PART I
ITEM 1. BUSINESS
Forward-Looking Statements
This
Annual Report on Form 10-K includes a number of forward-looking
statements that reflect management's current views with respect to
future events and financial performance. Forward-looking statements
are projections in respect of future events or our future financial
performance. In some cases, you can identify forward-looking
statements by terminology such as “may,”
“should,” “expects,” “plans,”
“anticipates,” “believes,”
“estimates.” “predicts,”
“potential” or “continue” or the negative
of these terms or other comparable terminology. Those statements
include statements regarding the intent, belief or current
expectations of us and members of our management team, as well as
the assumptions on which such statements are based. Prospective
investors are cautioned that any such forward-looking statements
are not guarantees of future performance and involve risk and
uncertainties, and that actual results may differ materially from
those contemplated by such forward-looking statements. These
statements are only predictions and involve known and unknown
risks, uncertainties and other factors, including the risks in the
section entitled “Risk Factors” set forth in this
Annual Report on Form 10-K for the fiscal year ended December 31,
2015, any of which may cause our company’s or our
industry’s actual results, levels of activity, performance or
achievements to be materially different from any future results,
levels of activity, performance or achievements expressed or
implied by these forward-looking statements. These risks include,
by way of example and without limitation:
●
our
ability to successfully commercialize and our products and services
on a large enough scale to generate profitable
operation;
●
our
ability to maintain and develop relationships with customers and
suppliers;
●
our
ability to successfully integrate acquired businesses or new
brands;
●
the
impact of competitive products and pricing;
●
supply
constraints or difficulties;
●
the
retention and availability of key personnel;
●
general
economic and business conditions;
●
substantial
doubt about our ability to continue as a going
concern;
●
our
need to raise additional funds in the future;
●
our
ability to successfully recruit and retain qualified personnel in
order to continue our operations;
●
our
ability to successfully implement our business plan;
●
our
ability to successfully acquire, develop or commercialize new
products and equipment;
●
intellectual
property claims brought by third parties; and
●
the
impact of any industry regulation.
Although
we believe that the expectations reflected in the forward-looking
statements are reasonable, we cannot guarantee future results,
levels of activity, or performance. Except as required by
applicable law, including the securities laws of the United States,
we do not intend to update any of the forward-looking statements to
conform these statements to actual results.
Readers
are urged to carefully review and consider the various disclosures
made by us in this report and in our other reports filed with the
Securities and Exchange Commission (the “SEC”). We
undertake no obligation to update or revise forward-looking
statements to reflect changed assumptions, the occurrence of
unanticipated events or changes in the future operating results
over time except as required by law. We believe that our
assumptions are based upon reasonable data derived from and known
about our business and operations. No assurances are made that
actual results of operations or the results of our future
activities will not differ materially from our
assumptions.
As
used in this Annual Report on Form 10-K and unless otherwise
indicated, the terms “GDSI,” “Company,”
“we,” “us,” and “our” refer to
Global Digital Solutions, Inc. and our wholly-owned subsidiaries
GDSI Florida, LLC and North American Custom Specialty Vehicles,
Inc. Unless otherwise specified, all dollar amounts are expressed
in United States dollars.
Corporate History
We
were incorporated in New Jersey as Creative Beauty Supply, Inc.
(“Creative”) in August 1995. In March 2004, Creative
acquired Global Digital Solutions, Inc., a Delaware corporation.
The merger was treated as a recapitalization of Global Digital
Solutions, Inc., and Creative changed its name to Global Digital
Solutions, Inc. (“GDSI”). We are focused in the area of
cyber arms technology and complementary security and technology
solutions. On October 22, 2012, we entered into an Agreement of
Merger and Plan of Reorganization to acquire 70% of Airtronic USA,
Inc. (“Airtronic”), a then debtor in possession under
chapter 11 of the Bankruptcy Code once Airtronic successfully
reorganized and emerged from bankruptcy (the “Merger”).
During the period from October 2012 through November 2013, we were
actively involved in the day to day management of Airtronic pending
the completion of the Merger. The Merger did not occur and we
ceased involvement with the Airtronic. In December 2012 we
incorporated GDSI Florida LLC (“GDSI FL”), a Florida
limited liability company. Except for the payment of administrative
expenses on behalf of the Company, GDSI FL has no business
operations. In January 2013 we incorporated Global Digital
Solutions, LLC, a Florida limited liability company. In November
2013, we incorporated GDSI Acquisition Corporation, a Delaware
corporation. On June 16, 2014, we acquired North American Custom
Specialty Vehicles, LLC into GDSI Acquisition Corporation, and
changed the latter’s name to North American Custom Specialty
Vehicles, Inc. (“NACSV”). In July 2014, we announced
the formation of GDSI International (f/k/a Global Digital
Solutions, LLC) to spearhead our efforts overseas.
Business Overview
Global Digital Solutions Inc. is positioning
itself as a leader in providing comprehensive security and
technology solutions. Since May 1, 2012, we have been focusing on
acquisitions of defense and defense-related entities both in the
United States and abroad.
On
June 16, 2014 GDSI completed its acquisition of North American
Custom Specialty Vehicles (“NACSV”). NACSV’s
mobile emergency operations centers (MEOC) can be tailored to the
needs of Police, Fire, EMS, Military, Homeland Security, National
Guard, FBI, Air National Guard Coast Guard, Chemical/Petrochemical,
Humanitarian Aid, Non-Governmental Organizations, Drug Enforcement,
Immigration & Customs, Bureau of Alcohol, Tobacco, Firearms and
Explosives, Water Management, Wildlife Management, D.O.T.
Engineering & Maintenance, Air & Water Quality Management
(EPA), Meteorological Seismic/Oil & Gas Exploration, IS/Mapping
Power Generation (Nuclear & Conventional), Power Transmission
and Strategic Infrastructure Security. The company has already
built customized vehicles for customers involved in one or more of
the above categories and we see many opportunities to improve NACSV
and its products and services through the integration of additional
software, hardware and firmware technologies.
We
are a holding company focused on the acquisition of companies in
the security and specialty vehicles and services marketplace
segments. We intend to pursue these identified segments in order to
expand the Company through strategic acquisitions and the
controlled internal growth of such acquisitions. Since the filing
of our Form 10-Q for the third quarter of 2015, as filed with the
Securities & Exchange Commission (“SEC”) on
November 6, 2015, we have been delinquent in filing of our
financial reports with the SEC pursuant to The Securities Exchange
Act of 1934 (the “Exchange Act”). Since that time, the
focus of our business has evolved, and the below discussion is
intended to show the chronology since that time to the date of the
filing of this report.
History of Business – September 30, 2015 to
Present
On
May 13, 2016, as more fully discussed below, we appointed William
Delgado as our Chief Executive Officer (“CEO”) and
Chairman of our Board of Directors, Mr. Delgado was serving at that
time as a director and our Executive Vice President in charge of
our business development. He served as our President, Chief
Executive Officer and Chief Financial Officer from August 2004 to
August 2013. Mr. Delgado began his career with Pacific Telephone in
the Outside Plant Construction. He moved to the network engineering
group and concluded his career at Pacific Bell as the Chief Budget
Analyst for the Northern California region. Mr. Delgado founded All
Star Telecom in late 1991, specializing in OSP construction and
engineering and systems cabling. All Star Telecom was sold to
International Fiber Com in April of 1999. After leaving
International Fiber Com in 2002, Mr. Delgado became President/CEO
of Pacific Comtel in San Diego, California. After we acquired
Pacific Comtel in 2004, he became part of our management and held
the positions of director, CEO, President and CFO.
Events Since September 30, 2015
The
following are events that have occurred since September 30,
2015:
Revenue Based Factoring Agreements Dated October 1, 2015 and
October 23, 2015
On
October 1, 2015, NACSV entered into a Revenue Based Factoring
Agreement (the “Factoring Agreement”) with Power Up
Lending Group, Ltd. (“Power Up”). The Factoring
Agreement was guaranteed by us under the terms of a Security
Agreement and Guaranty. Under the terms of the Factoring Agreement,
NACSV, as Merchant, agreed to transfer to Power Up in consideration
of the purchase price of $59,000, all of the Merchant’s
future receipts, accounts, contract rights and other obligations
arising from or relating to the payment of monies from
Merchant’s customers and/or other third party payors
(collectively the receipts) at the specified percentage of 24%
until such time as a total of $76,700 is repaid. A specified daily
repayment amount of $457 was required to be made to Power Up as a
base payment to be credited against the specified percentage due.
The Factoring Agreement had an indefinite term that was to last
until all of the Merchant’s obligations to Power Up were
fully satisfied. We used the purchase price proceeds to satisfy in
full the obligations that were outstanding at the
time.
On
October 23, 2015, NACSV entered into a Revenue Based Factoring
Agreement (the “Second Factoring Agreement”) with Power
Up on terms similar to the Factoring Agreement, except that under
the Second Factoring Agreement, the purchase price was $50,000 and
the specified daily repayment amount was $548.
Share Purchase and Sale Agreement for Acquisition of Grupo Rontan
Electro Metalurgica, S.A.
Effective
October 13, 2015, the Company (as “Purchaser”) entered
into the SPSA dated October 8, 2015 with Joao Alberto Bolzan and
Jose Carlos Bolzan, both Brazilian residents (collectively, the
“Sellers”) and Grupo Rontan Electro Metalurgica, S.A.,
a limited liability company duly organized and existing under the
laws of Federative Republic of Brazil (“Rontan”)
(collectively, the “Parties”), pursuant to which the
Sellers agreed to sell 100% of the issued and outstanding shares of
Rontan to the Purchaser on the closing date (the “Rontan
Transaction”).
The
purchase price consisted of a cash amount, a stock amount and an
earn-out amount as follows: (i) Brazilian Real (“R”)
$100 million (approximately US$26 million) to be paid by the
Purchaser in equal monthly installments over a period of forty
eight (48) months following the closing date; (ii) an aggregate of
R$100 million (approximately US$26 million) in shares of the
Purchaser’s common stock, valued at US$1.00 per share; and
(iii) an earn-out payable within ten business days following
receipt by the Purchaser of Rontan’s audited financial
statements for the 12-months ended December 31, 2017, 2018 and
2019. The earn-out shall be equal to the product of (i)
Rontan’s earnings before interest, taxes, depreciation and
amortization (“EBITDA”) for the last 12 months, and
(ii) twenty percent and is contingent upon Rontan’s EBITDA
results for any earn-out period being at least 125% of
Rontan’s EBITDA for the 12-months ended December 31, 2015. It
is the intention of the parties that the stock amount will be used
by Rontan to repay institutional debt outstanding as of the closing
date.
Under
the terms of a finder’s fee Agreement dated April 14, 2014,
we have agreed to pay RLT Consulting Inc., a related party, a fee
of 2% (two percent) of the transaction value, as defined in the
agreement, of Rontan upon closing. The fee is payable one-half in
cash and one-half in shares of our common stock. Specific
conditions to closing consist of:
a.)
Purchaser’s
receipt of written limited assurance of an unqualified opinion with
respect to Rontan’s audited financial statements for the
years ended December 31, 2013 and 2014 (the
“Opinion”);
b.)
The
commitment of sufficient investment by General American Capital
Partners LLC (the “Institutional Investor”), in the
Purchaser following receipt of the Opinion;
c.)
The
accuracy of each parties’ representations and warranties
contained in the SPSA;
d.)
The
continued operation of Rontan’s business in the ordinary
course;
e.)
The
maintenance of all of Rontan’s bank credit lines in the
maximum amount of R$200 million (approximately US$52 million) under
the same terms and conditions originally agreed with any such
financial institutions, and the maintenance of all other types of
funding arrangements. As of the date of the SPSA, Rontan’s
financial institution debt consists of not more than R$200 million
(approximately US$52 million), trade debt of not more than R$50
million (approximately US$13 million) and other fiscal
contingencies of not more that R$95 million (approximately US$24.7
million);
f.)
Rontan
shall enter into employment or consulting service agreements with
key employees and advisors identified by the Purchaser, including
Rontan’s Chief Executive Officer; and
g.)
The
Sellers continued guarantee of Rontan’s bank debt for a
period of 90 days following issuance of the Opinion, among other
items.
The
Institutional Investor has committed to invest sufficient capital
to facilitate the transaction, subject to receipt of the Opinion,
among other conditions. Subject to satisfaction or waiver of the
conditions precedent provided for in the SPSA, the closing date of
the transaction shall take place within 10 business days from the
date of issuance of the Opinion. Rontan is engaged in the
manufacture and distribution of specialty vehicles and
acoustic/visual signaling equipment for the industrial and
automotive markets.
On
April 1, 2016, we believed that we had satisfied or otherwise
waived the conditions to closing (as disclosed under the SPSA, the
closing was subject to specific conditions to closing, which were
waivable by us,) and on April 1, 2016, we advised the Sellers of
our intention to close the SPSA and demanded delivery of the Rontan
Securities. The Sellers, however, notified us that they intend to
terminate the SPSA. We believe that the Sellers had no right to
terminate the SPSA and that notice of termination by the Sellers
was not permitted under the terms of the SPSA.
Officers and Directors
Effective
May 13, 2016, we accepted the resignations of Richard J. Sullivan
as our Chairman and CEO along with the resignations of Stephanie C.
Sullivan and Arthur F. Noterman as directors.
Change in Independent Accounting Firm
Effective
July 13, 2017, our Board of Directors dismissed the auditing firm
of PMB Helin Donovan and subsequently engaged Turner Stone and
Company, Dallas, TX. We had no issues relating to the performance
of the PMB Helin Donovan audits or any disagreements with their
accounting practices and decisions.
Settlements of Certain Liabilities
On
August 30, 2017, we announced that we had reached tentative
agreements with three creditors for repayment of liabilities and/or
claims totaling approximately $491,574 as of August 15, 2017. This
settlement included amounts due under the factoring agreements
discussed above during the period from August 30, 2017 to December
31, 2017. We paid approximately $193,514 to settle these
liabilities and/or claims.
On
August 30, 2017, we finalized the settlement agreement reached
between the parties regarding the litigation between John Ramsay,
Carl Dekle, The Estate of Brian Dekle and us and NACSV,
collectively, which had been previously disclosed in our Quarterly
Report on Form 10-Q for the quarter ended September 30, 2015. We
made a payment of $20,000 in connection with the
settlement.
Litigation
On
January 31, 2018, we announced that we initiated a lawsuit for
damages against Grupo Rontan Metalurgica, S. A,
(“Rontan”) and that company’s controlling
shareholders, Joao Alberto Bolzan and Jose Carlos Bolzan. We have
engaged the law firm of Boies Schiller Flexner LLP to represent it
in this action. The case will be handled by William Isaacson of the
firm’s Washington office and Carlos Sires of the firm’s
Fort Lauderdale office. The action has been filed in the United
States District Court for the Southern District of Florida. The
complaint alleges that Rontan is wholly-owned by Joao Bolzan and
Jose Bolzan. In the complaint, we further allege that Rontan and
its shareholders improperly terminated a Share Purchase and Sale
Agreement (the “SPA”) by which we were to acquire whole
ownership of Rontan.
On
February 5, 2018, United States District Court Southern District of
Florida filed a Pretrial Scheduling Order and Order Referring Case
to Mediation dated February 5, 2018 for the Company’s lawsuit
against Grupo Rontan Electro Metalurgica, S.A., et al. The Case No.
is 18-80106-Civ-Middlebrooks/Brannon. The case is set for trial
before U.S. District Judge Middlebrooks. The court has issued a
schedule outlining various documents and responses that are to be
delivered by the parties as part of the discovery
plan.
Financing Transactions
On
February 2, 2018, we announced that we had secured $1.2 million in
a non-convertible financing from a New York-based
institution.
SEC Actions
On
August 11, 2016, the Securities and Exchange Commission
(“SEC”) filed suit in the United States District Court
for the Southern District of Florida against Global Digital
Solutions, Inc. (“GDSI”), Richard J. Sullivan
(“Sullivan”) and David A. Loppert
(“Loppert”) to enjoin GDSI; Sullivan, GDSI’s
former Chairman and CEO; and Loppert, GDSI’s former CFO from
alleged further violations of the anti-fraud and reporting
provisions of the federal securities laws, and against Sullivan and
Loppert from alleged further violations of the certification
provisions of the federal securities laws.
On
October 12, 2016, Defendant GDSI filed its First Answer to the
Complaint. On November 9, 2016, Defendant Sullivan filed a Letter
with the Court denying all allegations regarding the case. On
December 15, 2016, the SEC filed a Motion for Judgment and Notice
of Filing of Consent of Defendant Loppert to entry of Final
Judgment by the SEC. On December 19, 2016, the Court entered an
order granting the SEC’s Motion for Judgment as to Defendant
Loppert. On December 21, 2016, the SEC filed a Notice of Settlement
as entered into by it and Defendants GDSI and Sullivan. On December
23, 2016, the Court entered an Order staying the case and directing
the Clerk of the Court to close the case for statistical purposes
per the December 21, 2016 Notice of Settlement. On March 7, 2017,
the SEC moved for a Judgment of Permanent Injunction and Other
Relief and Notice of Filing Consent of Defendant GDSI to Entry of
Judgment by the SEC. On March 13, 2017, the Judge signed the
Judgment as to Defendant GDSI and it was entered on the
Court’s docket. On April 6, 2017, the SEC moved for a final
Judgment of Permanent Injunction and Other Relief and Notice of
Filing Consent of Defendant Sullivan. On April 10, 2017, the Judge
signed the final Judgment as to Defendant Sullivan and it was
entered on the Court’s docket. On December 21, 2017, the SEC
moved for a final Judgment and Notice of Filing Consent of
Defendant GDSI to Entry of Final Judgment. On January 2, 2018, the
Judge signed the Final Judgment as to Defendant GDSI and it was
entered on the Court’s docket.
Liquidity
Our
cash position is critically deficient, and payments essential to
our ability to operate are not being made in the ordinary course.
Failure to raise capital to fund our operations and failure to
generate positive cash flow to fund such operations in the future
will have a material adverse effect on our financial condition.
These factors raise substantial doubt about our ability to continue
as a going concern.
Business Strategy – As of the Date of This
Filing
As
of the date of this filing, our business continues to be through
our NACSV subsidiary and the production of mobile command centers.
Our future strategy is to expand into the infrastructure technology
and cybersecurity areas. We will look to acquire companies in these
respective areas, focusing on companies that have the ability to
utilize blockchain technology in their respective
operations.
Target Markets, Sales and Marketing
Our
target market will be primarily in North America, with a
concentration in the USA and Canada. We expect that sales and
marketing will utilize the company’s existing strategies,
augmented by a sales force developed by the parent company in
conjunction with the acquired subsidiary.
Competition
The
Company is and will continue to be an insignificant participant in
the business of seeking mergers with, joint ventures with and
acquisitions of other entities. A large number of established and
well- financed entities, including venture capital firms, private
equity firms and family offices, are active in mergers and
acquisitions of companies that may be desirable target candidates
for the Company. Nearly all such entities have significantly
greater financial resources, technical expertise and managerial
capabilities than the Company, and, consequently, the Company will
be at a competitive disadvantage in identifying possible business
opportunities and successfully completing a business combination.
Moreover, the Company will also compete in seeking merger or
acquisition candidates with numerous other small public
companies.
Research and Development
We
have not incurred any research and development
expense.
Intellectual Property
We
currently do not have any intellectual property.
Government Approvals and Regulations
We
do not expect to encounter any significant governmental approval or
regulation issues, as we do not intend to monopolize any target
business areas. We do expect to be subject to the traditional
government regulation related to business licenses, foreign
corporation rules, etc.
Subsidiaries
We
currently have two subsidiaries including GSDI Florida, LLC and
North American Custom Specialty Vehicles, Inc.
Employees
As
of December 31, 2015, we had eight full-time employees and two
part-time employees. We intend to hire additional staff and to
engage consultants in general administration on an as-needed basis.
We also intend to engage experts in operations, finance and general
business to advise us in various capacities. None of our employees
are covered by a collective bargaining agreement, and we believe
our relationship with our employees is good to
excellent.
Our
future success depends, in part, on our ability to continue to
attract, retain and motivate highly qualified technical, marketing,
and management personnel and, as of the end of the period covered
by this report and as of the date of filing, we continue to rely on
the services of independent contractors for much of our
sales/marketing. We believe technical, accounting and other
functions are also critical to our continued and future
success.
ITEM 1A. RISK FACTORS
You
should carefully consider the risks described below together with
all of the other information included in our public filings before
making an investment decision with regard to our securities. The
statements contained in or incorporated into this document that are
not historic facts are forward-looking statements that are subject
to risks and uncertainties that could cause actual results to
differ materially from those set forth in or implied by
forward-looking statements. If any of the following events
described in these risk factors actually occurs, our business,
financial condition or results of operations could be harmed. In
that case, the trading price of our common stock could decline, and
you may lose all or part of your investment. Moreover, additional
risks not presently known to us or that we currently deem less
significant also may impact our business, financial condition or
results of operations, perhaps materially. For additional
information regarding risk factors, see Item 1 –
“Forward-Looking Statements.”
Risks Related to Our Company
There is substantial doubt about our ability to continue as a going
concern.
We have not generated any profit from combined
operations since our inception. We expect that our operating
expenses will increase over the next twelve months to continue our
development activities. Based on our average monthly expenses and
current burn rate of $28,000
per month, we estimate that our cash on hand as of
May 22, 2018 will not be able to support our operations through the
balance of this calendar year. This amount could increase if we
encounter difficulties that we cannot anticipate at this time or if
we acquire other businesses. As of the date of this filing, we had
cash of approximately $20,032. On February 2, 2018, we announced
that we had secured $1.2 million in a non-convertible financing
from a New York-based institution. Should this amount not be
sufficient to support our continuing operations, we do not expect
to be able to raise any additional capital through debt financing
from traditional lending sources since we are not currently
generating a profit from operations. Therefore, we only expect to
raise money through equity financing via the sale of our common
stock or equity-linked securities such as convertible debt. If we
cannot raise the money that we need in order to continue to operate
our business beyond the period indicated above, we will be forced
to delay, scale back or eliminate some or all of our proposed
operations. If any of these were to occur, there is a substantial
risk that our business would fail. If we are unsuccessful in
raising additional financing, we may need to curtail, discontinue
or cease operations.
