UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-Q
(Mark One)
þ QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2015
o 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 R 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 R 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 |
R |
(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 ☐ NoR
The
number of shares outstanding of each of the issuer’s classes of common stock as of the close of business on November 4,
2015 is as follows:
Class |
|
Number
of Shares |
Common
Stock: $0.001 Par Value |
|
489,476,766 |
GLOBAL
DIGITAL SOLUTIONS, INC.
TABLE
OF CONTENTS
|
|
Page |
PART
I - FINANCIAL INFORMATION |
|
|
|
|
Item
1. |
Financial
Statements (unaudited): |
|
|
Consolidated
Balance Sheets – September 30, 2015 and December 31, 2014 |
3 |
|
Consolidated
Statements of Operations for the three and nine months ended September 30, 2015 and 2014 |
4 |
|
Consolidated
Statements of Cash Flows for the nine months ended September 30, 2015 and 2014 |
5 |
|
Notes
to Consolidated Financial Statements |
6 |
Item
2. |
Management’s
Discussion and Analysis of Financial Condition and Results of Operations. |
24 |
Item
3. |
Quantitative
and Qualitative Disclosures About Market Risk. |
32 |
Item
4. |
Controls
and Procedures. |
32 |
|
|
|
PART
II - OTHER INFORMATION |
|
|
|
|
Item
1. |
Legal
Proceedings. |
32 |
Item
1A. |
Risk
Factors. |
33 |
Item
2. |
Unregistered
Sales of Equity Securities and Use of Proceeds. |
33 |
Item
3. |
Defaults
Upon Senior Securities. |
33 |
Item
4. |
Mine
Safety Disclosures. |
34 |
Item
5. |
Other
Information. |
34 |
Item
6. |
Exhibits. |
34 |
|
Signatures |
35 |
PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
GLOBAL DIGITAL SOLUTIONS, INC. |
CONSOLIDATED BALANCE SHEETS |
|
| |
September 30, | | |
December 31, | |
| |
2015 | | |
2014 | |
| |
(unaudited) | | |
| |
Assets | |
| | |
| |
Current Assets | |
| | |
| |
Cash and cash equivalents | |
$ | 115,662 | | |
$ | 160,102 | |
Accounts receivable, net | |
| 306,439 | | |
| 302,400 | |
Inventory | |
| -- | | |
| 226,897 | |
Prepaid expenses | |
| 147,174 | | |
| 81,498 | |
Debt issuances fees, net | |
| 940 | | |
| -- | |
Total current assets | |
| 570,215 | | |
| 770,897 | |
| |
| | | |
| | |
Property and equipment, net | |
| 6,359 | | |
| 9,040 | |
Intangible asset | |
| -- | | |
| 596,471 | |
Deposits | |
| 2,415 | | |
| 2,882 | |
Total assets | |
$ | 578,989 | | |
$ | 1,379,290 | |
| |
| | | |
| | |
Liabilities and Stockholders' (Deficit) Equity | |
| | | |
| | |
Current Liabilities | |
| | | |
| | |
Accounts payable | |
$ | 141,598 | | |
$ | 281,726 | |
Accrued expenses | |
| 171,107 | | |
| 197,578 | |
Convertible notes payable | |
| 312,071 | | |
| -- | |
Accrued interest on convertible notes | |
| 76,473 | | |
| -- | |
Derivative liability | |
| 600,327 | | |
| -- | |
Notes payable | |
| 101,363 | | |
| 58,258 | |
Convertible notes payable to related parties, net of discount | |
| -- | | |
| 40,707 | |
Total current liabilities | |
| 1,402,939 | | |
| 578,269 | |
Contingent consideration payable | |
| 555,653 | | |
| 648,615 | |
Total liabilities | |
| 1,958,592 | | |
| 1,226,884 | |
| |
| | | |
| | |
Commitments and Contingencies | |
| | | |
| | |
| |
| | | |
| | |
Stockholders’ (deficit) equity | |
| | | |
| | |
Preferred stock, $0.001 par value, 35,000,000 shares authorized, none issued and outstanding | |
| -- | | |
| -- | |
Common stock, $0.001 par value, 650,000,000 shares authorized, 286,852,244 and 108,291,855 shares issued and
outstanding
| |
| 286,852 | | |
| 108,292 | |
Additional paid-in capital | |
| 29,844,051 | | |
| 28,559,677 | |
Accumulated deficit | |
| (31,510,506 | ) | |
| (28,515,563 | ) |
Total stockholders’ (deficit) equity | |
| (1,379,603 | ) | |
| 152,406 | |
Total liabilities and stockholders' (deficit) equity | |
$ | 578,989 | | |
$ | 1,379,290 | |
The accompanying notes are an integral part of these
consolidated financial statements.
GLOBAL DIGITAL SOLUTIONS, INC. |
CONSOLIDATED STATEMENTS OF OPERATIONS |
| |
For the Three Months Ended | | |
For the Nine Months Ended | |
| |
September 30, | | |
September 30, | |
| |
2015 | | |
2014 | | |
2015 | | |
2014 | |
| |
| | |
| | |
| | |
| |
Revenue | |
$ | 254,587 | | |
$ | 94,387 | | |
$ | 633,810 | | |
$ | 205,792 | |
| |
| | | |
| | | |
| | | |
| | |
Cost of revenue | |
| 278,676 | | |
| 180,066 | | |
| 535,517 | | |
| 249,412 | |
| |
| | | |
| | | |
| | | |
| | |
Gross profit (loss) | |
| (24,089 | ) | |
| (85,679 | ) | |
| 98,293 | | |
| (43,620 | ) |
| |
| | | |
| | | |
| | | |
| | |
Operating expenses | |
| | | |
| | | |
| | | |
| | |
Selling, general and administrative expenses | |
| 526,369 | | |
| 2,771,835 | | |
| 2,445,294 | | |
| 9,462,511 | |
Other (income)/expense | |
| | | |
| | | |
| | | |
| | |
Change in fair value of derivatives | |
| (230,099 | ) | |
| -- | | |
| (686,980 | ) | |
| -- | |
Loss on conversions of notes payable and accrued interest | |
| 406,617 | | |
| -- | | |
| 406,617 | | |
| -- | |
(Gain) loss on extinguishment of debt | |
| -- | | |
| -- | | |
| 22,170 | | |
| (387,642 | ) |
Reduction of contingent consideration for purchase price | |
| -- | | |
| -- | | |
| (280,461 | ) | |
| -- | |
Other income | |
| (600 | ) | |
| -- | | |
| (190,840 | ) | |
| -- | |
Interest income | |
| -- | | |
| -- | | |
| --- | | |
| (43,182 | ) |
Interest expense | |
| 208,636 | | |
| 3,811 | | |
| 1,377,436 | | |
| 12,992 | |
Total (income) and expenses | |
| 384,554 | | |
| 3,811 | | |
| 647,942 | | |
| (417,832 | ) |
| |
| | | |
| | | |
| | | |
| | |
Loss from continuing operations before provision for income taxes | |
| (935,012 | ) | |
| (2,861,325 | ) | |
| (2,994,943 | ) | |
| (9,088,299 | ) |
| |
| | | |
| | | |
| | | |
| | |
Provision for income taxes | |
| -- | | |
| -- | | |
| --- | | |
| -- | |
| |
| | | |
| | | |
| | | |
| | |
Loss from continuing operations | |
| (935,012 | ) | |
| (2,861,325 | ) | |
| (2,994,943 | ) | |
| (9,088,299 | ) |
| |
| | | |
| | | |
| | | |
| | |
Loss from discontinued operations | |
| -- | | |
| -- | | |
| -- | | |
| (2,832 | ) |
| |
| | | |
| | | |
| | | |
| | |
Net loss | |
$ | (935,012 | ) | |
$ | (2,861,325 | ) | |
$ | (2,994,943 | ) | |
$ | (9,091,131 | ) |
| |
| | | |
| | | |
| | | |
| | |
Loss per common share – basic and diluted: | |
| | | |
| | | |
| | | |
| | |
Loss from continuing operations | |
$ | (0.01 | ) | |
$ | (0.03 | ) | |
$ | (0.03 | ) | |
$ | (0.09 | ) |
Loss from discontinued operations | |
| -- | | |
| -- | | |
| --- | | |
| (0.00 | ) |
Net loss | |
$ | (0.01 | ) | |
$ | (0.03 | ) | |
$ | (0.03 | ) | |
$ | (0.09 | ) |
Shares used in computing net loss per share: | |
| | | |
| | | |
| | | |
| | |
Basic and diluted | |
| 140,365,540 | | |
| 101,707,322 | | |
| 119,425,067 | | |
| 100,468,189 | |
The accompanying notes are an integral part of these
consolidated financial statements.
GLOBAL DIGITAL SOLUTIONS, INC. |
CONSOLIDATED STATEMENTS OF CASH FLOWS |
| |
For the Nine Months Ended | |
| |
September 30, | |
| |
2015 | | |
2014 | |
Operating Activities | |
| | |
| |
Net loss | |
$ | (2,994,943 | ) | |
$ | (9,091,131 | ) |
Adjustments to reconcile net loss to net cash used in operating activities: | |
| | | |
| | |
Depreciation and amortization | |
| 38,018 | | |
| 89,032 | |
Stock- based compensation expense | |
| 602,764 | | |
| 6,659,855 | |
Common stock & warrants issued in payment of services | |
| 104,056 | | |
| 971,668 | |
Change in fair-value of embedded derivative liabilities of convertible notes | |
| (686,980 | ) | |
| -- | |
Loss on conversions of notes payable and accrued interest | |
| 406,617 | | |
| -- | |
Non-cash amortization of debt issue costs | |
| 123,180 | | |
| -- | |
Loss (gain) on extinguishment of debt | |
| 22,170 | | |
| (387,642 | ) |
Non-cash interest expense | |
| 1,290,166 | | |
| 8,333 | |
Beneficial conversion feature of debt | |
| 4,582 | | |
| -- | |
Intangible asset impairment | |
| 563,024 | | |
| -- | |
Acquisition expenses settled with common stock | |
| -- | | |
| 664,000 | |
Reduction of contingent consideration for purchase price | |
| (280,461 | ) | |
| -- | |
Non cash acquisition expense | |
| -- | | |
| 65,572 | |
Changes in operating assets and liabilities: | |
| | | |
| | |
Accounts receivable | |
| (4,040 | ) | |
| 106,393 | |
Inventory | |
| 226,897 | | |
| (184,582 | ) |
Costs in excess of billings | |
| -- | | |
| 557,425 | |
Prepaid expenses and other assets | |
| (65,208 | ) | |
| 25,433 | |
Accounts payable | |
| (140,128 | ) | |
| (58,303 | ) |
Accrued expenses | |
| 50,002 | | |
| 67,559 | |
Contingent consideration payable | |
| 187,499 | | |
| -- | |
Billings in excess of costs | |
| -- | | |
| 13,631 | |
Net cash used in operating activities | |
| (552,785 | ) | |
| (492,757 | ) |
Investing Activities | |
| | | |
| | |
Repayment of loans to Airtronic | |
| -- | | |
| 1,465,874 | |
Capital expenditures | |
| (1,890 | ) | |
| -- | |
Deposits | |
| -- | | |
| (2,180 | ) |
Payment for NACSV, net of cash acquired | |
| -- | | |
| 864,575 | |
Net cash (used in) provided by investing activities | |
| (1,890 | ) | |
| 599,119 | |
Financing Activities | |
| | | |
| | |
Proceeds from convertible notes payable | |
| 660,250 | | |
| -- | |
Proceeds from notes payable | |
| 135,393 | | |
| 96,241 | |
Proceeds from exercise of warrants | |
| -- | | |
| 125,000 | |
Debt issuance fees | |
| (124,120 | ) | |
| -- | |
Payments on notes payable | |
| (92,288 | ) | |
| (342,747 | ) |
Payment on convertible notes payable | |
| (69,000 | ) | |
| (150,000 | ) |
Net cash provided by (used in) financing activities | |
| 510,235 | | |
| (271,506 | ) |
Net decrease in cash and cash equivalents | |
| (44,440 | ) | |
| (165,144 | ) |
Cash and cash equivalents at beginning of year | |
| 160,102 | | |
| 509,224 | |
Cash and cash equivalents at end of period | |
$ | 115,662 | | |
$ | 344,080 | |
Taxes paid | |
$ | -- | | |
$ | -- | |
Interest paid | |
$ | 4,518 | | |
$ | 429 | |
Supplementary disclosure of non-cash investing and financing activities: | |
| | | |
| | |
Purchase of NACSV with common shares | |
$ | -- | | |
$ | 200,000 | |
Issuances of common stock for conversions of notes payable and accrued interest | |
$ | 349,497 | | |
$ | | |
The accompanying notes are an integral part of these
consolidated financial statements.
GLOBAL DIGITAL SOLUTIONS, INC.
Notes to Consolidated Financial Statements
Three and Nine Months Ended September 30, 2015 and
2014
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. Our current efforts are focused 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. (“Airtronic”).
Effective as of June 16, 2014 we acquired North American Custom Specialty Vehicles (“NACSV”).
Summary of Significant Accounting Policies
Principles of Consolidation
The accompanying unaudited consolidated financial statements
include the accounts of the Company and our wholly owned subsidiaries, NACSV, GDSI Florida, LLC and Global Digital Solutions, LLC,
dba GDSI International. All intercompany accounts and transactions have been eliminated in consolidation. The year-end 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 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, 2014, included in our Annual Report on Form 10-K (the “2014 Form 10-K”). The unaudited consolidated
statements of operations for the three and nine months ended September 30, 2015 are not necessarily indicative of the results that
may be expected for the entire year.
Use of Estimates
The preparation of these 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 allowance for doubtful
accounts receivable, provision for excess and obsolete inventory, valuation of intangible and long-lived assets, fair value of
convertible debt and derivative liabilities, contingent liabilities, income taxes and share-based compensation expense, 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 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, 2015 had an accumulated deficit of $31,510,506, cash and cash equivalents of $115,662, a working capital deficit
of $832,724 and stockholders’ deficit of $1,379,603. We have funded our activities to date primarily from equity and convertible
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 additional businesses that provide 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. We expect to raise additional funds through additional convertible debt offerings in the
future.
