Quarterly Report (10-q)

Date : 08/15/2018 @ 5:45PM
Source : Edgar (US Regulatory)
Stock : DSG Global Inc (DSGT)
Quote : 0.2875  -0.4125 (-58.93%) @ 9:19PM

Quarterly Report (10-q)

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

 

For the quarterly period ended June 30, 2018

 

or

 

[  ] Transition Report Pursuant Section 13 or 15(d) of the Securities Exchange Act of 1934

 

For the transition period from _____________ to _____________.

 

Commission file number 000-53988

 

DSG GLOBAL, INC.

(Exact name of registrant as specified in its charter)

 

Nevada   26-1134956
(State or other jurisdiction of
incorporation or organization)
 

(I.R.S. Employer

Identification No.)

 

214 - 5455 152nd Street

Surrey, British Columbia V3S 5A5, Canada

(Address of principal executive offices, zip code)

 

(604) 575-3848

(Registrant’s telephone number, including area code)

 

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 [X] 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 during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes [  ] No [X ]

 

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 (Check one):

 

Large accelerated filer [  ]   Accelerated filer  [  ]
Non-accelerated filer [  ] (Do not check if smaller reporting company) Smaller reporting company  [X]

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes [  ] No [X]

 

As August 10, 2018, the issuer had 1,643,444,139 shares of common stock issued and outstanding.

 

 

 

     
 

 

DSG GLOBAL, INC.
TABLE OF CONTENTS

 

    Page No.
PART I — FINANCIAL INFORMATION  
     
Item 1. Financial Statements (unaudited) 3
     
  Interim Condensed Consolidated Balance Sheets 4
     
 

Interim Condensed Consolidated Statements of Operations

5
     
 

Interim Condensed Consolidated Statements of Cash Flows

6
     
 

Notes to Interim Condensed Consolidated Financial Statements

7
     
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 23
     
Item 3. Quantitative and Qualitative Disclosures About Market Risk 36
     
Item 4. Controls and Procedures 36
     
PART II — OTHER INFORMATION  
     
Item 1. Legal Proceedings 37
     
Item 1A. Risk Factors 38
     
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 38
     
Item 3. Defaults Upon Senior Securities 38
     
Item 4. Mine Safety Disclosures 38
     
Item 5. Other Information 38
     
Item 6. Exhibits 39
     
Signatures 42

 

  2  
 

 

PART I: FINANCIAL INFORMATION

 

ITEM 1: Financial Statements (unaudited)

 

The accompanying unaudited consolidated interim financial statements of DSG Global Inc. as at June 30, 2018, have been prepared by our management in conformity with accounting principles generally accepted in the United States of America and in accordance with the instructions to Form 10-Q and Rule 8-03 of Regulation S-X and, therefore, do not include all information and footnotes necessary for a complete presentation of financial position, results of operations, cash flows, and stockholders’ equity in conformity with generally accepted accounting principles. In the opinion of management, all adjustments considered necessary for a fair presentation of the results of operations and financial position have been included and all such adjustments are of a normal recurring nature.

 

Operating results for the six month period ended June 30, 2018 are not necessarily indicative of the results that can be expected for the year ending December 31, 2018.

 

  3  
 

 

DSG GLOBAL, INC.

INTERIM CONDENSED CONSOLIDATED BALANCE SHEETS

AS AT JUNE 30, 2018 AND DECEMBER 31, 2017

 

    June 30, 2018     December 31, 2017  
    (unaudited)     (revised - Note 15)  
ASSETS                
CURRENT ASSETS                
Cash   $ 15,999     $ 5,488  
Trade receivables, net     100,580       23,736  
Inventories     56,797       8,929  
Prepaid expenses and deposits     53,984       20,355  
Due from related party     -       1,034  
TOTAL CURRENT ASSETS     227,360       59,542  
                 
NON-CURRENT ASSETS                
Fixed assets, net     2,068       964  
Equipment on lease, net     6,440       14,814  
Intangible assets, net     15,901       15,395  
TOTAL NON-CURRENT ASSETS     24,409       31,173  
                 
TOTAL ASSETS   $ 251,769     $ 90,715  
                 
LIABILITIES AND STOCKHOLDERS’ DEFICIT                
CURRENT LIABILITIES                
Accounts payable and accrued liabilities   $ 3,509,112     $ 3,328,851  
Deferred revenue     282,869       159,665  
Warranty reserve     134,940       165,523  
Convertible note payable to related party     310,000       310,000  
Loans payable     872,144       887,275  
Derivative liabilities     2,471,295       1,676,155  
Convertible notes payable, net of unamortized discount of $606,928 and $301,360, respectively     2,109,878       2,019,132  
TOTAL CURRENT LIABILITIES     9,690,238       8,546,601  
                 
Commitments     -          
Contingencies                
Subsequent events                
                 
MEZZANINE EQUITY                
Redeemable Preferred Shares   $ 5,286,731     $ 5,286,731  
                 
STOCKHOLDERS’ DEFICIT                
Common stock, $0.001 par value, 2,000,000,000 shares
authorized 1,263,873,040 and 101,877,495 outstanding, respectively.
    1,263,873       101,877  
Additional paid in capital     19,409,004       17,511,673  
Accumulated other comprehensive income    

1,152,747

      873,250  
Deficit     (36,550,824 )     (32,229,417 )
TOTAL STOCKHOLDERS’ DEFICIT     (14,725,200 )     (13,742,617 )
                 
TOTAL LIABILITIES AND STOCKHOLDERS’ DEFICIT   $ 251,769     $ 90,715  

 

The accompanying notes are an integral part of the unaudited condensed consolidated financial statements

 

  4  
 

 

DSG GLOBAL, INC.

INTERIM CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

FOR THE SIX MONTHS ENDING JUNE 30, 2018 and 2017

(Unaudited)

 

    Three months ending     Six months ending  
    June 30, 2018     June 30, 2017     June 30, 2018     June 30, 2017  
                         
Revenue   $ 237,046     $ 434,202     $ 347,942     $ 682,472  
Cost of revenue     79,552       135,940       97,881       205,445  
Gross profit     157,494       298,262       250,061       477,027  
                                 
Operating expenses                                
Compensation expense     209,174       231,086       417,802       420,395  
General and administration expense     275,480       165,472       633,493       438,459  
Warranty expense     46,273       4,738       46,273       7,362  
Bad debt     2,099       45,377       30,992       45,377  
Depreciation and amortization expense     2,220       7,686       8,914       15,510  
Total operating expense     535,246       454,359       1,137,474       927,103  
Loss from operations     (377,752 )     (156,097 )     (887,413 )     (450,076 )
                                 
Other income (expense)                                
Foreign currency exchange gain (loss)     410,454     149,943       (150,212 )     160,946  
Other expenses     -       (1,401 )     -       (5,419 )
Change in fair value of derivative instruments     6,013,778       1,946,087       397,517       91,670  
Loss on extinguishment of debt     (768,964 )             (2,164,231 )     -  
Finance costs     (776,506 )     (339,254 )     (1,517,068 )     (669,718 )
Total other income (expense)     4,878,762       1,755,375       (3,433,994 )     (422,521 )
                                 
Net income (loss)   $ 4,501,010     $ 1,599,278     $ (4,321,407 )   $ (872,597 )
                                 
Foreign currency translation adjustments     (361,594 )     (160,775 )     279,497       (210,649 )
                                 
Comprehensive income (loss)   $ 4,139,416     $ 1,438,503     $ (4,041,910 )   $ (1,083,246 )
                                 
Basic and diluted loss per share   $ 0.00     $ 0.04     $ (0.01 )   $ (0.03 )
                                 
Weighted average number of shares used in computing basic and diluted net loss per share:     1,071,608,846       37,430,450       743,085,844       33,428,275  

 

The accompanying notes are an integral part of the unaudited condensed consolidated financial statements

 

  5  
 

 

DSG GLOBAL INC.

INTERIM CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE PERIODS ENDED JUNE 30, 2018 AND 2017

(UNAUDITED)

 

    Six Months Ended  
    June 30, 2018     June 30, 2017  
             
Net loss   $ (4,321,407 )   $ (872,597 )
                 
Adjustments to reconcile net loss to net cash used in operating activities:                
Depreciation and amortization     8,914       15,510  
Inventory write-off     -       1,580  
Depreciation included in cost of goods sold     -       5,216  
Non-cash financing costs     224,956       10,015  
Accretion of discounts on convertible debt     924,905       328,690  
Change in fair value of derivative liabilities     (397,517 )     (91,670 )
Reserve for bad debt     30,992       16,140  
Shares issued for services     2,250       112,500  
Loss on extinguishment of debt     2,164,231       -  
Unrealized foreign exchange     152,901       (52,317 )
                 
Change in operating assets and liabilities:                
Trade receivables, net     (107,836 )     (71,360 )
Inventories     (47,868 )     6,872  
Prepaid expense and deposits     (33,629 )     (8,809 )
Due from related party     1,034       -  
Trade payables and other payables     313,849       387,484  
Deferred revenue     123,204       8,970  
Warranty reserve     (30,583 )     3,874  
Net cash used in operating activities     (991,604 )     (199,902 )
                 
Cash flows from investing activities                
Purchase of property, plant and equipment     (1,544 )     -  
Net cash used in investing activities     (1,544 )     -  
                 
Cash flows from financing activities                
Bank overdraft     -       (2,986 )
Proceeds from issuing common stock     81,659       50,000  
Repayments of notes payable     (45,000 )     -  
Proceeds from note payable     967,000       338,000  
Repayments of related party loans payable     -       (11,886 )
Net cash provided by financing activities     1,003,659       373,128  
                 
Net increase in cash and cash equivalents     10,511       173,226  
                 
Effect of exchange rate changes on cash     -       (173,226 )
                 
Cash, beginning of period     5,488       -  
Cash, end of the period   $ 15,999     $ -  
                 
Cash paid during the period for:                
Income tax payments   $ -     $ -  
Interest payments   $ -     $ 22,110  
                 
Supplemental schedule of non-cash financing activities:                
Convertible debenture issued for financing fees   $ 15,000     $ -  
Shares issued for convertible loans payable   $ 2,975,418     $ 165,000  
Shares issued for convertible related party payable   $ -     $ 19,615  
Returnable shares issued for commitment fee   $ -     $ 220,000  

 

The accompanying notes are an integral part of the unaudited condensed consolidated financial statements

 

  6  
 

 

DSG GLOBAL, INC.
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2018

(unaudited)

 

Note 1 – ORGANIZATION

 

DSG Global, Inc. (formerly Boreal Productions Inc.) (the “Company”) was incorporated under the laws of the State of Nevada on September 24, 2007. The Company is a technology development company engaged in the design, manufacture, and marketing of fleet management solutions for the golf industry, as well as commercial, government and military applications. Its principal activities are the sale and rental of GPS tracking devices and interfaces for golf vehicles, and related support services. The Company specializes in the vehicle fleet management industry, primarily focused on the golf industry to help golf course operators manage their fleet of golf carts, turf equipment, and utility vehicles.

 

Previously, in anticipation of the share exchange agreement with DSG Tag Systems, Inc. (“DSG TAG”), we undertook to change our name and effect a reverse stock split of our authorized and issued common stock. Accordingly, on January 19, 2015, our board of directors approved an agreement and plan of merger to merge with our wholly-owned subsidiary DSG Global Inc., a Nevada corporation, to affect a name change from Boreal Productions Inc. to DSG Global, Inc. Our company remains the surviving company. DSG Global, Inc. was formed solely for the change of our name.

 

The Company’s wholly owned subsidiary, DSG TAG Systems, Inc. (“DSG TAG”) was incorporated under the laws of the State of Nevada on April 17, 2008 and extra provincially registered in British Columbia, Canada in 2008. In March 2011, DSG TAG formed DSG Tag Systems International, Ltd. in the United Kingdom (“DSG UK”). DSG UK is a wholly owned subsidiary of DSG TAG.

 

Note 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

Basis of Presentation

 

The accompanying interim condensed consolidated financial statements have been prepared in conformity with generally accepted accounting principles in the United States (“US GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X.

