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EX-32.1 - SECTION 1350 CERTIFICATION OF CHIEF EXECUTIVE OFFICER AND CHIEF FINANCIAL OFFICE - DEFENSE TECHNOLOGIES INTERNATIONAL CORP.exh32_1.htm
EX-31.1 - SECTION 302 CERTIFICATION OF CHIEF EXECUTIVE OFFICER AND CHIEF FINANCIAL OFFICER - DEFENSE TECHNOLOGIES INTERNATIONAL CORP.exh31_1.htm

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, 2018

[   ]
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

DEFENSE TECHNOLOGIES INTERNATIONAL CORP.
(Exact name of registrant as specified in its charter)

Delaware
             99-0363802
(State of Incorporation)
                        (I.R.S. Employer Identification Number)
 
4730 South Fort Apache Road, Suite 300, Las Vegas, Nevada 89147
(Address of principal executive offices)

(800) 520-9485
(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

Large accelerated filer
[   ]
Accelerated filer
[   ]
Non-accelerated filer
[   ]
Smaller reporting company
[X]
   
Emerging Growth Company
[X]

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. [  ]

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 12, 2018, there were 1,657,820 shares of the registrant's common stock, and 3,277,369 Series A preferred and 520,000 Series B preferred; $0.0001 par value, outstanding.

DEFENSE TECHNOLOGIES INTERNATIONAL CORP.
FORM 10-Q

FOR THE THREE  MONTH PERIODS ENDED JULY 31, 2018 AND 2017
TABLE OF CONTENTS


 
PART  I    —   FINANCIAL INFORMATION
Page
     
Item 1.
Financial Statements:
 
     
 
Condensed Consolidated Balance Sheets as of July 31, 2018 (Unaudited) and April 30, 2018 (Audited)
3
     
 
Condensed Consolidated Statements of Operations for the three Month Periods Ended July 31, 2018 and 2017 (Unaudited)
4
     
 
Condensed Consolidated Statements of Cash Flows for the three Month Periods Ended July 31, 2019 and 2017 (Unaudited)
5
     
 
Notes to Condensed Consolidated Financial Statements
6
     
Item 2.
Management's Discussion and Analysis of Financial Condition and Results of Operations
14
     
Item 3.
Quantitative and Qualitative Disclosures about Market Risk
16
     
Item 4.
Controls and Procedures
16
     
 
PART II   —   OTHER INFORMATION
 
     
Item 1.
Legal Proceedings
17
     
Item 1A.
Risk Factors
17
     
Item 2
Unregistered Sales of Equity Securities and Use of Proceeds
17
     
Item 3.
Defaults upon Senior Securities
17
     
Item 4.
Mine Safety Disclosure
17
     
Item 5.
Other Information
17
     
Item 6.
Exhibits
18
     
 
Signatures
19

2

PART  I   —   FINANCIAL INFORMATION

Item 1.  Financial Statements
 
Defense Technologies International Corp.
 
Condensed Consolidated Balance Sheets
 
   
   
July 31,
2018
   
April 30,
2018
 
ASSETS
 
(Unaudited)
   
(Audited)
 
Current assets:
           
   Cash
 
$
120,183
   
$
8
 
   Inventory
   
2,787
     
--
 
   Total current assets
   
122,970
     
8
 
                 
Investments
   
378,600
     
378,600
 
Total assets
 
$
501,570
   
$
378,608
 
                 
LIABILITIES AND STOCKHOLDERS' DEFICIT
         
Current liabilities:
               
   Accounts payable
 
$
219,607
   
$
352,162
 
   Accrued licenses agreement payable
   
8,800
     
6,300
 
   Accrued interest and fees payable
   
120,576
     
155,896
 
   Accrued interest payable – related parties
   
--
     
21,383
 
   Convertible notes payable, net of discount
   
749,840
     
816,526
 
   Derivative liabilities
   
996,758
     
3,248,160
 
   Payables – related parties
   
575,132
     
437,968
 
   Notes payable
   
414,226
     
25,000
 
                 
   Total current liabilities
   
3,084,939
     
5,063,395
 
                 
   Total liabilities
   
3,084,939
     
5,063,395
 
                 
Commitments and Contingencies
   
--
     
--
 
                 
Stockholders' deficit:
               
   Preferred stock, $0.0001 par value; 20,000,000 shares authorized, Series A – 3,277,369 and 3,277,369 shares issued and outstanding, respectively
   
328
     
328
 
      Series B – 520,000 shares issued and outstanding, respectively
   
52
     
52
 
                 
   Common stock, $0.0001 par value; 200,000,000 shares authorized, 1,507,820, net of treasury and 1,283,758 shares issued and outstanding, respectively
   
