Notes to Condensed Consolidated Financial Statements
January 31, 2017
(Unaudited)
1. Nature of Operations and Formation of PSSI
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.
Effective January 12, 2017, Passive Security Scan, Inc. ("PSSI") was incorporated in the state of Utah as a wholly owned subsidiary. The Company has approved the merger of its wholly-owned subsidiary, Long Canyon Gold Resources Corp. ("Long Canyon"), into PSSI, with PSSI the surviving entity. The merger will not be effective until the articles of merger are filed with the state of Utah. The Company transferred to PSSI its exclusive world-wide license to the defense, detection and protection security products previously acquired by the Company (see Note 3). As discussed in Note 3, 34.62% of PSSI was acquired by several individuals and entities. The Company owns the remaining 65.38% of PSSI.
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 January 31, 2017, the Company has no revenues, has accumulated losses of $4,782,275 and total stockholders' deficit of $1,410,546 and expects to incur further losses in the development of its business, all of which cast substantial doubt about the Company's ability to continue as a going concern. Management plans to continue to provide for the Company's capital needs during calendar year 2017 by issuing debt and equity securities and by the continued support of its related parties (see Note 4). Immediate plans include raising the necessary capital to continue the development of the defense, detection and protection technology and conduct all sales and marketing activities in PSSI. 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. There is no assurance that funding will be available to continue the Company's business operations and to successfully develop and market its defense, detection and protection security products.
2. Basis of Presentation and Summary of Significant Accounting Policies
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 of 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, 2016 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 January 31, 2017, the consolidated results of its operations for the three and nine months ended January 31, 2017 and 2016 and its consolidated cash flows for the nine months ended January 31, 2017 and 2016. The results of operations for any interim period are not necessarily indicative of the results to be expected for the full fiscal year.
Consolidation and Non-Controlling Interest
These condensed consolidated financial statements include the accounts of the Company, and its wholly owned subsidiary, Long Canyon, through January 15, 2017, and its majority-owned subsidiary, PSSI from its formation on January 15, 2017. All inter-company transactions and balances have been eliminated.
The non-controlling interest in PSSI, representing 7,941,436 common shares, or 34.62%, was acquired by several individuals and entities, including related parties, in exchange for services valued at $6,100 and the extinguishment of Company accounts payable – related parties with a book value of $9,835.
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.
We have identified the conversion features of our convertible notes payable as derivatives. We estimate the fair value of the derivatives associated with our convertible notes payable using the Black-Scholes pricing model. We estimate the fair value of the derivative liabilities at the inception of the financial instruments, at the date of conversions to equity and at each reporting date, recording a derivative liability, debt discount, additional paid-in capital and a gain or loss on change in derivative liabilities as applicable. These estimates are based on multiple inputs, including the market price of our stock, interest rates, our stock price volatility, variable conversion prices based on market prices as defined in the respective agreements and probabilities of certain outcomes based on management projections. These inputs are subject to significant changes from period to period; therefore, the estimated fair value of the derivative liability and associated gain or loss on derivative liability will fluctuate from period to period and the fluctuation may be material.
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 January 31, 2017, the Company had 147,080,550 potential shares issuable under outstanding options, warrants, preferred stock and convertible debt.
Reclassifications
Certain amounts in the 2016 condensed consolidated financial statements have been reclassified to conform with the current year presentation.
3. License Agreement
Effective July 15, 2016, the Company executed documents intended to finalize the acquisition of 100% of Defense Technology Corporation, a non-related privately held Colorado company ("DTC"), a developer of defense, detection and protection products to improve security for Anchor schools and other public facilities. Subsequently, the Company and DTC mutually agreed to rescind the acquisition of DTC and entered into a Rescission Agreement and Mutual Release (the "Rescission Agreement"), dated October 17, 2016.
In connection with the Rescission Agreement with the Company, DTC rescinded its agreement with the inventor and developer of the technology and assets that were subject to the original agreement between the Company and DTC. On October 19, 2016, the Company entered into a new 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 term of the License Agreement shall be from October 19, 2016 until the expiration of the last to expire of the licensed issued patents or patents to be issued.