We have limited operating history with our operating subsidiary,
and as a result, we may experience losses and cannot assure you
that we will be profitable.
We
have a limited operating history with our single operating
subsidiary, NACSV, on which to evaluate our business. Our
operations are subject to all of the risks inherent in the
establishment and expansion of a business enterprise. Accordingly,
the likelihood of our success must be considered in the light of
the problems, expenses, difficulties, complications, and delays
frequently encountered in connection with the starting and
expansion of a business and the relatively competitive environment
in which we operate. Unanticipated delays, expenses and other
problems such as setbacks in product development, product
manufacturing, and market acceptance are frequently encountered in
establishing a business such as ours. There can be no assurance
that the Company will be successful in addressing such risks, and
any failure to do so could have a material adverse effect on the
Company's business, results of operations and financial
condition.
Because
of our limited operating history with our operating subsidiary, we
have limited historical financial data on which to base planned
operating expenses. Accordingly, our expense levels, which are, to
a large extent, variable, will be based in part on our expectations
of future revenues. As a result of the variable nature of many of
our expenses, we may be unable to adjust spending in a timely
manner to compensate for any unexpected delays in the development
and marketing of our products or any subsequent revenue shortfall.
Any such delays or shortfalls will have an immediate adverse impact
on our business, operating results and financial
condition.
We
have not achieved profitability on a quarterly or annual basis to
date. To the extent that net revenue does not grow at anticipated
rates or that increases in our operating expenses precede or are
not subsequently followed by commensurate increases in net revenue,
or that we are unable to adjust operating expense levels
accordingly, our business, results of operations and financial
condition will be materially and adversely affected. There can be
no assurance that our operating losses will not increase in the
future or that we will ever achieve or sustain
profitability.
No Assurance of Sustainable Revenues.
There
can be no assurance that our subsidiaries will generate sufficient
and sustainable revenues to enable us to operate at profitable
levels or to generate positive cash flow. As a result of our
limited operating history and the nature of the markets in which we
compete, we may not be able to accurately predict our revenues. Any
failure by us to accurately make such predictions could have a
material adverse effect on our business, results of operations and
financial condition. Further, our current and future expense levels
are based largely on our investment plans and estimates of future
revenues. We expect operating results to fluctuate significantly in
the future as a result of a variety of factors, many of which are
outside of our control. Factors that may adversely affect our
operating results include, among others, demand for our products
and services, the budgeting cycles of potential customers, lack of
enforcement of or changes in governmental regulations or laws, the
amount and timing of capital expenditures and other costs relating
to the expansion of our operations, the introduction of new or
enhanced products and services by us or our competitors, the timing
and number of new hires, changes in our pricing policy or those of
our competitors, the mix of products, increases in the cost of raw
materials, technical difficulties with the products, incurrence of
costs relating to future acquisitions, general economic conditions,
and market acceptance of our products. As a strategic response to
changes in the competitive environment, we may, from time to time,
make certain pricing, service or marketing decisions or business
combinations that could have a material adverse effect on our
business, results of operations and financial condition. Any
seasonality is likely to cause quarterly fluctuations in our
operating results, and there can be no assurance that such patterns
will not have a material adverse effect on our business, results of
operations and financial condition. We may be unable to adjust
spending in a timely manner to compensate for any unexpected
revenue shortfall.
We may need to raise additional funds in the future that may not be
available on acceptable terms or at all.
We
may consider issuing additional debt or equity securities in the
future to fund our business plan, for potential acquisitions or
investments, or for general corporate purposes. If we issue equity
or convertible debt securities to raise additional funds, our
existing stockholders may experience dilution, and the new equity
or debt securities may have rights, preferences and privileges
senior to those of our existing stockholders. If we incur
additional debt, it may increase our leverage relative to our
earnings or to our equity capitalization, requiring us to pay
additional interest expenses. We may not be able to obtain
financing on favorable terms, or at all, in which case, we may not
be able to develop or enhance our products, execute our business
plan, take advantage of future opportunities or respond to
competitive pressures.
A major part of our business strategy is to pursue strategic
acquisitions, although we may not be able to identify businesses
that we can acquire on acceptable terms, obtain the necessary
financing, may face risks due to additional indebtedness and our
acquisition strategy may incur significant costs or expose us to
substantial risks inherent in the acquired business’s
operations.
Our
strategy of pursuing strategic acquisitions may be negatively
impacted by several risks, including the following:
●
We
may not successfully identify companies that have complementary
product lines or technological competencies or that can diversify
our revenue or enhance our ability to implement our business
strategy;
●
We
may not successfully acquire companies if we fail to obtain
financing, or to negotiate the acquisition on acceptable terms, or
for other related reasons.
●
We
may incur additional expenses due to acquisition due diligence,
including legal, accounting, consulting and other professional fees
and disbursements. Such additional expenses may be material, will
likely not be reimbursed and would increase the aggregate cost of
any acquisition.
●
Any
acquired business will expose us to the acquired company’s
liabilities and to risks inherent to its industry, and we may not
be able to ascertain or assess all of the significant
risks.
●
We
may require additional financing in connection with any future
acquisition, and such financing may adversely impact, or be
restricted by, our capital structure.
●
Achieving
the anticipated potential benefits of a strategic acquisition will
depend in part on the successful integration of the operations,
administrative infrastructures and personnel of the acquired
company or companies in a timely and efficient manner. Some of the
challenges involved in such an integration include: (i)
demonstrating to the customers of the acquired company that the
consolidation will not result in adverse changes in quality,
customer service standards or business focus; (ii) preserving
important relationships of the acquired company; (iii) coordinating
sales and marketing efforts to effectively communicate the expanded
capabilities of the combined company; and (iv) coordinating the
supply chains.
Any future acquisitions could disrupt business.
If
we are successful in consummating acquisitions, those acquisitions
could subject us to a number of risks, including:
●
the
purchase price we pay could significantly deplete our cash reserves
or result in dilution to our existing stockholders;
●
we
may find that the acquired company or assets do not improve our
customer offerings or market position as planned;
●
we
may have difficulty integrating the operations and personnel of the
acquired company;
●
key
personnel and customers of the acquired company may terminate their
relationships with the acquired company as a result of the
acquisition;
●
we
may experience additional financial and accounting challenges and
complexities in areas such as tax planning and financial
reporting;
●
we
may assume or be held liable for risks and liabilities as a result
of our acquisitions, some of which we may not discover during our
due diligence or adequately adjust for in our acquisition
arrangements;
●
we
may incur one-time write-offs or restructuring charges in
connection with the acquisition;
●
we
may acquire goodwill and other intangible assets that are subject
to amortization or impairment tests, which could result in future
charges to earnings; and
●
we
may not be able to realize the cost savings or other financial
benefits we anticipated.
These
factors could have a material adverse effect on our business,
financial condition and operating results.
Our business is at risk if we lose key personnel or we are unable
to attract and integrate additional skilled personnel.
The
success of our business depends, in large part, on the skill of our
personnel. Accordingly, it is critical that we maintain, and
continue to build, a highly-experienced management team and
specialized workforce, including engineers, experts in project
management and business development, and sales professionals.
Competition for personnel, particularly those with expertise in the
specialty vehicle industry and, as we expect, in the industries of
any future acquisition targets, is high, and identifying candidates
with the appropriate qualifications can be difficult. We may not be
able to hire the necessary personnel to implement our business
strategy given our anticipated hiring needs, or we may need to
provide higher compensation or more training to our personnel than
we currently anticipate.
In
the event, we are unable to attract, hire and retain the requisite
personnel and subcontractors, we may experience delays in growing
our business plan in accordance with project schedules and budgets,
which may have an adverse effect on our financial results, harm our
reputation and cause us to curtail our pursuit of new initiatives.
Further, any increase in demand for personnel and specialty
subcontractors may result in higher costs, causing us to exceed the
budget on a project, which in turn may have an adverse effect on
our business, financial condition and operating results and harm
our relationships with our customers.
Our
future success is particularly dependent on the vision, skills,
experience and effort of our senior management team, including our
president and chief executive officer. If we were to lose the
services of our president and chief executive officer or any of our
key employees, our ability to effectively manage our operations and
implement our strategy could be harmed and our business may
suffer.
We may not be able to protect intellectual property that we hope to
acquire, which could adversely affect our business.
The
companies that we hope to acquire may rely on patent, trademark,
trade secret and copyright protection to protect their technology.
We believe that technological leadership can be achieved through
additional factors such as the technological and creative skills of
our personnel, new product developments, frequent product
enhancements, name recognition and reliable product maintenance.
Nevertheless, our ability to compete effectively depends in part on
our ability to develop and maintain proprietary aspects of our
technology, such as patents. We may not secure future patents; and
patents that we may secure may become invalid or may not provide
meaningful protection for our product innovations. In addition, the
laws of some foreign countries do not protect intellectual property
rights to the same extent as the United States. Furthermore, there
can be no assurance that competitors will not independently develop
similar products, "reverse engineer" our products, or, if patents
are issued to us, design around such patents. We also expect to
rely upon a combination of copyright, trademark, trade secret and
other intellectual property laws to protect our proprietary rights
by entering into confidentiality agreements with our employees,
consultants and vendors, and by controlling access to and
distribution of our technology, documentation and other proprietary
information. There can be no assurance, however, that the steps to
be taken by us will not be challenged, invalidated or circumvented,
or that the rights granted thereunder will provide a competitive
advantage to us. Any such circumstance could have a material
adverse effect on our business, financial condition and results of
operations. While we are not currently engaged in any intellectual
property litigation or proceedings, there can be no assurance that
we will not become so involved in the future or that our products
do not infringe any intellectual property or other proprietary
right of any third party. Such litigation could result in
substantial costs, the diversion of resources and personnel, and
subject us to significant liabilities to third parties, any of
which could have a material adverse effect on our
business.
We may not be able to protect our trade names and domain
names.
We
may not be able to protect our trade names and domain names against
all infringers, which could decrease the value of our brand name
and proprietary rights. We currently hold the Internet domain names
"www.gdsi.co" and “www.nacsvehicles.com” and we use
“GDSI” and “NACS Vehicles” as trade names.
Domain names generally are regulated by Internet regulatory bodies
and are subject to change and may be superseded, in some cases, by
laws, rules and regulations governing the registration of trade
names and trademarks with the United States Patent and Trademark
Office and certain other common law rights. If the domain
registrars are changed, new ones are created or we are deemed to be
infringing upon another's trade name or trademark, we could be
unable to prevent third parties from acquiring or using, as the
case may be, our domain name, trade names or trademarks, which
could adversely affect our brand name and other proprietary
rights.
We may be subject to liability claims for damages and other
expenses not covered by insurance that could reduce our earnings
and cash flows.
Our
business, profitability and growth prospects could suffer if we pay
damages or defense costs in connection with a liability claim that
is outside the scope of any applicable insurance coverage. We
intend to maintain, but do not yet have, general and product
liability insurance. There is no assurance that we will be able to
obtain insurance in amounts, or for a price, that will permit us to
purchase desired amounts of insurance. Additionally, if our costs
of insurance and claims increase, then our earnings could decline.
Further, market rates for insurance premiums and deductibles have
been steadily increasing, which may prevent us from being
adequately insured. A product liability or negligence action in
excess of insurance coverage could harm our profitability and
liquidity.
Insurance and contractual protections may not always cover lost
revenue.
We
possess insurance, warranties from suppliers, and our
subcontractors make contractual obligations to meet certain
performance levels, and we also attempt, where feasible, to pass
risks we cannot control to our customers, the proceeds of such
insurance, warranties, performance guarantees or risk sharing
arrangements may not be adequate to cover lost revenue, increased
expenses or liquidated damages payments that may be required in the
future.
We
currently carry customary insurance for business liability. For our
work as a general contractor, we carry workers comp insurance for
our employees and we have performance bonding insurance. Certain
losses of a catastrophic nature such as from floods, tornadoes,
thunderstorms and earthquakes are uninsurable or not economically
insurable. Such “Acts of God,” work stoppages,
regulatory actions or other causes, could interrupt operations and
adversely affect our business.
We rely on outside consultants and employees.
We
will rely on the experience of outside consultants and employees.
In the event that one or more of these consultants or employees
terminates employment with the Company, or becomes unavailable,
suitable replacements will need to be retained and there is no
assurance that such employees or consultants could be identified
under conditions favorable to us.
Risks Related to NACSV’s Business
We may face strong competition from larger, established
companies.
We
likely will face intense competition from other companies that
provide the same or similar custom specialty vehicle manufacturing
and other services that compete with acquired businesses, virtually
all of whom can be expected to have longer operating histories,
greater name recognition, larger installed customer bases and
significantly more financial resources, R&D facilities and
manufacturing and marketing experience than we have. There can be
no assurance that developments by our potential competitors will
not render our existing and future products or services obsolete.
In addition, we expect to face competition from new entrants into
the custom specialty vehicle business. As the demand for products
and services grows and new markets are exploited, we expect that
competition will become more intense, as current and future
competitors begin to offer an increasing number of diversified
products and services. We may not have sufficient resources to
maintain our research and development, marketing, sales and
customer support efforts on a competitive basis. Additionally, we
may not be able to make the technological advances necessary to
maintain a competitive advantage with respect to our products and
services. Increased competition could result in price reductions,
fewer product orders, obsolete technology and reduced operating
margins, any of which could materially and adversely affect our
business, financial condition and results of
operations.
If we are unable to keep up with technological developments, our
business could be negatively affected.
The
markets for our products and services are expected to be
characterized by rapid technological change and be highly
competitive with respect to timely innovations. Accordingly, we
believe that our ability to succeed in the sale of our products and
services will depend significantly upon the technological quality
of our products and services relative to those of our competitors,
and our ability to continue to develop and introduce new and
enhanced products and services at competitive prices and in a
timely and cost-effective manner. In order to develop such new
products and services, we will depend upon close relationships with
existing customers and our ability to continue to develop and
introduce new and enhanced products and services at competitive
prices and in a timely and cost-effective manner. There can be no
assurance that we will be able to develop and market our products
and services successfully or respond effectively to technological
changes or new product and service offerings of our potential
competitors. We may not be able to develop the required
technologies, products and services on a cost-effective and timely
basis, and any inability to do so could have a material adverse
effect on our business, financial condition and results of
operations.
We operate in a highly competitive industry and competitors may
compete more effectively.
The
industries in which we operate are highly competitive, with many
companies of varying size and business models, many of which have
their own proprietary technologies, competing for the same business
as we do. Many of our competitors have longer operating histories
and greater resources than us, and could focus their substantial
financial resources to develop a competing business model, develop
products or services that are more attractive to potential
customers than what we offer or convince our potential customers
that they require financing arrangements that would be impractical
for smaller companies to offer. Our competitors may also offer
similar products and services at prices below cost and/or devote
significant sales forces to competing with us or attempt to recruit
our key personnel by increasing compensation, any of which could
improve their competitive positions. Any of these competitive
factors could make it more difficult for us to attract and retain
customers; cause us to lower our prices in order to compete, and
reduce our market share and revenue, any of which could have a
material adverse effect on our financial condition and operating
results. We can provide no assurance that we will continue to
effectively compete against our current competitors or additional
companies that may enter our markets. We also expect to encounter
competition in the form of potential customers electing to develop
solutions or perform services internally rather than engaging an
outside provider such as us.
Operating results may fluctuate and may fall below expectations in
any fiscal quarter.
Our
operating results are difficult to predict and are expected to
fluctuate from quarter to quarter due to a variety of factors, many
of which are outside of our control. As a result, comparing our
operating results on a period-to-period basis may not be
meaningful, and investors should not rely on our past results or
future predictions prepared by the Company as an indication of our
future performance. If our revenue or operating results fall in any
period, the value of our common stock would likely
decline.
Risks Related to Our Financial Condition
Dependence on financing and losses for the foreseeable
future.
Our
independent registered public accounting firm has issued its audit
opinion on our consolidated financial statements appearing in this
Annual Report on Form 10-K, including an explanatory paragraph as
to substantial doubt with the respect to our ability to continue as
a going concern. The accompanying consolidated financial statements
have been prepared in conformity with accounting principles
generally accepted in the United States of America, assuming we
will continue as a going concern, which contemplates the
realization of assets and satisfaction of liabilities in the normal
course of business. For the fiscal year ended December 31, 2015,
our net loss was $2,689,331. As of December 31, 2015, we had an
accumulated deficit of $31,667,383 and a working capital deficit of
$694,906. These factors raise substantial doubt about our ability
to continue as a going concern. Our ability to continue as a going
concern is dependent on our ability to raise the required
additional capital or debt financing to meet short and long-term
operating requirements. We may also encounter business endeavors
that require significant cash commitments or unanticipated problems
or expenses that could result in a requirement for additional cash.
If we raise additional funds through the issuance of equity or
convertible debt securities, the percentage ownership of our
current shareholders could be reduced, and such securities might
have rights, preferences or privileges senior to our common stock.
Additional financing may not be available upon acceptable terms, or
at all. If adequate funds are not available or are not available on
acceptable terms, we may not be able to take advantage of
prospective business endeavors or opportunities, which could
significantly and materially restrict our operations. If we are
unable to obtain the necessary capital, we may have to cease
operations. For additional information, see Item 7 –
Management’s Discussion and Analysis of Financial Condition
and Results of Operations – “Going
Concern.”
Dependence on financing and losses for the foreseeable
future.
As
of December 31, 2015, we had current assets of $106,316 and current
liabilities of $801,222. We had a working capital deficiency of
$694,906. Our ability to continue as a going concern is dependent
upon raising capital from financing transactions. To stay in
business, we will need to raise additional capital through public
or private sales of our securities or debt financing. In the past,
we have financed our operations by issuing secured and unsecured
convertible debt and equity securities in private placements, in
some cases with equity incentives for the investor in the form of
warrants to purchase our common stock and have borrowed from
related parties. We have sought, and will continue to seek, various
sources of financing. On February 2, 2018, we announced that we had
secured $1.2 million in a non-convertible financing from a New
York-based institution. There are no additional commitments from
anyone to provide us with financing. We can provide no assurance as
to whether our capital raising efforts will be successful or as to
when, or if, we will be profitable in the future. Even if the
Company achieves profitability, it may not be able to sustain such
profitability. If we are unable to obtain financing or achieve and
sustain profitability, we may have to suspend operations, sell
assets and will not be able to execute our business plan. Failure
to become and remain profitable may adversely affect the market
price of our common stock and our ability to raise capital and
continue operations.
Our ability to generate positive cash flows is
uncertain.
To
develop and expand our business, we will need to make significant
up-front investments in our manufacturing capacity and incur
research and development, sales and marketing and general and
administrative expenses. In addition, our growth will require a
significant investment in working capital. Our business will
require significant amounts of working capital to meet our project
requirements and support our growth. We cannot provide any
assurance that we will be able to raise the capital necessary to
meet these requirements. If adequate funds are not available or are
not available on satisfactory terms, we may be required to
significantly curtail our operations and may not be able to fund
our current production requirements - let alone fund expansion,
take advantage of unanticipated acquisition opportunities, develop
or enhance our products, or respond to competitive pressures. Any
failure to obtain such additional financing could have a material
adverse effect on our business, results of operations and financial
condition.
Because we may never have net income from our operations, our
business may fail.
We
have no history of profitability from operations. There can be no
assurance that we will ever operate profitably. Our success is
significantly dependent on uncertain events, including successful
development of our products, establishing satisfactory
manufacturing arrangements and processes, and distributing and
selling our products. If we are unable to generate significant
revenues from sales of our products, we will not be able to earn
profits or continue operations. We can provide no assurance that we
will generate any revenues or ever achieve profitability. If we are
unsuccessful in addressing these risks, our business will fail and
investors may lose all of their investment in our
Company.
We need to raise additional funds and such funds may not be
available on acceptable terms or at all.
We
may consider issuing additional debt or equity securities in the
future to fund our business plan, for potential acquisitions or
investments, or for general corporate purposes. If we issue equity
or convertible debt securities to raise additional funds, our
existing stockholders may experience dilution, and the new equity
or debt securities may have rights, preferences and privileges
senior to those of our existing stockholders. If we incur
additional debt, it may increase our leverage relative to our
earnings or to our equity capitalization, requiring us to pay
additional interest expenses. We may not be able to obtain
financing on favorable terms, or at all, in which case, we may not
be able to develop or enhance our products, execute our business
plan, take advantage of future opportunities or respond to
competitive pressures.
Risks Related to Our Common Stock and Its Market Value
We have limited capitalization and may require financing, which may
not be available.
We
have limited capitalization, which increases our vulnerability to
general adverse economic and industry conditions, limits our
flexibility in planning for or reacting to changes in our business
and industry and may place us at a competitive disadvantage to
competitors with sufficient or excess capitalization. If we are
unable to obtain sufficient financing on satisfactory terms and
conditions, we will be forced to curtail or abandon our plans or
operations. Our ability to obtain financing will depend upon a
number of factors, many of which are beyond our
control.
A limited public trading market exists for our common stock, which
makes it more difficult for our stockholders to sell their common
stock in the public markets. Any trading in our shares may have a
significant effect on our stock prices.
Although
our common stock is listed for quotation on the OTC Marketplace,
Pink Tier, under the symbol “GDSI”, the trading
activity of our common stock is volatile and may not develop or be
sustained. As a result, any trading price of our common stock may
not be an accurate indicator of the valuation of our common stock.
Any trading in our shares could have a significant effect on our
stock price. If a more liquid public market for our common stock
does not develop, then investors may not be able to resell the
shares of our common stock that they have purchased and may lose
all of their investment. No assurance can be given that an active
market will develop or that a stockholder will ever be able to
liquidate its shares of common stock without considerable delay, if
at all. Many brokerage firms may not be willing to effect
transactions in the securities. Even if an investor finds a broker
willing to effect a transaction in our securities, the combination
of brokerage commissions, state transfer taxes, if any, and any
other selling costs may exceed the selling price. Furthermore, our
stock price may be impacted by factors that are unrelated or
disproportionate to our operating performance. These market
fluctuations, as well as general economic, political and market
conditions, such as recessions, interest rates or international
currency fluctuations may adversely affect the market price and
liquidity of our common stock.
Our stock price has reflected a great deal of volatility, including
a significant decrease over the past few years. The volatility may
mean that, at times, our stockholders may be unable to resell their
shares at or above the price at which they acquired
them.
