Quarterly Report (10-q)

Date : 12/15/2016 @ 4:20PM
Source : Edgar (US Regulatory)
Stock : Defense Technologies International Corp. (QB) (DTII)
Quote : 0.0062  -0.0003 (-4.62%) @ 9:51AM
Defense Technologies share price Chart

Quarterly Report (10-q)


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 October 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

DEFENSE TECHNOLOGIES INTERNATIONAL CORP.
(Formerly Canyon Gold Corp.)

 (Exact name of registrant as specified in its charter)

Nevada
Not Applicable
(State or jurisdiction of incorporation or organization)
(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]
 
(Do not check if 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 December 15, 2016, there were 30,576,056 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 OCTOBER 31, 2016
 
TABLE OF CONTENTS

 
PART  I    —   FINANCIAL INFORMATION
Page
     
Item 1.
Financial Statements:
 
     
 
Condensed Consolidated Balance Sheets
3
     
 
Condensed Consolidated Statements of Operations
4
     
 
Condensed Consolidated Statements of Cash Flows
5
     
 
Notes to Condensed Consolidated Financial Statements
6
     
Item 2.
Management's Discussion and Analysis of Financial Condition and Results of Operations
19
     
Item 3.
Quantitative and Qualitative Disclosures about Market Risk
23
     
Item 4.
Controls and Procedures
23
     
 
PART II   —   OTHER INFORMATION
 
     
Item 1.
Legal Proceedings
24
     
Item 1A.
Risk Factors
24
     
Item 2
Unregistered Sales of Equity Securities and Use of Proceeds
24
     
Item 3.
Defaults upon Senior Securities
24
     
Item 4.
Mine Safety Disclosure
24
     
Item 5.
Other Information
24
     
Item 6.
Exhibits
25
     
 
Signatures
26


2


PART  I   —   FINANCIAL INFORMATION

Item 1.  Financial Statements
 
Defense Technologies International Corp.
(Formerly Canyon Gold Corp.)
 
Condensed Consolidated Balance Sheets
 
   
October 31,
2016
   
April 30,
2016
 
ASSETS
 
(Unaudited)
       
Current assets:
           
   Cash
 
$
42
   
$
23
 
   Prepaid expenses
   
4,000
     
18,169
 
   Total current assets
   
4,042
     
18,192
 
                 
License agreement
   
378,600
     
-
 
                 
Total assets
 
$
382,642
   
$
18,192
 
                 
LIABILITIES AND STOCKHOLDERS' DEFICIT
         
Current liabilities:
               
   Accounts payable
 
$
281,957
   
$
150,362
 
   Accrued license agreement payments
   
378,600
     
-
 
   Accrued interest and fees payable
   
26,700
     
63,979
 
   Accrued interest payable – related parties
   
21,197
     
17,846
 
   Convertible notes payable, net of discount
   
449,915
     
63,486
 
   Convertible notes payable – related parties
   
57,050
     
57,050
 
   Notes payable – related parties
   
79,656
     
79,656
 
   Derivative liabilities
   
303,635
     
2,081,931
 
   Payables – related parties
   
631,654
     
565,459
 
   Total current liabilities
   
2,230,364
     
3,079,769
 
                 
   Total liabilities
   
2,230,364
     
3,079,769
 
                 
Commitments and Contingencies
               
                 
Stockholders' deficit:
               
   Preferred stock, $0.0001 par value; 20,000,000 shares authorized, 1,100,000 shares issued and outstanding, respectively
   
110
     
110
 
   Common stock, $0.0001 par value; 200,000,000 shares authorized, 26,576,056 and 21,249,676 shares issued and outstanding, respectively
   
2,658
     
2,125
 
   Additional paid-in capital
   
2,435,108
     
1,447,968
 
   Accumulated deficit
   
(4,285,598
)
   
(4,511,780
)
   Total stockholders' deficit
   
(1,847,722
)
   
(3,061,577
)
                 
Total liabilities and stockholders' deficit
 
$
382,642
   
$
18,192
 
 
See notes to condensed consolidated financial statements

3

 
Defense Technologies International Corp.
(Formerly Canyon Gold Corp.)
Condensed Consolidated Statements of Operations
(Unaudited)
 
   
Three Months Ended
October 31,
   
Six Months Ended
October 31,
 
   
2016
   
2015
   
2016
   
2015
 
                         
Revenue
 
$
-
   
$
-
   
$
-
   
$
-
 
                                 
Expenses:
                               
   General and administrative
   
290,008
     
45,690
     
968,346
     
117,161
 
   Exploration costs
   
1,452
     
1,725
     
1,452
     
3,375
 
                                 
   Total expenses
   
291,460
     
47,415
     
969,798
     
120,536
 
                                 
Loss from operations
   
(291,460
)
   
(47,415
)
   
(969,798
)
   
(120,536
)
                                 
Other income (expense):
                               
   Interest expense
   
(133,466
)
   
(62,006
)
   
(438,361
)
   
(90,420
)
   Gain (loss) on derivative liability
   
(174,907
)
   
(70,567
)
   
1,323,152
     
(144,941
)
   Gain on extinguishment of debt
   
189,786
     
92,712
     
311,189
     
155,459
 
                                 
   Total other income (expense)
   
(118,587
)
   
(39,861
)
   
1,195,980
     
(79,902
)
                                 
Income (loss) before income taxes
   
(410,047
)
   
(87,276
)
   
226,182
     
(200,438
)
                                 
Provision for income taxes
   
-
     
-
     
-
     
-
 
                                 
Net income (loss)
 
$
(410,047
)
 
$
(87,276
)
 
$
226,182
   
$
(200,438
)
                         
Net income (loss) per common share:
                       
   Basic
 
$
(0.02
)
 
$
(0.00
)  
$
0.01
   
$
(0.01
)
   Diluted
 
$
(0.02
)
 
$
(0.00
)  
$
0.01
   
$
(0.01
)
                                 
Weighted average common shares outstanding:
                               
