UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-Q
(Mark
One) |
☒ |
QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For
the quarterly period ended June 30, 2014
|
☐ |
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: 000-26361 |
Global
Digital Solutions, Inc. |
(Exact
name of registrant as specified in its charter) |
New
Jersey |
|
22-3392051 |
(State
or other jurisdiction of incorporation
or
organization) |
|
(I.R.S.
Employer
Identification No.) |
777
South Flagler Drive, Suite 800 West
West
Palm Beach, FL 33401 |
|
(561)
515-6163 |
(Address
of principal executive offices,
including
zip code) |
|
(Registrant’s
telephone number,
including
area code) |
Not
Applicable |
(Former
name, former address and former fiscal year, if changed since last report) |
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 preceding 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 ☐ 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
☐ 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. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act.
Large
accelerated filer |
☐ |
Accelerated
filer |
☐ |
Non-accelerated
filer |
☐ |
Smaller reporting
company |
☒ |
(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
☒
The
number of shares outstanding of each of the issuer’s classes of common stock as of the close of business on August 18, 2014
is as follows:
Class |
|
Number
of Shares |
Common Stock: $0.001 Par Value |
|
100,669,278 |
GLOBAL
DIGITAL SOLUTIONS, INC.
TABLE
OF CONTENTS
|
|
Page |
PART I - FINANCIAL
INFORMATION |
|
|
|
Item 1. |
Financial Statements (unaudited): |
1 |
|
Condensed Consolidated Balance Sheets
– June 30, 2014 and December 31, 2013 |
1 |
|
Condensed Consolidated Statements
of Operations for the three and six months ended June 30, 2014 and 2013 |
2 |
|
Condensed Consolidated Statements
of Cash Flows for the six months ended June 30, 2014 and 2013 |
3 |
|
Notes to Condensed Consolidated
Financial Statements |
4 |
Item 2. |
Management’s Discussion and Analysis of Financial Condition
and Results of Operations. |
16 |
Item 3. |
Quantitative and Qualitative Disclosures About Market Risk. |
21 |
Item 4. |
Controls and Procedures. |
21 |
|
|
|
PART II - OTHER INFORMATION |
|
|
|
Item 1. |
Legal Proceedings. |
22 |
Item 1A. |
Risk Factors. |
22 |
Item 2. |
Unregistered Sales of Equity Securities and Use of Proceeds. |
22 |
Item 3. |
Defaults Upon Senior Securities. |
22 |
Item 4. |
Mine Safety Disclosures. |
22 |
Item 5. |
Other Information. |
22 |
Item 6. |
Exhibits. |
22 |
|
Signatures |
23 |
PART
I - FINANCIAL INFORMATION
ITEM
1 - FINANCIAL STATEMENTS
GLOBAL
DIGITAL SOLUTIONS, INC. |
CONDENSED
CONSOLIDATED BALANCE SHEETS |
(unaudited) |
| |
June 30, | | |
December 31, | |
| |
2014 | | |
2013 | |
Assets | |
| | |
| |
Current Assets | |
| | |
| |
Cash and cash equivalents | |
$ | 353,087 | | |
$ | 509,224 | |
Accounts receivable, net | |
| 370,481 | | |
| - | |
Inventory | |
| 840,519 | | |
| | |
Notes receivable | |
| - | | |
| 1,465,874 | |
Prepaid expenses | |
| 59,901 | | |
| 122,056 | |
Costs and estimated earnings in excess of billings on uncompleted contracts | |
| 668,561 | | |
| - | |
Total current assets | |
| 2,292,549 | | |
| 2,097,154 | |
Property and equipment, net | |
| 67,648 | | |
| | |
Deposits | |
| 198 | | |
| 198 | |
Intangible assets | |
| 1,466,344 | | |
| | |
Goodwill | |
| 832,674 | | |
| | |
Total assets | |
$ | 4,659,413 | | |
$ | 2,097,352 | |
| |
| | | |
| | |
Liabilities and Stockholders' Equity | |
| | | |
| | |
Current Liabilities | |
| | | |
| | |
Accounts payable | |
$ | 178,695 | | |
$ | 166,256 | |
Accrued expenses | |
| 723,175 | | |
| 165,537 | |
Convertible notes payable | |
| - | | |
| 529,309 | |
Notes payable | |
| 305,453 | | |
| 25,000 | |
Due to NACSV sellers | |
| 816,373 | | |
| - | |
Total current liabilities | |
| 2,023,696 | | |
| 886,102 | |
Contingent consideration | |
| 1,955,293 | | |
| - | |
Total liabilities | |
| 3,978,989 | | |
| 886,102 | |
| |
| | | |
| | |
Commitments and Contingencies | |
| | | |
| | |
| |
| | | |
| | |
Stockholders’ equity | |
| | | |
| | |
Preferred stock, $0.001 par value, 35,000,000 shares authorized, none issued and outstanding | |
| - | | |
| - | |
Common stock, $0.001 par value, 450,000,000 shares authorized, 100,669,278 and 93,024,117 shares issued and outstanding | |
| 100,670 | | |
| 93,025 | |
Additional paid-in capital | |
| 23,667,935 | | |
| 17,976,600 | |
Accumulated deficit | |
| (23,088,181 | ) | |
| (16,858,375 | ) |
Total stockholders’ equity | |
| 680,424 | | |
| 1,211,250 | |
Total liabilities and stockholders' equity | |
$ | 4,659,413 | | |
$ | 2,097,352 | |
See
the accompanying notes to condensed consolidated financial statements.
GLOBAL
DIGITAL SOLUTIONS, INC. |
CONDENSED
CONSOLIDATED STATEMENTS OF OPERATIONS |
| |
For the Three Months Ended | | |
For the Six Months Ended | |
| |
June 30, | | |
June 30, | |
| |
2014 | | |
2013 | | |
2014 | | |
2013 | |
| |
| | |
| | |
| | |
| |
Revenue | |
$ | 111,405 | | |
$ | - | | |
$ | 111,405 | | |
$ | - | |
| |
| | | |
| | | |
| | | |
| | |
Cost of revenue | |
| 69,346 | | |
| - | | |
| 69,346 | | |
| - | |
| |
| | | |
| | | |
| | | |
| | |
Gross profit | |
| 42,059 | | |
| - | | |
| 42,059 | | |
| - | |
| |
| | | |
| | | |
| | | |
| | |
Operating expenses | |
| | | |
| | | |
| | | |
| | |
Selling, general and administrative expenses | |
| 3,834,260 | | |
| 1,368,497 | | |
| 6,690,676 | | |
| 2,047,696 | |
Other (income)/expense | |
| | | |
| | | |
| | | |
| | |
Gain on extinguishment of debt | |
| (387,642 | ) | |
| - | | |
| (387,642 | ) | |
| - | |
Interest income | |
| (14,179 | ) | |
| (10,416 | ) | |
| (43,182 | ) | |
| (12,321 | ) |
Interest expense | |
| 2,931 | | |
| 662,302 | | |
| 9,181 | | |
| 708,198 | |
Total costs and expenses | |
| 3,435,370 | | |
| 2,020,383 | | |
| 6,269,033 | | |
| 2,743,573 | |
| |
| | | |
| | | |
| | | |
| | |
Loss from continuing operations before provision for income taxes | |
| (3,393,311 | ) | |
| (2,020,383 | ) | |
| (6,226,974 | ) | |
| (2,743,573 | ) |
| |
| | | |
| | | |
| | | |
| | |
Provision for income taxes | |
| - | | |
| - | | |
| - | | |
| - | |
| |
| | | |
| | | |
| | | |
| | |
Loss from continuing operations | |
| (3,393,311 | ) | |
| (2,020,383 | ) | |
| (6,226,974 | ) | |
| (2,743,573 | ) |
| |
| | | |
| | | |
| | | |
| | |
Loss from discontinued operations | |
| (567 | ) | |
| (25,477 | ) | |
| (2,832 | ) | |
| (271,221 | ) |
| |
| | | |
| | | |
| | | |
| | |
Net loss | |
$ | (3,393,878 | ) | |
$ | (2,045,860 | ) | |
$ | (6,229,806 | ) | |
$ | (3,014,794 | ) |
| |
| | | |
| | | |
| | | |
| | |
Loss per common share - basic and diluted: | |
| | | |
| | | |
| | | |
| | |
Loss from continuing operations | |
$ | (0.03 | ) | |
$ | (0.03 | ) | |
$ | (0.06 | ) | |
$ | (0.05 | ) |
Loss from discontinued operations | |
| - | | |
| - | | |
| - | | |
| - | |
Net loss | |
$ | (0.03 | ) | |
$ | (0.03 | ) | |
$ | (0.06 | ) | |
$ | (0.05 | ) |
| |
| | | |
| | | |
| | | |
| | |
Shares used in computing net loss per share: | |
| | | |
| | | |
| | | |
| | |
Basic and diluted | |
| 101,145,350 | | |
| 63,943,788 | | |
| 99,848,623 | | |
| 58,598,393 | |
See
the accompanying notes to condensed consolidated financial statements.
GLOBAL DIGITAL SOLUTIONS, INC. |
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS |
|
|
For the Six Months Ended |
|
|
|
June 30, |
|
|
|
2014 |
|
|
2013 |
|
Operating Activities |
|
|
|
|
|
|
Net loss |
|
$ |
(6,229,806 |
) |
|
$ |
(3,014,794 |
) |
Adjustments to reconcile net loss to net cash used in operating activities: |
|
|
|
|
|
|
|
|
Depreciation and amortization |
|
|
12,831 |
|
|
|
- |
|
Stock- based compensation expense |
|
|
4,521,909 |
|
|
|
1,371,958 |
|
Common stock & warrants issued in payment of services |
|
|
604,168 |
|
|
|
375,533 |
|
Amortization of debt discount |
|
|
0 |
|
|
|
676,487 |
|
Gain on extinguishment of debt |
|
|
(387,642 |
) |
|
|
- |
|
Non-cash interest expense |
|
|
9,181 |
|
|
|
- |
|
Acquisition expenses settled with common stock |
|
|
235,000 |
|
|
|
- |
|
Non cash acquisition expense |
|
|
12,903 |
|
|
|
- |
|
Changes in operating assets and liabilities: |
|
|
|
|
|
|
|
|
Inventory |
|
|
5,000 |
|
|
|
- |
|
Costs in excess of billings |
|
|
(97,774 |
) |
|
|
- |
|
Prepaid expenses |
|
|
37,944 |
|
|
|
(165,000 |
) |
Other assets |
|
|
- |
|
|
|
(5,000 |
) |
Accounts payable |
|
|
48,162 |
|
|
|
79,212 |
|
Accrued expenses |
|
|
507,057 |
|
|
|
92,610 |
|
Billings in excess of costs |
|
|
13,631 |
|
|
|
|
|
Cash from discontinued operations |
|
|
- |
|
|
|
245,745 |
|
Net cash used in operating activities |
|
|
(707,436 |
) |
|
|
(343,249 |
) |
|
|
|
|
|
|
|
|
|
Investing Activities |
|
|
|
|
|
|
|
|
Repayment of loans to Airtronic |
|
|
1,509,056 |
|
|
|
- |
|
Loans to Airtronic |
|
|
(43,182 |
) |
|
|
(695,961 |
) |
Payment for NACSV |
|
|
(1,000,000 |
) |
|
|
- |
|
NACSV cash acquired |
|
|
135,425 |
|
|
|
- |
|
Net cash
provided by (used in) investing activities |
|
|
601,299 |
|
|
|
(695,961 |
) |
|
|
|
|
|
|
|
|
|
Financing Activities |
|
|
|
|
|
|
|
|
Proceeds from sale of common stock |
|
|
- |
|
|
|
926,100 |
|
Proceeds from exercise of warrants |
|
|
125,000 |
|
|
|
- |
|
Proceeds from short-term debt |
|
|
- |
|
|
|
374,900 |
|
Payments on short-term debt |
|
|
(25,000 |
) |
|
|
(37,500 |
) |
Payment on convertible notes |
|
|
(150,000 |
) |
|
|
- |
|
Net cash provided by (used in) financing activities |
|
|
(50,000 |
) |
|
|
1,263,500 |
|
|
|
|
|
|
|
|
|
|
Net (decrease) increase in cash and
cash equivalents |
|
|
(156,137 |
) |
|
|
224,290 |
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at beginning of year |
|
|
509,224 |
|
|
|
385,141 |
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of period |
|
$ |
353,087 |
|
|
$ |
609,431 |
|
|
|
|
|
|
|
|
|
|
Supplementary disclosure of non-cash investing and financing activities |
|
|
|
|
|
|
|
|
Purchase of NACSV with common shares |
|
$ |
200,000 |
|
|
$ |
- |
|
See
the accompanying notes to condensed consolidated financial statements.
