Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
FORWARD LOOKING STATEMENTS
This Quarterly Report on Form 10-Q 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. The words “believe,” “may,” “will,” “potentially,” “estimate,” “continue,” “anticipate,” “intend,” “could,” “would,” “project,” “plan,” “expect” and similar expressions that convey uncertainty of future events or outcomes are intended to identify forward-looking statements. These forward-looking statements include, but are not limited to, statements concerning the following:
|
·
|
our future financial and operating results;
|
|
·
|
our intentions, expectations and beliefs regarding anticipated growth, market penetration and trends in our business;
|
|
·
|
the timing and success of our business plan;
|
|
·
|
our plans regarding future financings;
|
|
·
|
our ability to attract and retain customers;
|
|
·
|
our dependence on growth in our customers’ businesses;
|
|
·
|
the effects of market conditions on our stock price and operating results;
|
|
·
|
our ability to maintain our competitive technological advantages against competitors in our industry;
|
|
·
|
the expansion of our business in our core golf market as well as in new markets like commercial fleet management and agriculture;
|
|
·
|
our ability to timely and effectively adapt our existing technology and have our technology solutions gain market acceptance;
|
|
·
|
our ability to introduce new offerings and bring them to market in a timely manner;
|
|
·
|
our ability to maintain, protect and enhance our intellectual property;
|
|
·
|
the effects of increased competition in our market and our ability to compete effectively;
|
|
·
|
the attraction and retention of qualified employees and key personnel;
|
|
·
|
future acquisitions of or investments in complementary companies or technologies; and
|
|
·
|
our ability to comply with evolving legal standards and regulations, particularly concerning requirements for being a public company.
|
These forward-looking statements speak only as of the date of this Form 10-Q and are subject to uncertainties, assumptions and business and economic risks. As such, our actual results could differ materially from those set forth in the forward-looking statements as a result of the factors set forth below in Part II, Item 1A, “Risk Factors,” and in our other reports filed with the Securities and Exchange Commission. Moreover, we operate in a very competitive and rapidly changing environment, and new risks emerge from time to time. It is not possible for us to predict all risks, nor can we assess the impact of all factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements we may make. In light of these risks, uncertainties and assumptions, the forward-looking events and circumstances discussed in this Form 10-Q may not occur, and actual results could differ materially and adversely from those anticipated or implied in our forward-looking statements.
You should not rely upon forward-looking statements as predictions of future events. Although we believe that the expectations reflected in our forward-looking statements are reasonable, we cannot guarantee that the future results, levels of activity, performance or events and circumstances described in the forward-looking statements will be achieved or occur. Moreover, neither we nor any other person assumes responsibility for the accuracy and completeness of the forward-looking statements. We undertake no obligation to update publicly any forward-looking statements for any reason after the date of this Form 10-Q to conform these statements to actual results or to changes in our expectations, except as required by law.
Our unaudited financial statements are state in United States Dollars (US$) and are prepared in accordance with United States Generally Accepted Principles. The following discussion should be read in conjunction with our unaudited condensed consolidated financial statements and notes thereto appearing elsewhere in this Quarterly Report on Form 10-Q with the understanding that our actual future results, levels of activity, performance and events and circumstances may be materially different from what we expect.
Corporate History
DSG Global, Inc. (formerly Boreal Productions Inc.) was incorporated under the laws of the State of Nevada on September 24, 2007. We were formed to option feature films and TV projects to be packaged and sold to movie studios and production companies.
In January 2015, we changed our name to DSG Global, Inc. and effected a one-for-three reverse stock split of our issued and outstanding common stock in anticipation of entering in a share exchange agreement with DSG TAG Systems, Inc., a corporation incorporated under the laws of the State of Nevada on April 17, 2008 and extra provincially registered in British Columbia, Canada in 2008.
On April 13, 2015, we entered into a share exchange agreement with DSG TAG Systems Inc. and the shareholders of DSG TAG Systems who become parties to the agreement. Pursuant to the terms of the share exchange agreement, we agreed to acquire not less than 75% and up to 100% of the issued and outstanding common shares in the capital stock of DSG TAG Systems in exchange for the issuance to the selling shareholders of up to 20,000,000 shares of our common stock on the basis of 1 common share for 5.4935 common shares of DSG TAG Systems.