The Company agreed to pay CCS an initial licensing fee of $25,000 and to pay ongoing royalties at the end of each six-month period at the rate of the greater of 5% of gross sales used or sold, or the minimum royalty payment of $25,000. The Company also agreed to compensate investors that have provided funding for the development of CCS's technology with 4,000,000 shares of the Company's common stock. Additionally, CCS will be entitled to receive 250,000 shares of the Company's common stock upon completed sales of 1,000 passive scanner units based on the CCS technology.
The Independent Contractor Agreement between the Company and CCS provides that CCS will provide support for the development of the security technology and products. An initial payment of $5,000 is to be paid to CCS plus ongoing hourly compensation for services provided.
The Company capitalized the costs to acquire the License Agreement, including the $25,000 initial licensing fee and the estimated value of $353,600 of the 4,000,000 shares of the Company's common stock issued on November 10, 2016 to the CCS investors, which value was based on the closing market price of the Company's common stock on the date of the Definitive Agreement. The Company has recorded a current liability of $25,000 for the remaining obligation in its consolidated balance sheet as of January 31, 2017. Once sales of products based on the CCS technology begin, the Company will amortize the capitalized costs over the estimated life of the license agreement as determined by the legal life of patents issued.
On January 15, 2017, the Company transferred the License Agreement to PSSI in exchange for 15,000,000 common shares of PSSI, or 65.38% ownership. The Company plans to continue the development of the technology and conduct all sales and marketing activities in PSSI.
On January 22, 2017, the Company and CCS entered into an Amendment to the Definitive Agreement, whereby CCS consented to the transfer of the Definitive Agreement, Patent License Agreement and Independent Contractor Agreement to PSSI and agreed to extend the due dates of certain payments due CCS to April 30, 2017. In exchange, CCS received 100,000 shares of PSSI common stock.
Also in connection with the Amendment to the Definitive Agreement, the investors that provided funding for the development of CCS's technology received 500,000 shares of PSSI common stock.
4. Related Party Transactions and Balances
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, 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, 2015, 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 January 31, 2017, and April 30, 2016, the Company had payable balances due to related parties totaling $243,628 and $565,459, respectively, which resulted from transactions with these related parties and other significant shareholders.
On December 17, 2016, the Company issued 561,000 shares of its common stock in payment of $56,100 of payables – related parties.
On December 31, 2016, the Company issued 763,681 shares of its preferred stock in payment of $381,841 of payables – related parties.
On January 31, 2017, $9,835 of payables – related parties were extinguished by the related party for a non-controlling interest in PSSI.
Convertible notes payable – related parties consisted of the following at:
|
|
January 31,
2017
|
|
|
April 30,
2016
|
|
|
|
|
|
|
|
|
|
|
Note payable to related party, no interest, convertible into common stock of the Company at $0.10 per share, imputed interest at 9% per annum
|
|
$
|
25,000
|
|
|
$
|
25,000
|
|
Note payable to related party, interest at 6%, convertible into common stock of the Company at $0.10 per share
|
|
|
32,050
|
|
|
|
32,050
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
57,050
|
|
|
$
|
57,050
|
|
Convertible notes payable – related parties issued prior to the fiscal year ended April 30, 2014 were convertible 30 days from the first day the Company's common shares are qualified for trading on the OTC Bulletin Board, which occurred in November 2012. As of January 31, 2017, the convertible note payable – related party of $25,000 had not been converted and therefore is in default.
Notes payable – related parties are currently in default and consisted of the following at:
|
|
January 31,
2017
|
|
|
April 30,
2016
|
|
|
|
|
|
|
|
|
|
|
Note payable to related party, with interest at 6% per annum, due September 15, 2013
|
|
$
|
24,656
|
|
|
$
|
24,656
|
|
Note payable to related party, with interest at 6% per annum, due March 8, 2014
|
|
|
7,500
|
|
|
|
7,500
|
|
Note payable to related party, with interest at 6% per annum, due December 5, 2013
|
|
|
2,270
|
|
|
|
47,500
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
34,426
|
|
|
$
|
79,656
|
|
Accrued interest payable – related parties was $12,957 and $17,846 at January 31, 2017 and April 30, 2016, respectively.