GLOBAL
DIGITAL SOLUTIONS, INC.
Notes
to Condensed Consolidated Financial Statements
June
30, 2014 and 2013
Note
1 –Organization and Summary of Significant Accounting Policies
We
were incorporated in New Jersey as Creative Beauty Supply, Inc. (“Creative”) in August 1995. In March 2004,
Creative acquired Global Digital Solutions, Inc., a Delaware corporation ("Global”). The merger was treated as a recapitalization
of Global, and Creative changed its name to Global Digital Solutions, Inc., Global provided structured cabling design, installation
and maintenance for leading information technology companies, federal, state and local government, major businesses, educational
institutions, and telecommunication companies. Our mission was to target the United States government contract marketplace for
audio and video services. Due to capital constraints our operations team focused mainly in Northern California. On May 1, 2012,
we made the decision to wind down our operations in the telecommunications area and to refocus our efforts in the area of cyber
arms technology and complementary security and technology solutions. From August 2012 through November 2013 we were actively involved
in managing Airtronic USA, Inc., and effective as of June 16, 2014 we acquired North American Custom Specialty Vehicles, LLC (“NACSV”).
Summary
of Significant Accounting Policies
Principles
of Consolidation
The
accompanying unaudited condensed consolidated financial statements include the accounts of the Company and our wholly owned subsidiaries.
Intercompany accounts and transactions have been eliminated. The year-end condensed balance sheet data was derived from audited
financial statements, but does not include all disclosures required by accounting principles generally accepted in the United
States of America. These condensed consolidated financial statements and accompanying notes should be read in conjunction with
the Company’s annual consolidated financial statements and the notes thereto for the year ended December 31, 2013, included
in our Annual Report on Form 10-K (the “2013 Form 10-K”). The unaudited condensed consolidated statements
of operations for the three and six months ended June 30, 2014 are not necessarily indicative of the results that may be expected
for the entire year.
Use
of Estimates
The
preparation of these condensed consolidated financial statements in conformity with U.S. generally accepted accounting principles
(“GAAP”) requires us to make estimates and assumptions that affect the amounts reported and disclosed in the financial
statements and the accompanying notes. Actual results could differ materially from these estimates. On an ongoing basis, we evaluate
our estimates, including those related to accounts receivable, fair values of financial instruments, useful lives of capitalized
software development costs and property and equipment, fair values of stock-based awards, income taxes, and contingent liabilities,
among others. We base our estimates on historical experience and on various other assumptions that are believed to be reasonable,
the results of which form the basis for making judgments about the carrying values of assets and liabilities. In the opinion of
the Company’s management, all adjustments (including normal recurring adjustments) considered necessary to present fairly
the unaudited condensed consolidated financial statements have been made.
Financial
Condition and Going Concern
The accompanying financial statements have been prepared assuming we will continue as a going concern,
which contemplates the realization of assets and the liquidation of liabilities in the normal course of business. We have sustained
losses and experienced negative cash flows from operations since inception, and at June 30, 2014 had an accumulated deficit of
$23,088,181, cash and cash equivalents of $353,087, working capital of $268,853 and stockholders’ equity of $680,424. We
have funded our activities to date almost exclusively from equity and debt financings. These factors raise substantial
doubt about our ability to continue as a going concern.
We
will continue to require substantial funds to continue development of our core business. Management’s plans in order to
meet our operating cash flow requirements include (i) financing activities such as private placements of common stock, and issuances
of debt and convertible debt instruments, (ii) the establishment of strategic relationships which we expect will lead to the generation
of additional revenue or acquisition opportunities and (iii) the acquisition of businesses in the areas of cyber arms technology
and complementary security and technology solutions.
While
we believe that we will be successful in obtaining the necessary financing to fund our operations, there are no assurances that
such additional funding will be achieved or that we will succeed in our future operations. The consolidated financial statements
do not include any adjustments relating to the recoverability and classification of recorded asset amounts or the amounts and
classification of liabilities that might be necessary should we be unable to continue as a going concern.
GLOBAL
DIGITAL SOLUTIONS, INC.
Notes
to Condensed Consolidated Financial Statements
June
30, 2014 and 2013
Revenue
and Cost Recognition
Revenues
from fixed-price and modified fixed-price construction contracts are recognized using the percentage-of-completion method of revenue
recognition, measured by the percentage of cost incurred to date to the estimated total cost for each contract. This method is
used because management considers it to be the best available measure of progress on these contracts. Because of inherent uncertainties
in estimating costs, it is possible that the estimates used will change within the near-term.
Contract
costs include all direct material and labor costs and those indirect costs related to contract performance, such as payroll taxes
and worker’s compensation insurance premiums. Operating expenses are charged to expense as incurred. Provisions for estimated
losses on uncompleted contracts are made in the period in which such losses are determined. Changes in job performance, job conditions,
estimated profitability, and final contract settlements may result in revisions to costs and income and are recognized in the
period in which the revisions are determined.
The
asset, “Costs and estimated earnings in excess of billings on uncompleted contracts”, represents revenues recognized
in excess of amounts billed. The liability, “Billings in excess of costs and estimated earnings on uncompleted contracts”,
represents billings in excess of revenues recognized.
Allowance
for doubtful accounts
Accounts
receivable is stated at cost, net of any allowance for doubtful accounts. The Company maintains allowances for doubtful accounts
for estimated losses resulting from the failure of customers to meet their obligations. Based on management’s evaluation
of each customer, the Company considers all remaining accounts receivable to be fully collectible and, therefore, did not provide
for an allowance for doubtful accounts.
Inventory
Inventory
consists of the shells and components to be added to the mobile command units and is stated at the lower of cost (first-in, first-out)
or market.
Property
and equipment
Property
and equipment are carried at cost. Expenditures which materially increase values or extend useful lives are capitalized while
replacements, maintenance and repairs which do not improve or extend the lives of the respective assets are charged against income
as incurred. The net gain or loss on items retired or otherwise disposed of is credited or charged to operations and the cost
and accumulated depreciation are removed from the accounts.
A
provision for depreciation of property and equipment is made on a basis considered adequate to amortize the related costs (net
of salvage value) over their estimated useful lives using the straight-line method. Estimated useful lives are principally as
follows: vehicles, 5 years; furniture and fixtures and office equipment, 5-10 years; leasehold improvements, 40 years; machinery
and equipment 5-10 years.
Concentrations
of Credit Risk
Financial
instruments that potentially subject us to concentrations of credit risk consist primarily of cash and accounts receivable.
Stock-Based
Compensation
At
June 30, 2014, we had one stock-based employee compensation plan. The awards granted are valued at fair value and compensation
cost is recognized on a straight-line basis over the service period of each award.
Advertising
All
advertising costs are expensed as incurred.
Income
Taxes
We
adopted Accounting Standards Codification subtopic 740-10, Income Taxes ("ASC 740-10") which requires the recognition
of deferred tax liabilities and assets for the expected future tax consequences of events that have been included in the financial
statement or tax returns. Under this method, deferred tax liabilities and assets are determined based on the difference between
financial statements and tax basis of assets and liabilities using enacted tax rates in effect for the year in which the differences
are expected to reverse. Temporary differences between taxable income reported for financial reporting purposes and income tax
purposes consist primarily of timing differences such as amortization of intangible assets, deferred officers' compensation
and stock-based compensation. A valuation allowance is provided against net deferred tax assets where we determine realization
is not currently judged to be more likely than not. We recognize and measure uncertain tax positions through a two-step process
in accordance with the Income Taxes Topic of the Codification. The first step is to evaluate the tax position for recognition
by determining if the weight of available evidence indicates it is more likely than not that the position will be sustained on
audit, including resolution of related appeals or litigation processes, if any. The second step is to measure the tax benefit
as the largest amount which is more than 50% likely of being realized upon ultimate settlement. We consider many factors when
evaluating and estimating tax positions and tax benefits, which may require periodic adjustments and which may not accurately
anticipate actual outcomes. Accordingly, we report a liability for unrecognized tax benefits resulting from the uncertain tax
positions taken or expected to be taken in a tax return and recognize interest and penalties, if any, related to uncertain tax
positions in income tax expense.
GLOBAL
DIGITAL SOLUTIONS, INC.
Notes
to Condensed Consolidated Financial Statements
June
30, 2014 and 2013
Loss
Per Common Share and Common Share Equivalent
Basic
and diluted loss per common share has been computed by dividing the loss by the weighted average number of common
shares outstanding. Diluted net loss per share reflects the potential dilution that could occur if securities or other contracts
to issue common stock were exercised or converted into common stock or resulted in the issuance of common stock that would then
share in the income of the Company, subject to anti-dilution limitations. As of June 30, 2014, the Company had warrants outstanding
for the purchase of 4,250,000 common shares, and options to purchase 5,500,000 common shares, which have not been included in
the calculation of loss per share as the effects would be anti-dilutive in periods in which a net loss in incurred.
Application
of New or Revised Accounting Standards
On
April 5, 2012, the Jump-Start Our Business Startups Act (JOBS Act) was signed into law. The JOBS Act contains provisions
that, among other things, reduce certain reporting requirements for an "emerging growth company." As an emerging growth
company we have elected to not take advantage of the extended transition period afforded by the JOBS Act for the implementation
of new or revised accounting standards, and as a result, will comply with new or revised accounting standards on the relevant
dates on which adoption of such standards is required for non-emerging growth companies.
Impact
of Recently Issued Accounting Standards
From
time to time, the Financial Accounting Standards Board (“FASB”) or other standards setting bodies will issue new accounting
pronouncements. Updates to the FASB Accounting Standards Codification (“ASC” or “Codification”) are communicated
through issuance of an Accounting Standards Update (“ASU”).
