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 September
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 November 6,
2014 is as follows:
Class |
|
Number of Shares |
Common Stock: $0.001 Par Value |
|
106,104,352 |
GLOBAL DIGITAL SOLUTIONS, INC.
TABLE OF CONTENTS
|
|
Page |
PART I - FINANCIAL INFORMATION |
|
|
|
Item 1. |
Financial Statements (unaudited): |
3 |
|
Condensed Consolidated Balance Sheets – September 30, 2014 and December 31, 2013 |
3 |
|
Condensed Consolidated Statements of Operations for the three and nine-month periods ended September 30, 2014 and 2013 |
4 |
|
Condensed Consolidated Statements of Cash Flows for the nine-month periods ended September 30, 2014 and 2013 |
5 |
|
Notes to Condensed Consolidated Financial Statements |
6 |
Item 2. |
Management’s Discussion and Analysis of Financial Condition and Results of Operations. |
18 |
Item 3. |
Quantitative and Qualitative Disclosures About Market Risk. |
25 |
Item 4. |
Controls and Procedures. |
25 |
|
|
|
PART II - OTHER INFORMATION |
|
|
|
Item 1. |
Legal Proceedings. |
26 |
Item 1A. |
Risk Factors. |
26 |
Item 2. |
Unregistered Sales of Equity Securities and Use of Proceeds. |
26 |
Item 3. |
Defaults Upon Senior Securities. |
26 |
Item 4. |
Mine Safety Disclosures. |
26 |
Item 5. |
Other Information. |
26 |
Item 6. |
Exhibits. |
26 |
|
Signatures |
27 |
PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
GLOBAL DIGITAL SOLUTIONS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(unaudited)
| |
September 30, | |
December 31, |
| |
2014 | |
2013 |
Assets | |
| | | |
| | |
Current Assets | |
| | | |
| | |
Cash and cash equivalents | |
$ | 344,080 | | |
$ | 509,224 | |
Accounts receivable, net | |
| 122,883 | | |
| — | |
Inventory, net | |
| 252,722 | | |
| — | |
Notes receivable | |
| — | | |
| 1,465,874 | |
Prepaid expenses | |
| 122,627 | | |
| 122,056 | |
Costs and estimated earnings in excess of billings on uncompleted contracts | |
| 13,362 | | |
| — | |
Total current assets | |
| 855,674 | | |
| 2,097,154 | |
Property and equipment, net | |
| 65,380 | | |
| — | |
Deposits | |
| 2,378 | | |
| 198 | |
Intangible assets | |
| 1,392,411 | | |
| — | |
Goodwill | |
| 1,463,492 | | |
| — | |
Total assets | |
$ | 3,779,335 | | |
$ | 2,097,352 | |
| |
| | | |
| | |
Liabilities and Stockholders' Equity | |
| | | |
| | |
Current Liabilities | |
| | | |
| | |
Accounts payable | |
$ | 72,230 | | |
$ | 166,256 | |
Accrued expenses | |
| 231,007 | | |
| 165,537 | |
Notes payable | |
| 92,450 | | |
| 25,000 | |
Convertible notes payable | |
| — | | |
| 529,309 | |
Total current liabilities | |
| 395,687 | | |
| 886,102 | |
True-up and contingent consideration | |
| 2,630,105 | | |
| — | |
Total liabilities | |
| 3,025,792 | | |
| 886,102 | |
| |
| | | |
| | |
Commitments and Contingencies | |
| | | |
| | |
| |
| | | |
| | |
Stockholders’ equity | |
| | | |
| | |
Preferred stock, $0.001 par value, 35,000,000 and 10,000,000 shares authorized, none issued and outstanding | |
| — | | |
| — | |
Common stock, $0.001 par value, 450,000,000 and 175,000,000 shares authorized, 103,469,278 and 93,024,117
shares issued and outstanding | |
| 103,469 | | |
| 93,025 | |
Additional paid-in capital | |
| 26,599,580 | | |
| 17,976,600 | |
Accumulated deficit | |
| (25,949,506 | ) | |
| (16,858,375 | ) |
Total stockholders’ equity | |
| 753,543 | | |
| 1,211,250 | |
Total liabilities and stockholders' equity | |
$ | 3,779,335 | | |
$ | 2,097,352 | |
GLOBAL DIGITAL SOLUTIONS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
| |
For the Three Months Ended | |
For the Nine Months Ended |
| |
September 30, | |
September 30, |
| |
2014 | |
2013 | |
2014 | |
2013 |
| |
| |
| |
| |
|
Revenue | |
$ | 94,387 | | |
$ | — | | |
$ | 205,792 | | |
$ | — | |
| |
| | | |
| | | |
| | | |
| | |
Cost of revenue | |
| 180,066 | | |
| — | | |
| 249,412 | | |
| — | |
| |
| | | |
| | | |
| | | |
| | |
Gross profit | |
| (85,679 | ) | |
| — | | |
| (43,620 | ) | |
| — | |
| |
| | | |
| | | |
| | | |
| | |
Operating expenses | |
| | | |
| | | |
| | | |
| | |
Selling, general and administrative expenses | |
| 2,771,835 | | |
| 2,399,223 | | |
| 9,462,511 | | |
| 4,446,917 | |
Other (income)/expense | |
| | | |
| | | |
| | | |
| | |
Gain on extinguishment of debt | |
| — | | |
| (31,712 | ) | |
| (387,642 | ) | |
| (31,712 | ) |
Interest income | |
| — | | |
| (18,623 | ) | |
| (43,182 | ) | |
| (30,944 | ) |
Interest expense | |
| 3,811 | | |
| — | | |
| 12,992 | | |
| 708,198 | |
Total costs and expenses | |
| 2,775,646 | | |
| 2,348,888 | | |
| 9,044,679 | | |
| 5,092,459 | |
| |
| | | |
| | | |
| | | |
| | |
Loss from continuing operations before provision for income taxes | |
| (2,861,325 | ) | |
| (2,348,888 | ) | |
| (9,088,299 | ) | |
| (5,092,459 | ) |
| |
| | | |
| | | |
| | | |
| | |
Provision for income taxes | |
| — | | |
| — | | |
| — | | |
| — | |
| |
| | | |
| | | |
| | | |
| | |
Loss from continuing operations | |
| (2,861,325 | ) | |
| (2,348,888 | ) | |
| (9,088,299 | ) | |
| (5,092,459 | ) |
| |
| | | |
| | | |
| | | |
| | |
Loss from discontinued operations | |
| — | | |
| — | | |
| (2,832 | ) | |
| (271,221 | ) |
| |
| | | |
| | | |
| | | |
| | |
Net loss | |
$ | (2,861,325 | ) | |
$ | (2,348,888 | ) | |
$ | (9,091,131 | ) | |
$ | (5,363,680 | ) |
| |
| | | |
| | | |
| | | |
| | |
Loss per common share - basic and diluted: | |
| | | |
| | | |
| | | |
| | |
Loss from continuing operations | |
$ | (0.03 | ) | |
$ | (0.03 | ) | |
$ | (0.09 | ) | |
$ | (0.07 | ) |
Loss from discontinued operations | |
| — | | |
| — | | |
| — | | |
| (0.01 | ) |
Net loss | |
$ | (0.03 | ) | |
$ | (0.03 | ) | |
$ | (0.09 | ) | |
$ | (0.08 | ) |
| |
| | | |
| | | |
| | | |
| | |
Shares used in computing net loss per share: | |