On May 6, 2015, we completed the acquisition of approximately 75% (82,435,748 common shares) of the issued and outstanding common shares of DSG TAG Systems as contemplated by the share exchange agreement by issuing 15,185,875 shares of our common stock to shareholders of DSG TAG Systems who became parties to the agreement. In addition, concurrent with the closing of the share exchange agreement, we issued an additional 179,823 shares of our common stock to Westergaard Holdings Ltd. in partial settlement of accrued interest on outstanding indebtedness of DSG TAG Systems.
Following the initial closing of the share exchange agreement and through October 22, 2015, we acquired an additional 101,200 shares of common stock of DSG TAG Systems from shareholders who became parties to the share exchange agreement, and issued to these shareholders an aggregate of 18,422 shares of our common stock. Following completion of these additional purchases, DSG Global owns approximately 100% of the issued and outstanding shares of common stock of DSG TAG Systems. An aggregate of 4,229,384 shares of Series A Convertible Preferred Stock of DSG TAG Systems continues to be held by Westergaard Holdings Ltd., an affiliate of Keith Westergaard, a member of our board of directors.
The reverse acquisition was accounted for as a recapitalization effected by a share exchange, wherein DSG TAG Systems is considered the acquirer for accounting and financial reporting purposes. The assets and liabilities of the acquired entity have been brought forward at their book value and no goodwill has been recognized. We adopted the business and operations of DSG TAG Systems upon the closing of the share exchange agreement.
Overview of Our Business
DSG Global, Inc. is a technology development company based in Surrey, British Columbia, Canada, engaged in the design, manufacture, and marketing of fleet management solutions for the golf industry, as well as commercial, government and military applications. Our principal activities are the sale and rental of GPS tracking devices and interfaces for golf vehicles, and related support services. We were founded by a group of individuals who have dedicated their careers to fleet management technologies and have been at the forefront of the industry's most innovative developments, and our executive team has over 50 years of experience in the design and manufacture of wireless, GPS, and fleet tracking solutions. We have developed the TAG suite of products that we believe is the first completely modular fleet management solution for the golf industry. The TAG suite of products is currently sold and installed around the world in golf facilities and as commercial applications through a network of established distributors and partnerships with some of the most notable brands in fleet and equipment manufacture.
DSG stands for “Digital Security Guard”, which is our primary value statement giving fleet operator’s new capabilities to track and control their vehicles. We have developed a proprietary combination of hardware and software that is marketed around the world as the TAG system. We have primarily focused on the golf industry where the TAG system is deployed to help golf course operators manage their fleet of golf carts, turf equipment, and utility vehicles. We are a leader in the category of fleet management in the golf industry and were awarded “Best Technology of the Year” in 2010 by Boardroom magazine, a publication of the National Golf Course Owners Association. To date the TAG system is installed on over 8,000 vehicles and has been used to monitor over 6,000,000 rounds of golf.
The TAG system fills a void in the marketplace by offering a modular structure that allows the customer to customize their system to meet desired functionality and budget constraints. In addition to the core TAG system vehicle control functionality, which can operate independently, we offer two golfer information display systems -- the alphanumeric TEXT and high definition TOUCH -- providing the operator with two display options which is unique in the industry.
The primary market for our TAG system is the 40,000 golf operations worldwide. While the golf industry remains the primary focus of our sales and marketing efforts, we have completed several successful pilots of the TAG system in other markets such as agriculture and commercial fleet operations. With appropriate resources, we intend to expand our sales and marketing efforts into these new markets.
We have a direct sales force in North America, which comprises the most significant portion of the golf fleet market, and have developed key relationships with distributors and golf equipment manufacturers such as E-Z-GO, Yamaha and Ransomes Jacobsen to help drive sales for the North American and worldwide markets.
In order to successfully deliver products, increase sales, and maintain customer satisfaction, we need to have a reliable supplier of our hardware units and components at competitive prices. Presently, we source our TOUCH units from one supplier in China and our TAG units from one supplier in the United Kingdom. We have recently established a new relationship with a supplier for our TOUCH units in China to provide us with higher quality, newer technology at competitive pricing.
In addition, DSG is currently in negotiations with a telecommunications provider to provide new technology in hardware and wireless access.