New
Accounting Pronouncements
In
June 2014, FASB issued ASU No. 2014-09, “Revenue from Contracts with Customers”. The update gives entities
a single comprehensive model to use in reporting information about the amount and timing of revenue resulting from contracts to
provide goods or services to customers. The proposed ASU, which would apply to any entity that enters into contracts to provide
goods or services, would supersede the revenue recognition requirements in Topic 605, Revenue Recognition, and most industry-specific
guidance throughout the Industry Topics of the Codification. Additionally, the update would supersede some cost guidance included
in Subtopic 605-35, Revenue Recognition – Construction-Type and Production-Type Contracts. The update removes inconsistencies
and weaknesses in revenue requirements and provides a more robust framework for addressing revenue issues and more useful information
to users of financial statements through improved disclosure requirements. In addition, the update improves comparability of revenue
recognition practices across entities, industries, jurisdictions, and capital markets and simplifies the preparation of financial
statements by reducing the number of requirements to which an entity must refer. The update is effective for annual reporting
periods beginning after December 15, 2016, including interim periods within that reporting period. The Company is currently evaluating
the impact this standard may have on our results of operations, cash flows or financial condition.
In
June 2014, FASB issued ASU No. 2014-12, “Compensation – Stock Compensation (Topic 718); Accounting for Share-Based
Payments When the Terms of an Award Provide That a Performance Target Could Be Achieved after the Requisite Service Period”. The
amendments in this ASU apply to all reporting entities that grant their employees share-based payments in which the terms of the
award provide that a performance target that affects vesting could be achieved after the requisite service period. The amendments
require that a performance target that affects vesting and that could be achieved after the requisite service period be treated
as a performance condition. A reporting entity should apply existing guidance in Topic 718 as it relates to awards with performance
conditions that affect vesting to account for such awards. For all entities, the amendments in this ASU are effective for annual
periods and interim periods within those annual periods beginning after December 15, 2015. Earlier adoption is permitted. The
effective date is the same for both public business entities and all other entities.
Entities
may apply the amendments in this ASU either (a) prospectively to all awards granted or modified after the effective date or (b)
retrospectively to all awards with performance targets that are outstanding as of the beginning of the earliest annual period
presented in the financial statements and to all new or modified awards thereafter. If retrospective transition is adopted, the
cumulative effect of applying this Update as of the beginning of the earliest annual period presented in the financial statements
should be recognized as an adjustment to the opening retained earnings balance at that date. Additionally, if retrospective transition
is adopted, an entity may use hindsight in measuring and recognizing the compensation cost. The Company is currently evaluating
the impact this standard may have on our results of operations, cash flows or financial condition.
GLOBAL
DIGITAL SOLUTIONS, INC.
Notes
to Condensed Consolidated Financial Statements
June
30, 2014 and 2013
Note
2 – Acquisition of North American Custom Specialty Vehicles, LLC (“NACSV”)
On
June 16, 2014, we acquired all of the outstanding membership interest of NACSV in a transaction accounted for using the purchase
method of accounting (the “Acquisition”). NACSV specializes in building mobile
command/communications and specialty vehicles for emergency management, first responders, national security and law enforcement
operations.
As
consideration for the consummation of the Acquisition, at the closing of the Acquisition, the Company paid $1,000,000 in cash
to the selling members, and issued them shares of the Company’s common stock valued at $200,000 (the “Stock Consideration”).
In connection with the Acquisition, the Company is required to make a true-up payment of the excess of total assets over $1.2
million, estimated at $816,373 payable in shares of the Company’s common stock (the “True-Up Payment”), and
additional consideration as certain events or transactions occur if the future, up to a maximum of $2.4 million, payable in shares
of the Company’s common stock or in cash at the seller’s option (the “Contingent Consideration”). Additionally,
the Company issued and 500,000 shares and has agreed to issue an additional 1.3 million shares of common stock for services rendered
in conjunction with the Acquisition. The Company recorded a nonrecurring charge of $800,241 during the quarter ended June 30,
2014 related to the direct costs of the Acquisition, consisting of the $664,000 value of the shares of common stock issued for
services and $136,241 of cash costs, which is recorded in general and administrative expenses in the accompanying condensed consolidated
statements of operations for the three and six months ended June 30, 2014.
The
estimated purchase price of the Acquisition totaled $3,971,666, comprised of $1,000,000 in cash, the Stock Consideration of $200,000,
the True-Up Payment of $816,373, and the fair value of the Contingent Consideration estimated at approximately $1,955,293. The
fair value of the Contingent Consideration was estimated based upon the present value of the expected future payouts of the Contingent
Consideration and is subject to change upon the finalization of the purchase accounting. The true up payment payable is included
in current liabilities at June 30, 2014.
Under
the purchase method of accounting, the estimated purchase price of the Acquisition was allocated to NACSV’s net tangible
and identifiable intangible assets and liabilities assumed based on their estimated fair values as of the date of the completion
of the Acquisition, as follows:
Assets
Acquired: | |
| |
Cash
and cash equivalents | |
$ | 135,425 | |
Accounts
receivable, net | |
| 370,481 | |
Inventory | |
| 845,519 | |
Prepaid
expenses | |
| 26,004 | |
Costs
in excess of billings | |
| 570,787 | |
Property
and equipment, net | |
| 68,157 | |
Customer
relationships | |
| 1,478,666 | |
Goodwill | |
| 832,674 | |
| |
| 4,327,713 | |
Liabilities
assumed: | |
| | |
Accounts
payable | |
| 35,724 | |
Accrued
expenses | |
| 2,087 | |
Notes
payable | |
| 304,605 | |
Billings
in excess of costs | |
| 13,631 | |
| |
| 356,047 | |
Total
estimated purchase price | |
$ | 3,971,666 | |
The
estimated fair values of certain assets and liabilities have been determined by management and are subject to change upon the
finalization of the purchase accounting. No portion of the intangible assets, including goodwill, is expected to be deductible
for tax purposes.
GLOBAL
DIGITAL SOLUTIONS, INC.
Notes
to Condensed Consolidated Financial Statements
June
30, 2014 and 2013
The results of operations of NACSV
are included in the Company’s condensed consolidated statements of operations from the date of the acquisition of June 16,
2014, including $111,000 of revenue and approximately $8,000 of net income. The following supplemental pro forma information assumes
that the Acquisition had occurred as of January 1, 2014:
| |
Three
Months Ended | | |
Six
Months Ended | |
| |
June
30, 2014 | | |
June
30, 2014 | |
Revenue | |
$ | 1,604,114 | | |
$ | 2,170,851 | |
Net
Loss | |
$ | (2,896,786 | ) | |
$ | (5,728,005 | ) |
Loss
per common share - basic and diluted | |
$ | (0.03 | ) | |
$ | (0.06 | ) |
The
pro forma financial information is not necessarily indicative of the results that would have occurred if the Acquisition had occurred
on the dates indicated or that may result in the future.
Note
3 – Financial Instruments
Cash
and Cash Equivalents
Our
cash and cash equivalents at June 30, 2014 and December 31, 2013 consisted of the following:
| |
2014 | | |
2013 | |
Cash
in bank | |
$ | 353,087 | | |
$ | 509,224 | |
Cash
and cash equivalents | |
$ | 353,087 | | |
$ | 509,224 | |
We classify
highly liquid temporary investments with an original maturity of three months or less when purchased as cash equivalents. We maintain
cash balances at various financial institutions. Balances at US banks are insured by the Federal Deposit Insurance Corporation
up to $250,000. We have not experienced any losses in such accounts and believe it is not exposed to any significant risk for
cash on deposit. As of June 30, 2014 and December 31, 2013, we had uninsured cash amounts. We maintained this balance with a high
quality financial institution, which we believe limits this risk.
Note
4 - Fair Value Measurements
Fair
value is the price that would be received upon sale of an asset or paid to transfer a liability in an orderly transaction between
market participants at the measurement date. The following fair value hierarchy is used in selecting inputs, with the highest
priority given to Level 1, as these are the most transparent or reliable:
Level
1 - Quoted prices for identical instruments in active markets.
Level
2 - Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that
are not active; and model-derived valuations in which all significant inputs are observable directly or indirectly.
Level
3 - Valuations derived from valuation techniques in which one or more significant inputs are unobservable.
We
had no Level 1, Level 2 or Level 3 assets or liabilities at June 30, 2014 or December 31, 2013.
Note
5 – Inventory
Inventory
consists of the following at June 30, 2014:
Materials
inventory | |
$ | 68,140 | |
Truck
and trailer inventory | |
| 772,379 | |
| |
$ | 840,519 | |
GLOBAL
DIGITAL SOLUTIONS, INC.
Notes
to Condensed Consolidated Financial Statements
June
30, 2014 and 2013
Note
6 - Contracts in progress
Contracts
in progress consisted of the following at June 30, 2014:
Costs
incurred on uncompleted contracts | |
$ | 794,665 | |
Estimated
earnings | |
| 689,050 | |
| |
| 1,483,715 | |
Less
billings to date | |
| (815,154 | ) |
| |
$ | 668,561 | |
| |
| | |
Included
in the accompanying balance sheet under the following captions: | |
| | |
Costs
and estimates in excess of billings on uncompleted contracts | |
$ | 668,561 | |
Billings
in excess of costs and estimated earnings on uncompleted contracts | |
| - | |
| |
$ | 668,561 | |
Note
7 – Acquisition of Airtronic and Notes Receivable from Airtronic
On
October 22, 2012, we entered into an Agreement of Merger and Plan of Reorganization (“Merger Agreement”) to acquire
70% of Airtronic USA, Inc. (“Airtronic”), a debtor in possession under chapter 11 of the Bankruptcy Code in a case
pending in the US Bankruptcy Court for the Northern District of Illinois, Eastern Division (the “Court”) once Airtronic
successfully reorganized and emerged from bankruptcy (the “Merger”). During the period from October 2012 through November
2013, GDSI was actively involved in the day to da management of Airtronic pending the completion of the Merger.
Contemporaneously,
on October 22, 2012, we entered into a Debtor In Possession Note Purchase Agreement (“Bridge Loan”) with Airtronic.
We agreed to lend Airtronic a maximum of $2,000,000, with an initial advance of $750,000 evidenced by an 8¼% Secured Promissory
Note made by Airtronic in favor of the Company (the “Original Note”) and a Security Agreement pledging all of Airtronic’s
assets. As of December 31, 2012 we had not advanced any funds to Airtronic under the Bridge Loan and Original Note. The Original
Note bears interest at 8¼% per annum, and, unless an event of default shall have previously occurred and be continuing,
the full amount of principal and accrued interest under the note shall be due and payable on the consummation of Airtronic’s
plan of reorganization. In March 2013, the Company and Airtronic amended the Bridge Loan to provide for a maximum advance
of up to $700,000 in accordance with draws submitted by Airtronic and approved by the Company in accordance with the budget set
forth in the amendment. On June 26, 2013, we agreed to a second modification of the Bridge Loan agreement with Airtronic,
and agreed to loan Airtronic up to an additional $550,000 under the Bridge Loan. On August 5, 2013, we entered into
the Second Bridge Loan Modification and Ratification Agreement, received a new 8¼% secured promissory note in principal
amount of $550,000 (the “Second Note”), and entered into a Security Agreement with the CEO of Airtronic, which granted
a security interest in certain intellectual property for patent-pending applications and trademarks that were registered in the
CEO’s name. On October 10, 2013, we entered into a third modification of the Bridge Loan Agreement, and agreed
to loan Airtronic up to an additional $200,000. On October 10, 2013, we entered into the Third Bridge Loan Modification and Ratification
Agreement, and received a new 8¼% secured promissory note for $200,000 (the “Third Note”).
