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, 2017, 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 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-K for the year ending 2016, as filed with the Securities
& Exchange Commission (“SEC”) on June 18 2018, 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 – December 31, 2016 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 December 31, 2016:
The following are
events that have occurred since December 31, 2016:
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.
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.
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
Speciality Vehicles, Inc.
Employees
As
of December 31, 2017, we had 1 full-time employee, William Delgado,
and 0 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 $20,032 per month, we estimate that our cash
on hand 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. 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, 2017, our net loss was $1,087,023. As of
December 31, 2017, we had an accumulated deficit of $33,798,191 and
a working capital deficit of $2,985,862. 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, 2017, we had current liabilities of $3,125,720 and
current assets of $113,000. We had a working capital deficiency of
$3,012,720. 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
orprivate 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,
2017 through the date of this report, the price per share of our
common stock has ranged from a high of $0.015 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 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, 2017, 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, 2017, 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 and one preferred
stockholder 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 June 22, 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.
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.
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, and
our management cannot predict the ultimate outcome of these legal
proceedings with certainty. 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 plantiff 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 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. The $20,000 settlement was
paid in August 2017
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 (Note 5).
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.
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. The Company believes the likelihood of an
unfavorable outcome of the dispute is remote.
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, which is
included in accrued expenses in the accompanying consolidated
balance sheet.
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. The Company believes the likelihood of an
unfavorable outcome of the dispute is remote.
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. The Company believes the likelihood of an unfavorable
outcome of the dispute is remote.
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. The Company
believes the likelihood of an unfavorable outcome of the dispute is
reasonably possible, but is not able to reasonably estimate a range
of potential loss, should the outcome be unfavorable.
PMB HELIN DONOVAN, LLP vs. GLOBAL DIGITAL SOLUTIONS, INC. IN THE
CIRCUIT COURT FOR THE 15TH JUDICIAL CIRCUIT lN 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
($40,000.00) of which the first payment of Ten Thousand Dollars
($10,000.00) has been paid on May 16, 2018. The $40,000
is included in accounts payable as of December 31,
2017.
JENNIFER CARROLL, vs. GLOBAL DIGITAL SOLUTIONS, INC., NORTH
AMERICAN CUSTOM SPECIALTY VEHICLES, INC., IN THE CIRCUIT
COURT FOR THE 15TH JUDICIAL CIRCUIT lN 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 ($15,000.00) 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. (“the Company”,
“we”), 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. The Company has
been dormant since December 31, 2015.
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, 2017 incurred a net loss of $1,116,296 and
used net cash of $175,000 to fund operating activities. At December
31, 2017, we had cash of $93,000, an accumulated deficit of
$33,827,464, a working capital deficit of $3,012,720 and
stockholders’ deficit of $3,012,720. 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
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 December 22, 2017, the Company entered into a
financing agreement with an accredited investor for $1.2 million,
as further detailed in Note 5.
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.
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
derivative liability valuation, deferred tax asset and valuation
allowance, and assumptions used in Black-Scholes-Merton, or BSM, or
other valuation methods, such as expected volatility, risk-free
interest rate, and expected dividend rate.
Revenue Recognition
The Company
recognizes revenue when all of the following conditions are
satisfied: (1) there is persuasive evidence of an arrangement; (2)
the product or service has been provided to the customer; (3) the
amount to be paid by the customer is fixed or determinable; and (4)
the collection of such amount is probable. The Company
records revenue when it is realizable and earned upon shipment of
the finished products or when the service has been
provided.
Income Taxes
Income taxes are
accounted for based upon an asset and liability
approach. Accordingly, deferred tax assets and
liabilities arise from the difference between the tax basis of an
asset or liability and its reported amount in the financial
statements. Deferred tax amounts are determined using
the tax rates expected to be in effect when the taxes will actually
be paid or refunds received, as provided under currently enacted
tax law. Valuation allowances are established when
necessary to reduce deferred tax assets to the amount expected to
be realized. Income tax expense or benefit is the tax
payable or refundable, respectively, for the period plus or minus
the change in deferred tax assets and liabilities during the
period.
