Item
2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
FORWARD
LOOKING STATEMENTS
This
Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933
and Section 21E of the Securities Exchange Act of 1934. The words “believe,” “may,” “will,”
“potentially,” “estimate,” “continue,” “anticipate,” “intend,” “could,”
“would,” “project,” “plan,” “expect” and similar expressions that convey uncertainty
of future events or outcomes are intended to identify forward-looking statements. These forward-looking statements include, but
are not limited to, statements concerning the following:
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our
future financial and operating results;
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our
intentions, expectations and beliefs regarding anticipated growth, market penetration and trends in our business;
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the
timing and success of our business plan;
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our
plans regarding future financings;
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our
ability to attract and retain customers;
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our
dependence on growth in our customers’ businesses;
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the
effects of market conditions on our stock price and operating results;
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our
ability to maintain our competitive technological advantages against competitors in our industry;
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the
expansion of our business in our core golf market as well as in new markets like commercial fleet management and agriculture;
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our
ability to timely and effectively adapt our existing technology and have our technology solutions gain market acceptance;
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our
ability to introduce new offerings and bring them to market in a timely manner;
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our
ability to maintain, protect and enhance our intellectual property;
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the
effects of increased competition in our market and our ability to compete effectively;
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the
attraction and retention of qualified employees and key personnel;
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future
acquisitions of or investments in complementary companies or technologies; and
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our
ability to comply with evolving legal standards and regulations, particularly concerning requirements for being a public company.
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These
forward-looking statements speak only as of the date of this Form 10-Q and are subject to uncertainties, assumptions and business
and economic risks. As such, our actual results could differ materially from those set forth in the forward-looking statements
as a result of the factors set forth below in Part II, Item 1A, “Risk Factors,” and in our other reports filed with
the Securities and Exchange Commission. Moreover, we operate in a very competitive and rapidly changing environment, and new risks
emerge from time to time. It is not possible for us to predict all risks, nor can we assess the impact of all factors on our business
or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained
in any forward-looking statements we may make. In light of these risks, uncertainties and assumptions, the forward-looking events
and circumstances discussed in this Form 10-Q may not occur, and actual results could differ materially and adversely from those
anticipated or implied in our forward-looking statements.
You
should not rely upon forward-looking statements as predictions of future events. Although we believe that the expectations reflected
in our forward-looking statements are reasonable, we cannot guarantee that the future results, levels of activity, performance
or events and circumstances described in the forward-looking statements will be achieved or occur. Moreover, neither we nor any
other person assumes responsibility for the accuracy and completeness of the forward-looking statements. We undertake no obligation
to update publicly any forward-looking statements for any reason after the date of this Form 10-Q to conform these statements
to actual results or to changes in our expectations, except as required by law.
Our
unaudited financial statements are stated in United States Dollars (US$) and are prepared in accordance with United States Generally
Accepted Principles. The following discussion should be read in conjunction with our unaudited condensed consolidated financial
statements and notes thereto appearing elsewhere in this Quarterly Report on Form 10-Q with the understanding that our actual
future results, levels of activity, performance and events and circumstances may be materially different from what we expect.
Corporate
History
DSG
Global, Inc. (formerly Boreal Productions Inc.) was incorporated under the laws of the State of Nevada on September 24, 2007.
We were formed to option feature films and TV projects to be packaged and sold to movie studios and production companies.
In
January 2015, we changed our name to DSG Global, Inc. and effected a one-for-three reverse stock split of our issued and outstanding
common stock in anticipation of entering in a share exchange agreement with DSG TAG Systems, Inc., a corporation incorporated
under the laws of the State of Nevada on April 17, 2008 and extra provincially registered in British Columbia, Canada in 2008.
On
April 13, 2015, we entered into a share exchange agreement with DSG TAG Systems Inc. and the shareholders of DSG TAG Systems who
become parties to the agreement. Pursuant to the terms of the share exchange agreement, we agreed to acquire not less than 75%
and up to 100% of the issued and outstanding common shares in the capital stock of DSG TAG Systems in exchange for the issuance
to the selling shareholders of up to 20,000,000 shares of our common stock on the basis of 1 common share for 5.4935 common shares
of DSG TAG Systems.
On
May 6, 2015, we completed the acquisition of approximately 75% (82,435,748 common shares) of the issued and outstanding common
shares of DSG TAG Systems as contemplated by the share exchange agreement by issuing 15,185,875 shares of our common stock to
shareholders of DSG TAG Systems who became parties to the agreement. In addition, concurrent with the closing of the share exchange
agreement, we issued an additional 179,823 shares of our common stock to Westergaard Holdings Ltd. in partial settlement of accrued
interest on outstanding indebtedness of DSG TAG Systems.
Following
the initial closing of the share exchange agreement and through October 22, 2015, we acquired an additional 101,200 shares of
common stock of DSG TAG Systems from shareholders who became parties to the share exchange agreement and issued to these shareholders
an aggregate of 18,422 shares of our common stock. Following completion of these additional purchases, DSG Global owns approximately
100% of the issued and outstanding shares of common stock of DSG TAG Systems. On August 27, 2018, an aggregate of 4,229,384 issued
and outstanding shares of Series A Convertible Preferred Stock of DSG TAG Systems, Inc. previously held by Westergaard Holdings
Ltd., an affiliate of Keith Westergaard, a former member of our board of directors, were exchanged for 51 and 3,000,000 shares
of Series B and Series E preferred shares of DSG Global, Inc., respectively.
The
reverse acquisition was accounted for as a recapitalization effected by a share exchange, wherein DSG TAG Systems is considered
the acquirer for accounting and financial reporting purposes. The assets and liabilities of the acquired entity have been brought
forward at their book value and no goodwill has been recognized. We adopted the business and operations of DSG TAG Systems upon
the closing of the share exchange agreement.
Overview
of Our Business
DSG
Global, Inc. is a technology development company based in Surrey, British Columbia, Canada, engaged in the design, manufacture,
and marketing of fleet management solutions for the golf industry, as well as commercial, government and military applications.
