1. Nature of Operations and Continuation of Business
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 January 12, 2017, Passive Security Scan, Inc. (“PSSI”) was incorporated in the state of Utah as a wholly owned subsidiary. The Company merged its wholly owned subsidiary, Long Canyon Gold Resources Corp. (“Long Canyon”), into PSSI, with PSSI the surviving entity. 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 65.38% of PSSI with 34.62% acquired by several individuals and entities. With the merger of Long Canyon into PSSI, the Company discontinued its mineral exploration business. The Company plans to continue the development of the technology and conduct all sales and marketing activities in PSSI.
Going Concern
These 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 April 30, 2017, the Company has no revenues, has accumulated losses of $6,586,401 since inception on June 19, 2008 and a working capital deficit of $2,277,601 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, 2018 by issuing debt and equity securities and by the continued support of its related parties (see Note 5). The 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. In addition, the Company does not have a sufficient number of authorized shares to allow for conversion of all outstanding convertible debt and convertible preferred stock, and will need to restructure its equity to allow for further convertible debt or equity financing.
2. Summary of Significant Accounting Policies
(a)
Basis of Presentation
These 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.
(b)
Consolidation and Non-Controlling Interest.
These consolidated financial statements include the accounts of the Company, and its wholly owned subsidiary, Long Canyon, through January 15, 2017, and its majority-owned subsidiary, PSSI, from its formation on January 15, 2017. All inter-company transactions and balances have been eliminated.
The non-controlling interest in PSSI, representing 7,941,436 common shares, or 34.62%, was acquired by several individuals and entities, including related parties, in exchange for services and accrued expenses totaling $15,935.
(c)
Basic and Diluted Net Loss per Share
The Company computes net loss per share in accordance with ASC 260,
Earnings per Share
, which requires presentation of both basic and diluted loss per share (“EPS”) on the face of the statement of operations. Basic EPS is computed by dividing net loss available to common shareholders (numerator) by the weighted average number of common shares outstanding (denominator) during the period. Diluted EPS gives effect to all dilutive potential common shares outstanding during the period including stock options and warrants, using the treasury stock method, convertible preferred stock, and convertible debt and preferred stock, using the if-converted method. In computing diluted EPS, the average stock price for the period is used in determining the number of shares assumed to be purchased from the exercise of stock options or warrants. Diluted EPS excludes all potentially dilutive common shares if their effect is antidilutive.
As of April 30, 2017, convertible debt and related accrued interest payable were convertible into 226,066,477 shares of the Company’s common stock, convertible preferred stock was convertible into 19,735,450 shares of the Company’s common stock, and 1,300,000 shares of the Company’s common stock were issuable upon exercise of outstanding stock options and warrants.
As of April 30, 2016, convertible debt and related accrued interest payable were convertible into 12,730,870 shares of the Company’s common stock, convertible preferred stock was convertible into 11,000,000 shares of the Company's common stock, and 1,068,333 shares of the Company’s common stock were issuable upon exercise of outstanding stock options and warrants.
Since we had no dilutive effect of stock options, warrants or convertible debt for the years ended April 30, 2017 and 2016, basic weighted average number of common shares outstanding is the same as diluted weighted average number of common shares outstanding.
(d)
Income Taxes
The Company accounts for income taxes using the asset and liability method in accordance with ASC 740,
Income Taxes
. The asset and liability method provides that deferred tax assets and liabilities are recognized for the expected future tax consequences of temporary differences between the financial reporting and tax bases of assets and liabilities and for operating loss and tax credit carry forwards. Deferred tax assets and liabilities are measured using the currently enacted tax rates and laws that will be in effect when the differences are expected to reverse. The Company records a valuation allowance to reduce deferred tax assets to the amount that is believed more likely than not to be realized.
(e)
Use of Estimates
The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. The Company bases its estimates and assumptions on current facts, historical experience and various other factors that it believes to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities and the accrual of costs and expenses that are not readily apparent from other sources. The actual results experienced by the Company may differ materially and adversely from the Company’s estimates. To the extent there are material differences between the estimates and the actual results, future results of operations will be affected.
(f)
Financial Instruments
Pursuant to ASC 820,
Fair Value Measurements and Disclosures
and ASC 825,
Financial Instruments,
an entity is required to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value using a hierarchy based on the level of independent, objective evidence when measuring fair value using a hierarch based on the level of independent, objective evidence surrounding the inputs used to measure fair value. A financial instrument’s categorization with the fair value hierarchy is based upon the lowest level of input that is significant to the fair value measurement. The hierarchy prioritized the inputs into three levels that may be used to measure fair value:
Level 1: applies to assets or liabilities for which there are quoted prices in active markets for identical assets or liabilities.