Accounting guidance
requires the recognition of a financial statement benefit of a tax
position only after determining that the relevant tax authority
would more likely than not sustain the position following an
audit. For tax positions meeting the
more-likely-than-not threshold, the amount recognized in the
financial statements is the largest benefit that has a greater than
fifty percent likelihood of being realized upon ultimate settlement
with the relevant tax authority. The Company believes
its income tax filing positions and deductions will be sustained
upon examination and accordingly, no reserves, or related accruals
for interest and penalties have been recorded at December 31, 2017
and 2016. The Company recognizes interest and penalties on
unrecognized tax benefits as well as interest received from
favorable tax settlements within income tax expense.
On December 22,
2017, the President of the United States signed and enacted into
law H.R. 1 (the “Tax Reform Law”). The Tax Reform Law,
effective for tax years beginning on or after January 1, 2018,
except for certain provisions, resulted in significant changes to
existing United States tax law, including various provisions that
are expected to impact the Company. The Tax Reform Law reduces the
federal corporate tax rate from 34% to 21% effective January 1,
2018. The Company will continue to analyze the provisions of the
Tax Reform Law to assess the impact on the Company’s
consolidated financial statements.
Cash and Cash Equivalents
We consider all
highly liquid investments with original maturities of three months
or less to be cash equivalents.
We maintain our cash in
high-quality financial institutions. The balances, at times, may
exceed federally insured limits.
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. As of December 31, 2017 and 2016, Managment
believed all amounts fully collectible.
Prepaid expenses
Prepaid expenses
consist primarily of legal retainers, which are expensed when the
services are incurred.
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. 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 in active markets for identical assets or
liabilities
●
Level 2
–Quoted prices for similar assets or liabilities in active
markets, quoted prices for identical or similar assets or
liabilities in markets that are not active, or other inputs that
are observable, either directly or indirectly
●
Level 3 –
Significant unobservable inputs that cannot be corroborated by
market data.
Derivative Financial Instruments
We account for
conversion options embedded in convertible notes payable 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 various
assumptions and such estimates are revalued at each balance sheet
date, with changes recorded to other income or expense as
Change in fair value of derivative
liability
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.
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
|
46,249,733
|
311,446,571
|
Preferred
stock
|
196,398,431
|
861,613,714
|
Stock
options
|
13,650,002
|
13,116,668
|
Warrants
|
1,500,000
|
1,500,000
|
Potentially
dilutive securities
|
257,798,166
|
1,187,676,953
|
Stock Based Compensation
In accordance with
ASC 718, "Compensation – Stock Compensation” the
Company measures 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.
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.
Convertible Securities
Based upon ASC
815-15, we have adopted a sequencing approach regarding the
application of ASC 815-40 to convertible securities. 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.
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. As there have not been
significant revenues since the year ending December 31, 2015, the
Company does not expect the adoption to have a material impact and
no transition method will be necessary upon adoption.
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
3 – ACCRUED EXPENSES
Accrued expenses
consist of the following amounts:
|
|
|
|
|
Accrued
compensation to executive officers and employees
|
$
342,919
|
$
91,086
|
Accrued
professional fees and settlements
|
125,771
|
285,771
|
Accrued
Interest
|
59,961
|
37,641
|
Total accrued
expenses
|
$
528,651
|
$
414,498
|
NOTE
4 – FAIR VALUE MEASUREMENTS
We had no Level 1
or Level 2 assets and liabilities at December 31, 2017 and December
31, 2016. The Derivative liabilities are Level 3 fair value
measurements.
The following is a
summary of activity of Level 3 liabilitiesduring the years ended
December 312017 and 2016:
|
|
|
Balance at
beginning of year
|
$
672,724
|
$
270,080
|
Change in fair
value
|
(289,776
)
|
402,644
|
Balance at end of
year
|
$
382,948
|
$
672,724
|
Embedded Derivative Liabilities of Convertible Notes
At December 31,
2017, the fair value of the bifurcated embedded derivative
liabilities of convertible notes was estimated using the following
weighted-average inputs: risk free interest rate – 1.39%;
term - .25 years; volatility – 246.62%; dividend rate –
0%. At December 31, 2016, the fair value of the
bifurcated embedded derivative liabilities of convertible notes was
estimated using the following weighted-average inputs: risk free
interest rate – 0.51%; term - .25 years; volatility –
287.12%; dividend rate – 0%.
