NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
THREE MONTHS ENDED MARCH 31, 2019
(Unaudited)
GLOBAL DIGITAL SOLUTIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 – DESCRIPTION OF BUSINESS
We were
incorporated in New Jersey as Creative Beauty Supply, Inc.
(“Creative”) in August 1995. In March 2004, Creative
acquired Global Digital Solutions, Inc., a Delaware corporation
("Global”). The merger was treated as a recapitalization of
Global, and Creative changed its name to Global Digital Solutions,
Inc. (“the Company”, “we”), Global provided
structured cabling design, installation and maintenance for leading
information technology companies, federal, state and local
government, major businesses, educational institutions, and
telecommunication companies. On May 1, 2012, we made the decision
to wind down our operations in the telecommunications area and to
refocus our efforts in the area of cyber arms technology and
complementary security and technology solutions. From August 2012
through November 2013 we were actively involved in managing
Airtronic USA, Inc., and effective as of June 16, 2014 we acquired
North American Custom Specialty Vehicles (“NACSV”). In
July 2014, we announced the formation of GDSI International (f/k/a
Global Digital Solutions, LLC) to spearhead our efforts overseas.
The Company has been dormant since December 31, 2015. The Company
had limited operations from the NACSV subsidiary from December 31,
2015 until May 13, 2016. During the interim, the Company was
pursuing acquisition opportunities and responding to the litigation
with the Securities and Exchange Commission. Subsequent to May 13,
2016, the Company has been seeking acquisitions and additional
financing.
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, 2019, incurred a net loss of $344,587
and used net cash of $252,922 to fund operating activities. At
March 31, 2019, we had cash of $126,796, an accumulated deficit of
$36,006,409 of a working capital deficit of $4,339,456, and
stockholders’ deficit of $4,336,074 We have funded our
activities to date almost exclusively from equity and debt
financings.
Our
cash position is critically deficient, and payments essential to
our ability to operate are not being made in the ordinary course.
Failure to raise capital in the coming days to fund our operations
and failure to generate positive cash flow to fund such operations
in the future will have a material adverse effect on our financial
condition. These factors raise substantial doubt about our ability
to continue as a going concern.
We
need to raise additional funds immediately and continue to raise
funds until we begin to generate sufficient cash from operations,
and we may not be able to obtain the necessary financing on
acceptable terms, or at all.
We
will continue to require substantial funds to continue development
of our core business. Management’s plans in order to meet our
operating cash flow requirements include financing activities such
as private placements of common stock, and issuances of debt and
convertible debt instruments, and the establishment of strategic
relationships which we expect will lead to the generation of
additional revenue or acquisition opportunities.
While we believe that we will be successful in
obtaining the necessary financing to fund our operations, there are
no assurances that such additional funding will be achieved or that
we will succeed in our future operations.
Our
independent registered public accounting firm has expressed
substantial doubt about our ability to continue as a going concern
as a result of our history of net losses. Our ability to achieve
and maintain profitability and positive cash flow is dependent upon
our ability to successfully execute the plans to pursue
acquisitions and raise the funds necessary to complete such
acquisitions. The outcome of these matters cannot be predicted at
this time. The consolidated financial statements do not include any
adjustments relating to the recoverability and classification of
recorded asset amounts or the amounts and classification of
liabilities that might be necessary should we be unable to continue
as a going concern.
Basis of Presentation
The
accompanying unaudited financial information as of and for the
three months ended March 31, 2019 and 2018 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, 2019 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, 2018 included in our Annual Report on Form 10-K
filed with the SEC on June 18, 2019.
The
condensed consolidated balance sheet at December 31, 2018 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.
Principles of Consolidation
The
accompanying consolidated financial statements include the accounts
of the Company and our wholly owned subsidiaries, NACSV, GDSI
Florida, LLC and Global Digital Solutions, LLC, dba GDSI
International. All intercompany accounts and transactions have been
eliminated in consolidation.
Use of Estimates
The
preparation of financial statements in conformity with generally
accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of
assets, liabilities, equity-based transactions and disclosure of
contingent liabilities at the date of the financial statements and
revenues and expenses during the reporting period. Actual results
could differ from those estimates.
The
Company believes the following critical accounting policies affect
its more significant judgments and estimates used in the
preparation of the financial statements. Significant estimates
include the derivative liability valuation, deferred tax asset and
valuation allowance, and assumptions used in Black-Scholes-Merton,
or BSM, or other valuation methods, such as expected volatility,
risk-free interest rate, and expected dividend rate.
Income Taxes
Income
taxes are accounted for based upon an asset and liability approach.
Accordingly, deferred tax assets and liabilities arise from the
difference between the tax basis of an asset or liability and its
reported amount in the financial statements. Deferred tax amounts
are determined using the tax rates expected to be in effect when
the taxes will actually be paid or refunds received, as provided
under currently enacted tax law. Valuation allowances are
established when necessary to reduce deferred tax assets to the
amount expected to be realized. Income tax expense or benefit is
the tax payable or refundable, respectively, for the period plus or
minus the change in deferred tax assets and liabilities during the
period.
Accounting guidance
requires the recognition of a financial statement benefit of a tax
position only after determining that the relevant tax authority
would more likely than not sustain the position following an audit.
For tax positions meeting the more-likely-than-not threshold, the
amount recognized in the financial statements is the largest
benefit that has a greater than fifty percent likelihood of being
realized upon ultimate settlement with the relevant tax authority.
The Company believes its income tax filing positions and deductions
will be sustained upon examination and accordingly, no reserves, or
related accruals for interest and penalties have been recorded at
March 31, 2019 and December 31, 2018.. The Company recognizes
interest and penalties on unrecognized tax benefits as well as
interest received from favorable tax settlements within income tax
expense.
Cash and Cash Equivalents
We
consider all highly liquid investments with original maturities of
three months or less to be cash equivalents.
We maintain our cash in
high-quality financial institutions. The balances, at times, may
exceed federally insured limits.
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. The Company utilizes market data or
assumptions that market participants would use in pricing the asset
or liability, including assumptions about risk and the risks
inherent in the inputs to the valuation technique. These inputs can
be readily observable, market corroborated, or generally
unobservable. ASC 820 establishes a fair value hierarchy that
prioritizes the inputs used to measure fair value. The hierarchy
gives the highest priority to unadjusted quoted prices in active
markets for identical assets or liabilities (level 1 measurement)
and the lowest priority to unobservable inputs (level 3
measurement). This fair value measurement framework applies at both
initial and subsequent measurement.
The
three levels of the fair value hierarchy defined by ASC 820 are as
follows:
|
●
|
Level 1
– Quoted prices in active markets for identical assets or
liabilities
|
|
●
|
Level 2
–Quoted prices for similar assets or liabilities in active
markets, quoted prices for identical or similar assets or
liabilities in markets that are not active, or other inputs that
are observable, either directly or indirectly
|
|
●
|
Level 3
– Significant unobservable inputs that cannot be corroborated
by market data.
|
Derivative Financial Instruments
We
account for conversion options embedded in convertible notes
payable in accordance with the Financial Accounting Standards Board
(“FASB”) Accounting Standard Codification
(“ASC’) 815,
“Derivatives and Hedging”
.