Our Revenue Model
We derive revenue from four different sources, as follows:
·
|
Systems Sales Revenue
, which consists of the sales price paid by those customers who purchase our TAG system hardware.
|
·
|
Monthly Service Fees
are paid by all customers for the wireless data fee charges required to operate the GPS tracking on the TAG systems.
|
·
|
Monthly Rental Fees
are paid by those customers that rent the TAG system hardware. The amount of a customer’s monthly payment varies based on the type of equipment rented (a TAG, a TAG and TEXT, or a TAG and TOUCH).
|
·
|
Advertising Revenue
is a new source of revenue that we believe has the potential to be strategic for us in the future. We are in the process of implementing and designing software to provide advertising and other media functionality on our TOUCH units.
|
We recognize revenue when persuasive evidence of an arrangement exists, delivery has occurred, the fee is fixed or determinable, and collectability is reasonably assured. In instances where final acceptance of the product is specified by the customer, revenue is deferred until all acceptance criteria have been met. We accrue for warranty costs, sales returns, and other allowances based on its historical experience.
Our revenue recognition policies are discussed in more detail under “
Note 2 – Summary of Significant Accounting Policies
” in the notes to our Condensed Consolidated Financial Statements included in Part I, Item 1 of this Form 10-Q.
Cost of Revenue
Our cost of revenue consists primarily of hardware purchases, wireless data fees, mapping, installation costs, freight expenses and inventory adjustments.
|
·
|
Hardware purchases.
Our equipment purchases consist primarily of TAG system control units, TEXT display, and TOUCH display tablets. The TAG system control unit is sold as a stand-alone unit or in conjunction with our TEXT alphanumeric display or TOUCH high definition “touch activated” display. Hardware purchases also include costs of components used during installations, such as cables, mounting solutions, and other miscellaneous equipment.
|
|
·
|
Wireless data fees.
Our wireless data fees consist primarily of the data fees charged by outside providers of GPS tracking used in all of our TAG system control units.
|
|
·
|
Mapping.
Our mapping costs consist of aerial mapping, course map, geofencing, and 3D flyovers for golf courses. This cost is incurred at the time of hardware installation.
|
|
·
|
Installation.
Our installation costs consist primarily of costs incurred by our employed service technicians for the cost of travel, meals, and miscellaneous components required during installations. In addition, these costs also include fees paid to external contractors for installations on a project by project basis.
|
|
·
|
Freight expenses and Inventory adjustments.
Our freight expenses consist primarily of costs to ship hardware to courses for installations. Our inventory adjustments include inventory write offs, write downs, and other adjustments to the cost of inventory.
|
|
·
|
Operating Expenses & Other Income (Expenses)
We classify our operating expenses and other income (expenses) into six categories: compensation, research and development, general and administrative, warranty, foreign currency exchange, and finance costs. Our operating expenses consist primarily of sales and marketing, salaries and wages, consulting fees, professional fees, trade shows, software development, and allocated costs. Allocated costs include charges for facilities, office expenses, telephones and other miscellaneous expenses. Our other income (expenses) primarily consists of financing costs and foreign exchange gains or losses.
|
|
·
|
Compensation expense.
Our compensation expenses consist primarily of personnel costs, such as employee salaries, payroll expenses, and employee benefits. This includes salaries for management, administration, engineering, sales and marketing, and service support technicians. Salaries and wages directly related to projects or research and development are expensed as incurred to their operating expense category.
|
|
·
|
Research and development
. Our research and development expenses consist primarily of personnel costs and professional services associated with the ongoing development and maintenance of our technology.
|
|
·
|
Research and development
expenses include payroll, and other headcount-related expenses associated with product development. Research and development expenses also include third-party development and programming costs. Such costs related to software development are included in research and development expense until the point that technological feasibility is reached. Research and development is expensed and is included in operating expenses.
|
|
·
|
General and administrative
. Our general and administrative expenses consist primarily of sales and marketing, commissions, travel, trade shows, consultant fees, insurance, and compliance and other administrative functions, as well as accounting and legal professional services fees, allocated costs and other corporate expenses. Sales and marketing includes brand marketing, marketing materials, and media management.
|
|
·
|
Warranty expense.
Our warranty expenses consist primarily of associated material product costs, labor costs for technical support staff, and other associated overhead. Warranty costs are expensed as they are incurred.
|
|
·
|
Foreign currency exchange.
Our foreign currency exchange consist primarily of foreign exchange fluctuations recorded in Canadian dollar (CAD), British Pounds (GBP), or Euro (EUR) at the rates of exchange in effect when the transaction occurred.
|
|
·
|
Finance costs.