On
October 2, 2013, Airtronic’s amended plan of reorganization (the “Plan”) was confirmed by the Court, but the
Plan was never substantially consummated and has now been terminated. Under the terms of the Plan, Airtronic needed
to close the Merger with the Company within 60 days following the confirmation date, i.e., on or before December 2, 2013, to obtain
the funds necessary to pay its creditors in accordance with the Plan. Nevertheless, Airtronic refused to close the
Merger with the Company on or before December 2, 2013, and as a result the Plan terminated and the reorganized Airtronic re-vested
in the bankruptcy estate of Airtronic as debtor in possession.
On March 31, 2014, Airtronic filed a
First Amended Modified Plan of Reorganization (“First Modified Plan”) which was confirmed on April 28, 2014. On
May 14, 2014 Airtronic repaid the Original Note, the Second Note and the Third Note together with all accrued interest thereon
in the total amount of $.1,509,055.63. Additionally, On May 14, 2014, we received $1,509,055.63
in full payment of its outstanding loans to Airtronic. On August 12, 2014, we received $414,760.83 that it was awarded for legal
fees and expenses incurred. Our involvement with Airtronic and its bankruptcy proceedings are now concluded.
GLOBAL
DIGITAL SOLUTIONS, INC.
Notes
to Condensed Consolidated Financial Statements
June
30, 2014 and 2013
Note
8 – Notes Payable
Convertible
Notes
Convertible
notes payable at June 30, 2014 and December 31, 2013 consisted of the following:
Type |
|
Collateral
(If any) |
|
Interest
Rate |
|
|
Monthly
Payment |
|
|
Maturity |
|
2014 |
|
|
2013 |
|
Laurus
Master Fund |
|
None |
|
|
5.00 |
% |
|
$ |
- |
|
|
May-13 |
|
$ |
- |
|
|
$ |
529,309 |
|
In
July 2004 we issued convertible notes payable to Laurus Master Fund and received total proceeds of $500,000. The Laurus note is
non interest bearing, and is convertible at a fixed conversion price equal to our share’s average trading closing share
price for the ten days prior to the closing of the conversion. The Company imputed interest at 5% which is included in the balance.
On May 21, 2014, we entered into a Debt Forgiveness Agreement with Laurus in which we agreed to pay them $150,000 in full satisfaction
of the note on or before June 30, 2014. On May 21, 2014, we paid the balance on the Laurus note, and recognized a gain on extinguishment
of debt of $387,642, of which $350,000 was a discount against the principal and $37,642 was for accrued imputed interest forgiven.
Notes
Payable
On
May 6, 2013, as discussed below, we amended the terms of a $750,000 Note (“Investor Note”) payable to a private investor
(“Investor”) and (i) extended the maturity date to July 1, 2013, (ii) provided that the Investor Note may be convertible
to shares of our common price at a conversion price of $0.25, and reduced the exercise price of the warrant issued in connection
with the Investor Note payable from $0.15 to $0.10. On July 1, 2013, the $750,000 Note payable was converted into 3,000,000 shares
of our common stock and on conversion we recognized a gain of $31,712 as a result of the forgiveness of accrued but unpaid interest
on the note.
Notes
payable at June 30, 2014 and December 31, 2013 consisted of the following:
Type |
|
Collateral
(if
any) |
|
Interest
Rate |
|
|
Monthly
Payments |
|
|
Maturity |
|
2014 |
|
|
2013 |
|
Private |
|
None |
|
|
10.00 |
% |
|
$ |
- |
|
|
May-13 |
|
$ |
- |
|
|
$ |
20,000 |
|
Private |
|
None |
|
|
5.00 |
% |
|
$ |
- |
|
|
Demand |
|
|
- |
|
|
|
5,000 |
|
Notes
payable NACSV former member |
|
None |
|
|
7.00 |
% |
|
$ |
- |
|
|
Demand |
|
|
291,498 |
|
|
|
- |
|
NACSV
premium finance agreement |
|
None |
|
|
7.84 |
% |
|
$ |
2,845 |
|
|
Nov
-14 |
|
|
13,955 |
|
|
|
|
|
Notes
payable |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
305,453 |
|
|
$ |
25,000 |
|
On
May 22, 2014 we paid off the balance outstanding on two notes payable for $20,000 and $5,000, respectively.
In
connection with the Acquisition of NACSV, we assumed notes payable of $305,453. Of this amount, $291,498 is payable to a former
member, bears interest at 7% and is payable as certain accounts receivable of NACSV are collected, and $13,955 is due under an
insurance premium finance agreement bearing interest at 7.84% with 10 equal monthly payments of principal and interest of $2,845
commencing February 28, 2014. Subsequent to June 30, 2014, the note payable to the former NACSV member was repaid.
In
December 2012, we entered into a Promissory Note Purchase Agreement, a Secured Promissory Note (“Note”) and Security
Agreement with the Investor to lend us $750,000. The Note bears interest at 8¼%, is secured by all of our assets and is
due on May 1, 2013. In connection with the transaction, we issued to the Investor the Warrant.
The
$360,000 fair value of the Warrant was calculated using a Black-Scholes pricing model. We calculated that the fair market value
of the beneficial conversion feature (“BCF”) of the Note is $393,243, and we amortized the BCF over the life of the
loan using the effective interest rate method. At December 31, 2013 the discount was fully amortized to interest expense.
On
May 6, 2013, the Company and the Investor amended the Promissory Note Purchase Agreement and the related Secured Promissory Note,
Security Agreement and Warrant which:
(1) |
Extended
the Note’s maturity date to July 1, 2013; |
(2) |
Provided
that on or before the maturity date, we may elect to convert the Note into 3,000,000 shares of our common stock at a conversion
price of $0.25; and |
(3) |
Reduced the
exercise price of the Warrant from $0.15 to $0.10. |
The
note was converted into 3,000,000 shares of common stock on July 1, 2013. – see Convertible Notes Payable above.
GLOBAL
DIGITAL SOLUTIONS, INC.
Notes
to Condensed Consolidated Financial Statements
June
30, 2014 and 2013
Note 9 – Commitments and Contingencies
Effective
January 1, 2013, we entered into a three-month consulting agreement with a consulting firm pursuant to which the firm would provide
investor relations services. The consulting firm was issued 500,000 shares of restricted shares of common stock valued at $50,000
and the expense was recognized over the three-month service period.
Effective
April 3, 2013, we entered into a twelve-month consulting agreement with a consultant pursuant to which the consultant would provide
investor relations services. The consultant was issued 500,000 shares of restricted shares of common stock valued at $50,000 and
the expense is being recognized over the term of the agreement. In June 2013, we entered into an amendment to the consulting agreement. The
consultant agreed to provide additional services over the remaining term of the agreement and, in consideration, we issued the
consultant 250,000 shares of our restricted common stock valued at $125,000 and we agreed to issue the consultant a warrant to
purchase 500,000 shares of our common stock at an exercise price of $0.50, with a fair market value of $250,000. The warrant was
issued on July 1, 2013.
Operating
Leases
In
August 2013 we entered into a twelve-month lease for a virtual office in West Palm Beach, Florida at a monthly rental of $299
plus taxes. The lease automatically renewed for an additional twelve months in August 2014.
On
January 1, 2014, NACSV renewed a lease agreement for two buildings under a year-to-year operating lease with monthly rent payments
totaling $6,749.
Future
minimum lease payments on all operating leases at June 30, 2014 are $44,381.
Note
10 - Stockholders’ Equity and Stock Based Compensation
Preferred
Stock
We
are authorized to issue 35,000,000 shares of noncumulative, non-voting, nonconvertible preferred stock, $0.001
par value per share at June 30, 2014. At June 30, 2014 and December 31, 2013, no
shares of preferred stock were outstanding.
Common
Stock
We are authorized to issue 450,000,000
shares of common stock, $0.001 par value per share at June 30, 2014. At June 30, 2014 and December 31, 2013, 100,669,278
and 93,024,117 shares were issued and outstanding, respectively.
During
the six-month period ended June 30, 2014, we issued the following shares of restricted common stock at fair market value unless
otherwise noted below.
In
Consideration For |
|
Award
Date |
|
Date
of Issue |
|
Number
of Shares |
|
|
Price |
|
|
Value |
|
Stock
based compensation |
|
01/01/14 |
|
01/01/14 |
|
|
1,500,000 |
|
|
$ |
0.88 |
* |
|
|
1,500 |
|
Stock based
compensation |
|
04/30/13 |
|
02/04/14 |
|
|
5,000,000 |
|
|
$ |
0.17 |
* |
|
|
5,000 |
|
Stock based
compensation |
|
02/04/14 |
|
02/04/14 |
|
|
1,500,000 |
|
|
$ |
0.64 |
* |
|
|
1,500 |
|
Acquisition
services |
|
N/A |
|
05/15/14 |
|
|
500,000 |
** |
|
$ |
0.47 |
|
|
|
235,000 |
|
Acquisition
of NACSV |
|
N/A |
|
06/16/14 |
|
|
645,161 |
|
|
$ |
0.31 |
*** |
|
|
200,000 |
|
Stock based compensation forfeited |
|
|
|
06/03/14 |
|
|
(1,500,000 |
) |
|
|
|
|
|
|
(1,500 |
) |
Net
change in shares issued |
|
|
|
|
|
|
7,645,161 |
|
|
|
|
|
|
$ |
441,500 |
|
*
Stock-based compensation was calculated at fair value on the grant date and the expense is being amortized over the vesting period
and service period. $1,792,713 of compensation expense will be recognized through April 30, 2016.
**
1.3 Million additional shares are due to be issued.
***
Issued at $0.31 per share. The fair market value on the date of issuance was $0.33 per share and the Company recognized an acquisition
expense of $12,903 related to the $0.02 share discount.
GLOBAL
DIGITAL SOLUTIONS, INC.
Notes
to Condensed Consolidated Financial Statements
June
30, 2014 and 2013
Common
Stock Warrants
We
have issued warrants as follows:
Class
of Warrant |
|
Issued
in connection with or for |
|
Number |
|
|
Exercise
Price |
|
Date
of Issue |
|
Date
Vest |
|
Date
of Expiration |
A-1 |
|
Debt |
|
|
1,750,000 |
(1) |
|
$ |
0.10 |
|
December
2012 |
|
December
2013 |
|
December
2015 |
A-2 |
|
Services |
|
|
1,000,000 |
|
|
$ |
0.15 |
|
May
2013 |
|
May
2014 |
|
May
2018 |
A-3 |
|
Services |
|
|
500,000 |
|
|
$ |
0.50 |
|
June
2013 |
|
June
2014 |
|
June
2018 |
A-4 |
|
Services |
|
|
1,000,000 |
|
|
$ |
1.00 |
|
October
2013 |
|
October
2013 |
|
October
2016 |
1. |
1,250,000
shares were exercised on December 18, 2013. We issued the shares in the name of the investor on December 18, 2013 in anticipation
of payment. At December 31, 2013 we had not received payment and recorded a stock subscription receivable from the investor.