151
     
128
 
   Additional paid-in capital
   
5,115,866
     
5,076,110
 
   Accumulated deficit
   
(7,678,075
)
   
(9,745,809
)
         Total
   
(2,561,678
)
   
(4,669,571
)
      Non-controlling interest
   
(21,691
)
   
(15,596
)
   Total stockholders' deficit
   
(2,583,369
)
   
(4,684,787
))
                 
Total liabilities and stockholders' deficit
 
$
501,570
   
$
378,608
 

See notes to condensed consolidated financial statements
3

 
Defense Technologies International Corp.
Condensed Consolidated Statements of Operations
(Unaudited)

   
Three Months Ended
July 31,
 
   
2018
   
2017
 
Expenses:
           
   General and administrative
 
$
168,750
   
$
156,443
 
                 
   Total expenses
   
160,750
     
156,443
 
                 
Loss from operations
   
(168,750
)
   
(156,443
)
                 
Other income (expense):
               
   Interest expense
   
(18,661
)
   
(145,589
)
   Gain (loss) on derivative liability
   
2,251,402
     
219,013
 
   Gain (loss) on notes
   
(2,352
)
   
---
 
                 
   Total other income (expense)
   
2,230,389
     
73,424
 
                 
Income (loss) before income taxes
   
2,061,639
     
(83,019
)
                 
Provision for income taxes
           
--
 
                 
Net income (loss) before non-controlling interest
   
2,061,639
     
(83,019
)
                 
Non- controlling interest in net loss of the consolidated subsidiary
   
(6,095
)
   
--
 
                 
Net income (loss) attributed to the Company
 
$
2,067,734
   
$
(83,019
)
                 
Net loss per common share:
               
   Basic and diluted
 
$
1.56
   
$
(0.64
)
   Diluted
 
$
0.51
   
$
(0.64
)
                 
Weighted average common shares outstanding:
               
   Basic
   
1,318,837
     
128,281
 
   Diluted
   
4,017,317
     
128,281
 

See notes to condensed consolidated financial statements
4

 
Defense Technologies International Corp.
Condensed Consolidated Statements of Cash Flows
(Unaudited)

   
Three Months Ended
July 31,
 
   
2018
   
2017
 
Cash flows from operating activities:
           
   Net income (loss)
 
$
2,061,639
   
$
(83,019
)
   Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
               
        Common shares issued for services
   
--
     
28,000
 
        Amortization of debt discount to interest expense
   
--
     
115,050
 
        (Gain) loss on derivative liability
   
(2,251,402
)
   
(219,013
)
         Loss on note
   
8,093
     
--
 
      Change in operating assets and liabilities:
               
        ( Increase) decrease in inventory
   
(2,787
)
   
--
 
         Increase (decrease) in accounts payable
   
(51,149
)
   
(50,500
)
         Increase in payables – related parties
   
115,781
     
113,760
 
   Net cash provided by (used in) operating activities
   
(119,825
)
   
(95,722
)
                 
Cash flows from financing activities:
               
   Repayment of  convertible notes payable
   
(35,000
)
   
96,500
 
   Proceeds from notes payable
   
275,000
     
--
 
                 
   Net cash provided by (used in) financing activities
   
240,000
     
96,500
 
                 
Net increase (decrease) in cash
   
120,175
     
778
 
                 
Cash at beginning of period
   
8
     
193
 
Cash at end of period
 
$
120,183
   
$
971
 
                 
Supplement Disclosures
               
  Interest Paid
 
$
---
   
$
--
 
  Income tax Paid
 
$
--
   
$
--
 
                 
Noncash financing and investing activities
               
   Common stock issued for convertible debt
 
$
39,779
   
$
13,890
 
   Note payable issued for accounts payable
 
$
114,226
   
$
--
 
   Preferred shares issued for conversion of debt
   
--
   
$
190,383
 
   Common stock retired to treasury
   
--
   
$
1,178
 
   Derivative liability on debt conversion
   
--
   
$
121,779
 


See notes to condensed consolidated financial statements
5

Defense Technologies International Corp.
Notes to Condensed Consolidated Financial Statements
As of July 31, 2018
(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 79.8% of PSSI with 20.2% acquired by several individuals and entities.  The Company plans to continue the development of the technology and conduct all sales and marketing activities in PSSI.

On January 19, 2018 the Board of Directors, with the approval of a majority of the shareholders, passed a resolution to effect a reverse split of the Company's outstanding common stock on a 1 share for 1,500 shares (1:1500) basis. The split became effective with FINRA on March 20, 2018, or as soon thereafter as practicable. The number of shares in the financials are reflective of the reverse split.

