DSG Global Inc. - Quarter Report: 2018 March (Form 10-Q)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

For the quarterly period ended March 31, 2018

or

For the transition period from _____________ to _____________.

Commission file number 000-53988

DSG GLOBAL, INC.

(Exact name of registrant as specified in its charter)

214 - 5455 152nd Street

Surrey, British Columbia V3S 5A5, Canada

(Address of principal executive offices, zip code)

(604) 575-3848

(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [  ]

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes [  ] No [X]

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act (Check one):

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes [  ] No [X]

As March 31, 2018, the issuer had 894,974,839 shares of common stock issued and outstanding.

DSG GLOBAL, INC.
TABLE OF CONTENTS

PART I: FINANCIAL INFORMATION

ITEM 1: Financial Statements (unaudited)

The accompanying unaudited consolidated interim financial statements of DSG Global Inc. as at March 31, 2018, have been prepared by our management in conformity with accounting principles generally accepted in the United States of America and in accordance with the instructions to Form 10-Q and Rule 8-03 of Regulation S-X and, therefore, do not include all information and footnotes necessary for a complete presentation of financial position, results of operations, cash flows, and stockholders’ equity in conformity with generally accepted accounting principles. In the opinion of management, all adjustments considered necessary for a fair presentation of the results of operations and financial position have been included and all such adjustments are of a normal recurring nature.

Operating results for the three-month period ended March 31, 2018 are not necessarily indicative of the results that can be expected for the year ending December 31, 2018.

DSG GLOBAL, INC.

INTERIM CONDENSED CONSOLIDATED BALANCE SHEETS

The accompanying notes are an integral part of the unaudited interim condensed consolidated financial statements

DSG GLOBAL, INC.

INTERIM CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(UNAUDITED)

The accompanying notes are an integral part of the unaudited interim condensed consolidated financial statements

DSG GLOBAL INC.

INTERIM CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

The accompanying notes are an integral part of the unaudited interim condensed consolidated financial statements

DSG GLOBAL, INC.
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

Note 1 – ORGANIZATION

DSG Global, Inc. (formerly Boreal Productions Inc.) was incorporated under the laws of the State of Nevada on September 24, 2007.

Previously, in anticipation of the share exchange agreement with DSG Tag Systems, Inc. (“DSG TAG”), we undertook to change our name and effect a reverse stock split of our authorized and issued common stock. Accordingly, on January 19, 2015, our board of directors approved an agreement and plan of merger to merge with our wholly-owned subsidiary DSG Global Inc., a Nevada corporation, to affect a name change from Boreal Productions Inc. to DSG Global, Inc. Our company remains the surviving company. DSG Global, Inc. was formed solely for the change of our name.

Subsequent to the closing of the share exchange agreement with DSG TAG, we have adopted the business and operations of DSG TAG, a supplier to the golf industry.

DSG TAG was incorporated under the laws of the State of Nevada on April 17, 2008 and extra provincially registered in British Columbia, Canada in 2008. In March 2011, DSG TAG formed DSG Tag Systems International, Ltd. in the United Kingdom (“DSG UK”). DSG UK is a wholly owned subsidiary of DSG TAG.

Note 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation

The accompanying interim condensed consolidated financial statements were prepared in conformity with generally accepted accounting principles in the United States (“US GAAP”) and with the instructions to Form 10-Q.

Certain information and footnote disclosures normally included in financial statements prepared in accordance with U.S. GAAP have been condensed or omitted pursuant to U.S. GAAP rules and regulations for presentation of interim financial information. Therefore, the unaudited condensed interim consolidated financial statements should be read in conjunction with the financial statements and the notes thereto, included in the Company’s Annual Report on the Form 10-K for the year ended December 31, 2017. Current and future financial statements may not be directly comparable to the Company’s historical financial statements. However, except as disclosed herein, there have been no material changes in the information disclosed in the notes to the financial statements for the year ended December 31, 2017 included in the Company’s Annual Report on Form 10-K filed with the Securities and Exchange Commission. In the opinion of management, all adjustments considered necessary for a fair presentation, consisting solely of normal recurring adjustments, have been made. Operating results for the three months ended March 31, 2018 are not necessarily indicative of the results that may be expected for the year ending December 31, 2018.

Principles of Consolidation

The condensed consolidated financial statements include the accounts of DSG Global Inc. and its subsidiary DSG Tag Systems, Inc., and its wholly owned subsidiary DSG Tag Systems International, Ltd., collectively referred to as the Company. All material intercompany accounts, transactions, and profits were eliminated in consolidation.

Use of Estimates

The preparation of these condensed consolidated financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Estimates and assumptions are reviewed periodically and the effects of revisions are reflected in the interim condensed consolidated financial statements in the period they are determined.