 

Certain information and footnote disclosures normally included in these interim condensed consolidated financial statements prepared in accordance with U.S. GAAP have been condensed or omitted pursuant to U.S. GAAP rules and regulations for presentation of interim financial information. Therefore, the unaudited condensed interim consolidated financial statements should be read in conjunction with the financial statements and the notes thereto, included in the Company’s Annual Report on the Form 10-K for the year ended December 31, 2017. Current and future financial statements may not be directly comparable to the Company’s historical financial statements. However, except as disclosed herein, there have been no material changes in the information disclosed in the notes to the financial statements for the year ended December 31, 2017 included in the Company’s Annual Report on Form 10-K filed with the Securities and Exchange Commission. In the opinion of Management, all adjustments considered necessary for a fair presentation, consisting solely of normal recurring adjustments, have been made. Operating results for the three and six months ended June 30, 2018 are not necessarily indicative of the results that may be expected for the year ending December 31, 2018.

 

Principles of Consolidation

 

These interim condensed consolidated financial statements include the accounts of DSG Global Inc., its subsidiary DSG Tag Systems, Inc., and its wholly owned subsidiary DSG Tag Systems International, Ltd., collectively referred to as the Company. For all periods presented, all significant intercompany accounts, transactions and profits have been eliminated in the consolidated financial statements and corporate administrative costs are not allocated to subsidiaries.

 

  7  
 

 

Use of Estimates

 

The preparation of these interim condensed consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Estimates and assumptions are reviewed periodically, and the effects of revisions are reflected in the condensed consolidated financial statements in the period they are determined.

 

Recently Issued Accounting Pronouncements

 

Applicable for fiscal years beginning after December 15, 2018:

 

In May 2014, the FASB issued Accounting Standards Update (“ASU”) No. 2014-09, “Revenue from Contracts with Customers”. This new standard replaces most of the existing revenue recognition guidance in U.S. GAAP permits the use of either the retrospective or cumulative effect transition method. The new standard, as amended, became effective in the first quarter of fiscal year 2018. The Company adopted the standard using the modified retrospective method. There was no effect for any adjustments to retained earnings (accumulated deficit) upon adoption of the standard on January 1, 2018.

 

In March 2017, the Financial Accounting Standards Board (“FASB”) issued ASC 2017-08 “ Receivables – Nonrefundable Fees and Other Costs (Subtopic 310-20) – Premium Amortization on Purchased Callable Debt Securities” an amendment to shorten the amortization period for certain callable debt securities held at a premium to the earliest call date. The amendments do not require an accounting change for securities held at a discount.

 

In July 2017, the Financial Accounting Standards Board (“FASB”) issued ASC 2017-11 “ Earnings Per Share (Topic 260), Distinguishing Liability from Equity (Topic 480), and Derivatives and Hedging (Topic 815) – (i) Accounting for Certain Financial Instruments with Down Round Features (ii) Replace of the Indefinite Deferral for Mandatorily Redeemable Financial Instruments. ” The amendments in (i) change the classification analysis of certain equity-linked financial instruments (or embedded features) with down round features and to help clarify existing disclosure requirements. The amendments in (ii) characterize the indefinite deferral of certain provisions and do not have an accounting effect.

 

In February 2016, the FASB issued ASU No. 2016-02, “Leases (Topic 842).” This accounting standard seeks to increase transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet and disclosing key information about leasing arrangements. Current US GAAP does not require lessees to recognize assets and liabilities arising from operating leases on the balance sheet. This standard also provides guidance from the lessees’ perspective on how to determine if a lease is an operating lease or a financing lease and the differences in accounting for each. In January 2018, the FASB issued ASU No. 2018-01, which allows for an entity to elect an optional transition practical expedient for land easements that exist or expired before adoption of Topic 842. The adoption of this standard is required for interim and fiscal periods beginning after December 15, 2018 and it is required to be applied using the modified retrospective approach. Early adoption is permitted.

 

The Company is currently evaluating the impact of the above standards on their consolidated financial statements. Other recent accounting pronouncements issued by the FASB, including its Emerging Issues Task Force, the American Institute of Certified Public Accountants, and the Securities and Exchange Commission did not or are not believed by management to have a material impact on the Company’s present or future consolidated financial statements.

 

Going Concern

 

As reflected in the accompanying financial statements, the Company incurred a net loss of $4,321,407 for the six month period ended June 30, 2018 and has a working capital deficit of $9,462,878 and an accumulated deficit of $36,550,824 as of June 30, 2018.

 

While the Company is attempting to grow revenues, improve margins, and lower costs, the Company’s cash position may not be sufficient to support the Company’s daily operations. Management is seeking to raise additional funds by way of a public or private offering. Management believes that the actions presently being taken to further implement its business plan and generate revenues provide the opportunity for the Company to continue as a going concern. While the Company believes in the viability of its strategy to generate revenues and in its ability to raise additional funds, there can be no assurances to that effect. The ability of the Company to continue as a going concern is dependent upon the Company’s ability to further implement its business plan and generate revenues.

 

These factors raise substantial doubt regarding the Company’s ability to continue as a going concern. These interim condensed consolidated financial statements do not include any adjustments that might be necessary if the Company is unable to continue as a going concern.

 

  8  
 

 

Reclassification

 

Certain prior year amounts have been reclassified for consistency with the current period presentation. These reclassifications had no effect on the reported results of operations or cash flows.

 

Note 3 – TRADE RECEIVABLES, NET

 

As of June 30, 2018 and December 31, 2017, trade receivables consisted of the following:

 

    June 30, 2018     December 31, 2017  
Trade receivables   $ 116,365     $ 52,373  
Allowance for bad debts     (15,785)       (28,637)  
Total trade receivables, net   $ 100,580     $ 23,736  

 

Note 4 – FIXED ASSETS

 

As of June 30, 2018, and December 31, 2017, fixed assets consisted of the following:

 

    June 30, 2018     December 31, 2017  
Furniture and equipment   $ 16,162     $ 17,914  
Computer equipment     25,320       26,435  
Accumulated depreciation     (39,414 )     (43,385 )
    $ 2,068     $ 964  

 

As of June 30, 2018, and December 31, 2017, equipment on lease consisted of the following:

 

    June 30, 2018     December 31, 2017  
Tags   $ 125,353     $ 124,314  
Text     27,705       27,475  
Touch     22,950       22,759  
Accumulated depreciation     (169,568)       (159,734)  
    $ 6,440     $ 14,814  

 

For the three months ended June 30, 2018 and 2017, total depreciation expense for fixed assets and leased equipment was $1,914 and $7,390 respectively.

 

For the six months ended June 30, 2018 and 2017, total depreciation expense for fixed assets and leased equipment was $8,320 and $14,918 respectively.

 

Note 5 – INTANGIBLE ASSETS

 

Intangible assets consist of the following as of June 30, 2018 and December 31, 2017:

 

    June 30, 2018     December 31, 2017  
Intangible asset – patent   $ 22,353     $ 21,253  
Accumulated depreciation     (6,452)       (5,858)  
    $ 15,901     $ 15,395  

 

The estimated useful life of the Patent is 20 years. Patents are amortized on a straight-line basis.

 

  9  
 

 

Note 6 – TRADE AND OTHER PAYABLES

 

As of June 30, 2018 and December 31, 2017, trade and other payables consist of the following:

 

 

    June 30, 2018     December 31, 2017  
Trade payables   $ 1,130,520     $ 1,121,841  
Accrued expenses     217,410       255,542  
Accrued interest     2,159,516       1,889,537  
Other liabilities     1,666       61,931  
Total trade and other payables   $ 3,509,112     $ 3,328,851  

 

Note 7 – LOANS PAYABLE

 

As of June 30, 2018 and December 31, 2017, loans payable consisted of the following:

 

Loans Payable   June 30, 2018     December 31, 2017  
             
Unsecured, due on demand, interest 15% per annum   $ 189,854     $ 199,283  
Unsecured, due on demand, interest 36% per annum     46,444       48,751  
Unsecured, loan payable, due on demand, interest 18% per annum     317,500       317,500  
Unsecured, loan payable, fee for services payable on the original loan amount of 5% by May 6, 2016, 10% payable by June 5, 2016, or 20% payable by July 5, 2016     68,346       71,741  
Unsecured, loan payable, interest 10% per annum, with a minimum interest amount of $25,000, due July 22, 2016.     250,000       250,000  
                 
Total current portion   $ 872,144     $ 887,275  

 

Note 8 – CONVERTIBLE LOANS PAYABLE

 

Related Party Convertible Loans Payable

 

(a) On March 31, 2015, the Company issued a convertible promissory note in the principal amount of $310,000 to a company owned by a director of the Company for marketing services. The convertible promissory note is unsecured, bears interest at 5% per annum, is convertible at $1.25 per common share, and is due on demand. As at June 30, 2018, the carrying value of the convertible promissory note was $310,000 (December 31, 2017 - $310,000).

 

Third Party Convertible Loans Payable

 

(b) On August 25, 2015, the Company issued a convertible promissory note in the principal amount of $250,000. The convertible promissory note is unsecured, bears interest at 10% per annum, is due on demand, and is convertible at $1.75 per share. As at June 30, 2018, the carrying value of the convertible promissory note was $250,000 (December 31, 2017 - $250,000).
   
(c) On November 7, 2016, the Company entered into a securities purchase agreement with a non-related party. Pursuant to the agreement, the Company was provided with proceeds of $125,000 on November 10, 2016 in exchange for the issuance of a secured convertible promissory note in the principal amount of $138,889, which was inclusive of an 8% original issue discount and bears interest at 8% per annum to the holder. The convertible promissory note matures six months from the date of issuance and is convertible at the option of the holder into our common shares at a price per share that is the lower of $0.12 or the closing price of the Company’s common stock on the conversion date. In addition, under the same terms, the Company also issued a secured convertible note of $50,000 in consideration for proceeds of $10,000 and another secured convertible note of $75,000 in consideration for proceeds of $10,000. Under the agreements, the Company has the right to redeem $62,500 and $40,000 of the notes for consideration of $1 each at any time prior to the maturity date in the event that the convertible promissory note is exchanged or converted into a revolving credit facility with the lender, whereupon the two $10,000 convertible note balances shall be rolled into such credit facility.
   
  On May 7, 2017, the Company triggered an event of default in the convertible note by failing to repay the full principal amount and all accrued interest on the due date. The entire convertible note payable became due on demand and would accrue interest at an increased rate of 1.5% per month (18% per annum) or the maximum rate permitted under applicable law until the convertible note payable was repaid in full.

 

  10  
 

 

  On May 8, 2017, the Company issued 100,000 common shares for the conversion of $5,000 of the $72,500 convertible note dated November 7, 2016. On May 24, 2017, the Company issued 210,000 common shares for the conversion of $10,500 of the $72,500 convertible note dated November 7, 2016. Refer to Note 11.
   
  On May 25, 2017, the lender provided conversion notice for the remaining principal $57,000 of the $72,500 convertible note dated November 7, 2016. This conversion was not processed by the Company’s transfer agent due to direction from the Company not to honor any further conversion notices from the lender. In response, the Company received legal notification pursuant to the refusal to process further conversion notices. Refer to Note 14.
   
  As at June 30, 2018, the carrying value of the note was $245,889 (December 31, 2017 - $245,889) and the fair value of the derivative liability was $758,016 (December 31, 2017 - $629,759). During the six months ended June 30, 2018, the Company accreted $nil (2017 - $72,099) of the debt discount to finance costs.
   
(d)

On December 21, 2016, the Company entered into a convertible note agreement for the principal amount of $74,500 for consideration of $72,250 which was received on January 10, 2017. The note is unsecured, bears interest at 12% per annum, was due on December 21, 2017, and is convertible into common shares at a conversion price equal to the lessor of: (i) the closing sale price of the Company’s common stock on the trading day immediately preceding the closing date, and (ii) 50% of the lowest sale price for the Company’s common stock during the twenty-five consecutive trading days immediately preceding the conversion date. Interest will be accrued and payable at the time of repayment of the note. Financing fees on the note were $4,750. The derivative liability applied as a discount on the note was $72,250 and is being accreted over the life of the note.

   
  On July 24, 2017, the Company issued 800,000 common shares for the conversion of $26,850 of principal and a $750 finance fee. On October 10, 2017, the Company issued 1,000,000 common shares for the conversion of $705 of principal, $3,200 of penalty interest, and a $750 finance fee. On October 19, 2017, the Company issued 4,400,000 common shares for the conversion of $4,814 of principal and a $1,500 finance fee. On October 25, 2017, the Company issued 2,700,000 common shares for the conversion of $3,030 of principal and a $750 finance fee. On October 27, 2017, the Company issued 3,000,000 common shares for the conversion of $3,450 of principal and a $750 finance fee. On October 31, 2017, the Company issued 3,000,000 common shares for the conversion of $3,450 of principal and a $750 finance fee. On December 27, 2017, the Company issued 4,200,000 common shares for the conversion of $1,182 of principal and a $750 finance fee. On December 29, 2017, the Company issued 4,600,000 common shares for the conversion of $1,132 of principal and a $750 conversion fee.
   
