Note Regarding Forward-Looking Statements
This Quarterly Report on Form 10-Q includes a number of forward-looking
statements that reflect management's current views with respect to future events
and financial performance. Forward-looking statements are projections in respect
of future events or our future financial performance. In some cases, you can
identify forward-looking statements by terminology such as "may," "should,"
"expects," "plans," "anticipates," "believes," "estimates," "predicts,"
"potential" or "continue" or the negative of these terms or other comparable
terminology. These statements include statements regarding the intent, belief or
current expectations of us and members of our management team, as well as the
assumptions on which such statements are based. Prospective investors are
cautioned that any such forward-looking statements are not guarantees of future
performance and involve risk and uncertainties, and that actual results may
differ materially from those contemplated by such forward-looking statements.
These statements are only predictions and involve known and unknown risks,
uncertainties and other factors, including the risks set forth in the section
entitled "Risk Factors" in our Annual Report on Form 10-K for the year ended
December 31, 2020, as filed with the U.S. Securities and Exchange Commission
(the "SEC") on April 19, 2021, any of which may cause our company's or our
industry's actual results, levels of activity, performance or achievements to be
materially different from any future results, levels of activity, performance or
achievements expressed or implied in our forward-looking statements. These risks
and factors include, by way of example and without limitation:
? our ability to successfully commercialize and our products and services on a
large enough scale to generate profitable operation;
? our ability to maintain and develop relationships with customers and suppliers;
? our ability to successfully integrate acquired businesses or new brands;
? the impact of competitive products and pricing;
? supply constraints or difficulties;
? the retention and availability of key personnel;
? general economic and business conditions;
? substantial doubt about our ability to continue as a going concern;
? our need to raise additional funds in the future;
? our ability to successfully recruit and retain qualified personnel in order to
continue our operations;
? intellectual property claims brought by third parties; and
? business interruptions resulting from geo-political actions, including war, and
terrorism or disease outbreaks (such as COVID-19).
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Although we believe that the expectations reflected in the forward-looking
statements are reasonable, we cannot guarantee future results, levels of
activity, or performance. Except as required by applicable law, including the
securities laws of the United States, we do not intend to update any of the
forward-looking statements to conform these statements to actual results.
Readers are urged to carefully review and consider the various disclosures made
by us in this report and in our other reports filed with the SEC. We undertake
no obligation to update or revise forward-looking statements to reflect changed
assumptions, the occurrence of unanticipated events, or changes in the future
operating results over time, except as required by law. We believe that our
assumptions are based upon reasonable data derived from and known about our
business and operations. No assurances are made that actual results of
operations or the results of our future activities will not differ materially
from our assumptions.
As used in this Quarterly Report on Form 10-Q and, unless otherwise indicated,
the terms "GDSI," "Company," "we," "us," and "our" refer to Global Digital
Solutions, Inc. and our wholly owned subsidiaries GDSI Florida, LLC, HarmAlarm
and North American Custom Specialty Vehicles, Inc. Unless otherwise specified,
all dollar amounts are expressed in United States dollars.
Corporate History
We were incorporated in New Jersey as Creative Beauty Supply, Inc. ("Creative")
in August 1995. In March 2004, Creative acquired Global Digital Solutions, Inc.,
a Delaware corporation. The merger was treated as a recapitalization of Global
Digital Solutions, Inc., and Creative changed its name to Global Digital
Solutions, Inc. ("GDSI"). We are focused in the area of cyber arms technology
and complementary security and technology solutions. On October 22, 2012, we
entered into an Agreement of Merger and Plan of Reorganization to acquire 70% of
Airtronic USA, Inc. ("Airtronic"), a then debtor in possession under chapter 11
of the Bankruptcy Code once Airtronic successfully reorganized and emerged from
bankruptcy (the "Merger"). During the period from October 2012 through November
2013, we were actively involved in the day to day management of Airtronic
pending the completion of the Merger. The Merger did not occur and we ceased
involvement with Airtronic. In December 2012 we incorporated GDSI Florida LLC
("GDSI FL"), a Florida limited liability company. Except for the payment of
administrative expenses on behalf of the Company, GDSI FL has no business
operations. In January 2013, we incorporated Global Digital Solutions, LLC, a
Florida limited liability company. In November 2013, we incorporated GDSI
Acquisition Corporation, a Delaware corporation. On June 16, 2014, we acquired
North American Custom Specialty Vehicles, LLC, into GDSI Acquisition
Corporation, and changed the latter's name to North American Custom Specialty
Vehicles, Inc. ("NACSV"). In July 2014, we announced the formation of GDSI
International (f/k/a Global Digital Solutions, LLC) to spearhead our efforts
overseas. In March of 2019, we acquired HarmAlarm ("HA"). 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). We believe 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.