On January 24, 2014 we received the proceeds and released the shares to the investor. |
The
valuation of warrants is estimated at the grant date based on the fair-value as calculated by the Black-Scholes Merton (“BSM”)
pricing model. The BSM pricing model incorporates various assumptions including expected volatility, expected life and interest
rates. The Company’s computation of expected life is based on the simplified method as the Company does not have sufficient
historical exercise data to provide a reasonable basis upon which to estimate the expected term due to the limited period of time
its equity shares have been publicly traded. The interest rate is based on the U.S. Treasury Yield curve in effect at the time
of grant. The Company’s computation of expected volatility is based on comparable companies’ average historical volatility.
The Company does not expect to pay dividends. While the Company believes these estimates are reasonable, the estimated compensation
expense would increase if the expected life was increased or a higher expected volatility was used. The Company recognizes warrant
expense cost as expense on a straight-line basis over the requisite service period.
The
following is a summary of outstanding and exercisable warrants at June 30, 2014:
| | | |
| Outstanding | | |
| Exercisable | |
| Range
of Exercise Prices | | |
| Weighted Average Number Outstanding at
06/30/14 | | |
| Outstanding Remaining Contractual Life
(in yrs.) | | |
| Weighted Average Exercise Price | | |
| Number Exercisable at
06/30/14 | | |
| Weighted Average Exercise Price | |
$ | 0.10 | | |
| 1,750,000 | | |
| 1.51 | | |
$ | 0.10 | | |
| 1,750,000 | | |
$ | 0.10 | |
$ | 0.15 | | |
| 1,000,000 | | |
| 3.85 | | |
$ | 0.15 | | |
| 1,000,000 | | |
$ | 0.15 | |
$ | 0.50 | | |
| 500,000 | | |
| 4.01 | | |
$ | 0.50 | | |
| 500,000 | | |
$ | 0.50 | |
$ | 1.00 | | |
| 1,000,000 | | |
| 2.30 | | |
$ | 1.00 | | |
| 1,000,000 | | |
$ | 1.00 | |
$ | 0.37 | | |
| 4,250,000 | | |
| 2.92 | | |
$ | 0.37 | | |
| 4,250,000 | | |
$ | 0.37 | |
The
aggregate intrinsic value of warrants outstanding at June 30, 2014 was $527,500. Aggregate intrinsic value represents the value
of the Company’s closing stock price on the last trading day of the fiscal period in excess of the exercise price of the
warrant multiplied by the number of warrants outstanding or exercisable.
Equity
Awards
Stock
Incentive Plans
2014
Global Digital Solutions Equity Incentive Plan
On
February 2, 2014 our board of directors approved the 2014 Global Digital Solutions Equity Incentive Plan and reserved 20,000,000
shares of our common stock for issuance pursuant to awards thereunder. A Revised Plan (the “Plan”), was approved by
a majority of shareholders of the Company on May 9, 2014. The Plan is intended as an incentive, to retain in the employ of and
as directors, our officers, employees, consultants and advisors, and to attract new officers, employees, directors, consultants
and advisors whose services are considered valuable, to encourage the sense of proprietorship and to stimulate the active interest
of such persons in the development and financial success of the Company and its subsidiaries.
GLOBAL
DIGITAL SOLUTIONS, INC.
Notes
to Condensed Consolidated Financial Statements
June
30, 2014 and 2013
A
summary of the Company’s stock option activity for the three-month period ended June 30, 2014 is as follows:
| |
| | |
Weighted | | |
Weighted | | |
| |
| |
| | |
Average | | |
Average | | |
| |
| |
| | |
Exercise | | |
Remaining | | |
Aggregate | |
| |
Number of | | |
Price Per | | |
Contractual | | |
Intrinsic | |
| |
Options | | |
Share | | |
Term | | |
Value | |
Balance at December
31, 2013 | |
| | | |
| | | |
| | | |
| | |
Options
granted | |
| 5,500,000 | | |
$ | 0.64 | | |
| 9.6 | | |
$ | 0.00 | |
Options
exercised | |
| - | | |
| | | |
| | | |
| | |
Options
forfeited | |
| - | | |
| | | |
| | | |
| | |
Balance at June
30, 2014 | |
| 5,500,000 | | |
$ | 0.64 | | |
| 9.6 | | |
$ | 0.00 | |
Exercisable
at June 30, 2014 | |
| - | | |
| - | | |
| - | | |
| - | |
Exercisable
after June 30, 2014 | |
| 5,500,000 | | |
$ | 0.64 | | |
| 9.6 | | |
$ | 0.00 | |
Stock-Based
Compensation
Stock
Options
Stock-based
compensation cost for stock options is estimated at the grant date based on the fair-value as calculated BSM option-pricing model
utilizing the assumptions discussed below. The Company recognizes stock-based compensation cost as expense on a straight-line
basis over the requisite service period.
We
granted 5,500,000 options during the six-month period ended June 30, 2014 resulting in stock- based compensation expense of $1,759,998
and $2,453,330 for the three and six month periods ended June 30, 2014, respectively. The options are exercisable at $0.64 and
expire in between February 2024 and March 2024. As of June 30, 2014, there was $1,066,670 of total unrecognized stock-based compensation
cost related to these stock options that will be recognized during the next quarter.
The
significant weighted average assumptions relating to the valuation of the Company’s options for the period ended June 30,
2014 were as follows:
Dividend
yield | |
| 0.00 | % |
Expected
life (years) | |
| 5.25 | |
Expected
volatility | |
| 718.70 | % |
Risk
free interest rate | |
| 1.80 | % |
Restricted
Stock Grants
Since January
2013, we have issued restricted stock to officers, advisors and consultants in lieu of cash compensation. A summary of restricted
stock outstanding as of June 30, 2014 and changes during the six months then ended is presented below:
Unvested
at January 1, 2014 | |
| 10,500,000 | |
Issued | |
| 3,500,000 | |
Vested | |
| (8,000,000 | ) |
Forfeited | |
| (1,500,000 | ) |
Unvested
at June 30, 2014 | |
| 4,500,000 | |
We
recorded stock-based compensation expense related to this restricted stock of $745,113 and $841,848 for the three-month periods
ended June 30, 2014 and 2013, respectively, and $2,068,579 and $1,063,387 for the six-month periods ended June 30, 2014 and 2013,
respectively. As of June 30, 2014 there was $1,792,713 of total unrecognized stock-based compensation expense related to these
restricted stock grants that will be recognized through June 2016.
Subsequent to June 30, 2014, we have
agreed to issue up to 12 million shares of restricted stock as more fully discussed in Note 14 – Subsequent Events.
GLOBAL
DIGITAL SOLUTIONS, INC.
Notes
to Condensed Consolidated Financial Statements
June
30, 2014 and 2013
Note
11 - Loss Per Common Share
Basic
and diluted loss per common share for the six months ended June 30, 2014 and 2013 is calculated based on the weighted average
common shares outstanding for the period. The following table sets forth the computation of basic and diluted loss
per common share:
| |
Three
Months Ended June 30, | | |
Three
Months Ended June 30, | |
| |
2014 | | |
2013 | | |
2014 | | |
2013 | |
| |
| | |
| | |
| | |
| |
Numerator: | |
| | |
| | |
| | |
| |
Loss
from continuing operations | |
$ | (3,393,311 | ) | |
$ | (2,020,383 | ) | |
$ | (6,226,974 | ) | |
$ | (2,743,573 | ) |
Loss
from discontinued operations | |
| (567 | ) | |
| (25,477 | ) | |
| (2,832 | ) | |
| (271,221 | ) |
Net
loss | |
$ | (3,393,878 | ) | |
$ | (2,045,860 | ) | |
$ | (6,229,806 | ) | |
$ | (3,014,794 | ) |
| |
| | | |
| | | |
| | | |
| | |
Denominator: | |
| | | |
| | | |
| | | |
| | |
Weighted-average
shares outstanding | |
| 101,145,350 | | |
| 63,943,788 | | |
| 99,848,623 | | |
| 58,598,393 | |
Effect
of dilutive securities (1) | |
| - | | |
| - | | |
| - | | |
| - | |
Weighted-average
diluted shares | |
| 101,145,350 | | |
| 63,943,788 | | |
| 99,848,623 | | |
| 58,598,393 | |
| |
| | | |
| | | |
| | | |
| | |
Loss
per common share – basic and diluted: | |
| | | |
| | | |
| | | |
| | |
Continuing
operations | |
$ | (0.03 | ) | |
$ | (0.03 | ) | |
$ | (0.06 | ) | |
$ | (0.05 | ) |
Discontinued
operations | |
| (0.00 | ) | |
| (0.00 | ) | |
| (0.00 | ) | |
| (0.00 | ) |
Total
– basic and diluted | |
$ | (0.03 | ) | |
$ | (0.03 | ) | |
$ | (0.06 | ) | |
$ | (0.05 | ) |
(1) The
following common stock equivalents outstanding as of June 30, 2014 and 2013 were not included in the computation of dilutive loss
per share because the net effect would have been anti-dilutive:
| |
2014 | | |
2013 | |
Warrants | |
| 4,250,000 | | |
| 3,250,000 | |
Options | |
| 5,500,000 | | |
| - | |
Total common stock equivalents | |
| 9,750,000 | | |
| 3,000,000 | |
Note
12 – Discontinued Operations
In
January 2012, we acquired 51% of Bronco Communications LLC. We subsequently discontinued the operations of Bronco and
disposed of its remaining assets in January 2013 although we were responsible for contract oversight which was concluded in June
2014. In accordance with ASC Topic 205, Presentation of Financial Statements - Discontinued Operation , we have presented
the loss on sale of the net assets of Bronco of $245,744 and operating costs incurred as a loss from discontinued operations in
the accompanying condensed consolidated statements of operations for the three and six months ended June 30, 2014 and 2013.
Note 13 – Customer concentrations
The Company had two customers who accounted
for 56.8% and 43.2% of our revenue in the three and six-month periods ended June 30, 2014. Accounts receivable were $370,481, net
of allowance, as of June 30, 2014. One customer accounted for 98.6% of this balance. The Company expects to continue to have customers
with revenues or accounts receivable balances of 10% or more of total revenue or total accounts receivable in the foreseeable future.
Note
14 – Subsequent Events
We
have completed an evaluation of all subsequent events after the unaudited balance sheet date of June 30, 2014 through August 19,
2014, the date this Quarterly Report on Form 10-Q was submitted to the SEC, to ensure that these financial statements includes
appropriate disclosure of events both recognized in the financial statements as of June 30, 2014, and events which occurred subsequently
but were not recognized in the financial statements.
Effective
July 2, 2014, we appointed Stephen L. Norris as a member of our Board of Directors (the “Board”) and as Chairman and
CEO of our wholly-owned subsidiary, GDSI International, and effective as of July 7, 2014, the Board elected Mr. Norris Vice Chairman
of the Company.
The
Company and Mr. Norris have agreed to certain compensation as follows:
| 1. | Effective
as of July 1, 2014, and for so long as Mr. Norris continues to serve as a director of
the Company, he shall be paid a monthly fee of $6,000, payable in cash, monthly in arrears. |
GLOBAL
DIGITAL SOLUTIONS, INC.