Recently Issued Accounting Pronouncements

For fiscal years beginning after December 15, 2018:

In March 2017, the Financial Accounting Standards Board (“FASB”) issued ASC 2017-08 “Receivables – Nonrefundable Fees and Other Costs (Subtopic 310-20) – Premium Amortization on Purchased Callable Debt Securities” an amendment to shorten the amortization period for certain callable debt securities held at a premium to the earliest call date. The amendments do not require an accounting change for securities held at a discount.

For fiscal years beginning after December 15, 2018:

In July 2017, the Financial Accounting Standards Board (“FASB”) issued ASC 2017-11 “Earnings Per Share (Topic 260), Distinguishing Liability from Equity (Topic 480), and Derivatives and Hedging (Topic 815) – (i) Accounting for Certain Financial Instruments with Down Round Features (ii) Replace of the Indefinite Deferral for Mandatorily Redeemable Financial Instruments.” The amendments in (i) change the classification analysis of certain equity-linked financial instruments (or embedded features) with down round features and to help clarify existing disclosure requirements. The amendments in (ii) characterize the indefinite deferral of certain provisions and do not have an accounting effect.

The Company is currently evaluating the impact of the above standards on their consolidated financial statements. Other recent accounting pronouncements issued by the FASB, including its Emerging Issues Task Force, the American Institute of Certified Public Accountants, and the Securities and Exchange Commission did not or are not believed by management to have a material impact on the Company’s present or future consolidated financial statements.

Going Concern

As reflected in the accompanying financial statements, the Company incurred a net loss of $8,822,417 for the period ended March 31, 2018 and had a working capital deficit of $14,777,676 and an accumulated deficit of $39,613,724 as of March 31, 2018.

While the Company is attempting to grow revenues, improve margins, and lower costs, the Company’s cash position may not be sufficient to support the Company’s daily operations. Management is seeking to raise additional funds by way of a public or private offering. Management believes that the actions presently being taken to further implement its business plan and generate revenues provide the opportunity for the Company to continue as a going concern. While the Company believes in the viability of its strategy to generate revenues and in its ability to raise additional funds, there can be no assurances to that effect. The ability of the Company to continue as a going concern is dependent upon the Company’s ability to further implement its business plan and generate revenues.

The financial statements do not include any adjustments that might be necessary if the Company is unable to continue as a going concern.

Reclassification

Certain prior year amounts have been reclassified for consistency with the current period presentation. These reclassifications had no effect on the reported results of operations or cash flow.

Note 3 – ACCOUNTS RECEIVABLE

As of March 31, 2018 and December 31, 2017, trade receivables consist of the following:

Note 4 – EQUIPMENT AND EQUIPMENT ON LEASE

As of March 31, 2018, and December 31, 2017, equipment consisted of the following:

As of March 31, 2018, and December 31, 2017, equipment on lease consisted of the following:

Note 5 – INTANGIBLE ASSETS

Intangible assets consist of the following as of March 31, 2018 and December 31, 2017:

Note 6 – ACCOUNTS PAYABLE AND ACCRUED LIABILITIES

As of March 31, 2018 and December 31, 2017, accounts payable and accrued liabilities consist of the following:

Note 7 – LOANS PAYABLE

As of March 31, 2018 and December 31, 2017, loans payable consisted of the following:

Note 8 – CONVERTIBLE NOTES PAYABLE

Related Party Notes

Third Party Notes

Note 9 – DERIVATIVE LIABILITIES

The Company records the fair value of the of the conversion price of the convertible debentures disclosed in Note 8 in accordance with ASC 815, “Derivatives and Hedging”. The fair values of the derivative liabilities were calculated using a multi-nominal lattice model. The fair value of the derivative liabilities is revalued on each balance sheet date with corresponding gains and losses recorded in the consolidated statement of operations. For the three months ended March 31, 2018, the Company recorded a loss on the change in fair value of derivative liabilities of $5,616,261 (2017 – $1,854,417). As at March 31, 2018, the Company recorded a derivative liability of $8,124,723 (December 31, 2017 - $1,676,155).

The following inputs and assumptions were used to value the derivative liabilities outstanding during the period ended March 31, 2018 and 2017, assuming no dividend yield:

A summary of the activity of the derivative liabilities is shown below:

Note 10 – MEZZANINE EQUITY

DSG TAG has 150,000,000 shares of undesignated preferred stock authorized, each having a par value of $0.001 as of December 31, 2017 and 2016. DSG TAG designated 5,000,000 shares as Series A Convertible Preferred Stock (“Series A Shares”) and issued 4,309,384 Series A Shares to a company controlled by a director of DSG TAG for conversion of its debt of $5,386,731 on October 24, 2014. The Series A Shares have no general voting rights and carry a 5% per annum interest rate. Series A Shares that are converted to common shares are entitled to the same voting rights as other common shareholders. The Series A Shares are subject to a redemption obligation at $1.25 per share pursuant to the following terms:

The preferred shares are recorded in the consolidated financial statements as Mezzanine Equity.