Our independent registered public accounting firm has
expressed substantial doubt about our ability to continue as a going concern as a result of our history of net losses and negative
cash flows from operations. Our ability to achieve and maintain profitability and positive cash flow is dependent upon our ability
to successfully execute the plans to pursue acquisitions and raise the funds necessary to complete such acquisitions as more fully
described in our 2014 Form 10-K. We will need to secure additional funds to finance our operations during the next twelve months,
but 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
In accordance with GAAP, revenue under fixed-price
contracts is accounted for on the percentage-of-completion method. This methodology recognizes revenue and earnings as work
progresses on the contract and is based on an estimate of the revenue and earnings earned to date, less amounts recognized in prior
periods. We base our estimate of the degree of completion of the contract by reviewing the relationship of costs incurred
to date to the expected total costs that will be incurred on the project. Estimated contract earnings are reviewed and revised
periodically as the work progresses, and the cumulative effect of any change in estimate is recognized in the period in which the
change is identified. Estimated losses are charged against earnings in the period such losses are identified. We recognize revenue
arising from contract claims either as income or as an offset against a potential loss only when the amount of the claim can be
estimated reliably and realization is probable and there is a legal basis of the claim. 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.
Revenue for service and refurbishment work is recognized
when the job is complete.
Concentrations of Credit Risk
Financial instruments that potentially subject us to
concentrations of credit risk consist primarily of cash and accounts receivable.
Allowance for doubtful accounts
We record accounts
receivable at the invoiced amount and we do not charge interest. We maintain an allowance for doubtful accounts to reserve for
potentially uncollectible receivables. We review the accounts receivable by customers which are past due to identify specific customers
with known disputes or collectability issues. In determining the amount of the reserve, we make judgments about the creditworthiness
of significant customers based on ongoing credit evaluations. Allowance for doubtful accounts was $0 and $104,085 at September
30, 2015 and December 31, 2014, respectively.
Inventory
Inventory at December 31, 2014 consisted of the in progress mobile command
unit 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 expensed 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.
Intangible Asset
Our intangible asset at December 31, 2014, consisted
of customer relationships, which arose from the acquisition of NACSV in June 2014, and were being amortized over its expected economic
life of five years. The life was determined based upon the expected use of the asset, and other contractual provisions associated
with the asset, the estimated average life of NACSV’s products, the stability of the industry, and other factors deemed appropriate.
We continually evaluated whether events or circumstances occurred that indicated the remaining estimated useful life of our customer
relationships asset may warrant revision or that the remaining balance of such asset may not be recoverable. We used an estimate
of the related discounted cash flows over the remaining life of the asset in measuring whether the asset is recoverable. Based
on our current valuation, we determined that the value of the customer relationships was fully impaired during the nine months
ended September 30, 2015, as more fully discussed in Note 5 – Intangible Asset.
Fair Value Measurements
The carrying amounts of our financial instruments,
including cash and cash equivalents, accounts receivable, accounts payable, and short-term debt approximate fair value due to their
relatively short maturities.
Convertible Notes Payable With Fixed Conversion
Options
We had entered into convertible notes payable with
related parties that contained conversion options, whereby the outstanding principal and accrued interest could be converted, by
the holder, into shares of our common stock. In the case of the convertible notes payable with related parties, the conversion
price was a fixed price, which represented a 30% discount to the price of our common stock at the time of issuance. We measured
the fair value of the notes payable at the time of issuance, which is the result of the share price conversion discount, and recorded
the discount (beneficial conversion feature) as a reduction of debt. We then accreted the discount as interest expense utilizing
the effective interest rate method over the life of the debt. The debt was repaid during the nine months ended September 30, 2015.
Derivative Financial Instruments
During the nine months ended September 30, 2015, we
have issued convertible notes payable to third parties, which contain variable conversion options allowing the holders to convert
the notes payable into shares of our common stock at discounts ranging from 39% to 40%. Each of these notes is more fully described
in Note 6, Notes Payable.
We account for these conversion options embedded in
the convertible notes payable to third parties in accordance with ASC 815, “Derivatives and Hedging”. Subtopic
ASC 815-15, Embedded Derivatives generally requires companies to bifurcate conversion options embedded in the convertible
notes from their host instruments and to account for them as free standing derivative financial instruments. Derivative liabilities
are recognized in the consolidated balance sheet at fair value as Derivative Liabilities and based on the criteria specified
in FASB ASC 815-40, Derivatives and Hedging – Contracts in Entity’s own Equity. The estimated fair value of
the derivative liabilities is calculated using the Black-Scholes-Merton pricing model and such estimates are revalued at each balance
sheet date, with changes recorded to other income or expense as Change in Fair Value – Derivatives in the consolidated
statement of operations. The classification of derivative instruments, including whether such instruments should be recorded as
liabilities or equity, is evaluated at the instrument origination date and reviewed at the end of each event date (i.e. conversions,
payments, etc.) and the measurement period end date for financial reporting, as applicable. Derivative instrument liabilities are
classified on the balance sheet as current or non-current based on whether or not net-cash settlement of the derivative instrument
would be required within twelve months of the balance sheet date. As a result of the conversions of portions of these notes pay
able and accrued interest during the three months ended September 30, 2015, we have recorded a loss on conversion of $406,617 and
a corresponding increase in additional-paid-in capital.
Convertible Securities
Based upon ASC 815-15, we
have adopted a sequencing approach regarding the application of ASC 815-40 to convertible securities issued subsequent to December
31, 2014. We will evaluate our contracts based upon the earliest issuance date. In the event partial reclassification of contracts
subject to ASC 815-40-25 is necessary, due to our inability to demonstrate we have sufficient shares authorized and unissued,
shares will be allocated on the basis of issuance date, with the earliest issuance date receiving first allocation of shares.
If a reclassification of an instrument were required, it would result in the instrument issued latest being reclassified first.
Provision for Income Taxes
Income taxes are calculated based upon the asset and
liability method of accounting. Deferred income taxes are recorded to reflect the tax consequences in future years of
differences between the tax basis of assets and liabilities and their financial reporting amounts at each year-end. A
valuation allowance is recorded against deferred tax assets if management does not believe the Company has met the “more
likely than not” standard to allow for recognition of such an asset. In addition, realization of an uncertain
income tax position must be estimated as “more likely than not” (i.e., greater than 50% likelihood of receiving a benefit)
before it can be recognized in the financial statements. Further, the recognition of tax benefits recorded in
the financial statements, if any, is based on the amount most likely to be realized assuming a review by tax authorities having
all relevant information.
Stock Based Compensation
We adopted the fair value recognition provisions of
Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 718, "Compensation
– Stock Compensation”. Under the fair value recognition provisions, we are required to measure the cost
of employee services received in exchange for share-based compensation measured at the grant date fair value of the award.
The Company’s accounting policy for equity instruments
issued to advisors, consultants and vendors in exchange for goods and services follows the provisions of ASC 505-50. The
measurement date for the fair value of the equity instruments issued is determined at the earlier of (i) the date at which a commitment
for performance by the advisor, consultant or vendor is reached or (ii) the date at which the advisor, consultant or vendor’s
performance is complete. In the case of equity instruments issued to advisors and consultants, the fair value of the equity instrument
is recognized over the term of the advisor or consulting agreement. Stock-based compensation related to non-employees is accounted
for based on the fair value of the related stock or options or the fair value of the services, whichever is more readily determinable.
Advertising
All advertising costs are expensed as incurred.
Basic and Fully Diluted Loss Per Share
Basic loss per common share is computed by dividing
the loss by the weighted-average number of common shares outstanding for the period. Diluted loss per common share gives effect
to all potentially dilutive common shares that were outstanding during the period. Diluted common shares consist of incremental
shares issuable upon the conversion of convertible notes payable and accrued interest, restricted stock, unvested stock issuable
for services and the exercise of outstanding stock options and warrants to the extent that such incremental shares are dilutive.
Contingent consideration for business acquisitions
Acquisitions may include contingent consideration payments
based on future financial measures of an acquired company. Contingent consideration is required to be recognized at fair value
as of the acquisition date. We estimate the fair value of these liabilities based on financial projections of the acquired companies
and estimated probabilities of achievement. At each reporting date, the contingent consideration obligation is revalued to its
estimated fair value and changes in fair value subsequent to the acquisition are reflected in income or expense in the consolidated
statements of operations, and could cause a material impact to our operating results. Changes in the fair value of contingent consideration
obligations may result from changes in discount periods and rates, changes in the timing and amount of revenue and/or earnings
estimates and changes in probability assumptions with respect to the likelihood of achieving the various earn-out criteria.
Deferred financing fees
We amortize the cost incurred to obtain debt financing
using the straight-line method over the expected term of the underlying obligations. The amortization of deferred financing
costs is included in selling, general and administrative expense. We recognized $28,693 and $0 of expense related to the
amortization of deferred financing costs during the three months ended September 30, 2015 and 2014, respectively, and $142,538
and $100,000 during the nine months ended September 30, 2015 and 2014, respectively.
Subsequent Events
We
evaluate events that occur subsequent to the balance sheet date of periodic reports, but before financial statements are issued
for periods ending on such balance sheet dates, for possible adjustment to such financial statements or other disclosure.
New Accounting Standards Issued But Not Yet Adopted
From time to time, new accounting pronouncements are
issued by the FASB, which are adopted by the Company as of the specified date. Unless otherwise discussed, management believes
the impact of recently issued standards, which are not yet effective, will not have a material impact on its consolidated financial
statements upon adoption.
In
February 2015, the FASB issued ASU No. 2015-02, Consolidation (Topic 810): Amendments to the Consolidation Analysis
(“ASU 2015-02”). ASU 2015-02 affects reporting entities that are required to evaluate whether they should consolidate
certain legal entities. ASU 2015-02 is effective for us on January 1, 2016, with early adoption permitted. We do not believe
that this pronouncement will have an impact on our consolidated financial statements.
In April 2015, the FASB issued ASU No. 2015-03, Interest
- Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs (“ASU 2015-03”).
The amendments in ASU 2015-03 require that debt issuance costs related to a recognized debt liability be presented in the
balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. The recognition
and measurement guidance for debt issuance costs are not affected by the amendments in ASU 2015-03. ASU 2015-03 is effective
for us on January 1, 2016, with early adoption permitted. We are currently evaluating the potential changes from this ASU
to our future financial reporting and disclosures.
In July 2015, the FASB issued ASU
2015-11, Inventory (Topic 330): Simplifying the Measurement of Inventory ("ASU 2015-11"). This ASU requires
inventories measured under any methods other than last-in, first-out ("LIFO") or the retail inventory method to be
subsequently measured at the lower of cost or net realizable value, rather than at the lower of cost or market. Subsequent
measurement of inventory using LIFO or the retail inventory method is unchanged by this ASU. ASU 2015-11 is effective for
public companies for interim and annual periods beginning after December 15, 2016. The Company is currently evaluating the
impact that this standard will have on the consolidated financial statements and does not anticipate a significant impact to
the Company's financial position as a result of this change.
In
September 2015, the FASB issued its final standard on simplifying the accounting for measurement-period adjustments for business
combinations. This standard, issued as ASU 2015-16, requires that an entity that is the acquirer in a business combination that
identifies adjustments to provisional amounts during the measurement period to recognize those adjustments in the reporting period
in which the amounts are determined. This update further requires that the acquirer record, in the same period's financial statements,
the effect on earnings of changes in depreciation, amortization, or other income effects, if any, as a result of the change to
the provisional amounts, calculated as if the accounting had been completed at the acquisition date. The update is effective for
financial statement periods beginning after December 15, 2015, and should be applied prospectively to adjustments to provisional
amounts that occur after the effective date of this update, with early adoption permitted. The Company has determined that this
update has no impact on the Company's historical financial statements and disclosures. When adjustments to provisional amounts
occur in the future, the Company will make the adjustments in the appropriate period and include the required 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, valued 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 in 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 acquisition services rendered in conjunction with the Acquisition valued at $664,000. The Company recorded
nonrecurring charges of $843,488 during the year ended December 31, 2014 related to the direct costs of the Acquisition, consisting
of the $664,000 value of the shares of common stock issued for acquisition services and $179,488 of cash costs for legal, accounting
fees and due diligence fees.
The purchase price of the Acquisition totaled $2,713,079,
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 of $696,706. The fair value of the Contingent Consideration was estimated based upon the present value
of the expected future payouts. 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 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 | |
| 668,940 | |
Goodwill | |
| 1,156,192 | |
| |
| 3,069,126 | |
Liabilities assumed: | |
| | |
Accounts payable | |
| 35,724 | |
Accrued expenses | |
| 2,087 | |
Notes payable | |
| 304,605 | |
Billings in excess of costs | |
| 13,631 | |
| |
| 356,047 | |
Total purchase price | |
$ | 2,713,079 | |
The fair values of certain assets and liabilities have
been determined by management. No portion of the intangible assets, including goodwill, is expected to be deductible for tax purposes. During
the fourth quarter of 2014, based on the annual testing for impairment, the implied value of the goodwill acquired in the Acquisition
was nil and, accordingly, we recorded a goodwill impairment charge for the full amount of the goodwill of $1,156,192 as of December
31, 2014.
The results of operations of NACSV are included in
the Company’s consolidated statements of operations from the date of the acquisition of June 16, 2014. 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 presented above 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, 2015
and December 31, 2014 consisted of the following:
| |
2015 | | |
2014 | |
Cash in bank | |
$ | 115,662 | | |
$ | 160,102 | |
Cash and cash equivalents | |
$ | 115,662 | | |
$ | 160,102 | |
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 we have not been exposed to any significant risk for cash on deposit. While as of September
30, 2015 and December 31, 2014, we did not have uninsured cash amounts, in the past we have had deposits in excess of the insurance
limit. We maintain our balances with high quality financial institutions, which we believe reduces any risk.
Note 4 – Inventory
Inventory consists of the following at September 30,
2015 and December 31, 2014:
| |
September 30, 2015 | | |
December 31, 2014 | |
Assets: | |
| | |
| |
Trailer inventory | |
$ | -- | | |
$ | 187,881 | |
Work in process | |
| -- | | |
| 226,897 | |
| |
| | | |
| 414,778 | |
Less: Reserve for inventory loss | |
| -- | | |
| (187,881 | ) |
Total | |
$ | -- | | |
$ | 226,897 | |
We had established a reserve for inventory loss for
$187,881 of trailer inventory on hand at NACSV at December 31, 2014. 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 were to be paid to the NACSV sellers and
thus the Company’s net realizable value on this inventory, which was sold during the nine months ended September 30, 2015,
was zero. The Company orders inventory/components when it receives a signed purchase order from its customer.