Business Overview
We are engaged in the development of proprietary aviation technology. We are
also looking to develop an automotive technology company currently in Brazil. We
have been in litigation concerning Rontan Metallurgica in Sao Paulo, Brazil and
have been awarded a default judgment regarding the acquisition of the company.
We are currently awaiting final damages in the case.
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Results of Operations
Comparison of the Three Months Ended September 30, 2021 to the Three Months
Ended September 30, 2020
Revenues
There was no revenue for the three months ending September 30, 2021 or September
30, 2020.
Our operating expenses for the three months ended September30, 2021 are
summarized as follows in comparison to the three months ended September 30,
2020:
For The Three Months Ended
September 30,
2021 2020
Salaries and related expenses $ 69,000 $ 72,105
Rent - 5,526
Professional fees 36,549 41,766
Consulting services 73,620 68,995
Other general and administrative 39,319 76,189
Total Operating Expenses $ 218,488 $ 264,581
Operating expenses for the three months ended September 30, 2021 decreased by $
46,000 $ or 18%, as compared with the same period in 2020. The decrease is due
primarily to reduction in legal fees of $62,000.
The professional fees, are for services provided by an attorney and accounting
and auditing services. The decrease is due primarily to reduction in legal fees
of $62,000.
Comparison of the Nine Months Ended September 30, 2021 to the Nine Months Ended
September 30, 2020
Revenues
There was no revenue for the nine months ending September 30, 2021 or September
30, 2020.
Our operating expenses for the nine months ended September 30, 2021 are
summarized as follows in comparison to the nine months ended September 30, 2020:
For The Nine Months Ended
September 30,
2021 2020
Salaries and related expenses $ 1,033,000 $ 225,000152,89
Rent - 8,4222,896
Professional fees 108,486 150,480
Consulting services 612,110 293,351
Other general and administrative 55,350 122,705
Total Operating Expenses $ 1,809,106 $ 799,958Operating expenses for the nine months ended September 30, 2021 increased by
$1,009,148, or 126%, as compared with the same period in 2020. The overall
change in operating expenses is mainly due to to the bonus paid to the CEO of
approximately $820,000, as well as the increase in consulting services during
the nine months ended September 30, 2021.
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Liquidity, Financial Condition and Capital Resources
As of September 30, 2021, we had cash on hand of approximately $2,003 and a
working capital deficiency of approximately $13,343,720 as compared to cash on
hand of approximately $300 and a working capital deficiency of approximately
$17,403,000 as of December 31, 2020. The decrease in working capital deficiency
for the nine months ended September 30, 2021 is mainly due to the decrease in
the derivative liability, resulting from the change in fair value of the
derivatives, offset by the recognition of the warrant liability, discussed in
further detail below, in current liabilities.