During the year ended December 31, 2015, 80,000 Series A Shares with a value of $100,000 was purchased by an unrelated third-party and exchanged for 80,000 shares of common stock of the Company. The Series A Shares were not exchanged for securities of DSG Global, Inc. as part of the Share Exchange Agreement. As of March 31, 2018, the non-controlling interest was $1,438,110 (December 31, 2017 - $1,334,805).

Note 11 – COMMON STOCK

During the three months ended March 31, 2018, the Company issued an aggregate of 743,097,344 common shares with a fair value of $1,803,141 upon the conversion of $399,297 of convertible debentures and $8,577 of accrued interest, as noted in Note 8. The Company recorded a loss on extinguishment of debt of $1,395,267 in connection with the conversions.

On February 7, 2018, the Company issued 20,742,000 common shares for proceeds of $34,846.

On March 19, 2018, the Company issued 29,258,000 common shares for proceeds of $46,813.

Note 12 – RELATED PARTY TRANSACTIONS

Note 13 – COMMITMENTS

Product Warranties

The Company’s product warranty costs are part of its cost of sales based on associated material product costs, labor costs for technical support staff, and associated overhead. The products sold are generally covered by a warranty for a period of one year. As of March 31, 2018, the Company has set up a reserve for future warranty costs of $137,701 (December 31, 2017 - $165,523). The Company’s past experience with warranty related costs was used as a basis for the reserve. During the three months ended March 31, 2018, the Company recorded warranty expense of $nil (2016 - $2,624).

In the normal course of business, the Company indemnifies other parties, including customers, lessors, and parties to other transactions with the Company, with respect to certain matters. The Company has agreed to hold the other parties harmless against losses arising from a breach of representations or covenants, or out of intellectual property infringement or other claims made against certain parties. These agreements may limit the time within which an indemnification claim can be made and the amount of the claim. In addition, the Company has entered into indemnification agreements with its officers and directors, and the Company’s bylaws contain similar indemnification obligations to the Company’s agents. It is not possible to determine the maximum potential amount under these indemnification agreements due to the Company’s limited history with prior indemnification claims and the unique facts and circumstances involved in each particular agreement. Historically, payments made by the Company under these agreements have not had a material effect on the Company’s operating results, financial position, or cash flows.

Note 14 – LEGAL MATTERS

A director of the Company, representing his company, Adore Creative Agency Inc. (“Adore”), has filed a notice of default on March 31, 2016, in regard to the related party convertible note on the Company’s. The note was issued in lieu of marketing services and has a maturity date of March 31, 2016. The Company has countersued Adore for failure to provide services as obligated under the terms and agreement of the convertible note, and in addition for damages as a result.

On September 7, 2016, Chetu Inc. has filed a Complaint for Damage in Florida to recover an unpaid invoice amount of $27,335 plus interest of $4,939. The invoice was not paid due to a dispute that DSG TAG did not think that vendor had delivered the service according to the agreement between the two parties.

On May 24, 2017, the Company received a notice of default from Coastal Investment Partners LLC (“Coastal”), on three 8% convertible promissory notes issued to the Company in aggregate principal amount of $261,389 and commenced a lawsuit on June 12, 2017 in the United States District Court, Southern District of New York. Coastal alleges that the Company failed to deliver shares of common stock underlying the Coastal notes, and thus giving rise to an event of default. Coastal seeks damages in excess of $250,000 for breach of contact damages, and legal fees incurred by Coastal with respects to the lawsuit. This action is still pending.

On October 10, 2017, a vendor filed a complaint for Breach of Contract with Superior Court of the State of California. The Complainant is alleging that it is contractually owed 1,848,130 of DSG’s common stock and has asked for damages of $270,000. In addition, a related vendor filed in the same filing a complaint for $72,000 as part of consulting agreement the Company executed. The Company believes the vendors have not performed duties required on the contractual relationships and that obligations exist, so no obligation has been recorded.

On February 9, 2017, the Company received a notice of default from Auctus Fund LLC (“Auctus”), on a 12% convertible promissory note issued to the Company in the principal amount of $75,000 and commenced a lawsuit on February 2, 2018 in the United States District Court, District of Massachusetts. Auctus alleges that the Company failed to honor a conversion notice under the terms of the note, and thus giving rise to an event of default. Auctus seeks damages in excess of $306,681, which consists of the principal amount of the note, liquidated damages, and default interest, and legal fees incurred by Auctus with respects to the lawsuit. This action is still pending.