Note 5 – Intangible Asset
At December 31, 2014, we had an intangible asset of
$596,471, which was comprised of customer relationships. During the three and nine months ended September 30, 2015, amortization
of the intangible asset charged against income amounted to $0 and $33,447, respectively, and during the three and nine months
ended September 30, 2014, amortization of the intangible asset charged against income amount to $73,933 and $86,255, respectively.
The customer relationships arose from the Acquisition as more fully discussed in Note 2, Acquisition of North American
Custom Specialty Vehicles, LLC (“NACSV”). In accordance with ASC 360-10, we continually evaluated whether events
or circumstances have occurred that indicate the remaining estimated useful life of our customer relationships asset may warrant
revision or that the remaining balance of such asset may not be recoverable. Based on valuation for the first quarter of 2015,
we determined that the remaining value of the customer relationships of $563,024 was impaired as of March 31, 2015. Therefore,
we recorded an intangible asset impairment loss of $563,024 as a component of our selling, general and administrative expenses
in our unaudited consolidated statement of operations for the nine months ended September 30, 2015. This was due in part to the
lack of revenue from sales of NACSV’s products during the three-months ended March 31, 2015, as well as to our expectations
regarding future estimated discounted cash flows attributable to such asset. We have filed legal proceedings against the sellers
of NACSV as more fully discussed in Note 8 – Commitments and Contingencies. We believe that certain misrepresentations
were made to us regarding the business prospects of NACSV. In addition to the legal issue discussed in Note 8, we intend to pursue
additional legal remedies related to NACSV’s business prospects.
Note 6 – Notes Payable
Convertible Notes Payable with Embedded Derivative
Liabilities (Conversion Options)
During the nine months ended September 30, 2015, we
entered into convertible notes payable with embedded derivative liabilities (conversion options). At September 30, 2015, these
notes consist of the following:
| |
September
30, 2015 | |
Convertible note
payable for $78,750 to LG Capital Funding, LLC (“LG Capital”) dated January 16, 2015, due January 16, 2016,
of which $28,750 was repaid by conversion as of September 30, 2015, bearing interest at the rate of 8% per annum. Note
may be converted by LG Capital into shares of our common stock at a conversion price equal to a 40% discount of the lowest
closing bid price for 20 prior trading days including the notice of conversion date. (1)(2) | |
$ | 50,000 | |
| |
| | |
Convertible note payable
for $66,000 to JSJ Investments Inc. (“JSJ”) dated January 26, 2015, due January 26, 2016, of which $57,495 was
repaid by conversion as of September 30, 2015. The note was issued with an original issue discount of $6,000 and bears interest
at 10% per annum. The note may be converted by JSJ into shares of our common stock at a conversion price equal to the lower
of (i) a 40% discount of the lowest trading price during the previous twenty (20) trading days prior to the date of conversion;
or (ii) a 40% discount to the lowest trading price during the previous twenty (20) trading days before the date that the note
was executed. (1)(2) | |
| 8,505 | |
| |
| | |
Convertible note payable
for $35,000 to Adar Bays, LLC (“Adar Bays”) dated January 26, 2015, due January 26, 2016, of which $22,250 was
repaid by conversion as of September 30, 2015, bearing interest at the rate of 8% per annum. The note may be converted by
Adar Bays into shares of our common stock at a conversion price equal to a 40% discount of the lowest closing bid price for
20 prior trading days including the notice of conversion date. (1)(2) | |
| 12,750 | |
| |
| | |
Convertible note payable for
$250,000 to JMJ Financial (“JMJ”) of which $82,500 was deemed funded on January 28, 2015 and $27,500 was deemed
funded on April 20, 2015, of which $40,930 was repaid by conversion as of September 30, 2015. The note was issued with an
original issue discount of 10% of amounts funded. The principal amount matures 24 months from the date of each funding, has
a one-time 12% interest charge as it was not repaid within 90 days of the effective date, and is convertible at any time at
the option of JMJ into shares of our common stock at the lesser of $0.075 per share or 60% of the average of the trade price
in the 25 trading days prior to conversion. JMJ has the option to finance additional amounts up to the balance of the $250,000
during the term of the note. (1)(2)(3)
| |
| 69,070 | |
| |
| | |
Convertible note payable for
$250,000 to Vista Capital Investments, LLC (“Vista”) of which $55,000 was deemed funded on February 9, 2015 and
including an additional $10,000, which became due in the three-months ended September 30, 2015 as a result of the conversion
price dropping below $0.01, and of which $35,265 was repaid by conversion as of September 30, 2015. The note was
issued with an original issue discount of $5,000. The note matures 24 months from the date funded, has a one-time 12% interest
charge as it was not repaid within 90 days following the issuance date and may be convertible at the option of Vista at any
time after the issuance date into shares of our common stock at the lesser of $0.10 per share or 60% of the lowest trade occurring
during the twenty five (25) consecutive trading days immediately preceding the applicable conversion date on which the holder
elects to convert all or part of the note, subject to adjustment. Vista has the option to finance additional amounts, up to
the balance of the $250,000, during the term of the note. (1)(2)(3) | |
| 29,735 | |
| |
| | |
Convertible note payable for
$115,000 to KBM Worldwide, Inc. (“KBM”) dated February 17, 2015, due February 17, 2016, of which $105,670 was
repaid by conversion as of September 30, 2015. The note was issued with an original issue discount of $11,000 and bears interest
at 8% per annum. The note is convertible at a price per share equal to 61% of the average of the lowest three trading prices
of our common stock during the 10 trading days prior to conversion. If, at any time the note is outstanding, we issue or sell,
or are deemed to have issued or sold, any shares of our common stock in connection with a subsequent placement for no consideration
or for a consideration per share based on a variable price formula that is less than the conversion price in effect on the
date of such issuance of shares of our common stock, then the conversion price will be reduced to the amount of the consideration
per share received for such issuance.(1) (2) (4)
| |
| 9,330 | |
| |
| | |
Convertible note payable for
$68,000 to EMA Financial, LLC (“EMA”) dated February 19, 2015, due February 19, 2016, of which $22,819 was repaid
by conversion as of September 30, 2015. The note was issued with an original issue discount of $6,800 and bears interest at
10% per annum. The note is convertible into shares of our common stock at a price per share equal to the lower of either
(i) the closing sale price of our common stock on the day prior to the closing date, and (ii) 60% of the lowest trade price
of our common stock during the twenty five (25) consecutive trading days prior to conversion.(1)(2) | |
| 45,181 | |
| |
| | |
Convertible note payable
for $220,000 to Tangiers Investment Group, LLC (“Tangiers”) of which $82,500 was deemed funded on March 10, 2015,
due March 8, 2016, of which $45,000 was repaid by conversion as of September 30, 2015. The note was issued an original issue
discount of 10% of amounts funded and bears interest at the rate of 10% per annum. The note is convertible at any time into
our common stock, at Tangiers's option, at a conversion price equal to the lower of $0.04 or 60% of the lowest trading price
of our common stock during the twenty consecutive trading days prior to the date on which Tangiers elects conversion. Tangiers
has the option to finance additional amounts, up to the balance of the $220,000, during the term of the note. (1) (2) | |
| 37,500 | |
| |
| | |
Convertible note payable for
$50,000 to Vis Vires Group Inc. (“Vis Vires”) dated April 3, 2016 bearing interest at 8% per annum, due April
2, 2016. The note is convertible at a price per share equal to 60% of the average of the lowest trading price of our
common stock during the 20 trading days prior to conversion.(1) (2) (4) | |
| 50,000 | |
| |
| | |
Total convertible
notes payable with embedded derivative liability | |
$ | 312,071 | |
| (1) | Note contains certain representations, warranties, covenants and events of default, and increases
in the amount of the principal and interest rate under the note in the event of such defaults. |
| (2) | The embedded derivative liability associated with the conversion option of the note was bifurcated
from the note and recorded at its fair value on the date of issuance and at each reporting date. |
| (3) | We have classified this note as current due to our expectation to convert the note on a current
basis. |
| (4) | Note was fully repaid in cash on October 1, 2015 in connection with a factoring agreement as more
fully discussed in Note 16 – Subsequent Events. |
As a result of recent declines in the fair value of the Company’s
common stock, the Company does not currently have sufficient authorized shares to satisfy in full its obligations under several
of these convertible notes payable. Accordingly, certain of the note holders have the right to accelerate the payment due under
the terms of their note. In addition, they have the right to require that additional shares and/or monies be paid in connection
with this technical default. At September 30, 2015, the Company has accrued $31,346 of penalty interest associated with one of
these notes. The Company intends to request shareholder approval to increase the number of authorized shares of common stock in
the near future in order to satisfy its obligations under these notes.
The total estimated fair value of the embedded derivative
liability associated with the conversion options of these convertible notes payable at inception was $1,287,307 of which $613,950
was discounted against the notes and was accreted as interest expense over the period from inception to September 30, 2015 and
$673,357 was recorded as interest expense upon issuance. See Note 7, Fair Value Measurements, for a discussion of the changes
in the fair value of the embedded derivative liability during the nine months ended September 30, 2015.
Convertible Notes Payable to Related Parties
Convertible notes payable to related parties at December
31, 2014 consist of the following:
| |
September 30, 2015 | | |
December 31, 2014 | |
Convertible note payable to an entity controlled by our Chairman and Chief Executive Officer (“CEO”), bore interest at 8% per annum, due December 8, 2016. After June 6, 2015, at the option of the holder, principal plus accrued interest was convertible into shares of our common stock at $0.09 per share. The note was fully repaid in cash during the nine months ended September 30, 2015 | |
$ | -- | | |
$ | 37,500 | |
Convertible note payable to our former Chief Financial Officer (“CFO”), bore interest at 8% per annum, due December 8, 2016. After June 6, 2015, at the option of the holder, principal plus accrued interest was convertible into shares of our common stock at $0.09 per share. The note was fully repaid in cash during the nine months ended September 30, 2015.(1) | |
| -- | | |
| 31,500 | |
| |
| -- | | |
| 69,000 | |
Add: Accrued interest | |
| -- | | |
| 363 | |
Less: Unamortized debt discount | |
| -- | | |
| (28,656 | ) |
Convertible notes payable to related parties | |
$ | -- | | |
$ | 40,707 | |
The 8% convertible notes payable to related parties
was convertible into common stock at the rate of $0.09 per share. The Company determined that the conversion feature was considered
a beneficial conversion feature and determined its value to be $30,667 as of December 8, 2014, which the Company recorded as a
debt discount to the notes. As a result of the repayment of the notes in nine months ended September 30, 2015, $22,170 of the unamortized
debt discount was recorded as a loss on extinguishment of debt in the nine months ended September 30, 2015.
| (1) | Our former CFO retired effective April 10, 2015. |
Other Note Payable
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; no payments remain owing on the note as of September 30, 2015. In January 2015, we entered into a second premium finance
agreement bearing interest at 9.25% with 10 equal monthly payments of principal and interest of $3,414, of which three payments
remain owing as of September 30, 2015. In August 2015, we entered into an additional insurance premium finance agreement bearing
interest at 5.1% with 10 equal monthly payments of principal and interest of $10,507, of which nine payments remain owing as of
September 30, 2015.
Interest Expense
We recorded interest expense of $208,636 and $3,811
during the three months ended September 30, 2015 and 2014, respectively, including $165,011 and $nil of non-cash interest expense,
respectively. We recorded interest expense of $1,377,436 and $12,992 during the nine months ended September 30, 2015 and 2014,
respectively, including $1,290,166 and $8,333 of non-cash interest expense, respectively. Given the significant amount of non-cash
interest expense associated with the amortization of debt discount and the embedded derivative conversion option fair value of
the convertible notes payable, the weighted average effective interest rate for the three and nine months ended September 30, 2015
was not a meaningful number.
Note 7 – Fair Value Measurements
Fair value is the price that
would be received upon sale of an asset or paid to transfer a liability in an orderly transaction between market participants at
the measurement date. The following fair value hierarchy is used in selecting inputs, with the highest priority given to Level
1, as these are the most transparent or reliable:
Level 1 – Quoted prices
for identical instruments in active markets.
Level 2 – Quoted prices
for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and
model-derived valuations in which all significant inputs are observable directly or indirectly.
Level 3 – Valuations
derived from valuation techniques in which one or more significant inputs are unobservable.
We had no Level 1, Level 2 or Level 3 assets at September
30, 2015 and December 31, 2014 and no Level 1 or Level 2 liabilities at September 30, 2015 and December 31, 2014. The following
table sets forth our Level 3 liabilities measured at fair value, whether recurring or non-recurring, at September 30, 2015 and
December 31, 2014.
| |
September 30, 2015 | | |
December 31, 2014 | |
Liabilities: | |
| | |
| |
Recurring: Embedded derivative liabilities of convertible notes | |
$ | 600,327 | | |
$ | -- | |
Recurring: Contingent Consideration | |
$ | 555,653 | | |
$ | 648,615 | |
The following is a summary of activity of Level 3 liabilities for the nine
months ended September 30, 2015:
| |
Embedded Derivative Liabilities of Convertible Notes | | |
Contingent Consideration | |
| |
| | |
| |
Balance at December 31, 2014 | |
$ | — | | |
$ | 648,615 | |
Initial fair value of embedded derivative liabilities of convertible notes payable issued during the six month | |
| 1,287,307 | | |
| — | |
Change in fair value during the nine months | |
| (686,980 | ) | |
| (92,962 | ) |
| |
| | | |
| | |
Balance at September 30, 2015 | |
$ | 600,327 | | |
$ | 555,653 | |
Embedded Derivative Liabilities of Convertible Notes
The initial fair value of the bifurcated embedded derivative
liabilities of convertible notes was estimated using the Black Scholes Merton (“BSM”) pricing model with the following
weighted-average inputs: risk free interest rate – 0.08%; expected life -.49 years: volatility - 339%; dividend rate –
0%. At September 30, 2015, the fair value of the bifurcated embedded derivative liabilities of convertible notes was estimated
using the BSM pricing model with the following weighted-average inputs: risk free interest rate – 0.01%; term - .25 years;
volatility - 201%; dividend rate – 0%.