Level 2: applies to assets or liabilities for which there are inputs other than quoted prices that are observable for the asset or liability such as quoted prices for similar assets or liabilities in markets that are not active.
Level 3: applies to assets or liabilities for which there are unobservable inputs to the valuation methodology that are significant to the measurement of the fair value of the assets or liabilities.
As of April 30, 2017 and 2016, 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.
Liabilities measured at fair value on a recurring basis were estimated as follows at April 30, 2017 and 2016:
(g)
Derivative Liabilities
We have identified the conversion features of certain of our convertible notes payable as derivatives. We estimate the fair value of the derivatives using the Black-Scholes pricing model. We estimate the fair value of the derivative liabilities at the inception of the financial instruments, at the date of conversions to equity and at each reporting date, recording a derivative liability, debt discount, and a gain or loss on change in derivative liabilities 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 agreements. These inputs are subject to significant changes from period to period and to management’s judgment; therefore, the estimated fair value of the derivative liabilities will fluctuate from period to period, and the fluctuation may be material.
(h) Over Commitment of Shares
The number of shares issuable under convertible debt with variable exercise prices is undeterminable. Currently, the Company does not have a sufficient number of authorized common shares to allow for conversion of all outstanding convertible debt and convertible preferred stock or exercise of stock options and warrants, and will need to restructure its equity.
(i)
Non-Monetary Transactions
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. 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.
The Company’s 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
. 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.
(j)
Cash and Cash Equivalents
The Company considers all investments purchased with original maturity of three or fewer months to be cash equivalents.
(k)
Exploration Costs
The Company has discontinued its mineral exploration business. All exploration costs, including lease payments, sampling, metallurgical, engineering, contractor costs, and efforts to obtain mineral rights have been charged to expense as incurred.
(l)
Impairment of Long-Lived Assets
The Company continually monitors 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, the Company assesses 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, the Company recognizes 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.
(m)
Reclassifications
Certain amounts in the 2016 consolidated financial statements have been reclassified to conform with the current year presentation.
3. License Agreement
Effective July 15, 2016, the Company executed documents intended to finalize the acquisition of 100% of Defense Technology Corporation, a non-related privately held Colorado company (“DTC”), a developer of defense, detection and protection products to improve security for Anchor schools and other public facilities. Subsequently, the Company and DTC 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 term of the License Agreement will 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 was paid to CCS plus ongoing hourly compensation for services provided.
The Company capitalized the costs to acquire the License Agreement, including the $25,000 initial licensing fee and the estimated value of $353,600 for the 4,000,000 shares of the Company’s common stock issued on November 10, 2016 to the CCS investors, which value was 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 $25,000 for the remaining obligation in its consolidated balance sheet as of April 30, 2017. The Company amortizes the capitalized costs over the estimated life of the license agreement as determined by the legal life of patents issued.
On January 15, 2017, the Company transferred the License Agreement to PSSI in exchange for 15,000,000 common shares of PSSI, or 65.38% ownership. The Company plans to continue the development of the technology and conduct all sales and marketing activities in PSSI.
On January 22, 2017, the Company and CCS entered into an Amendment to the Definitive Agreement, whereby CCS consented to the transfer of the Definitive Agreement, Patent License Agreement and Independent Contractor Agreement to PSSI and agreed to extend the due dates of certain payments due CCS to April 30, 2017. In exchange, CCS received 100,000 shares of PSSI common stock.
Also in connection with the Amendment to the Definitive Agreement, the investors that provided funding for the development of CCS’s technology received 500,000 shares of PSSI common stock.
4. Related Party Transactions and Balances
Payables – Related Parties
During the years ended April 30, 2017 and 2016, management and administrative services were compensated by the Company pursuant to: a Service Agreement between the Company and Merrill Moses, President, CEO, Secretary, acting CFO and director, dated April 25, 2016; a Service Agreement between the Company and Charles Hooper, director, dated May 20, 2016; a Service Agreement between the Company and Stephen Studdert, former President, CEO, Secretary, acting CFO and director, dated April 30, 2011; and an Administration Agreement with EMAC Handles AG (“EMAC”), a shareholder of the Company and PSSI, executed on March 15, 2011 and renewed on May 1, 2014. We also incurred consulting fees in fiscal year 2017 of $15,200 to Reinhard Hiestand, a shareholder and affiliate of EMAC.
During the year ended April 30, 2017, management and administrative services were compensated by PSSI pursuant to a Service Agreement between PSSI and Merrill Moses, dated January 12, 2017 and effective February 1, 2017 and an Administration and Management Agreement dated January 12, 2017 between PSSI and RAB Investments AG (“RAB”), a significant lender of the Company and a shareholder of PSSI.
The fees are 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 the Company’s or PSSI's 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.