Note 15 – REVISION OF PRIOR YEAR FINANCIAL STATEMENTS

While preparing the interim condensed consolidated financial statements for the period ending March 31, 2018, the Company noted that there was a revision of the fair value of the derivative liabilities and accordingly, has revised its consolidated financial statements as at and for the year ended December 31, 2017 to reflect the change in fair value of derivative liabilities during the period and the fair value of the derivative liabilities as at December 31, 2017. This revision resulted in an increase to net loss of $484,759 and an increase to net loss per share of $0.01. There was no impact on the consolidated statement of cash flows. In accordance with the guidance provided by the SEC’s Staff Accounting Bulletin 99, Materiality and Staff Accounting Bulletin No. 108, Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements, the Company has determined that the impact of adjustments relating to the correction of this accounting error are not material to previously issued annual audited consolidated financial statements as the amount was derived from an estimate, has no impact on compliance with regulatory requirements or loan covenants, and has no impact on the Company’s cash flows.. Accordingly, these changes are disclosed herein and will be disclosed prospectively.

The impact of the revision as at December 31, 2017 and for the year then ended is summarized below:

Consolidated Balance Sheet

Consolidated Statement of Operations and Comprehensive Loss

Consolidated Statement of Stockholders’ Equity

Consolidated Statement of Cash Flows

Note 16 – SUBSEQUENT EVENTS

On May 3, 2018, the Company amended the convertible promissory note dated March 19, 2018, to include that at any time after the 100th calendar day after the fund are issued, and at the option of the holder in addition to the right to conversion, the holder may deduct daily payments from the Company’s bank account in the amount of $5,562.30 per calendar day or $27,811.50 per week until the Company has paid or the holder has converted an amount equal to the principal balance, interest, accrued interest, and default amount.

On May 3, 2018, the Company received $146,500, net of $3,500 in legal fees, pursuant to the second tranche of the convertible promissory note dated March 19, 2018.

On May 8, 2018 the Company issued a convertible note to GHS Investments, LLC for $51,500, which is unsecured, bears interest at 10% per annum, and is due on May 8, 2019. GHS has the right to convert the loan at a 32% discount off of the lowest intra-day trading price for the Company’s common stock during the ten trading days immediately preceding a conversion date.

On May 8, 2018, the Company paid $45,000 to EMA Financial, LLC, to settle the balance of the $74,500 convertible note issued on December 21, 2016.

Subsequent to the quarter ended March 31, 2018, the Company issued 191,888,201 common shares for the conversion of $221,470 of convertible notes payable and accrued interest payable.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

FORWARD LOOKING STATEMENTS

This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. The words “believe,” “may,” “will,” “potentially,” “estimate,” “continue,” “anticipate,” “intend,” “could,” “would,” “project,” “plan,” “expect” and similar expressions that convey uncertainty of future events or outcomes are intended to identify forward-looking statements. These forward-looking statements include, but are not limited to, statements concerning the following:

These forward-looking statements speak only as of the date of this Form 10-Q and are subject to uncertainties, assumptions and business and economic risks. As such, our actual results could differ materially from those set forth in the forward-looking statements as a result of the factors set forth below in Part II, Item 1A, “Risk Factors,” and in our other reports filed with the Securities and Exchange Commission. Moreover, we operate in a very competitive and rapidly changing environment, and new risks emerge from time to time. It is not possible for us to predict all risks, nor can we assess the impact of all factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements we may make. In light of these risks, uncertainties and assumptions, the forward-looking events and circumstances discussed in this Form 10-Q may not occur, and actual results could differ materially and adversely from those anticipated or implied in our forward-looking statements.

You should not rely upon forward-looking statements as predictions of future events. Although we believe that the expectations reflected in our forward-looking statements are reasonable, we cannot guarantee that the future results, levels of activity, performance or events and circumstances described in the forward-looking statements will be achieved or occur. Moreover, neither we nor any other person assumes responsibility for the accuracy and completeness of the forward-looking statements. We undertake no obligation to update publicly any forward-looking statements for any reason after the date of this Form 10-Q to conform these statements to actual results or to changes in our expectations, except as required by law.

Our unaudited financial statements are stated in United States Dollars (US$) and are prepared in accordance with United States Generally Accepted Accounting Principles. The following discussion should be read in conjunction with our unaudited interim condensed consolidated financial statements and notes thereto appearing elsewhere in this Quarterly Report on Form 10-Q with the understanding that our actual future results, levels of activity, performance and events and circumstances may be materially different from what we expect.

Corporate History

DSG Global, Inc. (formerly Boreal Productions Inc.) was incorporated under the laws of the State of Nevada on September 24, 2007. We were formed to option feature films and TV projects to be packaged and sold to movie studios and production companies.