From
January 1, 2015 through the date of this report, or May 31, 2018,
the price per share of our common stock has ranged from a high of
$0.18 to a low of $0.0007. The price of our common stock has been,
and may continue to be, highly volatile and subject to wide
fluctuations. The market value of our common stock has declined in
the past, in part, due to our operating performance as well as to
conversions of dilutive debt instruments that we have issued to
fund operations. In the future, broad market and industry factors
may decrease the market price of our common stock, regardless of
our actual operating performance. Recent declines in the market
price of our common stock have and could continue to affect our
access to capital, and may, if they continue, impact our ability to
continue operations at the current level. In addition, any
continuation of the recent declines in the price of our common
stock may curtail investment opportunities presented to us, and
negatively impact other aspects of our business, including our
ability to raise the funds necessary to fund our operations. As a
result of any such declines, many stockholders have been or may
become unable to resell their shares at or above the price at which
they acquired them.
The
volatility of the market price of our common stock could fluctuate
widely in price in response to various factors, many of which are
beyond our control, including the following:
●
our
stock being held by a small number of persons whose sales (or lack
of sales) could result in positive or negative pricing pressure on
the market price for our common stock;
●
actual
or anticipated variations in our quarterly operating
results;
●
changes
in our earnings estimates;
●
our
ability to obtain adequate working capital financing;
●
changes
in market valuations of similar companies;
●
publication
(or lack of publication) of research reports about us;
●
changes
in applicable laws or regulations, court rulings, enforcement and
legal actions;
●
loss
of any strategic relationships;
●
additions
or departures of key management personnel;
●
actions
by our stockholders (including transactions in our
shares);
●
speculation
in the press or investment community;
●
increases
in market interest rates, which may increase our cost of
capital;
●
changes
in our industry;
●
competitive
pricing pressures;
●
our
ability to execute our business plan; and
●
economic
and other external factors.
In
addition, the securities markets have from time to time experienced
significant price and volume fluctuations that are unrelated to the
operating performance of particular companies. These market
fluctuations may also materially and adversely affect the market
price of our common stock.
Our common stock may never be listed on a national exchange and is
subject to being removed from the OTC Pink
Marketplace.
Our
common stock is quoted for trading on the OTC Pink Marketplace
(“OTC Pink”). On December 26, 2017, the Securities and
Exchange Commission instituted public administrative proceedings
pursuant to Section 12(j) of the Securities Exchange Act of 1934
(“Exchange Act”) against the Respondent Global Digital
Solutions, Inc. On January 8, 2018, Respondent Global Digital
Solutions, Inc. (“GDSI”) filed its answer to the
allegations contained in the Order Instituting Administrative
Proceedings and Notice of Hearing Pursuant to Section 12U) of the
Exchange Act. A briefing schedule was entered into and on February
15, 2018, the Securities and Exchange Commission filed a motion for
an order of summary disposition against Respondent GDSI on the
grounds that there is no genuine issue with regard to any material
fact, the Division was entitled as a matter of law to an order
revoking each class of GDSI's securities registered pursuant to
Section 12 of the Exchange Act. Respondent GDSI opposed the
Securities and Exchange Commission’s motion on the grounds
that there were material issues of fact. The Securities and
Exchange Commission replied and a hearing was held on April 9,
2018. The Administrative Law Judge ordered supplemental evidence
and briefing on the issues of material fact. In the event that we
are able to file the required reports with the SEC to be current
under the Exchange Act of 1934 (the “Exchange Act”), we
still will be unable to list our stock on the OTCQB since the price
of our stock is below $0.01, and we do not meet the eligibility
standards for listing under the OTCQB per OTC Markets guidelines.
Should we continue to fail to satisfy the eligibility standards of
OTC Markets for the OTCQB, the trading price of our common stock
could continue to suffer and the trading market for our common
stock may be less liquid and our common stock price may be subject
to increased volatility.
Our stock is categorized as a penny stock. Trading of our stock may
be restricted by the SEC’s penny stock regulations which may
limit a stockholder’s ability to buy and sell our
stock.
Our
stock is categorized as a “penny stock”, as that term
is defined in SEC Rule 3a51-1, which generally provides that
“penny stock”, is any equity security that has a market
price (as defined) less than US$5.00 per share, subject to certain
exceptions. Our securities are covered by the penny stock rules,
including Rule 15g-9, which impose additional sales practice
requirements on broker-dealers who sell to persons other than
established customers and accredited investors. The penny stock
rules require a broker-dealer, prior to a transaction in a penny
stock not otherwise exempt from the rules, to deliver a
standardized risk disclosure document in a form prepared by the SEC
which provides information about penny stocks and the nature and
level of risks in the penny stock market. The broker-dealer also
must provide the customer with current bid and offer quotations for
the penny stock, the compensation of the broker-dealer and its
salesperson in the transaction and monthly account statements
showing the market value of each penny stock held in the
customer’s account. The bid and offer quotations, and the
broker-dealer and salesperson compensation information, must be
given to the customer orally or in writing prior to effecting the
transaction and must be given to the customer in writing before or
with the customer’s confirmation. In addition, the penny
stock rules require that prior to a transaction in a penny stock
not otherwise exempt from these rules, the broker-dealer must make
a special written determination that the penny stock is a suitable
investment for the purchaser and receive the purchaser’s
written agreement to the transaction. These disclosure requirements
may have the effect of reducing the level of trading activity in
the secondary market for the stock that is subject to these penny
stock rules. Consequently, these penny stock rules may affect the
ability of broker-dealers to trade our securities and reduces the
number of potential investors. We believe that the penny stock
rules discourage investor interest in and limit the marketability
of our common stock.
According
to SEC Release No. 34-29093, the market for “penny
stocks” has suffered in recent years from patterns of fraud
and abuse. Such patterns include: (1) control of the market for the
security by one or a few broker-dealers that are often related to
the promoter or issuer; (2) manipulation of prices through
prearranged matching of purchases and sales and false and
misleading press releases; (3) boiler room practices involving
high-pressure sales tactics and unrealistic price projections by
inexperienced sales persons; (4) excessive and undisclosed bid-ask
differential and markups by selling broker-dealers; and (5) the
wholesale dumping of the same securities by promoters and
broker-dealers after prices have been manipulated to a desired
level, along with the resulting inevitable collapse of those prices
and with consequent investor losses. The occurrence of these
patterns or practices could increase the future volatility of our
share price.
FINRA sales practice requirements may also limit a
stockholder’s ability to buy and sell our stock.
In
addition to the “penny stock” rules described above,
FINRA has adopted rules that require that in recommending an
investment to a customer, a broker-dealer must have reasonable
grounds for believing that the investment is suitable for that
customer. Prior to recommending speculative low-priced securities
to their non-institutional customers, broker-dealers must make
reasonable efforts to obtain information about the customer’s
financial status, tax status, investment objectives and other
information. Under interpretations of these rules, FINRA believes
that there is a high probability that speculative low-priced
securities will not be suitable for at least some customers. The
FINRA requirements make it more difficult for broker-dealers to
recommend that their customers buy our common stock, which may
limit your ability to buy and sell our stock and have an adverse
effect on the market for our shares.
To date, we have not paid any cash dividends and no cash dividends
will be paid in the foreseeable future.
We
do not anticipate paying cash dividends on our common stock in the
foreseeable future and we may not have sufficient funds legally
available to pay dividends. Even if the funds are legally available
for distribution, we may nevertheless decide not to pay any
dividends. We presently intend to retain all earnings for our
operations.
If we fail to develop or maintain an effective system of internal
controls, we may not be able to accurately report our financial
results or prevent financial fraud. As a result, current and
potential stockholders could lose confidence in our financial
reporting.
We
are subject to the risk that sometime in the future, our
independent registered public accounting firm could communicate to
the board of directors that we have deficiencies in our internal
control structure that they consider to be “significant
deficiencies.” A “significant deficiency” is
defined as a deficiency, or a combination of deficiencies, in
internal controls over financial reporting such that there is more
than a remote likelihood that a material misstatement of the
entity’s financial statements will not be prevented or
detected by the entity’s internal controls.
Effective
internal controls are necessary for us to provide reliable
financial reports and effectively prevent fraud. If we cannot
provide reliable financial reports or prevent fraud, we could be
subject to regulatory action or other litigation and our operating
results could be harmed. We are required to document and test our
internal control procedures to satisfy the requirements of Section
404 of the Sarbanes-Oxley Act of 2002 (the “Sarbanes-Oxley
Act” or “SOX”), which requires our management to
annually assess the effectiveness of our internal control over
financial reporting.
We
currently are not an “accelerated filer” as defined in
Rule 12b-2 under the Securities Exchange Act of 1934, as amended.
Section 404 of the Sarbanes-Oxley Act of 2002 (“Section
404”) requires us to include an internal control report with
our Annual Report on Form 10-K. That report must include
management’s assessment of the effectiveness of our internal
control over financial reporting as of the end of the fiscal year.
This report must also include disclosure of any material weaknesses
in internal control over financial reporting that we have
identified. As of December 31, 2015, the management of the Company
assessed the effectiveness of the Company’s internal control
over financial reporting based on the criteria for effective
internal control over financial reporting established in Internal
Control - Integrated Framework issued by the Committee of
Sponsoring Organizations of the Treadway Commission
(“COSO”) and SEC guidance on conducting such
assessments. Management concluded, during the year ended December
31, 2015, that the Company’s internal controls and procedures
were not effective to detect the inappropriate application of U.S.
GAAP rules. Management realized there were deficiencies in the
design or operation of the Company’s internal control that
adversely affected the Company’s internal controls which
management considers to be material weaknesses. A material weakness
in the effectiveness of our internal controls over financial
reporting could result in an increased chance of fraud and the loss
of customers, reduce our ability to obtain financing and require
additional expenditures to comply with these requirements, each of
which could have a material adverse effect on our business, results
of operations and financial condition. For additional information,
see Item 9A – Controls and Procedures.
It
may be time consuming, difficult and costly for us to develop and
implement the internal controls and reporting procedures required
by the Sarbanes-Oxley Act. We may need to hire additional financial
reporting, internal controls and other finance personnel in order
to develop and implement appropriate internal controls and
reporting procedures. If we are unable to comply with the internal
controls requirements of the Sarbanes-Oxley Act, then we may not be
able to obtain the independent accountant certifications required
by such act, which may preclude us from keeping our filings with
the SEC current.
If
we are unable to maintain the adequacy of our internal controls, as
those standards are modified, supplemented, or amended from time to
time, we may not be able to ensure that we can conclude on an
ongoing basis that we have effective internal control over
financial reporting in accordance with Section 404. Failure to
achieve and maintain an effective internal control environment
could cause us to face regulatory action and cause investors to
lose confidence in our reported financial information, either of
which could adversely affect the value of our common
stock.
Because our current directors, executive officers beneficially hold
47.5% of our common stock, they can exert significant control over
our business and affairs and have actual or potential interests
that may depart from those of subscribers in our private
placements.
Our
current directors, executive officers and 5% or more stockholders
beneficially own or control approximately 47.5% of our issued and
outstanding shares of common stock as of May 30, 2018.
Additionally, the holdings of our directors and executive officers
preferred stock holders may increase in the future upon vesting or
other maturation of exercise rights under any of the restricted
stock grants, options or warrants they may hold or in the future be
granted or if they otherwise acquire additional shares of our
common stock. The interests of such persons may differ from the
interests of our other stockholders. As a result, in addition to
their board seats and offices, such persons may have significant
influence over and may control corporate actions requiring
stockholder approval, irrespective of how the Company's other
stockholders may vote, including the following
actions:
●
to
elect or defeat the election of our directors;
●
to
amend or prevent amendment of our Certificate of Incorporation or
By-laws;
●
to
effect or prevent a transaction, sale of assets or other corporate
transaction; and
●
to
control the outcome of any other matter submitted to our
stockholders for vote.
Such
persons' stock ownership may discourage a potential acquirer from
making a tender offer or otherwise attempting to obtain control of
the Company, which in turn could reduce our stock price or prevent
our stockholders from realizing a premium over our stock
price.
Exercise of options and warrants and conversion rights under
convertible notes and preferred stock would have a dilutive effect
on our common stock.
If
the price per share of our common stock at the time of exercise of
any options, warrants or any other convertible securities is in
excess of the various exercise or conversion prices of such
convertible securities, exercise or conversion of such convertible
securities would have a dilutive effect on our common stock. As of
December 31, 2015, we had: (a) outstanding options to acquire
shares our common stock at exercise prices ranging from $0.006 to
$0.14 for 12,100,000 options, and an exercise price of $0.64 per
share for 4.0 million options, (b) warrants to acquire 2,500,000
shares of our common stock at exercise prices ranging from $0.15 to
$1.00, and (c) convertible debt and accrued interest of $126,133
convertible into 28,666,591 shares of our common stock at $0.0044
per share. The number of shares and the conversion price for the
convertible debt is subject to change based on changes in the price
of our common stock. Further, any additional financing that we
secure may require the granting of rights, preferences or
privileges senior to those of our common stock and which result in
additional dilution of the existing ownership interests of our
common stockholders
Our certificate of incorporation allows for our board to create new
series of preferred stock without further approval by our
stockholders, which could adversely affect the rights of the
holders of our common stock.
Our
board of directors has the authority to fix and determine the
relative rights and preferences of preferred stock. Our board of
directors also has the authority to issue preferred stock without
further stockholder approval. As a result, our board of directors
could authorize the issuance of a series of preferred stock that
would grant to holders a preferred right to our assets upon
liquidation, the right to receive dividend payments before
dividends are distributed to the holders of common stock and the
right to the redemption of the shares, together with a premium,
prior to the redemption of our common stock. In addition, our board
of directors could authorize the issuance of a series of preferred
stock that has greater voting power than our common stock or that
is convertible into our common stock, which could decrease the
relative voting power of our common stock or result in dilution to
our existing stockholders.
ITEM 1B. UNRESOLVED STAFF COMMENTS
Not
Applicable.
ITEM 2. PROPERTIES
Our
principal executive offices are located at 777 South Flagler Drive,
Suite 800 West Tower, West Palm Beach, FL 33401, and our telephone
number is (561) 515-6163. Our executive office is a virtual office
and is utilized for meetings, conferences, telephone and message
support. On August 19, 2013, we entered into a lease agreement
located at such address for a total monthly rental of
$299.
On
January 1, 2015, NACSV renewed a lease agreement for one building
under a year-to-year operating lease with monthly rent payments
totaling $8,748 in January 2015 and $5,637 for February –
December, 2015. The lease provides that either party may cancel it
on thirty days’ notice. In January 2016, we terminated the
lease. In September 2014, NACSV entered into a 12-month operating
lease for a condominium for a vice president with monthly rent
payments of $2,160, the lease expired and was not
renewed.
We
own no other real property.
Our
registered agent is Direct Transfer, LLC, located at 500 Perimeter
Park Drive Suite D, Morrisville, NC 27560.
ITEM 3. LEGAL PROCEEDINGS
We
may be involved in legal proceedings in the ordinary course of our
business. Although our management cannot predict the ultimate
outcome of these legal proceedings with certainty, it believes that
the ultimate resolution of our legal proceedings, including any
amounts we may be required to pay, will not have a material effect
on our consolidated financial statements.
The
Company is plaintiff or defendant in the following
actions:
Dekle, et. al. v. Global Digital Solutions, Inc. et.
al.
Brian
A. Dekle and John Ramsay filed suit against the Company and its
wholly owned subsidiary, North American Custom Specialty Vehicles,
Inc. (“NACSV”), in the Circuit Court of Baldwin
Alabama, on January 14, 2015, case no. 05-CV-2015-9000050.00,
relating to our acquisition of NACSV (the ''Dekle Action"). Prior
to instituting the Dekle Action, in June 2014, the Company had
entered into an equity purchase agreement with Dekle and Ramsay to
purchase their membership interest in North American Custom
Specialty Vehicles, LLC. The Dekle Action originally sought payment
for $300,000 in post-closing consideration Dekle and Ramsay allege
they are owed pursuant to the equity purchase
agreement.
On February 9, 2015,
t
he Company and NACSV removed
the Dekle Action to federal court in the United States District
Court in and for the Southern District of Alabama, case no.
1:15-CV-00069. The Company and NACSV subsequently moved to dismiss
the complaint for (1) failing to state a cause of action, and (2)
lack of personal jurisdiction. Alternatively, the Company and NACSV
sought a transfer of the case to the United States District Court
in and for Middle District of Florida.
In
response to the Company’s and NACSV's motion to dismiss,
Dekle and Ramsay filed an amended complaint on March 2, 2015
seeking specific performance and alleging breach of contract,
violations of Security and Exchange Commission (“SEC”)
Rule 10b-5, and violations of the Alabama Securities Act. The
amended complaint also names the Company’s Chairman,
President, and CEO, Richard J. Sullivan (“Sullivan”),
as a defendant. On March 17, 2015, the Company, NACSV and Sullivan
filed a motion to dismiss the amended complaint seeking dismissal
for failure to state valid causes of action, for lack of personal
jurisdiction, or alternatively to transfer the case to the United
States District Court in and for the Middle District of Florida.
Dekle and Ramsay responded on March 31, 2015, and the Company filed
its response thereto on April 7, 2015.
On
June 2, 2015, Dekle passed away. On June 5, 2015, the Court
denied the Company’s motion to transfer the case to
Florida. On June 10, 2015, the Company filed a motion
to reconsider the Court’s denial of its motion to transfer
the case to Florida. On September 30, 2105, the Court granted
the Company’s Renewed Motion to Transfer Venue. The case was
transferred to the Middle District of Florida, where it is
currently pending.
On
June 15, 2015, Ramsay filed a second amended complaint. On June 25,
2015, the Company filed a motion to dismiss the second amended
complaint. The Company’s Motion to Dismiss was
denied.
On
July 27, 2017, the Company and Dekle and Ramsay came to a
Settlement Agreement. The Company and the plaintiff came to the
following agreements:
i.
Judgment
is due to be entered against the Company in the amount of $300,000
if the sum of $20,000 as noted in iv below is not
paid.
ii.
The
Company grants the plaintiffs vehicles and trailers in connection
to this proceeding.
iii.
The
Company will assist the plaintiffs in obtaining possession of the
said vehicles.
iv.
The
Company will pay the plaintiffs the sum of $20,000.
v.
The
$20,000 settlement was paid in August 2017.
Global Digital Solutions, Inc. et. al. v. Communications
Laboratories, Inc., et. al.
On
January 19, 2015 the Company and NACSV filed suit against
Communications Laboratories, Inc., ComLabs Global, LLC, Roland
Lussier, Brian Dekle, John Ramsay and Wallace Bailey for conversion
and breach of contract in a dispute over the payment of a $300,000
account receivable that ComLabs owed to NACSV but sent payment
directly to Brian Dekle. The case was filed in the Eighteenth
Judicial Circuit in and for Brevard County Florida, case no.
05-2015-CA-012250. On February 18, 2015 (i) defendants
Communications Laboratories, Inc., ComLabs Global, LLC and Roland
Lussier and (ii) defendant Wallace Bailey filed their respective
motions to dismiss seeking, among other things, dismissal for
failure to state valid causes of action, lumping and failure to
post a non-resident bond. On February 26, 2015, defendants Dekle
and Ramsay filed their motion to dismiss, or stay action, based on
already existing litigation between the parties. NACSV filed its
required bond on March 2, 2015.
PowerUp Lending Group, LTD., v. North American Custom Specialty
Vehicle, Inc. et.al
On
September 13, 2017 Power Up received a default judgment against the
Company in the amount of $109,302.00. The Company negotiated a
settlement agreement on December 21, 2017 with Power Up to pay
$90,000 in three installments of $30,000. As of May 15, 2018 the
company has paid the entire amount.
Securities and Exchange Commission v. Global Digital Solutions,
Inc., Richard J. Sullivan and David A. Loppert United States
District Court for the Southern District of Florida, Case No.
9:16-cv-81413-RLR
On
August 11, 2016, the Securities and Exchange Commission
(“SEC”) filed suit in the United States District Court
for the Southern District of Florida against Global Digital
Solutions, Inc. (“GDSI”), Richard J. Sullivan
(“Sullivan”) and David A. Loppert
(“Loppert”) to enjoin GDSI; Sullivan, GDSI’s
former Chairman and CEO; and Loppert, GDSI’s former CFO from
alleged further violations of the anti-fraud and reporting
provisions of the federal securities laws, and against Sullivan and
Loppert from alleged further violations of the certification
provisions of the federal securities laws.
On
October 12, 2016, Defendant GDSI filed its First Answer to the
Complaint. On November 9, 2016, Defendant Sullivan filed a Letter
with the Court denying all allegations regarding the case. On
December 15, 2016, the SEC filed a Motion for Judgment and Notice
of Filing of Consent of Defendant Loppert to entry of Final
Judgment by the SEC. On December 19, 2016, the Court entered an
order granting the SEC’s Motion for Judgment as to Defendant
Loppert. On December 21, 2016, the SEC filed a Notice of Settlement
as entered into by it and Defendants GDSI and Sullivan. On December
23, 2016, the Court entered an Order staying the case and directing
the Clerk of the Court to close the case for statistical purposes
per the December 21, 2016 Notice of Settlement. On March 7, 2017,
the SEC moved for a Judgment of Permanent Injunction and Other
Relief and Notice of Filing Consent of Defendant GDSI to Entry of
Judgment by the SEC. On March 13, 2017, the Judge signed the
Judgment as to Defendant GDSI and it was entered on the
Court’s docket. On April 6, 2017, the SEC moved for a final
Judgment of Permanent Injunction and Other Relief and Notice of
Filing Consent of Defendant Sullivan. On April 10, 2017, the Judge
signed the final Judgment as to Defendant Sullivan and it was
entered on the Court’s docket. On December 21, 2017, the SEC
moved for a final Judgment and Notice of Filing Consent of
Defendant GDSI to Entry of Final Judgment. On January 2, 2018, the
Judge signed the Final Judgment as to Defendant GDSI and it was
entered on the Court’s docket.
Adrian Lopez, Derivatively and on behalf of Global Digital
Solutions, Inc. v. William J. Delgado, Richard J. Sullivan, David
A. Loppert, Jerome J. Gomolski, Stephanie C. Sullivan, Arthur F.
Noterman, and Stephen L. Norris United States District Court for
the District of New Jersey, Case No.