On December 17, 2016, the Company issued 561,000 shares of its common stock to EMAC in payment of $56,100 of payables – related parties.
On December 31, 2016, the Company issued a total of 873,545 shares of its Series A preferred stock in payment of $381,841 of payables – related parties, $45,230 in notes payable – related parties and $9,702 in accrued interest payable – related parties.
On January 31, 2017, $9,835 of payables – related parties were extinguished by EMAC for 1,841,436 shares of PSSI.
As of April 30, 2017 and 2016, the Company had payable balances due to related parties totaling $334,753 and $565,459, respectively, which resulted from transactions with shareholders, officers and directors of the Company. Total compensation to related parties, including stock-based compensation was $495,450 and $209,020 for the years ended April 30, 2017 and 2016, respectively.
Convertible notes payable – related parties are currently in default and consisted of the following at April 30:
Notes payable – related parties are currently in default and consisted of the following at April 30:
5. Convertible Notes Payable
Convertible notes payable consisted of the following at:
|
|
April 30,
2017
|
|
|
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 to institutional investor, with interest at 15% per annum, convertible into common stock of the Company at a defined conversion price, in default
|
|
|
183,825
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
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 15% per annum, convertible into common stock of the Company at a defined conversion price, in default
|
|
|
10,000
|
|
|
|
-
|
|
Note payable to institutional investor, with interest at 15% per annum, convertible into common stock of the Company at a defined conversion price, in default
|
|
|
15,000
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Note payable to institutional investor, with interest at 15% per annum, convertible into common stock of the Company at a defined conversion price, in default
|
|
|
34,337
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Note payable to institutional investor, with interest at 15% per annum, convertible into common stock of the Company at a defined conversion price, in default
|
|
|
50,000
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
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
|
|
|
12,500
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Note payable to institutional investor, with interest at 8% per annum, convertible into common stock of the Company at a defined conversion price
|
|
|
10,931
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Note payable, with interest at 6% per annum, convertible into common stock of the Company at $0.035 per share
|
|
|
4,190
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Note payable, with interest at 6% per annum, convertible into common stock of the Company at $0.035 per share
|
|
|
17,350
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Note payable to institutional investor, with interest at 8% per annum, convertible after 180 days into common stock of the Company at a defined conversion price
|
|
|
37,000
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Note payable to institutional investor, with interest at 8% per annum, convertible into common stock of the Company at a defined conversion price
|
|
|
18,000
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Note payable to institutional investor, with interest at 12% per annum, convertible into common stock of the Company at a defined conversion price, repaid in August 2016
|
|
|
-
|
|
|
|
41,000
|
|
|
|
|
|
|
|
|
|
|
Note payable to institutional investor, with interest at 8% per annum, convertible into common stock of the Company at a defined conversion price, repaid in July 2016
|
|
|
-
|
|
|
|
55,500
|
|
|
|
|
|
|
|
|
|
|
Note payable to institutional investor, with interest at 8% per annum, convertible into common stock of the Company at a defined conversion price, repaid in July 2016
|
|
|
-
|
|
|
|
39,000
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
633,183
|
|
|
|
348,150
|
|
|
|
|
|
|
|
|
|
|
Less discount
|
|
|
(38,411
|
)
|
|
|
(284,664
|
)
|
|
|
|
|
|
|
|
|
|
|
|
$
|
594,772
|
|
|
$
|
63,486
|
|
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 June 9, 2016, the Company issued 1,232,880 shares of its common stock in the conversion of $50,000 principal of the $141,150 note and accrued interest payable of $11,644.
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.
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 an institutional investor for $189,000, with net proceeds to the Company of $175,000. The note bears interest at an annual rate of 8% (15% in the event of default), matures on January 17, 2017 and was 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. As of January 17, 2017, the Company was in default on this note and a penalty of $50,000 was added to the note principal. In a series of conversions during January through April 2017, the lender converted total principal of $55,175 into a total of 67,240,997 shares of the Company’s common stock. As of April 30, 2017, the note was in default with respect to the maturity date, and the Company was in default on certain terms of the July 2016 SPA. In August 2017, the Company and the lender entered into a settlement agreement (see Note 13).
The Company subsequently entered into Amendments #1 through #4 to the July 2016 SPA, receiving net proceeds of $10,000 on August 1, 2016, $15,000 on March 15, 2017, $34,337 on March 20, 2017 and $50,000 on April 28, 2017. The amendments are subject to the terms and conditions of the July 2016 SPA and the July 2016 Note. At the inception of the convertible note, the Company, recorded total debt discount of $99,337, a derivative liability of $2,836,791 related to the conversion feature, and a loss on derivative liability of $2,737,454.