  During the six months ended June 30, 2018, the Company incurred a default fee of $36,000 for failure to honor the conversion notice in a timely manner and issued 56,200,000 common shares with a fair value of $129,676 for the conversion of $13,461 of principal, $37,491 of default fees and finance costs, $5,250 for conversion fees resulting in a loss on settlement of debt of $73,474.
   
  On May 8, 2018, the Company paid $45,000 to settle the balance of the $74,500 convertible note including accrued interest. The Company recognized a gain on the settlement of this convertible note totaling $24,752.
   
  As at June 30, 2018, the carrying value of the note was $nil (December 31, 2017 - $65,887) and the fair value of the derivative liability was $nil (December 31, 2017 - $31,431). During the six months ended June 30, 2018, the Company accreted $nil (2017 - $1,180) of the debt discount and $nil (2017 - $37,905) of the financing fees to finance costs.
   
(e) On January 18, 2017, the Company issued a convertible promissory note in the principal amount of $75,000. The note is unsecured, bears interest at 12% per annum, was due on October 18, 2017, and is convertible into common shares at a conversion price equal to the lessor of (i) 60% multiplied by the lowest trading price (representing a discount rate of 40%) during the previous twenty-five trading day period ending on the latest complete trading day prior to the date of the note; and (ii) the variable conversion price which means 50% multiplied by the lowest trading price (representing a discount rate of 50%) during the previous twenty five trading day period ending on the latest complete trading day prior to the conversion date. Interest will be accrued and payable at the time of promissory note repayment. Financing fees on the note were $2,750. The derivative liability applied as a discount on the note was $75,000 and is being accreted over the life of the note.

 

  11  
 

 

  On July 28, 2017, the Company issued 500,000 common shares for the conversion of $4,474 of principal and $4,586 of accrued interest. On September 7, 2017, the Company issued 750,000 common shares for the conversion of $12,549 of principal and $951 of accrued interest. On October 11, 2017, the Company issued 750,000 common shares for the conversion of $3,342 of principal and $648 of accrued interest. On October 20, 2017, the Company issued 2,229,400 common shares for the conversion of $3,369 of principal and $198 of accrued interest. On October 27, 2017, the Company issued 3,017,400 common shares for the conversion of $4,592 of principal and $236 of accrued interest. On November 7, 2017, the Company issued 3,667,000 common shares for the conversion of $5,530 of principal and $337 of accrued interest.
   
  On November 7, 2017, the Company incurred a loan penalty of $15,000 for the conversion price being below the Company’s par value.
   
  On June 1, 2018 the remaining $56,144 principal balance and $2,023 in accrued interest were reassigned to another unrelated note holder and the note was treated as an extinguishment. Upon reassignment, the Company incurred a finance fee of $46,833 which was added to the principle balance of the new convertible note totaling $105,000. Refer to Note 8(z).
   
  As at June 30, 2018, the carrying value of the note was $nil (December 31, 2017 - $56,144) and the fair value of the derivative liability was $nil (December 31, 2017 - $70,818). During the six months ended June 30, 2018, the Company accreted $nil (2017 - $3,149) of the debt discount and $nil (2017 - $49,725) of the financing fees to finance costs.
   
(f) On April 3, 2017, the Company issued a convertible promissory note in the principal amount of $110,000. The note is unsecured, bears interest at 10% per annum, was due on October 3, 2017, and is convertible into common shares at a conversion price equal to the lessor of: (i) 55% multiplied by the lowest trading price during the previous twenty-five trading day period ending on the latest complete trading day prior to the date of this note and (ii) the alternate conversion price which means 55% multiplied by the lowest trading price during the previous twenty-five trading day period ending on the latest complete trading day prior to the conversion date. Interest will be accrued and payable at the time of promissory note repayment. In connection with the issuance, the Company issued 550,000 common shares as a commitment fee, however, these common shares must be returned if the note is fully repaid and satisfied prior to the maturity date. Financing fees on the note were $10,000. The derivative liability applied as a discount on the note was $100,000 and is being accreted over the life of the note.
   
  On October 11, 2017, the Company issued 1,415,205 common shares for the conversion of $2,590 of principal and $5,880 of accrued interest. On October 18, 2017, the Company issued 2,123,434 common shares for the conversion of $5,430 of principal and $494 of accrued interest. On October 19, 2017, the Company issued 2,229,450 common shares for the conversion of $3,879 of principal and $134 of accrued interest. On October 23, 2017, the Company issued 2,440,467 common shares for the conversion of $4,134 of principal and $258 of accrued interest. On October 26, 2017, the Company issued 1,791,445 common shares for the conversion of $3,107 of principal and $118 of accrued interest. On October 31, 2017, the Company issued 2,500,728 common shares for the conversion of $4,262 of principal and $239 of accrued interest. On November 2, 2017, the Company issued 1,499,272 common shares for the conversion of $2,528 of principal and $171 of accrued interest. On November 13, 2017, the Company issued 3,017,333 common shares for the conversion of $4,823 of principal and $608 of accrued interest. On November 22, 2017, the Company issued 4,000,565 common shares for the conversion of $4,292 of principal and $469 of accrued interest. On December 27, 2017, the Company issued 4,200,200 common shares for the conversion of $1,656 of principal and $1,725 of accrued interest. On December 29, 2017, the Company issued 4,619,360 common shares for the conversion of $3,347 of principal and $48 of accrued interest. During the six months ended June 30, 2018, the Company issued 247,495,414 common shares with a fair value of $571,886 for the conversion of $69,952 of principal and $56,227 of default fees and finance costs resulting in a loss on settlement of debt of $445,707.
   
  As at June 30, 2018, the carrying value of the note was $nil (December 31, 2017 - $69,952) and the derivative liability was $nil (December 31, 2017 - $108,326).

 

  12  
 

 

(g) On June 5, 2017, the Company issued a convertible promissory note in the principal amount of $110,000. The note is unsecured, bears interest at 10% per annum, was due on December 5, 2017, and is convertible into common shares at a conversion price equal to the lessor of (i) 55% multiplied by the lowest trading price during the previous twenty-five trading day period ending on the latest complete trading day prior to the date of this note and (ii) the alternate conversion price which means 55% multiplied by the lowest trading price during the previous twenty-five trading day period ending on the latest complete trading day prior to the conversion date. Interest will be accrued and payable at the time of promissory note repayment. Financing fees on the note were $7,000. The derivative liability applied as a discount on the note was $103,000 and is being accreted over the life of the note.
   
  On January 19, 2018, $50,000 of the note was reassigned to another unrelated note holder and the note was treated as an extinguishment. There were no material changes to the note upon reassignment. Refer to Note 8(o).
   
  On March 2, 2018, $25,000 of the note was reassigned to another unrelated note holder and the note was treated as an extinguishment. There were no material changes to the note upon reassignment. Refer to Note 8(r).
   
  During the six months ended June 30, 2018, the Company issued 206,994,645 common shares with a fair value of $524,487 for the conversion of the remaining principal balance of $35,000, and default penalties and finance costs of $37,448 resulting in a loss on settlement of debt of $452,039.
   
  As at June 30, 2018, the Company has accrued $9,487 in interest and penalties on the note and the fair value of the derivative liability was $13,936 (December 31, 2017 - $188,798).
   
(h) On July 17, 2017, the Company issued a convertible promissory note in the principal amount of $135,000. The note is unsecured, bears interest at 10% per annum, is due on July 17, 2018, and is convertible into common shares at a conversion price equal to the lessor of (i) 55% multiplied by the lowest trading price during the previous twenty trading day period ending on the latest complete trading day prior to the date of this note and (ii) $0.061. Interest will be accrued and payable at the time of promissory note repayment. Financing fees on the note were $16,500. Derivative liability applied as discount on the note was $118,500 and is being accreted over the life of the note. During the six months ended June 30, 2018, the Company issued 100,000,000 common shares with a fair value of $227,222 for the conversion of $53,530 of principal balance resulting in a loss on settlement of debt of $173,692.
   
  As at June 30, 2018, the carrying value of the note was $81,470 (December 31, 2017 - $70,718) and the fair value of the derivative liability was $138,828 (December 31, 2017 - $205,563). During the six months ended June 30, 2018, the Company accreted $64,282 (2017 - $nil) of the debt discount to interest expense.
   
(i) On August 17, 2017, the Company issued a convertible promissory note in the principal amount of $110,250. The note is unsecured, bears interest at 8% per annum, is due on August 16, 2018, and is convertible at 58% of to the lowest trading price during the previous ten trading days to the date of a conversion notice. Interest will be accrued and payable at the time of promissory note repayment. Deferred financing fees on the note were $5,250. The derivative liability applied as a discount on the note was $105,000 and is being accreted over the life of the note. During the six months ended June 30, 2018, the Company issued 86,173,799 common shares with a fair value of $293,267 for the conversion of $121,240 of principal and interest resulting in a loss on settlement of debt of 172,027.
   
  As at June 30, 2018, the carrying value of the note was $nil (December 31, 2017 - $44,661) and the fair value of the derivative liability was $nil (December 31, 2017 - $166,460). During the six months ended June 30, 2018, the Company accreted $65,589 (2017 - $nil) of the debt discount to finance costs.
   
(j) On September 6, 2017, the Company issued a convertible promissory note in the principal amount of $107,000. The note is unsecured, bears interest at 10% per annum, is due on March 6, 2018, and is convertible into common shares at a conversion price equal to the lessor of the lowest trading price during the previous twenty-five trading days prior to: (i) the date of the promissory note; or (ii) the latest complete trading day prior to the conversion date. Interest will be accrued and payable at the time of promissory note repayment. Deferred financing fees on the note were $7,000. The derivative liability applied as a discount on the note was $100,000 and is being accreted over the life of the note.
   
  On March 2, 2018, $111,808 of the note was reassigned to another unrelated note holder and the note was treated as an extinguishment. There were no material changes to the terms of the note upon reassignment. Refer to Note 8(s).

 

  13  
 

 

  As at June 30, 2018, the carrying value of the note was $nil (December 31, 2017 - $71,088) and the fair value of the derivative liability was $nil (December 31, 2017 - $100,000). During the six months ended June 30, 2018, the Company accreted $35,912 (2017 - $nil) of the debt discount to finance costs.
   
(k) On October 30, 2017, the Company issued a convertible promissory note in the principal amount of $107,000. The note is unsecured, bears interest at 10% per annum, is due on April 30, 2018, and is convertible into common shares at a conversion price equal to the lessor of the lowest trading price during the previous twenty-five trading days prior to: (i) the date of the promissory note; or (ii) the latest complete trading day prior to the conversion date. Interest will be accrued and payable at the time of promissory note repayment. Deferred financing fees on the note were $7,000. The derivative liability applied as a discount on the note was $100,000 and is being accreted over the life of the note.
   
  On May 22, 2018, the principal balance of $87,045 and accrued interest of $5,543 was reassigned to another unrelated note holder. There were no material changes to the note upon reassignment. Refer to Note 8(y).
   
  As at June 30, 2018, the carrying value of the note was $nil (December 31, 2017 - $41,066) and the fair value of the derivative liability was $nil (December 31, 2017 - $100,000). During the six months ended June 30, 2018, the Company accreted $65,934 (2017 - $nil) of the debt discount to finance costs.
   
(l) On December 18, 2017, the Company issued a convertible promissory note in the principal amount of $82,000. The note is unsecured, bears interest at 10% per annum, is due on June 18, 2018, and is convertible into common shares at a conversion price equal to the lessor of the lowest trading price during the previous twenty-five trading days prior to: (i) the date of the promissory note; or (ii) the latest complete trading day prior to the conversion date. Interest will be accrued and payable at the time of promissory note repayment. Deferred financing fees on the note were $7,000. The derivative liability applied as a discount on the note was $75,000 and is being accreted over the life of the note.
   
  On May 22, 2018, the principal balance of $82,000 and accrued interest of $3,055 was reassigned to another unrelated note holder. There were no material changes to the note upon reassignment. Refer to Note 8(y).
   
  As at June 30, 2018, the carrying value of the note was $nil (December 31, 2017 - $12,357) and the fair value of the derivative liability was $nil (December 31, 2017 - $75,000). During the six months ended June 30, 2018, the Company accreted $69,643 (2017 - $nil) of the debt discount to finance costs.
   
