Company as part
of the agreement paid Jabro Funds the $35,000 for the debt and
considered it retired and paid in full.
On May 6, 2019, the Company issued
an 8% convertible note to Black Ice
Advisors, LLC for $57,500 which matures on May 6, 2020. The note
redeemable at a premium up to 140% of the face value within 180
days of issuance or is convertible after 180 days to the Company
common stock at 60% of the lowest trading price twenty days prior
to conversion.
On May 10, 2019, the Company entered into a settlement agreement
with Firstfire Global for payment of the original note for $189,000
issued on July 18, 2016. Under the terms of the agreement the
Company paid Firstfire $65,000 on May 10, 2019 and $10,000 to be
paid on or before May 31, 2019. In addition Firstfire received
150,000 shares of the Company. On September 12, 2019, the $10,000
was converted in to 123,456 shares of common stock.
On July 11, 2019, the Company issued an 8% convertible note to GS
Capital Partners, LLC for $58,000 which matures on July 11, 2020.
The note redeemable at a premium up to 135% of the face value
within 180 days of issuance or is convertible after 180 days to the
Company common stock at 62% of the lowest trading price twenty days
prior to conversion. On January 16, 2020, the Company paid GS
Capital partners $80,620 consisting of principal of the face amount
of the note of $58,000 plus $22,600 in prepayment penalty which was
charged to interest.
On November 1, 2019, the Company issued a convertible note to Adar
Alef, LLC for $40,700 with a $3,700 original discount. The
note matures on October 31, 2020 bearing interest at the rate of 8%
per annum. The note is convertible into common stock of the Company
after 180 days at the rate of 70% of the lowest trading price for
twenty days prior to conversion. The note may be repaid to the
issuer within 180 days from issuance at variable premium rates of
115% to135% above face value.
On November 12, 2019, the Company
issued a convertible note to Platinum Point Capital, LLC for
$41,250 with an original discount of $3,750. The note matures
on November 12, 2020 bearing interest at the rate of 8% per annum
with a default rate of 24%. The note is convertible into common
stock of the Company
11
after 180 days at the rate of 60% of
the lowest trading price for twenty days prior to conversion. The
note may be repaid to the issuer after 90 days and within 180 days
from issuance at a premium rates of 140% above face
value
On November 12, 2019, the Company issued a convertible note to
Jefferson Street Capital, LLC for $41,250 with an original discount
of $3,750. The note matures on November 12, 2020 bearing
interest at the rate of 8% per annum with a default rate of 24%.
The note is convertible into common stock of the Company after 180
days at the rate of 60% of the lowest trading price for twenty days
prior to conversion. The note may be repaid to the issuer after 90
days and within 180 days from issuance at a premium rates of 140%
above face value.
On December 20, 2019, the Company issued a convertible note to
Lliah for $63,950 with an original discount of $8,950. The
note matures on December 19, 2020 bearing interest at the rate of
8% per annum. The note is convertible into common stock of the
Company after 180 days at the rate of 60% of the lowest trading
price for twenty days prior to conversion. The note may be repaid
to the issuer within 180 days from issuance at variable premium
rates of 115% to 135% above face value.
On January 10, 2020, the Company issued a convertible note to Crown
Bridge Partners, LLC with a principal; amount of $171,000 and a
prorate original discount of $15,000. The first tranche of
the note received by the Company was a face value of $57,000 and
net amount received of $50,000. Each tranche of the note matures
twelve months from receipt of the tranche and bears interest at the
rate of 10% per annum with a default rate of 15%. The note is
convertible into common stock of the Company after 180 days at the
rate of 60% of the lowest trading price for twenty days prior to
conversion. The note may be repaid to the issuer within 180 days
from issuance at variable premium rates of 125% above face
value.
On January 13, 2020, the Company issued an additional note to Ionic
Ventures, LLC for $220,000 with an original discount of $20,000.
The note is part of a securities purchase agreement dated
August 31, 2018. The note matures on June 20, 2020 bearing interest
at the rate of 15% per annum. The note is convertible into common
stock of the Company at $0.60 per share or of 60% of the lowest
trading price for twenty days prior to conversion, whichever is the
lowest.