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 $64,942 related to the conversion feature, and a loss on derivative liability of $42,442. Interest expense for the amortization of the debt discount is calculated on a straight-line basis over the life of the convertible note. On March 20, 2017, the lender converted $12,500 principal into 1,000,000 shares of the Company’s common stock. The note is currently in default.
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 30 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 $173,227 related to the conversion feature, and a loss on derivative liability of $166,727. Interest expense for the amortization of the debt discount is calculated on a straight-line basis over the life of the convertible note. In a series of conversions during February through April 2017, the lender converted total principal of $26,069 into a total of 87,515,449 shares of the Company’s common stock.
On November 1, 2016, the Company entered into a convertible promissory note for $4,190, 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 December 15, 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 September 30, 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 58% (representing a discount rate of 42%) of the average of the lowest three 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 $35,000, a derivative liability of $96,039 related to the conversion feature, and a loss on derivative liability of $61,039. Interest expense for the amortization of the debt discount is calculated on a straight-line basis over the life of the convertible note.
On January 31, 2017, the Company entered into a convertible promissory note for $17,350, 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 $0.035 per share.
On March 20, 2017, the Company entered into a convertible promissory note with an institutional investor for $18,000, which bears interest at an annual rate of 8% and matures on March 20, 2018. 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 recorded a debt discount of $18,000, including an original issue discount of $2,000, a derivative liability of $1,285,720 related to the conversion feature, and a loss on derivative liability of $1,269,720. Interest expense for the amortization of the debt discount is calculated on a straight-line basis over the life of the convertible note.
On November 24, 2015, the Company entered into a convertible promissory note with an institutional investor for $55,500, bearing interest at an annual rate of 8% and maturing on November 24, 2016. At the inception of the convertible note, the Company recorded debt issuance costs of $3,000 in prepaid expenses, a debt discount of $55,500, including an original issue discount of $7,000, a derivative liability of $167,776 related to the conversion feature, and a loss on derivative liability of $119,276. Interest expense for the amortization of the debt discount was calculated on a straight-line basis over the life of the convertible note. 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 55% (representing a discount rate of 45%) of the lowest sale price of the Company’s common stock during the 20 consecutive trading days immediately preceding the date of the conversion notice. The note was paid in full through conversion of $15,125 into a total of 325,000 shares of the Company’s common stock in June 2016 and a cash payment of $40,375 in July 2017.
On December 31, 2015, the Company entered into a convertible promissory note with an institutional investor for $39,000, bearing interest at an annual rate of 8% and maturing on December 31, 2016. At the inception of the convertible note, the Company recorded debt issuance costs of $4,500 in prepaid expenses, a debt discount of $39,000, including an original issue discount of $3,000, a derivative liability of $70,144 related to the conversion feature, and a loss on derivative liability of $34,144. Interest expense for the amortization of the debt discount was calculated on a straight-line basis over the life of the convertible note. 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 55% (representing a discount rate of 45%) of the lowest trading price of the Company’s common stock during the twenty consecutive trading days immediately preceding the date of the conversion notice. A $5,000 extension fee was added to the principal of the note in June 2016. The note was paid in full in July 2016 through conversion of $7,480 into a total 272,000 shares of the Company’s common stock and a cash payment of $36,520.
On February 4, 2016, the Company entered into a convertible promissory note with an institutional investor for $41,000 maturing on February 4, 2017. A one-time interest charge of 12% was payable in the event the Company did not repay the note during the first 120 days. At the inception of the convertible note, the Company recorded debt issuance costs of $2,500 in prepaid expenses, 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 Company also issued warrants to the investor to purchase 68,333 shares of the Company’s common stock at $0.60 per share (see Note 7).
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. The note was paid in full with a cash payment in July 2017.
On June 8, 2016, the Company entered into a convertible promissory note with an institutional investor for $25,000, bearing interest at an annual rate of 10% and maturing on December 9, 2016. 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 was calculated on a straight-line basis over the life of the convertible note. The note holder had 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. The Company obtained an extension of the maturity date to December 22, 2016 in exchange for the principal amount of the note increasing from $25,000 to $45,000. In December 2016, the Company paid the lender a principal payment of $35,000 and converted $4,000 principal into 129,032 shares of the Company’s common stock. In March 2017, the remaining principal of $6,000 plus $1,875 accrued interest payable were converted into 492,187 common shares of the Company.
On September 20, 2016, the Company entered into a convertible promissory note with an institutional investor for $35,000, bearing interest at an annual rate of 9% and maturing on June 20, 2017. 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 $42,432 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. The investor had 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. The note principal was increased by a penalty of $12,250 and the total principal of $47,250 was paid in March 2017.