Subtopic ASC 815-15,
Embedded
Derivatives
generally requires companies to bifurcate
conversion options embedded in the convertible notes from their
host instruments and to account for them as free standing
derivative financial instruments. Derivative liabilities are
recognized in the consolidated balance sheet at fair value as
Derivative Liabilities
and
based on the criteria specified in FASB ASC 815-40,
Derivatives and Hedging – Contracts in
Entity’s own Equity
. The estimated fair value of the
derivative liabilities is calculated using various assumptions and
such estimates are revalued at each balance sheet date, with
changes recorded to other income or expense as
Change in fair value of derivative
liability
in the condensed consolidated statement of
operations. The classification of derivative instruments, including
whether such instruments should be recorded as liabilities or
equity, is evaluated at the instrument origination date and
reviewed at the end of each event date (i.e. conversions, payments,
etc.) and the measurement period end date for financial reporting,
as applicable.
Earnings (Loss) Per Share (“EPS”)
Basic
EPS is computed by dividing net income (loss) by the weighted
average number of shares of common stock outstanding. Diluted EPS
includes the effect from potential issuance of common stock, such
as stock issuable pursuant to the exercise of stock options and
warrants and the assumed conversion of convertible
notes.
The
following table summarizes the securities that were excluded from
the diluted per share calculation because the effect of including
these potential shares was antidilutive:
|
|
Three Months
Ended
March 31,
1,
|
|
|
|
|
|
|
|
|
|
Convertible
notes
|
163,700,000
|
33,715,247
|
|
Preferred
stock
|
214,560,000
|
206,861,415
|
|
Stock
options
|
13,650,002
|
13,650,002
|
|
Warrants
|
10,500,000
|
1,500,000
|
|
Potentially
dilutive securities
|
402,410,002
|
255,726,664
|
Stock Based Compensation
In
accordance with ASC 718, "Compensation – Stock
Compensation” the Company measures the cost of employee
services received in exchange for share-based compensation measured
at the grant date fair value of the award.
The
Company’s accounting policy for equity instruments issued to
advisors, consultants and vendors in exchange for goods and
services follows the provisions of FASB ASC 505-50
.
The measurement date for the fair
value of the equity instruments issued is determined at the earlier
of (i) the date at which a commitment for performance by the
advisor, consultant or vendor is reached or (ii) the date at which
the advisor, consultant or vendor’s performance is complete.
In the case of equity instruments issued to advisors and
consultants, the fair value of the equity instrument is recognized
over the term of the advisor or consulting agreement. Stock-based
compensation related to non-employees is accounted for based on the
fair value of the related stock or options or the fair value of the
services, whichever is more readily determinable.
Convertible Instruments
The
Company evaluates and accounts for conversion options embedded in
its convertible instruments in accordance with accounting standards
for “Accounting for Derivative Instruments and Hedging
Activities.”
Accounting
standards generally provides three criteria that, if met, require
companies to bifurcate conversion options from their host
instruments and account for them as free standing derivative
financial instruments. These three criteria include circumstances
in which (a) the economic characteristics and risks of the embedded
derivative instrument are not clearly and closely related to the
economic characteristics and risks of the host contract, (b) the
hybrid instrument that embodies both the embedded derivative
instrument and the host contract is not re-measured at fair value
under otherwise applicable generally accepted accounting principles
with changes in fair value reported in earnings as they occur, and
(c) a separate instrument with the same terms as the embedded
derivative instrument would be considered a derivative instrument.
accounting standards also provide an exception to this rule when
the host instrument is deemed to be conventional as defined under
professional standards as “The Meaning of Conventional
Convertible Debt Instrument.”
The
Company accounts for convertible instruments (when it has
determined that the embedded conversion options should not be
bifurcated from their host instruments) in accordance with
professional standards when “Accounting for Convertible
Securities with Beneficial Conversion Features,” as those
professional standards pertain to “Certain Convertible
Instruments.” Accordingly, the Company records, when
necessary, discounts to convertible notes for the intrinsic value
of conversion options embedded in debt instruments based upon the
differences between the fair value of the underlying common stock
at the commitment date of the note transaction and the effective
conversion price embedded in the note. Original issue discounts
(“OID”) under these arrangements are amortized over the
term of the related debt to their earliest date of redemption. The
Company also records when necessary deemed dividends for the
intrinsic value of conversion options embedded in preferred shares
based upon the differences between the fair value of the underlying
common stock at the commitment date of the note transaction and the
effective conversion price embedded in the note.
ASC
815-40 provides that, among other things, generally, if an event is
not within the entity’s control could or require net cash
settlement, then the contract shall be classified as an asset or a
liability.
Convertible Securities
Based
upon ASC 815-15, we have adopted a sequencing approach regarding
the application of ASC 815-40 to convertible securities. We will
evaluate our contracts based upon the earliest issuance date. In
the event partial reclassification of contracts subject to ASC
815-40-25 is necessary, due to our inability to demonstrate we have
sufficient shares authorized and unissued, shares will be allocated
on the basis of issuance date, with the earliest issuance date
receiving first allocation of shares. If a reclassification of an
instrument were required, it would result in the instrument issued
latest being reclassified first.
Recent Accounting Pronouncements
In
February 2016, the FASB issued ASU No. 2016-02,
Leases: Topic
842. This standard
requires all leases that have a term of over 12 months to be
recognized on the balance sheet with the liability for lease
payments and the corresponding right-of-use asset initially
measured at the present value of amounts expected to be paid over
the term. Recognition of the costs of these leases on the income
statement will be dependent upon their classification as either an
operating or a financing lease. Costs of an operating lease will
continue to be recognized as a single operating expense on a
straight-line basis over the lease term. Costs for a financing
lease will be disaggregated and recognized as both an operating
expense (for the amortization of the right-of-use asset) and
interest expense (for interest on the lease liability). This
standard was adopted for our interim and annual periods beginning
January 1, 2019 and applied on a modified retrospective basis to
leases existing at, or entered into after, the beginning of the
earliest comparative period presented in the financial statements.
The Company has evaluated the timing of adoption and the potential
impact of this standard on our financial position, and we do not
expect it to have a material impact on our financial position or
results of operations.