Working Capital Deficiency
Our working capital deficiency as of September 30, 2021, in comparison to our
working capital deficiency as of December 31, 2020, can be summarized as
follows:
September 30, December 31,
2021 2020
Current assets $ 137,003 $ 264
Current liabilities 13,480,723 17,403,560
Working capital deficiency $ (13,343,720 ) $ (17,403,296 )
The increase in current assets is mainly due to the increase of approximately
$135,000 in prepaid expenses., The decrease in current liabilities is primarily
due to the decrease in the derivative liability, resulting from the change in
fair value of the derivatives of approximately $7,200,000 less the approximately
$1,026,000 reclassed to equity upon pay off of the related convertible notes,
offset by the recognition of the $2,398,000 in warrant liability for new
warrants issued in connection with a new convertible debenture in the first and
second quarter of 2021, and approximately $900,000 resulting from the change in
fair value of the warrants.
Cash Flows
During the nine months ended September 30, 2021 and 2020, our sources and uses
of cash were as follows:
Nine Months Ended September 30,
2021 2020
Net cash used in operating activities $ (1,890,386 ) $ (1,531,845 )
Net cash used in investing activities
(66,971 ) (233,548 )
Net cash provided by financing activities 1,959,096 1,368,375
Increase (decrease) in cash $ 1,739 $ (397,018 )
Operating Activities
Net cash used in operating activities was approximately $1,890,000 for the nine
months ended September 30, 2021, primarily due to the net income of
approximately $2,042,000 which was partially offset by non-cash expenses of
approximately $6,400,000 related to an decrease in the fair value of derivative
liabilities and $894,000 for the change in fair value of the warrant liability,
amortization of debt discount, interest expense, and the change in fair value of
the warrant liability recognized this period. There was additionally actual cash
used by changes in the levels of operating assets and liabilities, primarily as
a result of decreases in accrued interest and amount due to officer.
Net cash used in operating activities was $(1,531,845) for the nine months ended
September 30, 2020, primarily due to net loss of $(3,403,256), which was
partially offset by non-cash expenses of approximately $(236,206) related to
change in fair value of derivative liabilities, the amortization of debt
discount of $654,584, and interest expense, and $(314,591) cash used in the
levels of operating assets and liabilities.
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Investing Activities
During the nine months ended September 30, 2021 and 2020, net cash used in
investing activities was approximately $67,000 for advances to related party in
2021 and $233,548 in 2020 for cash used for software development costs.
Financing Activities
Net cash provided by financing activities for the nine months ended September
30, 2021 was approximately $1,959,000, which was due to $3,275,000 of proceeds
from debt financings, offset by approximately $1,316,000 of repayments of notes
payable and convertible notes and advances from partner
During the nine months ended September 30, 2020, cash provided by financing
activities consisted of proceeds from convertible notes payable of $1,077,000
offset by payment on convertible notes payable of $(571,750), proceeds of
$803,125 from notes payable, proceeds from exercise of warrants of $60,000.
Recent Financing Arrangements and Developments During the Period
On January 15, 2021, the Company and Power Up Lending Group entered into a
securities purchase agreement for a 10% convertible note in the aggregate
principal of $88,500 due on January 15, 2022. 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. The conversion
feature meets the definition of a derivative and therefore requires bifurcation
and will be accounted for as a derivative liability on the date the note becomes
convertible. On July 13, 2021, the Company paid off the note, plus accrued
interest and redemption fees, for a total payment of $130,078.
On February 25, 2021, the Company and Leonite Capital LLC entered into a
securities purchase agreement for a prime rate plus 8% convertible note in the
aggregate principal of $2,285,714. The note shall be paid in one or more
tranches. The maturity for each tranche shall be the twelve-month period from
advance date. The holder has the right at any time to convert all or any part of
the outstanding principal into shares of common stock of the Company. The
conversion price shall be a fixed conversion price of $0.06, which upon a
default event, shall be equal to the lesser of (i) the fixed conversion price;
(ii) or 70% of the lowest intraday price during the 21 days preceding the
conversion request. On March 1, 2021, the Company received the first tranche of
$1,000,000. In connection with the note, the Company issued 20,000,000 warrants,
exercisable at $0.10, with a 10-year term and contain full-ratchet anti-dilution
protection provisions, with a fair value of $1,015,000. The Company also issued
4,000,000 shares of common stock as commitment shares to the noteholder, with a
fair value of $204,000. The warrants and the commitment shares resulted in a
debt discount of $1,000,000, which will be amortized using the effective
interest method over the life of the convertible note, and the excess of
$101,000 recognized as interest expense at issuance. The warrants were evaluated
to be classified as a liability, as based on the various convertible notes
outstanding with variable conversion rates it cannot be determined if there are
sufficient authorized shares available during the contract period. As September
30, 2021, and through the date of this report, the principal balance totaling
$1,142,875 is outstanding.