Our principal activities are the sale and rental of GPS tracking devices and interfaces for golf vehicles, and related support
services. We were founded by a group of individuals who have dedicated their careers to fleet management technologies and have
been at the forefront of the industry’s most innovative developments, and our executive team has over 50 years of experience
in the design and manufacture of wireless, GPS, and fleet tracking solutions. We have developed the TAG suite of products that
we believe is the first completely modular fleet management solution for the golf industry. The TAG suite of products is currently
sold and installed around the world in golf facilities and as commercial applications through a network of established distributors
and partnerships with some of the most notable brands in fleet and equipment manufacture.
DSG
stands for “Digital Security Guard”, which is our primary value statement giving fleet operator’s new capabilities
to track and control their vehicles. We have developed a proprietary combination of hardware and software that is marketed around
the world as the TAG system. We have primarily focused on the golf industry where the TAG system is deployed to help golf course
operators manage their fleet of golf carts, turf equipment, and utility vehicles. We are a leader in the category of fleet management
in the golf industry and were awarded “Best Technology of the Year” in 2010 by Boardroom magazine, a publication of
the National Golf Course Owners Association. To date the TAG system is installed on over 8,000 vehicles and has been used to monitor
over 6,000,000 rounds of golf.
The
TAG system fills a void in the marketplace by offering a modular structure that allows the customer to customize their system
to meet desired functionality and budget constraints. In addition to the core TAG system vehicle control functionality, which
can operate independently, we offer two golfer information display systems — the alphanumeric TEXT and high definition TOUCH
— providing the operator with two display options which is unique in the industry.
The
primary market for our TAG system is the 40,000 golf operations worldwide. While the golf industry remains the primary focus of
our sales and marketing efforts, we have completed several successful pilots of the TAG system in other markets such as agriculture
and commercial fleet operations. With appropriate resources, we intend to expand our sales and marketing efforts into these new
markets.
We
have a direct sales force in North America, which comprises the most significant portion of the golf fleet market and have developed
key relationships with distributors and golf equipment manufacturers such as E-Z-GO, Yamaha and Ransomes Jacobsen to help drive
sales for the North American and worldwide markets.
In
order to successfully deliver products, increase sales, and maintain customer satisfaction, we need to have a reliable supplier
of our hardware units and components at competitive prices. Presently, we source our TOUCH units from one supplier in China and
our TAG units from one supplier in the United Kingdom. We have recently established a new relationship with a supplier for our
TOUCH units in China to provide us with higher quality, newer technology at competitive pricing. We are also exploring the opportunity
of a partnership with a US manufacturer.
In
addition, DSG is currently in negotiations with a telecommunications provider to provide new technology in hardware and wireless
access.
Our
Revenue Model
We
derive revenue from four different sources, as follows:
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Systems
Sales Revenue
, which consists of the sales price paid by those customers who purchase or lease our TAG system hardware.
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Monthly
Service Fees
are paid by all customers for the wireless data fee charges required to operate the GPS tracking on the
TAG systems.
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Monthly
Rental Fees
are paid by those customers that rent the TAG system hardware. The amount of a customer’s monthly
payment varies based on the type of equipment rented (a TAG, a TAG and TEXT, or a TAG and TOUCH).
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Advertising
Revenue
is a new source of revenue that we believe has the potential to be strategic for us in the future. We are
in the process of implementing and designing software to provide advertising and other media functionality on our TOUCH units.
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We
recognize revenue when persuasive evidence of an arrangement exists, delivery has occurred, the fee is fixed or determinable,
and collectability is reasonably assured. In instances where final acceptance of the product is specified by the customer, revenue
is deferred until all acceptance criteria have been met. We accrue for warranty costs, sales returns, and other allowances based
on its historical experience.
Our
revenue recognition policies are discussed in more detail under “
Note 2 – Summary of Significant Accounting Policies
”
in the notes to our Condensed Consolidated Financial Statements included in Part I, Item 1 of this Form 10-Q.
Cost
of Revenue
Our
cost of revenue consists primarily of hardware purchases, wireless data fees, mapping, installation costs, freight expenses and
inventory adjustments.
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Hardware
purchases.
Our equipment purchases consist primarily of TAG system control units, TEXT display, and TOUCH display
tablets. The TAG system control unit is sold as a stand-alone unit or in conjunction with our TEXT alphanumeric display or
TOUCH high definition “touch activated” display. Hardware purchases also include costs of components used during
installations, such as cables, mounting solutions, and other miscellaneous equipment.
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Wireless
data fees.
Our wireless data fees consist primarily of the data fees charged by outside providers of GPS tracking
used in all of our TAG system control units.
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Mapping.
Our mapping costs consist of aerial mapping, course map, geofencing, and 3D flyovers for golf courses. This cost is
incurred at the time of hardware installation.
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Installation.
Our installation costs consist primarily of costs incurred by our employed service technicians for the cost of travel,
meals, and miscellaneous components required during installations. In addition, these costs also include fees paid to external
contractors for installations on a project by project basis.
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Freight
expenses and Inventory adjustments.
Our freight expenses consist primarily of costs to ship hardware to courses for
installations. Our inventory adjustments include inventory write offs, write downs, and other adjustments to the cost of inventory.
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●
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Operating
Expenses & Other Income (Expenses)
We classify our operating expenses and other income (expenses) into nine categories:
compensation, research and development, general and administrative, warranty, foreign currency exchange, and finance costs.
Our operating expenses consist primarily of sales and marketing, salaries and wages, consulting fees, professional fees, trade
shows, software development, and allocated costs. Allocated costs include charges for facilities, office expenses, telephones
and other miscellaneous expenses. Our other income (expenses) primarily consists of financing costs and foreign exchange gains
or losses.
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●
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Compensation
expense.
Our compensation expenses consist primarily of personnel costs, such as employee salaries, payroll expenses,
and employee benefits. This includes salaries for management, administration, engineering, sales and marketing, and service
support technicians. Salaries and wages directly related to projects or research and development are expensed as incurred
to their operating expense category.