| | | |
| | | |
| | | |
| | |
Basic and diluted | |
| 101,707,322 | | |
| 88,827,524 | | |
| 100,468,189 | | |
| 68,674,770 | |
GLOBAL DIGITAL SOLUTIONS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
| |
For the Nine Months Ended |
| |
September 30, |
| |
2014 | |
2013 |
Operating Activities | |
| | | |
| | |
Net loss | |
$ | (9,091,131
| ) | |
$ | (5,363,680 | ) |
Adjustments to reconcile net loss to net cash used in operating activities: | |
| | | |
| | |
Depreciation and amortization | |
| 89,032
| | |
| — | |
Stock- based compensation expense | |
| 6,659,855 | | |
| 2,984,797 | |
Common stock and warrants issued in payment of services | |
| 971,668 | | |
| 542,732 | |
Amortization of debt discount | |
| — | | |
| 676,487 | |
Debt guarantee settled by issuing common stock | |
| — | | |
| 360,000 | |
Gain on extinguishment of debt | |
| (387,642 | ) | |
| — | |
Non-cash interest expense | |
| 8,333 | | |
| — | |
Acquisition expenses settled with common stock | |
| 664,000 | | |
| — | |
Non cash acquisition expense | |
| 65,572 | | |
| — | |
Changes in operating assets and liabilities: | |
| | | |
| | |
Accounts receivable | |
| 106,393 | | |
| | |
Inventory | |
| (184,582 | ) | |
| — | |
Costs in excess of billings | |
| 557,425 | | |
| — | |
Prepaid expenses | |
| 25,433 | | |
| (160,572 | ) |
Accounts payable | |
| (58,303 | ) | |
| 29,024 | |
Accrued expenses | |
| 67,559 | | |
| (22,950 | ) |
Billings in excess of costs | |
| 13,631 | | |
| — | |
Cash from discontinued operations | |
| — | | |
| 245,745 | |
Net cash (used in) operating activities | |
| (492,757 | ) | |
| (708,417 | ) |
| |
| | | |
| | |
Investing Activities | |
| | | |
| | |
Repayment of loans to Airtronic | |
| 1,465,874 | | |
| — | |
Loans to Airtronic | |
| — | | |
| (1,193,741 | ) |
Deposits | |
| (2,180 | ) | |
| (198 | ) |
Payment for NACSV, net of cash acquired | |
| (864,575 | ) | |
| — | |
Net cash provided by (used in) investing activities | |
| 599,119 | | |
| (1,193,939 | ) |
| |
| | | |
| | |
Financing Activities | |
| | | |
| | |
Proceeds from sale of common stock | |
| — | | |
| 1,916,100 | |
Proceeds from exercise of warrants | |
| 125,000 | | |
| 300,000 | |
Proceeds from notes payable | |
| 96,241 | | |
| 374,900 | |
Payments on notes payable | |
| (342,747 | ) | |
| (67,500 | ) |
Payment on convertible notes | |
| (150,000 | ) | |
| — | |
Net cash (used in) provided by financing activities | |
| (271,506 | ) | |
| 2,523,500 | |
| |
| | | |
| | |
Net increase in cash and cash equivalents | |
| (165,144 | ) | |
| 621,144 | |
| |
| | | |
| | |
Cash and cash equivalents at beginning of year | |
| 509,224 | | |
| 385,141 | |
| |
| | | |
| | |
Cash and cash equivalents at end of period | |
$ | 344,080 | | |
$ | 1,006,285 | |
| |
| — | | |
| | |
Supplementary disclosure of non-cash investing and financing activities | |
| | | |
| | |
Purchase of NACSV with common shares | |
$ | 200,000 | | |
$ | — | |
Debt settled with shares of common stock | |
$ | — | | |
$ | 750,000 | |
GLOBAL DIGITAL SOLUTIONS, INC.
Notes to Condensed Consolidated Financial
Statements
September 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, NACSV, GDSI International
and GDSI Florida LLC.. 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 nine-month periods ended September 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 Liquidity
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 September 30, 2014 had an accumulated deficit of $25,949,506, cash and cash equivalents of $344,080, working
capital of $459,987 and stockholders’ equity of $753,543. 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.
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.
Revenue for service and refurbishment
work are recognized when the job is complete.
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, term of lease or 15 years, whichever is less; 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 September 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.
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 September 30, 2014, the Company had warrants outstanding for the purchase of 4,250,000 common
shares, and options to purchase 5,840,000 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.
New Accounting Standards Issued But Not Yet Adopted
In April 2014, the Financial Accounting
Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2014-08, Reporting Discontinued
Operations and Disclosures of Disposals of Components of an Entity. Under ASU 2014-08, only disposals representing a
strategic shift in operations should be presented as discontinued operations. Those strategic shifts should have a major
effect on the organization’s operations and financial results. Additionally, ASU 2014-08 requires expanded disclosures
about discontinued operations that will provide financial statement users with more information about the assets, liabilities,
income, and expenses of discontinued operations. ASU 2014-08 is effective for fiscal and interim periods beginning on or
after December 15, 2014. The impact of the adoption of this ASU on the Company’s results of operation, financial
position, cash flows and disclosures will be based on the Company’s future disposal activity.
In May 2014, the FASB issued ASU
2014-09, Revenue from Contracts with Customers. ASU 2014-09 outlines a single, comprehensive model for entities
to use in accounting for revenue arising from contracts with customers and supersedes most current revenue recognition guidance
issued by the FASB, including industry specific guidance. ASU 2014-09 provides accounting guidance for all revenue arising
from contracts with customers and affects all entities that enter into contracts with customers to provide goods and services.