Contingent Consideration
ASC Topic 805 requires that contingent consideration
be recognized at fair value on the acquisition date and be re-measured each reporting period with subsequent adjustments recognized
in the consolidated statement of operations. We estimate the fair value of contingent consideration liabilities based on financial
projections of the acquired companies and estimated probabilities of achievement and discount the liabilities to present value
using a weighted-average cost of capital. Contingent consideration is valued using significant inputs that are not observable in
the market which are defined as Level 3 inputs pursuant to fair value measurement accounting. We believe our estimates and assumptions
are reasonable, however, there is significant judgment involved. At each reporting date, the contingent consideration obligation
is revalued to its estimated fair value, and changes in fair value subsequent to the acquisitions are reflected in income or expense
in the consolidated statements of operations, and could cause a material impact to, and volatility in, our operating results. Changes
in the fair value of contingent consideration obligations may result from changes in discount periods, changes in the timing and
amount of revenue and/or earnings estimates and changes in probability assumptions with respect to the likelihood of achieving
the various earn-out criteria.
As of September 30, 2015 and December 31, 2014,
contingent consideration included in liabilities on the consolidated balance sheet totaled $555,653 and $648,615, respectively.
The reduction in the value of contingent consideration of $92,262 during the nine month ended September 30, 2015 was due in part
to the lack of revenue from sales of NACSV’s products during the first quarter of 2015, our current expectations regarding
future revenue and earnings estimates associated with NACSV as well as the reversal of a liability to NACSV of $190,240 related
to equipment held by NACSV and that we believe we no longer owe. We have filed legal proceedings against the sellers of NACSV as
more fully discussed in Note 8 – Commitments and Contingencies.
Carrying Value of Other Current Assets and Other Current Liabilities
The Company’s management considers the carrying
values of other current assets and other current liabilities to approximate fair values primarily due to their short-term nature.
Note 8 – Commitments and Contingencies
Legal Proceedings
Dekle, et. al. v. Global Digital Solutions, Inc.
et. al.
Brian A. Dekle and John Ramsay filed suit against the
Company and its wholly owned subsidiary, North American Custom Specialty Vehicles, Inc. (“NACSV”), in the Circuit Court
of Baldwin Alabama, on January 14, 2015, case no. 05-CV-2015-9000050.00, relating to our acquisition of NACSV (the ''Dekle Action").
Prior to instituting the Dekle Action, in June 2014, the Company had entered into an equity purchase agreement with Dekle and Ramsay
to purchase their membership interest in North American Custom Specialty Vehicles, LLC. The Dekle Action originally sought payment
for $300,000 in post-closing consideration Dekle and Ramsay allege they are owed pursuant to the equity purchase agreement.
On February 9,
2015, the Company and NACSV removed the Dekle Action to federal court in the United States District Court in and for the
Southern District of Alabama, case no. 1:15-CV-00069. The Company and NACSV subsequently moved to dismiss the complaint for (1)
failing to state a cause of action, and (2) lack of personal jurisdiction. Alternatively, the Company and NACSV sought a transfer
of the case to the United States District Court in and for Middle District of Florida.
In response to the Company’s and NACSV's motion to dismiss, Dekle
and Ramsay filed an amended complaint on March 2, 2015 seeking specific performance and alleging breach of contract, violations
of Security and Exchange Commission (“SEC”) Rule 10b-5, and violations of the Alabama Securities Act. The amended complaint
also names the Company’s Chairman, President, and CEO, Richard J. Sullivan (“Sullivan”), as a defendant. On March
17, 2015, the Company, NACSV and Sullivan filed a motion to dismiss the amended complaint seeking dismissal for failure to state
valid causes of action, for lack of personal jurisdiction, or alternatively to transfer the case to the United States District
Court in and for Middle District of Florida. Dekle and Ramsay’s responded on March 31, 2015, and the Company filed its response
thereto on April 7, 2015.
On June 2, 2015, Dekle passed away. On June 5, 2015, the Court denied
the Company’s motion to transfer the case to Florida. On June 10, 2015, the Company filed a motion to reconsider
the Court’s denial of its motion to transfer the case to Florida. On September 30,
2105, the Court granted the Company’s Renewed Motion to Transfer Venue. The case was transferred to the Middle District of
Florida, where it is currently pending.
On June 15, 2015, Ramsay filed a second amended complaint. On June 25, 2015,
the Company filed a motion to dismiss the second amended complaint. The Company’s Motion to Dismiss was denied.
Global Digital Solutions, Inc. et. al. v. Communications Laboratories,
Inc., et. al.
On January 19, 2015 the Company and NACSV filed suit
against Communications Laboratories, Inc., ComLabs Global, LLC, Roland Lussier, Brian Dekle, John Ramsay and Wallace Bailey for
conversion and breach of contract in a dispute over the payment of a $300,000 account receivable that ComLabs owed to NACSV but
sent payment directly to Brian Dekle. The case was filed in the Eighteenth Judicial Circuit in and for Brevard County Florida,
case no. 05-2015-CA-012250-XXXX. On February 18, 2015 (i) defendants Communications Laboratories, Inc., ComLabs Global, LLC and
Roland Lussier and (ii) defendant Wallace Bailey filed their respective motions to dismiss seeking, among other things, dismissal
for failure to state valid causes of action, lumping and failure to post a non-resident bond. On February 26, 2015, defendants
Dekle and Ramsay filed their motion to dismiss, or stay action, based on already existing litigation between the parties. NACSV
filed its required bond on March 2, 2015.
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, 2015. At September 30, 2015 and December 31, 2014, no shares of preferred
stock were outstanding.
Common Stock
Effective May 18, 2015, we increased the number of
authorized shares of our common stock from 450,000,000 to 650,000,000 shares. At September 30, 2015, of the 650,000,000 authorized
shares of our common stock, 286,852,244 were issued and outstanding.
OTCQB Compliance
Pursuant to
a letter dated September 28, 2015 from the OTC Markets, the Company was advised that its bid price had closed below $0.01 for
more than 30 consecutive calendar days and, therefore, no longer meets the Standards for Continued Eligibility for the OTCQB marketplace
as per the OTCQB Standards, section 2.3(2). Pursuant to these OTCQB Standards, the company has been granted a period of 180 calendar
days in which to regain compliance with Section 2.3(2). This grace period expires March 26, 2016 and at that time if the Company’s
bid price has not closed at or above $0.01 for any ten consecutive trading days then the Company’s common stock will be
removed from the OTCQB.
Common Stock Issued for Services
During the
nine-month period ended September 30, 2015, we granted 1,500,000 restricted shares of our common stock valued at $60,000 to two
advisors. These restricted shares vested over an 85 day period and were fully vested at September 30, 2015. During the nine months
ended September 30, 2015, 812,500 shares of restricted common stock granted during the year ended December 31, 2014, vested and
the Company recorded $302,288 for advisory services, representing the value of the shares vested. During the nine months ended
September 30, 2015, we recorded $38,808 of advisory services expense related to 1 million restricted stock units granted during
the year ended December 31, 2014, and vesting over a three-year period commencing on January 1, 2015. In addition, 250,000 restricted
common shares granted during the year ended December 31, 2014, vested and the Company recorded $75,000 as investor relations fees.
During the nine months ended September 30, 2015, the Company issued 362,926 shares of restricted common stock for services related
to debt financing and recorded $21,558 as debt issue fees and the Company vested 75,000 shares of restricted common stock for
legal fees valued at $7,498.
Common Stock Issued for Debt Conversions
During the nine-month
period ended September 30, 2015, the Company issued 175,559,966 shares of its common stock upon conversion of $349,497 of principal
and accrued interest under the terms of convertible notes payable. At September 30, 2015, the shares issuable under the remaining
principal and accrued interest associated with these notes payable, if they had been fully converted on that date (excluding two
of the notes payable, which were repaid in cash on October 1, 2015 as more fully discussed in Note 16 - Subsequent Events),
would have resulted in the issuance of approximately 424,336,540 additional shares of the Company’s common stock. Because
the conversion prices vary with changes in the value of the Company’s common stock, the number of shares into which the
notes and accrued interest are convertible will continue to vary. As a result of recent declines in the fair value of the Company’s
common stock, the Company does not currently have sufficient authorized shares to satisfy in full its obligations under several
of the notes payable as more fully discussed in Note 6 – Notes Payable.
Common Stock Warrants
We have issued warrants, which are fully vested and
available for exercise, as follows:
Class of Warrant | | |
Issued in connection with or for | |
Number Outstanding | | |
Exercise Price | | |
Date of Issue | | |
Date Vest | |
Date of Expiration | |
| A-1 | | |
Debt | |
| 1,750,000 | | |
$ | 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 | |
| Total | | |
| |
| 4,250,000 | | |
| | | |
| | | |
| |
| | |
As of December 31, 2014 the fair value of warrants
had been fully amortized. All such warrants are exercisable at any time through the date of expiration. All related agreements
provide for the number of shares to be adjusted in the event of a stock split, a reverse stock split, a share exchange or other
conversion or exchange event in which case the number of warrants and the exercise price of the warrants shall be adjusted on a
proportional basis.
The intrinsic value of warrants outstanding at September
30, 2015 was $0. 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.
We determined the value of warrants issued using the
BSM valuation model as follows:
Warrant | | |
Fair Value | | |
Dividend Yield | | |
Volatility | | |
Contractual Lives (Yrs.) | | |
Risk-Free Rate | |
| A-1 | | |
$ | 210,000 | | |
| 0.00 | % | |
| 593.00 | % | |
| 2.0 | | |
| 1.58 | % |
| A-2 | | |
$ | 300,000 | | |
| 0.00 | % | |
| 593.00 | % | |
| 5.0 | | |
| 0.84 | % |
| A-3 | | |
$ | 250,000 | | |
| 0.00 | % | |
| 598.12 | % | |
| 5.0 | | |
| 1.20 | % |
| A-4 | | |
$ | 800,000 | | |
| 0.00 | % | |
| 647.97 | % | |
| 3.0 | | |
| 0.64 | % |
The expected life represents an estimate of the weighted
average period of time that options are expected to remain outstanding given consideration to vesting schedules and the Company’s
historical exercise patterns. Expected volatility is estimated based on the historical volatility of the Company’s common
stock. The risk free interest rate is estimated based on the U.S. Federal Reserve’s historical data for the maturity of nominal
treasury instruments that corresponds to the expected term of the option. The expected dividend yield is 0% based on the fact that
we have never paid dividends and have no present intention to pay dividends.
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, including options, stock appreciation right, restricted stock, restricted stock units, performance awards,
dividend equivalents, or other stock-based awards. The Plan is intended as an incentive to retain in the employ of the Company
our directors, 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.
In accordance with the ACS 718, Compensation –
Stock Compensation, awards granted are valued at fair value at the grant date. The Company recognizes compensation expense
on a pro rata straight-line basis over the requisite service period for stock-based compensation awards with both graded and cliff
vesting terms. The Company recognizes the cumulative effect of a change in the number of awards expected to vest in compensation
expense in the period of change. The Company has not capitalized any portion of its stock-based compensation.
Stock-based compensation expense for the three and nine months ended September
30, 2015 and 2014 is comprised of the following:
| |
Three Months Ended September 30, | | |
Nine Months Ended September 30, | |
| |
2015 | | |
2014 | | |
2015 | | |
2014 | |
| |
| | |
| | |
| | |
| |
Fair value expense of stock option grants | |
$ | 101,445 | | |
$ | 1,068,575 | | |
$ | 201,668 | | |
$ | 3,521,905 | |
Fair value expense of restricted stock unit grants | |
| 12,936 | | |
| 549,999 | | |
| 38,808 | | |
| 549,999 | |
Fair value expense of restricted stock grants | |
| 57,501 | | |
| 519,372 | | |
| 362,288 | | |
| 2,587,951 | |
| |
$ | 171,882 | | |
$ | 2,137,946 | | |
$ | 602,764 | | |
$ | 6,659,855 | |
Awards Issued Under Stock Incentive Plans
Stock Option Activity
As of September 30, 2015, we have outstanding 4,000,000
fully-vested stock options that were granted to a director and officer. These options were fully vested as of December 31, 2014.
In addition, we have unvested stock options that were granted to directors, employees and constants during the nine month ended
September 30, 2015. The outstanding stock options are exercisable at prices ranging from $0.08 to $0.64 and expire between February
2024 and May 2025.
Issuances of Stock Options
Effective as of April 10, 2015, David A. Loppert retired
as CFO and as an officer of the Company and the Company appointed Jerome J. Gomolski as its CFO. In connection with his appointment
as our CFO, on April 1, 2015, Mr. Gomolski was granted stock options to acquire 500,000 shares of the Company’s common stock
pursuant to the Plan. The options have an exercise price of $0.10 per share, vest one-third on each of October, 1 2015, April 1,
2016 and October 1, 2016 and expire on March 31, 2025.
In addition to the stock options granted to Mr. Gomolski,
our CFO, discussed above, subsequent to March 31, 2015, we have granted stock options under the Plan to consultants, members of
our board of directors and employees. On April 1, 2015, we granted stock options to acquire 300,000 shares of our common stock
to each of two consultants. The options have an exercise price of $0.10 per share, vest one-third on each of October 1, 2015, April
1, 2016 and October 1, 2016 and expire on March 31, 2025. On April 20, 2015, we granted stock options to acquire 500,000 shares
of our common stock to each of three board members. The options have an exercise price of $0.14 per share, vest one-third on each
of October 1, 2015, April 1, 2016 and October 1, 2016 and expire on March 31, 2025. Additionally, on May 8, 2015, we granted stock
options to acquire an aggregate of 300,000 shares of our common stock to four employees. The options have an exercise price of
$0.08 per share, vested ratably over a three-year period and expire ten years from the date of grant.