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●
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Research
and development
. Our research and development expenses consist primarily of personnel costs and professional services
associated with the ongoing development and maintenance of our technology.
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Research
and development expenses include payroll, and other headcount-related expenses associated with product development. Research
and development expenses also include third-party development and programming costs. Such costs related to software development
are included in research and development expense until the point that technological feasibility is reached. Research and development
is expensed and is included in operating expenses.
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●
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General
and administrative
. Our general and administrative expenses consist primarily of sales and marketing, commissions,
travel, trade shows, consultant fees, insurance, and compliance and other administrative functions, as well as accounting
and legal professional services fees, allocated costs and other corporate expenses. Sales and marketing includes brand marketing,
marketing materials, and media management.
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Warranty
expense.
Our warranty expenses consist primarily of associated material product costs, labor costs for technical support
staff, and other associated overhead. Warranty costs are expensed as they are incurred.
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●
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Foreign
currency exchange.
Our foreign currency exchange consists primarily of foreign exchange fluctuations recorded in Canadian
dollar (CAD), British Pounds (GBP), or Euro (EUR) at the rates of exchange in effect when the transaction occurred.
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●
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Finance
costs.
Our finance costs consist primarily of investor interest expense, investor commission fees, and other financing
charges for obtaining debt financing.
|
We
expect to continue to invest in corporate infrastructure and incur additional expenses associated with being a public company,
including increased legal and accounting costs, investor relations costs, higher insurance premiums and compliance costs associated
with Section 404 of the Sarbanes-Oxley Act of 2002. In addition, we expect sales and marketing expenses to increase in absolute
dollars in future periods. In particular, we expect to incur additional marketing costs to support the expansion of our offerings
in new markets like commercial fleet management and agriculture.
Additional
Capital
We
require additional capital to continue to develop software and products, meet our contractual obligations, and execute our business
plan. There can be no assurances that we will be able to raise additional capital on acceptable terms or at all, which would adversely
affect our ability to achieve our business objectives.
Results
of Operations
The
following table summarizes key items of comparison and their related increase (decrease) for the three and nine month periods
September 30, 2018 and 2017:
|
|
Three Months ended
|
|
|
Increase (Decrease)
|
|
|
Nine months ended
|
|
|
Increase (Decrease)
|
|
|
|
30-Sept-18
|
|
|
30-Sept-17
|
|
|
2018 – 2017
|
|
|
30-Sept-18
|
|
|
30-Sept-17
|
|
|
2018 – 2017
|
|
|
|
($)
|
|
|
($)
|
|
|
(%)
|
|
|
($)
|
|
|
($)
|
|
|
(%)
|
|
Revenues
|
|
$
|
708,963
|
|
|
|
303,151
|
|
|
|
133.9
|
%
|
|
$
|
1,056,905
|
|
|
$
|
975,623
|
|
|
|
8.3
|
%
|
Cost of revenue
|
|
|
26,091
|
|
|
|
121,072
|
|
|
|
-78.5
|
%
|
|
|
123,972
|
|
|
|
326,517
|
|
|
|
-62.0
|
%
|
Gross profit
|
|
|
682,872
|
|
|
|
182,079
|
|
|
|
-275.0
|
%
|
|
|
932,933
|
|
|
|
649,106
|
|
|
|
43.7
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Compensation expense
|
|
|
181,737
|
|
|
|
151,383
|
|
|
|
20.1
|
%
|
|
|
599,539
|
|
|
|
571,778
|
|
|
|
4.9
|
%
|
General and administrative expense
|
|
|
341,481
|
|
|
|
299,488
|
|
|
|
14.0
|
%
|
|
|
974,974
|
|
|
|
1,217,183
|
|
|
|
-19.9
|
%
|
Warranty expense
|
|
|
2,179
|
|
|
|
18,354
|
|
|
|
-88.1
|
%
|
|
|
48,452
|
|
|
|
25,716
|
|
|
|
88.4
|
%
|
Bad debt
|
|
|
39,163
|
|
|
|
21,670
|
|
|
|
80.7
|
%
|
|
|
70,155
|
|
|
|
67,047
|
|
|
|
4.6
|
%
|
Depreciation and amortization expense
|
|
|
3,427
|
|
|
|
8,668
|
|
|
|
-60.5
|
%
|
|
|
12,341
|
|
|
|
24,178
|
|
|
|
-49.0
|
%
|
Total operating expenses
|
|
|
567,987
|
|
|
|
499,563
|
|
|
|
13.7
|
%
|
|
|
1,705,461
|
|
|
|
1,905,902
|
|
|
|
-10.5
|
%
|
Income (loss) from operations
|
|
|
114,885
|
|
|
|
(317,484
|
)
|
|
|
-136.2
|
%
|
|
|
(772,528
|
)
|
|
|
(1,256,796
|
)
|
|
|
-38.5
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income (expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency exchange gain
|
|
|
234,109
|
|
|
|
297,333
|
|
|
|
-21.3
|
%
|
|
|
83,897
|
|
|
|
458,279
|
|
|
|
-81.7
|
%
|
Other (expenses) income
|
|
|
-
|
|
|
|
(465
|
)
|
|
|
-100.0
|
%
|
|
|
-
|
|
|
|
(5,884
|
)
|
|
|
-100.0
|
%
|
Change in fair value of derivative liabilities
|
|
|
(120,312
|
)
|
|
|
(134,220
|
)
|
|
|
-10.4
|
%
|
|
|
277,205
|
|
|
|
(42,550
|
)
|
|
|
-751.5
|
%
|
Loss on extinguishment of debt
|
|
|
(4,494,554
|
)
|
|
|
-
|
|
|
|
100.0
|
%
|
|
|
(6,658,785
|
)
|
|
|
-
|
|
|
|
100.0
|
%
|
Finance costs
|
|
|
(728,840
|
)
|
|
|
(439,467
|
)
|
|
|
65.8
|
%
|
|
|
(2,245,908
|
)
|
|
|
(1,109,185
|
)
|
|
|
102.5
|
%
|
Total other expense
|
|
|
(5,109,597
|
)
|
|
|
(276,819
|
)
|
|
|
1745.8
|
%
|
|
|
(8,543,591
|
)
|
|
|
(699,340
|
)
|
|
|
1121.7
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for income taxes expense (benefit)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
%
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
%
|
Net loss
|
|
|
(4,994,712
|
)
|
|
|
(594,303
|
)
|
|
|
740.4
|
%
|
|
|
(9,316,119
|
)
|
|
|
(1,956,136
|
)
|
|
|
376.3
|
%
|
We
recognized a net loss of $4,994,712 for the three-month period ended September 30, 2018, which was $4,400,409 or 740.4% more than
the net loss of $594,303 for the three-month period ended September 30, 2017. The primary reasons are attributable to the $4,494,554
loss on extinguishment of debt recorded in the current period relating to the conversion and settlement of convertible debt and
$728,840 finance costs on outstanding debt.