   Basic
   
26,922,578
     
21,049,682
     
25,009,972
     
20,988,445
 
   Diluted
   
26,922,578
     
21,049,682
     
32,165,511
     
20,988,445
 
 
 
See notes to condensed consolidated financial statements
4


Defense Technologies International Corp.
(Formerly Canyon Gold Corp.)
Condensed Consolidated Statements of Cash Flows
(Unaudited)
 
   
Six Months Ended
October 31,
 
   
2016
   
2015
 
             
Cash flows from operating activities:
           
   Net income (loss)
 
$
226,182
   
$
(200,438
)
   Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
               
      Common shares issued for services
   
570,110
     
-
 
      Stock options issued for services
   
9,056
     
-
 
      Imputed interest on convertible notes payable
   
1,125
     
1,125
 
      Amortization of debt discount to interest expense
   
409,296
     
16,585
 
      Debt extension penalty added to note principal
   
5,000
     
-
 
      (Gain) loss on derivative liability
   
(1,323,152
)
   
144,941
 
      (Gain) on extinguishment of debt
   
(311,189
)
   
(155,459
)
      Change in operating assets and liabilities:
               
         Increase in prepaid expenses
   
(2,125
)
   
(5,642
)
         Increase in accounts payable
   
67,284
     
49,130
 
         Decrease in accrued interest and fees payable
   
(15,310
)
   
(1,169
)
         Increase in accrued interest payable – related parties
   
3,351
     
3,351
 
         Increase in payables – related parties
   
66,195
     
191,379
 
   Net cash provided by (used in) operating activities
   
(294,177
)
   
43,803
 
                 
Cash flows from investing activities:
               
   Net cash provided by investing activities
   
-
     
-
 
                 
Cash flows from financing activities:
               
   Proceeds from convertible notes payable
   
423,590
     
-
 
   Repayment of convertible notes payable
   
(117,894
)
   
(43,986
)
   Payment of debt issuance costs
   
(11,500
)
   
-
 
   Net cash provided by (used in) financing activities
   
294,196
     
(43,986
)
                 
Net increase (decrease) in cash
   
19
     
(183
)
                 
Cash at beginning of period
   
23
     
183
 
Cash at end of period
 
$
42
   
$
-
 
 
See notes to condensed consolidated financial statements
5


Defense Technologies International Corp.
(Formerly Canyon Gold Corp.)
Notes to Condensed Consolidated Financial Statements
October 31, 2016
(Unaudited)


1. Nature of Operations and Rescission of DTC Agreement

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 executed documents intended to finalize the acquisition of 100% of Defense Technology Corporation, a privately held Colorado company ("DTC"), a developer of defense, detection and protection products to improve security for Anchor schools and other public facilities.  DTC has informed us that it is unable to complete the required financial statements.  Accordingly, the Company will not be able to consolidate DTC's financial statements into its audited financial statements. After a thorough review of the situation and discussions with DTC, we have mutually agreed to rescind the acquisition of DTC and entered into a Rescission Agreement and Mutual Release (the "Rescission Agreement"), dated October 17, 2016.

In connection with the Rescission Agreement with the Company, DTC rescinded its agreement with the inventor and developer of the technology and assets that were subject to the original agreement between the Company and DTC.  On October 19, 2016, the Company entered into a new Definitive Agreement with Controlled Capture Systems, LLC ("CCS"), representing the inventor of the technology and assets previously acquired by DTC, that included a new exclusive Patent License Agreement and Independent Contractor agreement.  Under the license agreement with CCS, the Company acquired the world-wide exclusive rights and privileges to the CCS security technology, patents, products and improvements.  The Company agreed to pay CCS an initial licensing fee of $25,000 and to pay ongoing royalties as defined in the Definitive Agreement.  See Note 3.
 
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 October 31, 2016, the Company has no revenues, has accumulated losses of $4,285,598 and a working capital deficit of $2,226,322 and expects to incur further losses in the development of its business, all of which cast substantial doubt about the Company's ability to continue as a going concern.  Management plans to continue to provide for the Company's capital needs during the year ending April 30, 2017 by issuing debt and equity securities and by the continued support of its related parties (see Note 4).  The condensed consolidated financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts or amounts and classification of liabilities that might be necessary should the Company be unable to continue in existence.  There is no assurance that funding will be available to continue the Company's business operations.
 
6

2. Basis of Presentation and Summary of Significant Accounting Policies

These condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States.  The Company's fiscal year end is April 30.

The interim condensed consolidated financial statements have been prepared without audit in accordance with accounting principles generally accepted in the United States for interim financial information and with the instructions to Securities and Exchange Commission ("SEC") Form 10-Q.  They do not include all the information and footnotes required by generally accepted accounting principles for complete financial statements.  Therefore, these unaudited interim condensed consolidated financial statements should be read in conjunction with the Company's audited financial statements and notes thereto for the year ended April 30, 2016 included in its Annual Report on Form 10-K filed with the SEC.

The interim condensed consolidated financial statements included herein are unaudited; however, they contain all normal recurring accruals and adjustments that, in the opinion of management, are necessary to present fairly the Company's consolidated financial position as of October 31, 2016, the consolidated results of its operations for the three and six months ended October 31, 2016 and 2015 and its consolidated cash flows for the six months ended October 31, 2016 and 2015.  The results of operations for any interim period are not necessarily indicative of the results to be expected for the full fiscal year.

Consolidation

These condensed consolidated financial statements include the accounts of the Company and its wholly owned subsidiary, Long Canyon Gold Resources Corp.  All inter-company transactions and balances have been eliminated.
 
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.