NOTE 3 – ACCRUED EXPENSES
Accrued
expenses consist of the following amounts:
|
|
|
|
|
Accrued
compensation to executive officers
|
$
587,273
|
$
572,437
|
|
Accrued
professional fees and settlements
|
177,226
|
196,663
|
|
Accrued
Interest
|
176,453
|
148,533
|
|
Total accrued
expenses
|
$
940,952
|
$
917,633
|
NOTE 4 – FAIR VALUE MEASUREMENTS
We had
no Level 1 or Level 2 assets and liabilities at March 31, 2019 and
December 31, 2018. 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, 2019
and 2018:
|
Derivative
Liability
|
|
|
|
Balance
at beginning of year
|
$
562,175
|
$
382,948
|
|
Additions
|
455,153
|
0.00
|
|
Settlements
|
(53,992
)
|
(28,995
)
|
|
Change
in fair value
|
(225,051
)
|
(156,045
)
|
|
Balance
at end of year
|
$
738,285
|
$
197,908
|
Embedded Derivative Liabilities of Convertible Notes
At
March 31,2019 the fair value of the bifurcated embedded derivative
liabilities of convertible notes was estimated using the following
weighted-average inputs: risk free interest rate –%; term
-1.0 years; volatility –%; dividend rate – 0%. At
December 31, 2018, the fair value of the bifurcated embedded
derivative liabilities of convertible notes was estimated using the
following weighted-average inputs: risk free interest rate- 1.39%%;
term - .25 years; volatility – 246.62%; dividend rate –
0%.
NOTE 5 – NOTE PAYABLE
Notes Payable
During
August 2017, Dragon Acquisitions, a related entity owned by William
Delgado, a related party, 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 note. The
Company defaulted on the note at maturity in August 2018. The
$20,000 note remained outstanding March 31, 2019 and through the
date of this report.
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 (VOX), a related
party. 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 VOX when the Resolution Progress Funding was met on December 22,
2017. As part of the agreement, VOX 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 –
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●
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$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.
|
Under
the terms of the VOX note consulting agreement (Note 6), any unpaid
consulting fees subsequent to December 2017 causes a default on the
note with unpaid consulting fees to be added to the principal of
the note. During the year ended December 31, 2018, consulting fees
totaling $100,000 were added to the note principal and are included
in the note balance at March 31, 2018. The notes had a balance of
$584,000 and $484,000 as of March 31, 2018 and 2017, respectively.
Through the date of this report, monthly consulting fees have not
been repaid and continue to be added to the principal balance of
the note. The note remains in default however VOX has voluntarily
refrained from making demand prior to the Resolution Funding Date.
VOX was granted a first priority security interest in the
Litigation Proceeds and is pari passu to Parabellum and Vox. To
that end, they share in the litigation in a priority position to
proceed to repay the note.
During
April 2018, the Company entered into an Investment Return Purchase
Agreement with an accredited investor (the “Purchaser”)
for proceeds of $50,000 (the “Investment Agreement”).
The $50,000 proceeds were paid directly to Bill Delgado to
reimburse expenses incurred on behalf of the Company. Under the
terms of the Investment Agreement, the Company agreed to pay the
Purchaser the $50,000 proceeds plus a 50% return, or $25,000 (the
“Investment Return”) within seven (7) months from the
date of the Investment Agreement. In addition, the Company agreed
to issue to the Purchaser 1,000,000 warrants to purchase common
stock of the Company at an exercise price of $0.01 per share,
exercisable for a period of five (5) years. The warrants were
valued using the Black Scholes Merton model, resulting in a fair
value of $9,000 which were recorded as a discount on the note. The
key valuation assumptions used consist, in part, of the price of
the Company’s common stock of $0.009 at issuance date; a
risk-free interest rate of 2.60% and estimated volatility of the
Company’s common stock of 235%. During November 2018, the
Company defaulted on the Investment Agreement. As of March 31,
2019, the $50,000 principal and $25,000 Investment Return remained
outstanding. During May 2019, the Company and the Purchaser amended
the Investment Agreement, as detailed in Note 10.
During
June 2018, the Company entered in to a one-year $300,000
non-convertible note with an accredited investor with $150,000
original issue discount (“OID”) 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, exercisable for a period of three (3) years. The warrants
were valued using the Black Scholes Merton model, resulting in a
fair value of $35,000 of which $28,378 was recorded as a discount
on the note. The key valuation assumptions used consist, in part,
of the price of the Company’s common stock of $0.008 at
issuance date; a risk-free interest rate of 2.62% and estimated
volatility of the Company’s common stock of 218%. At March
31, 2019, the $300,000 note remained outstanding. The Company
defaulted on the note at maturity in June 2019 and the note
remained outstanding through the date of this report. The note
contains a default interest rate of 10% plus a 5% penalty of the
outstanding balance of the note. The note holder has voluntarily
refrained from making demand for repayment under the default
provisions of the note, which would require the Company to pay the
holder 130% of the outstanding principal and interest accrued at
the default rate.
The
June 2018 note bears a personal guarantee by William Delgado, the
Chief Executive Officer of the Company. As further security for the
note, Mr. Delgado has also pledged the 1,000,000 Convertible
Preferred Shares of the Company that he owns, as well as 5,000,000
common shares of SHMP, another public company in which Mr. Delgado
is a director and Chief Financial Officer.
On
January 21, 2019 the Company entered into a Convertible Promissory
Note with Crown Bridge Partners, LLC., in the principal amount of
$75,000. The note carries original issue discount of $7,500 The
Principal amount with interest at 12% will be due in twelve months
from the advance. The Principal amount will be advanced in Tranches
of $25,000 each. The note is convertible into shares of The
Company’s common stock. The conversion price shall equal the
lessor of (i) Current Market price or (ii) Variable Market price as
defined as Market Price less a 45% discount price. In addition, the
Company agreed to issue to Crown Bridge Partners 3,750,000 warrants
to purchase common stock of the Company at an exercise price of
$0.01 per share, exercisable for a period of five (5) years. As of
the issuance date of these financial statements, $25,000 has been
received and remains outstanding.
For
other obligations, please see the Form 10K for the year ending
December 31, 2018 filed with the Securities and Exchange Commission
on June 18, 2019.
On
February 26, 2019, the Company entered into a 10% Convertible
Promissory Note with Tangiers Global LLC. in the principal amount
of $55,000 due on February 26, 220. The note is convertible into
shares of the Company’s common stock. The conversion price
shall equal 55% of the lowest trading price of the Company’s
common stock during the 20 consecutive trading days prior to the
date on which the holder elects to convert part of all of the note.
As of the issuance date of these financial statements, the note
remains outstanding.
On
March 7, 2019, the Company and Power Up Lending Group entered into
a security purchase agreement for a 10% Convertible Note in the
aggregate principal of $58,000 due on March 7, 2020. The note is
convertible into shares of common stock of the Company. The
conversion price is equal to the Variable Conversion price which is
defined as 61% of the Market Price for the lowest two trading dates
during a fifteen-day trading period ending on the latest complete
trading date prior to the Conversion date. As of the issuance date
of these financial statements, the note remains
outstanding.
NOTE 6 – COMMITMENTS AND CONTINGENCIES
Acquisition of HarmAlarm
On
March 1, 2019, the Company entered into a purchase agreement with
HarmAlarm, a company specializing in patented Aviation Technology.
The Company will leave 5,200,000 shares of its common stock in
exchange for the assets of HarmAlarm. Additionally, the Company
will pay 49.1% of any profits generated subsequently by the assets
to the former owner of HarmAlarm. As of the issuance date of these
financial statements, the shares have not been issued and no assets
have been received by the Company.