We
recognized a net loss of $9,316,119 for the nine-month period ended September 30, 2018, which was $7,359,983 or 376.3% more than
the net loss of $1,956,136 for the nine-month period ended September 30, 2017. The primary reasons are attributable to the $6,658,785
loss on extinguishment of debt recorded in the current period relating to the conversion and settlement of convertible debt and
$2,245,908 finance costs on outstanding debt.
Comparison
of the three and nine months ended September 30, 2018 and 2017:
Revenue
|
|
For the Three Months Ended
September 30,
|
|
|
For the Nine Months Ended
September 30,
|
|
|
|
2018
|
|
|
2017
|
|
|
% Change
|
|
|
2018
|
|
|
2017
|
|
|
% Change
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
708,963
|
|
|
$
|
303,151
|
|
|
|
133.9
|
|
|
$
|
1,056,905
|
|
|
|
975,623
|
|
|
|
8.3
|
|
Revenue
increased by $405,812 or 133.9%, for the three months ended September 30, 2018 as compared to the three months ended September
30, 2017. Revenue increased by $81,282 or 8.3% for the nine months ended September 30, 2018 as compared to the nine months ended
September 30, 2017.
Sales
increased as the result of aggressive marketing and installation of the new infinity suite of products.
Cost
of Revenue
|
|
For the Three Months Ended
September 30,
|
|
|
For the Nine Months Ended
September 30,
|
|
|
|
2018
|
|
|
2017
|
|
|
% Change
|
|
|
2018
|
|
|
2017
|
|
|
% Change
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenue
|
|
$
|
26,091
|
|
|
$
|
121,072
|
|
|
|
(78.5
|
)
|
|
$
|
123,972
|
|
|
$
|
326,517
|
|
|
|
(62.0
|
)
|
Cost
of revenue decreased by $26,091, or 78.5%, for the three months ended September 30, 2018 as compared to the three months September
30, 2017. The table below outlines the differences in detail:
|
|
For the Three Months Ended
|
|
|
|
September 30, 2018
|
|
|
September 30, 2017
|
|
|
Difference
|
|
|
% Difference
|
|
Cost of Goods
|
|
$
|
13,133
|
|
|
$
|
28,400
|
|
|
$
|
(15,267
|
)
|
|
|
(53.8
|
)
|
Mapping & Freight Costs
|
|
|
2,892
|
|
|
|
6,626
|
|
|
|
(3,734
|
)
|
|
|
(56.4
|
)
|
Wireless Fees
|
|
|
10,066
|
|
|
|
85,730
|
|
|
|
(75,664
|
)
|
|
|
(88.3
|
)
|
Other
|
|
|
-
|
|
|
|
316
|
|
|
|
(316
|
)
|
|
|
(100.0
|
)
|
|
|
$
|
26,091
|
|
|
$
|
121,072
|
|
|
$
|
(94,981
|
)
|
|
|
(78.5
|
)
|
For
the three months ended September 30, 2018 as compared to the three months ended September 30, 2017, the overall decrease was due
to manufacturing and supply efficiencies and better negotiated rates with suppliers, specifically the Company’s wireless
carrier.
Cost
of revenue decreased by $202,545, or 62.0%, for the nine months ended September 30, 2018 as compared to the nine months September
30, 2017. The table below outlines the differences in detail:
|
|
For
the Nine Months Ended
|
|
|
|
September
30, 2018
|
|
|
September
30, 2017
|
|
|
Difference
|
|
|
%
Difference
|
|
Cost
of Goods
|
|
$
|
77,703
|
|
|
$
|
88,429
|
|
|
$
|
(10,726
|
)
|
|
|
(12.1
|
)
|
Mapping
& Freight Costs
|
|
|
8,030
|
|
|
|
17,188
|
|
|
|
(9,158
|
)
|
|
|
(53.3
|
)
|
Wireless
Fees
|
|
|
38,239
|
|
|
|
218,923
|
|
|
|
(180,684
|
)
|
|
|
(82.5
|
)
|
Other
|
|
|
-
|
|
|
|
1,977
|
|
|
|
(1,977
|
)
|
|
|
(100.0
|
)
|
|
|
$
|
123,972
|
|
|
$
|
326,517
|
|
|
$
|
(202,545
|
)
|
|
|
(62.0
|
)
|
For
the nine months ended September 30, 2018 as compared to the nine months ended September 30, 2017, the overall decrease was due
to manufacturing and supply efficiencies and better negotiated rates with suppliers, specifically the Company’s wireless
carrier.
