NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
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 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 September 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
three months ended March 31, 2018 we incurred a net loss of
$554,811. At March 31, 2018, we had $3,000 of cash, an accumulated
deficit of $34,382,275, a working capital deficit of $3,236,940 and
stockholders’ deficit of $3,236,940. We have funded our
activities to date almost exclusively from equity and debt
financings.
Our
cash position is critically deficient, and payments essential to
our ability to operate are not being made in the ordinary course.
Failure to raise capital in the coming days to fund our operations
and failure to generate positive cash flow to fund such operations
in the future will have a material adverse effect on our financial
condition. These factors raise substantial doubt about our ability
to continue as a going concern.
We are
in default under the terms of our loan agreements. 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
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.
Basis of Presentation
The
accompanying unaudited financial information as of and for the
three months ended March 31, 2018 and 2017 has been prepared in
accordance with accounting principles generally accepted in the
U.S. for interim financial information and with the instructions to
Quarterly Report on Form 10-Q and Article 10 of Regulation S-X. In
the opinion of management, such financial information includes all
adjustments (consisting only of normal recurring adjustments,
unless otherwise indicated) considered necessary for a fair
presentation of our financial position at such date and the
operating results and cash flows for such periods. Operating
results for the three months ended March 31, 2018 are not
necessarily indicative of the results that may be expected for the
entire year or for any other subsequent interim
period.
Certain
information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted
accounting principles have been omitted pursuant to the rules of
the U.S. Securities and Exchange Commission, or the SEC. These
unaudited financial statements and related notes should be read in
conjunction with our audited financial statements for the year
ended December 31, 2017 included in our Annual Report on Form 10-K
filed with the SEC on June 29, 2018.
The
condensed consolidated balance sheet at December 31, 2017 has been
derived from the audited financial statements at that date but does
not include all of the information and footnotes required by
generally accepted accounting principles in the U.S. for complete
financial statements.
Fair Value of Financial Instruments
The
carrying value of cash, accounts payable and accrued expenses
approximate their fair values based on the short-term maturity of
these instruments. The carrying amounts of debt were also estimated
to approximate fair value. As defined in ASC 820, "Fair Value
Measurement," fair value is the price that would be received to
sell an asset or paid to transfer a liability in an orderly
transaction between market participants at the measurement date
(exit price). The Company utilizes market data or assumptions that
market participants would use in pricing the asset or liability,
including assumptions about risk and the risks inherent in the
inputs to the valuation technique. These inputs can be readily
observable, market corroborated, or generally unobservable. ASC 820
establishes a fair value hierarchy that prioritizes the inputs used
to measure fair value. The hierarchy gives the highest priority to
unadjusted quoted prices in active markets for identical assets or
liabilities (level 1 measurement) and the lowest priority to
unobservable inputs (level 3 measurement). This fair value
measurement framework applies at both initial and subsequent
measurement.
The
three levels of the fair value hierarchy defined by ASC 820 are as
follows:
●
Level 1 –
Quoted prices 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.
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 even though the exercise
price could be less than the average market price of the common
shares:
|
|
|
|
|
|
|
|
Convertible notes
and accrued interest
|
33,715,247
|
141,939,271
|
Preferred
stock
|
206,861,415
|
196,398,431
|
Stock
options
|
13,650,002
|
13,650,002
|
Warrants
|
1,500,000
|
1,500,000
|
Potentially
dilutive securities
|
255,726,664
|
353,487,704
|
The
convertible debentures were considered anti-dilutive as of March
31, 2017, in accordance with ASC 260-10-45-20, as under the
“if converted” method the adjustment to the control
number of net income resulted in a net loss.
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.
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.