Our finance costs consist primarily of investor interest expense, investor commission fees, and other financing charges for obtaining debt financing.
|
We expect to continue to invest in corporate infrastructure and incur additional expenses associated with being a public company, including increased legal and accounting costs, investor relations costs, higher insurance premiums and compliance costs associated with Section 404 of the Sarbanes-Oxley Act of 2002. In addition, we expect sales and marketing expenses to increase in absolute dollars in future periods. In particular, we expect to incur additional marketing costs to support the expansion of our offerings in new markets like commercial fleet management and agriculture.
Additional Capital
We require additional capital to continue to develop software and products, meet our contractual obligations, and execute our business plan. There can be no assurances that we will be able to raise additional capital on acceptable terms or at all, which would adversely affect our ability to achieve our business objectives.
Results of Operations
We had a net loss of $387,420 for the three month period ended March 31, 2016, which was $103,091 more than the net loss of $284,329 for the three month period ended March 31, 2015.
The following table summarizes key items of comparison and their related increase (decrease) for the three month periods ended March 31, 2016 and 2015:
|
|
Three Months
ended
|
|
|
Three Months
ended
|
|
|
Increase
(Decrease)
|
|
|
|
31-Mar-16
|
|
|
31-Mar-15
|
|
|
2016 from 2015
|
|
|
|
($)
|
|
|
($)
|
|
|
(%)
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
254,928
|
|
|
$
|
790,180
|
|
|
|
-67.7
|
%
|
Cost of revenue
|
|
|
94,548
|
|
|
|
488,047
|
|
|
|
-80.6
|
%
|
Gross profit
|
|
|
160,380
|
|
|
|
302,133
|
|
|
|
-46.9
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Compensation expense
|
|
|
195,844
|
|
|
|
152,920
|
|
|
|
28.1
|
%
|
Research and development expense
|
|
|
17,037
|
|
|
|
19,433
|
|
|
|
-12.3
|
%
|
General and administrative expense
|
|
|
318,664
|
|
|
|
331,228
|
|
|
|
-3.8
|
%
|
Warranty expense
|
|
|
45,217
|
|
|
|
58,843
|
|
|
|
-23.2
|
%
|
Bad Debt
|
|
|
3,105
|
|
|
|
-
|
|
|
|
100.0
|
%
|
Depreciation and amortization expense
|
|
|
5,584
|
|
|
|
8,704
|
|
|
|
-35.8
|
%
|
Total Operating Expenses
|
|
|
585,451
|
|
|
|
571,128
|
|
|
|
2.5
|
%
|
Loss from operations
|
|
|
(425,071
|
)
|
|
|
(268,995
|
)
|
|
|
58.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Income (Expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency exchange
|
|
|
72,140
|
|
|
|
(20,995
|
)
|
|
|
-443.6
|
%
|
Other (expenses) income
|
|
|
(490
|
)
|
|
|
(2,453
|
)
|
|
|
100.0
|
%
|
Finance costs
|
|
|
(108,560
|
)
|
|
|
(47,798
|
)
|
|
|
127.1
|
%
|
Total Other Expense
|
|
|
(36,910
|
)
|
|
|
(71,246
|
)
|
|
|
-48.2
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for income taxes expense (benefit)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Net loss
|
|
|
(461,981
|
)
|
|
|
(340,241
|
)
|
|
|
35.8
|
%
|
Net loss attributable to noncontrolling interest
|
|
|
74,561
|
|
|
|
55,912
|
|
|
|
33.4
|
%
|
Net loss attributable to DSG Global
|
|
$
|
(387,420
|
)
|
|
$
|
(284,329
|
)
|
|
|
36.3
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss per share (basic and diluted)
|
|
|
(0.013
|
)
|
|
|
(0.014
|
)
|
|
|
-7.1
|
%
|
Comparison of the three months ended March 31, 2016 and 2015:
Revenue
|
|
For the Three Months Ended March 31,
|
|
|
|
|
|
|
2016
|
|
|
2015
|
|
|
% Change
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
254,928
|
|
|
$
|
790,180
|
|
|
|
(67.7
|
) %
|
Revenue decreased by $535,252, or 67.7%, for the three months ended March 31, 2016 as compared to the three months ended March 31, 2015. The decrease was primarily due to DSG focusing on providing support to existing customers and ensuring that all our customers’ service needs were being met. In addition, 30% of sales included for the three months ended March 31, 2015 were from a product return from our distributor that is currently recognized on the financial statements as a deferred revenue. The revenue on the return will be recognized each quarter towards monthly service fees and new inventory purchases made.