NOTE
5 – NOTE PAYABLE
Convertible Notes Payable with Embedded
Derivative Liabilities
|
|
|
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. On December 12, 2017, LG Capital Funding and the Company
entered into a Convertible Note Redemption Agreement to pay back a
balance of $68,110 as more fully disclosed
below.
(1) (2)
(3)
|
$
68,110
|
$
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 trading 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. On December 13, 2017, JMJ Financial and the
Company entered into a Repayment Agremeent to pay back a balance of
$84,514 as more fully disclosed below.
(1) (2)
(4)
|
84,514
|
$
69,070
|
Total convertible
notes payable with embedded derivative liability
|
$
152,624
|
$
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)
|
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.
|
(3)
|
On December 12,
2017, LG Capital Funding, LLC and the Company entered into a
Convertible Note Redemption Agreement to pay back the balance
owed.
|
(4)
|
On December 13,
2017, JMJ Financial and the Company entered into a Repayment
Agreement to pay back the balance owed.
|
Under
the terms of the two convertible promissory notes outstanding at
December 31, 2017 and 2016, 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 82,557,576 and
514,438,096 shares at December 31, 2017 and 2016, respectively. 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, 2017 and 2016.
Accordingly, the note holder had the right to accelerate the
payment due (approximately $28,189 and $14,095 of interest was due
at December 31, 2017 and 2016, respectively). 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,
2016 we were in default on the notes.
During the year
ended December 31, 2017, in settlement of the default, we entered
into a Convertible Note Redemption Agreement with LG
Capital Funding, LLC. The Company is to wire redemption payment as
follows:
●
$6,500 by December
29, 2017 (paid on January 2, 2018)
●
$6,500 by January
31, 2018
●
$6,500 by February
28, 2018
●
$25,000 by March
30, 2018
●
The remaining
balance by April 30, 2018.
A total of $6,500
has been paid through the date of this filing, with the remaining
scheduled payments not yet been made.
During the year
ended December 31, 2017, in settlement of the default, we entered
into a Repayment Agreement with JMJ Financial. The Company agreed
to repay the balance as follows by wire:
●
$12,500
within five business days of the Issuer securing funding, provided
that such payment shall be made on January 31,
2018.
●
$12,500
within 45 days after the first payment.
●
$12,500
within 45 days after the second payment.
●
$47,014
within 30 days after the third payment.
A
total of $25,000 have been paid through the date of this filing.
The first payment of $12,500 was made on February 14, 2018 and the
second payment of $12,500 was made on May 17, 2018. There have been
no payments made since.
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, 2017 and 2016, respectively, $0 and
$0 of deferred interest expense related to this agreement is
included in current assets.
(1) (2)
|
|
$
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,
2017, we had not made $10,952 of payments that were due.
(1)
(2)
|
|
$
52,024
|
|
|
Settlement
agreement with Power Up dated December 21, 2017. Power Up has
agreed to accept the sum of $90,000 in full satisfaction of
outstanding obligation and Judgement Amount provided that NACSV and
GDSI make all payments provided for under the agreement. A payment
schedule is provided below.
|
77,266
|
|
Total due to
factor
|
$
77,266
|
$
107,266
|
(1)
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.
(2)
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,
2016, we have not accrued any penalties or interest that might be
due as a result of the defaults. The default was settled on
September 13, 2017, with payments made in 2018 per an agreed upon
schedule, with the judgement paid in full as of May 15,
2018. The expected gain on settlement will not be
recognized until the settlement is paid in full. See Note
6.
Promissory Note Agreement
On August 31, 2017, Dragon
Acqusitions, a related entity owned by William Delgado, and an
individual lender entered into a Promissory Note agreement for
$20,000 as well as $2,000 in interest to accrue through maturity on
August 31, 2018 for a total of $22,000 due on August 31, 2018.
Dragon Acqusition assumed payment of a payable of the Company and
the Company took on the debt. As of December 31, 2017, the Company
has accrued $500 of the interest.
Financing Agreement
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. Through December 31,
2017, $300,000 has been received.