The
Company adopted ASU 2014-09 in the three months ended March 31,
2018, and as there have not been any significant revenues to date,
the adoption did not have a material impact on the Company’s
financial position or results of operations, and no transition
method was 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
As of
March 31, 2018, and December 31, 2017, accrued expenses consist of
the following amounts:
|
|
|
Accrued
compensation to executive officers and employees
|
$
403,336
|
$
342,919
|
Accrued
professional fees and settlements
|
193,675
|
125,771
|
Accrued
interest
|
42,732
|
59,961
|
|
$
639,743
|
$
528,651
|
NOTE 4 – FAIR VALUE MEASUREMENTS
The
Company did not have any Level 1 or Level 2 assets and liabilities
at March 31, 2018 and December 31, 2017. The Derivative liabilities
are Level 3 fair value measurements.
The
following is a summary of activity of Level 3 liabilities during
the three months ended March 31, 2018 and 2017:
|
|
|
Derivative
liability balance at beginning of period
|
$
382,948
|
$
672,724
|
Change in fair
value
|
(156,045
)
|
(407,298
)
|
Reclassification to
equity
|
(28,995
)
|
-
|
Balance at end of
period
|
$
197,908
|
$
(265,426
)
|
At
March 31, 2018, the fair value of the derivative liabilities of
convertible notes was estimated using the following
weighted-average inputs: risk free interest rate – 1.73%;
term - .25 years; volatility – 185.50%; dividend rate –
0%.
At
December 31, 2017, the fair value of the 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%.
NOTE 5 – NOTE PAYABLE
Convertible Notes Payable with Embedded Derivative
Liabilities
On
January 16, 2015 the Company entered into an 8% convertible note
payable for $78,750 with LG Capital Funding, LLC (“LG
Capital”), which matured on January 16, 2016. The note is
convertible at a conversion price equal to a 40% discount to the
lowest closing bid price for 20 prior trading days including the
notice of conversion date. 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. Under the terms of the note
the Company is required to maintain a minimum share reserve equal
to four times the potential number of shares of their common stock
issuable upon conversion, $38,829 of the note was converted as of
December 31, 2015.
The
note was not paid by its maturity date, and was in default. On
December 12, 2017, LG Capital Funding and the Company entered into
a Convertible Note Redemption Agreement to pay back the balance of
$68,110, which included the principal balance and accrued interest,
per a set payment schedule to be paid in full by April 30, 2018.
Until all redemption payments are fully made the creditor agreed
not to effectuate any conversions. In the event the Company fails
to make timely payments, the creditor shall be able to convert the
balance of the note. The Company made the first required payment of
$6,500 on January 2, 2018, with the remaining scheduled payments
not made by their due dates. $61,610 is remaining outstanding as of
March 31, 2018.
The
Company entered into a Convertible note payable for up to $250,000
with JMJ Financial (“JMJ”) of which $82,500 was deemed
funded on January 28, 2015 and $27,500 was deemed funded on April
20, 2015. The principal amount matured 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 lesser of $0.075 per share or 60% of the average of
the trading price in the 25 trading days prior to conversion., 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. Under the
terms of the note, the Company is required to maintain 26,650,000
shares of their common stock in reserve for conversions. $40,930 of
the note was converted as of December 31, 2015.
The
note was not paid by its maturity date, and was in default. On
December 13, 2017, JMJ Financial and the Company entered into a
Repayment Agreement to pay back a balance of $84,514, which
included the principal balance and accrued interest, per a set
payment schedule. If the Company fails to pay the scheduled
payments by their due date the agreement is terminated. A total of
$25,000 has been paid through the date of this filing, with the
final two scheduled payments not made by their due date. $72,014 is
remaining outstanding on the note as of March 31,
2018.
Revenue Based Factoring Agreements
During
the year ended December 31, 2015, the Company entered into two
revenue-based factoring agreements for which the Company did not
make the required payments, and the factor agreements went into
default. On December 21, 2017 the Company entered into a Settlement
agreement with Power Up under which Power Up has agreed to accept
the sum of $90,000 in full satisfaction of outstanding obligation
(Note 6). The settlement is to be paid
in three installments of $30,000.