In addition, DSG anticipates increased sales in the second quarter of 2016 due to hiring of contract commission based sales agents to sell DSG products, negotiations with a telecommunications provider to provide new technology in hardware and wireless access, and negotiations to acquire a manufacturer of gold tournament scoring and management software to compete with the competition and provide more services to the customer. As a result, in the second quarter, DSG has finalized a contract renewal in the amount of $240,000, and has signed other installation contracts.
DSG has increased the monthly recurring service revenue by $25,699.44 or 17.7%, for the three months ended March 31, 2016 as compared to the three months ended March 31, 2015. The increase was primarily due to the increase in the installed units of TAG systems from 2014 to 2015.
Cost of Revenue
|
|
For the Three Months Ended March 31,
|
|
|
|
|
|
|
2016
|
|
|
2015
|
|
|
% Change
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenue
|
|
$
|
94,548
|
|
|
$
|
488,047
|
|
|
|
(80.6
|
) %
|
Cost of revenue decreased by $393,499, or 80.6%, for the three months ended March 31, 2016 as compared to the three months March 31, 2015. The decrease was primarily due to the decrease in hardware rentals and sales. Lower sales also resulted in lower installation costs, freight charges, mapping, and direct labor costs in the three months ended in March 31, 2016 in comparison to the three months ended March 31, 2015. Installation costs, such as direct labor decreased by $16,368, cost of goods for hardware sales decrease by $314,479 and mapping and freight costs decreased by $21,309. Wireless fees also decreased by $24,078 due to new lower negotiated wireless fee rates. There was also a decrease of $17,265 for inventory adjustments which was primarily due to write-off of obsolete inventory in the three months ended March 31, 2015 in comparison to the three months ended March 31, 2016. In addition, the decrease in cost of revenue was also due to lower sales compared to the prior year, and lower hardware purchasing costs from the new hardware supplier.
Overall, the cost of revenue decreased by 24.7% from the three months ended March 31, 2016 as compared to the three months ended March 31, 2015. The increase was due to the lower monthly fee rates for wireless data for the three months ended March 31, 2016. In addition, the decrease in cost of revenue was also due to lower sales compared to the prior period, which resulted in lower cost of good on hardware, mapping, direct labor and other installation costs.
Compensation Expense
|
|
For the Three Months Ended March 31,
|
|
|
|
|
|
|
2016
|
|
|
2015
|
|
|
% Change
|
|
|
|
|
|
|
|
|
|
|
|
Compensation
Expense
|
|
$
|
195,844
|
|
|
$
|
152,920
|
|
|
|
28.1
|
%
|
Compensation expense increased by $42,924, or 28.1%, for the three months ended March 31, 2016 as compared to the three months ended March 31, 2015. The increase was primarily due to the increase in hiring of employees and contractors to meet projected growth obligations in engineering for software and hardware development.
Research and Development
|
|
For the Three Months Ended March 31,
|
|
|
|
|
|
|
2016
|
|
|
2015
|
|
|
% Change
|
|
|
|
|
|
|
|
|
|
|
|
Research and development expense
|
|
$
|
17,037
|
|
|
$
|
19,433
|
|
|
|
(12.3
|
) %
|
Research and development expense decreased by $2,396, or 12.3% for the three months ended March 31, 2016 as compared to the three months ended March 31, 2015. We expect research and development expenses to increase as we enter new markets like commercial fleet management, agriculture, and advertising. In addition, the hiring of engineers in the first quarter of 2016 will result in higher research and development costs in future periods.