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, 2018 included in its Annual Report on Form 10-K filed with the SEC.

The interim condensed consolidated financial statements included herein are unaudited; however, they contain all normal recurring accruals and adjustments that, in the opinion of management, are necessary to present fairly the Company's consolidated financial position as of July 31, 2018, the consolidated results of its operations and its consolidated cash flows for the three months ended July 31, 2018 and 2017.  The results of operations for any interim period are not necessarily indicative of the results to be expected for the full fiscal year.
6


Consolidation and Non-Controlling Interest

These consolidated financial statements include the accounts of the Company, and its majority-owned subsidiary, PSSI, from its formation on January 12, 2017 to date.  All inter-company transactions and balances have been eliminated.

Inventory

Inventories are stated at the lower of cost using the first-in, first-out (FIFO) cost method of accounting. Inventories as of July 31, 2018 consist of parts used in assembly of the units being sold with no work in progress or finished goods. As of July 31, 2018 and 2017 the value of the inventory was $2,787 and zero, respectively.

Use of Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates.

Impairment of Long-Lived Assets

We continually monitor events and changes in circumstances that could indicate carrying amounts of long-lived assets may not be recoverable. When such events or changes in circumstances are present, we assess the recoverability of long-lived assets by determining whether the carrying value of such assets will be recovered through undiscounted expected future cash flows.  If the total of the future cash flows is less than the carrying amount of those assets, we recognize an impairment loss based on the excess of the carrying amount over the fair value of the assets.  Assets to be disposed of are reported at the lower of the carrying amount or the fair value less costs to sell. As of July 31, 2018 and April 30, 2018 no impairment of asset was necessary.

Net Income (Loss) per Common Share

Basic net income or loss per common share is calculated by dividing the Company's net income or loss by the weighted average number of common shares outstanding during the period.  Diluted net income or loss per common share is calculated by dividing the Company's net income or loss by sum of the weighted average number of common shares outstanding and the dilutive potential common share equivalents then outstanding.  Potential dilutive common share equivalents consist of shares issuable upon exercise of outstanding stock options and warrants, using the treasury stock method and the average market price per share during the period, and conversion of convertible debt, using the if converted method.  As of July 31, 2018, the Company had potential shares issuable under outstanding options, warrants and convertible debt of 2,696,480 shares. With the income  in operations for the three-month period ended July 31, 2018, the additional shares were determined to be dilutive and were used in the calculation of net income per share on a diluted basis.

Reclassifications

Certain amounts in the 2017 consolidated financial statements have been reclassified to conform with the current year presentation to effect a reverse split of the Company's outstanding common stock on a 1 share for 1,500 shares (1:1500) basis.

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 will be 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 is currently unable to determine the impact on its consolidated financial statements of the adoption of this new accounting pronouncement.
7


NOTE- 2: GOING CONCERN

These condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America applicable to a going concern.  Through July 31, 2018, the Company has no revenues, has accumulated deficit of $7,678,075 and a working capital deficit of $2,961,969 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, 2019 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 79.8% 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.

NOTE -4:  RELATED PARTY TRANSACTIONS

Management and administrative services are currently compensated as per a Service Agreement between the Company and its Chief Executive Officer and Director executed on April 25, 2016 and a Service Agreement with the subsidiary PSSI executed on January 12, 2017, a Service Agreement between the Company and a Director executed on May 20, 2016, and an Administration Agreement with a related party executed on March 15, 2011 and renewed on May 1, 2017 plus the assumption of a Service Agreement with the subsidiary PSSI assumed on January 12, 2017, whereby the fee is based on services provided and invoiced by the related parties on a monthly basis and the fees are paid in cash when possible or with common stock.  The Company also, from time to time, has some of its expenses paid by related parties with the intent to repay.  These types of transactions, when incurred, result in payables to related parties in the Company's consolidated financial statements as a necessary part of funding the Company's operations.

As of July 31, 2018, and April 30, 2017, the Company had payable balances due to related parties totaling $575,132 and $437,968, respectively, which resulted from transactions with these related parties and other significant shareholders.

NOTE – 5: NOTES PAYABLE

On July 6, 2018 the Company signed an investment agreement with a third party. Under the terms of the agreement the Company receive $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.
8


NOTE – 6: CONVERTIBLE DEBT

On May 25, 2017, the Company entered into a Convertible Promissory Note with an institutional investor for $56,500, with net proceeds to the Company of $52,000.  The note bears interest at an annual rate of 2%, matures on May 25, 2018 and is convertible into common shares of the Company after twelve months at a variable conversion price equal to 55% multiplied by the lowest one-day trading price of the Company's common stock during the twenty trading days prior to the conversion date. At the inception of the convertible note, the Company paid debt issuance costs of $4,500, recorded a debt discount of $47,500 and a loss on note issuance of $50,959.  Interest expense for the amortization of the debt discount was calculated on a straight-line basis over the life of the convertible note.