The
settlement has been paid in full as of May 15, 2018. The expected
gain on settlement will be recognized during the second quarter of
2018, when the debt has been extinguished.
Promissory Note Agreement
On
August 31, 2017, Dragon Acquisitions, 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 Acquisition assumed payment of a payable of
the Company and the Company took on the debt. As of March 31, 2018,
the Company has accrued $1,000 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 March
31, 2018, $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.
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 plaintiff came to the following
agreements:
i)
Judgment is due to
be entered against the Company in the amount of $300,000 if the sum
of $20,000 as noted in iv below is not paid.
ii)
The Company grants
the plaintiffs vehicles and trailers in connection to this
proceeding.
iii)
The Company will
assist the plaintiffs in obtaining possession of the said
vehicles.
iv)
The Company will
pay the plaintiffs the sum of $20,000.
v)
The $20,000
settlement was paid in August 2017.
Global Digital Solutions, Inc. et. al. v. Communications
Laboratories, Inc., et. al.
On
January 19, 2015, the Company and NACSV filed suit against
Communications Laboratories, Inc., ComLabs Global, LLC, Roland
Lussier, Brian Dekle, John Ramsay and Wallace Bailey for conversion
and breach of contract in a dispute over the payment of a $300,000
account receivable that ComLabs owed to NACSV but sent payment
directly to Brian Dekle. The case was filed in the Eighteenth
Judicial Circuit in and for Brevard County Florida, case no.
05-2015-CA-012250. On February 18, 2015 (i) defendants
Communications Laboratories, Inc., ComLabs Global, LLC and Roland
Lussier and (ii) defendant Wallace Bailey filed their respective
motions to dismiss seeking, among other things, dismissal for
failure to state valid causes of action, lumping and failure to
post a non-resident bond. On February 26, 2015, defendants Dekle
and Ramsay filed their motion to dismiss, or stay action, based on
already existing litigation between the parties. NACSV filed its
required bond on March 2, 2015.
PowerUp Lending Group, LTD., v. North American Custom Specialty
Vehicle, Inc. et.al
On
September 13, 2017 Power Up received a default judgment against the
Company in the amount of $109,302.00. The Company negotiated a
settlement agreement on December 21, 2017 with Power Up to pay
$90,000 in three installments of $30,000. As of May 15, 2018, the
company has paid the entire amount.
Securities and Exchange Commission v. Global Digital Solutions,
Inc., Richard J. Sullivan and David A. Loppert United States
District Court for the Southern District of Florida, Case No.
9:16-cv-81413-RLR
On
August 11, 2016, the Securities and Exchange Commission
(“SEC”) filed suit in the United States District Court
for the Southern District of Florida against Global Digital
Solutions, Inc. (“GDSI”), Richard J. Sullivan
(“Sullivan”) and David A. Loppert
(“Loppert”) to enjoin GDSI; Sullivan, GDSI’s
former Chairman and CEO; and Loppert, GDSI’s former CFO from
alleged further violations of the anti-fraud and reporting
provisions of the federal securities laws, and against Sullivan and
Loppert from alleged further violations of the certification
provisions of the federal securities laws.
On
October 12, 2016, Defendant GDSI filed its First Answer to the
Complaint. On November 9, 2016, Defendant Sullivan filed a Letter
with the Court denying all allegations regarding the case. On
December 15, 2016, the SEC filed a Motion for Judgment and Notice
of Filing of Consent of Defendant Loppert to entry of Final
Judgment by the SEC. On December 19, 2016, the Court entered an
order granting the SEC’s Motion for Judgment as to Defendant
Loppert. On December 21, 2016, the SEC filed a Notice of Settlement
as entered into by it and Defendants GDSI and Sullivan. On December
23, 2016, the Court entered an Order staying the case and directing
the Clerk of the Court to close the case for statistical purposes
per the December 21, 2016 Notice of Settlement. On March 7, 2017,
the SEC moved for a Judgment of Permanent Injunction and Other
Relief and Notice of Filing Consent of Defendant GDSI to Entry of
Judgment by the SEC. On March 13, 2017, the Judge signed the
Judgment as to Defendant GDSI and it was entered on the
Court’s docket. On April 6, 2017, the SEC moved for a final
Judgment of Permanent Injunction and Other Relief and Notice of
Filing Consent of Defendant Sullivan. On April 10, 2017, the Judge
signed the final Judgment as to Defendant Sullivan and it was
entered on the Court’s docket. On December 21, 2017, the SEC
moved for a final Judgment and Notice of Filing Consent of
Defendant GDSI to Entry of Final Judgment. On January 2, 2018, the
Judge signed the Final Judgment as to Defendant GDSI and it was
entered on the Court’s docket.