Compensation
Expense
|
|
For the Three Months Ended
September 30,
|
|
|
For the Nine Months Ended
September 30,
|
|
|
|
2018
|
|
|
2017
|
|
|
% Change
|
|
|
2018
|
|
|
2017
|
|
|
% Change
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Compensation Expense
|
|
$
|
181,737
|
|
|
$
|
151,383
|
|
|
|
20.1
|
|
|
$
|
599,539
|
|
|
$
|
571,778
|
|
|
|
4.9
|
|
Compensation
expense increased by $30,352, or 20.1%, for the three months ended September 30, 2018 as compared to the three months ended September
30, 2017. Compensation expense increased by $27,761 or 4.9% for the nine months ended September 30, 2018 as compared to the nine
months ended September 30, 2017. The increase in compensation expense was due to more employees in the period.
General
and Administration Expense
General
& administration expense increased by $41,993 or 14.0% for the three months ended September 30, 2018 compared to the three
months ended September 30, 2017. The table below outlines the differences in detail:
|
|
For the Three Months Ended
|
|
|
|
September 30, 2018
|
|
|
September 30, 2017
|
|
|
Difference
|
|
|
% Difference
|
|
Accounting & Legal
|
|
$
|
107,725
|
|
|
$
|
59,169
|
|
|
$
|
48,556
|
|
|
|
82.1
|
|
Marketing & Advertising
|
|
|
13,301
|
|
|
|
32,023
|
|
|
|
(18,722
|
)
|
|
|
(58.5
|
)
|
Subcontractor & Commissions
|
|
|
109,053
|
|
|
|
155,285
|
|
|
|
(46,232
|
)
|
|
|
(29.8
|
)
|
Hardware
|
|
|
10,660
|
|
|
|
5,599
|
|
|
|
5,061
|
|
|
|
90.4
|
|
Office Expense, Rent, Software,
Bank & Credit Card Charges,
Telephone, Travel, & Meals
|
|
|
100,742
|
|
|
|
47,412
|
|
|
|
53,330
|
|
|
|
112.5
|
|
|
|
$
|
341,481
|
|
|
$
|
299,488
|
|
|
$
|
41,993
|
|
|
|
14.0
|
|
For
the three months ended September 30, 2018 as compared to the three months ended September 30, 2017, the overall increase in expenses
is primary related to increases in office expense, rent, software, bank & credit card charges, telephone, travel, & meals
of $53,330 or 112.5% due to additional shipping and travel fees incurred during the period. Accounting and legal increase by $48.556
or 82.1% due to additional legal fees incurred pursuant to new debt agreements. These increases were partially offset by decrease
in subcontractors and commissions of $46,232 or 29.8% due to hiring fewer contract workers.
General
& administration expense decreased by $242,209 or 19.9% for the nine months ended September 30, 2018 compared to the nine
months ended September 30, 2017. The table below outlines the differences in detail:
|
|
For the Nine Months Ended
|
|
|
|
September 30, 2018
|
|
|
September 30, 2017
|
|
|
Difference
|
|
|
% Difference
|
|
Accounting & Legal
|
|
$
|
252,395
|
|
|
$
|
85,096
|
|
|
$
|
167,299
|
|
|
|
196.6
|
|
Marketing & Advertising
|
|
|
33,519
|
|
|
|
630,875
|
|
|
|
(597,356
|
)
|
|
|
(94.7
|
)
|
Subcontractor & Commissions
|
|
|
230,215
|
|
|
|
237,121
|
|
|
|
(6,906
|
)
|
|
|
(2.9
|
)
|
Hardware
|
|
|
47,900
|
|
|
|
6,845
|
|
|
|
41,055
|
|
|
|
599.8
|
|
Office Expense, Rent, Software,
Bank & Credit Card Charges,
Telephone, Travel, & Meals
|
|
|
410,945
|
|
|
|
257,246
|
|
|
|
153,699
|
|
|
|
59.7
|
|
|
|
$
|
974,974
|
|
|
$
|
1,217,183
|
|
|
$
|
(242,209
|
)
|
|
|
(19.9
|
)
|
For
the nine months ended September 30, 2018 as compared to the nine months ended September 30, 2017, the overall decrease in expenses
is primary related to decreases in marketing expenses of $597,356 or 94.7% due to shares issued as compensation for marketing
services in the prior year which were not issued in the current year. This decrease was partially offset by increases in accounting
and legal of $167,299 or 196.6% due to additional legal fees incurred pursuant to new debt agreements. Office expense, rent, software,
bank & credit card charges, telephone, travel, & meals increased by $153,699 or 59.7% due to additional shipping and travel
fees incurred during the period.
Warranty
Expense
|
|
For the Three Months Ended
September 30,
|
|
|
For the Nine Months Ended
September 30,
|
|
|
|
2018
|
|
|
2017
|
|
|
% Change
|
|
|
2018
|
|
|
2017
|
|
|
% Change
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Warranty Expense
|
|
$
|
2,179
|
|
|
$
|
18,354
|
|
|
|
(88.1
|
)
|
|
$
|
48,452
|
|
|
$
|
25,716
|
|
|
|
88.4
|
|
Warranty
expense decreased by $16,175, or 88.1% for the three months ended September 30, 2018 as compared to the three months ended September
30, 2017. Warranty expense increased by $22,736 or 88.4% for the nine month period ended September 30, 2018 as compared to the
nine month period ended September 30, 2017. Warranty expense for the year to date increased primarily due to the replacement of
cables and batteries for multiple clients of which are expected to last for several years.
As
of September 30, 2018, our balance sheet included a reserve of $137,265 for future warranty costs (September 30, 2017 - $122,120).
Foreign
Currency Exchange
|
|
For the Three Months Ended
September 30,
|
|
|
For the Nine Months Ended
September 30,
|
|
|
|
2018
|
|
|
2017
|
|
|
% Change
|
|
|
2018
|
|
|
2017
|
|
|
% Change
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency
exchange (gain) loss
|
|
$
|
(234,109
|
)
|
|
$
|
(297,333
|
)
|
|
|
(21.3
|
)
|
|
$
|
(83,897
|
)
|
|
$
|
(458,279
|
)
|
|
|
(81.7
|
)
|
For
the three months ended September 30, 2018, we recognized a $234,109 gain in foreign currency transaction as compared to $297,333
gain in foreign currency transaction for the three months ended September 30, 2017. The decrease in gain was primarily exchange
rate fluctuations on payables, receivables, and other foreign exchange transactions denominated in currencies other than the functional
currencies of the legal entities in which the transactions are recorded. Foreign currency fluctuations are primarily from the
Canadian Dollar, Euro and British pound.