On October 27, 2016, the Company entered into a convertible promissory note with an institutional investor for $40,000, bearing interest at an annual rate of 9% and maturing on July 7, 2017. 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. The investor had 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. The note principal was increased by a penalty of $8,200 and the total principal of $48,200 was paid in March 2017. As of April 30, 2017, an additional penalty of $5,800 was accrued, which was paid through the issuance of common stock of the Company in May 2017 (see Note 13).
During the year ended April 30, 2017, the Company issued a total of 158,207,545 shares of its common stock in the conversion of $176,349 convertible notes principal and $13,519 accrued interest payable. During the year ended April 30, 2016, the Company issued a total of 181,748 shares of its common stock in the conversion of $10,014 convertible notes principal.
During the years ended April 30, 2017 and 2016, we had the following activity in our derivative liabilities:
Balance at April 30, 2015
|
|
$
|
63,359
|
|
|
|
|
|
|
Issuance of convertible notes
|
|
|
122,000
|
|
Gain on derivative liability
|
|
|
2,104,872
|
|
Conversion of debt to shares of common stock and repayment of debt
|
|
|
(192,749
|
)
|
|
|
|
|
|
Balance at April 30, 2016
|
|
|
2,081,931
|
|
|
|
|
|
|
Issuance of convertible notes
|
|
|
262,525
|
|
Loss on derivative liability
|
|
|
412,372
|
|
Conversion of debt to shares of common stock and repayment of debt
|
|
|
(1,933,376
|
)
|
|
|
|
|
|
Balance at April 30, 2017
|
|
$
|
823,452
|
|
The estimated fair value of the derivative liabilities at April 30, 2017 was calculated using the Black-Scholes pricing model with the following assumptions:
Risk-free interest rate
|
|
|
0.80 – 1.070
|
%
|
Expected life in years
|
|
|
0.25 – 0.89
|
|
Dividend yield
|
|
|
0
|
%
|
Expected volatility
|
|
|
514.17% - 687.46
|
%
|
Accrued interest and fees payable were $74,181 and $63,979 at April 30, 2017 and 2016, respectively.
6. Mezzanine Equity
Convertible 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.
During the year ended April 30, 2017, the Company issued a total of 873,545 shares of its Series A preferred stock: 763,681 shares in payment of payables – related party of $381,841 and 109,864 shares in payment of notes payable – related parties principal of $45,230 and accrued interest payable of $9,702.
The Company had 1,473,545 and 600,000 shares of Series A preferred stock outstanding as of April 30, 2017 and 2016, respectively and 500,000 shares of Series B preferred stock outstanding at April 30, 2017 and 2016. Due to lack of authorized common shares available, the Series A and Series B preferred stock has been classified as mezzanine equity in our consolidated balance sheets.
7. Stockholders’ Deficit
Common Stock:
The Company has 200,000,000 shares of $0.0001 par value common stock authorized.
During the year ended April 30, 2017, the Company issued a total of 167,075,045 shares of its common stock: 3,330,000 shares for services valued at $591,880; 158,207,545 shares in the conversion of $176,349 convertible notes principal and $13,519 accrued interest payable (net of derivative liabilites, debt discounts, and gain/loss on extinguishment of debt); 561,000 shares in payment of payables – related party of $56,100; 4,126,500 shares in payment of accounts payable and accrued expenses of $373,686 (including 4,000,000 shares for the acquisition of the license agreement – Note 3); 550,000 shares valued at $80,000 for debt issuance costs; and 300,000 shares for settlement of warrants (see Note 8).
During the year ended April 30, 2016, the Company issued a total of 381,748 shares of its common stock: 181,748 shares for conversion of debt of $33,987 and 200,000 shares for director fees of $91,020. A reduction of 15 shares was recorded to adjust the number of common shares outstanding.
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. The majority of 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
On July 18, 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.
On June 14, 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 issued June and July 2016:
Risk free interest rate
|
|
|
.55 – .68
|
%
|
Expected life in years
|
|
|
1.0 – 2.0
|
|
Dividend yield
|
|
|
0
|
%
|
Expected volatility
|
|
|
137.99 – 351.37
|
%
|
On April 30, 2016, the Company issued options to a consultant to purchase a total of 1,000,000 shares of the Company’s common stock. The options vested upon grant, expire on May 31, 2018, with 250,000 options exercisable at $1.25 per share, 250,000 options exercisable at $1.50 per share, 250,000 options exercisable at $1.75 per share and 250,000 options exercisable at $2.00 per share. The Company estimated the grant date fair value of the options at $117,221 using the Black-Scholes option-pricing model and charged the amount to professional fees.