Adrian Lopez, Derivatively and on behalf of Global Digital
Solutions, Inc. v. William J. Delgado, Richard J. Sullivan, David
A. Loppert, Jerome J. Gomolski, Stephanie C. Sullivan, Arthur F.
Noterman, and Stephen L. Norris United States District Court for
the District of New Jersey, Case No.
3:17-cv-03468-PGS-LHG
On
September 19, 2016, Adrian Lopez, derivatively, and on behalf of
Global Digital Solutions, Inc., filed an action in New Jersey
Superior Court sitting Mercer County, General Equity Division. That
action was administratively dismissed for failure to prosecute.
Plaintiff Lopez, through his counsel, filed a motion to reinstate
the matter on the general equity calendar on or about February 10,
2017. The Court granted the motion unopposed on or about April 16,
2017. On May 15, 2017, Defendant William Delgado
(“Delgado”) filed a Notice of Removal of Case No.
C-70-16 from the Mercer County Superior Court of New Jersey to the
United States District Court for the District of New Jersey. On May
19, 2017, Defendant Delgado filed a First Motion to Dismiss for
Lack of Jurisdiction. On May 20, 2017, Defendant David A. Loppert
(“Loppert”) filed a Motion to Dismiss for Lack of
(Personal) Jurisdiction. On June 14, 2017, Plaintiff Adrian Lopez
(“Lopez”) filed a First Motion to Remand the Action
back to State Court. On June 29, 2017, Defendant Delgado filed a
Memorandum of Law in Response and Reply to the Memorandum of Law in
Support of Plaintiff’s Motion to Remand and in Response to
Defendants’ Delgado’s and Loppert’s Motions to
Dismiss. On January 1, 16, 2018, a Memorandum and Order granting
Plaintiff’s Motion to Remand the case back to the Mercer
County Superior Court of New Jersey was signed by the Judge and
entered on the Docket. Defendants Delgado and Loppert’s
Motions to Dismiss were denied as moot. On February 2, 2018,
Defendants filed a Motion to Dismiss the Complaint. On February 20,
2018, Plaintiff filed a Motion to Consolidate Cases. On March 21,
2018, Plaintiff filed an Opposition to Defendants’ Motion to
Dismiss the Complaint. On March 23, 2018, Defendants filed a Brief
in Reply to Plaintiff’s Opposition to Defendants’
Motion to Dismiss the Complaint. The Court held a hearing on the
motions to dismiss and consolidate. Jurisdictional discovery was
ordered. As of this date, the Court has not issued a decision and
Order regarding Defendants’ Motion to Dismiss the
Complaint.
Adrian Lopez v. Global Digital Solutions, Inc. and William J.
Delgado Superior Court of New Jersey, Chancery Division, Mercer
County, Equity Part, Docket No. MER-L-002126-17
On
September 28, 2017, Plaintiff Adrian Lopez (“Lopez”)
brought an action against Global Digital Solutions, Inc.
(“GDSI”) and William J. Delgado (“Delgado”)
to compel a meeting of the stockholders of Global Digital
Solutions, Inc. pursuant to Section 2.02 of GDSI’s Bylaws and
New Jersey Revised Statute § 14A:5-2. On October 27, 2017,
Defendants GDSI and Delgado filed a Motion to Stay the Proceeding.