The guidance also provides a model for the measurement and recognition of gains and losses on the sale of certain nonfinancial
assets, such as property and equipment, including real estate.
ASU 2014-09 is effective for annual
reporting periods, including interim reporting periods within those periods, beginning after December 15, 2016. The
new standard must be adopted using either a full retrospective approach for all periods presented in the period of adoption or
a modified retrospective approach. The modified retrospective approach requires that the new standard be applied to all new
and existing contracts as of the date of adoption, with a cumulative catch-up adjustment recorded to the opening balance of retained
earnings at the effective date for existing contracts that still require performance by the entity. Under the modified retrospective
approach, amounts reported prior to the date of adoption will be presented under existing guidance.
ASU 2014-09 also requires entities to
disclose both quantitative and qualitative information to enable users of the financial statements to understand the nature, amount,
timing, and uncertainty of revenue and cash flows arising from contracts with customers.
We have not yet determined the impact
of adopting the standard on our financial statements nor have we determined whether we will utilize the full retrospective or the
modified retrospective approach.
In August 2014, the FASB issued ASU 2014-15, Disclosure
of Uncertainties About an Entity’s Ability to Continue as a Going Concern. The new standard provides guidance on
determining when and how to disclose going-concern uncertainties in the financial statements. Management will be required
to perform interim and annual assessments of the Company’s ability to continue as a going concern within one year of the
date the financial statements are issued. ASU 2014-15 is effective for annual periods ending after December 15, 2016,
and interim periods thereafter, with early adoption permitted. We have not yet determined the impact of adopting this standard
on the Company’s financial statement disclosures.
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 emergency operations centers (“MEOC’s”)
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 645,161 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 1.8 million shares of common stock for services rendered in conjunction with the Acquisition. The Company recorded
nonrecurring charges of $3,029 and $803,270 during the three and nine-month periods ended September 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 $139,270 of cash
costs which are recorded in general and administrative expenses in the accompanying condensed consolidated statements of operations.
The estimated purchase price of the
Acquisition totaled $3,830,105, 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 $1,813,732. 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 liabilities at September 30, 2014.
On October 17, 2014, we issued 2,635,074 shares of our common stock valued at $0.31 as settlement for the True-Up Payment.
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 | |
| 73,140
|
Prepaid expenses | |
| 26,004 | |
Costs in excess of billings | |
| 570,787 | |
Property and equipment, net | |
| 68,157 | |
Customer relationships | |
| 1,478,666 | |
Goodwill | |
| 1,463,492 | |
| |
| 4,186,152 | |
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 | |
$ | 3,830,105 | |
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.
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 approximately $205,700 of revenue and approximately $317,000 of net loss. The following supplemental pro forma information
assumes that the Acquisition had occurred as of January 1, 2014:
| |
Nine-months Ended | |
| |
September 30,
2014 | |
Revenue | |
$ | 2,169,568 | |
Net Loss | |
$ | (8,689,001 | ) |
Loss per common share - basic and diluted | |
$ | (0.08 | ) |
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 September
30, 2014 and December 31, 2013 consisted of the following:
|
|
2014 |
|
|
2013 |
|
Cash in bank |
|
$ |
344,080 |
|
|
$ |
509,224 |
|
Cash and cash equivalents |
|
$ |
344,080 |
|
|
$ |
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 December 31, 2013, we had uninsured cash amounts. We maintained these balances with 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.
The following table sets forth our assets
and liabilities measured at fair value, whether recurring or non-recurring, at September 30, 2014 and December 31, 2013, and the
fair value calculation input hierarchy level that we have determined applies to each asset and liability category.
| |
September 30, 2014 | | |
December 31,
2013 | | |
Input Hierarchy Level |
Recurring: | |
| | | |
| | | |
|
True – Up and Contingent Consideration | |
$ | 2,630,105 | | |
| — | | |
Level 3 |
Non-recurring: Goodwill | |
$ | 1,463,492 | | |
| — | | |
Level 3 |
We had no Level 1 or Level 2
assets or liabilities at September 30, 2014 or December 31, 2013.
Note 5 – Inventory
Inventory consists of the following
at September 30, 2014:
Materials inventory | |
$ | 50,000 | |
Trailer inventory | |
| 779,620 | |
Work in process | |
| 195,481 | |
| |
| 1,025,101 | |
Less: Reserve for inventory loss | |
| (772,379 | ) |
| |
$ | 252,722 | |
The Company has established a reserve
for inventory loss for certain trailer inventory on hand at NACSV. Pursuant to the terms of the Equity Purchase Agreement between
the Company and the NACSV sellers, all of the proceeds from the sale of this inventory are to be paid to the NACSV sellers and
thus the Company’s potential net realizable value on this inventory is zero.
Note 6 – 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 was terminated. Under the terms of the Plan, Airtronic needed to close the Merger with the Company on or before
December 2, 2013. 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 $1,509,056. On August 12, 2014, we
received $414,761 that we were awarded for legal fees and expenses incurred.
Note 7 – Notes Payable
Convertible Notes
Convertible notes payable at September
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 of $0.35 per share. The Company imputed interest at 5% which is included in the balance. In January
2013, 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
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 was due on May 1, 2013. In
connection with the transaction, we issued to the Investor the Warrant.
On May 6, 2013, we amended the terms
of the Note and (i) extended the maturity date to July 1, 2013, (ii) provided that the Note may be convertible to shares of our
common price at a conversion price of $0.25, and (iii) reduced the exercise price of the Warrant from $0.15 to $0.10. On July 1,
2013, the Note 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.
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.
Notes payable at September 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 | |
Premium finance agreement | |
None | |
| 5.35 | % | |
$ | 9,862 | | |
| Jun – 15 | | |
| 86,810 | | |
| - | |
NACSV premium finance agreement | |
None | |
| 7.84 | % | |
$ | 2,845 | | |
| Nov -14 | | |
| 5,640 | | |
| - | |
Notes payable | |
| |
| | | |
| | | |
| | | |
$ | 92,450 | | |
$ | 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 was payable to a former member, bears interest at 7% and
was payable as certain accounts receivable of NACSV were 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. The
note payable to the former NACSV member was repaid during the quarter ended September 30, 2014.
In September 2014 we entered into a
premium finance agreement bearing interest at 5.35% with 10 equal monthly payments of principal and interest of $9,862.