In January 2015, we changed our name to DSG Global, Inc. and effected a one-for-three reverse stock split of our issued and outstanding common stock in anticipation of entering in a share exchange agreement with DSG TAG Systems, Inc., a corporation incorporated under the laws of the State of Nevada on April 17, 2008 and extra provincially registered in British Columbia, Canada in 2008.

On April 13, 2015, we entered into a share exchange agreement with DSG TAG Systems Inc. and the shareholders of DSG TAG Systems who become parties to the agreement. Pursuant to the terms of the share exchange agreement, we agreed to acquire not less than 75% and up to 100% of the issued and outstanding common shares in the capital stock of DSG TAG Systems in exchange for the issuance to the selling shareholders of up to 20,000,000 shares of our common stock on the basis of 1 common share for 5.4935 common shares of DSG TAG Systems.

On May 6, 2015, we completed the acquisition of approximately 75% (82,435,748 common shares) of the issued and outstanding common shares of DSG TAG Systems as contemplated by the share exchange agreement by issuing 15,185,875 shares of our common stock to shareholders of DSG TAG Systems who became parties to the agreement. In addition, concurrent with the closing of the share exchange agreement, we issued an additional 179,823 shares of our common stock to Westergaard Holdings Ltd. in partial settlement of accrued interest on outstanding indebtedness of DSG TAG Systems.

Following the initial closing of the share exchange agreement and through October 22, 2015, we acquired an additional 101,200 shares of common stock of DSG TAG Systems from shareholders who became parties to the share exchange agreement and issued to these shareholders an aggregate of 18,422 shares of our common stock. Following completion of these additional purchases, DSG Global owns approximately 100% of the issued and outstanding shares of common stock of DSG TAG Systems. An aggregate of 4,229,384 shares of Series A Convertible Preferred Stock of DSG TAG Systems continues to be held by Westergaard Holdings Ltd., an affiliate of Keith Westergaard, a former member of our board of directors.

The reverse acquisition was accounted for as a recapitalization effected by a share exchange, wherein DSG TAG Systems is considered the acquirer for accounting and financial reporting purposes. The assets and liabilities of the acquired entity have been brought forward at their book value and no goodwill has been recognized. We adopted the business and operations of DSG TAG Systems upon the closing of the share exchange agreement.

Overview of Our Business

DSG Global, Inc. is a technology development company based in Surrey, British Columbia, Canada, engaged in the design, manufacture, and marketing of fleet management solutions for the golf industry, as well as commercial, government and military applications. Our principal activities are the sale and rental of GPS tracking devices and interfaces for golf vehicles, and related support services. We were founded by a group of individuals who have dedicated their careers to fleet management technologies and have been at the forefront of the industry’s most innovative developments, and our executive team has over 50 years of experience in the design and manufacture of wireless, GPS, and fleet tracking solutions. We have developed the TAG suite of products that we believe is the first completely modular fleet management solution for the golf industry. The TAG suite of products is currently sold and installed around the world in golf facilities and as commercial applications through a network of established distributors and partnerships with some of the most notable brands in fleet and equipment manufacture.

DSG stands for “Digital Security Guard”, which is our primary value statement giving fleet operator’s new capabilities to track and control their vehicles. We have developed a proprietary combination of hardware and software that is marketed around the world as the TAG system. We have primarily focused on the golf industry where the TAG system is deployed to help golf course operators manage their fleet of golf carts, turf equipment, and utility vehicles. We are a leader in the category of fleet management in the golf industry and were awarded “Best Technology of the Year” in 2010 by Boardroom magazine, a publication of the National Golf Course Owners Association. To date the TAG system is installed on over 8,000 vehicles and has been used to monitor over 6,000,000 rounds of golf.

The TAG system fills a void in the marketplace by offering a modular structure that allows the customer to customize their system to meet desired functionality and budget constraints. In addition to the core TAG system vehicle control functionality, which can operate independently, we offer two golfer information display systems — the alphanumeric TEXT and high definition TOUCH — providing the operator with two display options which is unique in the industry.

The primary market for our TAG system is the 40,000 golf operations worldwide. While the golf industry remains the primary focus of our sales and marketing efforts, we have completed several successful pilots of the TAG system in other markets such as agriculture and commercial fleet operations. With appropriate resources, we intend to expand our sales and marketing efforts into these new markets.

We have a direct sales force in North America, which comprises the most significant portion of the golf fleet market and have developed key relationships with distributors and golf equipment manufacturers such as E-Z-GO, Yamaha and Ransomes Jacobsen to help drive sales for the North American and worldwide markets.

In order to successfully deliver products, increase sales, and maintain customer satisfaction, we need to have a reliable supplier of our hardware units and components at competitive prices. Presently, we source our TOUCH units from one supplier in China and our TAG units from one supplier in the United Kingdom. We have recently established a new relationship with a supplier for our TOUCH units in China to provide us with higher quality, newer technology at competitive pricing. We are also exploring the opportunity of a partnership with a US manufacturer.