Notes
to Condensed Consolidated Financial Statements
June
30, 2014 and 2013
| 2. | Mr.
Norris will be granted 12 million restricted stock units (“Units”) convertible
into 12 million shares of the Company’s common stock, with a fair market value
of $3,600,000 at July 1, 2014. 4,000,000 Units will vest in respect of each fiscal year of GDSI International
from 2015 through 2017 if the company has achieved at least 90% of the total revenue
targets set forth below. If less than 90% of the target is achieved in respect
of any such fiscal year, then the number of Units vesting for that fiscal year shall
be 4,000,000 times the applicable percentage shown below; provided that, if the
company shall exceed 100% of the revenue target for the 2016 or 2017 fiscal year, and
shall have failed to reach 90% of the target for a prior fiscal year, the excess over
100% shall be applied to reduce the deficiency in the prior year(s), and an additional
number of Units shall vest to reflect the increased revenue for such prior fiscal year.
Any such excess shall be applied first to reduce any deficiency for the 2015 fiscal year
and then for the 2016 fiscal year. The vesting of the Units shall be effective
upon the issuance of the audited financial statements of the Company for the applicable
fiscal year, and shall be based upon the total revenue of GDSI International as reflected
in such financial statements. |
Revenue Targets |
July 1, 2014 - June 30, 2015 | |
$ | 9,911,000 | |
July 1, 2015 - June 30, 2016 | |
$ | 18,921,000 | |
July 1, 2016 - June 30, 2017 | |
$ | 24,327,000 | |
Percentage vesting based on revenue targets: | |
| | |
Revenue as a % of Target |
% Vest |
90% - 100% |
100% |
80% - 90% |
90% |
70% - 80% |
80% |
60% - 70% |
70% |
50% - 60% |
60% |
40% - 50% |
50% |
30% - 40% |
40% |
20% - 30% |
30% |
10% - 20% |
20% |
less than 10% |
0% |
Item
2. |
Management’s
Discussion and Analysis of Financial Condition and Results of Operations |
This
quarterly report contains “forward-looking statements”. These statements concern expectations, beliefs, projections,
future plans and strategies, anticipated events or trends and similar expressions concerning matters that are not historical facts.
Specifically, this quarterly report contains forward-looking statements including, but not limited to:
● |
our
ability to fund our operations and continue as a going concern; |
● |
our
ability to have excess cash available for future actions; |
● |
our
ability or inability to implement our business plan, including the completion of the acquisitions of companies under letters
of intent; |
● |
anticipated
trends in our business and demographics; |
● |
relationships
with and dependence on technological partners; |
● |
our
future profitability and liquidity and the impact of potential future acquisitions on our financial condition, results of
operations and cash flows; |
● |
our
ability to preserve our intellectual property and trade secrets and operate without infringing on the proprietary rights of
third parties; |
● |
regulatory,
competitive or other economic influences; |
● |
our
operational strategies including, without limitation, our ability to develop or diversify into new businesses; |
● |
our
expectation that we will not suffer costly or material product liability claims and claims that our products infringe the
intellectual property rights of others; |
● |
our
ability to comply with current and future regulations relating to our businesses; |
● |
the
impact of new accounting pronouncements; |
● |
our
ability to establish and maintain proper and effective internal accounting and financial controls; |
● |
the
potential of further dilution to our common stock based on transactions effected involving issuance of shares; and |
● |
our
actual results may differ materially from those reflected in forward-looking statements as a result of (i) the risk factors
described under the heading “Risk Factors” set forth in Item 1A of our 2013 Annual Report on Form 10-K (“2013
Form 10-K”), (ii) general economic, market or business conditions, (iii) the opportunities (or lack thereof) that may
be presented to and pursued by us, (iv) competitive actions by other companies, (v) changes in laws, and (vi)
other factors, many of which are beyond our control. |
In
some cases, you can identify forward-looking statements by terms such as “may,” “should,” “could,”
“would,” “anticipates,” “expects,” “attempt,” “intends,” “plans,”
“hopes,” “believes,” “seeks,” “estimates” and similar expressions intended to
identify forward-looking statements. These forward-looking statements are not guarantees of future performance and are subject
to risks and uncertainties that could cause actual results to differ materially from estimates or forecasts contained in the forward-looking
statements. Some of these risks and uncertainties are beyond our control. Also, these forward-looking statements represent our
estimates and assumptions only as of the date the statement was made.
The
information in this quarterly report is as of June 30, 2014, or, where clearly indicated, as of the date of this filing. We undertake
no obligation to publicly update any forward-looking statements, whether as a result of new information, future events or otherwise,
except as required by law. We also may make additional disclosures in our Annual Reports on Form 10-K, Quarterly Reports on Form
10-Q and Current Reports on Form 8-K that we may file from time to time with the SEC.
The
following discussion and analysis of our financial condition and results of operations should be read in conjunction with the
accompanying unaudited condensed consolidated financial statements and related notes included in Item 1 of this report as
well as our annual financial statements for the year ended December 31, 2013 included in the 2013 Form 10-K.
Results
of Continuing Operations
Three
months ended June 30, 2014 and 2013
Revenue
and cost of revenue in the three month period ended June 30, 2014 were $111,405 and $69,346, respectively. Revenue was from fixed-price
and modified fixed-price construction contracts that are recognized using the percentage-of-completion method of revenue recognition.
Cost of revenue include all direct material and labor costs and indirect costs related to contract performance. We had no revenue,
or cost of revenue in the three-month period ended June 30, 2013.
Selling,
general and administrative (“S, G & A”) were $3,834,260 and $1,368,497 in three-month periods ended June 30, 2014
and 2013, respectively. S, G &A was comprised of:
| |
Three
Months Ended
June 30, | | |
Increase/ | | |
% | |
| |
2014 | | |
2013 | | |
(decrease | | |
Change | |
Compensation
and benefits | |
$ | 2,620,767 | | |
$ | 907,848 | | |
$ | 1,712,919 | | |
| 188.7 | % |
Acquisition
costs | |
| 754,572 | | |
| - | | |
| 754,572 | | |
| - | |
Debt
issuance costs | |
| 25,000 | | |
| 204,286 | | |
| (179,286 | ) | |
| -87.8 | % |
Investment
banking fees | |
| - | | |
| 71,610 | | |
| (71,610 | ) | |
| -100.0 | % |
Investor
relations and marketing | |
| 84,666 | | |
| 84,933 | | |
| (267 | ) | |
| -0.3 | % |
Office
support and supply | |
| 48,778 | | |
| 1,669 | | |
| 47,108 | | |
| 2821.9 | % |
Professional
and filing fees | |
| 276,092 | | |
| 90,876 | | |
| 185,216 | | |
| 203.8 | % |
Depreciation
and amortization | |
| 12,830 | | |
| - | | |
| 12,830 | | |
| - | |
Other | |
| 11,555 | | |
| 7,275 | | |
| 4,281 | | |
| 58.8 | % |
| |
$ | 3,834,260 | | |
$ | 1,368,497 | | |
$ | 2,465,763 | | |
| 180.2 | % |
Compensation
and benefits increased by $1,712,919, or 188.7% % to $2,620,767 in 2014 compared to $907,848 in 2013. In the three-month period
ended June 30, 2014 compensation and benefits comprised:
| |
2014 | | |
2013 | |
Fair
value expense of stock option grants | |
$ | 1,759,998 | | |
$ | - | |
Fair
value expense of restricted stock grants | |
| 743,613 | | |
| 841,848 | |
Officer
salaries | |
| 96,000 | | |
| 66,000 | |
Payroll | |
| 21,156 | | |
| - | |
| |
$ | 2,620,767 | | |
$ | 907,848 | |
Major
changes in compensation and benefits include:
| ● | Options
with a fair market value of $3,520,000 were granted in 2014 and $1,759,998 was expensed
in the quarter. |
| ● | We
have granted restricted stock to officers and advisors which vest ratably through June
2016 and $743,613 was expensed in 2014 compared to $841,848 in 2013. |
Acquisition
costs were related to the NACSV acquisition in 2014 and comprised non-cash compensation of (i) $664,000 of costs to advisors paid
in shares of our common stock, and (ii) $65,572 in stock discount expense for payments to the sellers of NACSV in our common stock
at a price which resulted in a $0.02 discount to fair value, and $25,000 paid in cash for due diligence services.
Debt
issuance costs decreased by $(179,286), or (87.8)%. In connection with the issuance of notes payable and convertible
notes payable in prior years, we issued a warrant to a consultant which vested over one year. In three-month period ended June
30, 2014 we expensed $25,000 for amortization of the warrant. In three-month period ended June 30, 2013, $204,286 was
for amortization of warrants issued related to the loans, including to the consultant and to the noteholder.
We
had no investment banking fees in 2014. In 2013 we paid placement fees of $71,610 in connection with private placements.
Investor
relations and marketing expense include $79,170 in 2014 and $80,033 paid to consultants for services in shares of our common stock
or compensation through the issuance of a warrant which is being amortized over the term of the consulting agreement.
Office
supply and support expenses increased by $47,108 or 2,821.9% to $48,778 in 2014 compared to $1,669 in 2013. In the
three-month period ended June 30, 2014, the expense included $30,504 of reimbursable expenses to an officer and advisors, $13,608
of directors and officers liability insurance and key man life insurance of $7,249. In the three-month period ended
June 30, 2013, the expense included $6,250 of web development fees.
Professional
and filing fees increased $185,216, or 203.8% to $276,092 in 2014 compared to $90,876 in 2013. In the three-month periods
ended June 30, 2014 and 2013, such fees consisted of:
| |
2014 | | |
2013 | |
Accounting
and & auditing fees | |
$ | 11,445 | | |
$ | 16,000 | |
Consulting
fees | |
| 30,000 | | |
| 7,173 | |
Legal
fees | |
| 229,555 | | |
| 67,173 | |
SEC
filing costs | |
| 4,844 | | |
| - | |
Other | |
| 248 | | |
| 530 | |
| |
$ | 276,092 | | |
$ | 90,876 | |
Major
changes in professional and filing fees include:
| ● | Consulting
fees increased by $22,827 which incudes $15,000 we paid on a monthly retainer to identify
and introduce us to potential acquisitions, and $15,000 paid for the commission of a
report. |
| ● | Legal
fees increased by $162,382. In 2014 we incurred legal fees of approximately $85,000 in
connection with litigation against Kett (See Part II, Item 1), approximately $46,000
for services in connection with the NACSV acquisition, approximately $65,000 in connection
with the Airtronic bankruptcy and $33,000 for other legal services. In 2013 legal fees
were primarily in connection with the Airtronic bankruptcy. |
Depreciation
and amortization in 2014 consists of $12,322 of amortization of intangible assets which are being amortized over five years and
$508 of depreciation. We has no such expense in 2013.
Gain
on extinguishment of debt in 2014 consists of a $350,000 forgiveness on the principal payoff of the convertible note payable to
Laurus, and $37,642 of interest forgiven. We has no such income in 2013.
Interest
income is the interest on the bridge loans we made to Airtronic. Interest expense was expense incurred on notes payable and convertible
notes payable.