On December 31, 2016, the Company issued 109,864 shares of its preferred stock to a related party in payment of $45,230 note principal and $9,702 accrued interest payable.
The Company issued 350,000 of its common shares, valued at $105,000, in May 2016, and 350,000 of its common shares, valued at $57,750, in August 2016 to its Chief Executive Officer pursuant to his Service Agreement.
The Company issued 250,000 of its common shares, valued at $112,500, in August 2016 to a Director.
5. Convertible Notes Payable
Convertible notes payable consisted of the following at:
|
|
January 31,
2017
|
|
|
April 30,
2016
|
|
|
|
|
|
|
|
|
|
|
Note payable, amended April 30, 2016, with interest at 6% per annum, convertible into common stock of the Company at $0.05 per share 90 days from demand
|
|
$
|
11,000
|
|
|
$
|
11,000
|
|
Note payable, amended April 30, 2016, with interest at 6% per annum, convertible into common stock of the Company at $0.05 per share 90 days from demand
|
|
|
9,000
|
|
|
|
9,000
|
|
Note payable, amended April 30, 2016, with interest at 6% per annum, convertible into common stock of the Company at $0.05 per share 90 days from demand
|
|
|
91,150
|
|
|
|
141,150
|
|
Note payable, amended April 30, 2016, with interest at 6% per annum, convertible into common stock of the Company at $0.05 per share 90 days from demand
|
|
|
14,500
|
|
|
|
14,500
|
|
Note payable, amended April 30, 2016, with interest at 6% per annum, convertible into common stock of the Company at $0.05 per share 90 days from demand
|
|
|
20,000
|
|
|
|
20,000
|
|
Note payable, with interest at 6% per annum, convertible into common stock of the Company at $0.05 per share
|
|
|
17,000
|
|
|
|
17,000
|
|
Note payable, with interest at 6% per annum, convertible into common stock of the Company at $0.05 per share
|
|
|
53,650
|
|
|
|
-
|
|
Note payable to institutional investor, with interest at 10% per annum, convertible into common stock of the Company at a defined conversion price
|
|
|
6,000
|
|
|
|
-
|
|
Note payable to institutional investor, with interest at 8% per annum, convertible into common stock of the Company at a defined conversion price
|
|
|
234,000
|
|
|
|
-
|
|
Note payable, with interest at 6% per annum, convertible into common stock of the Company at $0.10 per share
|
|
|
23,750
|
|
|
|
-
|
|
Note payable to institutional investor, with interest at 12% per annum, convertible into common stock of the Company at a defined conversion price
|
|
|
25,000
|
|
|
|
-
|
|
Note payable to institutional investor, with interest at 8% per annum, convertible into common stock of the Company at a defined conversion price
|
|
|
37,000
|
|
|
|
-
|
|
Note payable to institutional investor, with interest at 9% per annum, convertible after 180 days into common stock of the Company at a defined conversion price
|
|
|
35,000
|
|
|
|
-
|
|
Note payable to institutional investor, with interest at 9% per annum, convertible after 180 days into common stock of the Company at a defined conversion price
|
|
|
40,000
|
|
|
|
-
|
|
Note payable, with interest at 6% per annum, convertible into common stock of the Company at $0.035 per share
|
|
|
4,190
|
|
|
|
-
|
|
Note payable, with interest at 6% per annum, convertible into common stock of the Company at $0.035 per share
|
|
|
17,350
|
|
|
|
-
|
|
Note payable to institutional investor, with interest at 8% per annum, convertible after 180 days into common stock of the Company at a defined conversion price
|
|
|
37,000
|
|
|
|
-
|
|
Note payable to institutional investor repaid in August 2016
|
|
|
-
|
|
|
|
41,000
|
|
Note payable to institutional investor repaid in July 2016
|
|
|
-
|
|
|
|
55,500
|
|
Note payable to institutional investor repaid in July 2016
|
|
|
-
|
|
|
|
39,000
|
|
Total
|
|
|
675,590
|
|
|
|
348,150
|
|
|
|
|
|
|
|
|
|
|
Less discount
|
|
|
(94,058
|
)
|
|
|
(284,664
|
)
|
|
|
|
|
|
|
|
|
|
|
|
$
|
581,532
|
|
|
$
|
63,486
|
|
On April 30, 2016, the convertible notes payable with principal balances of $11,000, $9,000, $141,150, $14,500 and $20,000 were amended to establish a conversion price of $0.05 per share, interest at 6% retroactive to the original issuance date of the notes, and a conversion date of 90 days from demand of the lender. The amendments were determined to be extinguishments of the prior debt and the issuance of new debt in accordance with ASC 470-50,
Debt – Modifications and Extinguishments
, resulting in a loss on extinguishment of debt totaling $33,237. In addition, the Company recorded a debt discount and a beneficial conversion feature totaling $195,650 at the inception of the new debt.