On February 4, 2016, the Company issued warrants to a lender to purchase 68,333 shares of the Company’s common stock at $0.60 per share. The warrants vested upon grant and were to expire on February 4, 2021. The Company estimated the grant date fair value of the warrants at $18,403 using the Black-Scholes option pricing model and charged the amount to interest expense. Pursuant to a dispute regarding stock prices, t
he Company and the warrant holder entered into a Warrant Settlement Agreement on August 9, 2016 requiring a cash payment by the Company of $50,000, recorded as a reduction of additional paid-in capital, and the issuance by the Company of 300,000 of its common shares, recorded at par value of $30.
A summary of the Company’s stock options and warrants as of April 30, 2017, and changes during the two years then ended is as follows:
|
|
Shares
|
|
|
Weighted
Average
Exercise Price
|
|
|
Weighted Average
Remaining
Contract Term
(Years)
|
|
|
Aggregate
Intrinsic
Value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at April 30, 2015
|
|
|
-
|
|
|
$
|
-
|
|
|
|
|
|
|
|
Granted
|
|
|
1,068,333
|
|
|
$
|
1.559
|
|
|
|
|
|
|
|
Exercised
|
|
|
-
|
|
|
$
|
-
|
|
|
|
|
|
|
|
Forfeited or expired
|
|
|
-
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding and exercisable at April 30, 2016
|
|
|
1,068,333
|
|
|
$
|
1.559
|
|
|
|
2.26
|
|
|
$
|
-
|
|
Granted
|
|
|
300,000
|
|
|
$
|
0.583
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(68,333
|
)
|
|
$
|
0.600
|
|
|
|
|
|
|
|
|
|
Forfeited or expired
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding and exercisable at April 30, 2017
|
|
|
1,300,000
|
|
|
$
|
1.385
|
|
|
|
1.07
|
|
|
$
|
-
|
|
The aggregate intrinsic value in the preceding table represents the total pretax intrinsic value, based on our closing stock price of $0.0039 as of April 30, 2017, which would have been received by the holders of in-the-money options had the option holders exercised their options as of that date.
9. Income Taxes
Deferred taxes are provided on a liability method whereby deferred tax assets are recognized for deductible temporary differences and operating loss and tax credit carry forwards and deferred liabilities are recognized for taxable temporary differences. Temporary differences are the differences between the reported amounts of assets and liabilities and their tax bases. Deferred tax assets are reduced by the valuation allowances when, in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will not be realized.
Deferred tax assets and liabilities are adjusted for the effects of changes in tax laws and rates on the date of enactment.
Net deferred tax assets consist of the following components at April 30:
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
|
|
Deferred tax assets:
|
|
|
|
|
|
|
Net operating loss carryforwards
|
|
$
|
1,349,200
|
|
|
$
|
770,400
|
|
Related party accrued interest
|
|
|
9,000
|
|
|
|
27,900
|
|
Accrued expenses – related parties
|
|
|
127,100
|
|
|
|
220,500
|
|
Valuation allowance
|
|
|
(1,485,300
|
)
|
|
|
(1,018,800
|
)
|
|
|
|
|
|
|
|
|
|
Net deferred tax assets
|
|
$
|
-
|
|
|
$
|
-
|
|
The income tax provision (benefit) differs from the amount of income tax determined by applying U.S. Federal corporate income tax rates to pre-tax loss due to the following:
|
|
Year Ended April 30,
|
|
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
|
|
Book loss
|
|
$
|
(705,400
|
)
|
|
$
|
(926,300
|
)
|
Non deductible expenses
|
|
|
441,600
|
|
|
|
746,800
|
|
Gain on debt settlement
|
|
|
(142,900
|
)
|
|
|
(41,600
|
)
|
Related party accruals
|
|
|
(81,500
|
)
|
|
|
66,700
|
|
Related party interest
|
|
|
(16,500
|
)
|
|
|
19,700
|
|
Valuation allowance
|
|
|
504,700
|
|
|
|
134,700
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
-
|
|
|
$
|
-
|
|
At April 30, 2017, the Company had net operating loss carry forwards of approximately $3,417,000 that may be offset against future taxable income through 2036. No tax benefit has been reported in the accompanying consolidated financial statements since the potential tax benefit is offset by a valuation allowance of the same amount.
The Company has adopted the Income Tax topic of FASB ASC 740,
Accounting for Uncertainty in Income Taxes
. Included in the balance at April 30, 2017 and 2016, are no tax positions for which the ultimate deductibility is uncertain. Because of the impact of deferred tax accounting, other than interest and penalties, the disallowance of the shorter deductibility period would not affect the annual effective tax rate but would accelerate the payment of cash to the taxing authority to an earlier period.
The Company’s policy is to recognize interest accrued related to unrecognized tax benefits in interest expense and penalties in operating expenses.
Due to the change in ownership provisions of U.S. federal income tax laws, operating loss carryforwards are potentially subject to annual limitations. All tax years are open to audit.