There
is no income tax benefit for the losses for the three-month periods ended June 30, 2014 and 2013 since we determined that the
realization of the net deferred tax asset is not more likely than not to be realized and we created a valuation allowance for
the entire amount of such benefit.
Loss
from discontinued operations were $567 in 2014 and $25,477 in 2013 and represented direct costs incurred as we continued to wind
down our telecommunications business.
Our
results of operations for the three-month periods ended June 30, 2014 and 2013 did not contain any unusual gains or losses from
transactions not in our ordinary course of business.
Six
months ended June 30, 2014 and 2013
Revenue
and cost of revenue in the six-month period ended June 30, 2014 were $111,405 and $69,346, respectively. Revenue was from fixed-price
and modified fixed-price construction contracts that are recognized using the percentage-of-completion method of revenue recognition.
Cost of revenue include all direct material and labor costs and indirect costs related to contract performance. We had no revenue,
or cost of revenue in the six-month period ended June 30, 2013.
Selling,
general and administrative (“S, G & A”) were $6,690,676 and $2,047,696 in six-month periods ended June 30, 2014
and 2013, respectively. S, G &A was comprised of:
| |
Six
Months Ended June 30, | | |
Increase/ | | |
% | |
| |
2014 | | |
2013 | | |
(decrease | | |
Change | |
Compensation
and benefits | |
$ | 4,690,065 | | |
$ | 1,213,387 | | |
$ | 3,476,679 | | |
| 286.5 | % |
Acquisition
costs | |
| 754,572 | | |
| - | | |
| 754,572 | | |
| - | |
Debt
issuance costs | |
| 100,000 | | |
| 433,571 | | |
| (333,571 | ) | |
| -76.9 | % |
Investment
banking fees | |
| 412,498 | | |
| 71,610 | | |
| 340,888 | | |
| 476.0 | % |
Investor
relations and marketing | |
| 186,163 | | |
| 154,057 | | |
| 32,106 | | |
| 20.8 | % |
Office
support and supply | |
| 71,871 | | |
| 8,507 | | |
| 63,364 | | |
| 744.8 | % |
Professional
and filing fees | |
| 446,023 | | |
| 152,323 | | |
| 293,700 | | |
| 192.8 | % |
Depreciation
and amortization | |
| 12,830 | | |
| - | | |
| 12,830 | | |
| - | |
Other | |
| 16,654 | | |
| 14,240 | | |
| 2,414 | | |
| 17.0 | % |
| |
$ | 6,690,676 | | |
$ | 2,047,696 | | |
$ | 4,642,980 | | |
| 226.7 | % |
Compensation
and benefits increased by $3,476,679 or 286.5% % to $4,690,065 in 2014 compared to $1,213,387 in 2013. In the three-month period
ended June 30, 2014 compensation and benefits comprised:
| |
2014 | | |
2013 | |
Fair
value expense of stock option grants | |
$ | 2,453,330 | | |
$ | - | |
Fair
value expense of restricted stock grants | |
| 2,068,579 | | |
| 1,063,387 | |
Officer
salaries | |
| 147,000 | | |
| 100,000 | |
Payroll | |
| 21,156 | | |
| - | |
| |
$ | 4,690,065 | | |
$ | 1,163,387 | |
Major
changes in compensation and benefits include:
| ● | Options
with a fair market value of $3,520,000 were granted in 2014 and $2,453,330 has been expensed
in 2014. |
| ● | We
have granted restricted stock to officers and advisors which vest ratably through June
2016 and $2,068,579 was expensed in 2014 compared to $1,063,387 in 2013. |
Acquisition
costs were related to the NACSV acquisition in 2014 and comprised non-cash compensation of (i) $664,000 of costs to advisors paid
in shares of our common stock, and (ii) $65,572 in stock discount expense for payments to the sellers of NACSV in our common stock
at a price which resulted in a $0.02 discount to fair value, and $25,000 paid in cash for due diligence services.
Debt
issuance costs decreased by $(333,571), or (76.9)%. In connection with the issuance of notes payable and convertible
notes payable in prior years, we issued a warrant to a consultant which vested over one year. In three-month period ended June
30, 2014 we expensed $100,000 for amortization of the warrant. In three-month period ended June 30, 2013, $358,571
was for amortization of warrants issued related to the loans, including to the consultant and to the noteholder, and $75,000 was
paid in cash for loan fees.
Investment
banking fees in 2014 represented the amortization of a cash fee and the fair value of a warrant granted to an investment banking
company. In 2013 we paid placement fees of $71,610 in connection with private placements.
Investor
relations and marketing expense include $179,169 in 2014 and $148,807 paid to consultants for services in shares of our common
stock or compensation through the issuance of a warrant which is being amortized over the term of the consulting agreement.
Office
supply and support expenses increased by $63,364 or 744..8% to $71,871 in 2014 compared to $8,507 in 2013. In the six-month
period ended June 30, 2014, the expense included $30,504 of reimbursable expenses to an officer and advisors, $27,216 of directors
and officers liability insurance and key man life insurance of $14,498. In the six-month period ended June 30, 2013,
the expense included $6,250 of web development fees.
Professional
and filing fees increased $293,700, or 192.8% to $446,023 in 2014 compared to $152,323 in 2013. In the six-month periods
ended June 30, 2014 and 2013, such fees consisted of:
| |
2014 | | |
2013 | |
Accounting
and & auditing fees | |
$ | 42,895 | | |
$ | 30,500 | |
Consulting
fee | |
| 50,447 | | |
| 17,173 | |
Legal
fees | |
| 342,631 | | |
| 104,120 | |
Public
company/SEC related fees and expenses | |
| 8,651 | | |
| - | |
Other | |
| 1,399 | | |
| 530 | |
| |
$ | 446,023 | | |
$ | 152,323 | |
Major
changes in professional and filing fees include:
| ● | Consulting
fees increased by $33,274 which incudes $15,000 we paid on a monthly retainer to identify
and introduce us to potential acquisitions, and $15,000 paid for the commission of a
report. |
| ● | Legal
fees increased by $238,511. In 2014 we incurred legal fees of approximately $109,000
in connection with litigation against Kett (See Part II, Item 1), approximately $46,000
for services in connection with the NACSV acquisition, approximately $131,000 in connection
with the Airtronic bankruptcy, and $55,000 for other legal services. In 2013 legal fees
we incurred $101,000 of fees in connection with the Airtronic bankruptcy. |
Depreciation
and amortization in 2014 consists of $12,322 of amortization of intangible assets which are being amortized over five years and
$508 of depreciation. We had no such expense in 2013.
Gain
on extinguishment of debt in 2014 consists of $350,000 for forgiveness on the payoff of the convertible note payable to
Laurus, and the recapture of $37,642 of interest not paid. We had no such income in 2013.
Interest
income is the interest on the bridge loans we made to Airtronic. Interest expense was expense incurred on notes payable and convertible
notes payable.
There
is no income tax benefit for the losses for the three-month periods ended June 30, 2014 and 2013 since we determined that the
realization of the net deferred tax asset is not more likely than not to be realized and we created a valuation allowance for
the entire amount of such benefit.
Loss
from discontinued operations were $2,832 in 2014 and $271,221 in 2013 and represented the direct costs and loss on sale of assets
we incurred as we continued to wind down our telecommunications business.
Our
results of operations for the three-month periods ended June 30, 2014 and 2013 did not contain any unusual gains or losses from
transactions not in our ordinary course of business.
Liquidity
and Capital Resources
As
of June 30, 2014, we had cash and cash equivalents totaling $353,087 and working capital of $268,853. For the six-month period
ended June 30, 2014, we incurred a net loss of $6,229,806, and at June 30, 2014, we had an accumulated deficit of $23,088,181,694,304
and total stockholders’ equity of $680,424. We expect to incur losses for the remainder of fiscal 2014. There is no guarantee
that we will ultimately be able to generate sufficient revenue or reduce our costs in the anticipated time frame to achieve and
maintain profitability and have sustainable cash flows.
We
do not have any material commitments for capital expenditures during the next twelve months. Any required expenditure
will be completed through internally generated funding or from proceeds from the sale of common or preferred stock, or borrowings.
Cash
Flows
Cash
used in operating activities
Net
cash used in operating activities totaled $707,346 for the six-month period ended June 30, 2014 compared to $343,249 for the six-month
period ended June 30, 2013.
In
the six-month period ended June 30, 2014, cash was used to fund a net loss of $6,229,806, increased by a gain on extinguishment
of debt of $387,642, and reduced by depreciation and amortization of $12,831, non-cash stock-based compensation of $4,521,909,
common stock and warrants issued for services of $604,168, non cash interest expense of $9,181, common stock issued for acquisition
services of $235,000, other non cash acquisition expenses of $1,822, and changes in operating assets and liabilities of $514,020.
In
the six-month period ended June 30, 2013, cash was used to fund a net loss of $3,014,794, reduced by non-cash stock-based compensation
of $1,371,958, common stock and warrants issued for services of 375,533, amortization of debt discount of $676,487, and changes
in operating assets and liabilities totaling $106,774 and cash provided by discontinued operations of $245,745.
Cash
used in investing activities
Net
cash provided by investing activities totaled $601,299 for the six-month period ended June 30, 2014. During the period we advanced
$43,182 to Airtronic, received cash of $1,509,056 from Airtronic for the repayment of the bridge loans and $135,425 of cash in
connection with the NACSV acquisition, reduced by $1,000,000 paid for the acquisition of NACSV.
Net
cash used in investing activities totaled $695,961 in the six-month period ended June 30, 2013, and was for advances to Airtronic
under the bridge loans.
Cash
from financing activities
Net
cash used in financing activities was $50,000 in the six-month period ended June 30, 2013. We received proceeds from the exercise
of warrants of $125,000, and we paid off notes payable and convertible notes payable totaling $175,000.
Net
cash provided by financing activities totaled $1,263,500 in the six-month period ended June 30, 2013. We received net proceeds
of $926,100 from private placement sales of our common stock, $374,900 from short-term borrowings, and we repaid $37,500 of short-term
borrowings.
Financial
condition
As
of June 30, 2014, we had cash and cash equivalents totaling $353,087, working capital of $268,853 and stockholders equity of $680,424.
We do not have a line of credit facility and have relied on short-term borrowings and the sale of common stock to provide cash
to finance our operations. We believe that we will need to raise additional capital in 2014 to sustain our operations and fund
future acquisitions. We plan to seek additional equity and debt financing to provide funding for operations and future acquisitions.
On August 12, 2014, we received approximately $414,000 awarded to us for legal fees and expense in the Airtronic bankruptcy case,
as more fully discussed in Note 7 to our Condensed Consolidated Financial Statements in Part I of the Current Report.
At
December 31, 2013 our registered independent public accounting firm expressed substantial doubt as to our ability to continue
as a going concern because we have incurred substantial losses and negative cash flows from operations. Management’s plans
in order to meet our operating cash flow requirements include (i) financing activities such as private placements of common stock,
and issuances of debt and convertible debt instruments, (ii) the establishment of strategic relationships which we expect will
lead to the generation of additional revenue or acquisition opportunities and (iii) the acquisition of businesses in the areas
of cyber arms technology and complementary security and technology solutions.