On November 24, 2017, Plaintiff filed an Objection to
Defendants’ Motion to Stay the Proceeding. On January 19,
2018, Defendants’ Motion to Stay the Proceeding was denied.
On February 2, 2018, Defendants filed a Motion to Dismiss the
Complaint. On February 20, 2018, Plaintiff filed a Motion to
Consolidate Cases. On March 21, 2018, Plaintiff filed an Opposition
to Defendants’ Motion to Dismiss the Complaint. On March 23,
2018, Defendants filed a Brief in Reply to Plaintiff’s
Opposition to Defendants’ Motion to Dismiss the Complaint. As
of this date, the Court has not issued a decision and Order
regarding Defendants’ Motion to Dismiss the
Complaint.
Jeff Hull, Individually and on Behalf of All Others Similarly
Situated v. Global Digital Solutions, Inc., Richard J. Sullivan,
David A. Loppert, William J. Delgado, Arthur F. Noterman and
Stephanie C. Sullivan United States District Court, District of New
Jersey (Trenton), Case No. 3:16-cv-05153-FLW-TJB
On
August 24, 2016, Jeff Hull, Individually and on Behalf of All
Others Similarly Situated (“Hull”) filed suit in the
United States District Court for the District of New Jersey against
Global Digital Solutions, Inc. (“GDSI”), Richard J.
Sullivan (“Sullivan”), David A. Loppert
(“Loppert”), William J. Delgado
(“Delgado”), Arthur F. Noterman
(“Noterman”) and Stephanie C. Sullivan
(“Stephanie Sullivan”) seeking to recover compensable
damages caused by Defendants’ alleged violations of federal
securities laws and to pursue remedies under the Securities
Exchange Act of 1934. On January 18, 2018, pursuant to the
Court’s December 19, 2017 Order granting Plaintiff Hull leave
to file an amended Complaint, Plaintiff Hull filed a Second Amended
Complaint against Defendants. On February 8, 2018, Defendants GDSI
and Delgado filed a Second Motion to Dismiss the Complaint. On
February 8, 2018, Defendant Loppert filed a Motion for Extension of
Time to File an Answer. On February 13, 2018, Defendant Loppert
filed a Motion to Dismiss the Second Amended Complaint for Lack of
(personal) Jurisdiction and for Failure to State a Claim. On
February 20, 2018, Plaintiff Michael Perry (“Perry”)
filed a Brief in Opposition to Defendants GDSI and Delgado’s
Second Motion to Dismiss the Complaint and to Defendant
Loppert’s Motion to Dismiss the Second Amended Complaint for
Lack of (personal) Jurisdiction and for Failure to State a Claim.
On February 26, 2018, Defendants GDSI and Delgado filed a Reply
Brief to Plaintiff Michael Perry’s Brief in Opposition to
their Motion to Dismiss the Second Amended Complaint. On February
26, 2018, Defendant Loppert filed a Response in Support of
Defendants GDSI and Delgado’s Second Motion to Dismiss the
Complaint. On March 12, 2018, Defendant Loppert filed a Reply Brief
to Plaintiff Perry’s Brief in Opposition to Defendant
Loppert’s Motion to Dismiss the Second Amended Complaint for
Lack of (personal) Jurisdiction and for Failure to State a Claim.
To date, the Court has not issued a decision as to aforementioned
Motions. Global Digital Solutions, Inc. and William J. Delgado
intend to continue to vigorously defend against the claims asserted
by Jeff Hull, Individually and on Behalf of All Others Similarly
Situated.
In the Matter of Global Digital Solutions, Inc., Administrative
Proceeding File No. 3-18325. Administrative Proceeding Before the
Securities and Exchange Commission.
On
December 26, 2017, the Securities and Exchange Commission
instituted public administrative proceedings pursuant to Section
12(j) of the Securities Exchange Act of 1934 (“Exchange
Act”) against the Respondent Global Digital Solutions, Inc.