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 October 31, 2016, the Company had 10,577,860 potential shares issuable under outstanding options, warrants and convertible debt.
7


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

   
Three Months Ended
October 31,
   
Six Months Ended
October 31,
 
   
2016
   
2015
   
2016
   
2015
 
                         
Weighted average number of shares outstanding - basic
   
26,922,578
     
21,049,682
     
25,009,972
     
20,988,445
 
Dilutive effect of convertible debt
   
-
     
-
     
7,155,539
     
-
 
                                 
Weighted average number of shares outstanding - diluted
   
26,922,578
     
21,049,682
     
32,165,511
     
20,988,445
 
 
During the three months ended October 31, 2016 and 2015, 9,277,860 and 2,365,098 shares issuable upon exercise of convertible debt, respectively, were excluded from the above calculation due to anti-dilution.  For the six months ended October 31, 2015, 2,365,098 shares issuable upon exercise of convertible debt were excluded from the above calculation due to anti-dilution.
        
Reclassifications

Certain amounts in the 2015 condensed consolidated financial statements have been reclassified to conform with the current year presentation.

3. License Agreement

As discussed in Note 1, the Company rescinded its agreement to acquire DTC, and on October 19, 2016, the Company entered into a Definitive Agreement with CCS that included an exclusive Patent License Agreement ("License Agreement") and Independent Contractor Agreement.  Under the License Agreement, CCS granted to the Company an exclusive world-wide license to the assets comprising the technology and products of the defense, detection and protection security products invented and developed by the inventor and CCS.  The term of the License Agreement shall be from October 19, 2016 until the expiration of the last to expire of the licensed issued patents or patents to be issued.

The Company agreed to pay CCS an initial licensing fee of $25,000 and to pay ongoing royalties at the end of each six-month period at the rate of the greater of 5% of gross sales used or sold, or the minimum royalty payment of $25,000.  The Company also agreed to compensate investors that have provided funding for the development of CCS's technology with 4,000,000 shares of the Company's common stock.  Additionally, CCS will be entitled to receive 250,000 shares of the Company's common stock upon completed sales of 1,000 passive scanner units based on the CCS technology.

The Independent Contractor Agreement between the Company and CCS provides that CCS will provide support for the development of the security technology and products.  An initial payment of $5,000 is to be paid to CCS plus ongoing hourly compensation for services provided.
 
The Company has capitalized the costs to acquire the License Agreement, including the $25,000 initial licensing fee and the estimated value of the 4,000,000 shares of common stock to be issued to the CCS investors of $353,600, which is based on the closing market price of the Company's common stock on the date of the Definitive Agreement.  The Company has recorded a current liability of $378,600 for these obligations in its consolidated balance sheet as of October 31, 2016.  Once sales of products based on the CCS technology begin, the Company will amortize the capitalized costs over the estimated life of the license agreement as determined by the legal life of patents issued.

4. Related Party Transactions and Balances

Management and administrative services are currently compensated as per a Service Agreement between the Company and its Chief Executive Officer and Director executed on April 25, 2016, a Service Agreement between the Company and a Director executed on May 20, 2016, and an Administration Agreement with a related party executed on March 15, 2011 and renewed on May 1, 2015, whereby the fee is based on services provided and invoiced by the related parties on a monthly basis and the fees are paid in cash when possible or with common stock.  The Company also, from time to time, has some of its expenses paid by related parties with the intent to repay.  These types of transactions, when incurred, result in payables to related parties in the Company's consolidated financial statements as a necessary part of funding the Company's operations.

As of October 31, 2016, and April 30, 2016, the Company had payable balances due to related parties totaling $631,654 and $565,459, respectively, which resulted from transactions with these related parties and other significant shareholders.
8


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

   
October 31,
2016
   
April 30,
2016
 
Note payable to related party, no interest, convertible into common stock of the Company at $0.10 per share, imputed interest at 9% per annum
 
$
25,000
   
$
25,000
 
Note payable to related party, interest at 6%, convertible into common stock of the Company at $0.10 per share
   
32,050
     
32,050
 
                 
   
$
57,050
   
$
57,050
 

Convertible notes payable – related parties issued prior to the fiscal year ended April 30, 2014 were convertible 30 days from the first day the Company's common shares are qualified for trading on the OTC Bulletin Board, which occurred in November 2012.  As of October 31, 2016, the convertible note payable – related party of $25,000 had not been converted and therefore is in default.

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

   
October 31,
2016
   
April 30,
2016
 
Note payable to related party, with interest at 6% per annum, due September 15, 2013
 
$
24,656
   
$
24,656
 
Note payable to related party, with interest at 6% per annum, due March 8, 2014
   
7,500
     
7,500
 
Note payable to related party, with interest at 6% per annum, due December 5, 2013
   
47,500
     
47,500
 
                 
   
$
79,656
   
$
79,656
 

Accrued interest payable – related parties was $21,197 and $17,846 at October 31, 2016 and April 30, 2016, respectively.

The Company issued 350,000 of its common shares, valued at $105,000, in May 2016, and 350,000 of its common shares, valued at $57,750, in August 2016 to its Chief Executive Officer pursuant to his Service Agreement.

The Company issued 250,000 of its common shares, valued at $112,500, in August 2016 to a Director.

9


5. Convertible Notes Payable

Convertible notes payable consisted of the following at:

   
October 31,
2016
   
April 30,
2016
 
Note payable, amended April 30, 2016, with interest at 6% per annum, convertible into common stock of the Company at $0.05 per share 90 days from demand
 
$
11,000
   
$
11,000
 
Note payable, amended April 30, 2016, with interest at 6% per annum, convertible into common stock of the Company at $0.05 per share 90 days from demand
   
9,000
     
9,000
 
Note payable, amended April 30, 2016, with interest at 6% per annum, convertible into common stock of the Company at $0.05 per share 90 days from demand
   
91,150
     
141,150
 
Note payable, amended April 30, 2016, with interest at 6% per annum, convertible into common stock of the Company at $0.05 per share 90 days from demand
   
14,500
     
14,500
 
Note payable, amended April 30, 2016, with interest at 6% per annum, convertible into common stock of the Company at $0.05 per share 90 days from demand
   
20,000
     
20,000
 
Note payable, with interest at 6% per annum, convertible into common stock of the Company at $0.05 per share
   
17,000
     
17,000
 
Note payable, with interest at 6% per annum, convertible into common stock of the Company at $0.05 per share
   