For
the nine months ended September 30, 2018, we recognized a $83,897 gain in foreign currency transaction as compared to $458,279
gain in foreign currency transaction for the nine months ended September 30, 2017. The decrease in gain was primarily due to exchange
rate fluctuations on payables, receivables, and other foreign exchange transactions denominated in currencies other than the functional
currencies of the legal entities in which the transactions are recorded. Foreign currency fluctuations are primarily from the
Canadian Dollar, Euro and British pound.
Derivative
Expense
|
|
For the Three Months Ended
September 30,
|
|
|
For the Nine Months Ended
September 30,
|
|
|
|
2018
|
|
|
2017
|
|
|
% Change
|
|
|
2018
|
|
|
2017
|
|
|
% Change
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized (gain) loss on derivative
|
|
$
|
120,312
|
|
|
$
|
134,220
|
|
|
|
(10.4
|
)
|
|
$
|
(277,205
|
)
|
|
$
|
42,550
|
|
|
|
(751.5
|
)
|
Derivative
loss decreased by $13,908 or 10.4%, for the three months ended September 30, 2018 as compared to the three months ended September
30, 2017 due to the change in fair value as of September 30, 2017 triggering of unrealized gains on derivative instruments in
the current quarter ending on convertible notes payable. The change in fair value was impacted heavily due to the volatility in
the Company’s stock price.
Derivative
loss decreased by $319,755 to a gain of $277,205 or 751.5%, for the nine months ended September 30, 2018 as compared to the nine
months ended September 30, 2017 due to the change in fair value as of September 30, 2017 triggering of unrealized gains on derivative
instruments in the current quarter ending on convertible notes payable. The change in fair value was impacted heavily due to the
volatility in the Company’s stock price.
Finance
Costs
|
|
For the Three Months Ended
September 30,
|
|
|
For the Nine Months Ended
September 30,
|
|
|
|
2018
|
|
|
2017
|
|
|
% Change
|
|
|
2018
|
|
|
2017
|
|
|
% Change
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Finance costs
|
|
$
|
728,840
|
|
|
$
|
439,467
|
|
|
|
65.8
|
|
|
$
|
2,245,908
|
|
|
$
|
1,109,185
|
|
|
|
102.5
|
|
Finance
costs increased by $289,373 or 65.8%, for the three months ended September 30, 2018 as compared to the three months ended September
30, 2017. Finance costs increased by $1,136,723 or 102.5% for the nine months ended September 30, 2018 as compared to the nine
months ended September 30, 2017. Significant finance costs were incurred in relation to the restructuring work, which resulted
in additional accretion and extinguishment of debt costs.
Net
Loss
|
|
For the Three Months Ended
September 30,
|
|
|
For the Nine Months Ended
September 30,
|
|
|
|
2018
|
|
|
2017
|
|
|
% Change
|
|
|
2018
|
|
|
2017
|
|
|
% Change
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(4,994,712
|
)
|
|
$
|
(594,303
|
)
|
|
|
740.4
|
|
|
$
|
(9,316,119
|
)
|
|
$
|
(1,956,136
|
)
|
|
|
376.3
|
|
As
a result of the above factors, net loss increased by $4,400,409 or 740.4% for the three months ended September 30, 2018 as compared
to the three months ended September 30, 2017. The overall increase was primarily due to the $5,109,597 in other expenses inclusive
of losses on extinguishment of debt of $4,494,554 and finance costs of $728,840. This was partially offset by a foreign currency
gain of $234,109.
As
a result of the above factors, net loss increased by $7,359,983 or 376.3% for the nine month period ended September 30, 2018 as
compared to the nine months ended September 30, 2017. The overall increase was primarily due to the $8,543,591 in other expenses
inclusive of losses on extinguishment of debt of $6,658,785 and finance costs of $2,245,908. This was partially offset by a gain
on change in derivative instruments of $277,205 and foreign currency gain of $83,897.
Liquidity
and Capital Resources
From
our incorporation in April 17, 2008 through September 30, 2018, we have financed our operations, capital expenditures and working
capital needs through the sale of common shares and the incurrence of indebtedness, including term loans, convertible loans, revolving
lines of credit and purchase order financing. At September 30, 2018, we had $9,690,238 in outstanding liabilities, which all matures
within the next twelve months.
We
had cash in the amount of $55,166 as of September 30, 2018, as compared to $5,488 as of December 31, 2017. We had a working capital
deficit of $7,207,275 as of September 30, 2018 compared to working capital deficit of $8,487,059 as of December 31, 2017.
Liquidity
and Financial Condition
Our
financial position as of September 30, 2018 and December 31, 2017, and the changes for the periods then ended are as follows:
Working
Capital
|
|
At September 30, 2018
|
|
|
At December 31, 2017
|
|
Current Assets
|
|
$
|
700,502
|
|
|
$
|
59,542
|
|
Current Liabilities
|
|
$
|
7,907,777
|
|
|
$
|
8,546,601
|
|
Working Capital
|
|
$
|
(7,207,275
|
)
|
|
$
|
(8,487,059
|
)
|
Cash
Flow Analysis
Our
cash flows from operating, investing, and financing activities are summarized as follows:
|
|
September 30,
|
|
|
|
2018
|
|
|
2017
|
|
|
|
|
|
|
|
|
Net cash (used in) provided by operating activities
|
|
$
|
(1,124,073
|
)
|
|
$
|
(344,342
|
)
|
Net cash (used in) provided by investing activities
|
|
|
(2,670
|
)
|
|
|
-
|
|
Net cash provided by financing activities
|
|
|
1,328,659
|
|
|
|
766,434
|
|
Net (decrease) increase in cash
|
|
|
201,916
|
|
|
|
422,092
|
|
Effect of exchange rate changes on cash and cash equivalents
|
|
|
(152,238
|
)
|
|
|
(413,124
|
)
|
Cash at beginning of period
|
|
|
5,488
|
|
|
|
-
|
|
Cash at end of period
|
|
$
|
55,166
|
|
|
$
|
8,968
|
|
Net
Cash (Used in) Provided by Operating Activities
. During the nine months ended September 30, 2018, cash used in operations
totaled $1,124,073. This reflects the net loss of $9,316,119 less amounts provided by changes in operating assets and liabilities
and adjustments for non-cash items. Cash provided by working capital and adjustments for non-cash items was primarily impacted
by adjustments from fair valuing derivative liabilities of $277,205, a loss on extinguishment of debt of $6,658,785, and accretion
of discounts on convertible debt totaling $1,416,573.