Note 8 – Commitments and Contingencies
Price Protection
In connection with our acquisition of
NACSV, we granted the sellers “price protection” for the shares of restricted common stock they received at the closing
of the transaction. If the sellers sell any such shares of our common stock in arm’s-length transactions within the 12 month
period commencing June 16, 2014, and if the average selling price of the shares sold is less than $0.31 per share, then the Company
shall deliver to the sellers, within 30 days following a request from the sellers, additional shares of our common stock having
a market price at the time of delivery equal to the excess if any of (x) the sales price the sellers would have received if the
shares had sold for $0.31 per share minus the actual sales price received by the sellers; divided by (y) the actual
price per share received by the sellers. At September 30, 2014, the market price of our common stock was $0.13. Therefore, had
the sellers been in a position to sell the 645,161 shares of the restricted common stock they received at $0.13 per share, we would
have been required to issue an additional 893,300 shares valued at $116,129.
Consulting Agreements
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. Effective July 1, 2014, we entered into a new 12-month consulting agreement with the 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 $150,000 and the expense is being recognized over the term of the agreement.
Effective July 1, 2014, we entered into
a 12-month consulting agreement with the consultant pursuant to which the consultant would provide investor relations services.
The consultant was issued 1,000,000 shares of restricted shares of common stock valued at $330,000 and was expensed to services.
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. In September
NACSV entered into a 12-month operating lease for a condominium for a vice president with monthly rent payments of $2,160.
Future minimum lease payments on all
operating leases at September 30, 2014 are $49,456.
Note 9 - Stockholders’ Equity
and Stock Based Compensation
Preferred Stock
We are authorized to issue 35,000,000
shares of preferred stock, $0.001 par value per share at September 30, 2014. At September 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 September 30, 2014. At September 30, 2014 and December 31, 2013,
103,469,278 and 93,024,117 shares were issued and outstanding, respectively.
During the nine-month period ended September
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 services | |
| N/A | |
| 09/15/14 | |
| 1,300,000 | | |
$ | 0.33 | | |
| 429,000 | |
Acquisition of NACSV | |
| N/A | |
| 06/16/14 | |
| 645,161 | | |
$ | 0.31 | * | |
| 200,000 | |
Consulting Services | |
| | |
| 8/19/14 | |
| 1,500,000 | | |
$ | 0.001
| **
| |
| 1,500
| |
Stock based compensation forfeited | |
| | |
| 06/03/14 | |
| (1,500,000 | ) | |
| | | |
| (1,500 | ) |
Net change in shares issued | |
| | |
| | |
| 10,445,161 | | |
| | | |
$ | 872,000
| |
* 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.
** As the services vest, expense is
charged and additional paid in capital is increased. As of September 30, 2014, $367,500 had been expensed and $112,500 will be
expensed over the nine-month period ending June 30, 2015.
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 or vesting period.
The following is a summary of outstanding and exercisable
warrants at September 30, 2014:
| | |
Outstanding | | |
Exercisable | |
Range of Exercise Prices | | |
Weighted Average Number Outstanding at 09/30/14 | | |
Outstanding Remaining Contractual Life (in yrs.) | | |
Weighted Average Exercise Price | | |
Number Exercisable at 09/30/14 | | |
Weighted Average Exercise Price | |
$ | 0.10 | | |
| 1,750,000 | | |
| 1.30 | | |
$ | 0.10 | | |
| 1,750,000 | | |
$ | 0.10 | |
$ | 0.15 | | |
| 1,000,000 | | |
| 3.6 | | |
$ | 0.15 | | |
| 1,000,000 | | |
$ | 0.15 | |
$ | 0.50 | | |
| 500,000 | | |
| 3.8 | | |
$ | 0.50 | | |
| 500,000 | | |
$ | 0.50 | |
$ | 1.00 | | |
| 1,000,000 | | |
| 2.0 | | |
$ | 1.00 | | |
| 1,000,000 | | |
$ | 1.00 | |
$ | 0.37 | | |
| 4,250,000 | | |
| 2.7 | | |
$ | 0.37 | | |
| 4,250,000 | | |
$ | 0.37 | |
The aggregate intrinsic value of warrants
outstanding at September 30, 2014 was $52,500. 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 And Stock Based Compensation
Stock Incentive Plans
2014 Global Digital Solutions Equity
Incentive Plan
On May 9, 2014 our shareholders approved
the 2014 Global Digital Solutions Equity Incentive Plan (“Plan”) and reserved 20,000,000 shares of our common stock
for issuance pursuant to awards thereunder. 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.
Stock Options
A summary of the Company’s stock
option activity for the three-month period ended September 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 | |
| 5,840,000 | | |
$ | 0.61 | | |
| 69.9 | | |
$ | 6,800 | |
Options exercised | |
| - | | |
| | | |
| | | |
| | |
Options forfeited | |
| - | | |
| | | |
| | | |
| | |
Balance at September 30, 2014 | |
| 5,840,000 | | |
$ | 0.61 | | |
| 9.9 | | |
$ | 6,800 | |
Exercisable at September 30, 2014 | |
| 5,500,000 | | |
$ | .64 | | |
| 9.4 | | |
$ | 0 | |
Exercisable after September 30, 2014 | |
| 340,000 | | |
$ | 0.64 | | |
| 10.0 | | |
$ | 6,800 | |
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 5,840,000 options during
the nine-month period ended September 30, 2014 resulting in stock- based compensation expense of $1,068,575 and $3,521,905 for
the three and nine-month periods ended September 30, 2014, respectively. The options are exercisable at prices ranging from $0.11
to $0.64 and expire in between February 2024 and September 2024. As of September 30, 2014, there was $35,496 of total unrecognized
stock-based compensation cost related to these stock options that will be recognized through August 2017.
The significant weighted average assumptions
relating to the valuation of the Company’s options for the period ended September 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 September
30, 2014 and changes during the nine-months then ended is presented below:
Unvested at January 1, 2014 | | |
| 10,500,000 | |
Issued | | |
| 3,500,000 | |
Vested | | |
| (8,000,000 | ) |
Forfeited | | |
| (2,500,000 | ) |
Unvested at September 30, 2014 | | |
| 3,500,000 | |
We recorded stock-based compensation
expense related to this restricted stock of $519,372 and $1,921,410 for the three-month periods ended September 30, 2014 and 2013,
respectively, and $2,587,951 and $2,984,796 for the nine-month periods ended September 30, 2014 and 2013, respectively. As of September
30, 2014 there was $877,506 of total unrecognized stock-based compensation expense related to these restricted stock grants that
will be recognized through March 2016.