53,650
     
-
 
Note payable to institutional investor, with interest at 10% per annum, convertible into common stock of the Company at a defined conversion price
   
25,000
     
-
 
Note payable to institutional investor, with interest at 8% per annum, convertible into common stock of the Company at a fixed conversion price of $0.25 per share
   
200,000
     
-
 
Note payable, with interest at 6% per annum, convertible into common stock of the Company at $0.10 per share
   
23,750
     
-
 
Note payable to institutional investor, with interest at 12% per annum, convertible into common stock of the Company at a defined conversion price
   
25,000
     
-
 
Note payable to institutional investor, with interest at 8% per annum, convertible into common stock of the Company at a defined conversion price
   
37,000
     
-
 
Note payable to institutional investor, with interest at 9% per annum, convertible after 180 days into common stock of the Company at a defined conversion price
   
35,000
     
-
 
Note payable to institutional investor, with interest at 9% per annum, convertible after 180 days into common stock of the Company at a defined conversion price
    40,000       -  
Advances combined in note payable in November 2016
   
4,190
     
-
 
Note payable to institutional investor repaid in August 2016
   
-
     
41,000
 
Note payable to institutional investor repaid in July 2016
   
-
     
55,500
 
Note payable to institutional investor repaid in July 2016
   
-
     
39,000
 
Total
   
606,240
     
348,150
 
                 
Less discount
   
(156,325
)
   
(284,664
)
                 
   
$
449,915
   
$
63,486
 

10

On April 30, 2016, the convertible notes payable with principal balances of $11,000, $9,000, $141,150, $14,500 and $20,000 were amended to establish a conversion price of $0.05 per share, interest at 6% retroactive to the original issuance date of the notes, and a conversion date of 90 days from demand of the lender.  The amendments were determined to be extinguishments of the prior debt and the issuance of new debt in accordance with ASC 470-50, Debt – Modifications and Extinguishments , resulting in a loss on extinguishment of debt totaling $33,237.  In addition, the Company recorded a debt discount and a beneficial conversion feature totaling $195,650 at the inception of the new debt.

On March 10, 2016, the Company entered into a convertible promissory note for $17,000, which bears interest at an annual rate of 6% and is convertible into shares of the Company's common stock at $0.05 per share.  The Company recorded a debt discount and a beneficial conversion feature of $17,000 at the inception of the note.

On February 4, 2016, the Company entered into a convertible promissory note with an institutional investor for $41,000, which matures on February 4, 2017.  The investor had the right, after the first 180 days of the note, to convert the note and accrued interest in whole or in part into shares of the common stock of the Company at a price per share equal to 60% (representing a discount rate of 40%) of the lowest bid price of the Company's common stock during the 60 consecutive trading days immediately preceding the date of the conversion notice.  At the inception of the convertible note to institutional investor, the Company paid debt issuance costs of $2,500, and recorded a debt discount of $41,000, including an original issue discount of $3,500, a derivative liability of $78,034 related to the conversion feature, and a loss on derivative liability of $40,534.  Interest expense for the amortization of the debt discount was calculated on a straight-line basis over the life of the convertible note.  The note was repaid in August 2016.

On June 8, 2016, the Company entered into a convertible promissory note with an institutional investor for $25,000, which bears interest at an annual rate of 10% and matures on December 9, 2016.  The note holder has the right, after a period of 180 days of the note, to convert the note and accrued interest into shares of the common stock of the Company at a discounted price per share equal to 50% to 65% of the market price of the Company's common stock, depending upon the stock's liquidity as determined by the note holder's broker.  At the inception of the convertible note, the Company paid debt issuance costs of $2,500, recorded a debt discount of $22,500, and recorded a derivative liability of $51,553 related to the conversion feature, and a loss on derivative liability of $29,053.  Interest expense for the amortization of the debt discount is calculated on a straight-line basis over the life of the convertible note.

On July 18, 2016, the Company entered into a Senior Secured Convertible Promissory Note with an institutional investor for $189,000, with net proceeds to the Company of $175,000.  The note was subsequently amended to a total principal of $200,000, with net proceeds to the Company of $185,000.  The note bears interest at an annual rate of 8%, matures on January 17, 2017 and is convertible into common shares of the Company after six months at a fixed conversion price of $0.25 per share.  In the event of default, the conversion price changes to a variable price based on a defined discount to the market price of the Company's common stock.

On July 31, 2016, the Company entered into a convertible promissory note for $53,650, which has no defined maturity date.  The note bears interest at an annual rate of 6% and is payable only on conversion into shares of the Company's common stock at $0.10 per share.

On August 1, 2016, the Company entered into a convertible promissory note for $23,750, which has no defined maturity date.  The note bears interest at an annual rate of 6% and is payable only on conversion into shares of the Company's common stock at $0.10 per share.

On August 3, 2016, the Company entered into a convertible promissory note with an institutional investor for $25,000, which bears interest at an annual rate of 12% and matures on February 4, 2017.  The note holder has the right, after a period of 180 days of the note, to convert the note and accrued interest into shares of the common stock of the Company at a discounted price per share equal to 50% to 65% of the market price of the Company's common stock, depending upon the stock's liquidity as determined by the note holder's broker.  At the inception of the convertible note, the Company paid debt issuance costs of $2,500, recorded a debt discount of $22,500, and recorded a derivative liability of $48,106 related to the conversion feature, and a loss on derivative liability of $25,606.  Interest expense for the amortization of the debt discount is calculated on a straight-line basis over the life of the convertible note.