During the three months ended July 31, 2019 the Company issued
161,050 shares of common stock with a value of $39,711 for the
conversion of debt.
During the three months ended July 31, 2020 the Company issued
10,635,623 shares of common stock with a value of
$131,509 for debt.
As of
July 31, 2020, and April 30, 2020, the convertible debt
outstanding, net of discount, was $825,780 and $821,949,
respectively.
NOTE – 7: FAIR VALUE MEASUREMENTS AND DERIVATIVE
LIABILITIES
As
defined in (Financial Accounting Standards Board ASC 820), fair
value is the price that would be received to sell an asset or paid
to transfer a liability in an orderly transaction between market
participants at the measurement date (exit price). The Company
utilized the market data of similar entities in its industry or
assumptions that market participants would use in pricing the asset
or liability, including assumptions about risk and the risks
inherent in the inputs to the valuation technique. These inputs can
be readily observable, market corroborated, or generally
unobservable. The Company classifies fair value balances based on
the observability of those inputs. FASB ASC 820 establishes a fair
value hierarchy that prioritizes the inputs used to measure fair
value. The hierarchy gives the highest priority to unadjusted
quoted prices in active markets for identical assets or liabilities
(level 1 measurement) and the lowest priority to unobservable
inputs (level 3 measurement).
12
The
three levels of the fair value hierarchy are as follows:
Level
1 – Quoted prices are available in
active markets for identical assets or liabilities as of the
reporting date. Active markets are those in which transactions for
the asset or liability occur in sufficient frequency and volume to
provide pricing information on an ongoing basis. Level 1 primarily
consists of financial instruments such as exchange-traded
derivatives, marketable securities and listed equities.
Level
2 - Pricing inputs are other than
quoted prices in active markets included in level 1, which are
either directly or indirectly observable as of the reported date
and includes those financial instruments that are valued using
models or other valuation methodologies. These models are primarily
industry-standard models that consider various assumptions,
including quoted forward prices for commodities, time value,
volatility factors, and current market and contractual prices for
the underlying instruments, as well as other relevant economic
measures. Substantially all of these assumptions are observable in
the marketplace throughout the full term of the instrument, can be
derived from observable data or are supported by observable levels
at which transactions are executed in the marketplace. Instruments
in this category generally include non-exchange-traded derivatives
such as commodity swaps, interest rate swaps, options and
collars.
Level
3 – Pricing inputs include
significant inputs that are generally less observable from
objective sources. These inputs may be used with internally
developed methodologies that result in management’s best estimate
of fair value.
As of July 31, 2020, the Company believes the amounts reported for
cash, payables, accrued liabilities and amounts due to related
parties approximate their fair values due to the nature or duration
of these instruments.
The
following table represents the change in the fair value of the
derivative liabilities during the three months ended July 31,
2020:
|
|
Level
1
|
Level
2
|
Level
3
|
|
Balance at April 30,
2020
|
$
--
|
$
--
|
$
1,333,288
|
|
Retirement of
derivative at conversion
|
|
|
(237,433)
|
|
Change in fair value
of derivative liability
|
$
--
|
$
--
|
$
(66,056)
|
|
|
|
|
|
|
Balance at July 31,
2020
|
$
--
|
$
--
|
$ 1,029,799
|
The
estimated fair value of the derivative liabilities at July 31, 2020
was calculated using the Binomial Lattice pricing model with the
following assumptions:
|
Risk-free interest
rate
|
2.00%
|
|
Expected life in
years
|
0.25 to 0.85
|
|
Dividend yield
|
0%
|
|
Expected
volatility
|
443.00%
|
NOTE – 8:
EQUITY
Common Stock
During the three month period ended
July 31, 2019, the Company issued 325,000 shares of its common
stock for service with a value of $80,600.
During the three months ended July
31, 2020 the Company issued 10,635,623 shares of common stock with
a value of $131,509 for debt.
13
Preferred
Stock
The Company has 20,000,000 shares of $0.0001 par value preferred
stock authorized and has designated Series A and Series B preferred
stock. Each share of the Series A preferred stock is
convertible into ten common shares and carries voting rights on the
basis of 100 votes per share. Each share of the Series B
preferred stock is convertible into ten common shares and carries
no voting rights.