General and Administration Expense
|
|
For the Three Months Ended March 31,
|
|
|
|
|
|
|
2016
|
|
|
2015
|
|
|
% Change
|
|
|
|
|
|
|
|
|
|
|
|
General & administration expense
|
|
$
|
318,664
|
|
|
|
331,228
|
|
|
|
(3.8
|
) %
|
General & administration expense decreased by $12,564 or 3.8% for the three months ended March 31, 2016 compared to the three months ended March 31, 2015. The table below outlines the differences in detail:
|
|
March 31,
2016
|
|
|
March 31,
2015
|
|
|
Difference
|
|
|
%
Difference
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounting & Legal
|
|
$
|
21,878
|
|
|
$
|
34,044
|
|
|
$
|
(12,166
|
)
|
|
|
-35.74
|
%
|
Marketing & Advertising
|
|
|
142,634
|
|
|
|
187,779
|
|
|
|
(45,145
|
)
|
|
|
-24.04
|
%
|
Subcontractor & Commissions
|
|
|
24,472
|
|
|
|
6,535
|
|
|
|
17,937
|
|
|
|
274.48
|
%
|
Interest Expense
|
|
|
12,746
|
|
|
|
7,638
|
|
|
|
5,108
|
|
|
|
66.88
|
%
|
Hardware Design
|
|
|
12,745
|
|
|
|
779
|
|
|
|
11,966
|
|
|
|
1536.42
|
%
|
Office Expense, Rent, Software, Bank & Credit Card Charges, Telephone, Travel, & Meals
|
|
|
104,189
|
|
|
|
94,453
|
|
|
|
9,736
|
|
|
|
-10.24
|
%
|
|
|
$
|
318,664
|
|
|
$
|
331,228
|
|
|
$
|
(12,564
|
)
|
|
|
|
|
Overall, there was a decrease of $12,166 in accounting & legal fees due to efforts in decreasing legal costs for public filing requirements in the three months ended March 31, 2016. There was a decrease of $45,145 in marketing and advertising costs, this was due to the convertible note issued in March 31, 2015 for marketing services, in the three months ended March 31, 2016, no additional advertising services was expensed from the convertible note. Marketing and advertising also includes tradeshow costs, which provides us with brand recognition and awareness, and to help generate sales. Tradeshow costs include tradeshow rental space, booth design, travel, meals and entertainment costs, and hiring of additional staff. There was an increase of $17,937 and $11,966 in subcontractor wages and hardware design, respectively, this was due to hiring of engineers for software and hardware development needs. Overall, there was an increase of $14,844 in office and computer expense, rent, operations software, bank and interest charges, and filing fees for the three months ended March 31, 2016 compared to the three months ended March 31, 2015, this was due to due to warranty shipping and travel costs, filing fees for SEC requirements, and interest expense.
Warranty Expense
|
|
For the Three Months Ended March 31,
|
|
|
|
|
|
|
2016
|
|
|
2015
|
|
|
% Change
|
|
|
|
|
|
|
|
|
|
|
|
Warranty Expense
|
|
$
|
45,217
|
|
|
$
|
58,843
|
|
|
|
(23.2
|
) %
|
Warranty expense decreased by $13,626, or 23.2% for the three months ended March 31, 2016 as compared to the three months ended March 31, 2015. The decrease in warranty expense was primarily due to using a combination of repairing repairable units and replacing older units with new units, in order to help lower warranty costs. We are currently outsourcing products from an alternative supplier, which we believe will reduce the instances of defective products and reduce our warranty expense in future periods. In addition, the warranty amount for the three months ended March 31, 2016 includes a reserve of $115,643 for future warranty costs, no reserve was used in prior periods, and warranty costs were expensed as incurred.
Foreign Currency Exchange
|
|
For the Three Months Ended March 31,
|
|
|
|
|
|
|
2016
|
|
|
2015
|
|
|
% Change
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency exchange
|
|
$
|
(72,140
|
)
|
|
$
|
20,995
|
|
|
|
(443.6
|
) %
|
For the three months ended March 31, 2016, we recognized $72,140 gain in foreign currency transaction losses as compared to $20,995 in foreign currency transaction losses for the three months ended March 31, 2016. The decrease was primarily due to the gains or losses arising from exchange rate fluctuations on payables, receivables, and other foreign exchange transactions denominated in currencies other than the functional currencies of the legal entities in which the transactions are recorded. Foreign currency fluctuations are primarily from the Canadian Dollar, Euro and British pound.
Finance Costs
|
|
For the Three Months Ended March 31,
|
|
|
|
|
|
|
2016
|
|
|
2015
|
|
|
% Change
|
|
|
|
|
|
|
|
|
|
|
|
Finance costs
|
|
$
|
108,560
|
|
|
$
|
47,798
|
|
|
|
127.1
|
%
|
Finance costs increased by $60,762 or 127.1%, for the three months ended March 31, 2016 as compared to the three months ended March 31, 2015. The increase was primarily due to accrued interest expensed from additional loans and note convertible loans obtained after the three months ended March 31, 2015.