3:17-cv-03468-PGS-LHG
On September 19, 2016, Adrian
Lopez, derivatively, and on behalf of Global Digital Solutions,
Inc., filed an action in New Jersey Superior Court sitting Mercer
County, General Equity Division. That action was administratively
dismissed for failure to prosecute. Plaintiff Lopez, through his
counsel, filed a motion to reinstate the matter on the general
equity calendar on or about February 10, 2017. The Court granted
the motion unopposed on or about April 16, 2017. On May 15, 2017,
Defendant William Delgado (“Delgado”) filed a Notice of
Removal of Case No. C-70-16 from the Mercer County Superior Court
of New Jersey to the United States District Court for the District
of New Jersey. On May 19, 2017, Defendant Delgado filed a First
Motion to Dismiss for Lack of Jurisdiction. On May 20, 2017,
Defendant David A. Loppert (“Loppert”) filed a Motion
to Dismiss for Lack of (Personal) Jurisdiction. On June 14, 2017,
Plaintiff Adrian Lopez (“Lopez”) filed a First Motion
to Remand the Action back to State Court. On June 29, 2017,
Defendant Delgado filed a Memorandum of Law in Response and Reply
to the Memorandum of Law in Support of Plaintiff’s Motion to
Remand and in Response to Defendants’ Delgado’s and
Loppert’s Motions to Dismiss. On January 1, 16, 2018, a
Memorandum and Order granting Plaintiff’s Motion to Remand
the case back to the Mercer County Superior Court of New Jersey was
signed by the Judge and entered on the Docket. Defendants Delgado
and Loppert’s Motions to Dismiss were denied as moot. On
February 2, 2018, Defendants filed a Motion to Dismiss the
Complaint. On February 20, 2018, Plaintiff filed a Motion to
Consolidate Cases. On March 21, 2018, Plaintiff filed an Opposition
to Defendants’ Motion to Dismiss the Complaint. On March 23,
2018, Defendants filed a Brief in Reply to Plaintiff’s
Opposition to Defendants’ Motion to Dismiss the Complaint.
The Court held a hearing on the motions to dismiss and consolidate.
Jurisdictional discovery was ordered. As of this date, the Court
has not issued a decision and Order regarding Defendants’
Motion to Dismiss the Complaint.
Adrian Lopez v. Global Digital Solutions, Inc. and William J.
Delgado Superior Court of New Jersey, Chancery Division, Mercer
County, Equity Part, Docket No. MER-L-002126-17
On
September 28, 2017, Plaintiff Adrian Lopez (“Lopez”)
brought an action against Global Digital Solutions, Inc.
(“GDSI”) and William J. Delgado (“Delgado”)
to compel a meeting of the stockholders of Global Digital
Solutions, Inc. pursuant to Section 2.02 of GDSI’s Bylaws and
New Jersey Revised Statute § 14A:5-2. On October 27, 2017,
Defendants GDSI and Delgado filed a Motion to Stay the Proceeding.
On November 24, 2017, Plaintiff filed an Objection to
Defendants’ Motion to Stay the Proceeding. On January 19,
2018, Defendants’ Motion to Stay the Proceeding was denied.
On February 2, 2018, Defendants filed a Motion to Dismiss the
Complaint. On February 20, 2018, Plaintiff filed a Motion to
Consolidate Cases. On March 21, 2018, Plaintiff filed an Opposition
to Defendants’ Motion to Dismiss the Complaint. On March 23,
2018, Defendants filed a Brief in Reply to Plaintiff’s
Opposition to Defendants’ Motion to Dismiss the Complaint. As
of this date, the Court has not issued a decision and Order
regarding Defendants’ Motion to Dismiss the
Complaint.
Jeff Hull, Individually and on Behalf of All Others Similarly
Situated v. Global Digital Solutions, Inc., Richard J. Sullivan,
David A. Loppert, William J. Delgado, Arthur F. Noterman and
Stephanie C. Sullivan United States District Court, District of New
Jersey (Trenton), Case No. 3:16-cv-05153-FLW-TJB
On
August 24, 2016, Jeff Hull, Individually and on Behalf of All
Others Similarly Situated (“Hull”) filed suit in the
United States District Court for the District of New Jersey against
Global Digital Solutions, Inc. (“GDSI”), Richard J.
Sullivan (“Sullivan”), David A. Loppert
(“Loppert”), William J. Delgado
(“Delgado”), Arthur F. Noterman
(“Noterman”) and Stephanie C. Sullivan
(“Stephanie Sullivan”) seeking to recover compensable
damages caused by Defendants’ alleged violations of federal
securities laws and to pursue remedies under the Securities
Exchange Act of 1934. On January 18, 2018, pursuant to the
Court’s December 19, 2017 Order granting Plaintiff Hull leave
to file an amended Complaint, Plaintiff Hull filed a Second Amended
Complaint against Defendants. On February 8, 2018, Defendants GDSI
and Delgado filed a Second Motion to Dismiss the Complaint. On
February 8, 2018, Defendant Loppert filed a Motion for Extension of
Time to File an Answer. On February 13, 2018, Defendant Loppert
filed a Motion to Dismiss the Second Amended Complaint for Lack of
(personal) Jurisdiction and for Failure to State a Claim. On
February 20, 2018, Plaintiff Michael Perry (“Perry”)
filed a Brief in Opposition to Defendants GDSI and Delgado’s
Second Motion to Dismiss the Complaint and to Defendant
Loppert’s Motion to Dismiss the Second Amended Complaint for
Lack of (personal) Jurisdiction and for Failure to State a Claim.
On February 26, 2018, Defendants GDSI and Delgado filed a Reply
Brief to Plaintiff Michael Perry’s Brief in Opposition to
their Motion to Dismiss the Second Amended Complaint. On February
26, 2018, Defendant Loppert filed a Response in Support of
Defendants GDSI and Delgado’s Second Motion to Dismiss the
Complaint. On March 12, 2018, Defendant Loppert filed a Reply Brief
to Plaintiff Perry’s Brief in Opposition to Defendant
Loppert’s Motion to Dismiss the Second Amended Complaint for
Lack of (personal) Jurisdiction and for Failure to State a Claim.
To date, the Court has not issued a decision as to aforementioned
Motions. Global Digital Solutions, Inc. and William J. Delgado
intend to continue to vigorously defend against the claims asserted
by Jeff Hull, Individually and on Behalf of All Others Similarly
Situated.
In the Matter of Global Digital Solutions, Inc., Administrative
Proceeding File No. 3-18325. Administrative Proceeding Before the
Securities and Exchange Commission.
On
December 26, 2017, the Securities and Exchange Commission
instituted public administrative proceedings pursuant to Section
12(j) of the Securities Exchange Act of 1934 (“Exchange
Act”) against the Respondent Global Digital Solutions, Inc.
On January 8, 2018, Respondent Global Digital Solutions, Inc.
(“GDSI”) filed its answer to the allegations contained
in the Order Instituting Administrative Proceedings and Notice of
Hearing Pursuant to Section 12U) of the Exchange Act. A briefing
schedule was entered into and on February 15, 2018, the Securities
and Exchange Commission filed a motion for an order of summary
disposition against Respondent GDSI on the grounds that there is no
genuine issue with regard to any material fact, the Division was
entitled as a matter of law to an order revoking each class of
GDSI's securities registered pursuant to Section 12 of the Exchange
Act. Respondent GDSI opposed the Securities and Exchange
Commission’s motion on the grounds that there were material
issues of fact. The Securities and Exchange Commission replied and
a hearing was held on April 9, 2018. The Administrative Law Judge
ordered supplemental evidence and briefing on the issues of
material fact.
Securities and Exchange Commission v. Global Digital Solutions,
Inc., Richard J. Sullivan and David A. Loppert United States
District Court for the Southern District of Florida, Case No.
9:16-cv-81413-RLR
On
August 11, 2016, the Securities and Exchange Commission
(“SEC”) filed suit in the
United States District Court for the Southern
District of Florida
against Global Digital Solutions, Inc.
(“GDSI”), Richard J. Sullivan (“Sullivan”)
and David A. Loppert (“Loppert”) to enjoin GDSI;
Sullivan, GDSI’s former Chairman and CEO; and Loppert,
GDSI’s former CFO from alleged further violations of the
anti-fraud and reporting provisions of the federal securities laws,
and against Sullivan and Loppert from alleged further violations of
the certification provisions of the federal securities
laws.
On
October 12, 2016, Defendant GDSI filed its First Answer to the
Complaint. On November 9, 2016, Defendant Sullivan filed a Letter
with the Court denying all allegations regarding the case. On
December 15, 2016, the SEC filed a Motion for Judgment and Notice
of Filing of Consent of Defendant Loppert to entry of Final
Judgment by the SEC. On December 19, 2016, the Court entered an
order granting the SEC’s Motion for Judgment as to Defendant
Loppert. On December 21, 2016, the SEC filed a Notice of Settlement
as entered into by it and Defendants GDSI and Sullivan. On December
23, 2016, the Court entered an Order staying the case and directing
the Clerk of the Court to close the case for statistical purposes
per the December 21, 2016 Notice of Settlement. On March 7, 2017,
the SEC moved for a Judgment of Permanent Injunction and Other
Relief and Notice of Filing Consent of Defendant GDSI to Entry of
Judgment by the SEC. On March 13, 2017, the Judge signed the
Judgment as to Defendant GDSI and it was entered on the
Court’s docket. On April 6, 2017, the SEC moved for a final
Judgment of Permanent Injunction and Other Relief and Notice of
Filing Consent of Defendant Sullivan. On April 10, 2017, the Judge
signed the final Judgment as to Defendant Sullivan and it was
entered on the Court’s docket. On December 21, 2017, the SEC
moved for a final Judgment and Notice of Filing Consent of
Defendant GDSI to Entry of Final Judgment. On January 2, 2018, the
Judge signed the Final Judgment as to Defendant GDSI and it was
entered on the Court’s docket. The amount of the judgement is
One Hundred Thousand Dollars ($100,000) plus interest.
PMB Helin Donovan, LLP vs. Global Digital Solutions, Inc. in the
Circuit Court for the 15
th
Judicial Circuit in
and for Palm Beach County, Florida, Docket No.:
50-2017-CA-011937-XXXX-MB
On
October 31, 2017, PMB Helin Donovan, LLP filed an action for
account stated in Palm Beach County. Global Digital Solutions, Inc.
(“GDSI”) settled the matter for Forty Thousand Dollars
($40,000) of which the first payment of Ten Thousand Dollars
($10,000.00) has been paid.
Jennifer Carroll vs. Global Digital Solutions, Inc., North American
Custom Specialty Vehicles, Inc., in the Circuit Court for the
15
th
Judicial Circuit in and for Palm Beach County, Florida, Case No.:
50-2015-CC-012942-XXXX-MB
On
October 27, 2017, Plaintiff Jennifer Carroll moved the court for a
default judgment against Defendant Global Digital Solutions, Inc.
(“GDSI”) and its subsidiary North American Custom
Specialty Vehicles Inc. The amount of the judgement is Fifteen
Thousand Dollars ($15,000) plus fees of Thirteen Thousand Three
Hundred Fifty Three Dollars Forty Four Cents ($13,353.44) and costs
of Six Hundred Twenty Four Dollars Thirty Cents
($624.30).
ITEM 4. MINE SAFETY DISCLOSURES
Not
applicable.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 – DESCRIPTION OF BUSINESS
We
were incorporated in New Jersey as Creative Beauty Supply, Inc.
(“Creative”) in August 1995. In March 2004, Creative
acquired Global Digital Solutions, Inc., a Delaware corporation
("Global”). The merger was treated as a recapitalization of
Global, and Creative changed its name to Global Digital Solutions,
Inc., Global provided structured cabling design, installation and
maintenance for leading information technology companies, federal,
state and local government, major businesses, educational
institutions, and telecommunication companies. On May 1, 2012, we
made the decision to wind down our operations in the
telecommunications area and to refocus our efforts in the area of
cyber arms technology and complementary security and technology
solutions. From August 2012 through November 2013 we were actively
involved in managing Airtronic USA, Inc., and effective as of June
16, 2014 we acquired North American Custom Specialty Vehicles
(“NACSV”). In July 2014, we announced the formation of
GDSI International (f/k/a Global Digital Solutions, LLC) to
spearhead our efforts overseas.
Effective
October 13, 2015, the Company (as “Purchaser”) entered
into the SPSA dated October 8, 2015 with Joao Alberto Bolzan and
Jose Carlos Bolzan, both Brazilian residents (collectively, the
“Sellers”) and Grupo Rontan Electro Metalurgica, S.A.,
a limited liability company duly organized and existing under the
laws of Federative Republic of Brazil (“Rontan”)
(collectively, the “Parties”), pursuant to which the
Sellers agreed to sell 100% of the issued and outstanding shares of
Rontan to the Purchaser on the closing date (the “Rontan
Transaction”).
On
January 31, 2018, we announced that we initiated a lawsuit for
damages against Grupo Rontan Metalurgica, S. A,
(“Rontan”) and that company’s controlling
shareholders, Joao Alberto Bolzan and Jose Carlos Bolzan. We have
engaged the law firm of Boies Schiller Flexner LLP to represent us
in this action. The case will be handled by William Isaacson of the
firm’s Washington office and Carlos Sires of the firm’s
Fort Lauderdale office. The action has been filed in the United
States District Court for the Southern District of Florida. The
complaint alleges that Rontan is wholly-owned by Joao Bolzan and
Jose Bolzan. In the complaint, we further allege that Rontan and
its shareholders improperly terminated a Share Purchase and Sale
Agreement (the “SPA”) by which we were to acquire whole
ownership of Rontan.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Going Concern
The
accompanying financial statements have been prepared assuming we
will continue as a going concern, which contemplates the
realization of assets and the liquidation of liabilities in the
normal course of business. We have sustained losses and experienced
negative cash flows from operations since inception, and for the
year ended December 31, 2015 we incurred a net loss of $2,689,331
and used net cash of $767,390 to fund operating activities. At
December 31, 2015, we had cash and cash equivalents of $2,944, an
accumulated deficit of $31,667,384, a working capital deficit of
$694,906 and stockholders’ deficit of $957,651. We have
funded our activities to date almost exclusively from equity and
debt financings.
Our
cash position is critically deficient, and payments essential to
our ability to operate are not being made in the ordinary course.
Failure to raise capital in the coming days to fund our operations
and failure to generate positive cash flow to fund such operations
in the future will have a material adverse effect on our financial
condition. These factors raise substantial doubt about our ability
to continue as a going concern.
We
are in default under the terms of our loan agreements, as more
fully discussed in Note 8. We need to raise additional funds
immediately and continue to raise funds until we begin to generate
sufficient cash from operations, and we may not be able to obtain
the necessary financing on acceptable terms, or at
all.
We
will continue to require substantial funds to continue development
of our core business. Management’s plans in order to meet our
operating cash flow requirements include financing activities such
as private placements of common stock, and issuances of debt and
convertible debt instruments, and the establishment of strategic
relationships which we expect will lead to the generation of
additional revenue or acquisition opportunities.
While
we believe that we will be successful in obtaining the necessary
financing to fund our operations, there are no assurances that such
additional funding will be achieved or that we will succeed in our
future operations. On February 2, 2018, we announced that we had
secured $1.2 million in a non-convertible financing from a New
York-based institution.
Our
independent registered public accounting firm has expressed
substantial doubt about our ability to continue as a going concern
as a result of our history of net losses. Our ability to achieve
and maintain profitability and positive cash flow is dependent upon
our ability to successfully execute the plans to pursue
acquisitions, and raise the funds necessary to complete such
acquisitions. The outcome of these matters cannot be predicted at
this time. The consolidated financial statements do not include any
adjustments relating to the recoverability and classification of
recorded asset amounts or the amounts and classification of
liabilities that might be necessary should we be unable to continue
as a going concern.
Principles of Consolidation
The
accompanying consolidated financial statements include the accounts
of the Company and our wholly owned subsidiaries, NACSV, GDSI
Florida, LLC and Global Digital Solutions, LLC, dba GDSI
International. All intercompany accounts and transactions have been
eliminated in consolidation.
Revenue Recognition
In
accordance with U.S. generally accepted accounting principles, the
revenue under fixed-price contracts is accounted for on the
percentage-of-completion method. This methodology recognizes
revenue and earnings as work progresses on the contract and is
based on an estimate of the revenue and earnings earned to date,
less amounts recognized in prior periods. The Company bases its
estimate of the degree of completion of the contract by reviewing
the relationship of costs incurred to date to the expected total
costs that will be incurred on the project. Estimated contract
earnings are reviewed and revised periodically as the work
progresses, and the cumulative effect of any change in estimate is
recognized in the period in which the change is identified.
Estimated losses are charged against earnings in the period such
losses are identified. The Company recognizes revenue arising from
contract claims either as income or as an offset against a
potential loss only when the amount of the claim can be estimated
reliably and realization is probable and there is a legal basis of
the claim. Because of inherent uncertainties in estimating costs,
it is possible that the estimates used will change within the
near-term.
Contract
costs include all direct material and labor costs and those
indirect costs related to contract performance, such as payroll
taxes and worker’s compensation insurance premiums. Operating
expenses are charged to expense as incurred.
Revenue
for service and refurbishment work are recognized when the job is
complete.
Advertising
All
advertising costs are expensed as incurred.
Provision for Income Taxes
Income taxes are calculated based upon the asset
and liability method of accounting. Deferred income taxes are
recorded to reflect the tax consequences in future years of
differences between the tax basis of assets and liabilities and
their financial reporting amounts at each year-end. A valuation
allowance is recorded against deferred tax assets if management
does not believe the Company has met the “more likely than
not” standard to allow for recognition of such an asset. In
addition, realization of an uncertain income tax position must be
estimated as “more likely than not” (i.e., greater than
50% likelihood of receiving a benefit) before it can be recognized
in the financial statements
.
Further, the recognition of tax benefits recorded
in the financial statements, if any, is based on the amount most
likely to be realized assuming a review by tax authorities having
all relevant information.
Cash and Cash Equivalents
We consider all highly liquid investments with
original maturities of three months or less to be cash
equivalents.
At December 31, 2015 and 2014, cash and cash
equivalents, consisting of cash in bank, were $2,944 and $160,102,
respectively.
Accounts Receivable
We record accounts receivable at the invoiced amount and we do not
charge interest. We maintain an allowance for doubtful accounts to
reserve for potentially uncollectible receivables. We review the
accounts receivable by customers which are past due to identify
specific customers with known disputes or collectability issues. In
determining the amount of the reserve, we make judgments about the
creditworthiness of significant customers based on ongoing credit
evaluations. Allowance for doubtful accounts was $104,085 at
December 31, 2014. We did not have an allowance for doubtful
accounts at December 31, 2015, due to a significant decrease in
accounts receivable.
Prepaid expenses
Prepaid
expenses consist primarily of prepaid insurance totaling $99,111
and $81,499 at December 31, 2015 and 2014, respectively, which is
amortized on a straight-line basis over the policy
period.
Fair Value of Financial Instruments
The
carrying value of cash, accounts receivable, other receivables,
accounts payable and accrued expenses approximate their fair values
based on the short-term maturity of these instruments. The carrying
amounts of debt were also estimated to approximate fair value. As
defined in ASC 820, "Fair Value Measurements and Disclosures," fair
value is the price that would be received to sell an asset or paid
to transfer a liability in an orderly transaction between market
participants at the measurement date (exit price). The Company
utilizes market data or assumptions that market participants would
use in pricing the asset or liability, including assumptions about
risk and the risks inherent in the inputs to the valuation
technique. These inputs can be readily observable, market
corroborated, or generally unobservable. ASC 820 establishes a fair
value hierarchy that prioritizes the inputs used to measure fair
value. The hierarchy gives the highest priority to unadjusted
quoted prices in active markets for identical assets or liabilities
(level 1 measurement) and the lowest priority to unobservable
inputs (level 3 measurement). This fair value measurement framework
applies at both initial and subsequent measurement.
The
three levels of the fair value hierarchy defined by ASC 820 are as
follows:
●
Level
1 – Quoted prices are available in active markets for
identical assets or liabilities as of the reporting date. Active
markets are those in which transactions for the asset or liability
occur in sufficient frequency and volume to provide pricing
information on an ongoing basis. Level 1 primarily consists of
financial instruments such as exchange-traded derivatives,
marketable securities and listed equities.
●
Level
2 – Pricing inputs are other than quoted prices in active
markets included in Level 1, which are either directly or
indirectly observable as of the reported date. Level 2 includes
those financial instruments that are valued using models or other
valuation methodologies. These models are primarily
industry-standard models that consider various assumptions,
including quoted forward prices for commodities, time value,
volatility factors and current market and contractual prices for
the underlying instruments, as well as other relevant economic
measures. Substantially all of these assumptions are observable in
the marketplace throughout the full term of the instrument, can be
derived from observable data or are supported by observable levels
at which transactions are executed in the marketplace. Instruments
in this category generally include non-exchange-traded derivatives
such as commodity swaps, interest rate swaps, options and
collars.
●
Level
3 – Pricing inputs include significant inputs that are
generally less observable from objective sources. These inputs may
be used with internally developed methodologies that result in
management’s best estimate of fair value.
Convertible Notes With Fixed Conversion Options
We
have entered into convertible notes with related parties that
contain conversion options, whereby the outstanding principal and
accrued interest may be converted, by the holder, into shares of
our common stock at a fixed price which represented a 30% discount
to the price of our common stock at the time of issuance. We
measure the fair value of the notes at the time of issuance, which
is the result of the share price conversion discount, and record
the discount (beneficial conversion feature) as a reduction of
debt. We then accrete the discount as interest expense utilizing
the effective interest rate method over the life of the
debt.
Derivative Financial Instruments
During the year ended December 31, 2015, we issued
convertible notes payable to third parties, which contain variable
conversion options allowing the holders to convert the notes
payable into shares of our common stock at discounts ranging from
39% to 40%. Each of these notes is more fully described in Note
7
.