Demand Promissory Note Agreements
On
December 23, 2017 (the “effective date”), the Company
entered into a $485,000, 7% interest rate, Demand Promissory Note
with Vox Business Trust, LLC (the “Purchaser”.) The
note was in settlement of the amounts accrued under a consulting
agreement (Note 6), consisting of $200,000 owed for retainer
payments through December 2017, as well as $285,000 owed to the
Purchaser when the Resolution Progress Funding was met on December
22, 2017. As part of the agreement, the Purchaser may not demand
payment prior to the date of the Resolution Funding Date. The
Company also agreed to grant 5,000,000 shares within 90 days of the
Resolution Progress Funding Date and 10,000,000 shares within 90
days of the Resolution Funding Date. The 5,000,000 shares were
issued on March 13, 2018. The Company shall make mandatory
prepayment in the following amounts and at the following times
–
●
$1,000
on the effective date.
●
$50,000
on the date on which the judge presiding over the lawsuit issues a
ruling or decision in which the lawsuit survives a motion to
dismiss.
●
$50,000
on the date on which discovery closes with respect to the
lawsuit.
●
$100,000
on the date on which the judge presiding over the lawsuit issues a
ruling or decision in which the lawsuit survives a motion for
summary judgement on the claims.
On
December 26, 2017, the Company entered into a $485,000, 7% interest
rate, Demand Promissory Note with RLT Consulting, Inc (the
“Purchaser”.) The note was in settlement of the amounts
accrued under a consulting agreement (Note 6), consisting of
$200,000 owed for retainer payments through December 2017, as well
as $285,000 owed to the Purchaser when the Resolution Progress
Funding was met on December 22, 2017. As part of the agreement, the
Purchaser may not demand payment prior to the date of the
Resolution Funding Date. The Company also agreed to grant 5,000,000
shares within 90 days of the Resolution Progress Funding Date and
10,000,000 shares within 90 days of the Resolution Funding Date.
The 5,000,000 shares were issued on March 13, 2018 (as well as an
additional 4,000,000 for further services). The Company shall make
mandatory prepayment in the following amounts and at the following
times –
●
$1,000
on the effective date.
●
$50,000
on the date on which the judge presiding over the lawsuit issues a
ruling or decision in which the lawsuit survives a motion to
dismiss.
●
$50,000
on the date on which discovery closes with respect to the
lawsuit.
●
$100,000
on the date on which the judge presiding over the lawsuit issues a
ruling or decision in which the lawsuit survives a motion for
summary judgement on the claims.
RLT was granted a first priority security interest in the
Litigation Proceeds and is pari passu to Parabellum and
Vox. To that end, they share in the litigation in a priority
position to proceed to repay the note.
NOTE
6 – COMMITMENTS AND CONTINGENCIES
Legal Proceedings
We may be involved
in legal proceedings in the ordinary course of our business, and
our management cannot predict the ultimate outcome of these legal
proceedings with certainty. 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 plantiff 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 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. The $20,000 settlement was
paid in August 2017
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 (Note 5).
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.
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. The Company believes the likelihood of an
unfavorable outcome of the dispute is remote.
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, which is
included in accrued expenses in the accompanying consolidated
balance sheet.
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. The Company believes the likelihood of an
unfavorable outcome of the dispute is remote.
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. The Company believes the likelihood of an unfavorable
outcome of the dispute is remote.
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. The Company
believes the likelihood of an unfavorable outcome of the dispute is
reasonably possible, but is not able to reasonably estimate a range
of potential loss, should the outcome be unfavorable.
PMB HELIN DONOVAN, LLP vs. GLOBAL DIGITAL SOLUTIONS, INC. IN THE
CIRCUIT COURT FOR THE 15TH JUDICIAL CIRCUIT lN 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
($40,000.00) of which the first payment of Ten Thousand Dollars
($10,000.00) has been paid on May 16, 2018. The $40,000
is included in accounts payable as of December 31,
2017.
JENNIFER CARROLL, vs. GLOBAL DIGITAL SOLUTIONS, INC., NORTH
AMERICAN CUSTOM SPECIALTY VEHICLES, INC., IN THE CIRCUIT
COURT FOR THE 15TH JUDICIAL CIRCUIT lN 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 ($15,000.00) 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).
