NOTES
TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
NINE
MONTHS ENDED September 30, 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 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 Nine Months ended, September 30, 2019,
incurred a net loss of $ 1,848,568
and used net cash of $ 1,249,720 to fund operating activities. At
September 30, 2019 we had a working deficit of $ 5,072,867, and
stockholders’ deficit of $5,046,585.
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 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 nine months ended
September 30, 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 nine months ended
September 30, 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 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, and Harm
Alarm. 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 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
September 30, 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:
|
|
|
|
|
|
|
|
|
|
|
Convertible
notes and accrued interest
|
55,661,577
|
31,057,446
|
Preferred
Stock
|
214,560,000
|
208,371,015
|
Stock
options
|
13,650,002
|
13,650,002
|
Warrants
|
1,500,000
|
8,000,000
|
Potentially
dilutive securities
|
285,371,579
|
261,078,463
|
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 adoption
resulted in no material impact on our financial position or results
of operations.
NOTE
3 – ACCRUED EXPENSES
|
|
|
|
|
|
Accrued
compensation to executive officers and emoloyees
|
$226,442
|
$572,437
|
Accrued
professional fees and settlements
|
274,029
|
196,663
|
Accrued
interest
|
205,809
|
148,533
|
|
$706,280
|
$917,633
|
NOTE
4 – FAIR VALUE MEASUREMENTS
We had no Level 1
or Level 2 assets and liabilities at September 30, 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 nine months
ended September 30, 2019 and
2018:
Derivative Liability
|
|
|
Balance
at beginning of period
|
$562,175
|
$382,948
|
Change
in fair value
|
(311,575)
|
(133,411)
|
Additions
|
750,000
|
0
|
Reclassification
to equity
|
(459,400)
|
(117,854)
|
Balance
at end of period
|
$541,200
|
$131,683
|
Embedded Derivative Liabilities of Convertible Notes
At September 30,
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
On December
22, 2017, the Company entered into a financing agreement with an
accredited investor for $1.2 million. Under the terms of the
agreement, the Company is to receive milestone payments based on
the progress of the Company’s lawsuit for damages against
Grupo Rontan Metalurgica, S.A (the “Lawsuit”). Such
milestone payments consist of (i) an initial purchase price payment
of $300,000, which the Company received on December 22, 2017 (ii)
$150,000 within 30 days of the Lawsuit surviving a motion to
dismiss on the primary claims; (iii) $100,000 within 30 days of the
close of all discovery in the Lawsuit; and (iv) $650,000 within 30
days of the Lawsuit surviving a motion for summary judgment and
challenges on the primary claims. As part of the agreement, the
Company shall pay the investor an investment return of 100% of the
litigation proceeds to recoup all money invested, plus 27.5% of the
total litigation proceeds received by the Company. As of September
30, 2019, $1,200,000 has been received.
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 at September 30, 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).
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 –
●
$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 September 30, 2019 and 2018, 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.
On
December 23, 2017 (the “effective date”), the Company
entered into a $485,000, 7% interest rate, demand promissory note
with RLT (Consulting), 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 March 31, 2018. The notes had a balance of $584,000
and $484,000 as of September 30, 2019 and 2018, 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 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 RLT. 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 September 30,
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%. The Company defaulted on the
note at maturity in June 2019. 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. At September
30, 2019, $100,000 of the note remained outstanding. The 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, $50,000 has been
received and remains outstanding.
On August 19,2019
The Company entered into a Convertible Promissory Note with Auctus
Fund, LLC. in the principal amount of $142,750. The note carries
original issue discount of $14,275. The note is convertible at any
time following the issuance 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 50% discount price. In addition, the Company
agreed to issue to Auctus Fund, LLC 2,500,000 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 the note remains
outstanding.
On August 15, 2019,
the Company and Power Up Lending Group entered into a security
purchase agreement for a 10% Convertible Note in the aggregate
principal of $53,000 due on August 15, 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. The
note is convertible one hundred eighty (180) days from date of
issuance.
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 than 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.
The note is convertible one hundred eighty (180) days from date of
issuance.
On August 1, 2019,
the Company and Adar Alef, LLC entered into an 8% Convertible
Redeemable Note in the aggregate principal of $52,500 due on August
1, 2020. The note carries original issue discount or $2,500. 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
35,000,000 common shares. The note is convertible one hundred
eighty (180) days from date of issuance.
For other
obligations, please see the Form 10K for the year ending December
31, 2018 filed with the Securities and Exchange Commission on
June18, 2019.
NOTE
6 – Investments, Acquisitions and Goodwill
Acquisition of HarmAlarm
In March of 2019,
the Company acquired HarmAlarm. HA was formed in 2002 as a private
Texas company to pursue Infrared commercial applications in the
aviation services area. HA has developed a system known as Pilot
Assisted Landing Systems (PALS). The precision and robustness of
PALS has generated a host of new applications mainly through
“landing trajectory” optimization which provides
additional safety margin against weather related hazardous
conditions, like wind shear, wake turbulence, icing, as well as low
ceilings and fog.
The Company
completed the purchase agreement with HarmAlarm on September 16,
2019, , the Company issued 5,000,000, shares of its common stock
with a fair value of $62,000 in exchange for the assets of
HarmAlarm. For investments acquired with common stock, the Company
records its investments at the fair value of the common stock
issued for the ownership interest acquired.
The Company
periodically reviews the carrying value of intangible assets not
subject to amortization to determine whether impairment may exist.
Intangible assets are assessed annually, or when certain triggering
events occur, for impairment using
fair value measurement techniques. Subsequent to the
issuance of the stock the company determined the investment was
impaired and recorded an Impairment loss of $62,000 at September
30, 2019.