We account for these conversion options embedded
in the convertible notes payable to third parties in accordance
with the Financial Accounting Standards Board (“FASB”)
Accounting Standard Codification (“ASC’) 815,
“Derivatives
and Hedging”
. Subtopic
ASC 815-15,
Embedded Derivatives
generally requires companies to
bifurcate conversion options embedded in the convertible notes from
their host instruments and to account for them as free standing
derivative financial instruments. Derivative liabilities are
recognized in the consolidated balance sheet at fair value
as
Derivative Liabilities
and based on the criteria specified in
FASB ASC 815-40,
Derivatives and Hedging
– Contracts in Entity’s own Equity
. The estimated fair value of the derivative
liabilities is calculated using the Black-Scholes pricing model and
such estimates are revalued at each balance sheet date, with
changes recorded to other income or expense as
Change in Fair Value –
Derivatives
in the consolidated
statement of operations. The classification of derivative
instruments, including whether such instruments should be recorded
as liabilities or equity, is evaluated at the instrument
origination date and reviewed at the end of each event date (i.e.
conversions, payments, etc.) and the measurement period end date
for financial reporting, as applicable. Derivative instrument
liabilities are classified on the balance sheet as current or
non-current based on whether or not net-cash settlement of the
derivative instrument would be required within twelve months of the
balance sheet date.
Convertible Securities
Based
upon ASC 815-15, we have adopted a sequencing approach regarding
the application of ASC 815-40 to convertible securities issued
subsequent to December 31, 2014. We will evaluate our contracts
based upon the earliest issuance date. In the event partial
reclassification of contracts subject to ASC 815-40-25 is
necessary, due to our inability to demonstrate we have sufficient
shares authorized and unissued, shares will be allocated on the
basis of issuance date, with the earliest issuance date receiving
first allocation of shares. If a reclassification of an instrument
were required, it would result in the instrument issued latest
being reclassified first.
Earnings (Loss) Per Share (“EPS”)
Basic
EPS is computed by dividing net income (loss) by the weighted
average number of shares of common stock outstanding. Diluted EPS
includes the effect from potential issuance of common stock, such
as stock issuable pursuant to the exercise of stock options and
warrants and the assumed conversion of convertible
notes.
The
following table summarizes the securities that were excluded from
the diluted per share calculation because the effect of including
these potential shares was antidilutive:
|
|
|
|
|
Convertible
notes and accrued interest
|
48,513,147
|
766,666
|
Stock
options
|
16,100,000
|
5,840,000
|
Warrants
|
2,500,000
|
4,250,000
|
Vested
but unissued restricted stock awards
|
375,000
|
2,187,503
|
Restricted
stock units
|
1,000,000
|
-
|
Price
protection
|
-
|
1,854,838
|
Potentially
dilutive securities
|
68,488,147
|
14,899,007
|
Stock Based Compensation
We
adopted the fair value recognition provisions of ASC 718,
"Compensation – Stock Compensation”. Under the fair
value recognition provisions, we are required to measure the cost
of employee services received in exchange for share-based
compensation measured at the grant date fair value of the
award.
The Company’s accounting policy for equity
instruments issued to advisors, consultants and vendors in exchange
for goods and services follows the provisions of FASB ASC
505-50
.
The measurement date for the fair value of the
equity instruments issued is determined at the earlier of (i) the
date at which a commitment for performance by the advisor,
consultant or vendor is reached or (ii) the date at which the
advisor, consultant or vendor’s performance is complete. In
the case of equity instruments issued to advisors and consultants,
the fair value of the equity instrument is recognized over the term
of the advisor or consulting agreement. Stock-based compensation
related to non-employees is accounted for based on the fair value
of the related stock or options or the fair value of the services,
whichever is more readily determinable.
Use of Estimates
The
preparation of financial statements in conformity with generally
accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of
assets, liabilities, equity based transactions and disclosure of
contingent liabilities at the date of the financial statements and
revenues and expenses during the reporting period. Actual results
could differ from those estimates.
The
Company believes the following critical accounting policies affect
its more significant judgments and estimates used in the
preparation of the financial statements. Significant estimates
include the allowance for doubtful accounts, the useful life of
plant and equipment and intangible assets, deferred tax asset and
valuation allowance, and assumptions used in Black-Scholes-Merton,
or BSM, valuation methods, such as expected volatility, risk-free
interest rate, and expected dividend rate.
Contingent consideration for business acquisitions
Acquisitions
may include contingent consideration payments based on future
financial measures of an acquired company. Contingent consideration
is required to be recognized at fair value as of the acquisition
date. We estimate the fair value of these liabilities based on
financial projections of the acquired companies and estimated
probabilities of achievement. At each reporting date, the
contingent consideration obligation is revalued to its estimated
fair value and changes in fair value subsequent to the acquisition
are reflected in income or expense in the consolidated statements
of operations, and could cause a material impact to our operating
results. Changes in the fair value of contingent consideration
obligations may result from changes in discount periods and rates,
changes in the timing and amount of revenue and/or earnings
estimates and changes in probability assumptions with respect to
the likelihood of achieving the various earn-out
criteria
Property and Equipment
Property
and equipment is recorded at cost. Depreciation is computed using
straight-line and accelerated methods over the estimated useful
lives of the related assets. Expenditures that enhance the useful
lives of the assets are capitalized and depreciated. Maintenance
and repairs are expensed as incurred. When properties are retired
or otherwise disposed of, related costs and related accumulated
depreciation are removed from the accounts.
A
provision for depreciation of property and equipment is made on a
basis considered adequate to amortize the related costs (net of
salvage value) over their estimated useful lives using the
straight-line method. Estimated useful lives are principally as
follows: vehicles, 5 years; furniture and fixtures and office
equipment, 5-10 years; leasehold improvements, term of lease or 15
years, whichever is less; machinery and equipment 5-10
years.
Goodwill and Intangible Assets
Goodwill
represents the excess of purchase price over the fair value
assigned to the net assets acquired in business combinations.
Goodwill is allocated to reporting units as of the acquisition date
for the purpose of goodwill impairment testing. Currently, we
operate in only one reporting unit. Our goodwill arose from our
acquisition of NACSV in June 2014, as more fully discussed in Note
2. Intangible assets deemed to have an indefinite life such as
goodwill are not amortized, but instead are reviewed at least
annually for impairment. Intangible assets with finite lives are
amortized over their estimated useful lives. As of December 31,
2015 and 2014, other than goodwill in 2014, we had no intangible
assets with indefinite lives. We tested our goodwill for impairment
during the fourth quarter of 2014 as a part of our annual business
planning cycle. Goodwill is also tested between testing dates if an
impairment condition or event is determined to have occurred. As a
result of our annual assessment in 2014, we determined that the
implied value of our existing goodwill was nil and, therefore, we
recorded a $1,156,192 goodwill impairment charge in the fourth
quarter of 2014. In performing our assessment, we placed emphasis
on the estimated future cash flows from NACSV’s operations,
which had declined from our initial expectations in part due to
recent changes in its senior management, changes in the customer
base, and the reduction in the existing backlog of customer orders.
We based our valuation on the income valuation approach using a
discounted cash flow model.
At
December 31, 2014 and during the first quarter of 2015, we had one
other intangible asset consisting of customer relationships, which
arose from our acquisition of NACSV and was being amortized over
its expected economic life of five years. The life was determined
based upon the expected use of the asset, and other contractual
provisions associated with the asset, the estimated average life of
NACSV’s products, the stability of the industry, and other
factors deemed appropriate. We continually evaluated whether events
or circumstances occurred that indicated the remaining estimated
useful life of our customer relationships asset may warrant
revision or that the remaining balance of such asset may not be
recoverable. We used an estimate of the related discounted cash
flows over the remaining life of the asset in measuring whether the
asset is recoverable. Based on our valuation during the first
quarter of 2015, we determined that the value of the customer
relationships was fully impaired, as more fully discussed in Note
4.
See
Note 4 for more information regarding goodwill and intangible
assets.
Deferred Financing Costs
Costs
incurred in connection with obtaining financing are deferred and
classified as a discount to the related loan and amortized on a
straight-line basis over the term of the related loan. The
amortization of deferred financing costs is included in interest
expense. The Company recognized $652,031 and $5,011 of expense
related to the amortization of deferred financing costs during the
years ended December 31, 2015 and 2014, respectively.
Inventory
Inventory
at December 31, 2014 consists of the in-progress mobile command
units and is stated at the lower of cost (first-in, first-out) or
market. We did not have any inventory at December 31, 2015. We
order inventory/components upon receipt of a signed purchase order
from a customer.
|
|
|
|
|
Trailer
Inventory
|
$
-
|
$
187,881
|
Work-in-process
|
-
|
57,877
|
Less:
Reserve for inventory loss
|
-
|
(187,881
)
|
Total
|
$
-
|
$
57,877
|
Convertible Instruments
The
Company evaluates and accounts for conversion options embedded in
its convertible instruments in accordance with accounting standards
for “Accounting for Derivative Instruments and Hedging
Activities.”
Accounting
standards generally provides three criteria that, if met, require
companies to bifurcate conversion options from their host
instruments and account for them as free standing derivative
financial instruments. These three criteria include circumstances
in which (a) the economic characteristics and risks of the embedded
derivative instrument are not clearly and closely related to the
economic characteristics and risks of the host contract, (b) the
hybrid instrument that embodies both the embedded derivative
instrument and the host contract is not re-measured at fair value
under otherwise applicable generally accepted accounting principles
with changes in fair value reported in earnings as they occur, and
(c) a separate instrument with the same terms as the embedded
derivative instrument would be considered a derivative instrument.
Professional standards also provide an exception to this rule when
the host instrument is deemed to be conventional as defined under
professional standards as “The Meaning of Conventional
Convertible Debt Instrument.”
The
Company accounts for convertible instruments (when it has
determined that the embedded conversion options should not be
bifurcated from their host instruments) in accordance with
professional standards when “Accounting for Convertible
Securities with Beneficial Conversion Features,” as those
professional standards pertain to “Certain Convertible
Instruments.” Accordingly, the Company records, when
necessary, discounts to convertible notes for the intrinsic value
of conversion options embedded in debt instruments based upon the
differences between the fair value of the underlying common stock
at the commitment date of the note transaction and the effective
conversion price embedded in the note. Original issue discounts
(“OID”) under these arrangements are amortized over the
term of the related debt to their earliest date of redemption. The
Company also records when necessary deemed dividends for the
intrinsic value of conversion options embedded in preferred shares
based upon the differences between the fair value of the underlying
common stock at the commitment date of the note transaction and the
effective conversion price embedded in the note.
ASC
815-40 provides that, among other things, generally, if an event is
not within the entity’s control could or require net cash
settlement, then the contract shall be classified as an asset or a
liability.
Reclassifications
Certain
reclassifications have been made to conform the prior period data
to the current presentations.
Recent Accounting Pronouncements
In May 2014, the FASB issued Accounting Standards
Update (“ASU”) No. 2014-09,
Revenue from Contracts with
Customers: Topic 606,
or ASU
2014-09. ASU 2014-09 establishes the principles for recognizing
revenue and develops a common revenue standard for U.S. GAAP. The
standard outlines a single comprehensive model for entities to use
in accounting for revenue arising from contracts with customers and
supersedes most current revenue recognition guidance, including
industry-specific guidance. In applying the new revenue recognition
model to contracts with customers, an entity: (1) identifies the
contract(s) with a customer; (2) identifies the performance
obligations in the contract(s); (3) determines the transaction
price; (4) allocates the transaction price to the performance
obligations in the contract(s); and (5) recognizes revenue when (or
as) the entity satisfies a performance obligation. The accounting
standards update applies to all contracts with customers except
those that are within the scope of other topics in the FASB
Accounting Standards Codification. The accounting standards update
also requires significantly expanded quantitative and qualitative
disclosures regarding the nature, amount, timing and uncertainty of
revenue and cash flows arising from contracts with customers. This
guidance is effective for fiscal years and interim periods within
those years beginning after December 15, 2017. The Company is
currently evaluating the impact that the implementation of ASU
2014-09 will have on the Company’s financial
statements.
In August 2014, the FASB issued ASU No.
2014-15,
Disclosure of Uncertainties
about an Entity’s Ability to Continue as a Going
Concern
, or ASU 2014-15. ASU
2014-15 will explicitly require management to assess an
entity’s ability to continue as a going concern, and to
provide related footnote disclosure in certain circumstances. The
new standard will be effective for all entities in the first annual
period ending after December 15, 2016. Earlier adoption is
permitted. The Company is not early adopting ASU 2014-15. The
Company is currently evaluating the impact that the implementation
of ASU 2014-15 will have on the Company’s financial
statements, and the actual impact will be dependent upon the
Company’s liquidity and the nature or significance of future
events or conditions that exist upon adopting the updated
standard.
In April 2015, the FASB issued ASU No.
2015-03,
Simplifying the Presentation
of Debt Issuance Costs
, or ASU
2015-03. Under ASU 2015-03, the costs of issuing debt will no
longer be recorded as an intangible asset, except when incurred
before receipt of the funding from the associated debt liability.
Rather, debt issuance costs related to a recognized debt liability
will be presented on the balance sheet as a direct deduction from
the debt liability, similar to the presentation of debt discounts.
The costs will continue to be amortized to interest expense using
the effective interest method. ASU 2015-03 is effective for fiscal
years and interim periods beginning after December 15, 2015, with
early adoption permitted. ASU 2015-03 requires retrospective
application to all prior periods presented in the financial
statements. The Company does not expect that the adoption of ASU
2015-03 will have a material impact on its financial
statements.
In April 2015, the FASB issued ASU No.
2015-05,
Customer’s Accounting
for Fees Paid in a Cloud Computing Arrangement
, or ASU 2015-05
.
ASU 2015-05 provides guidance to entities about
whether a cloud computing arrangement includes a software license.
Under ASU 2015-05, if a software cloud computing arrangement
contains a software license, entities should account for the
license element of the arrangement in a manner consistent with the
acquisition of other software licenses. If the arrangement does not
contain a software license, entities should account for the
arrangement as a service contract. ASU 2015-05 also removes the
requirement to analogize to ASC 840-10, to determine the asset
acquired in a software licensing arrangement. For public companies,
ASU 2015-05 is effective for annual periods, including interim
periods within those annual periods, beginning after December 15,
2015, and early adoption is permitted. The Company does not expect
that the adoption of ASU 2015-05 will have a material impact on its
financial statements.
In November 2015, the FASB issued ASU No.
2015-17,
Balance Sheet Classification
of Deferred Taxes
, or ASU
2015-17
.
ASU 2015-17 provides guidance on balance sheet
classification of deferred taxes. The new guidance requires that
all deferred tax assets and liabilities, along with any related
valuation allowance, be classified as noncurrent on the balance
sheet. For public companies, ASU 2015-17 is effective for annual
periods, including interim periods within those annual periods,
beginning after December 15, 2016, and early adoption is permitted.
The Company does not expect that the adoption of ASU 2015-17 will
have a material impact on its financial
statements.
In February 2016, the FASB issued ASU No.
2016-02,
Leases
, or ASU 2016-02
.
The new guidance requires lessees to recognize the
assets and liabilities arising from leases on the balance sheet.
For public companies, ASU 2016-02 is effective for annual periods,
including interim periods within those annual periods, beginning
after December 15, 2018, and early adoption is permitted. The
Company does not expect that the adoption of ASU 2016-02 will have
a material impact on its financial statements.
NOTE 2 - ACQUISITIONS
North American Custom Specialty Vehicles
(“NACSV”)
On June 16, 2014, we acquired all of the
outstanding membership interest of NACSV in a transaction accounted
for using the purchase method of accounting (the
“Acquisition”).
NACSV specializes in
building mobile emergency operations centers
(“MEOC’s”) and specialty vehicles for emergency
management, first responders, national security and law enforcement
operations.
As
consideration for the consummation of the Acquisition, at the
closing of the Acquisition, the Company paid $1,000,000 in cash to
the selling members, and issued them 645,161 shares of the
Company’s common stock valued at $200,000 (the “Stock
Consideration”). In connection with the Acquisition, the
Company is required to make a true-up payment of the excess of
total assets over $1.2 million, valued at $816,373, payable in
shares of the Company’s common stock (the “True-Up
Payment”), and additional consideration as certain events or
transactions occur in the future, up to a maximum of $2.4 million,
payable in shares of the Company’s common stock or in cash at
the seller’s option (the “Contingent
Consideration”). Additionally, the Company issued 1.8 million
shares of common stock for acquisition services rendered in
conjunction with the Acquisition valued at $664,000. The Company
recorded nonrecurring charges of $843,488 during the year ended
December 31, 2014 related to the direct costs of the Acquisition,
consisting of the $664,000 value of the shares of common stock
issued for acquisition services and $179,488 of cash costs for
legal, accounting fees and due diligence fees.
The
purchase price of the Acquisition totaled $2,713,079, comprised of
$1,000,000 in cash, the Stock Consideration of $200,000, the
True-Up Payment of $816,373, and the fair value of the Contingent
Consideration of $696,706. The fair value of the Contingent
Consideration was estimated based upon the present value of the
expected future payouts. On October 17, 2014, we issued 2,635,074
shares of our common stock valued at $0.31 as settlement for the
True-Up Payment.
Under
the purchase method of accounting, the purchase price of the
Acquisition was allocated to NACSV’s net tangible and
identifiable intangible assets and liabilities assumed based on
their estimated fair values as of the date of the completion of the
Acquisition, as follows:
Cash and cash
equivalents
|
$
135,425
|
Accounts
receivable, net
|
370,481
|
Inventory
|
73,140
|
Prepaid
Expenses
|
26,004
|
Costs in excess of
billings
|
570,787
|
Property and
equipment, net
|
68,157
|
Customer
relationships
|
668,940
|
Goodwill
|
1,156,192
|
Total assets
acquired
|
3,069,126
|
|
|
Accounts payable
and accrued liabilities
|
37,811
|
Notes
payable
|
304,605
|
Billings in excess
of costs
|
13,631
|
Total liabilities
assumed
|
356,047
|
Total purchase
price
|
$
2,713,079
|
The fair values of certain assets and liabilities
have been determined by management. No portion of the intangible
assets, including goodwill, is expected to be deductible for tax
purposes.
During the fourth quarter of 2014, based on the
annual testing for impairment, the implied value of the goodwill
acquired in the Acquisition was nil and, accordingly, we recorded a
goodwill impairment charge for the full amount of the goodwill of
$1,156,192 as of December 31, 2014.
The
results of operations of NACSV are included in the Company’s
consolidated statements of operations from the date of the
acquisition of June 16, 2014, including approximately $205,700 of
revenue and approximately $317,000 of net loss for the year ended
December 31, 2014. The following unaudited supplemental pro forma
information assumes that the Acquisition had occurred as of January
1, 2014:
|
|
Revenues
|
$
2,658,798
|
Net loss from
continuing operations
|
$
(11,255,057
)
|
Net loss per share
from continuing operations
|
$
(0.11
)
|
The unaudited pro forma financial information is not necessarily
indicative of the results that would have occurred if the
Acquisition had occurred on the dates indicated or that may result
in the future.
Share Purchase and Sale Agreement for Acquisition of Grupo Rontan
Electro Metalurgica, S.A.
Effective
October 13, 2015, the Company (as “Purchaser”) entered
into the SPSA dated October 8, 2015 with Joao Alberto Bolzan and
Jose Carlos Bolzan, both Brazilian residents (collectively, the
“Sellers”) and Grupo Rontan Electro Metalurgica, S.A.,
a limited liability company duly organized and existing under the
laws of Federative Republic of Brazil (“Rontan”)
(collectively, the “Parties”), pursuant to which the
Sellers agreed to sell 100% of the issued and outstanding shares of
Rontan to the Purchaser on the closing date.
The
purchase price shall consist of a cash amount, a stock amount and
an earn-out amount as follows: (i) Brazilian Real (“R”)
$100 million (approximately US$26 million) to be paid by the
Purchaser in equal monthly installments over a period of forty
eight (48) months following the closing date; (ii) an aggregate of
R$100 million (approximately US$26 million) in shares of the
Purchaser’s common stock, valued at US$1.00 per share; and
(iii) an earn-out payable within ten business days following
receipt by the Purchaser of Rontan’s audited financial
statements for the 12-months ended December 31, 2017, 2018 and
2019. The earn-out shall be equal to the product of (i)
Rontan’s earnings before interest, taxes, depreciation and
amortization (“EBITDA”) for the last 12 months, and
(ii) twenty percent and is contingent upon Rontan’s EBITDA
results for any earn-out period being at least 125% of
Rontan’s EBITDA for the 12-months ended December 31, 2015. It
is the intention of the parties that the stock amount will be used
by Rontan to repay institutional debt outstanding as of the closing
date.
Under
the terms of a Finders Fees Agreement dated April 14, 2014, we have
agreed to pay RLT Consulting Inc., a related party, a fee of 2%
(two percent) of the Transaction Value, as defined in the
agreement, of Rontan upon closing. The fee is payable one-half in
cash and one-half in shares of our common stock.
Specific
conditions to closing consist of:
a)
Purchaser’s
receipt of written limited assurance of an unqualified opinion with
respect to Rontan’s audited financial statements for the
years ended December 31, 2013 and 2014 (the
“Opinion”);
b)
The
commitment of sufficient investment by General American Capital
Partners LLC (the “Institutional Investor”), in the
Purchaser following receipt of the Opinion;
c)
The
accuracy of each Parties’ representations and warranties
contained in the SPSA;
d)
The
continued operation of Rontan’s business in the ordinary
course;
e)
The
maintenance of all of Rontan’s bank credit lines in the
maximum amount of R$200 million (approximately US$52 million) under
the same terms and conditions originally agreed with any such
financial institutions, and the maintenance of all other types of
funding arrangements. As of the date of the SPSA, Rontan’s
financial institution debt consists of not more than R$200 million
(approximately US$52 million), trade debt of not more than R$50
million (approximately US$13 million) and other fiscal
contingencies of not more that R$95 million (approximately US$24.7
million);
f)
Rontan
shall enter into employment or consulting service agreements with
key employees and advisors identified by the Purchaser, including
Rontan’s Chief Executive Officer; and
g)
The
Sellers continued guarantee of Rontan’s bank debt for a
period of 90 days following issuance of the Opinion, among other
items.
The
Institutional Investor has committed to invest sufficient capital
to facilitate the transaction, subject to receipt of the Opinion,
among other conditions.
Subject
to satisfaction or waiver of the conditions precedent provided for
in the SPSA, the closing date of the transaction shall take place
within 10 business days from the date of issuance of the
Opinion.
Rontan
is engaged in the manufacture and distribution of specialty
vehicles and acoustic/visual signaling equipment for the industrial
and automotive markets.