On July 17, 2017, the Company entered into a Convertible Promissory Note amendment with an institutional investor for $ $25,000.  The note bears interest at an annual rate of 15%, as part of the note that is in default.  The note is convertible into common shares of the Company at a variable conversion price equal to 60% multiplied by the lowest one-day trading price of the Company's common stock during the twenty one trading days prior to the conversion date. At the inception of the convertible note, the recorded a debt discount of $22,920.

On July 24, 2017, the Company entered into a Convertible Promissory Note with an institutional investor for $15,000.  The note bears interest at an annual rate of 2%, matured on May 25, 2018 and is convertible into common shares of the Company after twelve months at a variable conversion price equal to 55% multiplied by the lowest one-day trading price of the Company's common stock during the twenty trading days prior to the conversion date. At the inception of the convertible note, the Company recorded a debt discount of $15,000and a loss on note issuance of $11,717.  Interest expense for the amortization of the debt discount was calculated on a straight-line basis over the life of the convertible note.

On July 24, 2017, the Company entered into a Funding Agreement with RAB Investments AG, a current lender and stockholder located in Zug, Switzerland, which was intended to provide necessary funding towards the initial production of our Offender Alert Passive Scan. The Funding Agreement calls for RAB to fund a minimum of $50,000 to a maximum of $150,000 on a "best efforts basis," with a first tranche of $25,000 completed during August 2017. In exchange for the funds, DTIC will issue convertible notes that may be converted into common stock of the Company at a discount of 25%, based on the 10-day average trading value of Company shares at the time of the initial conversion.  The notes may be converted at any time, in whole or partially, but all conversions must be at the same rate as the initial conversion.  No funding has been provided as of the date of this filing and there is no assurance that funds will be provided.

Pursuant to a Securities Purchase Agreement dated July 18, 2016 (the "July 2016 SPA", the Company entered into a Senior Secured Convertible Promissory Note (the "July 2016 Note") with Firstfire Global Opportunities Fund, LLC ("Firstfire) for $189,000.  The July 2016 Note was in default with respect to the maturity date, and the Company was in default on certain terms of the July 2016 SPA, including calculation of exercise prices on Firstfire debt conversions and limitations on the Company entering into subsequent "Variable Rate Transactions."  On August 9, 2017, the Company and Firstfire entered into a Waiver and Settlement Agreement whereby the Company will issue an additional 8,667 shares of its common stock to Firstfire to cure the deficiency of shares previously issued in the debt conversions.  Further, Firstfire agreed to waive any default with respect to the subsequent variable rate transactions. As of July 31, 2018 the shares had not been issued.

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%.
9


On July 10, 2018 RAB 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 three months ended July 31, 2018, the Company issued a total of 224,062 shares of its common stock in the conversion of $39,778 in convertible notes principal , accrued interest payable and fees.

As of July 31, 2018, and April 30, 2018, the convertible debt outstanding, net of discount, was $749,840 and $816,526, 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:

Level 1  -
Quoted prices are available in active markets for identical assets or liabilities as of the reporting date. Active markets are those in which transactions for the asset or liability occur in sufficient frequency and volume to provide pricing information on an ongoing basis. Level 1 primarily consists of financial instruments such as exchange-traded derivatives, marketable securities and listed equities.
   
Level 2  -
Pricing inputs are other than quoted prices in active markets included in level 1, which are either directly or indirectly observable as of the reported date and includes those financial instruments that are valued using models or other valuation methodologies. These models are primarily industry-standard models that consider various assumptions, including quoted forward prices for commodities, time value, volatility factors, and current market and contractual prices for the underlying instruments, as well as other relevant economic measures. Substantially all of these assumptions are observable in the marketplace throughout the full term of the instrument, can be derived from observable data or are supported by observable levels at which transactions are executed in the marketplace. Instruments in this category generally include non-exchange-traded derivatives such as commodity swaps, interest rate swaps, options and collars.
   
Level 3 -
Pricing inputs include significant inputs that are generally less observable from objective sources. These inputs may be used with internally developed methodologies that result in management's best estimate of fair value.