A summary of the stock option activity for our stock
options plans for nine months ended September 30, 2015 is as follows:
| |
Weighted Number of Options | | |
Weighted Average Exercise Price Per Share | | |
Average Remaining Contractual Term | | |
Aggregate Intrinsic Value | |
Outstanding at December 31, 2014 | |
| 5,840,000 | | |
$ | 0.61 | | |
| 9.3 | | |
| -- | |
Options granted | |
| 2,900,000 | | |
| 0.12 | | |
| 9.8 | | |
$ | -- | |
Options exercised | |
| - | | |
| -- | | |
| -- | | |
| -- | |
Options forfeited | |
| (1,840,000 | ) | |
| (0.54 | ) | |
| -- | | |
| -- | |
Outstanding at September 30, 2015 | |
| 6,900,000 | | |
$ | 0.42 | | |
| 9.1 | | |
$ | -- | |
Exercisable at September 30, 2015 | |
| 4,000,000 | | |
$ | 0.64 | | |
| 8.7 | | |
$ | -- | |
We account for our stock-based compensation plans in
accordance with ASC 718-10. Under the provisions of ASC 718-10, the fair value of each stock option is estimated on the date of
grant using a BSM option-pricing formula, and amortizing that value to expense over the expected performance or service periods
using the straight-line attribution method. The fair value of the stock options issued during the nine months ended September 30,
2015 was estimated using the BSM pricing model with the following weighted-average inputs: risk free interest rate – 1.3%;
expected life -5.17 years: volatility – 446.6%; dividend rate – 0%.
During the three months ended September 30, 2015 and
2014, we recorded stock-based compensation cost related to outstanding stock options of $101,445 and $1,068,575, respectively,
and during the nine months ended September 30, 2015 and 2014, we recorded stock-based compensation cost related to the outstanding
stock options of $201,668 and $3,521,905, respectively. At September 30, 2015, the unamortized value of the outstanding stock options
was $142,331. The intrinsic value of options outstanding at September 30, 2015 was $0. 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 option multiplied by the number of options outstanding.
During the nine months ended September 30, 2015, 340,000
stock options that had not yet vested were forfeited and 1,500,000 vested stock options granted to Mr. Loppert, our former CFO,
were forfeited by their terms.
Restricted Stock Units
In August 2014 we granted Stephen L. Norris, then Chairman
and CEO of our wholly owned subsidiary, GDSI International, restricted stock units (“RSU’s”) convertible into
12 million shares of the Company’s common stock, with a grant date fair market value of $3,600,000 as of July 1, 2014, the
effective grant date. The grant was made under our 2014 Equity Incentive Plan. 4,000,000 RSU’s would vest in respect of each
fiscal year of GDSI International from 2015 through 2017 if the company has achieved certain revenue targets set forth in the agreement.
Effective January 9, 2015, Mr. Norris resigned and forfeited all rights in and to his RSU’s.
On October 10, 2014 we granted an employee RSU’s
convertible into 1 million shares of the Company’s common stock, with a grant date fair market value of $100,000. The grant
was made under our 2014 Equity Incentive Plan. 333,333 RSU’s will vest in respect of each calendar year (commencing January
1 and ending December 31) of the Company from 2015 through 2017 if the company has achieved at least 90% of the total revenue and
EBITDA midpoint targets set forth in the agreement. If less than 90% of the target is achieved in respect of any such fiscal
year, then the number of RSU’s vesting for that fiscal year shall be 333,333 times the applicable percentage set forth in
the agreement; provided that, if the company shall exceed 100% of the revenue and EBITDA midpoint target for the 2016 or
2017 calendar year, and shall have failed to reach 90% of the target for a prior calendar year, the excess over 100% shall be applied
to reduce the deficiency in the prior year(s), and an additional number of RSU’s shall vest to reflect the increased revenue
for such prior calendar year. Any such excess shall be applied first to reduce any deficiency for the 2015 calendar year
and then for the 2016 calendar year. The vesting of the RSU’s shall be effective upon the issuance of the audited financial
statements of the Company for the applicable calendar year, and shall be based upon the total revenue and EBITDA of the acquired
companies as reflected in such financial statements.
A summary of RSU’s outstanding as of September
30, 2015 and changes during the nine months then ended is presented below:
| |
Number | | |
Weighted Average Grant Date Fair Value | | |
Aggregate Intrinsic Value | |
Nonvested at December 31, 2014 | |
| - | | |
| - | | |
| - | |
Issued | |
| 13,000,000 | | |
$ | 0.28 | | |
$ | 0.00 | |
Vested | |
| - | | |
| - | | |
| - | |
Forfeited | |
| (12,000,000 | ) | |
| - | | |
| - | |
Nonvested at September 30, 2015 | |
| 1,000,000 | | |
$ | 0.28 | | |
$ | 0.00 | |
On January 9, 2015, as noted above, the recipient of 12 million RSU’s resigned from the Board of
Directors and as an officer of the Company, and consequently forfeited his 12 million RSU’s. As of December 31, 2014, after
taking into account the forfeited 12 million RSU’s, there was $56,073 of total unrecognized stock-based compensation expense
related to 1 million unvested RSU’s that will be recognized on a straight-line basis over the performance periods of the
award through December 2017, of which $12,936 and $38,808 was recognized as expense during the three and nine months ended September
30, 2015, respectively. The aggregate intrinsic value of non-vested RSU’s was nil at September 30, 2015.
Awards Not Issued Under Stock Incentive Plans
Restricted Stock Grants Awarded to Advisors
In order to align
our senior advisors with the interest of the stakeholders of the Company, the Board of Directors of the Company has granted the
advisors restricted stock awards valued at $0.04 to $0.64 per share which vest over a period of 12 – 24 months, subject
to remaining an advisor for a minimum of twelve months, and which are forfeited if the advisor is terminated or is no longer an
advisor on the anniversary of the advisory award. Restricted stock awards granted or vested during the nine months ended September
30, 2015 are as follows:
| |
Date of | |
Number of | | |
| |
| |
September 30, 2015 | |
Name | |
Grant | |
Shares | | |
Vest from | |
Vest To | |
Vested | | |
Unvested | | |
Forfeited | |
| |
| |
| | |
| |
| |
| | |
| | |
| |
Edwin J. Wang | |
4/17/13 | |
| 104,166 | | |
2/28/14 | |
1/31/15 | |
| 104,166 | | |
| -- | | |
| -- | |
| |
2/4/14 | |
| 125,000 | | |
2/4/14 | |
1/31/15 | |
| 125,000 | | |
| -- | | |
| -- | |
| |
| |
| | | |
| |
| |
| | | |
| | | |
| | |
Jennifer S. Carroll | |
4/17/13 | |
| 104,167 | | |
2/28/14 | |
1/31/15 | |
| 104,167 | | |
| -- | | |
| -- | |
| |
| |
| | | |
| |
| |
| | | |
| | | |
| | |
Mathew Kelley | |
4/17/13 | |
| 104,167 | | |
2/28/14 | |
1/31/15 | |
| 104,167 | | |
| -- | | |
| -- | |
| |
| |
| | | |
| |
| |
| | | |
| | | |
| | |
Richard J. Feldman | |
4/30/14 | |
| 125,000 | | |
4/30/14 | |
3/30/15 | |
| 125,000 | | |
| -- | | |
| -- | |
| |
| |
| 500,000 | | |
4/1/15 | |
3/31/16 | |
| 250,000 | | |
| 250,000 | | |
| -- | |
| |
| |
| | | |
| |
| |
| | | |
| | | |
| | |
Gary Gray | |
3/7/15 | |
| 1,000,000 | | |
3/7/15 | |
5/30/15 | |
| 1,000,000 | | |
| -- | | |
| -- | |
| |
| |
| | | |
| |
| |
| | | |
| | | |
| | |
Ross Trevino | |
3/7/15 | |
| 500,000 | | |
3/7/15 | |
5/30/15 | |
| 500,000 | | |
| -- | | |
| -- | |
| |
| |
| | | |
| |
| |
| | | |
| | | |
| | |
| |
| |
| 2,562,500 | | |
| |
| |
| 2,312,500 | | |
| 250,000 | | |
| | |
A summary of restricted stock grants outstanding as
of September 30, 2015, and the changes during the nine months then ended is presented below:
| |
Number | | |
Weighted Average Grant Date Fair Value | | |
Aggregate Intrinsic Value | |
Non-vested at December 31, 2014 | |
| 1,062,500 | | |
$ | 0.31 | | |
$ | 0 | |
Granted | |
| 1,500,000 | | |
$ | 0.04 | | |
$ | 15,000 | |
Vested | |
| (2,312,500 | ) | |
$ | 0.16 | | |
$ | 15,000 | |
Forfeited | |
| -- | | |
| -- | | |
| -- | |
Non-vested at September 30, 2015 | |
| 250,000 | | |
$ | 0.46 | | |
$ | 0 | |
We recorded stock-based compensation expense related
to restricted stock grants of $57,501 and $519,372 for the three months ended September 30, 2015 and 2014, respectively, and $362,288
and $2,587,951 for the nine months ended September 30, 2015 and 2014, respectively. As of September 30, 2015 there was $114,998
of total unrecognized stock-based compensation expense related to the unvested restricted stock grants that will be recognized
through March 2016. The aggregate intrinsic value of non-vested restricted stock grants was nil at September 30, 2015.
Note 10 – Income Taxes
We have incurred losses since inception, which have
generated net operating loss carryforwards. At September 30, 2015, we had a federal net operating loss carryforwards of approximately
$3,400,000 that expire beginning in 2025. Current or future ownership changes may limit the future realization of these net operating
losses. While the Company does not believe that the shares issued upon conversions of notes payable during the three months ended
September 30, 2015 resulted in a change of control under Section 382 of the Internal Revenue Code, the Company has entered into
an acquisition agreement as more fully discussed in Note 16 – Subsequent Events, which upon closing will result in
a limitation on the realization of these net operating losses.
Our policy is to record interest and penalties associated
with unrecognized tax benefits as additional income taxes in the consolidated statements of operations. As of January 1, 2014,
we had no unrecognized tax benefits, or any tax related interest or penalties. There were no changes in our unrecognized tax benefits
during the nine months ended September 30, 2015 and 2014 and we did not recognize any interest or penalties during these periods
related to unrecognized tax benefits.
Section 382 of the Internal Revenue Code generally
imposes an annual limitation on the amount of net operating loss carryforwards that may be used to offset taxable income when a
corporation has undergone significant changes in its stock ownership. There can be no assurance that we will be able to utilize
any net operating loss carryforwards in the future.
We recognize deferred tax assets and liabilities for
both the expected impact of differences between the financial statements and the tax basis of assets and liabilities, and for the
expected future tax benefit to be derived from tax loss carryforwards. We have established a valuation allowance to reflect the
likelihood of realization of deferred tax assets. There is no income tax benefit for the losses for the three and nine months ended
September 30, 2015 and 2014, since management has determined that the realization of the net deferred tax asset is not more likely
than not to be realized and has created a valuation allowance for the entire amount of such benefit.
Note 11 – Loss Per Common Share
Basic and diluted loss per common share for the three
and nine months ended September 30, 2015 and 2014 is calculated based on the weighted average common shares outstanding for the
period. The following table sets forth the computation of basic and diluted income (loss) per common share:
Basic and diluted: | |
Three Months Ended September 30, | | |
Nine Months Ended September 30, | |
| |
2015 | | |
2014 | | |
2015 | | |
2014 | |
| |
| | |
| | |
| | |
| |
Numerator: | |
| | |
| | |
| | |
| |
Loss from continuing operations | |
$ | (935,012 | ) | |
$ | (2,861,325 | ) | |
$ | (2,994,943 | ) | |
$ | (9,088,299 | ) |
Loss from discontinued operations | |
| -- | | |
| -- | | |
| -- | | |
| (2,832 | ) |
Net loss – basic and diluted | |
$ | (935,012 | ) | |
$ | (2,861,325 | ) | |
$ | (2,994,943 | ) | |
$ | (9,091,131 | ) |
| |
| | | |
| | | |
| | | |
| | |
Denominator: | |
| | | |
| | | |
| | | |
| | |
Weighted-average common shares – basic and diluted (1) | |
| 140,365,540 | | |
| 101,707,322 | | |
| 119,425,067 | | |
| 100,468,189 | |
| |
| | | |
| | | |
| | | |
| | |
Loss per common share – basic and diluted | |
| | | |
| | | |
| | | |
| | |
Continuing operations | |
$ | (0.01 | ) | |
$ | (0.03 | ) | |
$ | (0.03 | ) | |
$ | (0.09 | ) |
Discontinued operations | |
| -- | | |
| -- | | |
| -- | | |
| (0.00 | ) |
Total – basic and diluted | |
$ | (0.01 | ) | |
$ | (0.03 | ) | |
$ | (0.03 | ) | |
$ | (0.09 | ) |
(1) The following common stock equivalents
outstanding as of September 30, 2015 and 2014 were not included in the computation of diluted loss per share because the net effect
would have been anti-dilutive:
| |
2015 | | |
2014 | |
Warrants | |
| 4,250,000 | | |
| 4,250,000 | |
Issued but unvested shares issued for services | |
| -- | | |
| 375,000 | |
Shares issuable upon conversion of notes payable and accrued interest | |
| 424,336,540 | | |
| -- | |
Restricted stock and restricted stock units | |
| 1,500,000 | | |
| -- | |
Options | |
| 6,900,000 | | |
| 5,840,000 | |
Total common stock equivalents | |
| 436,986,540 | | |
| 10,465,000 | |
Note 12 – Discontinued Operations
In January 2012, we acquired 51% of Bronco Communications
LLC. We subsequently discontinued the operations of Bronco and disposed of its remaining assets in January 2013 although
we were responsible for contract oversight, which was concluded in June 2014. In accordance with ASC Topic 205, Presentation
of Financial Statements - Discontinued Operation, we have presented the loss from discontinued operations in the consolidated
statement of operations, which loss consisted of general and administrative expenses of $2,832 for the nine months ended September
30, 2014.
Note 13 – 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, a then debtor in possession under
chapter 11 of the Bankruptcy Code once Airtronic successfully reorganized and emerged from bankruptcy (the “Merger”).
During the period from October 2012 through November 2013, we were actively involved in the day to day 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. 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”), 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 within 60 days following
the confirmation date, i.e., on or before December 2, 2013, to obtain the funds necessary to pay its creditors in accordance with
the Plan. Nevertheless, Airtronic refused to close the Merger with the Company on or before December 2, 2013, and as
a result the Plan terminated and the reorganized Airtronic re-vested in the bankruptcy estate of Airtronic as debtor in possession.