(m) On January 18, 2018, the Company issued a convertible promissory note in the principal amount of $55,000. The note is unsecured, bears interest at 10% per annum, is due on July 18, 2018, and is convertible into common shares at a conversion price equal to the lessor of the lowest trading price during the previous twenty-five trading days prior to: (i) the date of the promissory note; or (ii) the latest complete trading day prior to the conversion date. Interest will be accrued and payable at the time of promissory note repayment. The derivative liability applied as a discount on the note was $55,000 and is being accreted over the life of the note.
   
  On June 18, 2018, the principal balance of $55,000 and accrued interest of $2,215 was reassigned to another unrelated note holder. There were no material changes to the note upon reassignment. Refer to Note 8(aa).
   
  As at June 30, 2018, the carrying value of the note was $nil and the fair value of the derivative liability was $nil. During the six months ended June 30, 2018, the Company accreted $49,258 of the debt discount to finance costs.
   
(n) On January 19, 2018, the Company issued a convertible promissory note in the principal amount of $55,000. The note is unsecured, bears interest at 10% per annum, is due on January 19, 2019, and is convertible into common shares at a conversion price equal to 55% of the lowest trading price during the previous fifteen trading days prior to the conversion date, including the conversion date. Interest will be accrued and payable at the time of promissory note repayment. The derivative liability applied as a discount on the note was $55,000 and is being accreted over the life of the note.
   
  As at June 30, 2018, the carrying value of the note was $24,411 and the fair value of the derivative liability was $90,688. During the six months ended June 30, 2018, the Company accreted $24,411 of the debt discount to finance costs.

 

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(o) On January 19, 2018, the Company issued a convertible promissory note in the principal amount of $50,000, as partial replacement for a convertible promissory note originally issued on June 5, 2017 in the amount of $110,000. Refer to Note 8(g). The note is unsecured, bears interest at 10% per annum, is due on January 19, 2019, and is convertible into common shares at a conversion price equal to 55% of the lowest trading price during the previous fifteen trading days prior to the conversion date, including the conversion date. Interest will be accrued and payable at the time of promissory note repayment. The derivative liability applied as a discount on the note was $50,000 and is being accreted over the life of the note. During the six months ended June 30, 2018, the Company issued 57,244,977 common shares with a fair value of $137,143 to convert principal balance of $50,000 and accrued interest of $309 resulting in a loss on settlement of debt of $86,834.
   
  During the six months ended June 30, 2018, the Company accreted $50,000 of the debt discount to finance costs.
   
(p) On February 2, 2018, the Company issued a convertible promissory note in the principal amount of $107,500. The note is unsecured, bears interest at 10% per annum, is due on August 2, 2018, and is convertible into common shares at a conversion price equal to the lesser of the lowest trading price during the previous twenty-five trading days prior to: (i) the date of the promissory note; or (ii) the latest complete trading day prior to the conversion date. Interest will be accrued and payable at the time of promissory note repayment. The derivative liability applied as a discount on the note was $107,500 and is being accreted over the life of the note.
   
  On June 18, 2018, the principal balance of $107,500 and accrued interest of $4,005 was reassigned to another unrelated note holder. There were no material changes to the note upon reassignment. Refer to Note 8(aa).
   
  As at June 30, 2018, the carrying value of the note was $nil and the fair value of the derivative liability was $nil. During the six months ended June 30, 2018, the Company accreted $87,418 of the debt discount to finance costs.
   
(q) On March 2, 2018, the Company issued a convertible promissory note in the principal amount of $128,000. The note is unsecured, bears interest at 10% per annum, is due on March 2, 2019, and is convertible into common shares at a conversion price equal to 55% of the lowest trading price during the previous fifteen trading days prior to the conversion date, including the conversion date. Interest will be accrued and payable at the time of promissory note repayment. The derivative liability applied as a discount on the note was $128,000 and is being accreted over the life of the note.
   
  As at June 30, 2018, the carrying value of the note was $42,082 and the fair value of the derivative liability was $210,605. During the six months ended June 30, 2018, the Company accreted $42,082 of the debt discount to finance costs.
   
(r) On March 2, 2018, the Company issued a convertible promissory note in the principal amount of $25,000, as partial replacement for a convertible promissory note originally issued on June 5, 2017 in the amount of $110,000. Refer to Note 8(g). The note is unsecured, bears interest at 10% per annum, is due on March 2, 2019, and is convertible into common shares at a conversion price equal to 55% of the lowest trading price during the previous fifteen trading days prior to the conversion date, including the conversion date. Interest will be accrued and payable at the time of promissory note repayment. The derivative liability applied as a discount on the note was $25,000 and is being accreted over the life of the note. During the six months ended June 30, 2018, the Company issued 45,518,437 common shares with a fair value of $131,335 for the conversion of $25,000 of principal and accrued interest of $35 resulting in a loss on settlement of debt of $106,300.
   
  During the six months ended June 30, 2018, the Company accreted $25,000 of the debt discount to finance costs.
   
(s) On March 2, 2018, the Company issued a convertible promissory note in the principal amount of $111,808, as partial replacement for a convertible promissory note originally issued on September 6, 2017 in the amount of $107,000 plus accrued interest. Refer to Note 8(j). The note is unsecured, bears interest at 10% per annum, is due on March 2, 2019, and is convertible into common shares at a conversion price equal to 55% of the lowest trading price during the previous fifteen trading days prior to the conversion date, including the conversion date. Interest will be accrued and payable at the time of promissory note repayment. The derivative liability applied as a discount on the note was $25,000 and is being accreted over the life of the note. During the six months ended June 30, 2018, the Company issued 84,783,673 common shares with a fair value of $290,632 for the conversion of $93,400 of principal and $1,054 of accrued interest resulting in a loss on settlement of debt of $196,178.
   
  As at June 30, 2018, the carrying value of the note was $4,985 and the fair value of the derivative liability was $29,902. During the six months ended June 30, 2018, the Company accreted $98,385 of the debt discount to finance costs.

 

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(t) On March 19, 2018, the Company issued a convertible promissory note in the principal amount of up to $900,000. The note is unsecured, bears interest at 12% per annum, is due on September 19, 2018, and is convertible into common shares after 180 days from issuance date at a conversion price equal to the lessor of: (i) the lowest trading price during the previous fifteen trading days prior to the date of the promissory note; or (ii) 55% of the lowest trading price during the previous fifteen days prior to the latest complete trading day prior to the conversion date. Interest will be accrued and payable at the time of promissory note repayment.
   
  On March 19, 2018, the Company received $270,000 pursuant to the first tranche of the agreement, which is $300,000 in the principal amount, net of the original issuance discount of $30,000. The derivative liability applied as a discount on the note was $300,000 and is being accreted over the life of the note.
   
  As at June 30, 2018, the carrying value of the first tranche of the note was $163,043 and the fair value of the derivative liability was $423,476. During the six months ended June 30, 2018, the Company accreted $163,043 of the debt discount to finance costs.
   
  On May 3, 2018, the Company received $146,500, net of $3,500 in legal fees, pursuant to the second tranche of the agreement, which is $166,667 in the principle amount, net of the original issuance discount of $16,667. The derivative liability applied as a discount on the note was $166,667 and is being accreted over the life of the note.
   
  On May 3, 2018, the Company amended the convertible promissory note to include that at any time after the 100th calendar day after the funds are issued, and at the option of the holder in addition to the right of conversion, the holder may deduct daily payments from the Company’s bank account in the amount of $5,562 per calendar day or $27,812 per week until the Company has paid or the holder has converted an amount equal to the principal balance, interest, accrued interest, and default amount.
   
  As at June 30, 2018, the carrying value of the second tranche of the note was $52,536 and the fair value of the derivative liability was $241,079. During the six months ended June 30, 2018, the Company accreted $52,536 of the debt discount to finance costs.
   
(u) In January 2018, the Company issued a convertible promissory note in the principal amount of $15,000 as a commitment fee. The note is unsecured, non-interest bearing until default, is due on August 16, 2018, and is convertible into common shares at a conversion price equal to 75% of the average closing trading price during the previous five trading days prior to conversion date, with a minimum of $0.00005. On March 28, 2018, the Company issued 6,230,530 common shares with a fair value of $19,937 for the conversion of $10,000 of principal resulting in a loss on settlement of debt of $9,937.
   
  As at June 30, 2018, the carrying value of the note was $5,000 and the fair value of the derivative liability was $5,364.
   
(v) As at June 30, 2018, the Company owed a convertible promissory note in the principal amount of $934,939 (Cdn$1,231,128) (December 31, 2017 - $981,370 (Cdn$1,231,128)). The convertible promissory note is unsecured, bears interest at 17.2% per annum, is due on demand, and is convertible into Tags units at the average closing price of the 120 days period prior to conversion date. As at June 30, 2018, accrued interest of $604,452 (Cdn$795,960) (December 31, 2017 – $549,886(Cdn$689,832)) was recorded in accounts payable and accrued liabilities.
   
(w) On May 8, 2018 the Company issued a convertible note in the principal amount of $51,500. The note is unsecured, bears interest at 10% per annum, and is due on May 8, 2019. The note is convertible into common shares at a 32% discount to the lowest intra-day trading price of the Company’s common stock for the ten trading days immediately preceding the conversion date.
   
  As at June 30, 2018, the carrying value of the note was $9,889 and the fair value of the derivative liability was $65,203. During the six months ended June 30, 2018, the Company accreted $9,889 of the debt discount to finance costs.
   
(x) On May 28, 2018 the Company issued a convertible note in the principal amount of $180,000. The note is unsecured, bears interest at 10% per annum, and is due on May 8, 2019. The note is convertible into common shares at a 32% discount to the lowest intra-day trading price of the Company’s common stock for the ten trading days immediately preceding the conversion date.

 

  16  
 

 

  As at June 30, 2018, the carrying value of the note was $21,522 and the fair value of the derivative liability was $220,004. During the six months ended June 30, 2018, the Company accreted $21,522 of the debt discount to finance costs.
   
(y) On May 22, 2018 the Company reassigned convertible note balances from another unrelated party in the principal amount of $177,643. Refer to Note 8(k) and 8(l). The note is unsecured, bears interest at 10% per annum, became due and payable on June 18, 2018, and is convertible into common shares at a conversion price equal to the lessor of the lowest trading price during the previous twenty-five trading days prior to: (i) the date of the promissory note; or (ii) the latest complete trading day prior to the conversion date. Interest will be accrued and payable at the time of promissory note repayment. During the six months ended June 30, 2018, the Company issued 163,260,000 common shares with a fair value of $304,554 for the conversion of $146,518 of principal and $817 of accrued interest resulting in a loss on settlement of debt of $157,219.
   
  As at June 30, 2018, the carrying value of the note was $31,125 and the fair value of the derivative liability was $22,996.
   
(z) On June 1, 2018, the Company reassigned a convertible note from another unrelated party in the principal amount of $105,000; $58,167 in assigned principal and accrued interest and a finance fee of $46,833 Refer to Note 8(e). The note is unsecured, bears interest at 12% per annum, was due on October 18, 2017, and is convertible into common shares at a conversion price equal to the lessor of (i) 60% multiplied by the lowest trading price (representing a discount rate of 40%) during the previous twenty-five trading day period ending on the latest complete trading day prior to the date of the note; and (ii) the variable conversion price which means 50% multiplied by the lowest trading price (representing a discount rate of 50%) during the previous twenty five trading day period ending on the latest complete trading day prior to the conversion date. Interest will be accrued and payable at the time of promissory note repayment. During the six months ended June 30, 2018, the Company issued 13,000,000 common shares with a fair value of $26,000 for the conversion of $9,400 of principal and $350 of accrued interest resulting in a loss on settlement of debt of $16,250.
   
  As at June 30, 2018, the carrying value of the note was $95,600 and the fair value of the derivative liability was $126,594.
   
(aa) On June 18, 2018, the Company reassigned convertible note balances from another unrelated party in the principal amount of $168,721. Refer to Note 8(m) and 8(p). The note is unsecured, bears interest at 10% per annum, which is due on August 2, 2018, and is convertible into common shares at a conversion price equal to the lesser of the lowest trading price during the previous twenty-five trading days prior to: (i) the date of the promissory note; or (ii) the latest complete trading day prior to the conversion date. Interest will be accrued and payable at the time of promissory note repayment. The remaining derivative liability applied as a discount on the reassigned note was $25,824 and is being accreted over the remaining life of the note.
   