Liquidity and Capital Resources
From our incorporation in April 17, 2008 through March 31, 2016, we have financed our operations, capital expenditures and working capital needs through the sale of common shares and the incurrence of indebtedness, including term loans, convertible loans, revolving lines of credit and purchase order financing. At March 31, 2016, we had $2,362,393 in outstanding indebtedness, which all matures within the next twelve months.
We had cash in the amount of $0 as of March 31, 2016 as compared to $11,675 as of March 31, 2016. We had a working capital deficit of $3,666,597 as of March 31, 2016 compared to working capital deficit of 1,260,031 as of March 31, 2015.
Liquidity and Financial Condition
Our financial position as of March 31, 2016 and 2015, and the changes for the periods then ended are as follows:
Working Capital
|
|
|
|
|
|
|
|
Percentage
|
|
|
|
At March 31,
|
|
|
At March 31,
|
|
|
Increase/
|
|
|
|
2016
|
|
|
2015
|
|
|
(Decrease)
|
|
|
|
|
|
|
|
|
|
|
|
Current Assets
|
|
$
|
628,283
|
|
|
$
|
1,319,784
|
|
|
|
(52.4
|
) %
|
Current Liabilities
|
|
$
|
4,294,880
|
|
|
$
|
2,579,815
|
|
|
|
66.5
|
%
|
Working Capital
|
|
$
|
(3,666,597
|
)
|
|
$
|
(1,260,031
|
)
|
|
|
191.0
|
%
|
Cash Flow Analysis
Our cash flows from operating, investing and financing activities are summarized as follows:
|
|
March 31
|
|
|
|
2016
|
|
|
2015
|
|
|
|
|
|
|
|
|
Net cash used in operating activities
|
|
$
|
(259,817
|
)
|
|
$
|
(216,967
|
)
|
Net cash provided by investing activities
|
|
|
378
|
|
|
|
12,155
|
|
Net cash provided by financing activities
|
|
|
243,919
|
|
|
|
127,735
|
|
Net decrease in cash
|
|
|
(15,520
|
)
|
|
|
(77,077
|
)
|
Cash at beginning of period
|
|
|
0.00
|
|
|
|
91,840
|
|
Cash at end of period
|
|
$
|
0.00
|
|
|
$
|
11,675
|
|
Net Cash Used in Operating Activities
. During the three months ended March 31, 2016, cash used in operations totaled $259,817. This reflects the net loss of $461,981 less $202,164 provided by changes in operating assets and liabilities and adjustments for non-cash items. Cash provided by working capital items was primarily impacted by a decrease in prepaid expense and deposits of $75,651, a decrease in related party receivable of $10,142, an increase in trade receivables of $61,117, a decrease of $37,436 in inventories, and an increase in trade payables of $117,343.
During the three months ended March 31, 2015, cash used in operations totaled $216,967. This reflects a net loss of $340,241 less $123,274 provided by changes in operating assets and liabilities and adjustments for non-cash items. Cash provided by working capital items was primarily impacted by $158,381 for non-cash financing costs for notes issued for services, an increase of prepaid expense and deposits of $311,993, a decrease of inventory of $23,684, a decrease of $513,911 in trade receivables, and an increase in trade payables of $166,600.
Net Cash Provided by Investing Activities
. Investing activities provided $378 of cash in the three months ended March 31, 2016, and $12,155 for the three months ended March 31, 2015 for TAG system units leased to customers.
Net Cash Provided by Financing Activities
. Net cash used in financing activities during the three months ended March 31, 2016 totaled $243,919, of which $239,542 was from various note and loan facilities entered into during the period. Net cash provided by financing activities during the three months ended March 31, 2015 was $127,735, of which was from various note and loan facilities entered into during the period.