On
March 1, 2019, the Company entered into a consulting agreement with
the former owner of HarmAlarm. The agreement commenced on March 1,
2019 and shall continue for a period of thirty-six (36) months. The
agreement may only be terminated by either incapacitation or death
of consultant or for cause with ten (10) days written notice.
During the term of the agreement consultant will be paid at a rate
of $5,000 per month.
Management believes
that the HarmAlarm transaction is expected to close and shares are
expected to issue on or before August 1, 2019.
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.
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. The Company
believes the likelihood of an unfavorable outcome of the dispute is
remote.
Jeff Hull, Individually and on Behalf of All Others Similarly
Situated v. Global Digital Solutions, Inc., Richard J. Sullivan,
David A. Loppert, William J. Delgado, Arthur F. Noterman and
Stephanie C. Sullivan United States District Court, District of New
Jersey (Trenton), Case No. 3:16-cv-05153-FLW-TJB
On
August 24, 2016, Jeff Hull, Individually and on Behalf of All
Others Similarly Situated (“Hull”) filed suit in the
United States District Court for
the District of New Jersey
against Global Digital Solutions,
Inc. (“GDSI”), Richard J. Sullivan
(“Sullivan”), David A. Loppert (“Loppert”),
William J. Delgado (“Delgado”), Arthur F. Noterman
(“Noterman”) and Stephanie C. Sullivan
(“Stephanie Sullivan”) seeking to recover compensable
damages caused by Defendants’ alleged violations of federal
securities laws and to pursue remedies under the Securities
Exchange Act of 1934. On January 18, 2018, pursuant to the
Court’s December 19, 2017 Order granting Plaintiff Hull leave
to file an amended Complaint, Plaintiff Hull filed a Second Amended
Complaint against Defendants. On February 8, 2018, Defendants GDSI
and Delgado filed a Second Motion to Dismiss the Complaint. On
February 8, 2018, Defendant Loppert filed a Motion for Extension of
Time to File an Answer. On February 13, 2018, Defendant Loppert
filed a Motion to Dismiss the Second Amended Complaint for Lack of
(personal) Jurisdiction and for Failure to State a Claim. On
February 20, 2018, Plaintiff Michael Perry (“Perry”)
filed a Brief in Opposition to Defendants GDSI and Delgado’s
Second Motion to Dismiss the Complaint and to Defendant
Loppert’s Motion to Dismiss the Second Amended Complaint for
Lack of (personal) Jurisdiction and for Failure to State a Claim.
On February 26, 2018, Defendants GDSI and Delgado filed a Reply
Brief to Plaintiff Michael Perry’s Brief in Opposition to
their Motion to Dismiss the Second Amended Complaint. On February
26, 2018, Defendant Loppert filed a Response in Support of
Defendants GDSI and Delgado’s Second Motion to Dismiss the
Complaint. On March 12, 2018, Defendant Loppert filed a Reply Brief
to Plaintiff Perry’s Brief in Opposition to Defendant
Loppert’s Motion to Dismiss the Second Amended Complaint for
Lack of (personal) Jurisdiction and for Failure to State a Claim.
To date, the Court has not issued a decision as to aforementioned
Motions. Global Digital Solutions, Inc. and William J. Delgado
intend to continue to vigorously defend against the claims asserted
by Jeff Hull, Individually and on Behalf of All Others Similarly
Situated. The Company believes the likelihood of an unfavorable
outcome of the dispute is remote.
Securities and Exchange Commission v. Global Digital Solutions,
Inc., Richard J. Sullivan and David A. Loppert United States
District Court for the Southern District of Florida, Case No.
9:16-cv-81413-RLR
On
August 11, 2016, the Securities and Exchange Commission
(“SEC”) filed suit in the
United States District Court for the Southern
District of Florida
against Global Digital Solutions, Inc.
(“GDSI”), Richard J. Sullivan (“Sullivan”)
and David A. Loppert (“Loppert”) to enjoin GDSI;
Sullivan, GDSI’s former Chairman and CEO; and Loppert,
GDSI’s former CFO from alleged further violations of the
anti-fraud and reporting provisions of the federal securities laws,
and against Sullivan and Loppert from alleged further violations of
the certification provisions of the federal securities
laws.
On
October 12, 2016, Defendant GDSI filed its First Answer to the
Complaint. On November 9, 2016, Defendant Sullivan filed a Letter
with the Court denying all allegations regarding the case. On
December 15, 2016, the SEC filed a Motion for Judgment and Notice
of Filing of Consent of Defendant Loppert to entry of Final
Judgment by the SEC. On December 19, 2016, the Court entered an
order granting the SEC’s Motion for Judgment as to Defendant
Loppert. On December 21, 2016, the SEC filed a Notice of Settlement
as entered into by it and Defendants GDSI and Sullivan. On December
23, 2016, the Court entered an Order staying the case and directing
the Clerk of the Court to close the case for statistical purposes
per the December 21, 2016 Notice of Settlement. On March 7, 2017,
the SEC moved for a Judgment of Permanent Injunction and Other
Relief and Notice of Filing Consent of Defendant GDSI to Entry of
Judgment by the SEC. On March 13, 2017, the Judge signed the
Judgment as to Defendant GDSI and it was entered on the
Court’s docket. On April 6, 2017, the SEC moved for a final
Judgment of Permanent Injunction and Other Relief and Notice of
Filing Consent of Defendant Sullivan. On April 10, 2017, the Judge
signed the final Judgment as to Defendant Sullivan and it was
entered on the Court’s docket. On December 21, 2017, the SEC
moved for a final Judgment and Notice of Filing Consent of
Defendant GDSI to Entry of Final Judgment. On January 2, 2018, the
Judge signed the Final Judgment as to Defendant GDSI and it was
entered on the Court’s docket. The amount of the judgement is
One Hundred Thousand Dollars ($100,000.00) plus interest, which is
included in accrued expenses in the accompanying condensed
consolidated balance sheet.
Adrian Lopez, Derivatively and on behalf of Global Digital
Solutions, Inc. v. William J. Delgado, Richard J. Sullivan, David
A. Loppert, Jerome J. Gomolski, Stephanie C. Sullivan, Arthur F.
Noterman, and Stephen L. Norris United States District Court for
the District of New Jersey, Case No.
3:17-cv-03468-PGS-LHG
On
September 19, 2016, Adrian Lopez, derivatively, and on behalf of
Global Digital Solutions, Inc., filed an action in New Jersey
Superior Court sitting Mercer County, General Equity Division. That
action was administratively dismissed for failure to prosecute.
Plaintiff Lopez, through his counsel, filed a motion to reinstate
the matter on the general equity calendar on or about February 10,
2017. The Court granted the motion unopposed on or about April 16,
2017. On May 15, 2017, Defendant William Delgado
(“Delgado”) filed a Notice of Removal of Case No.