On May 20, 2019, the Company approved the issuance of 2,831,350
shares of its common stock for the conversion of 283,135 for Series
A preferred with a value of $28. As of July 31, 2020 the common
shares had not been issued and the conversion was not
completed.
As of July 31, 2020 the Company had 2,925,369 Series A and 520,000
Series B preferred share issued and outstanding.
NOTE – 9: STOCK OPTIONS AND WARRANTS
A summary of the Company’s stock options and warrants as of July
31, 2020, and changes during the three months then ended is as
follows:
|
|
Shares
|
Weighted
Average
Exercise Price
|
Weighted
Average
Remaining
Contract Term
(Years)
|
Aggregate
Intrinsic
Value
|
|
|
|
|
|
|
|
|
Outstanding at April 30, 2020
|
850,000
|
$
|
1.14
|
2.00
|
$ 882,300
|
|
Granted
|
--
|
$
|
--
|
--
|
--
|
|
Exercised
|
--
|
$
|
--
|
--
|
--
|
|
Forfeited or expired
|
--
|
$
|
--
|
--
|
--
|
|
Outstanding and exercisable
at July 31, 2020
|
850,000
|
$
|
1.14
|
1.50
|
$ 967,185
|
NOTE – 10: COMMITMENTS
AND CONTINGENCIES
The Company has the following material commitments as of July 31,
2020:
|
a)
|
Administration Agreement with EMAC
Handel’s AG, renewed effective May 1, 2017 for a period of three
years. Monthly fee for administration services of $5,000, office
rent of $250 and office supplies of $125. Extraordinary
expenses are invoiced by EMAC on a quarterly basis. The fee
may be paid in cash and or with common stock.
|
|
b)
|
Service Agreement signed April 25, 2016
with Merrill W. Moses, President, Director and CEO, for services of
$7,500 per month beginning May 2016 and the issuance of 233
restricted common shares of the Company. The fees may be paid
in cash and or with common stock.
|
|
c)
|
Service Agreement signed May 20, 2016
with Charles C. Hooper, Director, for services of $5,000 per month
beginning May 2016 and the issuance of 233 restricted common shares
of the Company. The fees may be paid in cash and or with
common stock.
|
|
d)
|
Administration and Management Agreement
of PSSI signed January 12, 2017 with EMAC Handel Investments AG,
for general fees of $5,000 per month, office rent of $250 and
telephone of $125 beginning January 2017, the issuance of 2,000
common shares of PSSI and a 12% royalty calculated on defines sales
revenues payable within 10 days after the monthly sales.
|
14
|
e)
|
Service Agreement of PSSI signed January
12, 2017 with Merrill W. Moses, President, Director and CEO, for
services of $2,500 per month beginning February 2017 and the
issuance of 333 common shares of PSSI.
|
|
f)
|
Business Development and Consulting
Agreement of PSSI signed January 15, 2017 with WSMG Advisors, Inc.,
for finder’s fees of 10% of funding raised for PSSI and the
issuance of 1,000 common shares of PSSI.
|
On May 30, 2018, the Company and Control Capture Systems, LLC
amended their license agreement as follows.
·Royalty
payments of 5% of gross sale from the license agreement will be
calculated and paid quarterly with a minimum of $12,500 paid each
quarter.
·All
payment will be in US dollars or stock of the Company and or its
subsidiary. The value of the stock will be a discount to
market of 25% of the average trading price for the 10 days prior to
conversion. The number of shares received by Control Capture prior
to any reverse split are anti-dilutive.
·Invoices
for parts and materials will be billed separate of the license fees
noted above.
NOTE - 11: LEASE
On
October 16, 2018, the Company signed a three year lease for the
Company’s warehouse space effective on November 1, 2018 through
October 31, 2021. The lease is for approximately 4,700 square feet
of warehouse space with a gross monthly rental cost including
common area charges of $3,250. The lease was terminated by the
landlord on August 30, 2019 with the outstanding balance due of
$11,230.
NOTE - 12: SUBSEQUENT EVENTS
During the period from
August 1, 2020 to September 18, 2020 the Company issued 9,727,135
shares of common stock for debt with a value of $63,657 on
conversion of notes.