Outstanding Indebtedness
Our current indebtedness as of March 31, 2016 is comprised of the following:
|
·
|
Unsecured loan payable in the amount of $192,738 bearing interest at 15% per annum and due on demand;
|
|
·
|
Unsecured loan payable in the amount of $315,000 bearing interest at 18% per annum;
|
|
·
|
Unsecured note payable in the amount of $53,885, bearing interest at 36% per annum and due on July 20, 2017;
|
|
·
|
Secured convertible loan payable in the amount of $949,139, bearing interest at 15.2% per annum and due on December 31, 2015;
|
|
·
|
Unsecured, convertible note payable to related party in the amount of $310,000, bearing interest at 5% per annum and due on March 30, 2016;
|
|
·
|
Unsecured, convertible note payable in the amount of $250,000, bearing interest at 10% per annum and due on demand;
|
|
·
|
Unsecured, loan payable in the amount of $41,631, interest 6% per annum, due April 30, 2016;
|
|
·
|
Unsecured, loan payable in the amount of $250,000, interest 10% per annum, with a minimum interest amount of $25,000, due July 22, 2016.
|
Preferred Stock Redemption Obligations
Westergaard Holdings Ltd., an affiliate of Keith Westergaard, a member of our board of directors, owns 4,229,384 shares (the “Series A Shares”) of Series A Convertible Preferred Stock of DSG TAG Systems. Pursuant to a Subscription / Debt Settlement Agreement dated September 26, 2014 between DSG TAG Systems and Westergaard Holdings, as amended on April 29, 2016, DSG TAG Systems has agreed that DSG Global, Inc. will complete financings for gross proceeds of at least $10 million and use a portion of the proceeds to redeem all of the Series A Shares at a price of $1.25 per share, as follows:
|
·
|
On or before August 1, 2016, we must complete a financing for gross proceeds of at least $2.5 million and use at least $1.125 million to redeem a minimum of 900,000 Series A Shares;
|
|
·
|
On or before September 1, 2016, we must complete an additional financing for gross proceeds of at least $2.5 million and use at least $1.125 million to redeem a minimum of 900,000 additional Series A Shares; and
|
|
·
|
On or before October 1, 2016, we must complete an additional financing for gross proceeds of at least $5.0 million and use at least $3.14 million to redeem the remaining 2,509,384 Series A Shares.
|
If we fail to satisfy the above described financing and share redemption schedule, we will be in default of the Subscription and Debt Settlement Agreement which would entitle the holder of the Preferred Shares to convert the Series A Convertible Preferred Shares into common shares in the capital of DSG Global at the price of $1.25 per share.
Prospective Capital Needs
We estimate our operating expenses and working capital requirements for the twelve month period beginning April 1, 2016 to be as follows:
Estimated Expenses for the Twelve Month Period Beginning April 1, 2016
Management compensation
|
|
$
|
500,000
|
|
Professional fees
|
|
$
|
150,000
|
|
General and administrative
|
|
$
|
1,900,000
|
|
Total
|
|
$
|
2,550,000
|
|
At present, our cash requirements for the next 12 months outweigh the funds available to maintain our operations or development of any future properties. Of the $2,550,000 that we require for the next 12 months, we had $12,600 in cash as of May 13, 2016, and a working capital deficit of $3,666,597. Our principal sources of liquidity are our existing cash and cash generated from product sales. In order to achieve sustained profitability and positive cash flows from operations, we will need to increase revenue and/or reduce operating expenses. Our ability to maintain, or increase, current revenue levels to achieve and sustain profitability will depend, in part, on demand for our products.
In order to improve our liquidity, we also plan to pursue additional equity financing from private investors or possibly a registered public offering. We do not currently have any definitive arrangements in place for the completion of any further private placement financings and there is no assurance that we will be successful in completing any further private placement financings. If we are unable to achieve the necessary additional financing, then we plan to reduce the amounts that we spend on our business activities and administrative expenses in order to be within the amount of capital resources obligations, and execute our business plan. There can be no assurances that we will be able to raise additional capital on acceptable terms or at all, which would adversely affect our ability to achieve our business objectives.
Off-Balance Sheet Transactions
We do not have any off-balance sheet arrangements.
Critical Accounting Policies and Estimates
We prepare our consolidated financial statements in accordance with U.S. GAAP. The preparation of consolidated financial statements also requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue, costs and expenses, and related disclosures. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances. Actual results could differ significantly from the estimates made by our management. To the extent that there are differences between our estimates and actual results, our future financial statements presentation, financial condition, results of operations, and cash flows will be affected.
We believe that the assumptions and estimates associated with revenue recognition, foreign currency and foreign currency transactions and comprehensive loss have the greatest potential impact on our consolidated financial statements. Therefore, we consider these to be our critical accounting policies and estimates. For further information on all of our significant accounting policies, see the notes to our condensed consolidated financial statements.