C-70-16 from the
Mercer County
Superior Court of New Jersey
to the
United States District Court for the District
of New Jersey
. On May 19, 2017, Defendant Delgado filed a
First Motion to Dismiss for Lack of Jurisdiction. On May 20, 2017,
Defendant David A. Loppert (“Loppert”) filed a Motion
to Dismiss for Lack of (Personal) Jurisdiction. On June 14, 2017,
Plaintiff Adrian Lopez (“Lopez”) filed a First Motion
to Remand the Action back to State Court. On June 29, 2017,
Defendant Delgado filed a Memorandum of Law in Response and Reply
to the Memorandum of Law in Support of Plaintiff’s Motion to
Remand and in Response to Defendants’ Delgado’s and
Loppert’s Motions to Dismiss. On January 1, 16, 2018, a
Memorandum and Order granting Plaintiff’s Motion to Remand
the case back to the
Mercer County
Superior Court of New Jersey
was signed by the Judge and
entered on the Docket. Defendants Delgado and Loppert’s
Motions to Dismiss were denied as moot. On February 2, 2018,
Defendants filed a Motion to Dismiss the Complaint. On February 20,
2018, Plaintiff filed a Motion to Consolidate Cases. On March 21,
2018, Plaintiff filed an Opposition to Defendants’ Motion to
Dismiss the Complaint. On March 23, 2018, Defendants filed a Brief
in Reply to Plaintiff’s Opposition to Defendants’
Motion to Dismiss the Complaint. The Court held a hearing on the
motions to dismiss and consolidate. Jurisdictional discovery was
ordered. As of this date, the Court has not issued a decision and
Order regarding Defendants’ Motion to Dismiss the Complaint.
The Company believes the likelihood of an unfavorable outcome of
the dispute is remote.
Adrian Lopez v. Global Digital Solutions, Inc. and William J.
Delgado Superior Court of New Jersey, Chancery Division, Mercer
County, Equity Part, Docket No. MER-L-002126-17
On
September 28, 2017, Plaintiff Adrian Lopez (“Lopez”)
brought an action against Global Digital Solutions, Inc.
(“GDSI”) and William J. Delgado (“Delgado”)
to compel a meeting of the stockholders of Global Digital
Solutions, Inc. pursuant to Section 2.02 of GDSI’s Bylaws and
New Jersey Revised Statute § 14A:5-2. On October 27, 2017,
Defendants GDSI and Delgado filed a Motion to Stay the Proceeding.
On November 24, 2017, Plaintiff filed an Objection to
Defendants’ Motion to Stay the Proceeding.
On January 19, 2018,
Defendants’ Motion to Stay the Proceeding was denied. On
February 2, 2018, Defendants filed a Motion to Dismiss the
Complaint. On February 20, 2018, Plaintiff filed a Motion to
Consolidate Cases. On March 21, 2018, Plaintiff filed an Opposition
to Defendants’ Motion to Dismiss the Complaint. On March 23,
2018, Defendants filed a Brief in Reply to Plaintiff’s
Opposition to Defendants’ Motion to Dismiss the Complaint. As
of this date, the Court has not issued a decision and Order
regarding Defendants’ Motion to Dismiss the Complaint. The
Company believes the likelihood of an unfavorable outcome of the
dispute is remote.
In the Matter of GLOBAL DIGITAL SOLUTIONS, INC., ADMINISTRATIVE
PROCEEDING File No. 3-18325. Administrative Proceeding Before the
Securities and Exchange Commission.
On
December 26, 2017, the Securities and Exchange Commission
instituted public administrative proceedings pursuant to Section
12(j) of the Securities Exchange Act of 1934 (“Exchange
Act”) against the Respondent Global Digital Solutions, Inc.
On January 8, 2018, Respondent Global Digital Solutions, Inc.
(“GDSI”) filed its answer to the allegations contained
in the Order Instituting Administrative Proceedings and Notice of
Hearing Pursuant to Section 12U) of the Exchange Act. A briefing
schedule was entered into and on February 15, 2018, the Securities
and Exchange Commission filed a motion for an order of summary
disposition against Respondent GDSI on the grounds that there is no
genuine issue with regard to any material fact, the Division was
entitled as a matter of law to an order revoking each class of
GDSI's securities registered pursuant to Section 12 of the Exchange
Act. Respondent GDSI opposed the Securities and Exchange
Commission’s motion on the grounds that there were material
issues of fact. The Securities and Exchange Commission replied and
a hearing was held on April 9, 2018. The Administrative Law Judge
ordered supplemental evidence and briefing on the issues of
material fact. The Company believes the likelihood of an
unfavorable outcome of the dispute is reasonably possible but is
not able to reasonably estimate a range of potential loss, should
the outcome be unfavorable.
PMB HELIN DONOVAN, LLP vs. GLOBAL DIGITAL SOLUTIONS, INC. IN THE
CIRCUIT COURT FOR THE 15TH JUDICIAL CIRCUIT 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
($40,000.00) of which the first payment of Ten Thousand Dollars
($10,000.00) has been paid on May 16, 2018. The $40,000 is included
in accounts payable as of December 31, 2017 and $30,000 at December
31, 2018. The Company defaulted on this Agreement. A judgment has
been entered against the Company for the full amount due and
owing.
JENNIFER CARROLL, vs. GLOBAL DIGITAL SOLUTIONS, INC., NORTH
AMERICAN CUSTOM SPECIALTY VEHICLES, INC., IN THE CIRCUIT COURT
FOR THE 15TH JUDICIAL CIRCUIT in AND FOR PALM BEACH COUNTY,
FLORIDA, CASE NO.: 50-2015-CC-012942-XXXX-MB
On
October 27, 2017, Plaintiff Jennifer Carroll the former President
of NACSV, moved the court for a default judgment against Defendant
Global Digital Solutions, Inc. (“GDSI”) and its
subsidiary North American Custom Specialty Vehicles Inc. The amount
of the judgement is Fifteen Thousand Dollars ($15,000.00) plus fees
of Thirteen Thousand Three Hundred Fifty Three Dollars Forty Four
Cents ($13,353.44) and costs of six hundred twenty four dollars
thirty cents ($624.30). The Company defaulted on this Agreement. A
judgment has been entered against the Company for the full amount
due and owing.
Consulting agreements
The
Company entered into two consulting agreements (See Note 5) in May
2016, for services to be provided in connection towards the
resolution of the Rontan lawsuit (below). The consulting agreements
includes a monthly retainer payment of$10,000 to each consultant.
The agreement also includes consideration of 5,000,000 shares of
restricted common stock of the Company, plus a 5% cash
consideration of the Resolution Progress Funding, (defined as upon
the retention of legal counsel and receipt of 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.
Share Purchase and Sale Agreement for Acquisition of Grupo Rontan
Electro Metalurgica, S.A.
Effective October
13, 2015, the Company (as “Purchaser”) entered into the
SPSA dated October 8, 2015 with Joao Alberto Bolzan and Jose Carlos
Bolzan, both Brazilian residents (collectively, the
“Sellers”) and Grupo Rontan Electro Metalurgica, S.A.,
a limited liability company duly organized and existing under the
laws of Federative Republic of Brazil (“Rontan”)
(collectively, the “Parties”), pursuant to which the
Sellers agreed to sell 100% of the issued and outstanding shares of
Rontan to the Purchaser on the closing date.