As of July 31, 2018, 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 year ended July 31, 2018:
10

 
   
Level 1
   
Level 2
   
Level 3
 
Fair value of derivative liability as of April 30, 2018
 
$
--
   
$
--
   
$
3,248,160
 
Debt discount related to new debt
   
--
     
--
     
--
 
Day one measurement of new debt
   
--
     
--
     
--
 
Change in fair value of the derivative
   
--
     
--
     
(2,251,402
)
Conversion of debt to shares of common stock and repayment of debt
   
--
     
--
     
--
 
                         
Balance at July 31, 2018
 
$
--
   
$
--
     
996,758
 

The estimated fair value of the derivative liabilities at July 31, 2018 was calculated using the Binomial Lattice pricing model with the following assumptions:

Risk-free interest rate
   
0.125
%
Expected life in years
   
0.25
 
Dividend yield
   
0
%
Expected volatility
   
407.00
%

NOTE – 8: EQUITY

Common Stock

Effective July 5, 2017, EMAC returned 7,850 common shares of the Company that were previously issued in payment for certain mineral lease properties in Nevada.

In June 2017, the Company entered into a ninety-day Business Consulting Agreement with Mark Taggatz ("Taggatz") for the development and commercialization of the Company's progressive scan technology.  The Company is to pay Taggatz fees totaling $37,500, payable in common stock of the Company.  The Company issued 9,333 shares of its common stock in July 2017  for payment of $28,000 of this obligation.

During the three month period ended July 31, 2018, the Company issued 224,062 shares of its common stock in the conversion of debt of $39,778.

Preferred Stock

The Company has 20,000,000 shares of $0.0001 par value preferred stock authorized and has designated Series A and Series B preferred stock.  Each share of the Series A preferred stock is convertible into ten common shares and carries voting rights on the basis of 100 votes per share.  Each share of the Series B preferred stock is convertible into ten common shares and carries no voting rights.

Effective June 12, 2017, the Company issued 1,309,380 shares of Series A preferred stock to EMAC for consideration totaling $130,938: convertible note payable of $25,000; three notes payable totaling $34,426; accrued interest payable of $18,718; payables – related parties of $22,794 and prepayment of services of $30,000 for the months of May 2017 through January2017.  The accrued interest payable included interest on the $25,000 convertible note payable compounded at 6% per annum retroactive to January 1, 2012, as negotiated between the parties.

Effective June 12, 2017, the Company issued 442,444 shares of Series A preferred stock to a related party lender in payment of Company indebtedness totaling $44,244: convertible note payable of $32,050; accrued interest payable of $4,694 and repayment of accounts payable of $7,500.

Effective June 12, 2017, the Company issued 152,000 shares of Series A preferred stock to a related party in repayment of accrued services of $15,200.
11


Effective December 14, 2017, the Company issued 20,000 shares of Series B preferred stock to Controlled Capture Systems, LLC to extend the exclusive rights to the Passive Security Scan to March 15, 2018.

As of July 31, 2018 the Company had 3,277,369 Series A and 520,000 Series B preferred share issued and outstanding.
 
NOTE – 9: STOCK OPTIONS AND WARRANTS

On April 30, 2016, the Company issued options to a consultant to purchase a total of 667 shares of the Company's common stock.  The options vested upon grant, expired on May 31, 2018

In January, 2016, the Company issued warrants to a lender to purchase 167 shares of the Company's common stock at an exercise price of $900 per share.  The warrants vested upon grant and expired on July 17, 2018

A summary of the Company's stock options and warrants as of July 31, 2018, and changes during the three months then ended is as follows:

   



Shares
   

Weighted
Average
Exercise
 Price
   
Weighted
Average
Remaining
Contract
Term
(Years)
   


Aggregate
Intrinsic
Value
 
                         
Outstanding at April 30, 2018
   
833
   
$
1.50
     
.06
   
$
83
 
Granted
   
--
   
$
--
                 
Exercised
   
-
   
$
-
                 
Forfeited or expired
   
(833
)
 
$
-
                 
                                 
Outstanding and exercisable at July 31, 2018
   
--
   
$
--
     
--
   
$
--
 

NOTE – 10:  COMMITMENTS AND CONTINGENCIES

The Company has the following material commitments as of July 31, 2018:

a)  
Administration Agreement with EMAC Handel's AG, renewed effective May 1, 2017 for a period of three years. Monthly fee for administration services of $5,000, office rent of $250 and office supplies of $125.  Extraordinary expenses are invoiced by EMAC on a quarterly basis.  The fee may be paid in cash and or with common stock.

b)  
Service Agreement signed April 25, 2016 with Merrill W. Moses, President, Director and CEO, for services of $7,500 per month beginning May 2016 and the issuance of 233 restricted common shares of the Company.  The fees may be paid in cash and or with common stock.