 

As at June 30, 2018, the carrying value of the note was $142,990 and the fair value of the derivative liability was $124,604. During the six months ended June 30, 2018, the Company accreted $73,669 of the debt discount to finance costs.

 

Note 9 – DERIVATIVE LIABILITIES

 

The Company records the fair value of the of the conversion price of the convertible debentures disclosed in Note 8 in accordance with ASC 815, Derivatives and Hedging. The fair value of the derivative was calculated using a multi-nominal lattice model. The fair value of the derivative liabilities is revalued on each balance sheet date with corresponding gains and losses recorded in the consolidated statement of operations. For the six-month period ended June 30, 2018, the Company recorded a gain on the change in fair value of derivative liability of $397,517 (June 30, 2017 – $91,670). As at June 30, 2018 and December 31, 2017, the Company recorded derivative liability of $2,471,295 and $1,676,155, respectively.

 

The following inputs and assumptions were used to value the derivative liabilities outstanding during the period and year ended June 30, 2018 and December 31, 2017 respectively, assuming no dividend yield:

 

      2018       2017  
Expected volatility     294 - 379 %     96 - 533 %
Risk free interest rate     1.19 - 2.15 %     0.11 - 1.76 %
Expected life (in years)     0.01 - 1.0       0.1 - 1.0  

 

  17  
 

 

A summary of the activity of the derivative liabilities is shown below:

 

    $  
Balance, December 31, 2016     365,944  
Derivative loss due to new issuances     350,250  
Mark-to-market adjustment     (91,670 )
Balance, June 30, 2017 (restated)     624,524  
         
Balance, December 31, 2017     1,676,155  
Derivative loss due to new issuances     1,192,657  
Mark-to-market adjustment     (397,517 )
         
Balance, June 30, 2018     2,471,295  

 

Note 10 – MEZZANINE EQUITY

 

Authorized

 

150,000,000 shares of undesignated preferred stock authorized, each having a par value of $0.001 as of June 30, 2018 and December 31, 2017, respectively.

 

Equity Transactions

 

DSG TAG designated 5,000,000 shares as Series A Convertible Preferred Stock (“Series A Shares”) and issued 4,309,384 Series A Shares to a company controlled by a director of DSG TAG for conversion of its debt of $5,386,731 on October 24, 2014. The Series A Shares have no general voting rights and carry a 5% per annum interest rate. Series A Shares that are converted to common shares are entitled to the same voting rights as other common shareholders. The Series A Shares are subject to a redemption obligation at $1.25 per common share pursuant to the following terms:

 

  On or before August 1, 2016, the Company 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, the Company 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, the Company 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.

 

During the year ended December 31, 2015, 80,000 Series A Shares with a value of $100,000 were purchased by an unrelated third-party and exchanged for 80,000 shares of common stock of the Company. The Series A Shares were not exchanged for securities of DSG Global, Inc. as part of the Share Exchange Agreement.

 

The preferred shares are recorded in the consolidated financial statements as Mezzanine Equity.

 

On June 21, 2018, the Company entered into a debt exchange agreement for the conversion of indebtedness totaling $6,283,766 ($7,627,303 CDN) including $5,286,731 in Series A Shares and $997,035 in interest accrued on the Series A Shares. For consideration of settlement, the Company will designate and issue an undetermined number of Series B Convertible Preferred Stock (“Series B Shares”) and Series E Convertible Preferred Stock (“Series E Shares” and all outstanding Series A Shares, previously issued under conversion of debt on October 24, 2014 , will be returned. As of June 30, 2018, the agreement has not yet closed as certain terms of the agreement have not yet been settled.

 

  18  
 

 

Note 11 – COMMON STOCK

 

During the six months ended June 30, 2018 the Company issued an aggregate of;

 

  1,161,245,545 shares of common stock with a fair value of $2,975,418 upon the conversion of $811,187 of convertible debentures and accrued interest, as noted in Note 8. The Company recorded a loss on extinguishment of debt of $2,164,231 in connection with the conversions.
     
  50,000,000 shares of common stock for proceeds of $81,659.
     
  750,000 shares of common stock, with a fair value of $2,250, in connection with a 5% commission granted on referral of sales totaling $45,000.

 

Note 12 – RELATED PARTY TRANSACTIONS

 

As at June 30, 2018, the Company owed $133,264 (Cdn$175,481) (December 31, 2017 - $205,963 (Cdn$258,381)) to the President, CEO, and CFO of the Company for management fees, which has been recorded in accounts payable and accrued liabilities. The amounts owed and owing are unsecured, non-interest bearing, and due on demand.

 

During the six months ended June 30, 2018 the Company paid $69,866 (Cdn$92,000) in management fees to the President, CEO, and CFO of the Company.

 

As at June 30, 2018, the Company owed $17,429 (Cdn$22,950) (December 31, 2017 - $4,273 (Cdn$27,950)) to a Company controlled by the son of the President, CEO, and CFO of the Company. The balance owing has been recorded in accounts payable and accrued liabilities. The amount owing is unsecured, non-interest bearing, and due on demand.

 

Note 13 – COMMITMENTS

 

Lease Obligations

 

On June 1, 2018, the Company signed a two year operating lease agreement expiring on May 31, 2020 with the right to renew for an additional two year term if written notice is provided within 120 days prior to the expiration of the current term. The annual rent for the premises in Canada is approximately CDN $46,552 commencing on July 1, 2018.

 

  19  
 

 

Product Warranties

 

The Company’s product warranty costs are part of its cost of sales based on associated material product costs, labor costs for technical support staff, and associated overhead. The products sold are generally covered by a warranty for a period of one year. As of June 30, 2018, the Company has set up a reserve for future warranty costs of $134,940. The Company’s past experience with warranty related costs was used as a basis for the reserve. During the six months ended June 30, 2018, the Company recorded warranty expense of $46,273 (2017 - $7,362).

 

A tabular reconciliation of the Company’s aggregate product warranty liability for the reporting periods is as follows:

 

    Six months ended     Year ended  
    June 30, 2018     December 31, 2017  
Product warranty liability:                
Opening balance   $ 165,523     $ 111,715  
Accruals for product warranties issued in the period     15,690       99,699  
Adjustments to liabilities for pre-existing warranties     (46,273 )     (45,891 )
Ending liability   $ 134,940     $ 165,523  

 

In the normal course of business, the Company indemnifies other parties, including customers, lessors, and parties to other transactions with the Company, with respect to certain matters. The Company has agreed to hold the other parties harmless against losses arising from a breach of representations or covenants, or out of intellectual property infringement or other claims made against certain parties. These agreements may limit the time within which an indemnification claim can be made and the amount of the claim. In addition, the Company has entered into indemnification agreements with its officers and directors, and the Company’s bylaws contain similar indemnification obligations to the Company’s agents. It is not possible to determine the maximum potential amount under these indemnification agreements due to the Company’s limited history with prior indemnification claims and the unique facts and circumstances involved in each particular agreement. Historically, payments made by the Company under these agreements have not had a material effect on the Company’s operating results, financial position, or cash flows.

 

Note 14 – CONTINGENCIES

 

A director of the Company, representing his company, Adore Creative Agency Inc. (“Adore”), has filed a notice of default on March 31, 2016, in regard to a related party convertible note issued by the Company. The note was issued in lieu of marketing services and has a maturity date of March 31, 2016. The Company has countersued Adore for failure to provide services as obligated under the terms and agreement of the convertible note, and in addition for damages as a result.

 

On September 7, 2016, Chetu Inc. filed a Complaint for Damage in Florida to recover an unpaid invoice amount of $27,335 plus interest of $4,939. The invoice was not paid due to a service dispute.

 

On May 24, 2017, the Company received a notice of default from Coastal Investment Partners LLC (“Coastal”), on three 8% convertible promissory notes issued by the Company in aggregate principal amount of $261,389 and commenced a lawsuit on June 12, 2017 in the United States District Court, Southern District of New York. Coastal alleges that the Company failed to deliver shares of common stock underlying the Coastal notes, and thus giving rise to an event of default. Coastal seeks damages in excess of $250,000 for breach of contact damages, and legal fees incurred by Coastal with respect to the lawsuit. This action is still pending.

 

On October 10, 2017, a vendor filed a complaint for Breach of Contract with Superior Court of the State of California. The Complainant is alleging that it is contractually owed 1,848,130 shares of the Company’s common stock and is seeking damages of $270,000. In addition, a related vendor filed in the same filing a complaint for $72,000 as part of a consulting agreement the Company executed. No accrual has been recorded because the Company is of the opinion that no obligation exists since the vendors have not performed their contractual duties.

 

  20  
 

 

On February 9, 2017, the Company received a notice of default from Auctus Fund LLC (“Auctus”), on a 12% convertible promissory note issued to the Company in the principal amount of $75,000 and commenced a lawsuit on February 2, 2018 in the United States District Court, District of Massachusetts. Auctus alleges that the Company failed to honor a conversion notice under the terms of the note, and thus giving rise to an event of default. Auctus seeks damages in excess of $306,681, which consists of the principal amount of the note, liquidated damages, and default interest, and legal fees incurred by Auctus with respect to the lawsuit. On June 1, 2018 the remaining $58,167 note balance, including principal and interest, was reassigned to another unrelated note holder and the note was extinguished. Refer to Note 8(e) and 8(z).

 

On April 9, 2018, the Company received a share-reserve increase letter from JSJ Investments Inc. (“JSJ”) pursuant to the terms of a 10% convertible promissory note issued to the Company in the principal amount of $135,000. On April 24, 2018, the Company received a notice of default from JSJ for failure to comply with the share-reserve increase and on April 30, 2018 demanded payment in full of the default amount totaling $172,845. On May 7, 2018, JSJ commenced a lawsuit in the United States District Court, District of Dallas County, Texas. JSJ alleges that the Company failed to comply with the share-reserve increase letter, thus giving rise to an event of default, and failed to pay the outstanding default amount due under the terms of the note. JSJ seeks damages in excess of $200,000 but not more than $1,000,000, which consists of the principal amount of the note, default interest, and legal fees incurred by JSJ with respect to the lawsuit. This action is still pending.

 

Note 15 – REVISION OF PRIOR YEAR FINANCIAL STATEMENTS

 

While preparing the interim condensed consolidated financial statements for the period ending March 31, 2018, the Company noted that there was a revision of the fair value of the derivative liabilities and during the period ended June 30, 2018, determined that no non-controlling interest exists. Accordingly, the Company has revised its consolidated financial statements as at and for the year ended December 31, 2017 to reflect the change in fair value of derivative liabilities and retained earnings during the period and the fair value of the derivative liabilities and retained earnings as at December 31, 2017. This revision resulted in an increase to retained earnings of 1,819,564, an increase to net loss of $720,424 and an increase to net loss per share of $0.01. There was no impact on the consolidated statement of cash flows. In accordance with the guidance provided by the SEC’s Staff Accounting Bulletin 99, Materiality and Staff Accounting Bulletin No. 108, Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements , the Company has determined that the impact of adjustments relating to the correction of this accounting error are not material to previously issued annual audited consolidated financial statements as the amount was derived from an estimate, has no impact on compliance with regulatory requirements or loan covenants, and has no impact on the Company’s cash flows.. Accordingly, these changes are disclosed herein and will be disclosed prospectively.

 

The impact of the revision as at December 31, 2017 and for the year then ended is summarized below:

 

Consolidated Balance Sheet

 

    As at December 31, 2017  
   

As reported

$

   

Adjustment

$

   

As restated

$

 
                   
LIABILITIES AND STOCKHOLDERS’ DEFICIT                        
Current Liabilities                        
Derivative liabilities     1,191,396       484,759       1,676,155  
Total Current Liabilities     8,061,842       484,759       8,546,601  
Total Liabilities     8,061,842       484,759       8,546,601  
Stockholders’ Equity                        
Deficit     (30,409,853 )     (1,819,564 )     (32,229,417 )
Noncontrolling interest     (1,334,805 )     1,334,805       -  
Total Stockholders’ Deficit     (13,257,858 )     (484,759 )     (13,742,617 )

 

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Consolidated Statement of Operations and Comprehensive Loss

 

    Year ended December 31, 2017  
   

As reported

$

   

Adjustment

$

   

As restated

$

 
                   
Other income (expense)                        
Change in fair value of derivative liabilities     (340,227 )     (484,759 )     (824,986 )
Total other income (expense)     (1,987,202 )     (484,759 )     (2,471,961 )
Net loss for the year     (3,632,072 )     (484,759 )     (4,116,831 )
Net loss attributed to non-controlling interest    

235,665

     

(235,665

)     -  
Comprehensive loss     (3,819,809 )     (720,424 )     (4,540,233 )

 

Consolidated Statement of Stockholders’ Equity

 

    Year ended December 31, 2017  
    As reported
$
    Adjustment
$
    As restated
$
 
Deficit     (30,409,853 )     (1,819,564 )     (32,229,417 )
Non-controlling interest    

(1,334,805

)    

1,334,805

      -  
Stockholders’ Equity     (13,257,858 )     (484,759 )     (13,742,617 )

 

Consolidated Statement of Cash Flows

 

    Year ended December 31, 2017  
   

As reported

$

   

Adjustment

$

   

As restated

$

 
                   
Operating activities                        
Net loss     (3,632,072 )     (484,759 )     (4,116,831 )
Adjustments to reconcile net loss to net cash used in operating activities:                        
Change in fair value of derivative liabilities     (340,227 )     (484,759 )     (824,986 )

 

Note 16 – SUBSEQUENT EVENTS

 

On July 2, 2018, the Company issued 63,055,661 shares of common stock to settle $39,092 in convertible debentures.