On March 31, 2014, Airtronic filed a First Amended
Modified Plan of Reorganization (“First Modified Plan”) which was confirmed on April 28, 2014. On May
14, 2014 Airtronic repaid us 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 $414,760.83 that we were
awarded for legal fees and expenses incurred. Our involvement with Airtronic and its bankruptcy proceedings were then concluded.
Note 14 – Related Party Transactions
Convertible Notes Payable to Related Parties
During the year ended December 31, 2014, we issued
convertible notes payable to an affiliate of our Chairman and CEO, and to our CFO. These notes are further discussed in Note 6
- Notes Payable – Convertible Notes Payable to Related Parties.
Note 15 – Customer concentrations
Accounts receivable, net of allowance, was $306,439
and $302,400, as of September 30, 2015 and December 31, 2014, respectively. Two customers accounted for 100% at September 30,
2015 and one 99.2% of the amount at December 31, 2014. 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 16 – Subsequent Events
Revenue Based Factoring Agreement Dated October 1, 2015
On October 1, 2015, NACSV entered into a Revenue Based Factoring Agreement
(the “Factoring Agreement”) with Power Up Lending Group, Ltd. (“Power Up”). The Factoring Agreement was
guaranteed by the Company under the terms of a Security Agreement and Guaranty.
Under the terms of the Factoring Agreement, NACSV,
as Merchant, agreed to transfer to Power Up in consideration of the purchase price of $59,000, all of the Merchant’s future
receipts, accounts, contract rights and other obligations arising from or relating to the payment of monies from Merchant’s
customers and/or other third party payors (collectively the receipts) at the specified percentage of 24% until such time as a
total of $76,700 is repaid. A specified daily repayment amount of $457 is required to be made to Power Up as a base payment to
be credited against the specified percentage due. The Factoring Agreement shall have an indefinite term that shall last until
all of the Merchant’s obligations to Power Up are fully satisfied. The Company used the purchase price proceeds to satisfy
in full the obligations under the notes payable to KBM and Vis Vires, which are more fully described in Note 6 – Notes
Payable.
The Factoring Agreement contains certain protections against default, including
prohibiting NACSV from changing its arrangement with its bank in any way that is adverse to Power Up and NACSV interrupting the
operation of its business, among others. Events of default include: (i) the violation of any term or covenant under the agreement,
(ii) the failure of NACSV to pay its debts when due and (iii) the transfer or sale of all or substantially all of NACSV’s
asset, amount others.
Share Purchase and Sale Agreement to Acquire Grupo Rontan Electro Metalurgica,
S. A.
Effective October 13, 2015, the Company (as “Purchaser”) entered
into a Share Purchase and Sale Agreement (the “SPSA”) dated October 8, 2015 with Joao Alberto Bolzan and Jose Carlos
Bolzan, both Brazilian residents (collectively, the “Sellers”) and Grupo Rontan Electro Metalurgica, S.A., a limited
liability company duly organized and existing under the laws of Federative Republic of Brazil (“Rontan”) (collectively,
the “Parties”), pursuant to which the Sellers agreed to sell 100% of the issued and outstanding shares of Rontan to
the Purchaser on the closing date.
Rontan is engaged in the manufacture and distribution of specialty vehicles
and acoustic/visual signaling equipment for the industrial and automotive markets.
The purchase price shall consist of a cash amount, a stock amount and an
earn-out amount as follows: (i) Brazilian Real (“R”) $100 million (approximately US$26 million) to be paid by the Purchaser
in equal monthly installments over a period of forty eight (48) months following the closing date; (ii) an aggregate of R$100 million
(approximately US$26 million) in shares of the Purchaser’s common stock, valued at US$1.00 per share; and (iii) an earn-out
payable within ten business days following receipt by the Purchaser of Rontan’s audited financial statements for the 12-months
ended December 31, 2017, 2018 and 2019. The earn-out shall be equal to the product of (i) Rontan’s earnings before interest,
taxes, depreciation and amortization (“EBITDA”) for the last 12 months, and (ii) twenty percent and is contingent upon
Rontan’s EBITDA results for any earn-out period being at least 125% of Rontan’s EBITDA for the 12-months ended December
31, 2015. It is the intention of the parties that the stock amount will be used by Rontan to repay institutional debt outstanding
as of the closing date.
Specific Conditions to Closing
Specific conditions to closing consist of:
|
a.) |
Purchaser’s receipt of written limited assurance of an unqualified opinion with respect to Rontan’s audited financial statements for the years ended December 31, 2013 and 2014 (the “Opinion”); |
|
b.) |
The commitment of sufficient investment by General American Capital Partners LLC (the “Institutional Investor”), in the Purchaser following receipt of the Opinion; |
|
c.) |
The accuracy of each Parties’ representations and warranties contained in the SPSA; |
|
d.) |
The continued operation of Rontan’s business in the ordinary course; |
|
e.) |
The maintenance of all of Rontan’s bank credit lines in the maximum amount of R$200 million (approximately US$52 million) under the same terms and conditions originally agreed with any such financial institutions, and the maintenance of all other types of funding arrangements. As of the date of the SPSA, Rontan’s financial institution debt consists of not more than R$200 million (approximately US$52 million), trade debt of not more than R$50 million (approximately US$13 million) and other fiscal contingencies of not more that R$95 million (approximately US$24.7 million); |
|
f.) |
Rontan shall enter into employment or consulting service agreements with key employees and advisors identified by the Purchaser, including Rontan’s Chief Executive Officer; and |
|
g.) |
The Sellers continued guarantee of Rontan’s bank debt for a period of 90 days following issuance of the Opinion, among other items. |
The Institutional Investor has committed
to invest sufficient capital to facilitate the transaction, subject to receipt of the Opinion, among other conditions.
Subject to satisfaction or waiver of the conditions
precedent provided for in the SPSA, the closing date of the transaction shall take place within 10 business days from the date
of issuance of the Opinion.
Revenue Based Factoring Agreement Dated October 23, 2015
On October 23, 2015, NACSV entered into a Revenue Based Factoring Agreement
(the “Second Factoring Agreement”) with Power Up Lending Group, Ltd. (“Power Up”). The Second Factoring
Agreement was guaranteed by the Company under the terms of a Security Agreement and Guaranty.
Under the terms of the Second Factoring Agreement, NACSV, as Merchant, agreed
to transfer to Power Up in consideration of the purchase price of $50,000, all of the Merchant’s future receipts, accounts,
contract rights and other obligations arising from or relating to the payment of monies from Merchant’s customers and/or
other third party payors (collectively the receipts) at the specified percentage of 24% until such time as a total of $69,000 is
repaid. A specified daily repayment amount of $548 is required to be made to Power Up as a base payment to be credited against
the specified percentage due. The Second Factoring Agreement shall have an indefinite term that shall last until all of the Merchant’s
obligations to Power Up are fully satisfied. The Company used the purchase price proceeds to fund operations.
The Second Factoring Agreement contains certain protections against default,
including prohibiting NACSV from changing its arrangement with its bank in any way that is adverse to Power Up and NACSV interrupting
the operation of its business, among others. Events of default include: (i) the violation of any term or covenant under the agreement,
(ii) the failure of NACSV to pay its debts when due and (iii) the transfer or sale of all or substantially all of NACSV’s
asset, amount others.
Item 2. |
Management’s Discussion and Analysis of Financial Condition and Results of Operations |
Share Purchase and Sale Agreement to Acquire Grupo Rontan Electro
Metalurgica, S. A.
As more fully discussed in Note 16 to the
accompanying unaudited consolidated financial statements, we have entered into a Security Purchase and Sale Agreement effective
October 13, 2015 the ”SPSA”), under which we have agreed to acquire Grupo Rontan Electro Metalurgica, S.A., a limited
liability company duly organized and existing under the laws of Federative Republic of Brazil (“Rontan”). There are
specific conditions to closing, which are more fully discussed in Note16, including the commitment of sufficient investment by
General American Capital Partners LLC, the institutional investor, in the Company. We anticipate closing the transaction during
the fourth quarter of 2015.
This quarterly report contains “forward-looking
statements” within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange
Act of 1934, as amended. These statements concern expectations, beliefs, projections, future plans and strategies, anticipated
events or trends and similar expressions concerning matters that are not historical facts.
This quarterly report contains forward-looking
that reflect our current estimates, expectations and projections about our future results, performance, prospects and opportunities,
including the purchase of Rontan. Forward-looking statements include, without limitation, statements about our market opportunities,
our business and growth strategies, our projected revenue and expense levels, possible future consolidated results of operations,
the adequacy of our available cash resources, our financing plans, our ability to pay dividends, our competitive position and the
effects of competition and the projected growth of the industries in which we intend to operate. Forward-looking statements are
only predictions based on our current expectations and projections about future events and involve risks and uncertainties.
Although we believe that the expectations reflected
in the forward-looking statements contained in this quarterly report are based upon reasonable assumptions, no assurance can be
given that such expectations will be attained or that any deviations will not be material. In light of these risks, uncertainties
and assumptions, the forward-looking statements, events and circumstances discussed in this quarterly report may not occur and
actual results could differ materially and adversely from those anticipated or implied in the forward-looking statements. Important
factors that could cause our actual results, level of performance or achievements to differ materially from those expressed or
forecasted in, or implied by, the forward-looking statements we make in this quarterly report and those discussed in the 2014 Form
10-K include:
|
● |
our ability to fund our operations and continue as a going concern; |
|
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|
● |
our ability to have excess cash available for future actions; |
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● |
our ability or inability to implement our business plan, including the completion of acquisitions of companies under letters of intent and the SPSA in connection with the acquisition of Rontan; |
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● |
anticipated trends in our business and demographics; |
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● |
relationships with and dependence on technological partners; |
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● |
our future profitability and liquidity and the impact of potential future acquisitions on our financial condition, results of operations and cash flows; |
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● |
our ability to preserve our intellectual property and trade secrets and operate without infringing on the proprietary rights of third parties; |
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● |
regulatory, competitive or other economic influences; |
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● |
our operational strategies including, without limitation, our ability to develop or diversify into new businesses; |
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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; |
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● |
our ability to comply with current the terms of existing convertible notes payable; |
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● |
our ability to comply with current and future regulations relating to our businesses; |
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● |
the impact of new accounting pronouncements; |
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● |
our ability to establish and maintain proper and effective internal accounting and financial controls; and |
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● |
the potential of further dilution to our common stock based on transactions, including convertible debt, effected involving issuance of shares. |
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 the 2014 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, 2015, 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 consolidated financial
statements and related notes included in Item 1 of this quarterly report as well as our annual financial statements for the
year ended December 31, 2014 included in the 2014 Form 10-K.
Results of Continuing Operations
On June 16, 2014, we acquired all of the outstanding
membership interest of North American Custom Specialty Vehicles (“NACSV”). NACSV
specializes in building mobile command/communications and specialty vehicles for emergency management, first responders, national
security and law enforcement operations. During the period from October 2012 through November 2013, we were actively involved
in the day to day management of Airtronic USA, Inc. (“Airtronic”) pending the completion of an anticipated merger.
The merger did not occur and we ceased involvement with the Airtronic during 2014.
Three Months Ended September 30, 2015
and 2014
Revenue from continuing operations in the three
months ended September 30, 2015 and 2014 was $254,587 and $94,387, respectively. Cost of revenue in the three months ended September
30, 2015 and 2014 was $278,676 and $180,066, respectively.
Revenue was from fixed-price and modified fixed-price
construction contracts and is recognized using the percentage-of-completion method of revenue recognition. Cost of revenue includes
all direct material and labor costs and indirect costs related to contract performance.
Selling, general and administrative expenses
(“S, G & A”) were $526,369 and $2,771,835 in three-month periods ended September 30, 2015 and 2014, respectively.
S, G & A was comprised of:
| |
Three Months Ended September 30, | | |
Increase/ | | |
% | |
| |
2015 | | |
2014 | | |
(decrease) | | |
Change | |
Compensation and benefits | |
$ | 222,741 | | |
$ | 2,347,881 | | |
$ | (2,125,140 | ) | |
| (90.5 | )% |
Advertising | |
| 2,722 | | |
| 49,801 | | |
| (47,079 | ) | |
| (94.5 | )% |
Debt issuance costs | |
| 28,693 | | |
| -- | | |
| 28,693 | | |
| 100.0 | % |
Depreciation and amortization | |
| 321 | | |
| 76,202 | | |
| (75,881 | ) | |
| (99.6 | )% |
Facility expense | |
| 35,115 | | |
| 26,487 | | |
| 8,628 | | |
| 32.6 | % |
Investor relations and marketing | |
| 37,998 | | |
| 372,644 | | |
| (334,646 | ) | |
| (89.8 | )% |
Office support and supply | |
| 30,126 | | |
| 100,770 | | |
| (70,644 | ) | |
| (70.1 | )% |
Professional fees | |
| 162,511 | | |
| (226,529 | ) | |
| 389,040 | | |
| 171.7 | % |
Travel and entertainment | |
| 4,691 | | |
| 21,800 | | |
| (17,109 | ) | |
| (78.5 | )% |
Other | |
| 1,451 | | |
| 2,779 | | |
| (1,328 | ) | |
| (47.8 | )% |
Total S, G & A | |
$ | 526,369 | | |
$ | 2,771,835 | | |
$ | (2,245,466 | ) | |
| (81.0 | )% |
Compensation and benefits decreased by $2,125,140,
or 90.5%, to $222,741 in the three months ended September 30, 2015 compared to $2,347,881 in the 2014 period. In the three months
ended September 30, 2015, compensation and benefits was comprised of $171,882 of non-cash stock-based compensation to our CEO and
CFO, board of directors, vice presidents, consultants and advisors and $50,859 of cash compensation to our CEO and CFO, vice presidents
and staff. In the three months ended September 30, 2014, compensation and benefits was comprised of $2,137,946 of non-cash stock-based
compensation to our CEO, CFO, vice presidents and advisors and $209,935 of cash compensation to our CEO and CFO and staff.
Debt issuance costs was $28,693 in three
months ended September 30, 2015. The costs incurred were related to the issuances of convertible notes payable during 2015.
We did not incur debt issuance costs in three-months ended September 30, 2014.