On March 10, 2016, the Company entered into a convertible promissory note for $17,000, which bears interest at an annual rate of 6% and is convertible into shares of the Company's common stock at $0.05 per share. The Company recorded a debt discount and a beneficial conversion feature of $17,000 at the inception of the note.
On February 4, 2016, the Company entered into a convertible promissory note with an institutional investor for $41,000, which matures on February 4, 2017. The investor had the right, after the first 180 days of the note, to convert the note and accrued interest in whole or in part into shares of the common stock of the Company at a price per share equal to 60% (representing a discount rate of 40%) of the lowest bid price of the Company's common stock during the 60 consecutive trading days immediately preceding the date of the conversion notice. At the inception of the convertible note to institutional investor, the Company paid debt issuance costs of $2,500, and recorded a debt discount of $41,000, including an original issue discount of $3,500, a derivative liability of $78,034 related to the conversion feature, and a loss on derivative liability of $40,534. Interest expense for the amortization of the debt discount was calculated on a straight-line basis over the life of the convertible note. The note was repaid in August 2016.
On June 8, 2016, the Company entered into a convertible promissory note with an institutional investor for $25,000, which bears interest at an annual rate of 10% and matures on December 9, 2016. The note holder has the right, after a period of 180 days of the note, to convert the note and accrued interest into shares of the common stock of the Company at a discounted price per share equal to 50% to 65% of the market price of the Company's common stock, depending upon the stock's liquidity as determined by the note holder's broker. At the inception of the convertible note, the Company paid debt issuance costs of $2,500, recorded a debt discount of $22,500, and recorded a derivative liability of $51,553 related to the conversion feature, and a loss on derivative liability of $29,053. Interest expense for the amortization of the debt discount is calculated on a straight-line basis over the life of the convertible note. The Company obtained an extension of the maturity date to December 22, 2016 in exchange for the principal amount of the note increasing from $25,000 to $45,000. On December 15, 2016, the Company paid the lender a principal payment of $35,000, and on December 26, 2016, the lender converted $4,000 principal into 129,032 shares of the Company's common stock. The remaining principal balance of $6,000 is in default as of January 31, 2017.
On July 18, 2016, the Company entered into a Senior Secured Convertible Promissory Note with an institutional investor for $189,000, with net proceeds to the Company of $175,000. The note was subsequently amended to a total principal of $200,000, with net proceeds to the Company of $185,000. The note bears interest at an annual rate of 8%, matures on January 17, 2017 and is convertible into common shares of the Company after six months at a fixed conversion price of $0.25 per share. In the event of default, the conversion price changes to a variable price based on a defined discount to the market price of the Company's common stock. As of January 17, 2017, the Company is in default on this note and a penalty of $50,000 was added to the note principal. The lender subsequently converted $10,000 principal into 833,334 shares of the Company's common stock on January 18, 2017 and converted $6,000 principal into 909,091 shares of the Company's common stock on January 26, 2017.
On July 31, 2016, the Company entered into a convertible promissory note for $53,650, which has no defined maturity date. The note bears interest at an annual rate of 6% and is payable only on conversion into shares of the Company's common stock at $0.10 per share.