Consulting agreements
The
Company entered into two consulting agreements in May 2016, for
services to be provided in connection towards the resolution of the
Rontan lawsuit (below). The consulting agreements includes a
monthly retainer payment of$10,000 to each consultant. The
agreement also includes consideration of 5,000,000 shares of
restricted common stock of the Company, plus a 5% cash
consideration of the Resolution Progress Funding, (defined as upon
the retention of legal counsel and receipt of fundingfor the
litigation), as of the Resolution Progress Funding date and
10,000,000 shares of restricted common stock of the Company and a
5% cash consideration of the Resolution Funding amount (defined as
a settlement or judgement in favour of the Company by Rotan),at the
Resolution Funding date. The Resolution Progress funding was met on
December 22, 2017.
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, as well as the
ability to acquire 100% of the outstanding stock of Rontan at a
price of $200 million BR, and the Company can acquire 100% of all
real estate held by Rontan.
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.
On April 25, 2018,
the Note of Filing Proposed Summons was completed by the
Company. On April 26, 2018, a summons was issued to
Grupo Rontan Electro Metalurgica, S.A. Also, on May 15, 2018 the
Company filed a motion for Issuance of Letters
Rogatory.
NOTE
7 – 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, 2017 and 2016, 1,000,000 shares of preferred stock
were outstanding.
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 the
common stock of the Company. The Preferred Stock is
convertible into common stock at any time after issuance 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.
Common Stock
We are authorized
to issue 650,000,000 shares of common stock, $0.001 par value per
share. At December 31, 2017 and 2016, 530,806,571 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:
Class of
Warrant
|
|
Issued in
connection with or for
|
|
Number
Outstanding
|
|
|
Exercise
Price
|
|
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
|
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 warrants expired
unexercised on the dates of expiration, as shown
above.
The following is a
summary of outstanding and exercisable warrants at December 31,
2017:
|
|
|
|
Weighted
Average
Number
Outstanding
at
12/31/17
|
Outstanding
Remaining
Contractual
Life (in
yrs.)
|
Weighted
Average
Exercise
Price
|
Number
Exercisable
at
12/31/17
|
Weighted
Average
Exercise
Price
|
$
0.15
|
1,000,000
|
0.33
|
$
0.15
|
1,000,000
|
$
0.15
|
$
0.50
|
500,000
|
0.42
|
$
0.50
|
500,000
|
$
0.50
|
$
0.15 to 0.50
|
1,500,000
|
0.75
|
$
0.37
|
1,500,000
|
$
0.56
|
The following is a
summary of outstanding and exercisable warrants at December 31,
2016:
|
|
|
|
Weighted
Average
Number
Outstanding
at
12/31/16
|
Outstanding
Remaining
Contractual
Life (in
yrs.)
|
Weighted
Average
Exercise
Price
|
Number
Exercisable
at
12/31/16
|
Weighted
Average
Exercise
Price
|
$
0.15
|
1,000,000
|
.92
|
$
.06
|
1,000,000
|
$
.06
|
|
500,000
|
.52
|
$
.31
|
500,000
|
$
.31
|
|
1.44
|
|
$
.37
|
1,500,000
|
$
.37
|
The intrinsic value
of warrants outstanding at December 31, 2017 and 2016 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.
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.
There was not any
stock based compensation in the year ended December 31,
2017. Stock-based compensation expense for the years
ended December 31, 2016 is comprised as follows:
|
|
Stock based
compensation expense
|
$
16,674
|
Stock options
forfeitures
|
(91,481
)
|
Restricted stock
units forfeitures
|
(51,747
)
|
Total
|
$
(126,554
)
|
Awards
Issued Under Stock Incentive Plans
Stock Option
Activity
At December 31,
2017 and 2016, we have outstanding 13,650,002 stock options -
all of which are fully-vested stock options that were
granted to directors, officers 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, for an
average exercise price per share of $0.60 and an average remaining
term of 8.5 years as of December 31, 2017.
During 2016 1,449,998 unvested
stock options were either forfeited due to employees leaving the
Company, or cancelled by the Board due to performance levels not
being met. Any compensation amount previously recognized
on the straight-line baiss relating to the unvested stock options
were reversed in the period of cancellation or
forfeiture. The remaining 533,334 options vested during
the year ended December 31, 2016. There were no options
granted, exercised, or forfeited during the year ended December 31,
2017.