Restricted Stock Units
In July 2014 we issued performance based
restricted stock units to an officer and director for future performance based compensation. A summary of restricted stock units
outstanding as of September 30, 2014 and changes during the nine-months then ended is presented below:
Issued | | |
| 12,000,000 | |
Vested | | |
| - | |
Forfeited | | |
| - | |
Unvested at September 30, 2014 | | |
| 12,000,000 | |
We recorded stock-based compensation
expense related to these restricted stock units of $549,999 for the three and nine-month periods ended September 30, 2014. As of
September 30, 2014 there was $3,050,000 of total unrecognized stock-based compensation expense related to these restricted stock
units that will be recognized through June 2017.
Note 10 - Loss Per Common Share
Basic and diluted loss per common share
for the nine-month periods ended September 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 September 30, |
|
|
Nine Months Ended September 30, |
|
|
|
2014 |
|
|
2013 |
|
|
2014 |
|
|
2013 |
|
Numerator: |
|
|
|
|
|
|
|
|
|
|
|
|
Loss from continuing operations |
|
$ |
(2,861,325 |
) |
|
$ |
(2,348,888 |
) |
|
$ |
(9,088,299 |
) |
|
$ |
(5,092,459 |
) |
Loss from discontinued operations |
|
|
- |
|
|
|
- |
|
|
|
(2,832 |
) |
|
|
(271,221 |
) |
Net loss |
|
$ |
(2,861,325 |
) |
|
$ |
(2,348,888 |
) |
|
$ |
(9,091,131 |
) |
|
$ |
(5,363,680 |
) |
Denominator: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average shares outstanding |
|
|
101,707,322 |
|
|
|
88,827,524 |
|
|
|
100,468,189 |
|
|
|
68,674,770 |
|
Effect of dilutive securities (1) |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Weighted-average diluted shares |
|
|
101,707,322 |
|
|
|
88,827,524 |
|
|
|
100,468,189 |
|
|
|
68,674,770 |
|
Loss per common share – basic and diluted: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing operations |
|
$ |
(0.03 |
) |
|
$ |
(0.03 |
) |
|
$ |
(0.09 |
) |
|
$ |
(0.07 |
) |
Discontinued operations |
|
|
(0.00 |
) |
|
|
(0.00 |
) |
|
|
(0.00 |
) |
|
|
(0.01 |
) |
Total – basic and diluted |
|
$ |
(0.03 |
) |
|
$ |
(0.03 |
) |
|
$ |
(0.09 |
) |
|
$ |
(0.08 |
) |
(1) The
following common stock equivalents outstanding as of September 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 | |
| 5,840,000 | | |
| — | |
Issued but unvested shares issued for services | |
| 375,000 | | |
| — | |
Total common stock equivalents | |
| 10,465,000 | | |
| 3,250,000 | |
Note 11 – 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 from discontinued
operations of $2,832 and $271,221 in the accompanying condensed consolidated statements of operations for the nine-month periods
ended September 30, 2014 and 2013.
Note 12 – Customer concentrations
The Company had revenue from each of
the following customers in the three and nine-month periods ended September 30, 2014 that were greater than 10% of total revenue:
| | |
Three Months Ended | | |
Nine Months Ended | |
| | |
September 30, 2014 | | |
September 30, 2014 | |
| | | |
| Amount | | |
| % of Total Revenue | | |
| Amount | | |
| % of Total Revenue | |
Customer 1 | | |
$ | - | | |
| - | | |
$ | 48,088 | | |
| 23.4 | % |
Customer 2 | | |
| 39,145 | | |
| 41.5 | % | |
| 102,462 | | |
| 49.8 | % |
Customer 3 | | |
| 45,794 | | |
| 48.5 | % | |
| 45,794 | | |
| 22.3 | % |
Customer 4 | | |
| 9,448 | | |
| 10.0 | % | |
| - | | |
| - | |
Accounts receivable were $122,883,
net of allowance, as of September 30, 2014. One customer accounted for 91.7% 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 13 – Subsequent Events
We have completed an evaluation
of all subsequent events after the unaudited balance sheet date of September 30, 2014 through 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 September 30, 2014, and events which occurred subsequently but were not recognized
in the financial statements. We have concluded that no subsequent events have occurred that
require disclosure except as disclosed within these financial statements.
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 September 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 month-periods ended September
30, 2014 and 2013
Revenue and cost of revenue in the three
month period ended September 30, 2014 were $94,387 and $180,666, respectively. Revenue was from service and refurbishment work
which is recognized on the completion of the job. 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 September 30, 2013.
Selling, general and administrative
(“S,G&A”) were $2,771,835 and $2,399,223 in three-month periods ended September 30, 2014 and 2013, respectively. S,
G &A was comprised of:
| |
Three Months Ended September 30, | |
Increase/ | |
% |
| |
2014 | |
2013 | |
(decrease) | |
Change |
Compensation and benefits | |
$ | 2,347,881 | | |
$ | 2,009,910 | | |
$ | 337,970 | | |
| 16.8 | % |
Advertising | |
| 49,801 | | |
| — | | |
| 49,801 | | |
| — | |
Debt issuance costs | |
| — | | |
| 126,429 | | |
| -126,429 | | |
| -100.0 | % |
Facility costs | |
| 26,487 | | |
| 1,773 | | |
| 24,714 | | |
| 1393.7 | % |
Investment banking fees | |
| — | | |
| 29,700 | | |
| -29,700 | | |
| -100.0 | % |
Investor relations and marketing | |
| 372,644 | | |
| 115,292 | | |
| 257,352 | | |
| 223.2 | % |
Office support and supply | |
| 100,770 | | |
| 11,110 | | |
| 89,660 | | |
| 807.0 | % |
Professional and filing fees | |
| (226,529 | ) | |
| 87,105 | | |
| -313,634 | | |
| -360.1 | % |
Travel and entertainment | |
| 21,800 | | |
| 15,119 | | |
| 6,681 | | |
| 44.2 | % |
Depreciation and amortization | |
| 76,202 | | |
| — | | |
| 76,202 | | |
| — | |
Other | |
| 2,779 | | |
| 2,785 | | |
| -6 | | |
| -0.2 | % |
| |
$ | 2,771,835 | | |
$ | 2,399,223 | | |
$ | 372,612 | | |
| 15.5 | % |
Compensation and benefits increased
by $337,970, or 16.8% to $2,347,881 in the three-month period ended September 30, 2014 from $2,009,910 in the three-month period
ended September 30, 2013. Compensation and benefits comprised:
| |
2014 | | |
2013 | |
Fair value expense of restricted stock grants | |
$ | 519,372 | | |
$ | 1,921,410 | |
Fair value expense of stock option grants | |
| 1,068,575 | | |
| - | |
Fair value expense of restricted stock unit grants | |
| 549,999 | | |
| - | |
Officer compensation | |
| 66,000 | | |
| 88,500 | |
Payroll | |
| 143,935 | | |
| - | |
| |
$ | 2,347,881 | | |
$ | 2,009,910 | |
Major changes in compensation and benefits
include:
|
● |
We have granted restricted stock to officers and advisors which vest ratably through June 2016 and $519,372 was expensed in the three-month period ended September 30, 2014 compared to $1,921,410 in the three-month period ended September 30, 2013. |
|
● |
Options with a fair market value of $5,500,000 were granted in 2014 and $1,068,575 was expensed in the three-month period ended September 30, 2014. |
|
● |
We granted performance based restricted stock units to an officer/director and expensed $549,999 in the three-month period ended September 30, 2014. |
|
● |
Officer compensation represents amounts paid to officers in the three-month periods ended September 30, 2014 and 2013, respectively. |
|
● |
Payroll represents salaries and wages at NACSV for three-month period ended September 30, 2014. |
Debt issuance costs decreased by $(126,429),
or (100.0)%. In connection with the issuance of notes payable and convertible notes payable in prior years, we issued
common stock to an affiliate of our CEO for a debt guaranty and a warrant to a consultant, and in the three-month period ended
September 30, 2013, we recoded amortization expense of $126,429.