In addition, DSG is currently in negotiations with a telecommunications provider to provide new technology in hardware and wireless access.

Our Revenue Model

We derive revenue from four different sources, as follows:

We recognize revenue when persuasive evidence of an arrangement exists, delivery has occurred, the fee is fixed or determinable, and collectability is reasonably assured. In instances where final acceptance of the product is specified by the customer, revenue is deferred until all acceptance criteria have been met. We accrue for warranty costs, sales returns, and other allowances based on its historical experience.

Our revenue recognition policies are discussed in more detail under “Note 2 – Summary of Significant Accounting Policies” in the notes to our Condensed Consolidated Financial Statements included in Part I, Item 1 of this Form 10-Q.

Cost of Revenue

Our cost of revenue consists primarily of hardware purchases, wireless data fees, mapping, installation costs, freight expenses and inventory adjustments.

We expect to continue to invest in corporate infrastructure and incur additional expenses associated with being a public company, including increased legal and accounting costs, investor relations costs, higher insurance premiums and compliance costs associated with Section 404 of the Sarbanes-Oxley Act of 2002. In addition, we expect sales and marketing expenses to increase in absolute dollars in future periods. In particular, we expect to incur additional marketing costs to support the expansion of our offerings in new markets like commercial fleet management and agriculture.

Additional Capital

We require additional capital to continue to develop software and products, meet our contractual obligations, and execute our business plan. There can be no assurances that we will be able to raise additional capital on acceptable terms or at all, which would adversely affect our ability to achieve our business objectives.

Results of Operations

We had a net loss of $8,822,417 for the three-month period ended March 31, 2018, which was $6,350,542 more than the net loss of $2,471,875 for the three-month period ended March 31, 2017. The primary reason is attributable to the derivative gain recorded in the current quarter end relating to the change in fair value on convertible notes.

The following table summarizes key items of comparison and their related increase (decrease) for the three month periods March 31, 2018 and 2017:

Comparison of the three months ended March 31, 2018 and 2017:

Revenue

Revenue decreased by $137,374 or 55.3%, for the three months ended March 31, 2018 as compared to the three months ended March 31, 2017.

Due to the redevelopment of our product line, it has created lower sales overall than anticipated. We have been forced to move to a 3G/4G GPS cellular device, require redevelopment of our advertising, and also software development delays in integrating the tournament software onto the TOUCH screen, all of which that has caused delays in sales. Our company along with the new sales team is aggressively building its pipeline for the prospective periods.

Cost of Revenue

Cost of revenue decreased by $51,176, or 73.6%, for the three months ended March 31, 2018 as compared to the three months ended March 31, 2017. The table below outlines the differences in detail:

For the three months ended March 31, 2018 as compared to the three months ended March 31, 2017, the overall decrease was due to the decrease in inventory adjustments.

Compensation Expense

Compensation expense increased by $19,319, or 10.2%, for the three months ended March 31, 2018 as compared to the three months ended March 31, 2017.

General and Administration Expense

General & administration expense increased by $81,008 or 29% for the three months ended March 31, 2018 compared to the three months ended March 31, 2017. The table below outlines the differences in detail:

For the three months ended March 31, 2018 as compared to the three months ended March, 2017, the overall increase in general and administrative expense is primary related to increase in accounting and legal of $35,916 or 303%. Subcontractors and commissions increased by $31,717 due to the hiring of more contract workers. Office expense, travel, and other miscellaneous operational expenses also increased by $117,315 or 108%.

Warranty Expense

Warranty expense decreased by $2,624, or100% for the three months ended March 31, 2018 as compared to the three months ended March 31, 2017.

As of March 31, 2018, our balance sheet included a reserve of $137,701 for future warranty costs. No reserve was used in prior periods, and warranty costs were expensed as incurred.

Foreign Currency Exchange

For the three months ended March 31, 2018, we recognized a $506,666 loss in foreign currency transaction as compared to $11,003 in foreign currency transaction gain for the three months ended March 30, 2017. The increase in loss was primarily due to changes in unrealized exchange losses between intercompany balances for the three months ending March 31, 2018 due to exchange rate fluctuations on payables, receivables, and other foreign exchange transactions denominated in currencies other than the functional currencies of the legal entities in which the transactions are recorded. Foreign currency fluctuations are primarily from the Canadian Dollar, Euro and British pound.

Finance Costs

Finance costs increased by $410,098 or 124%, for the three months ended March 31, 2018 as compared to the three months ended March 31, 2017. Finance costs increased due to an increase in the number of conversions of our convertible debentures as well as incurring default and interest penalties for non-payment of our convertible notes payable.

