DEFENSE TECHNOLOGIES INTERNATIONAL CORP. - Quarter Report: 2016 July (Form 10-Q)

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

[X]

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Quarterly Period Ended July 31, 2016

[   ]

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                       to __________

Commission File Number 000-54851

 (Exact name of registrant as specified in its charter)

(Address of principal executive offices)

(Registrant's telephone number, including area code)

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

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

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company

 

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

As of September 14, 2016, there were 26,196,056 shares of the registrant's common stock, $0.0001 par value, outstanding

 

DEFENSE TECHNOLOGIES INTERNATIONAL CORP.

(Formerly Canyon Gold Corp.)

 

FORM 10-Q

 

FOR THE QUARTER ENDED JULY 31, 2016

 

TABLE OF CONTENTS

PART  I   —   FINANCIAL INFORMATION

See notes to condensed consolidated financial statements

 

 

See notes to condensed consolidated financial statements

 

See notes to condensed consolidated financial statements

Defense Technologies International Corp.

(Formerly Canyon Gold Corp.)

Notes to Condensed Consolidated Financial Statements

July 31, 2016

(Unaudited)

2. Basis of Presentation and Summary of Significant Accounting Policies

Net Income (Loss) per Common Share

The common shares used in the computation of our basic and diluted net income (loss) per share are reconciled as follows:

 

 

		Three Months Ended July 31,
		2016				2015
Weighted average number of shares outstanding - basic			23,097,363				20,927,209
Dilutive effect of convertible debt			9,170,210				-
Weighted average number of shares outstanding - diluted			32,267,573				20,927,209

 

 

3. Defense Technology Corporation Acquisition

 

As of the date of filing of this report, not all financial information, including pro forma financial information was available for the acquisition.  Therefore, the above financial disclosure is based on preliminary assumptions and is subject to adjustment.

 

4. Mineral Claims

5. Related Party Transactions and Balances

Convertible notes payable – related parties consisted of the following at:

Notes payable – related parties are currently in default and consisted of the following at:

6. Convertible Notes Payable

Convertible notes payable consisted of the following at:

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 Company may repay the note at any time on or before the date that is 120 days after the date of the note.  If the Company does not repay the note during the first 120 days, a one-time interest charge of 12% will be charged.  After the first 120 days, the note may be prepaid by the Company with the prior written consent of the investor at 125% of the principal owed. The investor has 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 is calculated on a straight-line basis over the life of the convertible note.

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.

 

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 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.  The net proceeds were used to retire two outstanding convertible promissory notes and to provide working capital.

During the three months ended July 31, 2016, the Company issued a total of 1,829,880 shares of its common stock in the conversion of $72,605 convertible notes principal and $11,644 accrued interest payable.

During the three months ended July 31, 2016, we had the following activity in our derivative liabilities account:

The estimated fair value of the derivative liabilities at July 31, 2016 was calculated using the Black-Scholes pricing model with the following assumptions:

 

Accrued interest and fees payable was $365,593 and $63,979 at July 31, 2016 and April 30, 2016, respectively.

 

8. Stockholders' Deficit

(a)	Litigation

(b)	Indemnities and Guarantees

(c)	Commitments

12. Supplemental Statement of Cash Flows Information

During the three months ended July 31, 2016 and 2015, the Company paid $85,057 and $10,714 for interest.

During the three months ended July 31, 2016 and 2015, the Company paid no amounts for income taxes.

During the three months ended July 31, 2016, the Company had the following non-cash investing and financing activities:

In the DTC acquisition, increased inventories by $400, increased property and equipment by $11,463, increased intangible assets by $1,437,345, increased accounts payable by $1,445, increased accrued interest and fees payable by $341,161, increased convertible notes payable by $1,068,000 and increased payables – related parties by $57,011.

In debt conversions, increased common stock by $183, increased additional paid-in capital by $304,923, decreased convertible notes payable by $72,605, decreased accrued interest and fees payable by $11,644, decreased debt discount by $39,837 and decreased derivative liabilities by $41,880.

Increased debt discount and additional paid-in capital by $40,237 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 $22,500.

Increased common stock by $2 and additional paid-in capital by $5,773 and decreased accrued interest and fees payable by $10,325.

Increased debt discount and additional paid-in capital by $14,365 for the issuance of warrants.

During the three months ended July 31, 2015, 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 $6,680 and derivative liability by $71,943.

 

13. Subsequent Events

In accordance with ASC 855, Subsequent Events, the Company has evaluated subsequent events to determine events occurring after January 31, 2016 that would have a material impact on the Company's financial results or require disclosure.

Issuances of Common Shares

Mineral Claims

Subsequent to July 31, 2016, the Long Canyon reregistered and restaked the 30 mineral claims in Nevada and has 90 days from registration to pay the assessment fees for the period ended September 2017.