10. Contingencies and Commitments
(a)
Litigation
From time to time, the Company may become involved in various lawsuits and legal proceedings which arise in the ordinary course of business. However, litigation is subject to inherent uncertainties, and an adverse result in these or other matters may arise from time to time that may harm the Company. The Company is currently not aware of any such legal proceedings or claims that the Company believes will have, individually or in the aggregate, a material adverse effect on its business, financial condition or operating results.
(b)
Indemnities and Guarantees
During the normal course of business, the Company has made certain indemnities and guarantees under which it may be required to make payments in relation to certain transactions. The Company indemnifies its directors, officers, employees and agents to the maximum extent permitted under the laws of the State of Nevada. These indemnities include certain agreements with the Company’s officers under which the Company may be required to indemnify such person for liabilities arising out of their employment relationship. The duration of these indemnities and guarantees varies and, in certain cases, is indefinite. The majority of these indemnities and guarantees do not provide for any limitation of the maximum potential future payments the Company could be obligated to make. Historically, the Company has not been obligated to make significant payments for these obligations and no liabilities have been recorded for these indemnities and guarantees in the accompanying consolidated balance sheets.
(c)
Commitments
The Company has the following commitments as of April 30, 2017:
a)
|
Administration Agreement with EMAC Handels AG, renewed effective May 1, 2014 for a period of three years. The agreement has not been further renewed. 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 350,000 restricted common shares of the Company. No term of the agreement is specified. 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 350,000 restricted common shares of the Company. No term of the agreement is specified. The fees may be paid in cash and or with common stock.
|
d)
|
Administration and Management Agreement of PSSI signed January 12, 2017 for a three-year term, 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 3,000,000 common shares of PSSI and a 12% royalty calculated on defines sales revenues payable within 10 days after the monthly sales.
|
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 500,000 common shares of PSSI. No term of the agreement is specified.
|
f)
|
Business Development and Consulting Agreement of PSSI signed January 15, 2017 for a twelve-month term, with WSMG Advisors, Inc., for finder’s fees of 10% of funding raised for PSSI and the issuance of 1,500,000 common shares of PSSI.
|
11. Recent Accounting Pronouncements
In July 2017, the FASB issued Accounting Standards Update ("ASU") 2017-11, "Earnings Per Share (Topic 260), Distinguishing Liabilities from Equity (Topic 480) and Derivatives and Hedging (Topic 815): I. Accounting for Certain Financial Instruments with Down Round Features; II. Replacement of the Indefinite Deferral for Mandatorily Redeemable Financial Instruments of Certain Nonpublic Entities and Certain Mandatorily Redeemable Non-controlling Interests with a Scope Exception." Part I of this update addresses the complexity of accounting for certain financial instruments with down round features. Down round features are features of certain equity-linked instruments (or embedded features) that result in the strike price being reduced on the basis of the pricing of future equity offerings. Current accounting guidance creates cost and complexity for entities that issue financial instruments (such as warrants and convertible instruments) with down round features that require fair value measurement of the entire instrument or conversion option. Part II of this update addresses the difficulty of navigating Topic 480, "Distinguishing Liabilities from Equity," because of the existence of extensive pending content in the FASB Accounting Standards Codification. This pending content is the result of the indefinite deferral of accounting requirements about mandatorily redeemable financial instruments of certain nonpublic entities and certain mandatorily redeemable non-controlling interests. The amendments in Part II of this update do not have an accounting effect. This ASU is effective for fiscal years, and interim periods within those years, beginning after December 15, 2018. The Company is currently unable to determine the impact on its consolidated financial statements of the adoption of this new accounting pronouncement.
In January 2017, the FASB issued ASU No. 2017-4, “Intangibles – Goodwill and Other (Topic 350): “Simplifying the Test for Goodwill Impairment.” This update simplifies how an entity is required to test goodwill for impairment by eliminating Step 2 from the goodwill impairment test. Step 2 measures a goodwill impairment loss by comparing the implied fair value of a reporting unit’s goodwill with the carrying amount of that goodwill. Instead, under the amendments in this update, an entity should perform its annual, or interim, goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. An entity should recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value. An entity should apply the amendments in this update on a prospective basis. An entity is required to disclose the nature of and reason for the change in accounting principle upon transition. That disclosure should be provided in the first annual period and in the interim period within the first annual period when the entity initially adopts the amendments in this update. A public business entity that is an SEC filer should adopt the amendments in this Update for its annual or any interim goodwill impairment tests in fiscal years beginning after December 15, 2019. The Company is currently unable to determine the impact on its consolidated financial statements of the adoption of this new accounting pronouncement.