Net
Cash (Used in) Provided by Investing Activities
. Investing activities reduced cash by $2,670 in the nine months ended
September 30, 2018, related to the purchase of property, plant and equipment and intangible assets, and decreased cash by $nil
for the nine months ended September 30, 2017.
Net
Cash (Used in) Provided by Financing Activities
. Net cash from financing activities during the nine months ended September
30, 2018 totaled $1,328,659, primarily from various note and loan facilities entered during the period and from proceeds for the
issuance of shares. Net cash provided by financing activities during the nine months ended September 30, 2017 was $766,434 from
various note and loan facilities entered during the period and from proceeds for the issuance of shares.
Outstanding
Indebtedness
Our
current indebtedness as of September 30, 2018 is comprised of the following. For loans that have expired terms, we are in talks
with the lenders to extend them. The Company must increase revenue or raise more equity capital to meet the payment obligations.
Our
current indebtedness as of September 30, 2018 is comprised of the following:
|
●
|
Unsecured
loan payable in the amount of $193,125 bearing interest at 15% per annum and due on demand;
|
|
|
|
|
|
|
●
|
Unsecured
loan payable in the amount of $317,500 bearing interest at 18% per annum;
|
|
|
|
|
|
|
●
|
Unsecured
note payable in the amount of $47,244, bearing interest at 36% per annum, matured and in default;
|
|
|
|
|
|
|
●
|
Unsecured
loan payable in the amount of $250,000, bearing interest at 10% per annum, with a minimum interest amount of $25,000, mature
and in default;
|
|
|
|
|
|
|
●
|
Unsecured
loan payable in the amount of $250,000, bearing interest at 10% per annum, is due on demand, and convertible into common shares
at $1.75 per share;
|
|
|
|
|
|
|
●
|
Unsecured,
convertible note payable to related party in the amount of $310,000, bearing interest at 5% per annum, mature and in default;
|
|
|
|
|
|
|
●
|
Senior
secured, convertible note payable in the amount of $245,889 interest 8% per annum. Repayable in cash or common shares at the
lower of (i) twelve cents ($0.12) and (ii) the closing sales price of the Common Stock on the date of conversion;
|
|
|
|
|
|
|
●
|
Unsecured,
convertible note payable in the amount of $81,470 interest 10% per annum. Matures on July 17, 2018. Principal is repayable
in cash or common shares at the lower of (i) nine cents ($0.06) (ii) 55% of the lowest trading price during the 20 Trading
Days immediately preceding the date of conversion;
|
|
|
|
|
|
|
●
|
Unsecured,
convertible promissory note in the principal amount of up to $900,000, bears interest at 12% per annum, is convertible into
common shares after 180 days from issuance date at a conversion price equal to the lessor of (i) the lowest trading price
during the previous fifteen trading days prior to the date of the promissory note; or (ii) 55% of the lowest trading price
during the previous fifteen days prior to the latest complete trading day prior to the conversion date. As at September 30,
2018, the Company has received $665,000 from the note. $300,000 was due on September 19, 2018 and was assigned to another
lender along with accrued interest on August 31, 2018. $166,667 is due on November 3, 2018 and $198,333 is due on November
3, 2018. Interest will be accrued and payable at the time of promissory note repayment;
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Unsecured,
convertible note payable in the amount of $14,408, bears interest 10% per annum and matures on March 2, 2019. Principal is
repayable in cash or common shares at the lower of (i) three cents ($0.03) and (ii) lowest Trading Price during the previous
twenty five (25) Trading Day period ending on the latest complete Trading Day prior to the Conversion Date;
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Unsecured,
convertible promissory note in the principal amount of $103,000, bears interest at 10% per annum, is due on March 2, 2019,
and is convertible into common shares at a conversion price equal to 55% of the lowest trading price during the previous fifteen
trading days prior to the conversion date, including the conversion date. Interest will be accrued and payable at the time
of promissory note repayment;
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Unsecured,
convertible note payable in the principal amount of $51,500, bears interest at 10% per annum, is due on February 8, 2019,
and is convertible into common shares at a conversion price equal to the lower of (i) 32% discount off of the lowest intra-day
trading price during previous (10) trading days immediately preceding a conversion date;
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Unsecured,
convertible note payable in the principal amount of $180,000, bears interest at 10% per annum, is due on February 28, 2019,
and is convertible into common shares at a conversion price equal to the lower of (i) 32% discount off of the lowest intra-day
trading price during previous (15) trading days immediately preceding a conversion date;
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Unsecured,
convertible note payable in the principal amount of $140,401, bears interest 10% per annum, is due on August 2, 2018, and
is convertible into common shares at a conversion price equal to the lower of (i) lowest trading price during previous (25)
trading days prior to the date of note or (ii) lowest trading price during previous (25) trading days prior to the date of
conversion;
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Unsecured,
convertible promissory note in the principal amount of $226,000, bears interest at 12% per annum, is due on August 31, 2019,
and is convertible into common shares at a conversion price equal to 55% of the lowest trading price during the previous fifteen
trading days prior to the conversion date, including the conversion date. Interest will be accrued and payable at the time
of promissory note repayment;
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Unsecured
loan payable in the amount of $88,065 matured and in default; and
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Unsecured,
convertible note payable in the principal amount of $315,878, bears interest 12% per annum, is due on demand, and is convertible
into common shares at a conversion price equal to the lower of (i) the lowest trading price during the previous fifteen trading
days prior to the date of the promissory note; or (ii) 55% of the lowest trading price during the previous fifteen days prior
to the latest complete trading day prior to the conversion date.