On September 8, 2020,
the Company issued a convertible note with a face value of $75,350
for net cash purchase price of $68,500. The note bears interest of
8% and matures on September 8, 2021.
The
Company has evaluated subsequent events to determine events
occurring after July 31, 2020 through September 21, 2020 that would
have a material impact on the Company’s financial results or
require disclosure and have determined none exist.
15
Item 2: Management's
Discussion and Analysis of Financial Condition and Results of
Operations
Overview
The following
information should be read in conjunction with the condensed
consolidated financial statements and notes thereto appearing
elsewhere in this Form 10-Q.
Defense
Technologies International Corp. (the "Company ") was incorporated
in the State of Delaware on May 27, 1998. Effective June 15,
2016, the Company changed its name to Defense Technologies
International Corp. from Canyon Gold Corp. to more fully represent
the Company's expansion goals into the advanced technology
sector.
On October 19,
2016, the Company entered into a Definitive Agreement with
Controlled Capture Systems, LLC (“CCS”), representing the inventor
of the technology and assets previously acquired by DTC, that
included a new exclusive Patent License Agreement and Independent
Contractor agreement. Under the license agreement with CCS, the
Company acquired the world-wide exclusive rights and privileges to
the CCS security technology, patents, products, and improvements.
The Company agreed to pay CCS an initial licensing fee of
$25,000 and to pay ongoing royalties as defined in the Definitive
Agreement.
On May 30, 2018
the Company and Control Capture Systems, LLC amended their license
agreement as follows (1) Royalty payments of 5% of gross sale from
the license agreement will be calculated and paid quarterly with a
minimum of $12,500 paid each quarter (2) All payment will be in US
dollars or stock of the Company and or its subsidiary. The
value of the stock will be a discount to market of 25% of the
average trading price for the 10 days prior to conversion. The
number of shares received by Control Capture prior to any reverse
split are anti-dilutive.
Effective January 12, 2017, Passive Security Scan, Inc. ("PSSI")
was incorporated in the state of Utah as subsidiary controlled by
the Company. The Company transferred to PSSI its
exclusive world-wide license to the defense, detection and
protection security products previously acquired by the
Company. The Company owns 79.8% of PSSI with 20.2% acquired
by several individuals and entities. The Company plans to
continue the development of the technology and conduct all sales
and marketing activities in PSSI.
The occurrence of an uncontrollable
event such as the COVID-19 pandemic may negatively affect our
operations. A pandemic typically results in social distancing,
travel bans, and quarantine. This may limit access to our,
customers, management, support staff and professional advisors. As
the Company’s operations, are the continual building and sales of
units we cannot measure what the impact may be but we do not
anticipate a significant impact on our operations or financial
condition, except for potential initial reduction for the sale of
our product.
Forward Looking and Cautionary Statements
This report contains forward-looking statements relating to future
events or our future financial performance. In some cases,
you can identify forward-looking statements by terminology such as
“may,” “will,” “should,” “expect,” “intend,” “plan,” “anticipate,”
“believe,” “estimate,” “predict,” “potential,” “continue,” or
similar terms, variations of such terms or the negative of such
terms. These statements are only predictions and involve
known and unknown risks, uncertainties and other factors.
Although forward-looking statements, and any assumptions upon
which they are based, are made in good faith and reflect our
current judgment, actual results could differ materially from those
anticipated in such statements. Except as required by
applicable law, including the securities laws of the United States,
we do not intend to update any of the forward-looking statements to
conform these statements to actual results.
Results of Operations
We currently have no operating revenue for the three months ended
July 31, 2020. We do have customer deposits of $45,695 which will
be recognized as revenue when the units are shipped to the
buyers.
16
Our general and administrative expenses for the three months ended
July 31, 2020 was $189,709 compared to $221,822 for the same period
ended July 31, 2019. The decrease was due primarily to
consulting costs.
Interest expenses incurred in the three months ended July 31, 2020
was $34,860 compared to $44,524 for the three ended July 31, 2019.