Investment banking fees decreased by
$(29,700), or (100.0)%. In the three-month period ended September 30, 2013 we paid placement fees of $29,700 in connection
with private placements.
Investor relations and marketing expense
increased by $275,352, or 223.2%, and include $367,500 in the three-month period ended September 30, 2014 and $100,000 in the three-month
period ended September 30, 2013 paid to consultants for services in shares of our common stock and through the issuance of a warrant
which are being amortized over the term the services are provided and in one case which were expensed on issuance as the services
are non-cancellable.
Office supply and support expenses increased
by $89,660 or 807.0%. In the three-month period ended September 30, 2014, the expense included $26,462 of reimbursable
expenses to an officer and advisor, $28,197 for directors and officers liability insurance, $7,249 for key man life insurance,
and $30,610 attributable to NACSV, including $22,620 for insurance. In the three-month period ended September 30, 2013,
the expense included $6,777 for directors and officers liability insurance.
Professional and filing fees decreased
by $(313,634), or (360.1)% to $(226,529) in the three-month period ended September 30, 2014 from $87,105 in the three-month period
ended September 30, 2013. Such fees consisted of:
| |
2014 | | |
2013 | |
Accounting and auditing fees | |
$ | 86,834 | | |
$ | 7,650 | |
Consulting fee | |
| 21,110 | | |
| 20,649 | |
Legal fees | |
| (352,751 | ) | |
| 51,468 | |
Public company/SEC related fees and expenses | |
| 278 | | |
| 7,339 | |
Directors fees | |
| 18,000 | | |
| - | |
| |
$ | (226,529 | ) | |
$ | 87,105 | |
Major changes in professional and filing
fees include:
|
● |
Accounting and auditing fees increased by $79,184 or 1,035.1%. In 2014 the amount included $65,334 for the preparation of audited financial statements for NACSV required for our SEC filings, $10,000 for tax return preparation, and $6,000 for the review of this quarter’s financial statements. In 2013 the amount included $7,500 for the review of that quarter’s financial statements |
|
● |
Consulting fees in 2014 included $17,500 NACSV paid to a sales and marketing consultant, and $3,610 we paid for due diligence. In 2013, the amount was for reconstructive accounting work in connection with our proposed acquisition of Airtronic. |
|
● |
Legal fees decreased by $(404,219). In 2014 we recovered $414,761 of legal fees in the Airtronic bankruptcy matter, reduced by $62,010 of legal fees incurred of which approximately $13,600 was incurred in connection with the NACSV acquisition, $19,000 in connection with the Airtronic bankruptcy, $25,000 in connection with litigation against Kett (See Part II, Item 1), and $3,500 for other legal services. In 2013 we incurred approximately $37,000 in connection with the Airtronic bankruptcy, $10,000 for SEC work and $4,500 for other legal services. |
|
● |
Directors fees include a monthly payment of $6,000 to one of our directors. We had no such expense in 2013. |
Depreciation and amortization in 2014
consists of $73,933 of amortization of intangible assets which are being amortized over five years and $2,269 of depreciation.
We had no such expense in 2013.
Gain
on extinguishment of debt was $31,712 in the three-month period ended September 30, 2013 and was in connection with the conversion
of convertible notes payable into shares of our common stock. We had no such item in 2014.
Interest income is the interest on the
bridge loans we made to Airtronic. Interest expense was expense incurred on notes payable.
There is no income tax benefit for the
losses for the three-month periods ended September 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.
Our results of operations for the three-month
periods ended September 30, 2014 and 2013 did not contain any unusual gains or losses from transactions not in our ordinary course
of business.
Nine-month periods ended September
30, 2014 and 2013
Revenue and cost of revenue in the nine-month
period ended September 30, 2014 were $205,792 and $249,412, respectively. Revenue was from fixed-price and modified fixed-price
construction contracts that are recognized using the percentage-of-completion method of revenue recognition as well as from service
and refurbishment work which are recognized on the completion of the job. 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 nine-month period ended
September 30, 2013.