The
purchase price shall consist of a cash amount, a stock amount and
an earn-out amount as follows: (i) Brazilian Real (“R”)
$100 million (approximately US$26 million) to be paid by the
Purchaser in equal monthly installments over a period of forty
eight (48) months following the closing date; (ii) an aggregate of
R$100 million (approximately US$26 million) in shares of the
Purchaser’s common stock, valued at US$1.00 per share; and
(iii) an earn-out payable within ten business days following
receipt by the Purchaser of Rontan’s audited financial
statements for the 12-months ended December 31, 2017, 2018 and
2019. The earn-out shall be equal to the product of (i)
Rontan’s earnings before interest, taxes, depreciation and
amortization (“EBITDA”) for the last 12 months, and
(ii) twenty percent and is contingent upon Rontan’s EBITDA
results for any earn-out period being at least 125% of
Rontan’s EBITDA for the 12-months ended December 31, 2015. It
is the intention of the parties that the stock amount will be used
by Rontan to repay institutional debt outstanding as of the closing
date.
Under
the terms of a Finders Fees Agreement dated April 14, 2014, we have
agreed to pay RLT Consulting Inc., a related party, a fee of 2%
(two percent) of the Transaction Value, as defined in the
agreement, of Rontan upon closing. The fee is payable one-half in
cash and one-half in shares of our common stock.
Specific conditions
to closing consist of:
a)
Purchaser’s
receipt of written limited assurance of an unqualified opinion with
respect to Rontan’s audited financial statements for the
years ended December 31, 2013 and 2014 (the
“Opinion”);
b)
The
commitment of sufficient investment by General American Capital
Partners LLC (the “Institutional Investor”), in the
Purchaser following receipt of the Opinion;
c)
The
accuracy of each Parties’ representations and warranties
contained in the SPSA;
d)
The
continued operation of Rontan’s business in the ordinary
course;
e)
The
maintenance of all of Rontan’s bank credit lines in the
maximum amount of R$200 million (approximately US$52 million) under
the same terms and conditions originally agreed with any such
financial institutions, and the maintenance of all other types of
funding arrangements. As of the date of the SPSA, Rontan’s
financial institution debt consists of not more than R$200 million
(approximately US$52 million), trade debt of not more than R$50
million (approximately US$13 million) and other fiscal
contingencies of not more that R$95 million (approximately US$24.7
million);
f)
Rontan
shall enter into employment or consulting service agreements with
key employees and advisors identified by the Purchaser, including
Rontan’s Chief Executive Officer; and
g)
The
Sellers continued guarantee of Rontan’s bank debt for a
period of 90 days following issuance of the Opinion, among other
items.
The
Institutional Investor has committed to invest sufficient capital
to facilitate the transaction, subject to receipt of the Opinion,
as well as the ability to acquire 100% of the outstanding stock of
Rontan at a price of $200 million BR, and the Company can acquire
100% of all real estate held by Rontan.
Subject
to satisfaction or waiver of the conditions precedent provided for
in the SPSA, the closing date of the transaction shall take place
within 10 business days from the date of issuance of the
Opinion.
Rontan
is engaged in the manufacture and distribution of specialty
vehicles and acoustic/visual signaling equipment for the industrial
and automotive markets.
Subsequent to
December 31, 2015, on April 1, 2016, we believed that we had
satisfied or otherwise waived the conditions to closing (as
disclosed under the SPSA, the closing was subject to specific
conditions to closing, which were waivable by us,) and advised the
Sellers of our intention to close the SPSA and demanded delivery of
the Rontan Securities. The Sellers, however, notified us that they
intend to terminate the SPSA. We believe that the Sellers had no
right to terminate the SPSA and that notice of termination by the
Sellers was not permitted under the terms of the SPSA.
On
January 31, 2018, we announced that we initiated a lawsuit for
damages against Grupo Rontan Metalurgica, S. A,
(“Rontan”) and that company’s controlling
shareholders, Joao Alberto Bolzan and Jose Carlos Bolzan. The
action has been filed in the United States District Court for the
Southern District of Florida. The complaint alleges that Rontan is
wholly-owned by Joao Bolzan and Jose Bolzan. In the complaint, we
further allege that Rontan and its shareholders improperly
terminated a Share Purchase and Sale Agreement (the
“SPA”) by which we were to acquire whole ownership of
Rontan.
On
February 5, 2018, United States District Court Southern District of
Florida filed a Pretrial Scheduling Order and Order Referring Case
to Mediation dated February 5, 2018 for the Company’s lawsuit
against Grupo Rontan Electro Metalurgica, S.A., et al. The Case No.
is 18-80106-Civ-Middlebrooks/Brannon. The court has issued a
schedule outlining various documents and responses that are to be
delivered by the parties as part of the discovery
plan.
On
April 25, 2018, the Note of Filing Proposed Summons was completed
by the Company. On April 26, 2018, a summons was issued to Grupo
Rontan Electro Metalurgica, S.A. Also, on May 15, 2018, the Company
filed a motion for Issuance of Letters Rogatory.
On or
about January 31, 2019, Defendants filed a Motion to Dismiss for
Failure to State a Claim for failure to fulfill conditions
precedent in the consummation of the contract in question.
Defendants filed a Motion to Dismiss challenging jurisdiction,
venue, and
forum
nonconvenes
. On or about May 21, 2019, the Court denied
their motions to dismiss for lack of personal jurisdiction,
improper venue and
forum
nonconvenes
. The court granted their Motion to Dismiss for
Failure to State a Claim for failure to fulfill conditions
precedent in the consummation of the contract in question, but
granted leave to amend. On or about June 7, 2019, counsel filed an
amended complaint. On or about June 21, 2019, defendants answered
the amended complaint. The litigation moved from the pleading stage
to discovery. Trial is scheduled for December 9, 2019.
NOTE 7 – STOCKHOLDERS’ EQUITY
Preferred Stock
We are
authorized to issue 35,000,000 shares of noncumulative, non-voting,
nonconvertible preferred stock, $0.001 par value per share. At
March 31, 2019 and 2018, 1,000,000 shares of preferred stock were
outstanding.
On
August 15, 2016, William J. Delgado, our current Chief Executive
Officer, agreed to convert $231,565 of indebtedness owed to him by
the Company into 1,000,000 shares of convertible preferred stock
(the “Preferred Stock”). The Preferred Stock has voting
rights as to one (1) preferred share to four hundred (400) shares
of the common stock of the Company. The Preferred Stock is
convertible into common stock at any time after issuance into 37%
of the outstanding common stock of the Company at the time of the
conversion. The conversion to common can only take place when there
are an adequate number of shares that are available and is subject
to normal stock adjustments (i.e. stock splits etc.) that are
executed by the Company in its normal course of
business.
Common Stock
We are
authorized to issue 2,000,000,000 shares of common stock, $0.001
par value per share. At March 31,2019 and December 31, 2018,
604,900,814 and 579,900,814 shares were issued, outstanding, or
vested but unissued under stock compensation plans,
respectively.