Change in derivative liability resulted in a gain of $66,056 for
the three months period ended July 31, 2020, compared to a gain of
$863,032 for the same periods ended July 31, 2019. We
estimate the fair value of the derivative for the conversion
feature of our convertible notes payable using the American
Binominal Lattice pricing model at the inception of the debt, at
the date of conversions to equity, cash payments and at reporting
date, recording a derivative liability, debt discount and a gain or
loss on change in derivative liability as applicable. These
estimates are based on multiple inputs, including the market price
of our stock, interest rates, our stock price volatility, and
variable conversion prices based on market prices as defined in the
respective loan agreements. These inputs are subject to
significant changes from period to period; therefore, the estimated
fair value of the derivative liability will fluctuate from period
to period and the fluctuation may be material.
Total other income and expense for the three months periods ended
July 31, 2020 was expense of $103,114 compared to other
income of $953,089 for the three months period in 2019. The
variance is primarily due to the change in derivative liability and
debt extinguishment in the three months period in both 2020 and
2019 and loss on notes in the period ended Jul 31, 2020 versus the
same period in 2019.
Net income and loss before non-controlling interest for the three
and ended July 31, 2020 was a net loss of $292,823 compared net
income of 731,267 for the same three months periods in 2019. After
adjusting for our consolidated subsidiary, net loss and net income
for the three months ended July 31, 2020 a net loss of $ 281,996
compared to a net income of $739,421 for the same periods in 2019,
respectively.
Liquidity and Capital Resources
At July 31, 2020, we had total current assets of $43,352, and total
current liabilities of $4,061,803, resulting in a working capital
deficit of $4,018,451. Included in our current liabilities and
working capital deficit at July 31, 2020 are derivative liabilities
totaling $1,029,799 related to the conversion features of certain
of our convertible notes payable, convertible notes of $825,780,
net of discount, notes payable related parties of $1,028,122,
accounts payable and accrued expense of $412,486 and notes payables
of $424,226. We anticipate that in the short-term, operating funds
will continue to be provided by related parties and other
lenders.
As of July 31, 2020, we had total convertible notes payable of
$825,780, net of discount. Several of the note agreements
require repayment through conversion of principal and interest into
shares of the Company’s common stock. We anticipate,
therefore, converting these notes payable into shares of our common
stock without the need for replacement financing; however, there
can be no assurance that we will be successful in accomplishing
this.
During the three months ended July 31, 2020, net cash used in
operating activities was $70,299 compared to cash used of $34,102
in the same period in 2019. Net cash used in 2020 consisted of net
loss of $292,823 offset by gain in derivative liability of $66,056
and increase in payables to related parties of $57,575.
During the three months ended July 31, 2020 net cash provided by
financing activities was zero compared to $50,500 in 2019.
We have had minimal revenue and paid expenses and costs with
proceeds from the issuance of securities as well as by loans from
investor, stockholders and other related parties.
17
Our immediate
goal is to provide funding for the completion of the initial
production of the Offender Alert Passive Scan licensed from CCS.
The Offender Alert Passive Scan is an advanced passive
scanning system for detecting and identifying concealed
threats.
On September 6, 2018, we received funding for the production of up
to 100 units at a cost of $84,500. We built 4 Passive Portal units,
two of which will be used in the previously announced BETA Test at
a school near Austin Tx. The units have been tested multiple times
and performed with a 100% success every time. We are confident that
upon the successful conclusion of the Beta Test, we will receive
the first orders from school districts that will generate
initial revenues to the Company.
We believe a related party and other lenders will provide
sufficient funds to carry on general operations in the near term
and fund DTC’s production and sales. We expect to raise
additional funds from the sale of securities, stockholder loans and
convertible debt. However, we may not be successful in our
efforts to obtain financing to carry out our business plan.
See the notes to our
condensed consolidated financial statements for a discussion of
recently issued accounting pronouncements that we have either
implemented or that may have a material future impact on our
financial position or results of operations.
Off-Balance Sheet Arrangements
We have no off-balance sheet arrangements that have or are
reasonably likely to have a current or future effect on our
financial condition, changes in financial condition, revenues or
expenses, results of operations, liquidity, capital expenditures or
capital resources that is material to stockholders.