 

On July 3, 2018, the Company issued a second amendment to the convertible promissory note, dated March 19, 2018, which supersedes any provisions to the contrary, to include that at any time after the 115 th calendar day after the funds are issued, and at the option of the holder in addition to the right to conversion, the holder may deduct daily payments from the Company’s bank account in the amount of $5,562 per calendar day or $27,812 per week until the Company has paid or the holder has converted an amount equal to the principal balance, interest, accrued interest, and default amount. In addition, an amount of $26,500 was added to the balance of the note.

 

On July 6, 2018, the Company received a notice of conversion to issue 44,000,000 shares of common stock to settle $25,300 in convertible debentures.

 

On July 16, 2018, the Company received $125,000, net of $3,500 in legal fees which is $198,333 in the principal amount, net of the original issuance discount of $19,833 and $50,000 payable to the holder for the Company’s benefit, pursuant to the third tranche of the convertible promissory note dated March 19, 2018.

 

On July 19, 2018, the Company received a notice of conversion to issue 19,095,964 shares of common stock to settle $10,503 in convertible debentures.

 

On July 24, 2018, the Company issued 57,000,000 shares of common stock to settle outstanding convertible debentures.

 

On July 25, 2018, the Company received a notice of conversion to issue 42,502,808 shares of common stock to settle $21,039 in convertible debentures.

 

On August 1, 2018, the Company received a notice of conversion to issue 38,323,242 shares of common stock to settle $12,647 in convertible debentures.

 

On August 2, 2018, the Company issued 74,000,000 shares of common stock to settle outstanding convertible debentures.

 

On August 8, 2018, the Company received a notice of conversion to issue 41,593,424 shares of common stock to settle $13,726 in convertible debentures.

 

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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.

 

  23  
 

 

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 stated 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 former 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.

 

  24  
 

 

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. We are also exploring the opportunity of a partnership with a US manufacturer.

 

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 or lease 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.

 

  25  
 

 

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.

 

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  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 consists 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

 

The following table summarizes key items of comparison and their related increase (decrease) for the three and six month periods June 30, 2018 and 2017:

 

    Three Months ended     Increase (Decrease)     Six months ended     Increase (Decrease)  
      30-Jun-18       30-Jun-17       2018 – 2017       30-Jun-18       30-Jun-17       2018 – 2017  
      ($)       ($)       (%)       ($)       ($)       (%)  
Revenues   $ 237,046       434,202       -45.41 %   $ 347,942     $ 682,472       -49.02 %
Cost of revenue     79,552       135,940       -41.48 %     97,881       205,445       -52.36 %
Gross profit     157,494       298,262       -47.20 %     250,061       477,027       -47.58 %
                                                 
Operating Expenses:                                                
Compensation expense     209,174       231,086       -9.48 %     417,802       420,395       -0.62 %
General and administrative expense     275,480       165,472       66.48 %     633,493       438,459       44.48 %
Warranty expense     46,273       4,738       876.64 %     46,273       7,362       528.54 %
Bad debt     2,099       45,377       -95.37 %     30,992       45,377       -31.70 %
Depreciation and amortization expense     2,220       7,686       -71.12 %     8,914       15,510       -42.53 %
Total Operating Expenses     535,246       454,359       17.80 %     1,137,474       927,103       22.69 %
Loss from operations     (377,752 )     (156,097 )     142.00 %     (887,413 )     (450,076 )     97.17 %
                                                 
Other Income (Expense):                                                
Change in fair value of derivative liabilities     6,013,778       1,946,087      

209.01

%     397,517       91,670       333.64 %
Other (expenses) income     -       (1,401 )     100.00 %     -       (5,419 )     -100.00 %
Finance costs     (776,506 )     (339,254 )     128.89 %     (1,517,068 )     (669,718 )     126.52 %
Foreign currency exchange     410,454       149,943       173.74 %     (150,212 )     160,946       -193.33 %
Loss on extinguishment of debt     (768,964 )     -               (2,164,231 )     -       100.00 %
Total Other Expense     4,878,762       1,755,375       177.93 %     (3,433,994 )     (422,521 )     712.74 %
                                                 
Provision for income taxes expense (benefit)     -       -       0.00 %     -       -       0.00 %
Net income (loss)     4,501,010       1,599,278       181.44 %     (4,321,407 )     (872,597 )     395.24 %

 

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We recognized net income of $4,501,010 for the three-month period ended June 30, 2018, which was $2,901,732 or 181.4% more than the net income of $1,599,278 for the three-month period ended June 30, 2017. The primary reason is attributable to the derivative gain recorded in the current quarter end relating to the change in fair value on convertible notes.

 

We recognized a net loss of $4,321,407 for the six-month period ended June 30, 2018, which was $3,448,810 or 395.2% more than the net loss of $872,597 for the six-month period ended June 30, 2017. The primary reasons are attributable to the $3,433,994 in other expenses incurred inclusive of $1,517,068 in finance cots, $150,212 in foreign exchange losses, and $2,164,231 in losses on the extinguishment of debt upon conversion.

 

Comparison of the three and six months ended June 30, 2018 and 2017:

 

Revenue

 

    For the Three Months Ended June 30,     For the Six Months Ended June 30,  
    2018     2017     % Change     2018     2017     % Change  
                                                 
Revenue   $ 237,046     $ 434,202       (45.4 )   $ 347,942       682,472       (49.0 )

 

Revenue decreased by $197,156 or 45.4%, for the three months ended June 30, 2018 as compared to the three months ended June 30, 2017. Revenue decreased by $334,530 or 49.0% for the six months ended June 30, 2018 as compared to the six months ended June 30, 2017.

 

The redevelopment of our product line has resulted in lower sales than anticipated. As a result, we have been forced to move to a 3G/4G GPS cellular device, require redevelopment of our advertising, and also software development delays in integrating the tournament software onto the TOUCH screen, all of which that has caused delays in sales. Our Company along with the new sales team is aggressively building its pipeline for the next year.

 

Cost of Revenue

 

    For the Three Months Ended June 30,     For the Six Months Ended June 30,  
    2018     2017     % Change     2018     2017     % Change  
                                                 
Cost of revenue   $ 79,552     $ 135,940       (41.5 )   $ 97,881     $ 205,445       (52.4 )

 

Cost of revenue decreased by $56,388, or 41.5%, for the three months ended June 30, 2018 as compared to the three months June 30, 2017. The table below outlines the differences in detail:

 

    For the Three Months Ended  
    June 30, 2018     June 30, 2017     Difference     % Difference  
Cost of Goods   $ 64,570     $ 56,365     $ 8,205       14.6  
Labour     -       -       -       -  
Mapping & Freight Costs     4,478       8,845       (4,367 )     (49.4 )
Wireless Fees     10,504       69,282       (58,778 )     (84.8 )
Inventory Write-off/Adjustments     -       1,448       (1,448 )     (100.0 )
    $ 79,552     $ 135,940     $ (56,388 )     (41.5 )

 

For the three months ended June 30, 2018 as compared to the three months ended June 30, 2017, the overall decrease was due to lower revenues over the comparable period.

 

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Cost of revenue decreased by $107,564, or 52.4%, for the six months ended June 30, 2018 as compared to the six months June 30, 2017. The table below outlines the differences in detail:

 

    For the Six Months Ended  
    June 30, 2018     June 30, 2017     Difference     % Difference  
Cost of Goods   $ 64,570     $ 60,029     $ 4,541       7.6  
Labour     -       81       (81 )     (100.0 )
Mapping & Freight Costs     5,138       10,562       (5,424 )     (51.4 )
Wireless Fees     28,173       133,193       (105,020 )     (78.8 )
Inventory Write-off/Adjustments     -       1,580       (1,580 )     (100.0 )
    $ 97,881     $ 205,445     $ (107,564 )     (52.4 )

 

For the six months ended June 30, 2018 as compared to the six months ended June 30, 2017, the overall decrease was due to the decrease in revenues due to the redevelopment of our product line as discussed above.

 

Compensation Expense

 

    For the Three Months Ended June 30,     For the Six Months Ended June 30,  
    2018     2017     % Change     2018     2017     % Change  
                                                 
Compensation Expense   $ 209,174     $ 231,086       (9.5 )   $ 417,802     $ 420,395       (0.6 )

 

Compensation expense decreased by $21,912, or 9.5%, for the three months ended June 30, 2018 as compared to the three months ended June 30, 2017. Compensation expense decreased by $2,593 or 0.6% for the six months ended June 30, 2018 as compared to the six months ended June 30, 2017. The decreases in compensation expense were immaterial.

 

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General and Administration Expense

 

General & administration expense increased by 107,758 or 65.12% for the three months ended June 30, 2018 compared to the three months ended June 30, 2017. The table below outlines the differences in detail:

 

    For the Three Months Ended  
    June 30, 2018     June 30, 2017     Difference     % Difference  
Accounting & Legal   $ 96,884     $ 14,057     $ 82,827       589.2  
Marketing & Advertising     7,535       17,395       (9,860 )     (56.7 )
Subcontractor & Commissions     64,854       38,128       26,726       70.1  
Hardware     21,632       373       21,259       5,699.5  
Office Expense, Rent, Software,
Bank & Credit Card Charges,
Telephone, Travel, & Meals
    84,575       95,519       (10,944 )     (11.5 )
    $ 275,480     $ 165,472     $ 110,008       66.5  

 

For the three months ended June 30, 2018 as compared to the three months ended June 30, 2017, the overall increase in expenses is primary related to increases in accounting and legal of $82,827 or 589.2% due to additional legal fees incurred pursuant to new debt agreements. Subcontractors and commissions increased by $26,726 due to the hiring of more contract workers. These increases were partially offset by decreases in office expenses, travel, and other miscellaneous operational expenses of $10,944 or 11.5%. and marketing expense of $9,860 or 56.7%.

 

General & administration expense increased by $195,034 or 44% for the six months ended June 30, 2018 compared to the six months ended June 30, 2017. The table below outlines the differences in detail:

 

    For the Six Months Ended  
    June 30, 2018     June 30, 2017     Difference     % Difference  
Accounting & Legal   $ 144,670     $ 25,927     $ 118,743       458.0  
Marketing & Advertising     20,218       119,616       (99,398 )     (83.1 )
Subcontractor & Commissions     121,162       81,836       39,326       48.1  
Hardware     37,240       1,246       35,994       2,888.8  
Office Expense, Rent, Software,
Bank & Credit Card Charges,
Telephone, Travel, & Meals
    310,203       209,834       100,369       47.8  
    $ 633,493     $ 438,459     $ 195,034       44.5  

 

For the six months ended June 30, 2018 as compared to the six months ended June 30, 2017, the overall increase in expenses is primary related to increases in accounting and legal of $118,743 or 458.0% due to additional legal fees incurred pursuant to new debt agreements. Subcontractors and commissions increased by $39,326 due to the hiring of more contract workers. Office expenses, travel, and other miscellaneous operational expenses also increased by $100,369 or 47.8% due to additional shipping and travel fees incurred during the period. These increases were partially offset by a decrease in marketing expense of $99,398 or 83.1%.