On August 1, 2016, the Company entered into a convertible promissory note for $23,750, which has no defined maturity date. The note bears interest at an annual rate of 6% and is payable only on conversion into shares of the Company's common stock at $0.10 per share.
On August 3, 2016, the Company entered into a convertible promissory note with an institutional investor for $25,000, which bears interest at an annual rate of 12% and matures on February 4, 2017. The note holder has the right, after a period of 180 days of the note, to convert the note and accrued interest into shares of the common stock of the Company at a discounted price per share equal to 50% to 65% of the market price of the Company's common stock, depending upon the stock's liquidity as determined by the note holder's broker. At the inception of the convertible note, the Company paid debt issuance costs of $2,500, recorded a debt discount of $22,500, and recorded a derivative liability of $64,942 related to the conversion feature, and a loss on derivative liability of $42,442. Interest expense for the amortization of the debt discount is calculated on a straight-line basis over the life of the convertible note.
On August 3, 2016, the Company entered into a convertible promissory note with an institutional investor for $37,000, which bears interest at an annual rate of 8% and matures on August 3, 2017. The investor has the right, after the first six months of the note, to convert the note and accrued interest in whole or in part into shares of the common stock of the Company at a price per share equal to 55% (representing a discount rate of 45%) of the lowest bid price of the Company's common stock during the 20 trading days immediately ending on the last trading date prior to the conversion date. At the inception of the convertible note to institutional investor, the Company paid debt issuance costs of $25,500, including 150,000 shares of its common stock valued at $24,000, and recorded a debt discount of $37,000, including an original issue discount of $5,000, a derivative liability of $173,227 related to the conversion feature, and a loss on derivative liability of $166,727. Interest expense for the amortization of the debt discount is calculated on a straight-line basis over the life of the convertible note.
On September 20, 2016, the Company entered into a convertible promissory note with an institutional investor for $35,000, which bears interest at an annual rate of 9% and matures on June 20, 2017. The investor has the right, commencing on the 180
th
day of the note, to convert the note and accrued interest in whole or in part into shares of the common stock of the Company at a price per share equal to 72.5% (representing a discount rate of 27.5%) of the lowest trading price of the Company's common stock during the 15 trading days prior to the conversion date. At the inception of the convertible note to institutional investor, the Company recorded debt issuance costs comprised of an obligation to issue 110,000 shares of its common stock valued at $14,311, and recorded a debt discount of $35,000, a derivative liability of $42,432 related to the conversion feature, and a loss on derivative liability of $21,743. Interest expense for the amortization of the debt discount is calculated on a straight-line basis over the life of the convertible note.
On October 27, 2016, the Company entered into a convertible promissory note with an institutional investor for $40,000, which bears interest at an annual rate of 9% and matures on July 7, 2017. The investor has the right, commencing on the 180
th
day of the note, to convert the note and accrued interest in whole or in part into shares of the common stock of the Company at a price per share equal to 72.5% (representing a discount rate of 27.5%) of the lowest trading price of the Company's common stock during the 15 trading days prior to the conversion date. At the inception of the convertible note to institutional investor, the Company recorded a debt discount of $40,000, a derivative liability of $47,939 related to the conversion feature, and a loss on derivative liability of $7,939. Interest expense for the amortization of the debt discount is calculated on a straight-line basis over the life of the convertible note.
On November 1, 2016, the Company entered into a convertible promissory note for $4,190, which has no defined maturity date. The note bears interest at an annual rate of 6% and is payable only on conversion into shares of the Company's common stock at $0.10 per share.
On December 15, 2016, the Company entered into a convertible promissory note with an institutional investor for $37,000, which bears interest at an annual rate of 8% and matures on September 30, 2017. The investor has the right, commencing on the 180
th
day of the note, to convert the note and accrued interest in whole or in part into shares of the common stock of the Company at a price per share equal to 58% (representing a discount rate of 42%) of the average of the lowest three trading price of the Company's common stock during the 15 trading days prior to the conversion date. At the inception of the convertible note to institutional investor, the Company recorded a debt discount of $35,000, a derivative liability of $96,039 related to the conversion feature, and a loss on derivative liability of $61,039. Interest expense for the amortization of the debt discount is calculated on a straight-line basis over the life of the convertible note.