Subsequent
to December 31, 2015, on April 1, 2016, we believed that we had
satisfied or otherwise waived the conditions to closing (as
disclosed under the SPSA, the closing was subject to specific
conditions to closing, which were waivable by us,) and advised the
Sellers of our intention to close the SPSA and demanded delivery of
the Rontan Securities. The Sellers, however, notified us that they
intend to terminate the SPSA. We believe that the Sellers had no
right to terminate the SPSA and that notice of termination by the
Sellers was not permitted under the terms of the SPSA.
On
January 31, 2018, we announced that we initiated a lawsuit for
damages against Grupo Rontan Metalurgica, S. A,
(“Rontan”) and that company’s controlling
shareholders, Joao Alberto Bolzan and Jose Carlos Bolzan. The
action has been filed in the United States District Court for the
Southern District of Florida. The complaint alleges that Rontan is
wholly-owned by Joao Bolzan and Jose Bolzan. In the complaint, we
further allege that Rontan and its shareholders improperly
terminated a Share Purchase and Sale Agreement (the
“SPA”) by which we were to acquire whole ownership of
Rontan.
On
February 5, 2018, United States District Court Southern District of
Florida filed a Pretrial Scheduling Order and Order Referring Case
to Mediation dated February 5, 2018 for the Company’s lawsuit
against Grupo Rontan Electro Metalurgica, S.A., et al. The Case No.
is 18-80106-Civ-Middlebrooks/Brannon. The court has issued a
schedule outlining various documents and responses that are to be
delivered by the parties as part of the discovery
plan.
NOTE 4 - INVENTORY
Inventory
consists of the following:
|
|
|
|
|
Trailer
Inventory
|
$
-
|
$
187,881
|
Work-in-process
|
-
|
57,877
|
Less:
Reserve for inventory loss
|
-
|
(187,881
)
|
Total
|
$
-
|
$
57,877
|
We
had established a reserve for inventory loss for $187,881 of
trailer inventory on hand at NACSV at December 31, 2014. Pursuant
to the terms of the Equity Purchase Agreement between the Company
and the NACSV sellers, all of the proceeds from the sale of this
inventory were to be paid to the NACSV sellers and thus the
Company’s net realizable value on this inventory, which was
sold during the year ended December 31, 2015, was zero. The Company
orders inventory/components when it receives a signed purchase
order from its customer.
NOTE 5 – GOODWILL AND INTANGIBLE ASSETS
Goodwill
Goodwill
arose in connection with our acquisition of NACSV in June 2014,
which is more fully discussed in Note 2. We do not presently have
any other intangible assets with indefinite lives.
In
testing our goodwill during the fourth quarter of 2014, we used an
income valuation approach based on information currently available.
The approach considered the likelihood of future cash flows that we
expect our NACSV business to generate over the next ten years,
along with a terminal value based on a long-term sustainable growth
rate subsequent to 2015 of 1%, which were discounted using a 20%
discount rate. Based on our analysis, the implied value of our
goodwill was nil and, accordingly, we recorded a goodwill
impairment charge of as of December 31, 2014 as
follows:
|
|
Beginning
balance
|
$
-
|
Acquired
goodwill (see Note 2)
|
1,156,192
|
Goodwill
impairment loss
|
(1,156,192
)
|
Ending
balance
|
$
-
|
Intangible Asset
At
December 31, 2014, we had an intangible asset of $596,471, which
was comprised of customer relationships. The customer relationships
arose from the Acquisition, as more fully discussed in Note 2.
Based on valuation for the year ending December 31, 2014, we
determined that the remaining value of the customer relationships
of $596,471 was impaired. Therefore, we recorded an intangible
asset impairment loss of $596,471, which is included as a component
of our selling, general and administrative expenses in the
statement of operations for the year ended December 31, 2014. This
was due in part to the lack of revenue from sales of NACSV’s
products during the year ending December 31, 2104, as well as to
our expectations regarding future estimated discounted cash flows
attributable to such asset. We have filed legal proceedings against
the sellers of NACSV as more fully discussed in Note 10. We believe
that certain misrepresentations were made to us regarding the
business prospects of NACSV. In addition to the legal issue
discussed in Note 10, we intend to pursue additional legal remedies
related to NACSV’s business prospects.
NOTE 6 – ACCRUED EXPENSES
Accrued
expenses consist of the following amounts:
|
|
|
|
|
Accrued
compensation to executive officers and employees
|
$
151,565
|
$
189,487
|
Accrued
professional fees
|
45,735
|
6,220
|
Accrued
expenses due to related parties
|
-
|
1,871
|
Total
accrued expenses
|
$
197,300
|
$
197,578
|
NOTE 7 – FAIR VALUE MEASUREMENTS
We
had no Level 1 or Level 2 assets and liabilities at December 31,
2015 and December 31, 2014. The following table sets forth our
Level 3 liabilities measured at fair value, whether recurring or
non-recurring, at December 31, 2015 and December 31,
2014.
|
|
|
|
|
Liabilities:
|
$
-
|
$
-
|
Recurring:
Embedded derivative liabilities of convertible notes
|
270,080
|
-
|
Recurring:
Liability for stock options
|
-
|
-
|
Recurring:
Contingent Consideration
|
$
270,080
|
$
-
|
The following is a summary of activity of Level 3 liabilities
during the year ended December 31, 2015:
|
Embedded Derivative Liabilities of Convertible
Notes
|
|
Balance
at December 31, 2014
|
$
-
|
$
648,615
|
Initial
fair value of embedded derivative liabilities of convertible notes
payable issued during 2015
|
1,068,109
|
-
|
Change
in fair value
|
(798,029
)
|
(92,962
)
|
Reductions
in EPA due to overvaluation of assets
|
-
|
(149,108
)
|
Increase
in amount owed to Dekle per EPA Potter County Sale
|
-
|
(406,545
)
|
Recurring:
Contingent Consideration
|
$
270,080
|
$
-
|
Embedded Derivative Liabilities of Convertible Notes
The
initial fair value of the bifurcated embedded derivative
liabilities of convertible notes was estimated using the following
weighted-average inputs: risk free interest rate – 0.08%;
expected life -.49 years: volatility - 339%; dividend rate –
0%. At December 31, 2015, the fair value of the bifurcated embedded
derivative liabilities of convertible notes was estimated using the
following weighted-average inputs: risk free interest rate –
0.16%; term - .25 years; volatility - 224%; dividend rate –
0%.
Liability for Stock Options
The
stock options giving rise to the liability for stock options were
granted on December 9, 2015. At December 9, 2015 and December 31,
2015, the fair value of the liability for stock options was
estimated using the Black Scholes Merton (“BSM”)
pricing model with the following weighted-average inputs: risk free
interest rate – 1.6%; term - .5 years; volatility - 273%;
dividend rate – 0%.
Contingent Consideration
ASC
Topic 805 requires that contingent consideration be recognized at
fair value on the acquisition date and be re-measured each
reporting period with subsequent adjustments recognized in the
consolidated statement of operations. We estimate the fair value of
contingent consideration liabilities based on financial projections
of the acquired companies and estimated probabilities of
achievement and discount the liabilities to present value using a
weighted-average cost of capital. Contingent consideration is
valued using significant inputs that are not observable in the
market which are defined as Level 3 inputs pursuant to fair value
measurement accounting. We believe our estimates and assumptions
are reasonable, however, there is significant judgment involved. At
each reporting date, the contingent consideration obligation is
revalued to its estimated fair value, and changes in fair value
subsequent to the acquisitions are reflected in income or expense
in the consolidated statements of operations, and could cause a
material impact to, and volatility in, our operating results.
Changes in the fair value of contingent consideration obligations
may result from changes in discount periods, changes in the timing
and amount of revenue and/or earnings estimates and changes in
probability assumptions with respect to the likelihood of achieving
the various earn-out criteria.
As
of December 31, 2015 and December 31, 2014, contingent
consideration included in liabilities on the consolidated balance
sheet totaled $0 and $648,614, respectively. After further
developments, we have reserved $370,340 to increase amount owed to
Dekle per the EPA Potter County Sale, We have filed legal
proceedings against the sellers of NACSV as more fully discussed in
Note 10.
Carrying Value of Other Current Assets and Other Current
Liabilities
The
Company’s management considers the carrying values of other
current assets and other current liabilities to approximate fair
values primarily due to their short-term nature.
NOTE 8 – NOTE PAYABLE
Convertible Notes Payable with Embedded Derivative Liabilities
(Conversion Options)
During
the year ended December 31, 2015, we entered into nine convertible
notes payable with embedded derivative liabilities (conversion
options) with an aggregate principal balance of $670,250. At
December 31, 2015, two of these notes were outstanding as
follows:
|
|
Convertible note payable for $78,750 to LG Capital
Funding, LLC (“LG Capital”) dated January 16, 2015, due
January 16, 2016, of which $38,829 was repaid by conversion as of
December 31, 2015, bearing interest at the rate of 8% per annum.
Note may be converted by LG Capital into shares of our common stock
at a conversion price equal to a 40% discount of the lowest closing
bid price for 20 prior trading days including the notice of
conversion date.
(1)
(3)
|
$
39,921
|
|
|
Convertible note payable for $250,000 to JMJ
Financial (“JMJ”) of which $82,500 was deemed funded on
January 28, 2015 and $27,500 was deemed funded on April 20, 2015,
of which $40,930 was repaid by conversion as of December 31, 2015.
The note was issued with an original issue discount of 10% of
amounts funded. The principal amount matures 24 months from the
date of each funding, had a one-time 12% interest charge as it was
not repaid within 90 days of the effective date, and is convertible
at any time at the option of JMJ into shares of our common stock at
the lesser of $0.075 per share or 60% of the average of the trade
price in the 25 trading days prior to conversion. JMJ has the
option to finance additional amounts up to the balance of the
$250,000 during the term of the note.
(1)
(2)
|
$
69,070
|
Total
convertible notes payable with embedded derivative
liability
|
$
108,991
|
(1)
|
The embedded derivative liability associated with the conversion
option of the note was bifurcated from the note and recorded at its
fair value on the date of issuance and at each reporting
date.
|
(2)
|
We have classified this note as current due to our expectation to
convert the note on a current basis.
|
(3)
|
Note was due on January 16, 2016. We have not yet repaid this note
and it is, therefore, in default. We have also not maintained the
required number of shares of our common stock in reserve for this
note as more fully discussed below.
|
Under
the terms of the two convertible promissory notes outstanding at
December 31, 2015, we are required to maintain a minimum number of
shares of our common stock in reserve for conversions. In the case
of the note with JMJ, the reserve amount is set at 26,650,000
shares of our common stock. However, under the terms of the note
with LG Capital we are required to maintain a minimum share reserve
equal to four times the potential number of shares of our common
stock issuable upon conversion, or 66,204,427 shares at December
31, 2015. As a result of declines in the fair value of our common
stock, we did not have sufficient authorized shares to maintain
this required four times share reserve at December 31, 2015.
Accordingly, the note holder had the right to accelerate the
payment due (approximately $43,033 of principal and interest was
due at December 31, 2015). In addition, they have the right to
require that additional shares and/or monies be paid in connection
with this technical default. At December 31, 2015, we have not
accrued any penalties or penalty interest associated with this
note, nor have we been notified by the lender of a technical
default. Because the conversion prices vary with changes in the
value of our common stock, the number of shares into which the
outstanding notes payable and accrued interest are convertible will
continue to vary, which may result in additional technical defaults
if the price of our common stock decreases. As soon as we are able,
we intend to request shareholder approval to increase the number of
authorized shares of our common stock in order to satisfy our
obligations to maintain sufficient authorized share reserves under
the terms of our convertible notes. In addition, the two
outstanding convertible notes also contain certain representations,
warranties, covenants and other events of default, including in the
case of one of the notes maintaining our common stock listing on
the OTCQB exchange.
At
inception the total estimated fair value of the embedded derivative
liability associated with the conversion options of all nine such
convertible notes payable issued during 2015 was $1,068,109 of
which $798,029 was classified as a debt discount and amortized
under the effective interest method during the year ended December
31, 2015, and $652,031 was immediately recognized as interest
expense upon issuance, as it exceeded the principal balance of the
related notes. During 2015, we recognized a gain on the change in
the fair value of the derivative liability of $798,029. During
2015, we issued 419,364,293 shares of our common stock upon
conversions of principal and accrued interest totaling $529,166. We
also used $59,000 of proceeds from a revenue based factoring
agreement to repay in cash two of the convertible notes payable.
The factoring agreement is more fully discussed below.
Revenue Based Factoring Agreements
During
the year ended December 31, 2015, we entered into two revenue based
factoring agreements as follows:
|
|
Factoring agreement with Power Up Lending Group,
Ltd. (“Power Up”) dated October 1, 2015, purchase price
was $59,000. Company agreed to transfer all NACSV future receipts,
accounts, contract rights, etc. arising from accounts receivable or
other third party payors at the specified percentage of 24% until
such time as $76,700 is paid in full. A daily repayment amount of
$457 is required to be made and is credited against the specified
percentage due. As of December 31, 2015, we paid $21,458 of the
daily specified repayments and we had not made $9,588 of payments
that were due. At December 31, 2015, $12,748 of deferred interest
expense related to this agreement is included in current
assets.
(1) (2)
(3)
|
$
55,242
|
|
|
Factoring agreement with Power Up dated October
23, 2015, purchase price was $50,000. Company agreed to transfer
all NACSV future receipts, accounts, contract rights, etc. arising
from accounts receivable or other third party payors at the
specified percentage of 24% until such time as $69,000 is paid in
full. A daily repayment amount of $548 is required to be made and
is credited against the specified percentage due. As of December
31, 2015, we paid $16,976 of the daily specified repayments and we
had not made $10,952 of payments that were due. At December 31,
2015, $14,326 of deferred interest expense related to this
agreement is included in current assets.
(2)
(3)
|
$
52,024
|
Total
due to factor
|
$
107,266
|
(1)
|
We used the purchase price proceeds to satisfy in full the
obligations under two convertible notes payable with embedded
derivative liabilities.
|
(2)
|
The agreement contains certain protections against default,
including prohibiting NACSV from changing its arrangement with its
bank in any way that is adverse to Power Up and NACSV interrupting
the operation of its business, among others. Events of default
include: (i) the violation of any term or covenant under the
agreement, (ii) the failure of NACSV to pay its debts when due and
(iii) the transfer or sale of all or substantially all of
NACSV’s asset, amount others.
|
(3)
|
We are currently in default under the terms of the two factoring
agreements as we have not made the specified daily repayment
amounts aggregating $20,540 and $107,266 as of December 31, 2015
and April 9, 2016, respectively, among other items. At December 31,
2015, we have not accrued any penalties or interest that might be
due as a result of the defaults.
|
Notes Payable
Notes
payable at December 31, 2015 and 2014 consist of the
following:
|
|
Collateral
|
|
|
|
|
Type
|
|
(if
any)
|
|
|
Maturity
|
|
|
Premium
finance agreement
|
|
None
|
5.10
%
|
$
10,507
|
June-2016
|
$
61,809
|
$
-
|
Premium
finance agreement
|
|
None
|
9.25
%
|
$
3,414
|
January-2016
|
$
3,037
|
$
-
|
Premium
finance agreement
|
|
None
|
5.00
%
|
$
9,862
|
Jun-15
|
$
-
|
$
58,258
|
Total
notes payable
|
|
|
|
|
|
$
64,948
|
$
58,258
|
Convertible Notes Payable to Related Parties
Convertible
notes payable to related parties at December 31, 2014 consist of
the following (we did not have convertible notes payable to related
parties at December 31, 2015):
|
|
Convertible
note payable to an entity controlled by our Chairman and CEO, bore
interest at 8% per annum, due December 8, 2016. After June 6, 2015,
at the option of the holder, principal plus accrued interest was
convertible into shares of our common stock at $0.09 per share. The
note was fully repaid in cash during 2015
|
$
37,500
|
Convertible note payable to our former Chief
Financial Officer (“CFO”), bore interest at 8% per
annum, due December 8, 2016. After June 6, 2015, at the option of
the holder, principal plus accrued interest was convertible into
shares of our common stock at $0.09 per share. The note was fully
repaid in cash during 2015.
(1)
|
31,500
|
|
69,000
|
Add:
Accrued interest
|
363
|
Less:
Unamortized debt discount
|
(28,656
)
|
Convertible
notes payable to related parties
|
$
40,707
|
(1)
|
We used the purchase price proceeds to satisfy in full the
obligations under two convertible notes payable with embedded
derivative liabilities.
|
The
8% convertible notes payable to related parties was convertible
into common stock at the rate of $0.09 per share. The Company
determined that the conversion feature was considered a beneficial
conversion feature and determined its value to be $30,667 as of
December 8, 2014, which the Company recorded as a debt discount to
the notes. As a result of the repayment of the notes in 2015,
$22,170 of the unamortized debt discount was recorded as a loss on
extinguishment of debt in the year ended December 31,
2015.
NOTE 9 –
DERIVATIVE
LIABILITY
Derivative Liability- Debt
The
fair value of the described embedded derivative on all convertible
debt was valued at $270,080 and $0 at December 31, 2015 and 2014,
respectively, which was determined using the following
assumptions:
|
|
Dividend
yield:
|
0
%
|
Term
|
|
Volatility
|
224
%
|
Risk free
rate:
|
0.16
%
|
For the
year ended December 31, 2017, the Company adjusted the recorded
fair value of the derivative liability on debt to market resulting
in non-cash, non-operating loss of $798,029.
During
the year ended December 31, 2017, the Company reclassed derivative
liability of $1,248,746 to additional paid in capital on conversion
of a convertible note.
The
following table provides a summary of changes in fair value of the
Company’s Level 3 financial liabilities as of December 31,
2015 and 2014:
|
|
|
|
|
|
Balance,
December 31, 2014
|
$
-
|
Initial
fair value at note issuances
|
670,250
|
Fair
value of liability at note conversion
|
397,859
|
Mark-to-market
at December 31, 2015
|
(798,029
)
|
Balance,
December 31, 2015
|
|
|
$
270,080
|
NOTE 10 – COMMITMENTS AND CONTINGENCIES
Legal Proceedings
Dekle, et. al. v. Global Digital Solutions, Inc. et.
al.
Brian
A. Dekle and John Ramsay filed suit against the Company and its
wholly owned subsidiary, North American Custom Specialty Vehicles,
Inc. (“NACSV”), in the Circuit Court of Baldwin
Alabama, on January 14, 2015, case no. 05-CV-2015-9000050.00,
relating to our acquisition of NACSV (the ''Dekle Action"). Prior
to instituting the Dekle Action, in June 2014, the Company had
entered into an equity purchase agreement with Dekle and Ramsay to
purchase their membership interest in North American Custom
Specialty Vehicles, LLC. The Dekle Action originally sought payment
for $300,000 in post-closing consideration Dekle and Ramsay allege
they are owed pursuant to the equity purchase
agreement.
On February 9, 2015,
t
he Company and NACSV removed
the Dekle Action to federal court in the United States District
Court in and for the Southern District of Alabama, case no.
1:15-CV-00069. The Company and NACSV subsequently moved to dismiss
the complaint for (1) failing to state a cause of action, and (2)
lack of personal jurisdiction. Alternatively, the Company and NACSV
sought a transfer of the case to the United States District Court
in and for Middle District of Florida.
In
response to the Company’s and NACSV's motion to dismiss,
Dekle and Ramsay filed an amended complaint on March 2, 2015
seeking specific performance and alleging breach of contract,
violations of Security and Exchange Commission (“SEC”)
Rule 10b-5, and violations of the Alabama Securities Act. The
amended complaint also names the Company’s Chairman,
President, and CEO, Richard J. Sullivan (“Sullivan”),
as a defendant. On March 17, 2015, the Company, NACSV and Sullivan
filed a motion to dismiss the amended complaint seeking dismissal
for failure to state valid causes of action, for lack of personal
jurisdiction, or alternatively to transfer the case to the United
States District Court in and for the Middle District of Florida.
Dekle and Ramsay responded on March 31, 2015, and the Company filed
its response thereto on April 7, 2015.
On
June 2, 2015, Dekle passed away. On June 5, 2015, the Court
denied the Company’s motion to transfer the case to
Florida. On June 10, 2015, the Company filed a motion
to reconsider the Court’s denial of its motion to transfer
the case to Florida. On September 30, 2105, the Court granted
the Company’s Renewed Motion to Transfer Venue. The case was
transferred to the Middle District of Florida, where it is
currently pending.
On
June 15, 2015, Ramsay filed a second amended complaint. On June 25,
2015, the Company filed a motion to dismiss the second amended
complaint. The Company’s Motion to Dismiss was
denied.
On
July 27, 2017, the Company and Dekle and Ramsay came to a
Settlement Agreement. The Company and the plaintiff came to the
following agreements:
vi.
Judgment
is due to be entered against the Company in the amount of $300,000
if the sum of $20,000 as noted in iv is not paid.
vii.
The
Company grants the plaintiffs vehicles and trailers in connection
to this proceeding.
viii.
The
Company will assist the plaintiffs in obtaining possession of the
said vehicles.
ix.
The
Company will pay the plaintiffs the sum of $20,000.
The
$20,000 settlement was paid in August 2017
Global Digital Solutions, Inc. et. al. v. Communications
Laboratories, Inc., et. al.
On
January 19, 2015 the Company and NACSV filed suit against
Communications Laboratories, Inc., ComLabs Global, LLC, Roland
Lussier, Brian Dekle, John Ramsay and Wallace Bailey for conversion
and breach of contract in a dispute over the payment of a $300,000
account receivable that ComLabs owed to NACSV but sent payment
directly to Brian Dekle. The case was filed in the Eighteenth
Judicial Circuit in and for Brevard County Florida, case no.
05-2015-CA-012250. On February 18, 2015 (i) defendants
Communications Laboratories, Inc., ComLabs Global, LLC and Roland
Lussier and (ii) defendant Wallace Bailey filed their respective
motions to dismiss seeking, among other things, dismissal for
failure to state valid causes of action, lumping and failure to
post a non-resident bond. On February 26, 2015, defendants Dekle
and Ramsay filed their motion to dismiss, or stay action, based on
already existing litigation between the parties. NACSV filed its
required bond on March 2, 2015.
PowerUp Lending Group, LTD., v. North American Custom Specialty
Vehicle, Inc. et.al
On
September 13, 2017 Power Up received a default judgment against the
Company in the amount of $109,302.00. The Company negotiated a
settlement agreement on December 21, 2017 with Power Up to pay
$90,000 in three installments of $30,000. As of May 15, 2018 the
company has paid the entire amount.