 

Warranty Expense

 

    For the Three Months Ended June 30,     For the Six Months Ended June 30,  
    2018     2017     % Change     2018     2017     % Change  
                                                 
Warranty Expense   $ 46,273     $ 4,738       876.6     $ 46,273     $ 7,362       528.5  

 

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Warranty expense increased by $41,535, or 876.6% for the three months ended June 30, 2018 as compared to the three months ended June 30, 2017. Warranty expense increased by $38,911 or 528.5% for the six month period ended June 30, 2018 as compared to the six month period ended June 30, 2017. Warranty expense increased primarily due to the replacement of cables and batteries for multiple clients of which are expected to last for several years.

 

As of June 30, 2018, our balance sheet included a reserve of $134,940 for future warranty costs (June 30, 2017 - $115,589).

 

Foreign Currency Exchange

 

    For the Three Months Ended June 30,     For the Six Months Ended June 30,  
    2018     2017     % Change     2018     2017     % Change  
                                                 
Foreign currency
exchange (gain) loss
  $ (410,454   $ (149,943 )     173.7     $ 150,212     $ (160,946 )     (193.3 )

 

For the three months ended June 30, 2018, we recognized a $410,454 gain in foreign currency transaction as compared to $149,943 in foreign currency transaction gain for the three months ended June 30, 2017. The increase in loss was primarily due to realized exchange loss on the change in derivative liabilities for the three months ending June 30, 2018 due to 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.

 

For the six months ended June 30, 2018, we recognized a $150,212 loss in foreign currency transaction as compared to $160,943 in foreign currency transaction gain for the six months ended June 30, 2017. The increase in loss was primarily due to realized exchange loss on the change in derivative liabilities for the six months ending June 30, 2018 due to 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 June 30,     For the Six Months Ended June 30,  
    2018     2017     % Change     2018     2017     % Change  
                                                 
Finance costs   $ 776,506     $ 339,254       128.9     $ 1,517,068     $ 669,718       126.5  

 

Finance costs increased by $437,252 or 128.9%, for the three months ended June 30, 2018 as compared to the three months ended June 30, 2017. Finance costs increased due to the large number of conversions of convertible notes payable. Finance costs increased by $847,350 or 126.5% for the six months ended June 30, 2018 as compared to the six months ended June 30, 2017.

 

Derivative Expense

 

    For the Three Months Ended June 30,     For the Six Months Ended June 30,  
    2018     2017     % Change     2018     2017     % Change  
                                                 
Unrealized (gain) loss on derivative   $ (6,013,778 )   $ (1,946,087 )     209.0     $ (397,517 )   $ (91,670 )     333.6  

 

Derivative gain increased by $4,067,691 or 209%, for the three months ended June 30, 2018 as compared to the three months ended June 30, 2017 due to the change in fair value as of June 30, 2017 triggering of unrealized gains on derivative instruments in the current quarter ending on convertible notes payable. The change in fair value was impacted heavily due to the volatility in the Company’s stock price.

 

Derivative gain increased by $305,847 or 333.6%, for the six months ended June 30, 2018 as compared to the six months ended June 30, 2017 due to the change in fair value as of June 30, 2017 triggering of unrealized gains on derivative instruments in the current quarter ending on convertible notes payable. The change in fair value was impacted heavily due to the volatility in the Company’s stock price.

 

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Net Income (Loss)

 

    For the Three Months Ended June 30,     For the Six Months Ended June 30,  
    2018     2017     % Change     2018     2017     % Change  
                                                 
Net income (loss)   $ 4,501,010     $ 1,599,278       181.4     $ (4,321,407 )   $ (872,597 )     395.2  

 

As a result of the above factors, net income increased by $2,901,732 or 181.4% for the three months ended June 30, 2018 as compared to the three months ended June 30, 2017. The overall increase was primary due to the $4,878,762 in other income earned inclusive of a gain in the fair value of derivative liabilities totaling $6,013,778 and a gain in foreign exchange of $410,454 and partially offset by $776,506 in finance costs, and $768,964 in losses on the extinguishment of debt upon conversion.

 

As a result of the above factors, net loss increased by $3,448,810 or 395.2% for the six month period ended June 30, 2018 as compared to the six months ended June 30, 2017. The overall increase was primary due to the $3,433,994 in other expenses incurred inclusive of $1,517,068 in finance cots, $150,212 in foreign exchange losses, and $2,164,231 in losses on the extinguishment of debt upon conversion.

 

Liquidity and Capital Resources

 

From our incorporation in April 17, 2008 through June 30, 2018, 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 June 30, 2018, we had $9,690,238 in outstanding liabilities, which all matures within the next twelve months.

 

We had cash in the amount of $15,999 as of June 30, 2018, as compared to $5,488 as of December 31, 2017. We had a working capital deficit of $9,462,878 as of June 30, 2018 compared to working capital deficit of $8,487,059 as of December 31, 2017.

 

Liquidity and Financial Condition

 

Our financial position as of June 30, 2018 and December 31, 2017, and the changes for the periods then ended are as follows:

 

Working Capital

 

    At June 30, 2018     At December 31, 2017  
Current Assets   $ 227,360     $ 59,542  
Current Liabilities   $ 9,690,238     $ 8,546,601  
Working Capital   $ (9,462,878 )   $ (8,487,059 )

 

Cash Flow Analysis

 

Our cash flows from operating, investing, and financing activities are summarized as follows:

 

    June 30,  
    2018     2017  
             
Net cash (used in) provided by operating activities   $ (991,604 )   $ (199,902 )
Net cash (used in) provided by investing activities     (1,544 )     -  
Net cash provided by financing activities     1,003,659       373,128  
Net (decrease) increase in cash     10,511       173,226  
Effect of exchange rate changes on cash and cash equivalents     -       (173,226 )
Cash at beginning of period     5,488       -  
Cash at end of period   $ 15,999     $ -  

 

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Net Cash (Used in) Provided by Operating Activities . During the six months ended June 30, 2018, cash used in operations totaled $991,604. This reflects the net loss of $4,321,407 less $3,329,803 provided by changes in operating assets and liabilities and adjustments for non-cash items. Cash provided by working capital items was primarily impacted by non-cash adjustments from fair valuing finance costs of $224,956, a loss on extinguishment of debt of $2,164,231, unrealized foreign exchange of $152,901 and interest on discount of convertible debt totaling $924,905.

 

Net Cash (Used in) Provided by Investing Activities . Investing activities reduced cash by $1,544 in the six months ended June 30, 2018, related to the purchase of property, plant and equipment, and decreased cash by $nil for the six months ended June 30, 2017.

 

Net Cash (Used in) Provided by Financing Activities . Net cash from financing activities during the six months ended June 30, 2018 totaled $1,003,659, mostly from various note and loan facilities entered during the period and from proceeds for the issuance of shares. Net cash provided by financing activities during the six months ended June 30, 2017 was $373,128 from various note and loan facilities entered during the period and from proceeds for the issuance of shares.

 

Outstanding Indebtedness

 

Our current indebtedness as of June 30, 2018 is comprised of the following. For loans that have expired terms, we are in talks with the lenders to extend them. The Company must increase revenue or raise more equity capital to meet the payment obligations.

 

Our current indebtedness as of June 30, 2018 is comprised of the following:

 

       
  Unsecured loan payable in the amount of $189,854 bearing interest at 15% per annum and due on demand;  
       
  Unsecured loan payable in the amount of $317,500 bearing interest at 18% per annum;  
       
  Unsecured note payable in the amount of $46,444, bearing interest at 36% per annum, matured and in default.  
       
  Unsecured loan payable in the amount of $68,346 matured and in default  
       
  Unsecured loan payable in the amount of $250,000, bearing interest at 10% per annum, with a minimum interest amount of $25,000, mature and in default.  
       
 

Unsecured loan payable in the amount of $250,000, bearing interest at 10% per annum, is due on demand, and convertible into common shares at $1.75 per share.

 
       
  Secured convertible loan payable in the amount of $934,939, bearing interest at 15.2% per annum, mature and in default.  
       
  Unsecured, convertible note payable to related party in the amount of $310,000, bearing interest at 5% per annum, mature and in default.  
       
  Senior secured, convertible note payable in the amount of $245,889 interest 8% per annum. Repayable in cash or common shares at the lower of (i) twelve cents ($0.12) and (ii) the closing sales price of the Common Stock on the date of conversion.  
       
  Unsecured, convertible note payable in the amount of $81,470 interest 10% per annum. Matures on July 17, 2018. Principal is repayable in cash or common shares at the lower of (i) six cents ($0.06) (ii) 55% of the lowest trading price during the 20 Trading Days immediately preceding the date of conversion  
       
  Unsecured, convertible promissory note in the principal amount of up to $900,000, bears interest at 12% per annum, is convertible into common shares after 180 days from issuance date at a conversion price equal to the lessor of (i) the lowest trading price during the previous fifteen trading days prior to the date of the promissory note; or (ii) 55% of the lowest trading price during the previous fifteen days prior to the latest complete trading day prior to the conversion date. As at June 30, 2018, the Company has received $466,667 from the note of which $300,000 is due on September 19, 2018 and $166,667 is due on November 3, 2018. Interest will be accrued and payable at the time of promissory note repayment.  
       

 

  33  
 

 

       
  Unsecured, convertible note payable in the amount of $55,000, bears interest at 10% per annum, is due on January 19, 2019 and is convertible into common shares at a conversion price equal to 55% of the lowest trading price during the previous fifteen trading days prior to the conversion date, including the conversion date. Interest will be accrued and payable at the time of promissory note repayment.  
       
  Unsecured, convertible note payable in the amount of $18,408, bears interest 10% per annum and matures on March 2, 2019. Principal is repayable in cash or common shares at the lower of (i) three cents ($0.03) and (ii) lowest Trading Price during the previous twenty five (25) Trading Day period ending on the latest complete Trading Day prior to the Conversion Date.  
       
  Unsecured, convertible promissory note in the principal amount of $128,000, bears interest at 10% per annum, is due on March 2, 2019, and is convertible into common shares at a conversion price equal to 55% of the lowest trading price during the previous fifteen trading days prior to the conversion date, including the conversion date. Interest will be accrued and payable at the time of promissory note repayment.  
       
  Unsecured, convertible note payable in the principal amount of $51,500, bears interest at 10% per annum, is due on February 8, 2019, and is convertible into common shares at a conversion price equal to the lower of (i) 32% discount off of the lowest intra-day trading price during previous (10) trading days immediately preceding a conversion date  
       
  Unsecured, convertible note payable in the principal amount of $31,125, bears interest 10% per annum, is due on demand, and is convertible into common shares at a conversion price equal to the lower of (i) lowest trading price during previous (25) trading days prior to the date of note or (ii) lowest trading price during previous (25) trading days prior to the date of conversion.  
       
  Unsecured, convertible note payable in the principal amount of $180,000, bears interest at 10% per annum, is due on February 28, 2019, and is convertible into common shares at a conversion price equal to the lower of (i) 32% discount off of the lowest intra-day trading price during previous (15) trading days immediately preceding a conversion date  
       
 

Unsecured, convertible note payable in the amount of $95,600, bearing interest at 12% per annum, due on demand, and convertible into common shares at the lower of: (i) $0.03; or (ii) 50% of the lowest trading price during the previous twenty-five trading days ending on the latest complete trading day prior to the conversion date.

 

 
 

Unsecured, convertible note payable in the principal amount of $168,721, bears interest 10% per annum, is due on August 2, 2018, and is convertible into common shares at a conversion price equal to the lower of (i) lowest trading price during previous (25) trading days prior to the date of note or (ii) lowest trading price during previous (25) trading days prior to the date of conversion.

 

 

 

Preferred Stock Redemption Obligations

 

Westergaard Holdings Ltd. (“Westergaard), an affiliate of Keith Westergaard, a former 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, 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.

 

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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. As of the date of this report, these commitments have not been satisfied and we are currently negotiating an extension on the terms of this agreement.

 

On June 21, 2018, a Debt Exchange Agreement was entered into between DSG Global Inc. and DSG TAG Systems (together “the Company”) and Westergaard Holdings. Pursuant to this agreement, the Company agreed to issue to Westergaard, an undetermined number of Series B Convertible Preferred Stock (“Series B Shares”) and Series E Convertible Preferred Stock (“Series E Shares”) and Westergaard agreed to return all Series A Shares to DSG Tag, as described above in Note 10. As of June 30, 2018, the agreement has not yet closed as certain terms of the agreement have not yet been settled.