On January 8, 2018, Respondent Global Digital Solutions, Inc.
(“GDSI”) filed its answer to the allegations contained
in the Order Instituting Administrative Proceedings and Notice of
Hearing Pursuant to Section 12U) of the Exchange Act. A briefing
schedule was entered into and on February 15, 2018, the Securities
and Exchange Commission filed a motion for an order of summary
disposition against Respondent GDSI on the grounds that there is no
genuine issue with regard to any material fact, the Division was
entitled as a matter of law to an order revoking each class of
GDSI's securities registered pursuant to Section 12 of the Exchange
Act. Respondent GDSI opposed the Securities and Exchange
Commission’s motion on the grounds that there were material
issues of fact. The Securities and Exchange Commission replied and
a hearing was held on April 9, 2018. The Administrative Law Judge
ordered supplemental evidence and briefing on the issues of
material fact. On June 1, 2018, GDSI filed various Affidavits
providing supplemental evidence and briefing on the issues of
material fact. On June 21, 2018, the Securities and Exchange
Commission issued an order immediately staying all administrative
proceedings pending before its administrative law judges in light
of the Supreme Court’s decision in
Lucia v. SEC
, No. 17-130 (U.S. June 21,
2018).
Pending Admin.
Proc.
, Securities Act of 1933 Release No. 10510,
https://www.sec.gov/litigation/opinions/2018/33-10510.pdf. The stay
will last until July 23, 2018, or further order of the Commission.
Id.
Securities and Exchange Commission v. Global Digital Solutions,
Inc., Richard J. Sullivan and David A. Loppert United States
District Court for the Southern District of Florida, Case No.
9:16-cv-81413-RLR
On
August 11, 2016, the Securities and Exchange Commission
(“SEC”) filed suit in the
United States District Court for the Southern
District of Florida
against Global Digital Solutions, Inc.
(“GDSI”), Richard J. Sullivan (“Sullivan”)
and David A. Loppert (“Loppert”) to enjoin GDSI;
Sullivan, GDSI’s former Chairman and CEO; and Loppert,
GDSI’s former CFO from alleged further violations of the
anti-fraud and reporting provisions of the federal securities laws,
and against Sullivan and Loppert from alleged further violations of
the certification provisions of the federal securities
laws.
On
October 12, 2016, Defendant GDSI filed its First Answer to the
Complaint. On November 9, 2016, Defendant Sullivan filed a Letter
with the Court denying all allegations regarding the case. On
December 15, 2016, the SEC filed a Motion for Judgment and Notice
of Filing of Consent of Defendant Loppert to entry of Final
Judgment by the SEC. On December 19, 2016, the Court entered an
order granting the SEC’s Motion for Judgment as to Defendant
Loppert. On December 21, 2016, the SEC filed a Notice of Settlement
as entered into by it and Defendants GDSI and Sullivan. On December
23, 2016, the Court entered an Order staying the case and directing
the Clerk of the Court to close the case for statistical purposes
per the December 21, 2016 Notice of Settlement. On March 7, 2017,
the SEC moved for a Judgment of Permanent Injunction and Other
Relief and Notice of Filing Consent of Defendant GDSI to Entry of
Judgment by the SEC. On March 13, 2017, the Judge signed the
Judgment as to Defendant GDSI and it was entered on the
Court’s docket. On April 6, 2017, the SEC moved for a final
Judgment of Permanent Injunction and Other Relief and Notice of
Filing Consent of Defendant Sullivan. On April 10, 2017, the Judge
signed the final Judgment as to Defendant Sullivan and it was
entered on the Court’s docket. On December 21, 2017, the SEC
moved for a final Judgment and Notice of Filing Consent of
Defendant GDSI to Entry of Final Judgment. On January 2, 2018, the
Judge signed the Final Judgment as to Defendant GDSI and it was
entered on the Court’s docket. The amount of the judgement is
One Hundred Thousand Dollars ($100,000) plus interest.