S,G&A were $9,462,511 and $4,446,917
in nine-month periods ended September 30, 2014 and 2013, respectively. S, G &A was comprised of:
| |
Nine Months Ended September 30, | |
Increase/ | |
% |
| |
2014 | |
2013 | |
(decrease) | |
Change |
Compensation and benefits | |
$ | 7,067,946 | | |
$ | 3,223,297 | | |
$ | 3,844,649 | | |
| 119.3 | % |
Acquisition costs | |
| 754,572 | | |
| — | | |
| 754,572 | | |
| — | |
Advertising | |
| 51,301 | | |
| — | | |
| 51,301 | | |
| — | |
Debt issuance costs | |
| 100,000 | | |
| 560,000 | | |
| -460,000 | | |
| -82.1 | % |
Facility costs | |
| 29,370 | | |
| 8,358 | | |
| 21,012 | | |
| 251.4 | % |
Investment banking fees | |
| 412,498 | | |
| 101,310 | | |
| 311,188 | | |
| 307.2 | % |
Investor relations and marketing | |
| 558,807 | | |
| 269,349 | | |
| 289,458 | | |
| 107.5 | % |
Office support and supply | |
| 172,641 | | |
| 19,617 | | |
| 153,024 | | |
| 780.0 | % |
Professional and filing fees | |
| 189,494 | | |
| 239,428 | | |
| -49,934 | | |
| -20.9 | % |
Travel and entertainment | |
| 34,473 | | |
| 21,336 | | |
| 13,137 | | |
| 61.6 | % |
Depreciation and amortization | |
| 89,032 | | |
| — | | |
| 89,032 | | |
| — | |
Other | |
| 2,377 | | |
| 4,222 | | |
| -1,845 | | |
| -43.7 | % |
| |
$ | 9,462,511 | | |
$ | 4,446,917 | | |
$ | 5,015,594 | | |
| 106.1 | % |
Compensation and benefits increased
by $3,844,649 or 119.3% to $7,067,946 in the nine-month period ended September 30, 2014 compared to $3,223,297 in the nine-month
period ended September 30, 2013. Compensation and benefits comprised:
| |
2014 | | |
2013 | |
Fair value expense of restricted stock grants | |
$ | 2,587,951 | | |
$ | 2,984,796 | |
Fair value expense of stock option grants | |
| 3,521,905 | | |
| - | |
Fair value expense of restricted stock unit grants | |
| 549,999 | | |
| - | |
Officer compensation | |
| 198,000 | | |
| 238,500 | |
Payroll | |
| 210,091 | | |
| - | |
| |
$ | 7,067,946 | | |
$ | 3,223,296 | |
Major changes in compensation and benefits include:
|
● |
We have granted restricted stock to officers and advisors which vest ratably through June 2016 and $2,587,951 was expensed in nine-months ended September 30, 2014, compared to $2,984,796 in nine-months ended September 30, 2013. |
|
● |
Options with a fair market value of $5,500,000 were granted in 2014 and $3,521,905 was expensed in the nine-months ended September 30, 2014. We had no such expense in 2013. |
|
● |
We granted performance based restricted stock units to an officer/director and expensed $549,999 in the nine-months ended September 30, 2014. We had no such expense in 2013. |
|
● |
Officer compensation represents amounts paid to officers in the nine-months ended September 30, 2014 and 2013, respectively. |
|
● |
Payroll represents salaries and wages at NACSV for the period from acquisition through September 30, 2014. |
Acquisition costs were related to the
NACSV acquisition in the nine-month period ended September 30, 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 $(460,000),
or (82.1)%. In connection with the issuance of convertible notes payable in prior years, we issued a warrant to a consultant
which vested over one year. In nine-month period ended September 30, 2014 we expensed $100,000 for amortization of the warrant.
In the nine-month period ended September 30, 2013 we amortized $525,000 of expense related to the warrant and for a debt guaranty
issued by an affiliate of our CEO, and $35,000 was paid in cash for loan fees.
Investment banking fees increased by
$311,188, or 307.2%. In the nine-month period ended September 30, 2014 we incurred $412,498 of expense which represented the amortization
of a cash fee and the fair value of a warrant granted to an investment banking company. In the nine-month period ended September
30, 2013 we paid placement fees of $101,310 in connection with private placements.
Investor relations and marketing expense
increased by $289,458 or 107.5%, and include $546,669 in the nine-month period ended September 30, 2014 and $249,106 in the nine-month
period ended September 30, 2013 paid to consultants for services in shares of our common stock and through the issuance of a warrant
which are being amortized over the term the services are provided and in one case which were expensed on issuance as the services
are non-cancellable.
Office supply and support expenses increased
by $153,024 or 780.0%. In the nine-month period ended September 30, 2014, the expense included $56,966 of reimbursable
expenses to an officer and advisors, $55,413 for directors and officers liability insurance, $21,747 for key man life insurance,
and $38,340 attributable to NACSV, including $23,485 for insurance. In the nine-month period ended September 30, 2013,
the expense included $6,777 for directors and officers liability insurance and $6,250 for web development expense.
Professional and filing fees decreased
by $(49,934), or (20.9)%. In the nine-month periods ended September 30, 2014 and 2013, such fees consisted of:
| |
2014 | | |
2013 | |
Accounting and auditing fees | |
$ | 129,729 | | |
$ | 38,150 | |
Consulting fee | |
| 41,557 | | |
| 37,821 | |
Legal fees | |
| -18,099 | | |
| 155,588 | |
Public company/SEC related fees and expenses | |
| 18,307 | | |
| 7,869 | |
Directors fees | |
| 18,000 | | |
| - | |
| |
$ | 189,494 | | |
$ | 239,428 | |
Major changes in professional and filing fees include:
|
● |
Accounting and auditing fees increased by $91,579 or 240.0%. In 2014 the amount included $69,029 for the preparation of audited financial statements for NACSV required for our SEC filings, $10,000 for tax return preparation, and $50,300 for audit and review fees. In 2013 the amount included $32,500 for audit and review fees and $4,500 for temporary help. |
|
● |
Consulting fees in 2014 included $17,500 NACSV paid to a sales and marketing consultant, and $24,057 we paid for due diligence. In 2013, the amount included $25,321 for reconstructive accounting work in connection with our proposed acquisition of Airtronic and $12,500 for other consulting services. |
|
● |
Legal fees decreased by $(173,687) or 111.6%. In 2014 we recovered $414,761 of legal fees in the Airtronic bankruptcy matter, reduced by $396,662 of legal fees incurred of which approximately $56,000 was incurred in connection with the NACSV acquisition, $150,000 in connection with the Airtronic bankruptcy, $132,000 in connection with litigation against Kett (See Part II, Item 1), and $40,500 for other legal services. In 2013 we incurred approximately $135,000 in connection with the Airtronic bankruptcy, $10,000 for SEC work and $10,500 for other legal services. |
|
● |
Directors fees include a monthly payment of $6,000 to one of our directors. We had no such expense in 2013. |
Depreciation and amortization in the
nine-month period ended September 30, 2014 consists of $86,255 of amortization of intangible assets which are being amortized over
five years and $2,777 of depreciation. We had no such expense in in the nine-month period ended September 30, 2013.
Gain on extinguishment of debt in in
the nine-month period ended September 30, 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 in the nine-month period ended September
30, 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 nine-month periods ended September 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 and $271,221 in in the nine-month periods ended September 30, 2014 and 2013, respectively, 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 nine-month
periods ended September 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 September 30, 2014, we had cash
and cash equivalents totaling $344,080 and working capital of $459,987. For the nine-month period ended September 30, 2014, we
incurred a net loss of $9,091,131, and at September 30, 2014, we had an accumulated deficit of $25,949,506 and total stockholders’
equity of $753,543. 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 $492,757 for the nine-month period ended September 30, 2014 compared to $708,417 for the nine-month period ended September
30, 2013.