c)  
Service Agreement signed May 20, 2016 with Charles C. Hooper, Director, for services of $5,000 per month beginning May 2016 and the issuance of 233 restricted common shares of the Company.  The fees may be paid in cash and or with common stock.

d)  
Administration and Management Agreement of PSSI signed January 12, 2017 with 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 2,000 common shares of PSSI and a 12% royalty calculated on defines sales revenues payable within 10 days after the monthly sales. On January 12, 2017 the agreement was cancelled with RAB and assigned to EMAC Handel

12

e)  
Service Agreement of PSSI signed January 12, 2017 with Merrill W. Moses, President, Director and CEO, for services of $2,500 per month beginning February 2017 and the issuance of 333 common shares of PSSI.

f)  
Business Development and Consulting Agreement of PSSI signed January 15, 2017 with WSMG Advisors, Inc., for finder's fees of 10% of funding raised for PSSI and the issuance of 1,000 common shares of PSSI.

On May 30, 2018 the Company and Control Capture Systems, LLC amended their license agreement as follows
 
·
Royalty payments of 5% of gross sale from the license agreement will be calculated and paid quarterly with a minimum of $12,500 paid each quarter.
   
·
All payment will be in US dollars or stock of the Company and or its subsidiary.  The value of the stock will be a discount to market of 25% of the average trading price for the 10 days prior to conversion. The number of shares received by Control Capture prior to any reverse split are anti-dilutive.
   
·
Invoices for parts and materials will be billed separate of the license fees noted above.
 

NOTE – 11:  SUBSEQUENT EVENTS

On August 15, 2018 the Company issued 150,000 shares of common stock to Michele Hillbery per the definitive agreement with the Company dated July 6, 2018.

On August 29, 2018 the Company entered into a settlement agreement with Firstfire Global Opportunity Fund where the Company will pay Firstfire $250,000 plus $50,000 in common stock to settle all the debt owed Firstfire by the Company. Under terms of the agreement the Company will pay $125,000 upon receipt of initial funding and $125,000 within 90 days after the initial payment. On December 1, 2018 the Company will issue the $50,000 in stock with the number of shares being based on the lessor of $1.00 per share or a 25% discount of the average closing share price during the 10 trading days prior to the issuance of the shares. If funding is not secured the funding for the second payment within 90 days of the initial payment the present note due Firstfire will remain in place less the $125,000 paid by the Company. The initial payment of $125,000 was made on September 6, 2018.

On August 31, 2018 the Company entered into a debentures purchase agreement whereas the Company may issue debentures to up to $275,000 in value various subscribers that are convertible into common shares of the Company. In addition to the debentures, the subscribers  will receive 100,000 warrants with a conversion price of $0.70 per share of common stock

On September 5, 2018 the Company entered into a settlement agreement with Crown Bridge Partners LLC where the Company will pay Crown Bridge $100,000 to settle all the debt owed Crown Bridge by the Company. Under terms of the agreement the Company will pay $30,000 upon receipt of initial funding and $70,000 within 90 days after the initial payment. If funding is not secured the funding for the second payment within 90 days of the initial payment the present note due Crown Bridge will remain in place less the $30,000 paid by the Company. The initial payment of $30,000 was made on September 6, 2018.

The Company has evaluated subsequent events to determine events occurring after July 31, 2018 through September 12, 2018 that would have a material impact on the Company's financial results or require disclosure and have determined none exist other than those noted above in this footnote.
13

 
ITEM 2: Management's Discussion and Analysis of Financial Condition and Results of Operations

Overview

The following information should be read in conjunction with the condensed consolidated financial statements and notes thereto appearing elsewhere in this Form 10-Q.

Defense Technologies International Corp. (the "Company ") was incorporated in the State of Delaware on May 27, 1998.  Effective June 15, 2016, the Company changed its name to Defense Technologies International Corp. from Canyon Gold Corp. to more fully represent the Company's expansion goals into the advanced technology sector.

On October 19, 2016, the Company entered into a Definitive Agreement with Controlled Capture Systems, LLC ("CCS"), representing the inventor of the technology and assets previously acquired by DTC, that included a new exclusive Patent License Agreement and Independent Contractor agreement.  Under the license agreement with CCS, the Company acquired the world-wide exclusive rights and privileges to the CCS security technology, patents, products and improvements.  The Company agreed to pay CCS an initial licensing fee of $25,000 and to pay ongoing royalties as defined in the Definitive Agreement.