On January 31, 2017, the Company entered into a convertible promissory note for $17,350, which has no defined maturity date. The note bears interest at an annual rate of 6% and is payable only on conversion into shares of the Company's common stock at $0.035 per share.
During the nine months ended January 31, 2017, the Company issued a total of 3,701,337 shares of its common stock in the conversion of $92,605 convertible notes principal and $11,644 accrued interest payable.
During the nine months ended January 31, 2017, we had the following activity in our derivative liabilities account:
Balance at April 30, 2016
|
|
$
|
2,081,931
|
|
Issuance of new debt
|
|
|
147,189
|
|
Gain on derivative liability
|
|
|
(1,084,350
|
)
|
Conversion of debt to shares of common stock and repayment of debt
|
|
|
(633,877
|
)
|
|
|
|
|
|
Balance at January 31, 2017
|
|
$
|
510,893
|
|
The estimated fair value of the derivative liabilities at January 31, 2017 was calculated using the Black-Scholes pricing model with the following assumptions:
Risk-free interest rate
|
|
|
0.52 – 0.749
|
%
|
Expected life in years
|
|
|
0.23 - 0.66
|
|
Dividend yield
|
|
|
0
|
%
|
Expected volatility
|
|
|
266.93% - 353.75
|
%
|
Accrued interest and fees payable were $37,808 and $63,979 at January 31, 2017 and April 30, 2016, respectively.
6. Financial Instruments
The convertible notes payable and related derivative liabilities are measured at fair value on a recurring basis and estimated as follows at January 31, 2017:
|
|
Total
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative liabilities
|
|
$
|
510,893
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
510,893
|
|
Convertible notes payable, net
|
|
|
581,532
|
|
|
|
-
|
|
|
|
-
|
|
|
|
581,532
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities measured at fair value
|
|
$
|
1,092,425
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
1,092,425
|
|
7. Stockholders' Deficit
The Company has authorized 20,000,000 shares of $0.0001 par value preferred stock and 200,000,000 shares of $0.0001 par value common stock.
During the nine months ended January 31, 2017, the Company issued a total of 873,545 shares of its preferred stock: 763,681 shares in payment of payables – related party of $381,841 and 109,864 shares in payment of notes payable – related parties principal of $45,230 and accrued interest payable of $9,702.
During the nine months ended January 31, 2017, the Company issued a total of 12,568,837 shares of its common stock: 3,330,000 shares for services valued at $591,880; 4,126,500 shares in payment of accounts payable and accrued expenses of $373,686, recognizing a gain on extinguishment of debt of $4,550; 561,000 shares in payment of payables – related party of $56,100; 3,701,337 shares in the conversion of debt principal of $92,605 and accrued interest payable of $11,644; 550,000 shares valued at $80,000 for debt issuance costs; and 300,000 shares valued at $38,400 for settlement of warrants (see Note 8).
All issuances of the Company's common stock for non-cash consideration have been assigned a dollar amount equaling either the market value of the shares issued or the value of consideration received whichever is more readily determinable. Most of the non-cash consideration received pertaining to services rendered by consultants and others has been valued at the market value of the shares issued.
8. Stock Options and Warrants
During the nine months ended January 31, 2017, the Company issued warrants to a lender to purchase 250,000 shares of the Company's common stock at an exercise price of $0.60 per share. The warrants vested upon grant and expire on July 17, 2018. The Company estimated the grant date fair value of the warrants at $14,365 using the Black-Scholes option-pricing model and charged the amount to debt discount.
During the nine months ended January 31, 2017, the Company issued warrants to a consultant to purchase 50,000 shares of the Company's common stock at an exercise price of $0.50 per share. The warrants vested upon grant and expire on June 14, 2017. The Company estimated the grant date fair value of the warrants at $9,056 using the Black-Scholes option-pricing model and charged the amount to general and administrative expenses.
