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DEFENSE TECHNOLOGIES INTERNATIONAL CORP. : Management's Discussion and Analysis of Financial Condition and Results of Operations (form 10-Q)

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03/13/2018 | 04:34pm CET


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 audited 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In connection with the Rescission Agreement with the Company, DTC rescinded its agreement with the inventor and developer of the technology and assets that were subject to the original agreement between the Company and DTC.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.

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. We anticipate that the split will become effective on March 20, 2018, or as soon thereafter as practicable.

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 and nine months ended January 31, 2018 and 2017.


Our general and administrative expenses decreased $62,776 and $305,192 for the three and nine months ended January 31, 2018 compared to $192,337 and $1,160,683 for the same period ended January31, 2017. The decrease was due primarily to lower cost of legal accounting and professional fees.

The Company did not incur research and development costs in the three and nine months ended January31, 2018 compared to research and development costs of $1,452 in both the three and nine months ended January31, 2017.

Interest expenses incurred in the three and nine months ended January 31, 2018 was $31,910 and $129,790 compared to $117,280 and $555,641 for the three and nine months ended January 31, 2017. The decrease was attributable to lower cost of debt discounts and loan conversion for equity.

Losses on derivative liability of $477,166 and $14,140 was incurred in the three and nine months period ended January31, 2018, compared to a loss of $ 238,802 and a gain of $1,084,350 for the three and nine months ended January31, 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 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 loss on extinguishment of debt of zero for the three and nine months ended January 31, 2018, and a gain of $48,429 and $359,618 for the same periods in 2017. The gain on extinguishment of debt resulted primarily as a result of the elimination of derivative liabilities upon debt extinguishment.

Total other expenses for the three and nine months periods ended January 31, 2018 was $509,076 and $206,633, compared to, total other expense of $307,653 for the three months and other income of $888,327 for the nine months period in 2017. The variance is primarily due to the gain in derivative liability of $1,084,350 in the 2017 nine-month period compared to the loss of $14,140 in the 2018 nine-month period along with derivative liability losses of $477,166 during the three months period in 2018 compared to a $238,802 loss for the three months period in 2017.

Net loss before non-controlling interest for the three months ended January 31, 20118 was $571,852 compared to $499,990 for the 2017 period. For the nine-month periods ended January 31, 2018 and 2017, net loss before non-controlling interest was $511,825 and $273,808, respectively. After adjusting for our consolidated subsidiary, net loss for the three months ended January 31, 2018 and 2017 was $567,019 and $496,677, respectively, and for the nine month periods, the net loss was $506,992 for 2018 and $270,495 in 2017.

Liquidity and Capital Resources

At January 31, 2018, we had total current assets of $981, and total current liabilities of $2,436,335, resulting in a working capital deficit of $2,435,574. Included in our current liabilities and working capital deficit at January 31, 2018 are derivative liabilities totaling $806,437 related to the conversion features of certain of our convertible notes payable and convertible notes of $734,954, net of discount.

Our current liabilities as of January 31, 2018 is comprised of amounts due to related parties of $492,988. We anticipate that in the short-term, operating funds will continue to be provided by related parties and other lenders.

At January 31, 2018, we had total convertible notes payable of $740,593, less discount of $5,639. 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 nine months ended January 31, 2018, net cash used in operating activities was $114,712 compared to net cash used of $331,433 for the same period in 2017. The decrease in 2018 over 2017 was due to lower amortization of debt discount, lower gain on derivative liability offset by a loss lower in 2018 than the gain offset by the derivative in 2017.

During the nine months ended January 31, 2018, net cash provided by financing activities was $115,500, comprised of proceeds from convertible notes payable of $115,500, This compares to net cash provided in the same period in 2017 of $331,456 consisting of $477,940 in proceeds from convertible notes, partially offset by repayment of convertible notes payable of $132,894 and payment of debt issuance costs of $13,500.

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 January 31, 2018, we did not have sufficient cash to fund our operations for the next twelve months.

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.

© Edgar Online, source Glimpses

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