In the nine-month period ended September
30, 2014, cash was used to fund a net loss of $9,091,131, increased by a gain on extinguishment of debt of $387,642, and reduced
by depreciation and amortization of $89,032, non-cash stock-based compensation of $6,659,855, expense of common stock and warrants
issued for services of $971,668, non cash interest expense of $8,333, expense of common stock issued for acquisition services of
$664,000, other non cash acquisition expenses of $65,572, and changes in operating assets and liabilities of $527,556.
In the nine-month period ended September
30, 2013, cash was used to fund a net loss of $5,363,680 and changes in in operating assets and liabilities totaling $154,498,
reduced by non-cash stock-based compensation of $2,984,797, expense of common stock and warrants issued for services of $542,732,
amortization of debt discount of $676,487, expense of non-cash debt guaranty settled with shares common stock of $360,000, and
cash provided by discontinued operations of $245,745.
Cash used in investing activities
Net cash provided by investing activities
totaled $599,119 for the nine-month period ended September 30, 2014. During the period we, received cash of $1,465,874 from Airtronic
for the repayment of the bridge loans, reduced by net cash of $864,575 for the acquisition of NACSV and $2,180 for deposits.
Net cash used in investing activities
totaled $1,193,939 in the nine-month period ended September 30, 2013, and consisted of $1,193,741 for advances to Airtronic under
the bridge loans and $198 for a deposit.
Cash from financing activities
Net cash used in financing activities
was $271,506 in the nine-month period ended September 30, 2014. We received $125,000 from the exercise of warrants and $96,241
from notes payable offset by $342,247 paid against notes payable and $150,000 paid against convertible notes payable.
Net cash provided by financing activities
totaled $2,523,500 in the nine-month period ended September 30, 2013. We received $1,916,100 of net proceeds from private placement
sales of our common stock, $300,000 from the exercise of warrants and $374,900 from notes payable offset by $67,500 paid against
notes payable.
Financial condition
As of September 30, 2014, we had cash
and cash equivalents totaling $344,080, working capital of $459,987 and stockholders’ equity of $753,543. 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.
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 New Accounting Standards
Issued But Not Yet Adopted
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 “Smaller 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
and Procedures
Our management, with the participation
of our Chief Executive Officer and our Chief Financial and Accounting Officer, has evaluated the effectiveness of our disclosure
controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1937, as
amended, which we refer to as the Exchange Act) as of the end of the period covered by this report. Based on this evaluation, our
Chief Executive Officer and our Chief Financial and Accounting Officer, we have concluded that, as of the end of such period, these
controls and procedures are not effective to ensure that information required to be disclosed by us in the reports we file or submit
under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the Securities and
Exchange Commission’s rules and forms. These disclosure controls and procedures include, without limitation, controls and
procedures designed to ensure that information required to be disclosed by us in the reports that we file or submit is accumulated
and communicated to our management, including our Chief Executive Officer and Chief Accounting Officer, as appropriate to allow
timely decisions regarding required disclosure.
Identified
Material Weaknesses
A material
weakness in our internal control over financial reporting is a control deficiency, or combination of control deficiencies, that
results in more than a remote likelihood that a material misstatement or the financial statements will not be prevented or detected.
Management
identified the following material weaknesses during its assessment of internal controls over financial reporting as of December
31, 2013 which have not been rectified as of September 30, 2014:
| · | Resources: Our corporate Chief
Financial Officer performs all corporate accounting functions. As a result, there is a lack of proper segregation of duties. |
| · | Audit Committee: We do not
have, and are not required to have, an audit committee. An audit committee would improve oversight in the establishment and monitoring
of required internal controls and procedures. |
Management's
Remediation Initiatives
As we expand,
we plan to hire additional accounting staff and implement systems where we have adequate segregation of duties. We also plan to
add an audit committee financial expert to our board and create an audit committee made up of one or more of our independent directors.
Changes
in Internal Control over Financial Reporting
There were no changes in our internal
controls over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during our
last fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial
reporting.
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 party to 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. On May 30, 2014, the Company amended its Complaint to allege four causes of action
against Kett: Tortious Interference with Contract and/or with Prospective Economic Advantage; Fraudulent Inducement; Fraudulent
Concealment; and Civil Conspiracy. Kett was 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 the discovery stage. The Company is seeking a judgment against Kett, damages,
costs and such other relief as may be awarded by the court. On October 27, 2014, Kett filed a counterclaim against the Company
alleging fraud and civil conspiracy seeking damages based on her allegation that the merger prevented her from getting a better
personal employment contract on the open market. The Company denies Kett’s allegations. The Court placed
this case on the trial docket for April/May 2015, which begins on April 6, 2015. |
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 September
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 August 19, 2014 we issued 1,000,000 shares of our common stock to a consultant for investor
relations service pursuant to a consulting agreement dated June 16, 2014. |
| 2. | On August 19, 2014 we issued 500,000 shares of our common stock to a consultant for investor relations
service pursuant to a consulting agreement dated July 1, 2014. |
| 3. | On September 5, 2014, we issued an aggregate of 1,300,000 shares of our common stock to three individuals
in connection with the acquisition of NACSV. |
The shares of common 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: November 7, 2014 |
By: |
/s/ DAVID A. LOPPERT |
|
|
Chief Financial Officer |
|
|
(Duly Authorized Officer and
Principal Financial Officer) |
INDEX TO EXHIBITS |
|
Exhibit No. |
|
Description of Exhibit |
10.1 |
|
Addendum dated April 16, 2014 to Investment Banking Agreement with Midtown Partners & Co, LLC dated October 16, 2013 (incorporated by reference to Draft Registration Statement filed 8/5/14 with the Commission as Exhibit 10.17) |
10.2 |
|
Global Digital Solutions, Inc. 2014 Equity Incentive Plan approved by Shareholders May 19, 2014 (incorporated by reference to Draft Registration Statement filed 8/5/14 with the Commission as Exhibit 10.19) |
10.3 |
|
Online Virtual Office Agreement dated August 19, 2013 (incorporated by reference to Draft Registration Statement filed 8/5/14 with the Commission as Exhibit 10.20) |
10.4 |
|
Restricted Stock Unit Agreement dated as of August 25, 2014 between Global Digital Solutions, Inc. and Stephen L. Norris (incorporated by reference to Form 8-K/A filed 8/25/14 with the Commission as Exhibit 10.1) |
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. |
28
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: November 7, 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: November 7, 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 September 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: November 7, 2014 |
|
|
|
/s/ DAVID A. LOPPERT |
|
David A. Loppert |
|
Chief Financial Officer |
|
Date: November 7, 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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