The following assumptions were used in estimating the value of the warrants:
Risk free interest rate
|
|
|
.55 - .68
|
%
|
Expected life in years
|
|
|
1.0 - 2.0
|
|
Dividend yield
|
|
|
0
|
%
|
Expected volatility
|
|
|
137.99 – 351.37
|
%
|
A summary of the Company's stock options and warrants as of January 31, 2017, and changes during the nine months then ended is as follows:
|
|
Shares
|
|
|
Weighted
Average
Exercise Price
|
|
Weighted Average
Remaining
Contract Term
(Years)
|
|
|
Aggregate
Intrinsic
Value
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at April 30, 2016
|
|
|
1,068,333
|
|
|
$
|
1.56
|
|
|
|
|
|
Granted
|
|
|
300,000
|
|
|
$
|
0.58
|
|
|
|
|
|
Exercised
|
|
|
(68,333
|
)
|
|
$
|
0.60
|
|
|
|
|
|
Forfeited or expired
|
|
|
-
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding and exercisable at January 31, 2017
|
|
|
1,300,000
|
|
|
$
|
1.39
|
|
1.32
|
|
$
|
-
|
The aggregate intrinsic value in the preceding table represents the total pretax intrinsic value, based on our closing stock price of $0.005 as of January 31, 2017, which would have been received by the holders of in-the-money options had the option holders exercised their options as of that date.
The Company and a warrant holder ("Holder") entered into a Warrant Settlement Agreement on August 9, 2016 whereby the Holder exercised 68,333 shares in exchange for a cash payment by the Company of $50,000 and the issuance by the Company of 300,000 of its common shares, valued at $38,400. The total obligation of $88,400 has been recorded as a reduction of additional paid-in capital.
9. Contingencies and Commitments
The Company has the following material commitments as of January 31, 2017:
a)
|
Administration Agreement with EMAC Handels AG, renewed effective May 1, 2015 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 a total 700,000 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 250,000 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 RAB Investments AG, for general fees of $5,000 per month, office rent of $250 and telephone of $125 beginning January 2017, the issuance of 3,000,000 common shares of PSSI and a 12% royalty calculated on defines sales revenues payable within 10 days after the monthly sales.
|
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 500,000 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 1,500,000 common shares of PSSI.
|
10. Recent Accounting Pronouncements
In January 2017, the FASB issued Accounting Standards Update ("ASU") No. 2017-4, "Intangibles – Goodwill and Other (Topic 350): "Simplifying the Test for Goodwill Impairment." This update simplifies how an entity is required to test goodwill for impairment by eliminating Step 2 from the goodwill impairment test. Step 2 measures a goodwill impairment loss by comparing the implied fair value of a reporting unit's goodwill with the carrying amount of that goodwill. Instead, under the amendments in this update, an entity should perform its annual, or interim, goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. An entity should recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit's fair value. An entity should apply the amendments in this update on a prospective basis. An entity is required to disclose the nature of and reason for the change in accounting principle upon transition. That disclosure should be provided in the first annual period and in the interim period within the first annual period when the entity initially adopts the amendments in this update. A public business entity that is an SEC filer should adopt the amendments in this Update for its annual or any interim goodwill impairment tests in fiscal years beginning after December 15, 2019. The Company is currently unable to determine the impact on its consolidated financial statements of the adoption of this new accounting pronouncement.
In January 2017, the FASB issued ASU No. 2017-1, "Business Combinations (Topic 805): Clarifying the Definition of a Business." The amendments in this update clarify the definition of a business with the objective of adding guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. The definition of a business affects many areas of accounting including acquisitions, disposals, goodwill, and consolidation. The amendments of this ASU are effective for public business entities for annual periods beginning after December 15, 2018, and interim periods within annual periods beginning after December 15, 2019. The amendments in this Update are to be applied prospectively on or after the effective date. The Company is currently unable to determine the impact on its consolidated financial statements of the adoption of this new accounting pronouncement.