On
January 31, 2019, the Company increased its authorized common
shares to 2,000,000,000.
On
February 11, 2019, the Company entered into an agreement for the
purchase of common stock with Mared Management LLC. Under the terms
of the agreement the purchaser purchased 25,000,000 shares of
common stock for $250,000. The purchaser also received warrants to
purchase 6,250,000 shares of GDSI common stock at $.01/share.
Warrants will have a three-year term to exercise.
Common Stock Warrant
We have
issued warrants, which are fully vested and available for exercise,
as follows:
|
Class of Warrant
|
|
Issued in connection with or for
|
|
Number outstanding
|
|
Exercise Price
|
|
Date of Issue
|
|
Date Vest
|
|
Date of Expiration
|
|
A-5
|
|
Financing
|
|
1,000,000
|
|
$ 0.01
|
|
April 3, 2018
|
|
April 3, 2018
|
|
April 3, 2023
|
|
A-6
|
|
Financing
|
|
2,000,000
|
|
$ 0.01
|
|
May 15, 2018
|
|
May 15, 2018
|
|
May 15, 2021
|
|
A-7
|
|
Financing
|
|
5,000,000
|
|
$ 0.01
|
|
June 1, 2018
|
|
June 1, 2018
|
|
June 1, 2021
|
|
A-8
|
|
Financing
|
|
2,500,000
|
|
$ 0.0069
|
|
Nov. 2, 2018
|
|
Nov. 2, 2018
|
|
Nov. 2, 2023
|
|
A-9
|
|
Financing
|
|
3,750,000
|
|
$0.01
|
|
Jan.
21, 2019
|
|
Jan.
21, 2019
|
|
Jan.
21, 2024
|
|
|
|
|
|
14,250,000
|
|
|
|
|
|
|
|
|
All
warrants are exercisable at any time through the date of
expiration. All agreements provide for the number of shares to be
adjusted in the event of a stock split, a reverse stock split, a
share exchange or other conversion or exchange event in which case
the number of warrants and the exercise price of the warrants shall
be adjusted on a proportional basis. The warrants expired
unexercised on the dates of expiration, as shown
above.
The
following is a summary of outstanding and exercisable warrants at
March 31,2019
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
0.01
|
1,000,000
|
4.26
|
$
0.01
|
1,000,000
|
$
0.01
|
|
$
0.01
|
2,000,000
|
2.37
|
$
0.01
|
2,000,000
|
$
0.01
|
|
$
0.01
|
5,000,000
|
2.40
|
$
0.01
|
5,000,000
|
$
0.01
|
|
$
0.0069
|
2,500,000
|
4.85
|
$
0.0069
|
2,500,000
|
$
0.0069
|
|
$
0.01
|
3,750,000
|
5
|
$
0.01
|
3,750,000
|
$
0.01
|
|
$
0.0069 to 0.01
|
14,250,000
|
3.17
|
$
0.0093
|
10,500,000
|
$
0.0093
|
The
following is a summary of outstanding and exercisable warrants at
December 31, 2018
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
0.01
|
1,000,000
|
4.26
|
$
0.01
|
1,000,000
|
$
0.01
|
|
$
0.01
|
2,000,000
|
2.37
|
$
0.01
|
2,000,000
|
$
0.01
|
|
$
0.01
|
5,000,000
|
2.40
|
$
0.01
|
5,000,000
|
$
0.01
|
|
$
0.0069
|
2,500,000
|
4.85
|
$
0.0069
|
2,500,000
|
$
0.0069
|
|
$
0.0069 to 0.01
|
10,250,000
|
3.17
|
$
0.0093
|
10,500,000
|
$
0.0093
|
The
intrinsic value of warrants outstanding at March 31, 2019 and
December 31, 2018 was $0. Aggregate intrinsic value represents the
value of the Company’s closing stock price on the last
trading day of the fiscal period in excess of the exercise price of
the warrant multiplied by the number of warrants outstanding or
exercisable.
Stock Incentive Plans
2014 Global Digital Solutions Equity Incentive Plan
On May
9, 2014 our shareholders approved the 2014 Global Digital Solutions
Equity Incentive Plan (“Plan”) and reserved 20,000,000
shares of our common stock for issuance pursuant to awards
thereunder, including options, stock appreciation right, restricted
stock, restricted stock units, performance awards, dividend
equivalents, or other stock-based awards. The Plan is intended as
an incentive, to retain in the employ of the Company, our
directors, officers, employees, consultants and advisors, and to
attract new officers, employees, directors, consultants and
advisors whose services are considered valuable, to encourage the
sense of proprietorship and to stimulate the active interest of
such persons in the development and financial success of the
Company and its subsidiaries.
In
accordance with the ACS 718,
Compensation – Stock
Compensation
, awards granted are valued at fair value at the
grant date. The Company recognizes compensation expense on a pro
rata straight-line basis over the requisite service period for
stock-based compensation awards with both graded and cliff vesting
terms. The Company recognizes the cumulative effect of a change in
the number of awards expected to vest in compensation expense in
the period of change. The Company has not capitalized any portion
of its stock-based compensation.
There
was not any stock based compensation in the three month period
ended March 31,2019.
Awards Issued Under Stock Incentive Plans
Stock Option Activity
At
March 31,2019 and December 31, 2018, and we have outstanding
13,650,002 stock options - all of which are fully-vested stock
options that were granted to directors, officers and consultants.
The outstanding stock options are exercisable at prices ranging
from $0.006 to $0.64 and expire between February 2024 and December
2025, for an average exercise price per share of $0.60 and an
average remaining term of 7.5 years as of December 31,
2018.
During 2016
1,449,998 unvested stock options were either forfeited due to
employees leaving the Company or cancelled by the Board due to
performance levels not being met. Any compensation amount
previously recognized on the straight-line basis relating to the
unvested stock options were reversed in the period of cancellation
or forfeiture. The remaining 533,334 options vested during the year
ended December 31, 2016. There were no options granted, exercised,
or forfeited during the Three Months ended March 31, 2019 and
2018.
During
the three month period ended March 31, 2019 and the year ended
December 31, 2018 we did not recognize any stock-based
compensation cost related to the outstanding stock options. The
intrinsic value of options outstanding at March 31, 2019 and
December 31, 2018 was $0. Aggregate intrinsic value represents the
value of the Company’s closing stock price on the last
trading day of the fiscal period in excess of the exercise price of
the option multiplied by the number of options
outstanding.