The acquisition of
HarmAlarm has contributed $0 revenue and approximately $35,000 of
net loss for the period May1, 2019 to September 30,2019 and a net
loss of $67,500 for the period January 1, 2018 to September 30,
2018.
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. Additionally, the Company will pay 49.1% of
any profits generated subsequently to the former owner of
HarmAlarm.
NOTE 7 – COMMITMENTS AND
CONTINGENCIES
Legal Proceedings
We may be involved
in legal proceedings in the ordinary course of our business, and
our management cannot predict the ultimate outcome of these legal
proceedings with certainty. The Company is plaintiff or defendant
in the following actions:
Dekle, et. al. v. Global Digital Solutions, Inc. et.
al.
Brian A. Dekle and
John Ramsay filed suit against the Company and its wholly owned
subsidiary, North American Custom Specialty Vehicles, Inc.
(“NACSV”), in the Circuit Court of Baldwin Alabama, on
January 14, 2015, case no. 05-CV-2015-9000050.00, relating to our
acquisition of NACSV (the ''Dekle Action"). Prior to instituting
the Dekle Action, in June 2014, the Company had entered into an
equity purchase agreement with Dekle and Ramsay to purchase their
membership interest in North American Custom Specialty Vehicles,
LLC. The Dekle Action originally sought payment for $300,000 in
post-closing consideration Dekle and Ramsay allege they are owed
pursuant to the equity purchase agreement.
On February 9, 2015, the 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 entered into a court ordered mediation with
Plaintiff’s counsel and entered into a settlement agreement
on June 12, 2019. The settlement agreement was filed in the United
States District Court for the District of New Jersey on June 13,
2019. The Company notified the attorneys general of the several
states and the United States government as required. The settlement
agreement received preliminary approval on July 15, 2019. We
anticipate that all of the costs of settlement will be covered by
the Company’s insurance carrier.
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. The Company entered into a court ordered mediation with
Plaintiff’s counsel and entered into a settlement agreement
on June 12, 2019. The settlement agreement was filed in the United
States District Court for the District of New Jersey on June 13,
2019. The Company notified the attorneys general of the several
states and the United States government as required. The settlement
agreement received preliminary approval on July 15, 2019. We
anticipate that all of the costs of settlement will be covered by
the Company’s insurance carrier.
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. The Company entered into a court
ordered mediation with Plaintiff’s counsel and entered into a
settlement agreement on June 12, 2019. The settlement agreement was
filed in the United States District Court for the District of New
Jersey on June 13, 2019. The Company notified the attorneys general
of the several states and the United States government as required.
The settlement agreement received preliminary approval on July 15,
2019. We anticipate that all of the costs of settlement will be
covered by the Company’s insurance carrier.
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. Subsequent to the supplemental brief, the United
States Supreme Court issued a decision questioning the validity of
the administrative law judges appointed by the Securities and
Exchange Commission. Accordingly, the complaint had to begin again
with a new, properly appointed administrative law judge. At the
submission of the new complaint, the violations of Section 12(j) of
the Exchange Act had been cured and accordingly, then Securities
and Exchange Commission moved to dismiss the complaint. The
Commission granted the motion and closed the matter.
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 condition’s 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. The Company and
Rontan/Bolzans entered into court order mediation on November 7,
2019. Although there was some movement by each side, the sides
still remain apart. Trial is scheduled for December 9,
2019.
NOTE
8 – 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
September 30, 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 September 30, 2019 and December 31, 2018, 637,675,079 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.
In May 2019 the
Company sold 3,513,888 of common stock shares for $35,138 to three
individual investors.
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 September 30,
2019
|
Outstanding
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$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
|
|
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
|
Outstanding
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$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
|
|
10,500,000
|
3.17
|
$0.0093
|
10,500,000
|
$0.0093
|
The intrinsic value
of warrants outstanding at September 30, 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. Stock based compensation under the
Equity Incentive Plan was $62,000 in the nine- month period ended
September 30, 2019.
Awards
Issued Under Stock Incentive Plans
Stock Option Activity
At September 30,
2019 and December 31, 2018, 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
nine months ended September 30, 2019 and 2018.
During the nine-
month period ended September 30, 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 September 30, 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
9 – INCOME TAXES
As
of September 30, 2019, the Company had $13,622,276 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 approximately$309,000 for the nine
- month period ending September 30, 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 September
30, 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
NOTE
10 – 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 September 30, 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 September 30, 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 September 30, 2019, and
December 31, 2018 included in accounts payable was compensation
owed to related parties as seen below
|
|
|
|
|
|
RLT
Consulting
|
$33,841
|
$33,841
|
Jerry
Gomolski
|
25,000
|
25,000
|
Charter
804CS
|
20,099
|
20,099
|
Gary
Gray
|
12,000
|
12,000
|
|
$90,940
|
$90,940
|
Accrued Compensation
At September
30, 2019 and December 31, 2018, we had $161,676 and $482,431
payable to William J. Delgado and $78,335 and $65,835 to Jerome
Gomolski, respectively.
|
|
|
|
|
|
|
|
Balance
12/31/2018
|
$548,266
|
$482,431
|
$65,835
|
|
|
|
|
2019
Salary
|
215,000
|
180,000
|
37,500
|
Payments
|
(525,755)
|
(514,324)
|
(25,000)
|
|
|
|
|
Balance
9/30/2019
|
$226,442
|
$148,107
|
$78,335
|
NOTE
11 – SUBSEQUENT EVENTS
On October 16,2019
the Company and Tangiers Global,LLC entered into a security
agreement for a 10% Convertible Note in the aggregate principal of
$137,500 due on October 20, 2020. The note carries original issue
discount or $12,500 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 than 125,000,000
shares