Securities and Exchange Commission v. Global Digital Solutions,
Inc., Richard J. Sullivan and David A. Loppert United States
District Court for the Southern District of Florida, Case No.
9:16-cv-81413-RLR
On
August 11, 2016, the Securities and Exchange Commission
(“SEC”) filed suit in the United States District Court
for the Southern District of Florida against Global Digital
Solutions, Inc. (“GDSI”), Richard J. Sullivan
(“Sullivan”) and David A. Loppert
(“Loppert”) to enjoin GDSI; Sullivan, GDSI’s
former Chairman and CEO; and Loppert, GDSI’s former CFO from
alleged further violations of the anti-fraud and reporting
provisions of the federal securities laws, and against Sullivan and
Loppert from alleged further violations of the certification
provisions of the federal securities laws.
On
October 12, 2016, Defendant GDSI filed its First Answer to the
Complaint. On November 9, 2016, Defendant Sullivan filed a Letter
with the Court denying all allegations regarding the case. On
December 15, 2016, the SEC filed a Motion for Judgment and Notice
of Filing of Consent of Defendant Loppert to entry of Final
Judgment by the SEC. On December 19, 2016, the Court entered an
order granting the SEC’s Motion for Judgment as to Defendant
Loppert. On December 21, 2016, the SEC filed a Notice of Settlement
as entered into by it and Defendants GDSI and Sullivan. On December
23, 2016, the Court entered an Order staying the case and directing
the Clerk of the Court to close the case for statistical purposes
per the December 21, 2016 Notice of Settlement. On March 7, 2017,
the SEC moved for a Judgment of Permanent Injunction and Other
Relief and Notice of Filing Consent of Defendant GDSI to Entry of
Judgment by the SEC. On March 13, 2017, the Judge signed the
Judgment as to Defendant GDSI and it was entered on the
Court’s docket. On April 6, 2017, the SEC moved for a final
Judgment of Permanent Injunction and Other Relief and Notice of
Filing Consent of Defendant Sullivan. On April 10, 2017, the Judge
signed the final Judgment as to Defendant Sullivan and it was
entered on the Court’s docket. On December 21, 2017, the SEC
moved for a final Judgment and Notice of Filing Consent of
Defendant GDSI to Entry of Final Judgment. On January 2, 2018, the
Judge signed the Final Judgment as to Defendant GDSI and it was
entered on the Court’s docket.
Adrian Lopez, Derivatively and on behalf of Global Digital
Solutions, Inc. v. William J. Delgado, Richard J. Sullivan, David
A. Loppert, Jerome J. Gomolski, Stephanie C. Sullivan, Arthur F.
Noterman, and Stephen L. Norris United States District Court for
the District of New Jersey, Case No.
3:17-cv-03468-PGS-LHG
On
September 19, 2016, Adrian Lopez, derivatively, and on behalf of
Global Digital Solutions, Inc., filed an action in New Jersey
Superior Court sitting Mercer County, General Equity Division. That
action was administratively dismissed for failure to prosecute.
Plaintiff Lopez, through his counsel, filed a motion to reinstate
the matter on the general equity calendar on or about February 10,
2017. The Court granted the motion unopposed on or about April 16,
2017. On May 15, 2017, Defendant William Delgado
(“Delgado”) filed a Notice of Removal of Case No.
C-70-16 from the Mercer County Superior Court of New Jersey to the
United States District Court for the District of New Jersey. On May
19, 2017, Defendant Delgado filed a First Motion to Dismiss for
Lack of Jurisdiction. On May 20, 2017, Defendant David A. Loppert
(“Loppert”) filed a Motion to Dismiss for Lack of
(Personal) Jurisdiction. On June 14, 2017, Plaintiff Adrian Lopez
(“Lopez”) filed a First Motion to Remand the Action
back to State Court. On June 29, 2017, Defendant Delgado filed a
Memorandum of Law in Response and Reply to the Memorandum of Law in
Support of Plaintiff’s Motion to Remand and in Response to
Defendants’ Delgado’s and Loppert’s Motions to
Dismiss. On January 1, 16, 2018, a Memorandum and Order granting
Plaintiff’s Motion to Remand the case back to the Mercer
County Superior Court of New Jersey was signed by the Judge and
entered on the Docket. Defendants Delgado and Loppert’s
Motions to Dismiss were denied as moot. On February 2, 2018,
Defendants filed a Motion to Dismiss the Complaint. On February 20,
2018, Plaintiff filed a Motion to Consolidate Cases. On March 21,
2018, Plaintiff filed an Opposition to Defendants’ Motion to
Dismiss the Complaint. On March 23, 2018, Defendants filed a Brief
in Reply to Plaintiff’s Opposition to Defendants’
Motion to Dismiss the Complaint. The Court held a hearing on the
motions to dismiss and consolidate. Jurisdictional discovery was
ordered. As of this date, the Court has not issued a decision and
Order regarding Defendants’ Motion to Dismiss the
Complaint.
Adrian Lopez v. Global Digital Solutions, Inc. and William J.
Delgado Superior Court of New Jersey, Chancery Division, Mercer
County, Equity Part, Docket No. MER-L-002126-17
On
September 28, 2017, Plaintiff Adrian Lopez (“Lopez”)
brought an action against Global Digital Solutions, Inc.
(“GDSI”) and William J. Delgado (“Delgado”)
to compel a meeting of the stockholders of Global Digital
Solutions, Inc. pursuant to Section 2.02 of GDSI’s Bylaws and
New Jersey Revised Statute § 14A:5-2. On October 27, 2017,
Defendants GDSI and Delgado filed a Motion to Stay the Proceeding.
On November 24, 2017, Plaintiff filed an Objection to
Defendants’ Motion to Stay the Proceeding. On January 19,
2018, Defendants’ Motion to Stay the Proceeding was denied.
On February 2, 2018, Defendants filed a Motion to Dismiss the
Complaint. On February 20, 2018, Plaintiff filed a Motion to
Consolidate Cases. On March 21, 2018, Plaintiff filed an Opposition
to Defendants’ Motion to Dismiss the Complaint. On March 23,
2018, Defendants filed a Brief in Reply to Plaintiff’s
Opposition to Defendants’ Motion to Dismiss the Complaint. As
of this date, the Court has not issued a decision and Order
regarding Defendants’ Motion to Dismiss the
Complaint.
Jeff Hull, Individually and on Behalf of All Others Similarly
Situated v. Global Digital Solutions, Inc., Richard J. Sullivan,
David A. Loppert, William J. Delgado, Arthur F. Noterman and
Stephanie C. Sullivan United States District Court, District of New
Jersey (Trenton), Case No. 3:16-cv-05153-FLW-TJB
On
August 24, 2016, Jeff Hull, Individually and on Behalf of All
Others Similarly Situated (“Hull”) filed suit in the
United States District Court for the District of New Jersey against
Global Digital Solutions, Inc. (“GDSI”), Richard J.
Sullivan (“Sullivan”), David A. Loppert
(“Loppert”), William J. Delgado
(“Delgado”), Arthur F. Noterman
(“Noterman”) and Stephanie C. Sullivan
(“Stephanie Sullivan”) seeking to recover compensable
damages caused by Defendants’ alleged violations of federal
securities laws and to pursue remedies under the Securities
Exchange Act of 1934. On January 18, 2018, pursuant to the
Court’s December 19, 2017 Order granting Plaintiff Hull leave
to file an amended Complaint, Plaintiff Hull filed a Second Amended
Complaint against Defendants. On February 8, 2018, Defendants GDSI
and Delgado filed a Second Motion to Dismiss the Complaint. On
February 8, 2018, Defendant Loppert filed a Motion for Extension of
Time to File an Answer. On February 13, 2018, Defendant Loppert
filed a Motion to Dismiss the Second Amended Complaint for Lack of
(personal) Jurisdiction and for Failure to State a Claim. On
February 20, 2018, Plaintiff Michael Perry (“Perry”)
filed a Brief in Opposition to Defendants GDSI and Delgado’s
Second Motion to Dismiss the Complaint and to Defendant
Loppert’s Motion to Dismiss the Second Amended Complaint for
Lack of (personal) Jurisdiction and for Failure to State a Claim.
On February 26, 2018, Defendants GDSI and Delgado filed a Reply
Brief to Plaintiff Michael Perry’s Brief in Opposition to
their Motion to Dismiss the Second Amended Complaint. On February
26, 2018, Defendant Loppert filed a Response in Support of
Defendants GDSI and Delgado’s Second Motion to Dismiss the
Complaint. On March 12, 2018, Defendant Loppert filed a Reply Brief
to Plaintiff Perry’s Brief in Opposition to Defendant
Loppert’s Motion to Dismiss the Second Amended Complaint for
Lack of (personal) Jurisdiction and for Failure to State a Claim.
To date, the Court has not issued a decision as to aforementioned
Motions. Global Digital Solutions, Inc. and William J. Delgado
intend to continue to vigorously defend against the claims asserted
by Jeff Hull, Individually and on Behalf of All Others Similarly
Situated.
In the Matter of Global Digital Solutions, Inc., Administrative
Proceeding File No. 3-18325. Administrative Proceeding Before the
Securities and Exchange Commission.
On
December 26, 2017, the Securities and Exchange Commission
instituted public administrative proceedings pursuant to Section
12(j) of the Securities Exchange Act of 1934 (“Exchange
Act”) against the Respondent Global Digital Solutions, Inc.
On January 8, 2018, Respondent Global Digital Solutions, Inc.
(“GDSI”) filed its answer to the allegations contained
in the Order Instituting Administrative Proceedings and Notice of
Hearing Pursuant to Section 12U) of the Exchange Act. A briefing
schedule was entered into and on February 15, 2018, the Securities
and Exchange Commission filed a motion for an order of summary
disposition against Respondent GDSI on the grounds that there is no
genuine issue with regard to any material fact, the Division was
entitled as a matter of law to an order revoking each class of
GDSI's securities registered pursuant to Section 12 of the Exchange
Act. Respondent GDSI opposed the Securities and Exchange
Commission’s motion on the grounds that there were material
issues of fact. The Securities and Exchange Commission replied and
a hearing was held on April 9, 2018. The Administrative Law Judge
ordered supplemental evidence and briefing on the issues of
material fact.
Securities and Exchange Commission v. Global Digital Solutions,
Inc., Richard J. Sullivan and David A. Loppert United States
District Court for the Southern District of Florida, Case No.
9:16-cv-81413-RLR
On
August 11, 2016, the Securities and Exchange Commission
(“SEC”) filed suit in the
United States District Court for the Southern
District of Florida
against Global Digital Solutions, Inc.
(“GDSI”), Richard J. Sullivan (“Sullivan”)
and David A. Loppert (“Loppert”) to enjoin GDSI;
Sullivan, GDSI’s former Chairman and CEO; and Loppert,
GDSI’s former CFO from alleged further violations of the
anti-fraud and reporting provisions of the federal securities laws,
and against Sullivan and Loppert from alleged further violations of
the certification provisions of the federal securities
laws.
On
October 12, 2016, Defendant GDSI filed its First Answer to the
Complaint. On November 9, 2016, Defendant Sullivan filed a Letter
with the Court denying all allegations regarding the case. On
December 15, 2016, the SEC filed a Motion for Judgment and Notice
of Filing of Consent of Defendant Loppert to entry of Final
Judgment by the SEC. On December 19, 2016, the Court entered an
order granting the SEC’s Motion for Judgment as to Defendant
Loppert. On December 21, 2016, the SEC filed a Notice of Settlement
as entered into by it and Defendants GDSI and Sullivan. On December
23, 2016, the Court entered an Order staying the case and directing
the Clerk of the Court to close the case for statistical purposes
per the December 21, 2016 Notice of Settlement. On March 7, 2017,
the SEC moved for a Judgment of Permanent Injunction and Other
Relief and Notice of Filing Consent of Defendant GDSI to Entry of
Judgment by the SEC. On March 13, 2017, the Judge signed the
Judgment as to Defendant GDSI and it was entered on the
Court’s docket. On April 6, 2017, the SEC moved for a final
Judgment of Permanent Injunction and Other Relief and Notice of
Filing Consent of Defendant Sullivan. On April 10, 2017, the Judge
signed the final Judgment as to Defendant Sullivan and it was
entered on the Court’s docket. On December 21, 2017, the SEC
moved for a final Judgment and Notice of Filing Consent of
Defendant GDSI to Entry of Final Judgment. On January 2, 2018, the
Judge signed the Final Judgment as to Defendant GDSI and it was
entered on the Court’s docket. The amount of the judgement is
One Hundred Thousand Dollars ($100,000.00) plus
interest.
PMB Helin Donovan, LLP vs. Global Digital Solutions, Inc. in the
Circuit Court for the 15
th
Judicial Circuit in
and for Palm Beach County, Florida, Docket No.:
50-2017-CA-011937-XXXX-MB
On
October 31, 2017, PMB Helin Donovan, LLP filed an action for
account stated in Palm Beach County. Global Digital Solutions, Inc.
(“GDSI”) settled the matter for Forty Thousand Dollars
($40,000) of which the first payment of Ten Thousand Dollars
($10,000.00) has been paid.
Jennifer Carroll vs. Global Digital Solutions, Inc., North American
Custom Specialty Vehicles, Inc., in the Circuit Court for the
15
th
Judicial Circuit in and for Palm Beach County, Florida, Case No.:
50-2015-CC-012942-XXXX-MB
On
October 27, 2017, Plaintiff Jennifer Carroll moved the court for a
default judgment against Defendant Global Digital Solutions, Inc.
(“GDSI”) and its subsidiary North American Custom
Specialty Vehicles Inc. The amount of the judgement is Fifteen
Thousand Dollars ($15,000) plus fees of Thirteen Thousand Three
Hundred Fifty Three Dollars Forty Four Cents ($13,353.44) and costs
of Six Hundred Twenty Four Dollars Thirty Cents
($624.30).
NOTE 11 – STOCKHOLDERS’ EQUITY
Preferred Stock
We
are authorized to issue 35,000,000 shares of noncumulative,
non-voting, nonconvertible preferred stock, $0.001 par value per
share. At December 31, 2015 and 2014, no shares of preferred stock
were outstanding.
Common Stock
We
are authorized to issue 650,000,000 shares of common stock, $0.001
par value per share. At December 31, 2015 and 2014, 530,806,571 and
108,291,855 shares were issued, outstanding, or vested but unissued
under stock compensation plans, respectively
Common Stock Warrant
We
have issued warrants, which are fully vested and available for
exercise, as follows:
|
Issued in connection with or for
|
|
|
Date of Issue
|
|
Date Vest
|
|
Date of Expiration
|
A-2
|
Services
|
1,000,000
|
$
0.15
|
May,
2013
|
|
May,
2014
|
|
May,
2018
|
A-3
|
Services
|
500,000
|
$
0.50
|
June,
2013
|
|
June,
2014
|
|
June,
2018
|
A-4
|
Services
|
1,000,000
|
$
1.00
|
October,
2013
|
|
October,
2013
|
|
October,
2016
|
We
recognized compensation costs of $604,168 related to the
amortization of the fair value of the warrants in the year ended
December 31, 2014. At December 31, 2014 the fair value of warrants
had been fully amortized.
All
warrants are exercisable at any time through the date of
expiration. All agreements provides for the number of shares to be
adjusted in the event of a stock split, a reverse stock split, a
share exchange or other conversion or exchange event in which case
the number of warrants and the exercise price of the warrants shall
be adjusted on a proportional basis.
The
following is a summary of outstanding and exercisable warrants at
December 31, 2015:
|
|
|
|
Weighted
Average Number Outstanding at 12/31/15
|
Outstanding
Remaining Contractual Life (in yrs.)
|
Weighted
Average Exercise Price
|
Number
Exercisable at 12/31/15
|
Weighted
Average Exercise Price
|
$
0.15
|
1,000,000
|
2.3
|
$
0.15
|
1,000,000
|
$
0.15
|
$
0.50
|
500,000
|
2.5
|
$
0.50
|
500,000
|
$
0.50
|
$
1.00
|
1,000,000
|
.8
|
$
1.00
|
1,000,000
|
$
1.00
|
$
0.56
|
2,500,000
|
1.90
|
$
0.37
|
2,500,000
|
$
0.56
|
The
intrinsic value of warrants outstanding at December 31, 2015 was
$0. Aggregate intrinsic value represents the value of the
Company’s closing stock price on the last trading day of the
fiscal period in excess of the exercise price of the warrant
multiplied by the number of warrants outstanding or
exercisable.
We
determined the value of warrants issued using the following
valuation amounts:
|
|
|
|
|
|
A-2
|
$
300,000
|
0.00
%
|
593.00
%
|
5.0
|
0.84
%
|
A-3
|
$
250,000
|
0.00
%
|
598.12
%
|
5.0
|
1.20
%
|
A-4
|
$
800,000
|
0.00
%
|
647.97
%
|
3.0
|
0.64
%
|
The
expected life represents an estimate of the weighted average period
of time that options are expected to remain outstanding given
consideration to vesting schedules and the Company’s
historical exercise patterns. Expected volatility is estimated
based on the historical volatility of the Company’s common
stock. The risk free interest rate is estimated based on the U.S.
Federal Reserve’s historical data for the maturity of nominal
treasury instruments that corresponds to the expected term of the
option. The expected dividend yield is 0% based on the fact that we
have never paid dividends and have no present intention to pay
dividends
Stock Incentive Plans
2014 Global Digital Solutions Equity Incentive Plan
On
May 9, 2014 our shareholders approved the 2014 Global Digital
Solutions Equity Incentive Plan (“Plan”) and reserved
20,000,000 shares of our common stock for issuance pursuant to
awards thereunder, including options, stock appreciation right,
restricted stock, restricted stock units, performance awards,
dividend equivalents, or other stock-based awards. The Plan is
intended as an incentive, to retain in the employ of the Company,
our directors, officers, employees, consultants and advisors, and
to attract new officers, employees, directors, consultants and
advisors whose services are considered valuable, to encourage the
sense of proprietorship and to stimulate the active interest of
such persons in the development and financial success of the
Company and its subsidiaries.
In accordance with the ACS 718,
Compensation
– Stock Compensation
,
awards granted are valued at fair value at the grant date. The
Company recognizes compensation expense on a pro rata straight-line
basis over the requisite service period for stock-based
compensation awards with both graded and cliff vesting terms. The
Company recognizes the cumulative effect of a change in the number
of awards expected to vest in compensation expense in the period of
change. The Company has not capitalized any portion of its
stock-based compensation.
Stock-based
compensation expense for the years ended December 31, 2015 and 2014
is comprised as follows:
|
|
|
Fair
value expense of stock option grants
|
$
308,143
|
$
3,527,620
|
Fair
value expense of restricted stock unit grants
|
51,520
|
785,452
|
Fair
value expense of restricted stock grants
|
419,789
|
2,703,997
|
|
$
779,679
|
$
7,075,629
|
Awards Issued Under Stock Incentive Plans
Stock Option Activity
At
December 31, 2015, we have outstanding 16,100,000 stock options -
14,116,668 of which are fully-vested stock options that were
granted to directors, officers and consultants and 1,983,332 of
which are unvested stock options that were granted to directors,
employees and consultants. The outstanding stock options are
exercisable at prices ranging from $0.006 to $0.64 and expire
between February 2024 and December 2025.
Issuances of Stock Options
Effective
as of April 10, 2015, David A. Loppert retired as our CFO and as an
officer of the Company and we appointed Jerome J. Gomolski as our
CFO. In connection with his appointment as our CFO, on April 1,
2015, Mr. Gomolski was granted stock options to acquire 500,000
shares of our common stock pursuant to the Plan. The options have
an exercise price of $0.10 per share, vest one-third on each of
October, 1 2015, April 1, 2016 and October 1, 2016, expire on April
1, 2025 and had an aggregate grant date fair value of
$50,000.
On
April 1, 2015, we granted stock options to acquire 300,000 shares
of our common stock to each of two consultants. The options have an
exercise price of $0.10 per share, vest one-third on each of
October 1, 2015, April 1, 2016 and October 1, 2016 and expire on
March 31, 2025. The options had an aggregate grant date fair value
of $30,000 each.
On
April 20, 2015 we granted options to acquire 500,000 shares of our
common stock exercisable at $0.14 per share to each of William J.
Delgado, executive officer and director, and Arthur F. Noterman and
Stephanie C. Sullivan, directors. The options vest one-third on
each of October 1, 2015, April 1, 2016 and October 1, 2016, are
exercisable through March 31, 2025, and had an aggregate grant date
fair value of $70,000 each.
On
May 8, 2015, we granted stock options to acquire an aggregate of
300,000 shares of our common stock to four employees. The options
have an exercise price of $0.08 per share, vested ratably over a
three-year period, expire ten years from the date of grant and had
an aggregate grant date fair value of $24,000.
On
November 30, 2015, we granted to each of our executive officers,
Jerome J. Gomolski and Gary A. Gray, and to an employee options to
acquire 1,000,000 shares of our common stock exercisable at $0.006
per share. The options vested on the date of grant and expire on
November 30, 2025 and had an aggregate grant date fair value of
$50,000 each.
On
December 9, 2015, we granted to Vox Equity Partners LLC options to
acquire 4,000,000 shares of our common stock exercisable at $0.006
per share. The 4,000,000 options vested on the date of grant,
expire on December 8, 2025 and had a grant date fair value of
$24,000. Richard J. Sullivan is a co-founder of Vox
Equity.
On
December 15, 2015, we granted to each of William J. Delgado,
executive officer and director, and Arthur F. Noterman and
Stephanie C. Sullivan, directors options to acquire 750,000 shares
of our common stock exercisable at $0.008 per share. The options
vested on the date of grant and expire on December 14, 2025. The
options had an aggregate grant date fair value of $6,000
each.