Derivative Expense

Derivative expense increased by $3,761,844 or 203%, for the three months ended March 31, 2018 as compared to the three months ended March 31, 2017 due to the change in fair value of the beneficial conversion features on our convertible notes payable. The change in fair value was impacted heavily due to the volatility in the Company’s stock price.

Net Loss Attributable to DSG Global

As a result of the above factors, the net loss attributable to DSG Global increased by $6,625,095 or 316% for the three months ended March 31, 2018 as compared to the three months ended March 31, 2017. The overall increase was due primarily due to change in the fair value of the derivative liabilities given the increase in the amount of convertible notes issued and the discount-to-market for conversion of the principal and accrued interest portions of the convertible notes.

Liquidity and Capital Resources

From our incorporation in April 17, 2008 through March 31, 2018, we have financed our operations, capital expenditures and working capital needs through the sale of common shares and the incurrence of indebtedness, including term loans, convertible loans, revolving lines of credit and purchase order financing. At March 31, 2018, we had $7,583,038 in outstanding indebtedness, which all matures within the next twelve months.

We had cash in the amount of 147,343 as of March 31, 2018, as compared to $5,488 as of December 31, 2017. We had a working capital deficit of $14,777,676 as of March 31, 2018 compared to working capital deficit of $8,487,059 as of December 31, 2017.

During the three months ended March 31, 2018, the Company issued an aggregate of 743,097,344 common shares with a fair value of $1,803,141 upon the conversion of $399,297 of convertible debentures and $8,577 of accrued interest, as noted in Note 8. The Company recorded a loss on extinguishment of debt of $1,395,267 in connection with the conversions.

On February 7, 2018, the Company issued 20,742,000 common shares for proceeds of $34,846.

On March 19, 2018, the Company issued 29,258,000 common shares for proceeds of $46,813.

Liquidity and Financial Condition

Our financial position as of March 31, 2018 and 2017, and the changes for the periods then ended are as follows:

Working Capital

Cash Flow Analysis

Our cash flows from operating, investing, and financing activities are summarized as follows:

Net Cash (Used in) Provided by Operating Activities. During the three months ended March 31, 2018, cash used in operations totaled $555,304. This reflects the net loss of $8,822,417 less $8,280,378 provided by changes in operating assets and liabilities and adjustments for non-cash items. Cash provided by working capital items was primarily impacted by non-cash adjustments from fair valuing finance costs of $611,243, a loss on extinguishment of debt of $1,395,267 and a fair market value increase to derivatives of $5,616,261.

Net Cash (Used in) Provided by Investing Activities. There were no investing activities for the three months ended March 31, 2018 and March 31, 2017.

Net Cash (Used in) Provided by Financing Activities. Net cash from financing activities during the three months ended March 31, 2018 totaled $697,159, from the issuance of $81,659 in proceeds from share issuances and $615,500 in notes payable.

Outstanding Indebtedness

Our current indebtedness as of March 31, 2018 is comprised of the following. For loans that have expired terms, we are in talks with the lenders to extend them. The company must increase revenue or raise more equity capital to meet the payment obligations.

Our current indebtedness as of March 31, 2018 is comprised of the following:

Preferred Stock Redemption Obligations

Westergaard Holdings Ltd., an affiliate of Keith Westergaard, a former member of our board of directors, owns 4,229,384 shares (the “Series A Shares”) of Series A Convertible Preferred Stock of DSG TAG Systems. Pursuant to a Subscription / Debt Settlement Agreement dated September 26, 2014 between DSG TAG Systems and Westergaard Holdings, as amended on April 29, 2016, DSG TAG Systems has agreed that DSG Global, Inc. will complete financings for gross proceeds of at least $10 million and use a portion of the proceeds to redeem all of the Series A Shares at a price of $1.25 per share, as follows:

If we fail to satisfy the above described financing and share redemption schedule, we will be in default of the subscription and Debt Settlement Agreement which would entitle the holder of the Preferred Shares to convert the Series A Convertible Preferred Shares into common shares in the capital of DSG Global at the price of $1.25 per share. As of the date of this report, these commitments have not been satisfied and we are currently negotiating an extension on the terms of this agreement.

If we fail to satisfy the above described financing and share redemption schedule, we will be in default of the Subscription and Debt Settlement Agreement which would entitle the holder of the Preferred Shares to convert the Series A Convertible Preferred Shares into common shares in the capital of DSG Global at the price of $1.25 per share.

Related party transactions

As at March 31, 2018, the Company owes $154,143 (Cdn$198,715) (December 31, 2017 - $205,963 (Cdn$258,381)) to the President, CEO, and CFO of the Company for management fees, which has been recorded in accounts payable and accrued liabilities. The amounts owed, and owing are unsecured, non-interest bearing, and due on demand.