Restricted Stock Units
On
October 10, 2014 we granted an employee 1 million RSU’s
convertible into 1 million shares of the Company’s common
stock, with a grant date fair market value of $100,000. The grant
was made under our 2014 Equity Incentive Plan. 333,333 RSU’s
will vest in respect of each calendar year (commencing January 1
and ending December 31) of the Company from 2015 through 2017 if
the Company has achieved at least 90% of the total revenue and
EBITDA midpoint targets set forth in the agreement. If less than
90% of the target is achieved in respect of any such fiscal year,
then the number of RSU’s vesting for that fiscal year shall
be 333,333 times the applicable percentage set forth in the
agreement;
provided that,
if the company shall exceed 100% of the revenue and EBITDA midpoint
target for the 2018 or 2017 calendar year, and shall have failed to
reach 90% of the target for a prior calendar year, the excess over
100% shall be applied to reduce the deficiency in the prior
year(s), and an additional number of RSU’s shall vest to
reflect the increased revenue for such prior calendar year. Any
such excess shall be applied first to reduce any deficiency for the
2015 calendar year and then for the 2016 calendar year. The vesting
of the RSU’s shall be effective upon the issuance of the
audited financial statements of the Company for the applicable
calendar year and shall be based upon the total revenue and EBITDA
of the acquired companies as reflected in such financial
statements.
NOTE 8 – INCOME TAXES
As
of March 31, 2019, , the Company had $12,495,620 of federal net
operating loss carry forwards. These carry forwards, if not used,
will begin to expire in 2028. Current or future ownership changes,
including issuances of common stock under the terms of the
Company’s convertible notes payable that were entered into
during 2015 and the closing of the Rontan Transaction may severely
limit the future realization of these net operating
losses.
The
Company provides for a valuation allowance when it is more likely
than not that they will not realize a portion of the deferred tax
assets. The Company has established a valuation allowance against
their net deferred tax asset due to the uncertainty that enough
taxable income will be generated in those taxing jurisdictions to
utilize the assets. Therefore, they have not reflected any benefit
of such deferred tax assets in the accompanying financial
statements. The Company’s net deferred tax asset and
valuation allowance increased by $62,000the three month period
ending ended March 31, 2019, related to the current period
activity.
The
Company has reviewed all income tax positions taken or that are
expected to be taken for all open years and determined that their
income tax positions are appropriately stated and supported for all
open years. The Company is subject to U.S. federal income tax
examinations by tax authorities for years after 2011 due to
unexpired net operating loss carryforwards originating in and
subsequent to that year. The Company may be subject to income tax
examinations for the various taxing authorities which vary by
jurisdiction.
The
Company’s policy is to record interest and penalties
associated with unrecognized tax benefits as additional income
taxes in the consolidated statements of operations. As of March 31,
2019, there were no unrecognized tax benefits, or any tax related
interest or penalties.
The
Company files income tax returns in the U.S. federal jurisdiction
and the various states in which they operate. The former members of
NACSV are required to file separate federal and state tax returns
for NACSV for the periods prior to our acquisition of NACSV. The
Company files consolidated tax returns for subsequent periods. The
Company has not filed their U.S. federal and certain state tax
returns since 2014 and currently do not have any examinations
ongoing. Tax returns for the years 2012 onwards are subject to
federal, state or local examinations.
NOTE 9 – RELATED PARTY TRANSACTIONS
During
August 2017, Dragon Acquisitions, a related entity owned by William
Delgado, a related party, 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 note. The
Company defaulted on the note at maturity in August 2018. The
$20,000 note remained outstanding March 31, 2019 and through the
date of this report.
On December 26, 2017 (the “effective date”), the
Company entered into a $485,000, 7% interest rate, demand
promissory note with RLT Consulting, Inc. (RLT), a related party.
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 RLT when the Resolution Progress Funding was met on December 22,
2017. As part of the agreement, RLT 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.
Under
the terms of the RLT note consulting agreement (Note 6), any unpaid
consulting fees subsequent to December 2017 causes a default on the
note with unpaid consulting fees to be added to the principal of
the note. During the year ended December 31, 2018, consulting fees
totaling $100,000 were added to the note principal and are included
in the note balance at December 31, 2018. The notes had a balance
of $584,000 as of March 31, 2019 and December 31, 2018,
respectively. Through the date of this report, monthly consulting
fees have not been repaid. The note remains in default however RLT
has voluntarily refrained from making demand prior to the
Resolution Funding Date. RLT was granted a first priority security
interest in the Litigation Proceeds and is pari passu to Parabellum
and Vox. To that end, they share in the litigation in a priority
position to proceed to repay the note.
The
June 2018 note bears a personal guarantee by William Delgado, the
Chief Executive Officer of the Company. As further security for the
note, Mr. Delgado has also pledged the 1,000,000 Convertible
Preferred Shares of the Company that he owns, as well as 5,000,000
common shares of SHMP, another public company in which Mr. Delgado
is a director and Chief Financial Officer.
Accounts Payable
At March 31,2019, and December 31, 2018 included in
accounts payable was compensation owed to related parties as seen
below
|
|
|
|
|
RLT
Consulting
|
$
30,000
|
$
33,841
|
|
Jerome
Gomolski
|
25,000
|
25,000
|
|
Charter
804CS
|
20,099
|
20,099
|
|
Gary
Gray
|
12,000
|
12,000
|
|
Total
|
$
90,940
|
$
90,940
|
Accrued Compensation
At
March 31, 2019 and December 31, 2018, we had $483,781 and $482,431
payable to William J. Delgado and $70,335 and $65,835 to Jerome
Gomolski, respectively.
|
|
|
|
|
|
|
|
|
|
|
Balance
12/31/2018
|
$
548,266
|
$
482,431
|
$
-65,835
|
|
|
|
|
|
|
2019
Salary
|
$
72,500
|
$
60,000
|
$
12,500
|
|
Payments
|
$
(66,650
)
|
$
(58,650
) )
|
$
(8,000
)
|
|
|
|
|
|
|
Balance
3/31/2019
|
$
554,611
|
$
483,781
|
$
70,335
|
NOTE 10 – SUBSEQUENT EVENTS
On May
10, 2019, the Company and GHS Investments LLC entered into a
security agreement for a 10% Convertible Note in the aggregate
principal of $335,000 due on February 10, 2020. The note carries
original issue discount or $35,000. The note is convertible into
shares of common stock of the Company. The “Conversion
Price” shall mean 60% multiplied by the Market Price (as
defined herein), representing a discount rate of 40%. “Market
Price” means the lowest Traded Price for the Common Stock
during the twenty (20) Trading Day period ending on the latest
complete Trading Day prior to the Conversion Date. The Company is
required to maintain a common share reserve of not less that three
times the number of shares that is actually issuable upon full
conversion of the note. The purchaser will also receive warrants to
purchase 5,000,000 shares of GDSI common stock at $.01/share.
Warrants will have a three-year term to exercise. The Convertible
Note is personally guaranteed by William Delgado, CEO. As of the
issuance date of these financial statements, the note remains
outstanding.
In May
2019 the Company sold 3,513,888 of common stock shares for $35,138
to three individual investors.
On May
28, 2019, the Company amended the March 28, 2018 $50,000 note
payable. The Company agreed to increase the holder's return by
$25,000 to $50,000 and repaid the original $50,000 principal in May
2019. Additionally, the holder is to receive 1,000,000 additional
common stock warrants under the same terms as the original March
2018 warrants and the holder will receive $15,000 in common stock
at a 20% discount to the closing price on the date the $50,000
holder's return is paid. As of the issuance date of these financial
statements, the warrants and common stock have not been issued and
the $50,000 holder's return remains outstanding.