On May 30, 2018 the Company and Control Capture Systems, LLC amended their license agreement as follows (1) Royalty payments of 5% of gross sale from the license agreement will be calculated and paid quarterly with a minimum of $12,500 paid each quarter (2) All payment will be in US dollars or stock of the Company and or its subsidiary.  The value of the stock will be a discount to market of 25% of the average trading price for the 10 days prior to conversion. The number of shares received by Control Capture prior to any reverse split are anti-dilutive (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 owns 79.8% of PSSI with 20.2% acquired by several individuals and entities.  The Company plans to continue the development of the technology and conduct all sales and marketing activities in PSSI.

On January 19, 2018 the Board of Directors, with the approval of a majority of the shareholders, passed a resolution to effect a reverse split of the Company's outstanding common stock on a 1 share for 1,500 shares (1:1500) basis. The split became effective on March 20, 2018.

Forward Looking and Cautionary Statements

This report contains forward-looking statements relating to future events or our future financial performance.  In some cases, you can identify forward-looking statements by terminology such as "may," "will," "should," "expect," "intend," "plan," "anticipate," "believe," "estimate," "predict," "potential," "continue," or similar terms, variations of such terms or the negative of such terms.  These statements are only predictions and involve known and unknown risks, uncertainties and other factors.  Although forward-looking statements, and any assumptions upon which they are based, are made in good faith and reflect our current judgment, actual results could differ materially from those anticipated in such statements.  Except as required by applicable law, including the securities laws of the United States, we do not intend to update any of the forward-looking statements to conform these statements to actual results.

Results of Operations

We currently have no sources of operating revenues. Accordingly, no revenues were recorded for the three  months ended July 31, 2018 and 2017.
14


Our general and administrative expenses for the three  months ended July 31, 2018 was $168,750 compared to $156,443 for the same period ended July 31, 2017.  The decrease was due primarily to lower cost of legal accounting and professional fees.

Interest expenses incurred in the three months ended July 31, 2018 was $18,661 compared to $145,589 for the three July months ended July 31, 2017.  The decrease was attributable to lower cost of debt discounts and loan conversion for equity.

Gain on derivative liability of $2,251,402 was incurred in the three  months period ended July 31, 2018, compared to a loss of $ 219,013 for the three  months ended July 31, 2017.  We estimate the fair value of the derivative for the conversion feature of our convertible notes payable using the Black-Scholes pricing model at the inception of the debt, at the date of conversions to equity, cash payments and at the Binominal Lattice model at reporting date, recording a derivative liability, debt discount and a gain or loss on change in derivative liability as applicable.  These estimates are based on multiple inputs, including the market price of our stock, interest rates, our stock price volatility, and variable conversion prices based on market prices as defined in the respective loan agreements.  These inputs are subject to significant changes from period to period; therefore, the estimated fair value of the derivative liability will fluctuate from period to period and the fluctuation may be material.

We recognized a loss on notes of $2,352 for the three  months ended July 31, 2018, and zero for the same periods in 2017. The loss on notes resulted primarily as a result of the payment of convertible notes of $35,000.

Total other income for the three  months periods ended  July 31, 2018 was $2,230,389, compared to, $73,424 for the three months period in 2017. The variance is primarily due to the gain in derivative liability of $2,251,402 in the 2018 three  month period compared to the gain of $219,013 in the same in 2017.

Net income before non-controlling interest for the three months ended July 31, 2018 was $2,061,639 compared to a loss of $83,019 for the 2017 period. After adjusting for our consolidated subsidiary, net loss for the three months ended July 31, 2018 and 2017 was $2,067,734 and $83,019, respectively.

Liquidity and Capital Resources

At July 31, 2018, we had total current assets of $122,970, and total current liabilities of $3,084,939, resulting in a working capital deficit of $2,961,969.  Included in our current liabilities and working capital deficit at July 31, 2018 are derivative liabilities totaling $996,758 related to the conversion features of certain of our convertible notes payable and convertible notes of $749,840, net of discount.

Our current liabilities as of July 31, 2018 is comprised of amounts due to related parties of $575,132.  We anticipate that in the short-term, operating funds will continue to be provided by related parties and other lenders.

At July 31, 2018, we had total convertible notes payable of $749,840.  Several of the note agreements require repayment through conversion of principal and interest into shares of the Company's common stock.  We anticipate, therefore, converting these notes payable into shares of our common stock without the need for replacement financing; however, there can be no assurance that we will be successful in accomplishing this.

During the three months ended July 31, 2018, net cash used in operating activities was $119,825 compared to $95,722 in the same period in 2017. Net cash used in 2018 consisted of net income  of $2,061,639 offset by gain in derivative liability of $2,251,402, increase in inventory of $2,787 and accounts payable of $51,149.

During the three months ended July 31, 2018, net cash provided by financing activities was $240,000, comprised of proceeds from notes payable of $275,000 offset by repayment of convertible notes payable of $35,000. This compares to net cash provided in the same period in 2017 of $96,000 from convertible notes.