PMB Helin Donovan, LLP vs. Global Digital Solutions, Inc. in the
Circuit Court for the 15
th
Judicial Circuit in
and for Palm Beach County, Florida, Docket No.:
50-2017-CA-011937-XXXX-MB
On
October 31, 2017, PMB Helin Donovan, LLP filed an action for
account stated in Palm Beach County. Global Digital Solutions, Inc.
(“GDSI”) settled the matter for Forty Thousand Dollars
($40,000) of which the first payment of Ten Thousand Dollars
($10,000) has been paid.
Jennifer Carroll vs. Global Digital Solutions, Inc., North American
Custom Specialty Vehicles, Inc., in the Circuit Court for the
15
th
Judicial Circuit in and for Palm Beach County, Florida, Case No.:
50-2015-CC-012942-XXXX-MB
On
October 27, 2017, Plaintiff Jennifer Carroll moved the court for a
default judgment against Defendant Global Digital Solutions, Inc.
(“GDSI”) and its subsidiary North American Custom
Specialty Vehicles Inc. The amount of the judgement is Fifteen
Thousand Dollars ($15,000) plus fees of Thirteen Thousand Three
Hundred Fifty-Three Dollars ($13,353) and costs of Six Hundred
Twenty-Four Dollars ($624).
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. The consulting agreements include 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 funding for 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 favor of the Company by Rotan), at the Resolution
Funding date. The Resolution Progress funding was met on December
22, 2017, as more fully discussed in the financing agreement in
Note 5.
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 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 – RELATED PARTY TRANSACTIONS
Accounts Payable
At
March 31, 2018 and December 31, 2017, included in accounts payable
was compensation owed to related parties as seen below
-
|
|
|
Jerry
Gomolski
|
$
25,000
|
$
25,000
|
Charter
804CS
|
20,099
|
20,099
|
Gary
Gray
|
12,000
|
12,000
|
Total
|
$
57,099
|
$
57,099
|
Accrued Compensation
At
March 31, 2018 and December 31, 2017, we had $370,000 and $310,000
payable to William J. Delgado and $29,169 and $20,835 to Jerry
Gomolski, respectively.
NOTE 8 – STOCKHOLDERS’ DEFICIT
On
February 9, 2018, the Company issued 333,334 of their common shares
to a consultant, as consideration for $4,000 of consulting
services.
On
February 9, 2018, the Company sold 4,320,000 of their common shares
to an unrelated party, at $0.0028 per share, for a total purchase
price of $12,096.
On
February 21, 2018, in connection with a $36,000 promissory note
that was entered into on May 1, 2018 (Note 9) the Company issued
5,000,000 shares of their common stock. The common stock was valued
at $57,500, based on the market price of $0.0115 of the common
stock on the date of issuance, which was recognized as a financing
cost in the accompanying condensed consolidated statement of
operations.
On
March 13, 2018, in connection with the two $485,000 demand notes
(Note 5), the Company issued 14,000,000 shares of their common
stock as consideration for consulting services. The common stock
was valued at $168,000, based on the market price of $0.0120 of the
common stock on the date of issuance.
On
March 13, 2018, in connection with the $20,000 promissory note
(Note 5), the Company issued 5,000,000 shares of their common
stock. The common stock was valued at $60,000, based on the market
price of $0.0120 of the common stock on the date of issuance which
was recognized as a financing cost in the accompanying condensed
consolidated statement of operations.
NOTE 9 – SUBSEQUENT EVENTS
We have completed an evaluation of all subsequent events after the
balance sheet date of March 31, 2018 through the date this
Quarterly Report on Form 10-Q was submitted to the SEC, to ensure
that this filing includes appropriate disclosure of events both
recognized in the financial statements as of March 31, 2018, and
events which occurred subsequently but were not recognized in the
financial statements. We have concluded that no subsequent events
have occurred that require recognition or disclosure, except as
disclosed within these financial statements and except as described
below:
On 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.