During the years
ended December 31, 2017 we did not recognize
any stock-based compensation cost related to the
outstanding stock options. During the year ended
December 31, 2016 we recognized stock-based compensation cost
related to the outstanding stock options of $16,674 expense and
($91,481) fofeitures. The intrinsic value of options outstanding at
December 31, 2017 and 2016 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.
Restricted
Stock Units
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. The performance levels were not met, and the
Board canceled the RSUs during January 2016.
We recorded
stock-based compensation expense related to these RSU’s of
($51,747) fofeitures and $51,749 for the year ended December 31,
2016.
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 an advisor for a minimum of twelve months, and which are
forfeited if the advisor is terminated or is no longer an advisor
on the anniversary of the advisory award, as follows:
|
|
|
|
|
|
|
|
|
|
|
December 31,
2017
|
|
Name
|
|
Date
of
Grant
|
|
Number
of
Shares
|
|
|
Vest
from
|
|
Vest
To
|
|
Vested
|
|
|
Unvested
|
|
|
Forfeited
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,000,000
|
|
|
|
|
|
|
|
4,875,000
|
|
|
|
-
|
|
|
|
125,000
|
|
The aggregate
intrinsic value of the restricted stock grant was $0 at December
31, 2017 and 2016.
NOTE
8 – INCOME TAXES
Reconciliations
between the statutory rate and the effective tax rate for the years
ended December 31, 2017 and 2016 consist as follows:
|
|
|
Federal
statutory tax rate
|
(34.0
)%
|
(34.0
)%
|
Permanent
differences
|
(9.0
)
|
16.0
%
|
Valuation
allowance
|
43.0
%
|
18.0
%
|
Effective
tax rate
|
—
|
—
|
Significant components of the
Company’s deferred tax assets as of December 31, 2017 and
2016 are summarized below.
|
|
|
Deferred
tax assets:
|
|
|
Net
operating loss carryforwards
|
$
2,632,000
|
$
3,784,000
|
Accrued
expenses
|
26,000
|
42,000
|
Stock
based compensation
|
2,908,000
|
4,709,000
|
Amortization
and depreciation
|
19,000
|
31,000
|
Impairment
of intangible assets
|
243,000
|
393,000
|
Total
deferred tax asset
|
5,828,000
|
8,959,000
|
Valuation
allowance
|
(5,828,000
)
|
(8,959,000
)
|
|
$
-
|
$
-
|
As
of December 31, 2017, the Company had approximately $11,769,000 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
Companyprovides 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 $3,131,000 in the year ended
December 31, 2017, or which an increase of $295,000 related to the
current year activity and a decrease of $3,426,000 was a result of
the change in the expected tax rate from 34% to 21% .
The
Companyhas 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 December
31, 2017, 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
9 – RELATED PARTY TRANSACTIONS
Accounts Payable
|
|
|
RLT
Consulting
|
$
33,841
|
$
33,841
|
Jerry
Gomolski
|
25,000
|
25,000
|
Charter
804CS
|
20,099
|
20,099
|
Gary
Gray
|
12,000
|
12,000
|
Total
|
$
90,940
|
$
90,940
|
Accrued Compensation
At December 31, 2017 and
December 31, 2016, we had $310,000 and $70,000 payable to William
J. Delgado and $20,835 and $16,668 to Jerry Gomolski, respectively.
During the year ended December 31, 2016, $231,565 of accrued
compensation for William B. Delgado was converted to preferred
shares.
NOTE
10 – SUBSEQUENT EVENTS
We have completed an evaluation of all
subsequent events after the balance sheet date of December 31, 2017
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, 2017
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:
From February 9,
2018 to March 13, 2018, the Company issued 28,653,334 shares of
common stock as follows:
Date Issued
|
Recipient
|
|
Purpose
of
Issuance
|
|
|
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
|
Services
|
$
0.012
|
$
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 1, 2018 the
Company entered into a $36,000 promissory note with an individual
with $5,000 original issue discount for net proceeds of
$31,000.
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 June 1, 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.