We have not realized any revenues since inception and paid expenses and costs with proceeds from the issuance of securities as well as by loans from investor, stockholders and other related parties.
15


Our immediate goal is to provide funding for the completion of the initial production of the Offender Alert Passive Scan licensed from CCS.  The Offender Alert Passive Scan is an advanced passive scanning system for detecting and identifying concealed threats.
On September 6, 2018, we received funding for the production of up to 100 units at a cost of $84,500.00. We built 4 Passive Portal units, two of which will be used in the previously announced BETA Test at a school near Austin Tx. The units have been tested multiple times and performed with a 100% success every time. We are confident that upon the successful conclusion of the Beta Test, we will receive the first orders from  school districts that will generate initial revenues to the Company.

We believe a related party and other lenders will provide sufficient funds to carry on general operations in the near term and fund DTC's production and sales.  We expect to raise additional funds from the sale of securities, stockholder loans and convertible debt.  However, we may not be successful in our efforts to obtain financing to carry out our business plan.

See the notes to our condensed consolidated financial statements for a discussion of recently issued accounting pronouncements that we have either implemented or that may have a material future impact on our financial position or results of operations.

Off-Balance Sheet Arrangements

We have no off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that is material to stockholders.


Item 3.   Quantitative and Qualitative Disclosures About Market Risk.

This item is not required for a smaller reporting company.

Item 4.  Controls and Procedures.

Evaluation of Disclosure Controls and Procedures.  As of the end of the period covered by this report, we conducted an evaluation, under the supervision and with the participation of our management including our principal executive officer and principal financial officer, of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934) ("Exchange Act").  Based on this evaluation, the principal executive officer and principal financial officer concluded that, as of the end of the period covered by this report, our disclosure controls and procedures were not effective in ensuring that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in applicable rules and forms and that such information is accumulated and communicated to our management, including our principal executive officer and principal financial officer, in a manner that allows timely decisions regarding required disclosures.

We operate with a limited number of accounting and financial personnel.  Although we retain the services of an experienced certified public accountant, we have been unable to implement proper segregation of duties over certain accounting and financial reporting processes, including timely and proper documentation of material transactions and agreements.  We believe these control deficiencies represent material weaknesses in internal control over financial reporting.

Despite the material weaknesses in financial reporting noted above, we believe that our consolidated financial statements included in this report fairly present our financial position, results of operations and cash flows as of and for the periods presented in all material respects.
16


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


Item 1.  Legal Proceedings

There are no material pending legal proceedings to which we are a party or to which any of our property is subject and, to the best of our knowledge, no such actions against us are contemplated or threatened.

Item 1A.  Risk Factors

This item is not required for a smaller reporting company.

Item 2.  Unregistered Sales of Equity Securities and Use of Proceeds

During the three months ended July 31, 2018, the Company issued a total of 224,062 shares of its common stock in the conversion of $39,778 in convertible notes principal , accrued interest payable and fees. These shares were issued in a private transaction to a person familiar with our business pursuant to an exemption from registration from registration provided by Section 4(a)(2) of the Securities Act of 1933.

Item 3.  Defaults Upon Senior Securities

This item is not applicable.

Item 4.  Mine Safety Disclosure

This item is not applicable.

Item 5.  Other Information

Not applicable

17

Item 6.  Exhibits

The following exhibits are filed as part of this report:

Exhibit No.
Description of Exhibit 
   
31.1
Section 302 Certification of Chief Executive Officer and Chief Financial Officer
   
32.1
Section 1350 Certification of Chief Executive Officer and Chief Financial Officer
   
101 INS*
XBRL Instance Document
   
101SCH*
XBRL Taxonomy Extension Schema
   
101 CAL*
XBRL Taxonomy Extension Calculation Linkbase
   
101 DEF*
XBRL Taxonomy Extension Definition Linkbase
   
101 LAB*
XBRL Taxonomy Extension Label Linkbase
   
101 PRE*
XBRL Taxonomy Extension Presentation Linkbase


* The XBRL related information in Exhibit 101 shall not be deemed "filed" for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, or otherwise subject to liability of that section and shall not be incorporated by reference into any filing or other document pursuant to the Securities Exchange Act of 1933, as amended, except as shall be expressly set forth by specific reference in such filing or document.
18


 SIGNATURES


Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
 
  DEFENSE TECHNOLOGIES INTERNATIONAL CORP.
   
   
Date: September 12, 2018
By: /S/ MERRILL W. Moses
  Merrill W. Moses
 
Chief Executive Officer
 
Acting Chief Financial Officer
 
 
 
19