While
we believe that we will be successful in obtaining the necessary financing to fund our operations, there are no assurances that
such additional funding will be achieved or that we will succeed in our future operations. The consolidated financial statements
do not include any adjustments relating to the recoverability and classification of recorded asset amounts or the amounts and
classification of liabilities that might be necessary should we be unable to continue as a going concern.
Off-Balance
Sheet Arrangements
Since
our inception, except for standard operating leases, we have not engaged in any off-balance sheet arrangements, including the
use of structured finance, special purpose entities or variable interest entities.
Critical
Accounting Policies
Our
2013 Form 10-K contains further information regarding our critical accounting policies.
Impact
of Recently Issued Accounting Standards
For
information regarding recent accounting pronouncements and their expected impact on our future consolidated results of operations
or financial condition, see Note 1 to our accompanying unaudited condensed consolidated financial statements
Tabular
Disclosure of Contractual Obligations
As
a small reporting company, we are not required to provide this information and have elected not to provide it.
Item
3. |
Quantitative
And Qualitative Disclosures About Market Risk. |
As
a “Smaller Reporting Company,” we are not required to provide the information required by this item.
Item
4. |
Controls
and Procedures. |
Evaluation
of Disclosure Controls.
We
evaluated the effectiveness of the design and operation of our “disclosure controls and procedures” as defined in
Rule 13a-15(e) under the Exchange Act as of June 30, 2014. This evaluation (the “disclosure controls evaluation”)
was done under the supervision and with the participation of management, including the person(s) performing the function of our
chief executive officer (“CEO”) and chief financial officer (“CFO”). Rules adopted by the SEC require
that in this section of this Report we present the conclusions of the CEO and CFO about the effectiveness of our disclosure controls
and procedures as of June 30, 2014 based on the disclosure controls evaluation.
Objective
of Controls.
Our
disclosure controls and procedures are designed so that information required to be disclosed in our reports filed under the Exchange
Act, such as this Report, is recorded, processed, summarized and reported within the time periods specified in the SEC’s
rules and forms. Our disclosure controls and procedures are also intended to ensure that such information is accumulated and communicated
to our management, including the CEO and CFO, as appropriate to allow timely decisions regarding required disclosure. There are
inherent limitations to the effectiveness of any system of disclosure controls and procedures, including the possibility of human
error and the circumvention or overriding of the controls and procedures. Accordingly, even effective disclosure controls and
procedures can only provide reasonable assurance of achieving their control objectives, and management necessarily is required
to use its judgment in evaluating the cost-benefit relationship of possible disclosure controls and procedures.
Conclusion.
Based
upon the disclosure controls evaluation, our CEO and CFO had concluded that, as of June 30, 2014, our disclosure controls and
procedures were effective to provide reasonable assurance that the foregoing objectives are achieved.
PART
II – OTHER INFORMATION
Item
1. |
Legal
Proceedings. |
From
time to time, we may become involved in litigation relating to our business as either Plaintiff or Defendant.
The
Company is plaintiff in one action:
● |
On
January 9, 2014, the Company filed a lawsuit against Merriellyn Kett Murphy (“Kett”) asserting three causes of
action against her: Tortious Interference with Contract and/or with Prospective Economic Advantage; Fraudulent Inducement;
and Negligent Misrepresentation. Kett is the CEO, President and sole director and stockholder of Airtronic. The Company
had entered into a merger agreement with Airtronic and Kett had made numerous representations to the Company that she would
close the merger if the Company met her personal demands, which the Company did. Nonetheless, Kett refused to close
the merger. The case, captioned Global Digital Solutions, Inc. v. Merriellyn Kett Murphy, was filed in Palm
Beach County Circuit Court and Kett later removed it to Federal Court in the Southern District of Florida. The case
number is 14-cv-80190-DTKH and is in its early stages. The Company is seeking a judgment against Kett, damages, costs
and such other relief as may be awarded by the court. Kett filed a Motion to Dismiss or Transfer Venue. The Company opposes
Kett’s motions and is vigorously pursuing all claims against Kett. |
To
the best of our knowledge, no governmental authority is contemplating any proceeding to which we are a party or to which any of
our properties is subject, which would reasonably be likely to have a material adverse effect on our business, financial condition
and operating results.
As
a “Smaller Reporting Company,” we are not required to provide the information required by this item.
Item
2. |
Unregistered
Sales of Equity Securities and Use of Proceeds. |
During
the three months ended June 30, 2014, we issued shares of our Common Stock that were not registered under the Securities Act,
and were not previously disclosed in a Current Report on Form 8-K as follows:
1. On
May 15, 2014, we issued an aggregate of 500,000 shares of our common stock in connection with acquisition services for NACSV.
The
shares of stock described in this Item 2 were issued without registration in reliance upon the exemption provided, among others,
by Section 4(2) of the Securities Act of 1933, as amended, as a transaction not involving any public offering. Our reliance on
Section 4(2) of the Securities Act was based upon the following factors: (a) the transaction did not involve a public offering;
(b) there were only a limited number of offerees; (c) there were no subsequent or contemporaneous public offerings of the securities
by us; (d) the securities were not broken down into smaller denominations; and (e) the negotiations for the sale of the stock
took place directly between the offeree and us.
Item
3. |
Defaults
Upon Senior Securities. |
None.
Item
4. |
Mine
Safety Disclosures. |
Not
applicable.
Item
5. |
Other
Information. |
None.
We
have listed the exhibits by numbers corresponding to the Exhibit Table of Item 601 in Regulation S-K on the Exhibit
list attached to this report.
SIGNATURE
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.
|
Global
Digital Solutions, Inc.
(Registrant) |
|
|
Date:
August 19, 2014 |
By: |
/s/
DAVID A. LOPPERT |
|
|
Chief
Financial Officer |
|
|
(Duly
Authorized Officer and
Principal
Financial Officer) |
INDEX
TO EXHIBITS |
|
Exhibit
No. |
|
Description
of Exhibit |
31.1* |
|
Rule
13a-14(a) Certification of Chief Executive Officer. |
31.2* |
|
Rule
13a-14(a) Certification of Chief Financial Officer. |
32.1** |
|
Section
1350 Certifications of Chief Executive Officer and Chief Financial Officer. |
EX-101.INS+ |
|
XBRL
Instance Document |
EX-101.SCH+ |
|
XBRL
Taxonomy Extension Schema Document |
EX-101.CAL+ |
|
XBRL
Taxonomy Extension Calculation Linkbase Document |
EX-101.DEF+ |
|
XBRL
Taxonomy Extension Definition Linkbase Document |
EX-101.LAB+ |
|
XBRL
Taxonomy Extension Label Linkbase Document |
EX-101.PRE+ |
|
XBRL
Taxonomy Extension Presentation Linkbase Document |
* |
Filed
herewith. |
** |
Furnished
herewith. |
+ |
These
interactive data files are deemed not filed or part of a registration statement or prospectus for purposes of sections 11
or 12 of the Securities Act of 1933, as amended, are deemed not filed for purposes of section 18 of the Securities Exchange
Act of 1934, as amended, and otherwise are not subject to liability under these sections. |
24
Exhibit
31.1
CERTIFICATION
I,
Richard J. Sullivan, certify that:
1. |
I
have reviewed this Quarterly Report on Form 10-Q of Global Digital Solutions, Inc.; |
|
|
2. |
Based
on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect
to the period covered by this report; |
|
|
3. |
Based
on my knowledge, the financial statements, and other financial information included in this report, fairly present in all
material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods
presented in this report; |
|
|
4. |
The
registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and
procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as
defined in Exchange Act Rules 13a-15(f) and 15(d)-15(f)) for the registrant and have: |
|
a. |
Designed
such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision,
to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to
us by others within those entities, particularly during the period in which this report is being prepared; |
|
|
|
|
b. |
Designed
such internal control over financial reporting, or caused such internal control over financial reporting to be designed under
our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial
statements for external purposes in accordance with generally accepted accounting principles; |
|
|
|
|
c. |
Evaluated
the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions
about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based
on such evaluation; and |
|
|
|
|
d. |
Disclosed
in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s
most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially
affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting;
and |
5. |
The
registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control
over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors
(or persons performing the equivalent functions): |
|
a. |
All
significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which
are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial
information; and |
|
|
|
|
b. |
Any
fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s
internal control over financial reporting. |
Date:
August 19, 2014 |
/s/
RICHARD J. SULLIVAN |
|
Richard
J. Sullivan |
|
Chief
Executive Officer
(Principal
Executive Officer) |
Exhibit 31.2
CERTIFICATION
I,
David A. Loppert, certify that:
1. |
I
have reviewed this Quarterly Report on Form 10-Q of Global Digital Solutions, Inc.; |
|
|
2. |
Based
on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect
to the period covered by this report; |
|
|
3. |
Based
on my knowledge, the financial statements, and other financial information included in this report, fairly present in all
material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods
presented in this report; |
|
|
4. |
The
registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and
procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as
defined in Exchange Act Rules 13a-15(f) and 15(d)-15(f)) for the registrant and have: |
|
a. |
Designed
such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision,
to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to
us by others within those entities, particularly during the period in which this report is being prepared; |
|
|
|
|
b. |
Designed
such internal control over financial reporting, or caused such internal control over financial reporting to be designed under
our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial
statements for external purposes in accordance with generally accepted accounting principles; |
|
|
|
|
c. |
Evaluated
the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions
about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based
on such evaluation; and |
|
|
|
|
d. |
Disclosed
in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s
most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially
affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting;
and |
5. |
The
registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control
over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors
(or persons performing the equivalent functions): |
|
a. |
All
significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which
are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial
information; and |
|
|
|
|
b. |
Any
fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s
internal control over financial reporting. |
Date: August 19, 2014 |
/s/
DAVID A. LOPPERT |
|
David
A. Loppert |
|
Chief
Financial Officer (Principal Financial Officer) |
Exhibit
32.1
CERTIFICATION
PURSUANT TO
18
U.S.C. SECTION 1350,
AS
ADOPTED PURSUANT TO
SECTION
906 OF THE SARBANES-OXLEY ACT OF 2002
In
connection with the Quarterly Report of Global Digital Solutions, Inc. (the “Company”) on Form 10-Q for the quarter
ended June 30, 2014 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Richard
J. Sullivan, Chief Executive Officer of the Company, and I, David A. Loppert, Chief Financial Officer of the Company, certify,
pursuant to 18 U.S.C. §1350, as adopted pursuant to §906 of the Sarbanes-Oxley Act of 2002, that to the best of my knowledge:
1. |
The
Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended;
and |
|
|
2. |
The
information contained in the Report fairly presents, in all material respects, the financial condition and result of operations
of the Company. |
/s/
RICHARD J. SULLIVAN |
|
Richard
J. Sullivan |
|
Chief
Executive Officer |
|
Date: August 19, 2014 |
|
|
|
/s/
DAVID A. LOPPERT |
|
David
A. Loppert |
|
Chief
Financial Officer |
|
Date:
August 19, 2014 |
|
A
signed original of this written statement required by Section 906 has been provided to Global Digital Solutions, Inc. and will
be retained by Global Digital Solutions, Inc. and furnished to the Securities and Exchange Commission or its staff upon request.
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