Depreciation and amortization decreased $75,881,
or 99.6%, from $76,202 in the three months ended September 30, 2014 to $321 for the three months ended September 30, 2015. In the
2015 period the depreciation related to fixed assets. In the 2014 period, the depreciation and amortization relates to depreciation
of fixed assets totaling $2,269 and the amortization of customer relationships totaling $73,933. The depreciation and amortization
related to assets that were acquired in connection with the acquisition of NACSV effective June 16, 2014. At March 31, 2015, we
determined that the full value of the customer relationships was impaired, as more fully discussed in Note 5 to the accompanying
unaudited consolidated financial statements.
Facility expense increased by $8,628, or 32.6%,
to $35,115 for the three months ended September 30, 2015 compared to $26,487 in the 2014 period. Facility expense relates primarily
to the operations of NACSV, which we acquired effective June 16, 2014.
Investor relations and marketing expense decreased
by $334,646, or 89.8%, to $37,998 in the three months ended September 30, 2015 compared to $372,644 in the 2014 period. The fees
were primarily for services rendered and paid in shares of our common stock or compensation through the issuance of a warrant,
which are being amortized over the terms of the consulting agreements.
Office supply and support expenses decreased
by $70,644, or 70.1%, to $30,126 in the three months ended September 30, 2015 compared to $100,770 in the 2014 period. In
the three months ended September 30, 2015, the expense included $26,716 of directors and officers liability insurance. In the three
months ended September 30, 2014, the expense included $26,462 of reimbursable expenses to an officer and advisor, $28,197 for directors
and officer’s liability insurance and $7,249 of key man life insurance and $30,610 attributable to NACSV, including $22,620
for insurance.
Professional fees increased by $389,040, or
171.7%, to $162,511 in the three months ended September 30, 2015 compared to $(226,529) in the 2014 period. In the three-month
periods ended September 30, 2015 and 2014, such fees consisted of:
| |
2015 | | |
2014 | |
Accounting and & auditing fees | |
$ | 22,800 | | |
$ | 86,834 | |
Consulting fees | |
| 16.415 | | |
| 21,110 | |
Legal fees | |
| 119,255 | | |
| (352,751 | ) |
Public company/SEC related fees and expenses and transfer agent fees | |
| 3,472 | | |
| 278 | |
Other | |
| 569 | | |
| 18,000 | |
| |
$ | 162,511 | | |
$ | (226,529 | ) |
In 2014, we recovered $414,761 of legal fees related
to Airtronic’s bankruptcy, reduced by $62,010 of legal fees incurred for services.
Change in fair value of embedded derivative
liabilities of convertible notes payable resulted in other income of $230,099 in the three months ended September 30, 2015. We
did not incur a change in fair value of embedded derivative liabilities of convertible notes during the 2014 period. The liability
resulted from convertible notes with variable conversion options that we issued during 2015. The value of the conversion options
are required to be bifurcated from the notes and recorded at fair value at each reporting period with changes in the fair value
reported as income or expense in the statement of operations.
Loss on conversion of convertible notes
payable and accrued interest was $406,617 for the three months ended September 30, 2015. The loss represents the difference between
the fair value of the shares of the Company’s common stock issued upon conversion of the notes and related accrued interest
as compared to the conversion prices per the terms of notes. Future conversions of the convertible notes payable and accrued interest
outstanding as of September 30, 2015 would result in additional losses on conversion. We did not have convertible notes with variable
conversion prices during the 2014 period.
Interest expense was $208,636 in the three
months ended September 30, 2015 as compared to $3,811 in the 2014 period. The increase in interest expense was due primarily to
the amortization of debt discount resulting primarily from the initial fair value of the embedded derivative liabilities of convertible
notes issued during 2015.
There is no income tax benefit for the losses
for the three-month periods ended September 30, 2015 and 2014 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 months
ended September 30, 2015 and 2014 did not contain any unusual gains or losses from transactions not in our ordinary course of business.
Nine Months Ended September 30, 2015
and 2014
Revenue from continuing operations in the nine
months ended September 30, 2015 and 2014 was $633,810 and $205,792, respectively. Cost of revenue in the nine months ended September
30, 2015 and 2014 was $535,517 and $249,412, respectively.
Revenue was from fixed-price and modified fixed-price
construction contracts and is recognized using the percentage-of-completion method of revenue recognition. Cost of revenue includes
all direct material and labor costs and indirect costs related to contract performance.
Selling, general and administrative expenses
(“S, G & A”) were $2,445,294 and $9,462,511 in nine-month periods ended September 30, 2015 and 2014, respectively.
S, G & A was comprised of:
| |
Nine Months Ended September 30, | | |
Increase/ | | |
% | |
| |
2015 | | |
2014 | | |
(decrease) | | |
Change | |
Compensation and benefits | |
$ | 872,590 | | |
$ | 7,067,946 | | |
$ | (6,195,356 | ) | |
| (87.7 | )% |
Advertising | |
| 2,722 | | |
| 51,301 | | |
| (48,579 | ) | |
| (94.7 | )% |
Debt issuance costs and amortization of warrant | |
| 142,538 | | |
| 100,000 | | |
| 42,538 | | |
| 42.5 | % |
Depreciation and amortization | |
| 38,018 | | |
| 89,032 | | |
| (51,014 | ) | |
| (57.3 | )% |
Acquisition costs | |
| -- | | |
| 754,572 | | |
| (754,572 | ) | |
| (100.0 | )% |
Facility expense | |
| 125,444 | | |
| 29,370 | | |
| 96,074 | | |
| 327.1 | % |
Investment banking fees | |
| -- | | |
| 412,498 | | |
| (412,498 | ) | |
| (100.0 | )% |
Investor relations and marketing | |
| 126,498 | | |
| 558,807 | | |
| (432,309 | ) | |
| (77.4 | )% |
Office support and supply | |
| 110,024 | | |
| 172,641 | | |
| (62,617 | ) | |
| (36.3 | )% |
Professional fees | |
| 431,196 | | |
| 189,494 | | |
| 241,702 | | |
| 127.6 | % |
Intangible asset impairment loss | |
| 563,024 | | |
| -- | | |
| 563,024 | | |
| 100.0 | % |
Travel and entertainment | |
| 29,484 | | |
| 34,473 | | |
| (4,989 | ) | |
| (14.5 | )% |
Other | |
| 3,756 | | |
| 2,377 | | |
| 1,379 | | |
| 58.0 | % |
Total S, G & A | |
$ | 2,445,294 | | |
$ | 9,462,511 | | |
$ | (7,017,217 | ) | |
| (74.2 | )% |
Compensation and benefits decreased by $6,195,356,
or 87.7%, to $872,590 in the nine months ended September 30, 2015 compared to $7,067,946 in the 2014 period. In the nine months
ended September 30, 2015, compensation and benefits were comprised of $602,764 of non-cash stock-based compensation to our CEO
and CFO, directors, vice presidents, consultants and advisors and $269,826 of cash compensation to our CEO and CFO, vice presidents
and staff. In the nine months ended September 30, 2014, compensation and benefits were comprised of $6,659,855 of non-cash stock-based
compensation to our CEO, CFO, vice presidents and advisors and $408,091 of cash compensation to our CEO and CFO and staff.
Debt issuance costs and amortization of warrant
increased by $42,538, or 42.5%, from $100,000 in the nine months ended September 30, 2015 to $142,538 in nine months ended
September 30, 2015. The fees incurred in the nine months ended September 30, 2015 were related primarily to the issuances
of convertible notes payable during 2015. In nine months ended September 30, 2014 we expensed $100,000 for amortization of a warrant
issued in connection with a financing.
Depreciation and amortization decreased by
$51,014, or 57.3%, from $89,032 in the nine months ended September 30, 2014 to $38,018 for the nine months ended September 30,
2015. In the 2015 period, we incurred $4,571 of depreciation related to fixed assets and $33,447 for the amortization of customer
relationships. In the 2014 period, the depreciation and amortization relates to depreciation of fixed assets totaling $2,777 and
the amortization of customer relationships totaling $86,255. The depreciation and amortization related primarily to assets that
were acquired in connection with the acquisition of NACSV effective June 16, 2014. At March 31, 2015, we determined that the full
value of the customer relationships was impaired, as more fully discussed in Note 5 to the accompanying unaudited consolidated
financial statements.
Acquisition costs of $754,572 in the nine months
ended September 30, 2014 were related to the NACSV acquisition in 2014 and comprised non-cash compensation of (i) $664,000 of
costs to advisors paid in shares of our common stock, and (ii) $65,572 in stock discount expense for payments to the sellers of
NACSV in our common stock at a price which resulted in a $0.02 discount per share to fair value, as well as $25,000 paid in cash
for due diligence services. We did not incur acquisition costs in the 2015 period.
Facility expense increased by $96,074, or 327.1%,
from $29,370 for the nine months ended September 30, 2014 compared to $125,444 for the nine months ended September 30, 2015. Facility
expense relates primarily to the operations of NACSV, which we acquired effective June 16, 2014.
Investment banking fees were $412,498 in the
nine month ended September 30, 2014. We did not incur investment banking fees in the 2015 period. Investment banking fees in the
2014 period represented the amortization of a cash fee and the fair value of a warrant granted to an investment banking company.
Investor relations and marketing expense decreased
by $432,309, or 77.4%, from $558,807 in the nine months ended September 30, 2014 compared to $126,498 in the nine months ended
September 30, 2015. The fees were primarily for services rendered and paid in shares of our common stock or compensation through
the issuance of a warrant, which are being amortized over the terms of the consulting agreements.
Office supply and support expenses decreased
by $62,617, or 36.3%, from $172,641 in the nine months ended September 30, 2014 compared to $110,024 in the nine months ended September
30, 2015. In the nine months ended September 30, 2015, the expense included $90,820 of directors and officers liability
insurance. In the nine months 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.
Professional fees increased $241,702, or 127.6%,
to $431,196 in the nine months ended September 30, 2015 compared to $189,494 in the 2014 period. In the nine-month periods
ended September 30, 2015 and 2014, such fees consisted of:
| |
2015 | | |
2014 | |
Accounting and & auditing fees | |
$ | 66,200 | | |
$ | 129,729 | |
Consulting fees | |
| 30,264 | | |
| 41,557 | |
Legal fees | |
| 316,949 | | |
| (18,099 | ) |
Public company/SEC related fees and expenses and transfer agent fees | |
| 15,876 | | |
| 18,307 | |
Other | |
| 1,907 | | |
| 18,000 | |
| |
$ | 431,196 | | |
$ | 189,494 | |
In 2014 we recovered $414,761 of legal fees related
to Airtronic’s bankruptcy, reduced by $396,662 of legal fees incurred.
Intangible asset impairment loss was $563,024
in the nine months ended September 30, 2015. Based on our revaluation, we determined that the value of the customer relationships
was impaired as of March 31, 2015. This was due in part to the lack of revenue from sales of NACSV’s products during the
three-months ended March 31, 2015, as well as to our current expectations regarding future estimated discounted cash flows attributable
to such asset. We did not incur an intangible asset impairment loss in the 2014 period.
Change in fair value of embedded derivative
liabilities of convertible notes resulted in other income of $686,980 in the nine months ended September 30, 2015. We did not incur
a change in fair value of embedded derivative liabilities of convertible notes during the 2014 period. The liability resulted from
convertible notes with variable conversion options that we issued during the 2015 period. The value of the conversion options are
required to be bifurcated from the notes and recorded at fair value at each reporting period with changes in the fair value reported
as income or expense in the statement of operations.
Loss on conversion of convertible notes payable and accrued interest was $406,617 for the nine months ended September
30, 2015. The loss represents the difference between the fair value of the shares of the Company’s common stock issued upon
conversion of the notes and related accrued interest as compared to the conversion prices per the terms of notes. Future conversions
of the notes payable outstanding as of September 30, 2015 would result in additional losses on conversion. We did not have convertible
notes with variable conversion prices during the 2014 period.
Loss (gain) on extinguishment of debt was a
loss of $22,170 in the nine months ended September 30, 2015 compared to a gain of $387,642 in the nine months ended September 30,
2014. The loss in the 2015 period resulted from the write off of debt discount for notes payable to related parties that were fully
repaid during the 2015 period. The gain in the 2014 period consists of $350,000 for forgiveness on the payoff of a convertible
note and the recapture of $37,642 of interest not paid.
The reduction in contingent consideration for
purchase price was $280,461 in the nine months ended September 30, 2015 and was due in part to the lack of revenue from sales of
NACSV’s products during the first quarter of 2015, as well as to our current expectations regarding future revenue and earnings
estimates associated with NACSV. We did not incur a change in contingent consideration for purchase price in the 2014 period.
We realized other income of $190,240 in the
nine months ended September 30, 2015 due to the reversal of a liability to NACSV related to equipment held by NACSV and that we
believe we no longer owe. We have filed legal proceedings against the sellers of NACSV as more fully discussed in Note 8 to the
accompanying unaudited consolidated financial statements. We did not have other income in the 2014 period.
Interest income was $43,182 in the nine months
ended September 30, 2014 and was related to loans outstanding during the 2014 period. We did not earn interest income in the nine
months ended September 30, 2015.
Interest expense was $1,377,436 in the nine
months ended September 30, 2015 as compared to $12,992 in the 2014 period. The significant increase in interest expense was due
primarily to the initial fair value of the embedded derivative liabilities of convertible notes issued during the nine months ended
September 30, 2015.
There is no income tax benefit for the losses
for the nine-month periods ended September 30, 2015 and 2014 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 in the nine-month
period ended September 30, 2014 was $2,832 and represented costs related to the wind down of a telecommunications business.
Our results of operations for the nine months ended September 30,
2015 and 2014 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, 2015, we had cash and cash
equivalents totaling $115,662 and working capital deficit of $832,724. For the nine months ended September 30, 2015, we incurred
a net loss of $2,994,943 and at September 30, 2015, we had an accumulated deficit of $31,510,506 and total stockholders’
deficit of $1,379,603. We expect to incur losses during the remainder of fiscal 2015. 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.
As of September 30, 2015, we did 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.
As more fully discussed in Note 16 to the
accompanying unaudited consolidated financial statements, we have entered into the SPSA under which we have agreed to acquire
Rontan. There are specific conditions to closing, which are more fully discussed in Note16, including the commitment of sufficient
investment by General American Capital Partners LLC, the institutional investor, in the Company. We have not yet determined the
impact on our liquidity and capital resources, including any material commitments for capital expenditures, as a result of this
pending transaction.