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Preferred
Stock Redemption Obligations
Westergaard
Holdings Ltd. (“Westergaard”), an affiliate of Keith Westergaard, a former member of our board of directors, owns
4,229,384 shares (the “Series A Shares”) of Series A Convertible Preferred Stock of DSG TAG Systems. Pursuant to a
Subscription / Debt Settlement Agreement dated September 26, 2014 between DSG TAG Systems and Westergaard, as amended on April
29, 2016, DSG TAG Systems has agreed that DSG Global, Inc. will complete financings for gross proceeds of at least $10 million
and use a portion of the proceeds to redeem all of the Series A Shares at a price of $1.25 per share, as follows:
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On
or before August 1, 2016, we must complete a financing for gross proceeds of at least $2.5 million and use at least $1.125
million to redeem a minimum of 900,000 Series A Shares;
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On
or before September 1, 2016, we must complete an additional financing for gross proceeds of at least $2.5 million and use
at least $1.125 million to redeem a minimum of 900,000 additional Series A Shares; and
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On
or before October 1, 2016, we must complete an additional financing for gross proceeds of at least $5.0 million and use at
least $3.14 million to redeem the remaining 2,509,384 Series A Shares.
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If
we fail to satisfy the above described financing and share redemption schedule, we will be in default of the subscription and
Debt Settlement Agreement which would entitle the holder of the Preferred Shares to convert the Series A Convertible Preferred
Shares into common shares in the capital of DSG Global at the price of $1.25 per share. As of the date of this report, these commitments
have not been satisfied and we are currently negotiating an extension on the terms of this agreement.
As
described in Note 10 above, on August 27, 2018, pursuant to a debt exchange agreement, the Company exchanged all 4,229,384 issued
and outstanding DSG TAG Series A Shares with a fair value of $5,873,481 ($7,627,303 CDN), 51 and 3,000,000 shares of Series B
and Series E preferred shares, respectively.
Related
party transactions
As
at September 30, 2018, we owed $119,692 ($154,952 CDN) (December 31, 2017 - $205,963 ($258,381 CDN)) to our President, CEO, and
CFO for management fees, which has been recorded in accounts payable and accrued liabilities. The amounts owed, and owing are
unsecured, non-interest bearing, and due on demand. During the nine months ended September 30, 2018 the Company paid or accrued
$150,000 ($194,175 CDN) in management fees to the President, CEO, and CFO of the Company.
As
at September 30, 2018, we owed $13,480 ($17,450 CDN) (December 31, 2017 - $4,273 ($27,950 CDN)) to a Company controlled by the
son of our President, CEO, and CFO. The balance owing has been recorded in accounts payable and accrued liabilities. The amount
owing is unsecured, non-interest bearing, and due on demand.
Prospective
Capital Needs
We
estimate our operating expenses and working capital requirements for the twelve-month period to be as follows:
Estimated Expenses for the Twelve-Month Period ending September 30, 2019
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Management compensation
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$
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500,000
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Professional fees
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$
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150,000
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General and administrative
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$
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1,900,000
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Total
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$
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2,550,000
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During
the nine months ended September 30, 2018, cash used in operations totaled $1,276,311. The relatively low level of cash used compared
to our estimated working capital needs in the future was the result of an accumulation of vendor payables, customer receivables,
and an increasing loan payable balance. We need to reduce the current level of payables in the near future to keep a good relationship
with our vendors and expand our sales and service team to achieve our operational objectives. At present, our cash requirements
for the next 12 months outweigh the funds available. Of the $2,550,000 that we require for the next 12 months, we had $55,166
in cash as of September 30, 2018, and a working capital deficit of $7,207,275. Our principal sources of liquidity are cash generated
from product sales and debt financings. In order to achieve sustained profitability and positive cash flows from operations, we
will need to increase revenue and/or reduce operating expenses. Our ability to maintain, or increase, current revenue levels to
achieve and sustain profitability will depend, in part, on demand for our products.
In
order to improve our liquidity, we also plan to pursue additional equity financing from private investors or possibly a registered
public offering. We do not currently have any definitive arrangements in place for the completion of any further private placement
financings and there is no assurance that we will be successful in completing any further private placement financings. To help
finance our day to day working capital needs, the founder and CEO of the company has made a total payment of $113,475 since late
2015. If we are unable to achieve the necessary additional financing, then we plan to reduce the amounts that we spend on our
business activities and administrative expenses in order to be within the amount of capital resources obligations, and execute
our business plan. There can be no assurances that we will be able to raise additional capital on acceptable terms or at all,
which would adversely affect our ability to achieve our business objectives.
Off-Balance
Sheet Transactions
We
do not have any off-balance sheet arrangements.
Critical
Accounting Policies and Estimates
We
prepare our consolidated financial statements in accordance with U.S. GAAP. The preparation of consolidated financial statements
also requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue, costs and
expenses, and related disclosures. We base our estimates on historical experience and on various other assumptions that we believe
to be reasonable under the circumstances. Actual results could differ significantly from the estimates made by our management.
To the extent that there are differences between our estimates and actual results, our future financial statements presentation,
financial condition, results of operations, and cash flows will be affected.
We
believe that the assumptions and estimates associated with revenue recognition, foreign currency and foreign currency transactions
and comprehensive loss have the greatest potential impact on our consolidated financial statements. Therefore, we consider these
to be our critical accounting policies and estimates. For further information on all of our significant accounting policies, see
the notes to our condensed consolidated financial statements.