In January 2017, the FASB issued ASU No. 2017-1, “Business Combinations (Topic 805): Clarifying the Definition of a Business.” The amendments in this update clarify the definition of a business with the objective of adding guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. The definition of a business affects many areas of accounting including acquisitions, disposals, goodwill, and consolidation. The amendments of this ASU are effective for public business entities for annual periods beginning after December 15, 2018, and interim periods within annual periods beginning after December 15, 2019. The amendments in this Update are to be applied prospectively on or after the effective date. The Company is currently unable to determine the impact on its consolidated financial statements of the adoption of this new accounting pronouncement.
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.
In May 2014, the FASB issued ASU No. 2014-09, "Revenue from Contracts with Customers (Topic 606)". This standard provides a single set of guidelines for revenue recognition to be used across all industries and requires additional disclosures. This ASU is effective for the Company in the first quarter of fiscal year 2019 using either of two methods: (i) retrospective to each prior reporting period presented with the option to elect certain practical expedients as defined within the ASU; or (ii) retrospective with the cumulative effect of initially applying the ASU recognized at the date of initial application and providing certain additional disclosures as defined in the ASU. Early adoption in the first quarter of fiscal year 2018 is permitted. The Company is currently unable to determine the impact on its consolidated financial statements of the adoption of this new accounting pronouncement.
In February 2016, the FASB issued ASU No. 2016-02, "Leases (Topic 842)," which supersedes the lease accounting requirements in Topic 840. This ASU requires a dual approach for lessee accounting under which a lessee would account for leases as finance leases or operating leases. Both finance leases and operating leases will result in the lessee recognizing a right-of use asset and a corresponding lease liability. For finance leases, the lessee would recognize interest expense and amortization of the right-of-use asset, and for operating leases, the lessee would recognize a straight-line total lease expense. The guidance also requires qualitative and specific quantitative disclosures to supplement the amounts recorded in the financial statements so that users can understand more about the nature of an entity's leasing activities, including significant judgments and changes in judgments. This guidance is effective beginning in the first quarter of fiscal year 2020 on a modified retrospective approach. 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.
12.
Supplemental Statement of Cash Flows Information
During the years ended April 30, 2017 and 2016, the Company paid no amounts for income taxes.
During the years ended April 30, 2017 and 2016, the Company paid $137,855 and $67,514 for interest.
During the year ended April 30, 2017, the Company had the following non-cash investing and financing activities:
Increased accounts payable and debt discount by $14,311.
In debt conversions, increased common stock by $15,821, increased additional paid-in capital by $1,650,297, decreased convertible notes payable by $176,349, decreased accrued interest and fees payable by $13,519, decreased debt discount by $48,953 and decreased derivative liabilities by $1,933,376.
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 $262,525.
Increased common stock by $413 and additional paid-in capital by $373,273 and decreased accrued interest and fees payable by $24,636 and accrued license agreement payments by $353,600.
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.
Increased preferred stock by $11, increased additional paid-in capital by $54,921, decreased notes payable – related parties by $45,230 and decreased accrued interest payable – related parties by $9,702.
Increased preferred stock by $76, increased additional paid-in capital by $381,841 and decreased payables – related parties by $381,841.
Increased non-controlling interest and decreased payables – related parties by $9,835.
Increased common stock by $56, increased additional paid-in capital by $56,044 and decreased payables – related parties by $56,100.
During the year ended April 30, 2016, 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 $168,698.
Increased debt discount and derivative liability by $122,000.
Increased debt discount and additional paid in capital by $232,650.
13. Subsequent Events
In accordance with ASC 855,
Subsequent Events
, the Company has evaluated subsequent events to determine events occurring after April 30, 2017 that would have a material impact on the Company’s results or require disclosure.
Issuances of Common Stock
Subsequent to April 30, 2017, the Company issued 8,815,624 shares of its common stock in the conversion of debt of $13,890 and 14,000,000 shares for services valued at $25,200.
Issuances of Preferred Stock
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 October 2017. 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.
Business Consulting Agreement
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 14,000,000 shares of its common stock in July 2017 in partial payment of this obligation.
Convertible Promissory Note
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, 2017 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.
Amendment #5 to the July 2016 SPA
On July 7, 2017, the Company entered into Amendment #5 to the July 2016 SPA, with proceeds to the Company of $25,000. The amendment is subject to the terms and conditions of the July 2016 SPA and the July 2016 Note. The proceeds from this loan were used to pay accounts payable of $25,000.
Cancellation of Common Shares
Effective July 5, 2017, EMAC returned 11,775,000 common shares of the Company that were previously issued in payment for certain mineral lease properties in Nevada.
Funding Agreement
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 is 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 to be 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 by the anticipated initial first tranche during August 2017, or thereafter.
Waiver and Settlement Agreement
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 13,000,000 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.
Payment to CCS
In May 2017, the Company paid $17,500 of the accrued license agreement payment to CCS.