Cash Flows
Cash used in operating activities
Net cash used in operating activities totaled
$552,785 for the nine months ended September 30, 2015 compared to $492,757 for the nine months ended September 30, 2014.
In the nine months ended September
30, 2015, cash was used primarily to fund $807,807 of the net loss of $2,994,943. Non-cash items affecting the net loss were:
(i) a reduction in contingent consideration for purchase price of $280,461; (ii) depreciation and amortization of $38,018; (iii)
loss on extinguishment of debt of $22,170; (iv) non-cash stock-based compensation of $602,764; (v) reduction in value of embedded
derivative liabilities of convertible notes of $686,980; (vi) intangible asset impairment loss of $563,024; (vii) non-cash interest
expense of $1,290,166; (viii) common stock issued for services of $104,056; (ix) non-cash amortization of debt issuance costs
of $123,180; (x) loss on conversion of notes payable and accrued expenses of $406,617; and (xi) a beneficial conversion feature
of $4,582. Offsetting a portion of the use of cash were net changes in operating assets and liabilities totaling $255,022.
In the nine months ended September 30, 2014,
cash was used to fund $1,020,313 of the net loss of $9,091,131. Non-cash items affecting the net loss were: (i) a gain on extinguishment
of debt of $387,642; (ii) depreciation and amortization of $89,032; (iii) non-cash stock-based compensation of $6,659,855; (iv)
common stock and warrants issued for services of $971,668; (v) non-cash interest expense of $8,333; (vi) common stock issued for
acquisition services of $664,000; (vii) and other non-cash acquisition expenses of $65,572. Offsetting a portion of the use of
cash were net changes in operating assets and liabilities of $527,556.
Cash used in investing activities
Cash of $1,890 was used in investing activities
during the nine months ended September 30, 2015 to purchase fixed asset. Net cash provided by investing activities totaled $599,119
for the nine-month period ended September 30, 2014. During the 2014 period, we received cash of $1,465,874 from Airtronic for the
repayment of bridge loans and $135,425 of cash in connection with the NACSV acquisition, reduced by $1,000,000 paid for the acquisition
of NACSV and cash of $2,180 used for deposits.
Cash from financing activities
Net cash provided by financing activities
totaled $510,235 for the nine months ended September 30, 2015, compared to $271,506 of cash used by financing activities for the
nine months ended September 30, 2014. In the nine months ended September 30, 2015, we received proceeds from the issuance of notes
payable and convertible debt of $795,643. These receipts were partially offset by debt issuance fees of $124,120 and payments
on convertible and other notes payable of $161,288. In the nine months ended September 30, 2014, we received $125,000 from the
exercise of warrants and $96,241 from notes payable offset by $492,747 paid against notes payable and convertible debt.
Financial condition
As of September 30, 2015, we had cash and cash
equivalents totaling $115,662, a working capital deficit of $832,724 and stockholders’ deficit of $1,379,603. We do not have
a line of credit facility and have relied on short-term borrowings, convertible debt and the sale of common stock to provide cash
to finance our operations. We will need to raise additional capital during the next twelve months 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.
As a result of recent declines in the fair
value of the Company’s common stock, the Company does not currently have sufficient authorized shares to satisfy in full
its obligations under several existing convertible notes payable. Accordingly, certain of the note holders have the right to accelerate
the payment due under the terms of their note. In addition, they have the right to require that additional shares and/or monies
be paid in connection with this technical default. At September 30, 2015, the Company has accrued $31,346 of penalty interest
associated with one of these notes. The Company intends to request shareholder approval to increase the number of authorized shares
of common stock in the near future in order to satisfy its obligations under these notes.
At December 31, 2014 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 complementary businesses, including Rontan.
We will need to secure additional funds to
finance our operations during the next twelve months, but 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.
Inflation
We do not believe that inflation has had a
material effect on our results of operations.
Off-Balance Sheet Arrangements
We had no off-balance sheet arrangements during the three and nine
months ended September 30, 2015 and 2014.
Critical Accounting Policies
Our 2014 Form 10-K contains further information
regarding our critical accounting policies.
Impact of Recently Issued Accounting Standards
For information regarding recent accounting
pronouncements and their expected impact on our future consolidated results of operations or financial condition, see Note
1 to our accompanying unaudited consolidated financial statements
Tabular Disclosure of Contractual Obligations
As a small reporting company, we are not required
to provide this information and have elected not to provide it.
Item 3. |
Quantitative And Qualitative Disclosures About Market Risk. |
As a “Smaller Reporting Company,” we are not required
to provide the information required by this item.
Item 4. |
Controls and Procedures. |
Evaluation of Disclosure Controls 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 1934, 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 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, 2014 which
have not been rectified as of September 30, 2015:
|
● |
Resources: One staff accountant performed the majority of our corporate accounting functions. As a result, there was 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 plaintiff in two actions: The
Company is plaintiff or defendant in two actions:
Dekle, et. al. v. Global Digital Solutions,
Inc. et. al.
Brian A. Dekle and John Ramsay filed suit against
the Company and its wholly owned subsidiary, North American Custom Specialty Vehicles, Inc. (“NACSV”), in the Circuit
Court of Baldwin Alabama, on January 14, 2015, case no. 05-CV-2015-9000050.00, relating to our acquisition of NACSV (the ''Dekle
Action"). Prior to instituting the Dekle Action, in June 2014, the Company had entered into an equity purchase agreement with
Dekle and Ramsay to purchase their membership interest in North American Custom Specialty Vehicles, LLC. The Dekle Action originally
sought payment for $300,000 in post-closing consideration Dekle and Ramsay allege they are owed pursuant to the equity purchase
agreement.
On February
9, 2015, the Company and NACSV removed the Dekle Action to federal court in the United States District Court in and for
the Southern District of Alabama, case no. 1:15-CV-00069. The Company and NACSV subsequently moved to dismiss the complaint for
(1) failing to state a cause of action, and (2) lack of personal jurisdiction. Alternatively, the Company and NACSV sought a transfer
of the case to the United States District Court in and for Middle District of Florida.
In response to the Company’s and NACSV's motion to dismiss,
Dekle and Ramsay filed an amended complaint on March 2, 2015 seeking specific performance and alleging breach of contract, violations
of Security and Exchange Commission (“SEC”) Rule 10b-5, and violations of the Alabama Securities Act. The amended complaint
also names the Company’s Chairman, President, and CEO, Richard J. Sullivan (“Sullivan”), as a defendant. On March
17, 2015, the Company, NACSV and Sullivan filed a motion to dismiss the amended complaint seeking dismissal for failure to state
valid causes of action, for lack of personal jurisdiction, or alternatively to transfer the case to the United States District
Court in and for Middle District of Florida. Dekle and Ramsay’s responded on March 31, 2015, and the Company filed its response
thereto on April 7, 2015.
On June 2, 2015, Dekle passed away. On June 5, 2015, the Court
denied the Company’s motion to transfer the case to Florida. On June 10, 2015, the Company filed a motion to
reconsider the Court’s denial of its motion to transfer the case to Florida. On
September 30, 2105, the Court granted the Company’s Renewed Motion to Transfer Venue. The case was transferred to the Middle
District of Florida, where it is currently pending.
On June 15, 2015, Ramsay filed a second amended
complaint. On June 25, 2015, the Company filed a motion to dismiss the second amended complaint. The Company’s Motion to
Dismiss was denied.
Global Digital Solutions, Inc. et. al. v. Communications Laboratories,
Inc., et. al.
On January 19, 2015 the Company and NACSV
filed suit against Communications Laboratories, Inc., ComLabs Global, LLC, Roland Lussier, Brian Dekle, John Ramsay and Wallace
Bailey for conversion and breach of contract in a dispute over the payment of a $300,000 account receivable that ComLabs owed
to NACSV but sent payment directly to Brian Dekle. The case was filed in the Eighteenth Judicial Circuit in and for Brevard County
Florida, case no. 05-2015-CA-012250-XXXX. On February 18, 2015 (i) defendants Communications Laboratories, Inc., ComLabs Global,
LLC and Roland Lussier and (ii) defendant Wallace Bailey filed their respective motions to dismiss seeking, among other things,
dismissal for failure to state valid causes of action, lumping and failure to post a non-resident bond. On February 26, 2015,
defendants Dekle and Ramsay filed their motion to dismiss, or stay action, based on already existing litigation between the parties.
NACSV filed its required bond on March 2, 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. |
None.
Item 3. |
Defaults Upon Senior Securities. |
As a result of recent declines in the fair value of the Company’s
common stock, the Company does not currently have sufficient authorized shares to satisfy in full its obligations under several
existing convertible notes payable. Accordingly, certain of the note holders have the right to accelerate the payment due under
the terms of their note. In addition, they have the right to require that additional shares and/or monies be paid in connection
with this technical default. At September 30, 2015, the Company has accrued $31,346 of penalty interest associated with one of
these notes. The Company intends to request shareholder approval to increase the number of authorized shares of common stock in
the near future in order to satisfy its obligations under these notes.
Item 4. |
Mine Safety Disclosures. |
Not applicable.
Item 5. |
Other Information. |
See the discussion under Item 3. Defaults
Upon Senior Securities.
OTCQB Compliance
Pursuant to a letter dated September 28, 2015 from the OTC Markets, the
Company was advised that its bid price had closed below $0.01 for more than 30 consecutive calendar days and, therefore, no longer
meets the Standards for Continued Eligibility for the OTCQB marketplace as per the OTCQB Standards, section 2.3(2).
To remain eligible for trading on the OTCQB marketplace, the Company must have proprietary priced quotations published
by a Market Maker in OTC Link with a minimum closing bid price of $0.01 per share on at least one of the prior thirty consecutive
calendar days. In the event that the minimum closing bid price for the Company’s common stock falls below $0.01 per share,
a grace period of 180 calendar days to regain compliance shall begin, during which the minimum closing bid price for the Company’s
common stock must be $0.01 or greater for ten consecutive trading days.
Pursuant to these OTCQB Standards, the company has been granted a period of 180 calendar days in which to regain compliance with
Section 2.3(2). This grace period expires March 26, 2016 and at that time if the Company’s bid price has not closed at or
above $0.01 for any ten consecutive trading days then the Company’s common stock will be removed from the OTCQB.
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 6, 2015 |
By: |
/s/ JEROME J. GOMOLSKI |
|
|
Chief Financial Officer |
|
|
(Duly Authorized Officer and
Principal Financial Officer) |
EXHIBIT INDEX
|
|
|
|
Incorporated by Reference |
Exhibit
No. |
|
Description |
|
Form |
|
Filing Date/
Period End |
|
Exhibit
Number |
3.1 |
|
Certificate of Incorporation |
|
10 |
|
8/9/13 |
|
3.1 |
3.2 |
|
Articles of Merger |
|
10 |
|
8/9/13 |
|
3.2 |
3.3 |
|
Certificate of Amendment to Certificate of Incorporation |
|
10 |
|
8/9/13 |
|
3.3 |
3.4 |
|
Bylaws |
|
10 |
|
8/9/13 |
|
3.4 |
3.5 |
|
Certificate of Amendment to Certificate of Incorporation filed July 7, 2014 |
|
8-K |
|
7/30/14 |
|
3.1 |
3.6 |
|
Certificate of Amendment to Certificate of Incorporation filed May 18, 2015 |
|
8-K |
|
5/20/15 |
|
3.1 |
2.1 |
|
Share Purchase and Sale Agreement dated October 8, 2015 and effective October 13, 2015 |
|
8-K |
|
10/19/15 |
|
2.1 |
10.1 |
|
Revenue Based Factoring Agreement dated October 1, 2015 |
|
8-K |
|
10/5/15 |
|
10.1 |
10.2 |
|
Security Agreement and Guarantee dated October 1, 2015 |
|
8-K |
|
10/5/15 |
|
10.2 |
10.3 |
|
Revenue Based Factoring Agreement dated October 23, 2015 |
|
8-K |
|
11/5/15 |
|
10.1 |
10.4 |
|
Security Agreement and Guarantee dated October 23, 2015 |
|
8-K |
|
11/5/15 |
|
10.2 |
31.1** |
|
Rule 13a-14(a) / 15d-14(a) Certification of Chief Executive Officer |
|
|
|
|
|
|
31.2** |
|
Rule 13a-14(a) / 15d-14(a) Certification of Chief Financial Officer |
|
|
|
|
|
|
32.1*** |
|
Section 1350 Certifications of Chief Executive Officer and Chief Financial Officer |
|
|
|
|
|
|
101. INS** |
|
XBRL Instance |
|
|
|
|
|
|
101. SCH ** |
|
XBRL Taxonomy Extension Scheme |
|
|
|
|
|
|
101. CAL ** |
|
XBRL Taxonomy Extension Calculation |
|
|
|
|
|
|
101. DEF ** |
|
XBRL Taxonomy Extension Definition |
|
|
|
|
|
|
101. LAB ** |
|
XBRL Taxonomy Extension Labels |
|
|
|
|
|
|
101. PRE ** |
|
XBRL Taxonomy Extension Presentation |
|
|
|
|
|
|
* |
Management contract or compensatory plan or arrangement. |
** |
Filed herewith. |
*** |
Furnished herewith. |
36
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. |
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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): |
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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 |
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b. |
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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 6, 2015 |
/s/ RICHARD J. SULLIVAN |
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Richard J. Sullivan |
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Chief Executive Officer
(Principal Executive Officer) |
Exhibit 31.2
CERTIFICATION
I, Jerome J. Gomolski, certify that:
1. |
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I have reviewed this Quarterly Report on Form 10-Q of Global Digital Solutions, Inc.; |
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2. |
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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; |
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3. |
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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; |
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4. |
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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: |
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a. |
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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; |
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b. |
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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; |
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c. |
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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 |
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d. |
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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. |
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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): |
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a. |
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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 |
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b. |
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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 6, 2015 |
/s/ JEROME J. GOMOLSKI |
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Jerome J. Gomolski |
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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, 2015 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, Jerome J. Gomolski, 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. |
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The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and |
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2. |
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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 |
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Richard J. Sullivan |
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Chief Executive Officer |
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Date: November 6, 2015 |
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/s/ JEROME J. GOMOLSKI |
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Jerome J. Gomolski |
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Chief Financial Officer |
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Date: November 6, 2015 |
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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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