On August 3, 2016, the Company entered into a convertible promissory note with an institutional investor for $37,000, which bears interest at an annual rate of 8% and matures on August 3, 2017.  The investor has the right, after the first six months of the note, to convert the note and accrued interest in whole or in part into shares of the common stock of the Company at a price per share equal to 55% (representing a discount rate of 45%) of the lowest bid price of the Company's common stock during the 20 trading days immediately ending on the last trading date prior to the conversion date.  At the inception of the convertible note to institutional investor, the Company paid debt issuance costs of $25,500, including 150,000 shares of its common stock valued at $24,000, and recorded a debt discount of $37,000, including an original issue discount of $5,000, a derivative liability of $148,934 related to the conversion feature, and a loss on derivative liability of $142,434.  Interest expense for the amortization of the debt discount was calculated on a straight-line basis over the life of the convertible note.
11


On September 20, 2016, the Company entered into a convertible promissory note with an institutional investor for $35,000, which bears interest at an annual rate of 9% and matures on June 20, 2017.  The investor has the right, commencing on the 180 th day of the note, to convert the note and accrued interest in whole or in part into shares of the common stock of the Company at a price per share equal to 72.5% (representing a discount rate of 27.5%) of the lowest trading price of the Company's common stock during the 15 trading days prior to the conversion date.  At the inception of the convertible note to institutional investor, the Company recorded debt issuance costs comprised of an obligation to issue 110,000 shares of its common stock valued at $14,311, and recorded a debt discount of $35,000, a derivative liability of $47,432 related to the conversion feature, and a loss on derivative liability of $21,743.  Interest expense for the amortization of the debt discount was calculated on a straight-line basis over the life of the convertible note.
 
On October 27, 2016, the Company entered into a convertible promissory note with an institutional investor for $40,000, which bears interest at an annual rate of 9% and matures on July 7, 2017.  The investor has the right, commencing on the 180 th day of the note, to convert the note and accrued interest in whole or in part into shares of the common stock of the Company at a price per share equal to 72.5% (representing a discount rate of 27.5%) of the lowest trading price of the Company's common stock during the 15 trading days prior to the conversion date.  At the inception of the convertible note to institutional investor, the Company recorded a debt discount of $40,000, a derivative liability of $47,939 related to the conversion feature, and a loss on derivative liability of $7,939.  Interest expense for the amortization of the debt discount was calculated on a straight-line basis over the life of the convertible note.

During the six months ended October 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 six months ended October 31, 2016, we had the following activity in our derivative liabilities account:
 
Balance at April 30, 2016
 
$
2,081,931
 
Issuance of new debt
   
112,189
 
Gain on derivative liability
   
(1,323,152
)
Conversion of debt to shares of common stock and repayment of debt
   
(567,333
)
         
Balance at October 31, 2016
 
$
303,635
 
 
The estimated fair value of the derivative liabilities at October 31, 2016 was calculated using the Black-Scholes pricing model with the following assumptions:

Risk-free interest rate
0.34 – 0.59%
Expected life in years
0.11 - 0.76
Dividend yield
0%
Expected volatility
130.03% - 354.88%
 
Accrued interest and fees payable was $26,700 and $63,979 at October 31, 2016 and April 30, 2016, respectively.

6. Financial Instruments

The convertible notes payable and related derivative liabilities are measured at fair value on a recurring basis and estimated as follows at October 31, 2016:
 
   
Total
   
Level 1
   
Level 2
   
Level 3
 
                         
Derivative liabilities
 
$
303,635
   
$
-
   
$
-
   
$
303,635
 
Convertible notes payable, net
   
449,915
     
-
     
-
     
449,915
 
                                 
Total liabilities measured at fair value
 
$
753,550
   
$
-
   
$
-
   
$
753,550
 
12

 
7. Stockholders' Deficit
 
During the six months ended October 31, 2016, the Company issued a total of 5,326,380 shares of its common stock: 2,630,000 shares for services valued at $570,110; 16,500 shares in payment of accrued fees payable of $10,325, recognizing a gain on extinguishment of debt of $4,550; 1,829,880 shares in the conversion of debt principal of $72,605 and accrued interest payable of $11,644; 550,000 shares valued at $80,000 for debt issuance costs; and 300,000 shares valued at $38,400 for settlement of warrants (see Note 8).

All issuances of the Company's common stock for non-cash consideration have been assigned a dollar amount equaling either the market value of the shares issued or the value of consideration received whichever is more readily determinable.  Most the non-cash consideration received pertaining to services rendered by consultants and others has been valued at the market value of the shares issued.
 
8.  Stock Options and Warrants
 
During the six months ended October 31, 2016, the Company issued warrants to a lender to purchase 250,000 shares of the Company's common stock at an exercise price of $0.60 per share. The warrants vested upon grant and expire on July 17, 2018.  The Company estimated the grant date fair value of the warrants at $14,365 using the Black-Scholes option-pricing model and charged the amount to debt discount.
 
During the six months ended October 31, 2016, the Company issued warrants to a consultant to purchase 50,000 shares of the Company's common stock at an exercise price of $0.50 per share. The warrants vested upon grant and expire on June 14, 2017.  The Company estimated the grant date fair value of the warrants at $9,056 using the Black-Scholes option-pricing model and charged the amount to general and administrative expenses.

The following assumptions were used in estimating the value of the warrants:

Risk free interest rate
.55 - .68%
Expected life in years
1.0 - 2.0
Dividend yield
0%
Expected volatility
137.99 – 351.37%
 
A summary of the Company's stock options and warrants as of October 31, 2016, and changes during the six months then ended is as follows:
 
   


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

Aggregate
Intrinsic
Value
                                                
Outstanding at April 30, 2016
   
1,068,333
   
$
1.56
              
Granted
   
300,000
   
$
0.58
              
Exercised
   
(68,333
)
 
$
0.60
              
Forfeited or expired
   
-
   
$
-
              
                                                          
Outstanding and exercisable at October 31, 2016
   
1,300,000
   
$
1.39
 
1.57
 $ 
  -

The aggregate intrinsic value in the preceding table represents the total pretax intrinsic value, based on our closing stock price of $0.11 as of October 31, 2016, which would have been received by the holders of in-the-money options had the option holders exercised their options as of that date.  
13

The Company and a warrant holder ("Holder") entered into a Warrant Settlement Agreement on August 9, 2016 whereby the Holder exercised 68,333 shares in exchange for a cash payment by the Company of $50,000 and the issuance by the Company of 300,000 of its common shares, valued at $38,400.  The total obligation of $88,400 has been recorded as a reduction of additional paid-in capital.  
 