 

Related party transactions

 

As at June 30, 2018, we owed $133,264 (Cdn$175,481) (December 31, 2017 - $205,963 (Cdn$258,381)) to our President, CEO, and CFO for management fees, which has been recorded in accounts payable and accrued liabilities. The amounts owed, and owing are unsecured, non-interest bearing, and due on demand. During the six months ended June 30, 2018 the Company paid $69,866 (Cdn$92,000) in management fees to the President and CEO.

 

As at June 30, 2018, we owed $17,429 (Cdn$22,950) (December 31, 2017 - $4,273 (Cdn$27,950)) and paid $3,797 (Cdn$5,000) respectively to a Company controlled by the son of our President, CEO, and CFO. The balance owing has been recorded in accounts payable and accrued liabilities. The amount owing is unsecured, non-interest bearing, and due on demand.

 

Prospective Capital Needs

 

We estimate our operating expenses and working capital requirements for the twelve-month period to be as follows:

 

Estimated Expenses for the Twelve-Month Period ending June 30, 2019
Management compensation   $ 500,000  
Professional fees   $ 150,000  
General and administrative   $ 1,900,000  
Total   $ 2,550,000  

 

As noted earlier, during the six months ended June 30, 2018, cash used in operations totaled $991,604. The relatively low level of cash used compared to our estimated working capital needs in the future was the result of an accumulation of vendor payables, customer receivables, and an increasing loan payable balance. We need to reduce the current level of payables in the near future to keep a good relationship with our vendors and expand our sales and service team to achieve our operational objectives. At present, our cash requirements for the next 12 months outweigh the funds available. Of the $2,550,000 that we require for the next 12 months, we had $15,999 in cash as of June 30, 2018, and a working capital deficit of $9,470,709. Our principal sources of liquidity are cash generated from product sales and debt financings. 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. To help finance our day to day working capital needs, the founder and CEO of the company has made a total payment of $113,475 since late 2015. 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.

 

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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.

 

Item 3. Quantitative and Qualitative Disclosures About Market Risk

 

Not Applicable

 

Item 4. Controls and Procedures

 

Evaluation of Disclosure Controls and Procedures

 

Management is responsible for establishing and maintaining adequate disclosure controls and procedures as defined in Rules 13a-15(e) or 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Our disclosure controls and procedures are designed to ensure that information required to be disclosed in reports filed under the Exchange Act, is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the Securities and Exchange Commission, and that such information is accumulated and communicated to management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure and to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with U.S. generally accepted accounting principles.

 

Our management, under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of the design and operation of our disclosure controls and procedures as of the end of the period covered by this quarterly report on Form 10-Q. Based upon this assessment, we determined that as of the end of period covered by this quarterly report on Form 10-Q our disclosure controls and procedures were not effective because there exist material weaknesses affecting our internal control over financial reporting.

 

The matters involving internal controls and procedures that our management considers to be material weaknesses under COSO and SEC rules are: (1) lack of a functioning audit committee, resulting in ineffective oversight in the establishment and monitoring of required internal controls and procedures; (2) inadequate segregation of duties consistent with control objectives; (3) insufficient written policies and procedures for accounting and financial reporting with respect to the requirements and application of US GAAP and SEC disclosure requirements; and (4) ineffective controls over period end financial disclosure and reporting processes. The aforementioned potential material weaknesses were identified by our Chief Financial Officer in connection with the preparation of our financial statements as of June 30, 2018, who communicated the matters to our management and board of directors.

 

Management believes that the material weaknesses set forth in items (2), (3) and (4) above did not have an effect on our financial results. However, the lack of a functioning audit committee, resulting in ineffective oversight in the establishment and monitoring of required internal controls and procedures, can impact our financial statements for the future years.

 

Saturna Group Chartered Professional Accountants LLP, our independent auditors, were not required to and have not attested to the design and effectiveness of our internal controls.

 

Management’s Remediation Initiatives

 

Although we are unable to meet the standards under COSO because of the limited funds available to a company of our size, we are committed to improving our financial organization. As funds become available, we will undertake to: (1) create a position to segregate duties consistent with control objectives, (2) increase our personnel resources and technical accounting expertise within the accounting function (3) appoint one or more outside directors to our board of directors who shall be appointed to the audit committee of the Company resulting in a fully functioning audit committee who will undertake the oversight in the establishment and monitoring of required internal controls and procedures; and (4) prepare and implement sufficient written policies and checklists which will set forth procedures for accounting and financial reporting with respect to the requirements and application of US GAAP and SEC disclosure requirements.

 

We will continue to monitor and evaluate the effectiveness of our internal controls and procedures and our internal control over financial reporting on an ongoing basis and are committed to taking further action and implementing additional enhancements or improvements, as necessary and as funds allow. However, because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that misstatements due to error or fraud will not occur or that all control issues and instances of fraud, if any, within the Company have been detected. These inherent limitations include the realities that judgments in decision making can be faulty and that breakdowns can occur because of simple error or mistake. The design of any system of controls is based in part on certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Projections of any evaluation of controls effectiveness to future periods are subject to risks.

 

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PART II: OTHER INFORMATION

 

ITEM 1. LEGAL PROCEEDINGS

 

On June 4, 2015, a lawsuit was commenced against DSG TAG Systems Inc. in the Supreme Court of British Columbia, captioned Amanda McGuire v. DSG TAG Systems Inc., No. S-154634, Vancouver Registry. The plaintiff alleges that a promissory note in the principal amount of $100,000 CDN issued by DSG TAG Systems was not converted into common shares of DSG TAG Systems, as asserted by DSG TAG Systems, and the plaintiff seeks repayment of indebtedness in the amount of $100,000 CDN plus interest and costs. An agreement was reached on August 13, 2015 between DSG TAG Systems and the plaintiff, pursuant to which DSG TAG Systems agreed to pay the plaintiff $119,700 CDN in monthly installations of $17,100 CDN, the first payment commencing on October 1, 2015, and the plaintiff agreed to exchange 101,200 shares of common stock of DSG Tag Systems for 18,422 shares of common stock of DSG Global, which exchange occurred on October 22, 2015.

 

On December 3, 2015, a second action lawsuit was commenced against DSG TAG Systems Inc. in the Supreme Court of British Columbia, captioned Amanda McGuire v. DSG TAG Systems and DSG Global Inc., No. S-1510050, Vancouver Registry. The plaintiff filed a claim for default on the settlement agreement entered in on August 13, 2015 due to non-payment. On February 20, 2016, a new agreement was reached between DSG TAG Systems and the plaintiff, pursuant to which DSG TAG Systems agreed to pay the plaintiff $86,780 CDN in monthly installations of $5,423.75 CDN over a period of sixteen consecutive months, the first payment commencing April 20, 2016.

 

On October 17, 2016, the Supreme Court of British Columbia made a new order after we did not make the above-mentioned payments on schedule to the shareholder per the settlement agreement. DSG TAG was ordered to repay the remaining loan plus costs in the amount of $77,589 to the shareholder in 14 monthly payments of $5,500 each plus $589 at the 15th month starting February 15, 2017.

 

On September 7, 2016, a vendor has filed a Complaint for Damage in Florida (Case Number: CACE-16-016663) to recover unpaid invoice amount of $27,335 plus interest of $4,939. The invoice was not paid due to a dispute that DSG TAG did not think that vendor had delivered the service according to the agreement between the two parties. On May 31, 2017, the Company was ordered to repay the total invoice amount of $22,396 plus interest of $7,722 as well as costs and reasonable attorney fees incurred in this action totaling $9,971. The Company has accrued liabilities related to this matter in the financial statements. As of March 31, 2018, the Company not yet made any payments.

 

On May 31, 2017, in response to the Company’s refusal to process further conversion notices, the Company received legal notice that a lendor of the Company would be commencing all collection efforts to recover convertible loans of $245,889. The letter also served as notice of an obligation to maintain all documents and records, including electronic information.

 

On October 10, 2017, a vendor filed a complaint for Breach of Contract with Superior Court of the State of California. The Complainant is alleging that it is contractually owed 1,848,130 of DSG’s common stock and has asked for a cash reward $270,000. In addition, a related vendor filed in the same filing a complaint for $72,000 as part of consulting agreement DSG executed. The Company believes the vendors have not performed duties required on the contractual relationships and that obligations exist.

 

On February 2, 2018 a lawsuit was commenced in the United States District Court, District of Massachusetts against DSG Global by a lendor alleging that the Company failed to honor a conversion notice under the terms of a 12% convertible promissory note issued to the Company in the principal amount of $75,000, and thus giving rise to an event of default. The plaintiff sought damages in excess of $306,681, which consisted of the principal amount of the note, liquidated damages, and default interest, and legal fees incurred by the lendor with respect to the lawsuit. On June 1, 2018 the remaining $58,167 note balance, including principle and interest, was reassigned to another unrelated note holder and the note was extinguished.

 

On May 7, 2018, a lawsuit was commenced in the United States District Court, District of Dallas County, Texas against DSG Global by a lendor alleging that the Company failed to comply with the share-reserve increase letter under the terms of a 10% convertible promissory note issued to the Company in the principal amount of $135,000 and in failing to pay the outstanding default amount due under the terms of the note. The plaintiff seeks damages in excess of $200,000 but not more than $1,000,000, which consists of the principal amount of the note, default interest, and legal fees incurred by the lendor with respect to the lawsuit. This action is still pending.

 

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We may, from time to time, be party to litigation and subject to claims incident to the ordinary course of business. As our growth continues, we may become party to an increasing number of litigation matters and claims. The outcome of litigation and claims cannot be predicted with certainty, and the resolution of any future matters could materially affect our future financial position, results of operations or cash flows.

 

ITEM 1A. RISK FACTORS

 

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

 

On July 3, 2018, the Company issued a second amendment to the convertible promissory note, dated March 19, 2018 and held by Labrys Fund, LP (“Labrys”), which supersedes any provisions to the contrary, to include that at any time after the 115 th calendar day after the funds are issued, and at the option of the holder in addition to the right to conversion, the holder may deduct daily payments from the Company’s bank account in the amount of $5,562 per calendar day or $27,812 per week until the Company has paid or the holder has converted an amount equal to the principal balance, interest, accrued interest, and default amount. In addition, an amount of $26,500 was added to the balance of the Note.

 

On July 16, 2018, the Company issued received $125,000, net of $3,500 in legal fees which is $198,333 in the principal amount, net of the original issuance discount of $19,833 and $50,000 payable to the holder for the Company’s benefit, pursuant to the third tranche of the convertible promissory note dated March 19, 2018 and held by Labrys.

 

On July 2, 2018, the Company issued 63,055,661 shares of common stock to GHS Investments, LLC (“GHS”), to settle $39,092 in convertible debentures.

 

On July 6, 2018, the Company received a notice of conversion from GHS, to issue 44,000,000 shares of common stock at a conversion rate of $0.000575 to settle $25,300 in convertible debentures.

 

On July 19, 2018, the Company received a notice of conversion from Eagle Equities, LLC (“Eagle Securities”), to issue 19,095,964 shares of common stock at a conversion rate of $0.00055 to settle $10,503 in convertible debentures.

 

On July 24, 2018, the Company received a notice of conversion from GHS, to issue 57,000,000 shares of common stock to settle outstanding convertible debentures.

 

On July 25, 2018, the Company received a notice of conversion from Eagle Securities, to issue 42,502,808 shares of common stock at a conversion rate of $0.000495 to settle $21,039 in convertible debentures.

 

On August 1, 2018, the Company received a notice of conversion from Eagle Securities, to issue 38,323,242 shares of common stock at a conversion rate of $0.00033 to settle $12,647 in convertible debentures.

 

On August 2, 2018, the Company received a notice of conversion from GHS, to issue 74,000,000 shares of common stock to settle outstanding convertible debentures.

 

On August 8, 2018, the Company received a notice of conversion from Eagle Securities, to issue 41,593,424 shares of common stock at a conversion rate of $0.00033 to settle $13,726 in convertible debentures.

 

Item 3. Defaults Upon Senior Securities

 

None.

 

Item 4. Mine Safety Disclosures

 

Not Applicable.

 

Item 5. Other Information

 

Not Applicable.

 

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Item 6. Exhibits

 

Exhibit       Filed       Filing      
Number   Exhibit Description   Form   Exhibit   Date   Herewith  
                       
3.1.1   Articles of Incorporation of the Registrant   SB-2   3.1   10-22-07      
                       
3.1.2   Certificate of Change of the Registrant   8-K   3.1   06-24-08      
                       
3.1.3   Articles of Merger of the Registrant   8-K   3.1   02-23-15      
                       
3.1.4   Certificate of Change of the Registrant   8-K   3.2   02-23-15