On March 25, 2021, the Company and GS Capital Partners LLC entered into a
securities purchase agreement for a prime rate plus 8% convertible note in the
aggregate principal of $2,285,714. The note shall be paid in one or more
tranches. The maturity for each tranche shall be the twelve-month period from
advance date. The holder has the right at any time to convert all or any part of
the outstanding principal into shares of common stock of the Company. The
conversion price shall be a fixed conversion price of $0.06, which upon a
default event, shall be equal to the lesser of (i) the fixed conversion price;
(ii) or 70% of the lowest intraday price during the 21 days preceding the
conversion request. On April 1, 2021, the Company received the first tranche of
$1,000,000. In connection with the note, the Company will issue 20,000,000
warrants, exercisable at $0.10, with a 10-year term and contain full-ratchet
anti-dilution protection provisions, with a fair value of $917,000. The Company
also will issue 4,000,000 shares of common stock as commitment shares to the
noteholder, with a fair value of $184,000.
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Going Concern
The accompanying financial statements have been prepared in conformity with
accounting principles generally accepted in the United States of America
("GAAP"), assuming the Company will continue as a going concern, which
contemplates the realization of assets and satisfaction of liabilities in the
normal course of business. The Company has sustained losses and experienced
negative cash flows from operations since inception, and for the nine months
ended September 30, 2021, while it had net income of approximately $2,042,000,
which was mostly the result of the change in fair value of the derivative
liability, the Company used net cash of approximately $1,890,000 to fund
operating activities at September 30, 2021, had an accumulated deficit of
approximately $49,518,000, and a working capital deficit of approximately
$13,344,000. These factors raise substantial doubt about the Company's ability
to continue as a going concern, within one year from the issuance date of the
financial statements. The Company has funded its activities to date almost
exclusively from equity and debt financings.
Future Financing
We will require additional funds to implement our growth strategy for our
business. In addition, while we have received capital from various private
placements that have enabled us to fund our operations, these funds have been
largely used to develop our processes, although additional funds are needed for
other corporate operational and working capital purposes. Subsequent to period
end we have received funding of $1,000,000 from the first tranche of a
convertible note entered into in March 2021. However, not including funds needed
for capital expenditures or to pay down existing debt and trade payables, we
anticipate that we will need to raise an additional $2,500,000 to cover all of
our operational expenses over the next 12 months, not including any capital
expenditures needed as part of any commercial scale-up of our equipment. These
funds may be raised through equity financing, debt financing, or other sources,
which may result in further dilution in the equity ownership of our shares.
There can be no assurance that additional financing will be available to us when
needed or, if available, that such financing can be obtained on commercially
reasonable terms. If we are not able to obtain the additional necessary
financing on a timely basis, or if we are unable to generate significant
revenues from operations, we will not be able to meet our other obligations as
they become due, and we will be forced to scale down or perhaps even cease our
operations.
Effects of Inflation
We do not believe that inflation has had a material impact on our business,
revenues or operating results during the periods presented.
Significant Accounting Policies and Estimates
Our significant accounting policies are more fully described in the notes to our
unaudited condensed consolidated financial statements included herein for the
quarter ended September 30, 2021 and in the notes to our consolidated financial
statements included in our Annual Report on Form 10-K for the year ended
December 31, 2020, as filed with the SEC on April 19, 2021.