In October 2016, the FASB issued Accounting Standards Update ("ASU") No. 2016-17, "Consolidation (Topic 810): Interests Held Through Related Parties That are Under Common Control." This update amends the consolidation guidance on how a reporting entity that is the single decision maker of a variable interest entity ("VIE") should treat indirect interests in the entity held through related parties that are under common control with the reporting entity when determining whether it is the primary beneficiary of that VIE. The primary beneficiary of a VIE is the reporting entity that has a controlling financial interest in a VIE and, therefore, consolidates the VIE. A reporting entity has an indirect interest in a VIE if it has a direct interest in a related party that, in turn, has a direct interest in the VIE. The amendments in this ASU are effective for public business entities for fiscal years beginning after December 15, 2016, including interim periods within those fiscal years. Early adoption is permitted, including adoption in an interim period. If an entity early adopts the amendments in an interim period, any adjustments should be reflected as of the beginning of the fiscal year that includes that interim period. The Company is currently unable to determine the impact on its consolidated financial statements of the adoption of this new accounting pronouncement.
In August 2016, the FASB issued ASU No. 2016-15, "Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments." This ASU addresses eight specific cash flow issues with the objective of reducing the existing diversity in practice. The amendments in this ASU are effective for public business entities for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. Early adoption is permitted. The Company is currently unable to determine the impact on its consolidated financial statements of the adoption of this new accounting pronouncement.
Although there are several other new accounting pronouncements issued or proposed by the FASB, which the Company has adopted or will adopt, as applicable, the Company does not believe any of these accounting pronouncements has had or will have a material impact on its consolidated financial position or results of operations.
11. Supplemental Statement of Cash Flows Information
During the nine months ended January 31, 2017 and 2016, the Company paid $165,317 and $67,514 for interest.
During the nine months ended January 31, 2017 and 2016, the Company paid no amounts for income taxes.
During the nine months ended January 31, 2017, the Company had the following non-cash investing and financing activities:
In debt conversions, increased common stock by $370, increased additional paid-in capital by $342,851, decreased convertible notes payable by $92,605, decreased accrued interest and fees payable by $11,644, decreased debt discount by $39,837 and decreased derivative liabilities by $67,826.
Increased accounts payable and debt discount by $14,311.
Increased debt discount and additional paid-in capital by $52,136 for beneficial conversion feature of new convertible notes payable.
Increased debt discount and decreased prepaid expenses by $16,294.
Increased debt discount and derivative liability by $147,189.
Increased common stock by $413 and additional paid-in capital by $373,273 and decreased accrued interest and fees payable by $24,636 and accrued license agreement payments by $353,600.
Increased debt discount and additional paid-in capital by $14,365 for the issuance of warrants.
Increased common stock and decreased additional paid-in capital by $30 for net settlement of warrants.
Increased accounts payable and decreased additional paid-in capital by $50,000 for settlement of warrants obligation.
Increased license agreement and accrued license agreement payments by $378,600.
Increased debt discount by $80,000, common stock by $55 and additional paid-in capital by $79,945 for issuance of common stock for debt issuance costs.
Increased preferred stock by $11, increased additional paid-in capital by $54,921, decreased notes payable – related parties by $45,230 and decreased accrued interest payable – related parties by $9,702.
Increased preferred stock by $76, increased additional paid-in capital by $381,841 and decreased payables – related parties by $381,841.
Increased non-controlling interest and decreased payables – related parties by $9,835.
Increased common stock by $56, increased additional paid-in capital by $56,044 and decreased payables – related parties by $56,100.
During the nine months ended January 31, 2016, the Company had the following non-cash investing and financing activities:
Increased common stock by $18, increased additional paid-in capital by $33,969, decreased convertible notes payable by $10,014, decreased debt discount by $2,594 and decreased derivative liability by $24,051.
Decreased debt discount by $10,723 and derivative liability by $168,698.
Increased debt discount and derivative liability by $84,500.
12. Subsequent Events
In accordance with ASC 855, Subsequent Events, the Company has evaluated subsequent events to determine events occurring after January 31, 2017 that would have a material impact on the Company's financial results or require disclosure.
Issuances of Common Shares
Subsequent to January 31, 2017 the Company issued a total of 10,761,435 shares of its common stock in conversion of convertible notes principal totaling $19,156.
Subsequent to January 31, 2017, the Company received additional debt funding from current lenders totaling $15,000.