Item
3. Quantitative and
Qualitative Disclosures About Market Risk.
This item is not
required for a smaller reporting company.
Item
4.Controls and Procedures.
Evaluation of Disclosure
Controls and Procedures. As of the end of the period
covered by this report, we conducted an evaluation, under the
supervision and with the participation of our management including
our principal executive officer and principal financial officer, of
the effectiveness of the design and operation of our disclosure
controls and procedures (as defined in Rules 13a-15(e) and
15d-15(e) under the Securities Exchange Act of 1934) (“Exchange
Act”). Based on this evaluation, the principal executive
officer and principal financial officer concluded that, as of the
end of the period covered by this report, our disclosure controls
and procedures were not effective in ensuring that information
required to be disclosed by us in the reports that we file or
submit under the Exchange Act is recorded, processed, summarized
and reported within the time periods specified in applicable rules
and forms and that such information is accumulated and communicated
to our management, including our principal executive officer and
principal financial officer, in a manner that allows timely
decisions regarding required disclosures.
We operate with
a limited number of accounting and financial personnel.
Although we retain the services of an experienced certified
public accountant, we have been unable to implement proper
segregation of duties over certain accounting and financial
reporting processes, including timely and proper documentation of
material transactions and agreements. We believe these
control deficiencies represent material weaknesses in internal
control over financial reporting.
Despite the
material weaknesses in financial reporting noted above, we believe
that our consolidated financial statements included in this report
fairly present our financial position, results of operations and
cash flows as of and for the periods presented in all material
respects.
Changes in
Internal Control over Financial Reporting. There was no
change in our internal control over financial reporting (as defined
in Rule 13a-15(f) under the Exchange Act) during our most
recently
18
completed fiscal quarter that has materially
affected, or is reasonably likely to materially affect, our
internal control over financial reporting.
PART II
— OTHER INFORMATION
Item
1.Legal Proceedings
There
are no material pending legal proceedings to which we are a party
or to which any of our property is subject and, to the best of our
knowledge, no such actions against us are contemplated or
threatened.
Item
1A.Risk Factors
This
item is not required for a smaller reporting company.
Item
2.Unregistered Sales of Equity Securities and Use of
Proceeds
During the three months ended July 31, 2020 the Company issued
10,635,623 shares of common stock with a value of $131,509 for
debt.
The
issuances of the Company’s common stock set forth above were in
private transactions to a persons familiar with the Company’s
business, pursuant to an exemption from registration provided by
Section 4(a)(2) of the Securities Act of 1933.
Item
3.Defaults Upon Senior Securities
This
item is not applicable.
Item
4.Mine Safety Disclosure
This
item is not applicable.
Item
5.Other Information
Not
applicable
19
Item
6.Exhibits
The following
exhibits are filed as part of this report:
|
Exhibit
No.
|
Description of
Exhibit
|
|
31.1
|
Section 302 Certification of Chief Executive Officer and Chief
Financial Officer
|
|
32.1
|
Section 1350 Certification of Chief Executive Officer and Chief
Financial Officer
|
|
101
INS*
|
XBRL
Instance Document
|
|
101SCH*
|
XBRL
Taxonomy Extension Schema
|
|
101
CAL*
|
XBRL
Taxonomy Extension Calculation Linkbase
|
|
101
DEF*
|
XBRL
Taxonomy Extension Definition Linkbase
|
|
101
LAB*
|
XBRL
Taxonomy Extension Label Linkbase
|
|
101
PRE*
|
XBRL
Taxonomy Extension Presentation Linkbase
|
* The XBRL
related information in Exhibit 101 shall not be deemed “filed” for
purposes of Section 18 of the Securities Exchange Act of 1934, as
amended, or otherwise subject to liability of that section and
shall not be incorporated by reference into any filing or other
document pursuant to the Securities Exchange Act of 1933, as
amended, except as shall be expressly set forth by specific
reference in such filing or document.
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.
DEFENSE TECHNOLOGIES INTERNATIONAL CORP.
Date:
September 21, 2020
By:
/S/ MERRILL W.
MOSES
Merrill W. Moses
Chief Executive Officer
Acting
Chief Financial Officer
20