Fair Value Measurement
The fair value measurement guidance clarifies that fair value is an exit price,
representing the amount that would be received to sell an asset or paid to
transfer a liability in an orderly transaction between market participants. As
such, fair value is a market-based measurement that should be determined based
on assumptions that market participants would use in the valuation of an asset
or liability. It establishes a fair value hierarchy that prioritizes the inputs
to valuation techniques 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 measurements) and the lowest priority to
unobservable inputs (Level 3 measurements). The three levels of the fair value
hierarchy under the fair value measurement guidance are described below:
Level 1 - Unadjusted quoted prices in active markets that are accessible at the
measurement date for identical assets or liabilities;
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Level 2 - Quoted prices in markets that are not active, or inputs that are
observable, either directly or indirectly, for substantially the full term of
the asset or liability; or
Level 3 - Prices or valuation techniques that require inputs that are both
significant to the fair value measurement and unobservable (supported by little
or no market activity).
Use of Estimates
The preparation of unaudited condensed consolidated financial statements in
conformity with U.S. GAAP requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of
contingent liabilities at dates of the unaudited condensed consolidated
financial statements and the reported amounts of revenue and expenses during the
periods. Our significant estimates and assumptions include the recoverability
and useful lives of long-lived assets, the fair value of our common stock,
stock-based compensation, warrants issued in connection with notes payable,
derivative liabilities and the valuation allowance related to our deferred tax
assets. Certain of our estimates, including the carrying amount of the
intangible assets, could be affected by external conditions, including those
unique to us and general economic conditions. It is reasonably possible that
these external factors could have an effect on our estimates and could cause
actual results to differ from those estimates.
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.
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.
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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.
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 June 30, 2021,
and December 31, 2020. The Company recognizes interest and penalties on
unrecognized tax benefits as well as interest received from favorable tax
settlements within income tax expense.
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.
New and Recently Adopted Accounting Pronouncements
In August 2020, the FASB issued ASU 2020-06, Debt - Debt with Conversion and
Other Options (Subtopic 470- 20) and Derivatives and Hedging - Contracts in
Entity's Own Equity (Subtopic 815-40): Accounting for Convertible Instruments
and Contracts in an Entity's Own Equity ("ASU 2020-06"), which simplifies the
accounting for certain financial instruments with characteristics of liabilities
and equity. This ASU (1) simplifies the accounting for convertible debt
instruments and convertible preferred stock by removing the existing guidance in
ASC 470-20, Debt: Debt with Conversion and Other Options, that requires entities
to account for beneficial conversion features and cash conversion features in
equity, separately from the host convertible debt or preferred stock; (2)
revises the scope exception from derivative accounting in ASC 815-40 for
freestanding financial instruments and embedded features that are both indexed
to the issuer's own stock and classified in stockholders' equity, by removing
certain criteria required for equity classification; and (3) revises the
guidance in ASC 260, Earnings Per Share, to require entities to calculate
diluted earnings per share (EPS) for convertible instruments by using the
if-converted method. In addition, entities must presume share settlement for
purposes of calculating diluted EPS when an instrument may be settled in cash or
shares. For SEC filers, excluding smaller reporting companies, ASU 2020-06 is
effective for fiscal years beginning after December 15, 2021 including interim
periods within those fiscal years. Early adoption is permitted, but no earlier
than fiscal years beginning after December 15, 2020. For all other entities, ASU
2020-06 is effective for fiscal years beginning after December 15, 2023,
including interim periods within those fiscal years. Entities should adopt the
guidance as of the beginning of the fiscal year of adoption and cannot adopt the
guidance in an interim reporting period. The Company is currently evaluating the
impact that ASU 2020-06 may have on its consolidated financial statements and
related disclosures.
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Management is evaluating other new accounting pronouncements but doesn't expect
them to have material impact on our financial position or results of operations.
Off-Balance Sheet Arrangements
We have no off-balance sheet arrangements that have or are reasonably likely to
have a current or future effect on our financial condition, changes in financial
condition, revenues or expenses, results of operations, liquidity, capital
expenditures or capital resources that is material to stockholders.
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