Warrant Settlement Agreement

On August 9, 2016, the Company entered into a Warrant Settlement Agreement with a lender to eliminate the lender's warrant to purchase 68,333 shares of common stock of the Company previously issued in connection with a convertible promissory note.  The Company is required to pay a total of $50,000 cash and issue 300,000 shares of its common stock.  The Company paid $10,000 and issued the shares in August 2016

Amendment to Security Purchase Agreement

On August 1, 2016, the Company entered into an Amendment to Security Purchase Agreement whereby the lender that loaned the Company $189,000 pursuant to a Senior Secured Convertible Promissory Note agreed to loan the Company an additional $10,000.

Security Purchase Agreement

On August 3, 2016, the Company entered into a Securities Purchase Agreement with an institutional lender for the issuance of an 8% convertible note in the aggregate principal amount of $37,000.  The Company issued 150,000 shares of its common stock to the lender as a loan commitment fee.

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.

Effective July 15, 2016, the Company completed the acquisition of 100% of the member's equity of Defense Technology Corporation, a privately held Colorado limited liability company ("DTC").  DTC is a developer of defense detection and protection products intended to improve security for military personnel, schools and other public facilities.  See Note 3.

On July 20, 2011, the Company acquired 100% of the issued shares of Long Canyon Gold Resources Corp. ("Long Canyon"), a private British Columbia, Canada Corporation, incorporated on June 19, 2008, in a share for share exchange accounted for as a reverse acquisition and recapitalization.  Long Canyon has held leases for 30 BLM mineral lease claims, situated in the west section of the new Long Canyon Gold Trend area of east central Nevada and intends to conduct exploration activities on the properties as funding permits. 

The consolidated financial statements presented in this report include the financial statements of the Company and those of Long Canyon and DTC (from the date of acquisition forward).

Our principal executive office is located at 4730 South Fort Apache Road, Suite 300, Las Vegas, Nevada 89147, telephone 1-(800) 520-9485.  Additional office space is subleased from EMAC at 641 West 3rd Street, North Vancouver BC, Canada.  The office of DRLLC that is responsible for management of exploration program is located at 125 East Main Street # 307, American Fork, Utah 84003.

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.

Going Concern

Results of Operations

Primarily as a result of the gain on derivative liability, we reported net income of $799,206 in the three months ended July 31, 2016 compared to a net loss of $113,162 in the three months ended July 31, 2015.

Our immediate goal is to provide funding for the completion of the initial production of DTC's Offender Alert Passive Scan.  The Offender Alert Passive Scan is an advanced passive scanning system for detecting and identifying concealed threats.

In the opinion of management, inflation has not and will not have a material effect on our operations until such time as we successfully complete an acquisition or merger.  At that time, management will evaluate the possible effects of inflation related to our business and operations following a successful acquisition or merger.

In accordance with Accounting Standards Codification ("ASC") 350, "Intangibles – Goodwill and Other," the Company has capitalized intangible assets acquired in the DTC acquisition (Note 3) that are used in research and development activities.  Such intangible assets are considered indefinite lived until completion or abandonment of the associated research and development efforts.  During the period that the assets are considered indefinite lived, they are not amortized but tested for impairment.  Once the research and development efforts are completed or abandoned, the Company will determine the useful life of the assets and amortize the assets over such useful life.  Research and development expenses incurred subsequent to the acquisition date are expensed.

Net Income (Loss) per Common Share

Exploration Costs

All sampling, metallurgical, engineering, contractor costs, and efforts to obtain mineral rights have been charged to expense as incurred.

Comprehensive Loss

We have no component of other comprehensive income.  Accordingly, net loss equals comprehensive loss for the three months ended July 31, 2016 and 2015.

Income Taxes

We provide for income taxes under ASC 740, Accounting for Income Taxes. ASC 740 requires the use of an asset and liability approach in accounting for income taxes.  Deferred tax assets and liabilities are recorded based on the differences between the financial statement and tax bases of assets and liabilities and the tax rates in effect when these differences are expected to reverse.  Our predecessor operated as entity exempt from federal and state income taxes.

ASC 740 requires the reduction of deferred tax assets by a valuation allowance if, based on the weight of available evidence, it is more likely than not that some or all of the deferred tax assets will not be realized.

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.

Revenue Recognition

Revenues from the sale of products will be recorded when the product is shipped, title and risk of loss have transferred to the purchaser, payment terms are fixed or determinable and payment is reasonably assured.  Revenues from service contracts will be recognized when performance of the service is complete or over the term of the contract.

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.

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.

This item is not required for a smaller reporting company.

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 completed fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

 

PART II — OTHER INFORMATION

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.

During the three months ended July 31, 2016, the Company issued a total of 3,246,380 unregistered shares of its common stock: 1,400,000 shares for services valued at $303,800; 16,500 shares in payment of accrued fees payable of $10,325 and a total of 1,829,880 shares in the conversion of debt principal of $72,605 and accrued interest payable of $11,644.  The securities were issued in a private transaction to a related party pursuant to an exemption from registration provided by Section 4(a)(2) of the Securities Act of 1933.

This item is not applicable.

This item is not applicable.

Not applicable

The following exhibits are filed as part of this report:

* 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.

 

 

 

 

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