Notes to Condensed Consolidated Financial Statements
As of January 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, 2019 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, 2020, the consolidated results of its operations and its consolidated cash flows for the nine months ended January 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.
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 January 31, 2020 consist of parts used in assembly of the units being
sold with no work in progress or finished goods. As of January 31, 2020 and April 30, 2019 the value of the inventory was $26,737 and $2,787, 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
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 January 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 January 31, 2020, the Company had potential shares issuable under convertible preferred shares, outstanding options, warrants and convertible debt for a total of 43,441,701. With the loss in operations
for the nine-month period ended January 31, 2020, the additional shares were determined to be non-dilutive.
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 January 31, 2020, the Company has no revenues, has accumulated deficit of $9,569,949 and a working capital deficit of $3,580,931 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 January 31, 2020, and April 30, 2019, the Company had payable balances due to related parties totaling $904,122 and $749,879, respectively, which resulted from transactions
with these related parties and other significant shareholders.
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 January 31, 2020, $25,000 of the loan was funded by the lender.
As of January 31, 2020 and April 30, 2019 the outstanding balances of notes payable was $429,226, 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.
During the nine months ended January 31, 2019, the Company issued a total of 474,062 shares of its common stock in the conversion of $52,278 in convertible notes principal,
accrued interest payable and fees.
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 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 nine months ended January 31, 2020 the Company issued 2,642,860 shares of common stock with a value of $183,002 for debt.
As of January 31, 2020, and April 30, 2019, the convertible debt outstanding, net of discount, was $689,454 and $959,800, 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).
The three levels of the fair value hierarchy are as follows:
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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.
|
|
|
|
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Level 2 –
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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.
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|
|
|
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Level 3 –
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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 January 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 nine months ended January 31, 2020:
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|
|
Level 1
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|
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Level 2
|
|
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Level 3
|
|
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Balance at January 31, 2020
|
|
$
|
--
|
|
|
$
|
--
|
|
|
$
|
1,136,092
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|
The estimated fair value of the derivative liabilities at January 31, 2020 was calculated using the Binomial Lattice pricing model with the following assumptions:
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Risk-free interest rate
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2.00%
|
|
Expected life in years
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0.25 to 0.85
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|
Dividend yield
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0%
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Expected volatility
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443.00%
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NOTE – 8: EQUITY
During the nine months ended January 31, 2019 the Company issued 461,425 shares of common stock with a value of $154,856 for service.
During the nine month period ended January 31, 2019, the Company issued 474,062 shares of its common stock in the conversion of debt of $52,278.
On May 10, 2019 the Company issued 150,000 shares of common stock to First Fire Financial as part of a debt settlement with a value of $37,501.
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 January
31, 2020 the Common shares had not been issued and the conversion was not completed.
During the nine months ended January 31, 2020 the Company issued 2,642,860 shares of common stock with a value of $183,002 for debt.
During the nine months ended January 31, 2020 the Company issued 386,091 shares of common stock with a value of $90,245 for accounts payable.
During the nine month period ended January 31, 2020, the Company issued 798,200 shares of its common stock for service with a value of $166,779.
During the nine month period ended January 31, 2020, the Company cancelled 408,333 shares of its common stock for service with a value of $96,517. The shares were cancelled as they
had been authorized by the Company but never issued by the transfer agent thus the Company elected to cancel the shares. The cancellation resulted in a gain on cancellation of shares of $96,517.
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 January 31, 2020 the Common shares had not been issued and the conversion was not completed.
As of January 31, 2020 the Company had 2,925,369 Series A and 520,000 Series B preferred share issued and outstanding.
During the year ended April 30, 2019 the Company issued 250,000 warrants with a conversion price of $1.00 to one individual. The options have
a three year term and are convertible into the common shares of the Company.
A summary of the Company’s stock options as of January 31, 2020, and changes during the nine months then ended is as follows:
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|
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Shares
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|
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Weighted
Average
Exercise Price
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|
|
Weighted Average
Remaining
Contract Term
(Years)
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|
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Aggregate
Intrinsic
Value
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|
|
|
|
|
|
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|
|
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|
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Outstanding at April 30, 2019
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|
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250,000
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|
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$
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1.00
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2.00
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|
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$
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205,000
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|
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Granted
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|
|
--
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|
|
$
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--
|
|
|
|
--
|
|
|
|
--
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|
|
Exercised
|
|
|
--
|
|
|
$
|
--
|
|
|
|
--
|
|
|
|
--
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|
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Forfeited or expired
|
|
|
--
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|
|
$
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--
|
|
|
|
--
|
|
|
|
--
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|
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Outstanding and exercisable at January 31, 2020
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|
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250,000
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|
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$
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1.00
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|
|
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1.25
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|
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$
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182,500
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During the year ended April 30, 2019 the Company issued 600,000 warrants with a conversion price of $0.70 to $2.50 to four individuals. The
warrants have a three and one half year term and are convertible into the common shares of the Company.
A summary of the Company’s warrants as of January 31, 2020, and changes during the nine months then ended is as follows:
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|
|
Shares
|
|
|
Weighted
Average
Exercise Price
|
|
|
Weighted Average
Remaining
Contract Term
(Years)
|
|
|
Aggregate
Intrinsic
Value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
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Outstanding at April 30, 2019
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|
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600,000
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|
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$
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1.20
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|
|
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3.00
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|
|
$
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492,000
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|
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Granted
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|
|
--
|
|
|
$
|
--
|
|
|
|
--
|
|
|
|
--
|
|
|
Exercised
|
|
|
--
|
|
|
$
|
--
|
|
|
|
--
|
|
|
|
--
|
|
|
Forfeited or expired
|
|
|
--
|
|
|
$
|
--
|
|
|
|
--
|
|
|
|
--
|
|
|
Outstanding and exercisable at January 31, 2020
|
|
|
600,000
|
|
|
$
|
1.20
|
|
|
|
2.25
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|
|
$
|
558,000
|
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NOTE – 11: COMMITMENTS AND CONTINGENCIES
The Company has the following material commitments as of January 31, 2020:
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a)
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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.
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b)
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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.
|
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c)
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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.
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d)
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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.
|
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e)
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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.
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f)
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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.
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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.
|
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 yearly rental obligations including the lease agreements are as follows:
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Fiscal Year
|
|
|
|
|
2020
|
|
$
|
9,750
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|
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2021
|
|
$
|
39,000
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|
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2022
|
|
|
19,500
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|
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Total
|
|
$
|
68,250
|
|
Under the new standards the lease has been determined to be an operating lease with a fair value was determined to be $91,474 which is presented in the balance sheet as an asset labeled “right to use
lease” offset by a liability labeled “lease liability”. The rate was determined as a fair value of the lease over a 30 month period using a 5% interest rate for the present value calculation. During the nine months ended January 31, 2020 the asset
and liability were both reduced by $28,649.
NOTE 1
3: SUBSEQUENT EVENTS
The Company has evaluated subsequent events to determine events occurring after January 31, 2020 through March 12, 2020 that would have a material impact on the Company’s financial results or require
disclosure and have determined none exist.