9. Contingencies and Commitments
 
The Company has the following material commitments as of October 31, 2016:

a)  
Administration Agreement with EMAC Handels AG, renewed effective May 1, 2015 for a period of three years. Monthly fee for administration services of $5,000, office rent of $250 and office supplies of $125.  Extraordinary expenses are invoiced by EMAC on a quarterly basis.  The fee may be paid in cash and or with common stock.

b)  
Service Agreement signed April 25, 2016 with Merrill W. Moses, President, Director and CEO, for services of $7,500 per month beginning May 2016 and the issuance of a total 700,000 restricted common shares of the Company.  The fees may be paid in cash and or with common stock.

c)  
Service Agreement signed May 20, 2016 with Charles C. Hooper, Director, for services of $5,000 per month beginning May 2016 and the issuance of 250,000 restricted common shares of the Company.  The fees may be paid in cash and or with common stock.
 
10. Recent Accounting Pronouncements

In October 2016, the FASB issued Accounting Standards Update ("ASU") No. 2016-17, "Consolidation (Topic 810): Interests Held Through Related Parties That are Under Common Control." This update amends the consolidation guidance on how a reporting entity that is the single decision maker of a variable interest entity ("VIE") should treat indirect interests in the entity held through related parties that are under common control with the reporting entity when determining whether it is the primary beneficiary of that VIE. The primary beneficiary of a VIE is the reporting entity that has a controlling financial interest in a VIE and, therefore, consolidates the VIE. A reporting entity has an indirect interest in a VIE if it has a direct interest in a related party that, in turn, has a direct interest in the VIE. The amendments in this ASU are effective for public business entities for fiscal years beginning after December 15, 2016, including interim periods within those fiscal years. Early adoption is permitted, including adoption in an interim period. If an entity early adopts the amendments in an interim period, any adjustments should be reflected as of the beginning of the fiscal year that includes that interim period. The Company is currently unable to determine the impact on its consolidated financial statements of the adoption of this new accounting pronouncement.
 
In August 2016, the FASB issued ASU No. 2016-15, "Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments." This ASU addresses eight specific cash flow issues with the objective of reducing the existing diversity in practice. The amendments in this ASU are effective for public business entities for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. Early adoption is permitted. The Company is currently unable to determine the impact on its consolidated financial statements of the adoption of this new accounting pronouncement.

Although there are several other new accounting pronouncements issued or proposed by the FASB, which the Company has adopted or will adopt, as applicable, the Company does not believe any of these accounting pronouncements has had or will have a material impact on its consolidated financial position or results of operations.
 

14


 
11. Supplemental Statement of Cash Flows Information

During the six months ended October 31, 2016 and 2015, the Company paid $95,017 and $67,514 for interest.

During the six months ended October 31, 2016 and 2015, the Company paid no amounts for income taxes.
 
During the six months ended October 31, 2016, the Company had the following non-cash investing and financing activities:

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 accounts payable and debt discount by $14,311.

Increased debt discount and additional paid-in capital by $52,136 for beneficial conversion feature of new convertible notes payable.

Increased debt discount and decreased prepaid expenses by $16,294.

Increased debt discount and derivative liability by $112,189.

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.

Increased common stock and decreased additional paid-in capital by $30 for net settlement of warrants.

Increased accounts payable and decreased additional paid-in capital by $50,000 for settlement of warrants obligation.

Increased license agreement and accrued license agreement payments by $378,600.

Increased debt discount by $80,000, common stock by $55 and additional paid-in capital by $79,945 for issuance of common stock for debt issuance costs.

During the six months ended October 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 $10,723 and derivative liability by $146,533.

15


12. Restatement of Consolidated Financial Statements

Because of the Rescission Agreement with DTC discussed in Note 1, the Company has eliminated the accounts of DTC from the Company's condensed consolidated financial statements as of July 31, 2016 and for the three months then ended, which accounts were previously consolidated with those of the Company.  In addition, certain equity transactions involving obligations to issue shares of the Company's common stock and the issuance of stock options were not properly recorded in the three months ended July 31, 2016.  The following schedules present the condensed consolidated amounts previously reported, the restatement adjustments to eliminate the accounts of DTC and properly record the equity transactions, and the condensed consolidated amounts as restated.

Defense Technologies International Corp.
(Formerly Canyon Gold Corp.)
 
Condensed Consolidated Balance Sheet
 
As of July 31, 2016 (Unaudited)
 
   
   
As Previously
Reported
   

Restatement
Adjustments
   

As
Restated
 
ASSETS
                 
Current assets:
                 
   Cash
 
$
13,362
   
$
(12,187
)
 
$
1,175
 
   Inventories
   
5,355
     
(5,355
)
   
-
 
   Prepaid expenses
   
7,875
             
7,875
 
   Total current assets
   
26,592
     
(17,542
)
   
9,050
 
                         
Property and equipment – construction in progress
   
11,819
     
(11,819
)
   
-
 
Intangible assets
   
1,437,345
     
(1,437,345
)
   
-
 
                         
Total assets
 
$
1,475,756
   
$
(1,466,706
)
 
$
9,050
 
                         
LIABILITIES AND STOCKHOLDERS' DEFICIT
                 
Current liabilities:
                       
   Accounts payable
 
$
216,210
   
$
60,555
   
$
276,765
 
   Accrued interest and fees payable
   
365,593
     
(343,846
)
   
21,747
 
   Accrued interest payable – related parties
   
19,521
             
19,521
 
   Convertible notes payable, net of discount
   
1,465,571
     
(1,119,716
)
   
345,855
 
   Convertible notes payable – related parties
   
57,050
             
57,050
 
   Notes payable – related parties
   
79,656
             
79,656
 
   Derivative liabilities
   
228,825
             
228,825
 
   Payables – related parties
   
635,855
     
90,222
     
726,077
 
   Total current liabilities
   
3,068,281
     
(1,312,785
)
   