A
summary of the stock option activity for our stock options plans
for year ended December 31, 2015 is as follows:
|
|
|
Average
Remaining
Term in
Years
|
Aggregate
Intrinsic
Value at Date
of Grant
|
|
|
|
|
|
Outstanding
December 31, 2014
|
5,840,000
|
$
0.61
|
9.6
|
-
|
Options
granted
|
12,150,000
|
0.03
|
9.7
|
-
|
Options
exercised
|
-
|
|
|
-
|
Options
forfeited
|
(1,890,000
)
|
(0.53
)
|
-
|
-
|
Outstanding
December 31, 2015
|
16,100,000
|
0.18
|
-
|
-
|
Exercisable
at December 31 2015
|
14,116,668
|
$
0.19
|
9.4
|
-
|
We
account for our stock-based compensation plans in accordance with
ASC 718-10. Under the provisions of ASC 718-10, the fair value of
each stock option is estimated on the date of grant using a BSM
option-pricing formula, and amortizing that value to expense over
the expected performance or service periods using the straight-line
attribution method. The fair value of the stock options issued
during the year ended December 31, 2015 was estimated using the BSM
pricing model with the following weighted-average inputs: risk free
interest rate of 1.5%; expected term of 5.08 years: volatility of
352.5% and dividend rate of 0%. The weighted average values of the
assumptions used to value the options granted in the year ended
December 31, 2014 were as follows: risk-free interest rates of
1.83%; expected term of 10 years; expected volatility of 684.6% and
expected dividend yield of 0%. The expected life represents an
estimate of the weighted average period of time that options are
expected to remain outstanding given consideration to vesting
schedules and the Company’s historical exercise patterns.
Expected volatility is estimated based on the historical volatility
of the Company’s common stock. The risk free interest rate is
estimated based on the U.S. Federal Reserve’s historical data
for the maturity of nominal treasury instruments that corresponds
to the expected term of the option. The expected dividend yield is
0% based on the fact that we have never paid dividends and have no
present intention to pay dividends.
During
the years ended December 31, 2015 and 2014, we recorded stock-based
compensation cost related to the outstanding stock options of
$308,143 and $3,527,620, respectively. At December 31, 2015, the
unamortized value of the outstanding stock options was $91,847. The
intrinsic value of options outstanding at December 31, 2015 was $0.
Aggregate intrinsic value represents the value of the
Company’s closing stock price on the last trading day of the
fiscal period in excess of the exercise price of the option
multiplied by the number of options outstanding.
During
the year ended December 31, 2015, 390,000 stock options that had
not yet vested were forfeited and 1,500,000 vested stock options
granted to Mr. Loppert, our former CFO, were forfeited by their
terms.
Restricted Stock Units
In August 2014 we granted Stephen L. Norris, then
Chairman and CEO of our wholly owned subsidiary, GDSI
International, 12 million restricted stock units
(“RSU’s”) convertible into 12 million shares of
the Company’s common stock, with a grant date fair market
value of $3,600,000 as of July 1, 2014, the effective grant date.
The grant was made under our 2014 Equity Incentive Plan. 4,000,000
RSU’s will vest in respect of each fiscal year of GDSI
International from 2015 through 2017 if the company has achieved at
least 90% of the total revenue targets set forth in the agreement.
If less than 90% of the target is achieved in respect of any such
fiscal year, then the number of RSU’s vesting for that fiscal
year shall be 4,000,000 times the applicable percentage shown
below;
provided that,
if the company shall exceed 100% of
the revenue target for the 2016 or 2017 fiscal year, and shall have
failed to reach 90% of the target for a prior fiscal year, the
excess over 100% shall be applied to reduce the deficiency in the
prior year(s), and an additional number of RSU’s shall vest
to reflect the increased revenue for such prior fiscal year. Any
such excess shall be applied first to reduce any deficiency for the
2015 fiscal year and then for the 2016 fiscal year. The vesting of
the RSU’s shall be effective upon the issuance of the audited
financial statements of the Company for the applicable fiscal year,
and shall be based upon the total revenue of GDSI International as
reflected in such financial statements. Effective January 9, 2015,
Mr. Norris resigned and forfeited all rights in and to his
RSU’s.
On October 10, 2014 we granted an employee 1
million RSU’s convertible into 1 million shares of the
Company’s common stock, with a grant date fair market value
of $100,000. The grant was made under our 2014 Equity Incentive
Plan. 333,333 RSU’s will vest in respect of each calendar
year (commencing January 1 and ending December 31) of the Company
from 2015 through 2017 if the company has achieved at least 90% of
the total revenue and EBITDA midpoint targets set forth in the
agreement. If less than 90% of the target is achieved in respect of
any such fiscal year, then the number of RSU’s vesting for
that fiscal year shall be 333,333 times the applicable percentage
set forth in the agreement;
provided that,
if the company shall exceed 100% of
the revenue and EBITDA midpoint target for the 2016 or 2017
calendar year, and shall have failed to reach 90% of the target for
a prior calendar year, the excess over 100% shall be applied to
reduce the deficiency in the prior year(s), and an additional
number of RSU’s shall vest to reflect the increased revenue
for such prior calendar year. Any such excess shall be applied
first to reduce any deficiency for the 2015 calendar year and then
for the 2016 calendar year. The vesting of the RSU’s shall be
effective upon the issuance of the audited financial statements of
the Company for the applicable calendar year, and shall be based
upon the total revenue and EBITDA of the acquired companies as
reflected in such financial statements.
A
summary of RSU’s outstanding as of December 31, 2015 and
changes during the year then ended is presented below:
|
|
Weighted Average Grant Date Fair Value
|
Aggregate Intrinsic Value
|
|
|
|
|
Nonvested
at December 31, 2014
|
-
|
-
|
-
|
Issued
|
13,000,000
|
$
0.28
|
$
0.00
|
Vested
|
-
|
-
|
-
|
Forfeited
|
(12,000,000
)
|
(0.30
)
|
-
|
Nonvested
at December 31, 2015
|
1,000,000
|
$
(0.10
)
|
$
0.00
|
We
recorded stock-based compensation expense related to these
RSU’s of $51,747 and $1,112,934 for the years ended December
31, 2015 and 2014, respectively. As of December 31, 2015, there was
$35,317 of total unrecognized stock-based compensation expense
related to 1 million unvested RSU’s that will be recognized
on a straight-line basis over the performance periods of the award
through December 2017. The aggregate intrinsic value of nonvested
RSU’s was $0 at December 31, 2015.
Restricted Stock Grants
On
March 7, 2015, we granted 1,000,000 restricted shares of our common
stock to Gary A. Gray, our Executive Vice President. The restricted
stock vested on May 30, 2015 and had a grant date fair value of
$40,000.
On
March 7, 2015, we granted 500,000 restricted shares of our common
stock to an employee. The restricted stock vested on May 30, 2015
and had a grant date fair value of $20,000.
Awards Not Issued Under Stock Incentive Plans
Restricted Stock Grants Awarded to Advisors
In
order to align our senior advisors with the interest of the
stakeholders of the Company, the Board of Directors of the Company
has granted the advisors restricted stock awards valued at $0.17 to
$0.364 per share which vest over a period of 12 – 24 months,
subject to remaining and advisor for a minimum of twelve months,
and which are forfeited if the advisor is terminated or is no
longer an advisor on the anniversary of the advisory award, as
follows:
|
|
|
|
|
|
|
|
|
|
|
December 31, 2015
|
|
Name
|
|
Date ofGrant
|
|
Number of Shares
|
|
|
Vest from
|
|
Vest To
|
|
Vested
|
|
|
Unvested
|
|
|
Forfeited
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Edwin J. Wang
|
|
4/17/13
|
|
|
1,250,000
|
|
|
4/30/13
|
|
3/31/14
|
|
|
1,250,000
|
|
|
|
-
|
|
|
|
-
|
|
|
|
4/17/13
|
|
|
1,250,000
|
|
|
2/28/14
|
|
1/31/15
|
|
|
1,250,000
|
|
|
|
-
|
|
|
|
-
|
|
|
|
2/4/14
|
|
|
1,500,000
|
|
|
2/4/14
|
|
1/31/15
|
|
|
1,500,000
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Jennifer S. Carroll
|
|
4/17/13
|
|
|
1,250,000
|
|
|
4/30/13
|
|
3/31/14
|
|
|
1,250,000
|
|
|
|
-
|
|
|
|
-
|
|
|
|
4/17/13
|
|
|
1,250,000
|
|
|
2/28/14
|
|
1/31/15
|
|
|
1,250,000
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mathew Kelley
|
|
4/17/13
|
|
|
1,250,000
|
|
|
4/30/13
|
|
3/31/14
|
|
|
1,250,000
|
|
|
|
-
|
|
|
|
-
|
|
|
|
4/17/13
|
|
|
1,250,000
|
|
|
2/28/14
|
|
1/31/15
|
|
|
1,250,000
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Scott Brown
(1)
|
|
9/9/13
|
|
|
1,500,000
|
|
|
9/1/13
|
|
8/31/14
|
|
|
-
|
|
|
|
-
|
|
|
|
1,500,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Richard J. Feldman
|
|
4/30/14
|
|
|
500,000
|
|
|
4/30/14
|
|
3/30/15
|
|
|
500,000
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
500,000
|
|
|
4/30/15
|
|
3/30/16
|
|
|
375,000
|
|
|
|
125,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Thomas W. Janes
(2)
|
|
5/7/14
|
|
|
500,000
|
|
|
5/7/14
|
|
4/30/14
|
|
|
-
|
|
|
|
-
|
|
|
|
500,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gary Gray
|
|
3/7/15
|
|
|
1,000,000
|
|
|
3/7/15
|
|
5/30/15
|
|
|
1,000,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ross Trevino
|
|
3/7/15
|
|
|
500,000
|
|
|
3/7/15
|
|
5/30/15
|
|
|
500,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
13,500,000
|
|
|
|
|
|
|
|
11,375,000
|
|
|
|
125,000
|
|
|
|
2,000,000
|
|
(1)
|
Mr. Brown resigned from the advisory board in June 2014. Since he
had not been an advisor for the minimum period, the shares had not
vested, were forfeited, returned to treasury and
cancelled.
|
(2)
|
Forfeited in September 2014 upon termination as an
advisor.
|
A
summary of restricted stock grants outstanding as of December 31,
2014 and 2015, and the changes during the twelve months then ended
is presented below:
|
|
Weighted Average Grant Date Fair Value
|
Aggregate Intrinsic Value
|
Nonvested
at December 31, 2013
|
4,965,774
|
-
|
0.00
|
Granted
|
6,750,000
|
$
0.33
|
|
Vested
|
(8,653,274
)
|
|
|
Forfeited
|
(2000,000
)
|
|
|
Nonvested
at December 31, 2014
|
1,062,500
|
0.40
|
$
0.00
|
Granted
|
1,500,000
|
$
0.04
|
|
Vested
|
(2,437,500
)
|
(0.17
)
|
|
Forfeited
|
-
|
-
|
-
|
Nonvested
at December 31, 2015
|
125,000
|
$
0.46
|
$
0.00
|
We
recorded stock-based compensation expense related to these
restricted stock grants of $419,789 and $3,047,012 for the years
ended December 31, 2015 and 2014, respectively. As of December 31,
2015 there was $57,497 of total unrecognized stock-based
compensation expense related to a nonvested restricted stock grant
that will be recognized through March 2016. The aggregate intrinsic
value of the nonvested restricted stock grant was $0 at December
31, 2015.
NOTE 12 – INCOME TAXES
Reconciliations
between the statutory rate and the effective tax rate for the years
ended December 31, 2015 and 2014 consist as follows:
|
|
|
Federal statutory
tax rate
|
(34.0
)%
|
(34.0
)%
|
State taxes, net of
federal benefit
|
(5.5
)%
|
(3.6
)%
|
Permanent
differences
|
(2.9
)
|
4.3
%
|
Valuation
allowance
|
42.4
%
|
33.3
%
|
Effective tax
rate
|
—
|
—
|
Significant
components of the Company’s deferred tax assets as of
December 31, 2015 and 2014 are summarized below.
|
|
|
Deferred tax
assets:
|
|
|
Net operating loss
carryforwards
|
$
1,741,000
|
$
709,000
|
Derivative
liability
|
170,000
|
--
|
Accrued expenses
and reserves
|
--
|
216,000
|
Stock based
compensation
|
100,000
|
892,000
|
Transaction
costs
|
--
|
(12,000
)
|
Total deferred tax
asset
|
2,011,000
|
3,805,000
|
Valuation
allowance
|
(2,011,000
)
|
(3,805,000
)
|
|
$
-
|
$
-
|
As of
December 31, 2015, the Company had approximately $4,627,000 of
federal net operating loss carry forwards. These carry forwards, if
not used, will begin to expire in 2028. Current or future ownership
changes, including issuances of common stock under the terms of the
Company’s convertible notes payable that were entered into
during 2015 and the closing of the Rontan Transaction may severely
limit the future realization of these net operating
losses.
The
Company provides for a valuation allowance when it is more likely
than not that they will not realize a portion of the deferred tax
assets. The Company has established a valuation allowance against
their net deferred tax asset due to the uncertainty that enough
taxable income will be generated in those taxing jurisdictions to
utilize the assets. Therefore, they have not reflected any benefit
of such deferred tax assets in the accompanying financial
statements. The Company’s net deferred tax asset and
valuation allowance decreased by $1,346,000 in the year ended
December 31, 2015.
The
Company has reviewed all income tax positions taken or that are
expected to be taken for all open years and determined that their
income tax positions are appropriately stated and supported for all
open years. The Company is subject to U.S. federal income tax
examinations by tax authorities for years after 2011 due to
unexpired net operating loss carryforwards originating in and
subsequent to that year. The Company may be subject to income tax
examinations for the various taxing authorities which vary by
jurisdiction.
The
Company’s policy is to record interest and penalties
associated with unrecognized tax benefits as additional income
taxes in the consolidated statements of operations. As of January
1, 2015, there were had no unrecognized tax benefits, or any tax
related interest or penalties.
The
Company files income tax returns in the U.S. federal jurisdiction
and the various states in which they operate. The former members of
NACSV are required to file separate federal and state tax returns
for NACSV for the periods prior to our acquisition of NACSV. The
Company files consolidated tax returns for subsequent periods. The
Company has not yet filed their U.S. federal and certain state tax
returns for 2015 and currently do not have any examinations
ongoing. Tax returns for the years 2012 onwards are subject to
federal, state or local examinations.
NOTE 13 – ACQUISITION OF AIRTRONIC AND NOTE RECEIVABLE FROM
AIRTRONIC
On
October 22, 2012, we entered into an Agreement of Merger and Plan
of Reorganization (“Merger Agreement”) to acquire 70%
of Airtronic USA, Inc. (“Airtronic”), a debtor in
possession under chapter 11 of the Bankruptcy Code in a case
pending in the US Bankruptcy Court for the Northern District of
Illinois, Eastern Division (the “Court”) once Airtronic
successfully reorganized and emerged from bankruptcy (the
“Merger”). During the period from October 2012 through
November 2013, GDSI was actively involved in the day to day
management of Airtronic pending the completion of the
Merger.
Contemporaneously,
on October 22, 2012, we entered into a Debtor In Possession Note
Purchase Agreement (“Bridge Loan”) with Airtronic. We
agreed to lend Airtronic a maximum of $2,000,000, with an initial
advance of $750,000 evidenced by an 8¼% Secured Promissory
Note made by Airtronic in favor of the Company (the “Original
Note”) and a Security Agreement pledging all of
Airtronic’s assets. As of December 31, 2012 we had not
advanced any funds to Airtronic under the Bridge Loan and Original
Note. In March 2013, the Company and Airtronic amended the Bridge
Loan to provide for a maximum advance of up to $700,000 in
accordance with draws submitted by Airtronic and approved by the
Company in accordance with the budget set forth in the amendment.
On August 5, 2013, we entered into the Second Bridge Loan
Modification and Ratification Agreement, received a new 8¼%
secured promissory note in principal amount of $550,000 (the
“Second Note”), and entered into a Security Agreement
with the CEO of Airtronic, which granted a security interest in
certain intellectual property for patent-pending applications and
trademarks that were registered in the CEO’s name. On October
10, 2013, we entered into the Third Bridge Loan Modification and
Ratification Agreement, and received a new 8¼% secured
promissory note for $200,000 (the “Third
Note”).
On
October 2, 2013, Airtronic’s amended plan of reorganization
(the “Plan”) was confirmed by the Court, but the Plan
was never substantially consummated and was terminated. Under the
terms of the Plan, Airtronic needed to close the Merger with the
Company on or before December 2, 2013 which Airtronic refused to
do, and, as a result, the Plan terminated and the reorganized
Airtronic re-vested in the bankruptcy estate of Airtronic as a
debtor-in-possession.
On March 31, 2014, Airtronic filed a First Amended
Modified Plan of Reorganization (“First Modified Plan”)
which was confirmed on April 28, 2014. On May 14, 2014 Airtronic
repaid the Original Note, the Second Note and the Third Note
together with all accrued interest thereon in the total amount of
$1,509,056.
On August 12, 2014, we
received $414,761 that we were awarded for legal fees and expenses
incurred.
NOTE 14 – DISCONTINUED OPERATIONS
In
January 2012, we acquired 51% of Bronco Communications LLC. We
subsequently discontinued the operations of Bronco and disposed of
its remaining assets in January 2013 although we were responsible
for contract oversight, which was concluded in June 2014. In
accordance with ASC Topic 205, Presentation of Financial Statements
- Discontinued Operation, we have presented the loss from
discontinued operations in the consolidated statement of
operations, which loss consisted of general and administrative
expenses of $2,832 for the year ended December 31,
2014.
NOTE 15 – RELATED PARTY TRANSACTIONS
Accounts Payable
At
December 31, 2015 and 2014, included in accounts payable were
compensation owed to our senior management totaling $50,614 and
$11,778, respectively.
Convertible Notes Payable to Related Parties
During
the year ended December 31, 2014, we issued convertible notes
payable to an affiliate of our Chairman and CEO, and to our then
CFO. These notes, which were repaid in 2015, are further discussed
in Note 7.
See
also Note 6 for accrued expenses due to related parties and Note 11
for a discussion of restricted stock and stock option grants during
2015.
NOTE 16 – CUSTOMER
CONCENTRATIONS
The
Company had revenue from two customers in the year ended December
31, 2015 and three customers in the year ended December 31, 2014
that were greater than 10% of total revenue:
|
Year Ended December 31, 2015
|
|
|
|
Customer
1
|
$
350,000
|
58.3
|
Customer
2
|
$
250,000
|
41.7
|
|
Year Ended December 31, 2014
|
|
|
|
Customer
1
|
$
161,994
|
61.3
|
Customer
2
|
$
102,462
|
38.7
|
Accounts
receivable at December 31, 2015 and 2014 were $4,261 and $302,400,
respectively. The balance at December 31, 2014 was net of an
allowance for doubtful account of $104,085. One customer accounted
for 100.0% and 99.2% of the balances at December 31, 2015 and 2014,
respectively.
NOTE 17 – SUBSEQUENT EVENTS
We have completed an evaluation of all subsequent events after the
balance sheet date of December 31, 2015 through the date this
Annual Report on Form 10-K is issued to ensure that this filing
includes appropriate disclosure of events, both recognized in the
financial statements as of December 31, 2015 and events which
occurred subsequently but were not recognized in the financial
statements. We have concluded that no subsequent events have
occurred that require recognition or disclosure, except as
disclosed within these financial statements and except as described
below:
On August 15, 2016, William J. Delgado, our current Chief Executive
Officer, agreed to convert $231,565 of indebtedness owed to him by
the Company into 1,000,000 shares of convertible preferred stock
(the “Preferred Stock”). The Preferred Stock has voting
rights as to one (1) preferred share to four hundred (400) shares
of our common stock. The Preferred Stock is also convertible to
common stock at any time into 37% of the outstanding common stock
of the Company at the time of the conversion. The conversion to
common can only take place when there are an adequate number of
shares that are available and is subject to normal stock
adjustments (i.e. stock splits etc.) that are executed by the
company in its normal course of business.
On
December 22, 2017, the Company entered into a financing agreement
with an accredited investor for $1.2 million. Under the terms of
the agreement, the Company is to receive milestone payments based
on the progress of the Company’s lawsuit for damages against
Grupo Rontan Metalurgica, S.A (the “Lawsuit”). Such
milestone payments consist of (i) an initial purchase price payment
of $300,000, which the Company received on December 22, 2017, (ii)
$150,000 within 30 days of the Lawsuit surviving a motion to
dismiss on the primary claims, (iii) $100,000 within 30 days of the
close of all discovery in the Lawsuit and (iv) $650,000 within 30
days of the Lawsuit surviving a motion for summary judgment and
challenges on the primary claims. As part of the agreement, the
Company shall pay the investor an investment return of 100% of the
litigation proceeds to recoup all money invested, plus 27.5% of the
total litigation proceeds received by the Company.
From
February 9, 2018 to March 13, 2018, the Company issued 28,653,334
shares of common stock as follows:
Date
Issued
|
|
Recipient
|
|
|
|
|
February 9,
2018
|
|
Accredited
Investor
|
4,320,000
|
Purchase
Agreement
|
$
0.012
|
$
12,096
|
February 9,
2018
|
|
Consultant
|
333,334
|
Services
|
$
0.012
|
N/A
|
February 21,
2018
|
|
Consultant
|
5,000,000
|
Services
|
$
0.012
|
N/A
|
March 13,
2018
|
|
Consultant
|
5,000,000
|
Purchase
Agreement
|
$
0.004
|
$
20,000
|
March 13,
2018
|
|
Consultant
|
5,000,000
|
Services
|
$
0.012
|
N/A
|
March 13,
2018
|
|
Consultant
|
9,000,000
|
Services
|
$
0.012
|
N/A
|
On May
15, 2018, the Company entered into an Investment Return Purchase
Agreement with an accredited investor (the “Purchaser”)
for proceeds of $200,000 (the “Investment Agreement”).
Under the terms of the Investment Agreement, the Company agreed to
pay the Purchaser a 10% return, or $20,000 (the “Investment
Return”) within three (3) months from the date of the
Investment Agreement. Such Investment Return shall be paid earlier
if the Company secures funding totaling $500,000 within 90 days
from the date of the Investment Agreement. In addition, the Company
agreed to issue to the Purchaser 2,000,000 warrants to purchase
common stock of the Company at an exercise price of $0.01 per
share, exercisable for a period of three (3) years.
On May
31, 2018, the Company entered into a $300,000 non-convertible note
with an accredited investor with $150,000 original issue discount
for net proceeds of $150,000. As part of the note agreement, the
Company also agreed to issue the investor 5,000,000 warrants at an
exercise price of $0.01.