As at March 31, 2018, the Company owes $21,681 (Cdn$27,950) (December 31, 2017 - $4,273 (Cdn$27,950)) to a Company controlled by the son of the President, CEO, and CFO of the Company, which has been recorded in accounts payable and accrued liabilities. The amount owing is unsecured, non-interest bearing, and due on demand.

Prospective Capital Needs

We estimate our operating expenses and working capital requirements for the twelve-month period to be as follows:

As noted earlier, during the three months ended March 31, 2018, cash used in operations totaled $555,304. The relatively low level of cash used compared to our estimated working capital needs in the future was the result of an accumulation of vendor payables, customer receivables, and an increasing loan payable balance. We need to reduce the current level of payables in the near future to keep a good relationship with our vendors and expand our sales and service team to achieve our operational objectives. At present, our cash requirements for the next 12 months outweigh the funds available. Of the $2,550,000 that we require for the next 12 months, we had $147,343 in cash as of March 31, 2018, and a working capital deficit of $14,639,975. Our principal sources of liquidity are cash generated from product sales. In order to achieve sustained profitability and positive cash flows from operations, we will need to increase revenue and/or reduce operating expenses. Our ability to maintain, or increase, current revenue levels to achieve and sustain profitability will depend, in part, on demand for our products.

In order to improve our liquidity, we also plan to pursue additional equity financing from private investors or possibly a registered public offering. We do not currently have any definitive arrangements in place for the completion of any further private placement financings and there is no assurance that we will be successful in completing any further private placement financings. If we are unable to achieve the necessary additional financing, then we plan to reduce the amounts that we spend on our business activities and administrative expenses in order to be within the amount of capital resources obligations and execute our business plan. There can be no assurances that we will be able to raise additional capital on acceptable terms or at all, which would adversely affect our ability to achieve our business objectives.

Off-Balance Sheet Transactions

We do not have any off-balance sheet arrangements.

Critical Accounting Policies and Estimates

We prepare our consolidated financial statements in accordance with U.S. GAAP. The preparation of consolidated financial statements also requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue, costs and expenses, and related disclosures. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances. Actual results could differ significantly from the estimates made by our management. To the extent that there are differences between our estimates and actual results, our future financial statements presentation, financial condition, results of operations, and cash flows will be affected.

We believe that the assumptions and estimates associated with revenue recognition, foreign currency and foreign currency transactions and comprehensive loss have the greatest potential impact on our consolidated financial statements. Therefore, we consider these to be our critical accounting policies and estimates. For further information on all of our significant accounting policies, see the notes to our condensed consolidated financial statements.

Fair value

The Company records its cash and derivative liability at fair value.

The fair values of the derivative liabilities were calculated using a multi-nominal lattice model. The fair value of the derivative liabilities is revalued on each balance sheet date with corresponding gains and losses recorded in the consolidated statement of operations. For the three months ended March 31, 2018, the Company recorded a loss on the change in fair value of derivative liabilities of $5,616,261 (2017 – $1,854,417). As at March 31, 2018, the Company recorded a derivative liability of $8,124,723 (December 31, 2017 - $1,676,155).

The following inputs and assumptions were used to value the derivative liabilities outstanding during the period ended March 31, 2018 and 2017, assuming no dividend yield:

Item 3. Quantitative and Qualitative Disclosures About Market Risk

Not Applicable

Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

Management is responsible for establishing and maintaining adequate disclosure controls and procedures as defined in Rules 13a-15(e) or 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Our disclosure controls and procedures are designed to ensure that information required to be disclosed in reports filed under the Exchange Act, is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the Securities and Exchange Commission, and that such information is accumulated and communicated to management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure and to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with U.S. generally accepted accounting principles.

Our management, under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of the design and operation of our disclosure controls and procedures as of the end of the period covered by this quarterly report on Form 10-Q. Based upon this assessment, we determined that as of the end of period covered by this quarterly report on Form 10-Q our disclosure controls and procedures were not effective because there exist material weaknesses affecting our internal control over financial reporting.

The matters involving internal controls and procedures that our management considers to be material weaknesses under COSO and SEC rules are: (1) lack of a functioning audit committee, resulting in ineffective oversight in the establishment and monitoring of required internal controls and procedures; (2) inadequate segregation of duties consistent with control objectives; (3) insufficient written policies and procedures for accounting and financial reporting with respect to the requirements and application of US GAAP and SEC disclosure requirements; and (4) ineffective controls over period end financial disclosure and reporting processes. The aforementioned potential material weaknesses were identified by our Chief Financial Officer in connection with the preparation of our financial statements as of March 31, 2018, who communicated the matters to our management and board of directors.

Management believes that the material weaknesses set forth in items (2), (3) and (4) above did not have an effect on our financial results. However, the lack of a functioning audit committee, resulting in ineffective oversight in the establishment and monitoring of required internal controls and procedures, can impact our financial statements for the future years.