1,755,496
 
                         
   Total liabilities
   
3,068,281
     
(1,312,785
)
   
1,755,496
 
                         
Commitments and Contingencies
                       
                   
Stockholders' deficit:
                 
   Preferred stock, $0.0001 par value; 20,000,000 shares authorized, 1,100,000 shares issued and outstanding
   
110
           
110
 
   Common stock, $0.0001 par value; 200,000,000 shares authorized, 24,496,056 and 21,249,676 shares issued and outstanding, respectively
   
2,450
           
2,450
 
   Additional paid-in capital
   
2,117,489
     
9,056
     
2,126,545
 
   Accumulated deficit
   
(3,712,574
)
   
(162,977
)
   
(3,875,551
)
   Total stockholders' deficit
   
(1,592,525
)
   
(153,921
)
   
(1,746,446
)
                         
Total liabilities and stockholders' deficit
 
$
1,475,756
   
$
(1,466,706
)
 
$
9,050
 


16

 
Defense Technologies International Corp.
(Formerly Canyon Gold Corp.)
 
Condensed Consolidated Statement of Operations
 
Three Months Ended July 31, 2016 (Unaudited)
 
                   
   
As Previously
Reported
   
Restatement
Adjustments
   
As
Restated
 
                   
Revenue
 
$
-
       
$
-
 
                       
Expenses:
                     
   General and administrative
   
513,682
    $
164,656
     
678,338
 
   Research and development
   
3,277
     
(3,277
)
   
-
 
   Total expenses
   
516,959
     
161,379
     
678,338
 
                         
Loss from operations
   
(516,959
)
   
(161,379
)
   
(678,338
)
                         
Other income (expense):
                       
   Interest expense
   
(303,297
)
   
(1,598
)
   
(304,895
)
   Gain (loss) on derivative liability
   
1,498,059
             
1,498,059
 
   Gain on extinguishment of debt
   
121,403
             
121,403
 
                         
   Total other income (expense)
   
1,316,165
     
(1,598
)
   
1,314,567
 
                         
Income (loss) before income taxes
   
799,206
     
(162,977
)
   
636,229
 
                         
Provision for income taxes
   
-
             
-
 
                         
Net income (loss)
 
$
799,206
   
$
(162,977
)
 
$
636,229
 
                         
Net income (loss) per common share:
                       
   Basic
 
$
0.03
           
$
0.03
 
   Diluted
 
$
0.03
   
$
(0.01
)
 
$
0.02
 
                         
Weighted average common shares outstanding:
                       
   Basic
   
23,097,363
             
23,097,363
 
   Diluted
   
32,267,573
             
32,267,573
 

17

 
13. Subsequent Events

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

Issuances of Common Shares

In November 2016, the Company issued 4,000,000 shares of its common stock to several individuals as required by the License Agreement discussed in Note 3.

In November 2016, the Company entered into a short-term convertible promissory note of $5,790, with interest at 6% per annum and convertible into shares of the Company's common stock at a conversion price of $0.10 per share. 
 
In November 2016, the Company entered into a short-term convertible promissory note of $14,600, with interest at 6% per annum and convertible into shares of the Company's common stock at a conversion price of $0.075 per share. 
18


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.

Effective July 15, 2016, the Company executed documents intended to finalize the acquisition of 100% of Defense Technology Corporation, a privately held Colorado company ("DTC"), a developer of defense, detection and protection products to improve security for Anchor schools and other public facilities.  DTC has informed us that it is unable to complete the required financial statements.  Accordingly, the Company will not be able to consolidate DTC's financial statements into its audited financial statements. After a thorough review of the situation and discussions with DTC, we have mutually agreed to rescind the acquisition of DTC and entered into a Rescission Agreement and Mutual Release (the "Rescission Agreement"), effective October 17, 2016.

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

The security products licensed from CCS and to be developed by the Company are designed for personal and collateral protection.  The proposed detection technology is intended to provide passive security scanning units for either walk-through or hand-held use.  The units use electromagnets and do not emit anything (such as x-rays) through the subject.  The Company recently completed a prototype and currently has an operational testing unit.  The units are intended to improve security for schools and other public facilities.

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.

Our website address is http://www.defensetechnologiesintl.com
Information on or accessed through our website is not incorporated into this Quarterly Report on Form 10-Q and is not a part of this Form 10-Q.

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.
19

Going Concern

The accompanying 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 October 31, 2016, the Company has no revenues, has accumulated losses of $4,285,598 and a working capital deficit of $2,226,322 and expects to incur further losses in the development of its business, all of which cast substantial doubt about the Company's ability to continue as a going concern.  Management plans to continue to provide for the Company's capital needs during the year ending April 30, 2017 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.  There is no assurance that funding will be available to continue the Company's business operations.
 
Results of Operations

We currently have no sources of operating revenues. Accordingly, no revenues were recorded for the three and six months ended October 31, 2016 and 2015.

Our general and administrative expenses increased $244,318 to $290,008 in the three months ended October 31, 2016 from $45,690 in the three months ended October 31, 2015, and increased $851,185 to $968,346 in the six months ended October 31, 2016 from $117,161 in the six months ended October 31, 2015.  The increases are due primarily to an increase in stock based compensation, including shares issued to our new President and to a Director, and the issuance of shares to investor relations consultants.  We also incurred an increase in professional fees and costs associated with the rescinded agreement with DTC and the new Definitive Agreement with CCS.

Exploration costs were $1,452 in the three months ended October 31, 2016 compared to $1,725 in the three months ended October 31, 2015, and were $1,452 in the six months ended October 31, 2016 compared to $3,375 in the six months ended October 31, 2015.  The exploration costs for all periods consisted of State of Nevada annual claims maintenance fees and the costs of re-staking the Nevada mineral claims.

Our interest expense increased to $133,466 in the three months ended October 31, 2016 from $62,006 in the three months ended October 31, 2015, and increased to $438,361 in the six months ended October 31, 2016 from $90,420 in the six months ended October 31, 2015.  The increase in interest expense is due primarily to new interest-bearing debt issued to institutional investors, related extension and early payment penalties, and to the amortization of debt discount to interest expense in the current year.  A portion of our interest expense is incurred to related parties.

We recognized a loss on derivative liability of $174,907 and $70,567 for the three months ended October 31, 2016 and 2015, respectively.  We recognized a gain on derivative liability of $1,323,152 in the six months ended October 31, 2016 and a loss on derivative liability of $144,941 in the six months ended October 31, 2015.  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 each 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 gain on extinguishment of debt of $189,786 and $92,712 in the three months ended October 31, 2016 and 2015, respectively, and of $311,189 and $155,459 in the six months ended October 31, 2016 and 2015, respectively.  The gain on extinguishment of debt resulted primarily from the elimination of derivative liabilities upon debt extinguishment.

As a result, we recognized a net loss of $410,047 and $87,276 in the three months ended October 31, 2016 and 2015, respectively, and a net loss of $200,438 in the six months ended October 31, 2015.  Primarily due to the gain on derivative liability, we reported net income of $226,182 in the six months ended October 31, 2016.
20


Liquidity and Capital Resources
 
At October 31, 2016, we had total current assets of $4,042, including cash of $42 and prepaid expenses of $4,000, and total current liabilities of $2,230,364, resulting in a working capital deficit of $2,226,322.  Included in our current liabilities and working capital deficit are derivative liabilities totaling $303,635 related to the conversion features of certain of our convertible notes payable.  We do not believe the derivative liabilities will be required to be settled in cash.

A significant portion of our current liabilities as of October 31, 2016 is comprised of amounts due to related parties: accrued interest payable – related parties of $21,197; convertible notes payable – related parties of $57,050; notes payable – related parties of $79,656; and payables – related parties of $631,654.  We anticipate that in the short-term, operating funds will continue to be provided by related parties and other lenders.

At October 31, 2016, we had total convertible notes payable of $449,915, net of discount of $156,325.  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.

Pursuant to nine convertible notes payable, we received total cash proceeds of $423,590 during the six months ended October 31, 2016.  These short-term notes, which have a total principal balance of $443,590 at October 31, 2016 (including $20,000 total original interest discount), bear interest at annual rates ranging from 6% to 12% per annum and are convertible into common shares of the Company upon the terms and subject to the limitations and conditions set forth in the note agreements.  The notes generally contain early repayment penalties if repaid before defined payment dates in the note agreements.

From proceeds from the new convertible notes payable, we repaid $117,894 in principal of convertible notes payable and further extinguished $72,605 in principal through conversion of convertible notes payable to common stock.

During the six months ended October 31, 2016, net cash used in operating activities was $294,177, as a result of our net income of $226,182, non-cash expenses totaling $994,587 and increases in accounts payable of $67,284, accrued interest payable – related parties of $3,351 and payables – related parties of $66,195, offset by non-cash gains totaling $1,634,341, increase in prepaid expenses of $2,125, and a decrease in accrued interest and fees payable of $15,310.
 
During the six months ended October 31, 2015, net cash provided by operating activities was $43,803, as a result of our net loss of $200,438, gain on extinguishment of debt of $155,459, increase in prepaid expenses of $5,642 and decrease in accrued interest and fees payable of $1,169, offset by non-cash expenses totaling $162,651 and increases in accounts payable of $49,130, accrued interest payable – related parties of $3,351, and payables – related parties of $191,379.

During the six months ended October 31, 2016 and 2015, we had no cash provided by or used in investing activities.

During the six months ended October 31, 2016, net cash provided by financing activities was $294,177, comprised of proceeds from convertible notes payable of $423,590 , partially offset by repayment of convertible notes payable of $117,894 and payment of debt issuance costs of $11,500.
 
During the six months ended October 31, 2015, net cash used in financing activities was $43,986, comprised of repayment of convertible notes payable.

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.

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.

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.

As of October 31, 2016, we did not have sufficient cash to fund our operations for the next twelve months.
21


Inflation

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.

Critical Accounting Policies

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.

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.  
 
Exploration Costs

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

Non-Monetary Transactions

All issuances of our common stock for non-cash consideration have been assigned a dollar amount equaling either the market value of the shares issued or the value of consideration received whichever is more readily determinable.  The majority of the non-cash consideration received pertains to services rendered by consultants and others and has been valued at the market value of the shares issued.

Our accounting policy for equity instruments issued to consultants and vendors in exchange for goods and services follows the provisions of ASC 505, Equity Based Payments to Non Employees , where the equity instruments are accounted for based on the fair value of the consideration received or the fair value of the equity instruments issued, whichever is more reliably measurable.  The measurement date for the fair value of the equity instruments issued is determined at the earlier of (i) the date at which a commitment for performance by the consultant or vendor is reached or (ii) the date at which the consultant or vendor's performance is complete.

In the case of equity instruments issued to consultants, the fair value of the equity instrument is recognized over the term of the consulting agreement.

Comprehensive Loss

We have no component of other comprehensive income.  Accordingly, net loss equals comprehensive loss for the three months and six months ended October 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.
22


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.

Recent Accounting Pronouncements

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

Off-Balance Sheet Arrangements

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

Item 3.  Quantitative and Qualitative Disclosures About Market Risk.

This item is not required for a smaller reporting company.

Item 4.  Controls and Procedures.

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

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

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

Changes in Internal Control over Financial Reporting .  There was no change in our internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act) during our most recently completed fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
23

 
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 October 31, 2016, the Company issued a total of 2,080,000 unregistered shares of its common stock: 1,230,000 shares for services valued at $266,310; 550,000 shares for debt issuance costs valued at $80,000; and 300,000 shares for warrant settlement valued at $38,400.  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.

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
24

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.
25

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: December 15, 2016
By:   /S/  Merrill W. Moses
 
Merrill W. Moses
 
Chief Executive Officer
 
Acting Chief Financial Officer
 
 
 
26


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