GLOBAL DIGITAL SOLUTIONS INC - Quarter Report: 2016 June (Form 10-Q)

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

 

For the Quarterly Period Ended June 30, 2016

 

or

 

 

For the Transition Period from _________ to _________

 

Commission file number: 000-26361

 

GLOBAL DIGITAL SOLUTIONS, INC.

(Exact name of registrant as specified in its charter)

 

New Jersey		22-3392051
(State or other Jurisdiction of Incorporation or Organization)		(I.R.S. Employer Identification No.)

 

777 South Flagler Drive, Suite 800 West Tower, West Palm Beach, FL		33401
(Address of Principal Executive Offices)		(Zip Code)

 

(561) 515-6163

(Registrant’s telephone number, including area code)

 

N/A

(Former name, former address and former fiscal year, if changed since last report)

 

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 ☑ 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 (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ☐ No ☑

 

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

 

Large accelerated filer	☐	Accelerated filer	☐
Non-accelerated filer	☐ (Do not check if a smaller reporting company)	Smaller reporting company	☑
		Emerging Growth company	☐

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 7(a)(2)(B) of the Securities Act: ☐

 

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

 

As of June 13, 2018, there were 559,084,905 shares of the registrant’s common stock outstanding.

 

 

GLOBAL DIGITAL SOLUTIONS, INC.

FORM 10-Q

FOR THE SIX MONTHS ENDED JUNE 30, 2016

 

TABLE OF CONTENTS

 

		Page
PART I. FINANCIAL INFORMATION
ITEM 1.	Financial Statements	3
	Condensed Consolidated Balance Sheets as of June 30, 2016 (unaudited) and December 31, 2015	3
	Condensed Consolidated Statements of Operations for the Three and Six Months Ended June 30, 2016 and 2015 (unaudited)	4
	Condensed Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2016 and 2015 (unaudited)	5
	Notes to Condensed Consolidated Financial Statements (unaudited)	6
ITEM 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations.	23
ITEM 3.	Quantitative and Qualitative Disclosures about Market Risk	30
ITEM 4.	Controls and Procedures	30
PART II. OTHER INFORMATION
ITEM 1.	Legal Proceedings	32
ITEM 1A.	Risk Factors	34
ITEM 2.	Unregistered Sales of Equity Securities and Use of Proceeds	34
ITEM 3.	Defaults Upon Senior Securities	34
ITEM 4.	Mine Safety Disclosures	34
ITEM 5.	Other Information	34
ITEM 6.	Exhibits	35
SIGNATURES		38

 

 

 

PART I – FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

 

GLOBAL DIGITAL SOLUTIONS, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)

 

	June 30, 2016	December 31, 2015
	(unaudited)
Assets
Current Assets
Cash	$959	$2,944
Accounts receivable	4,261	4,261
Prepaid expenses	22,597	99,111
Total current assets	27,817	106,316
Property and equipment, net of accumulated depreciation of $24,463 and $19,543	-	4,920
Deposits	2,415	2,415
Total assets	$30,232	$113,651
Liabilities and Stockholders' Equity
Current Liabilities
Accounts payable	$507,377	$357,198
Accrued expenses	254,926	197,300
Accrued interest		-
Convertible notes payable, net of disounts of $0 and $18,219, respectively	108,991	90,772
Due to factor, net of discount of $0 and $16,160, respectively	107,266	91,106
Financed insurance policy	11,187	64,847
Due to Officer	20,096	-
Derivative liability	334,859	270,080
Total current liabilities	1,344,702	1,071,303
Total Liabilities	1,344,702	1,071,303
Commitments and Contingencies (Note 6)
Stockholders’ deficit
Preferred stock, $0.001 par value, 35,000,000 shares authorized, none issued and outstanding	-	-
Common stock, $0.001 par value, 650,000,000 and 650,000,000 shares authorized, 530,806,571 and 530,806,571 shares issued and outstanding	$530,807	$530,807
Additional paid-in capital	30,052,372	30,178,926
Accumulated deficit	(31,897,649)	(31,667,385)
Total stockholders’ deficit	(1,314,470)	(957,652)
Total liabilities and stockholders' deficit	$30,232	$113,651

 

The accompanying footnotes are in integral part of these unaudited condensed consolidated financial statements.

 

 

GLOBAL DIGITAL SOLUTIONS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

 

	For the Three Months Ended		For the Six Months Ended
	June 30		June 30
	2016	2015	2016	2015
		(Restated)		(Restated)
Revenue	1,307	375,910	$14,386	$379,223
Cost of revenue		79,635	-	139,191
Gross profit	1,307	296,275	14,386	240,032
Operating expenses
Selling, general and administrative expenses	50,780	594,750	134,584	1,190,510
Operating loss before other income(expense)	(49,473)	(298,475)	(120,198)	(950,478)
Other (income)/expense
Change in fair market value of derivatives	122,964	(1,575,168)	64,779	(456,881)
Other Income	-	(212,440)	-	(374,599)
Loan Fees	-	113,845	-	113,845
Loss on extinguishment of debt	-	22,170	-	22,170
Finance Costs	-	554,778	-	1,131,058
Amortization of debt discount - Convertible Notes Payable	2,222	(52,825)	18,219	-
Amortization of debt discount - Factoring	-	-	16,160	-
Interest expense	5,454	27,609	10,908	83,391
	130,640	(1,122,031)	110,066	518,984
Loss before provision for income taxes	(180,113)	823,556	(230,264)	(1,469,462)
Provision for income taxes	-	280,009	-	-
Benefit of net operating loss	-	(280,009)	-	-
	-	-	-	-
Net loss	$(180,113)	$823,556	$(230,264)	$(1,469,462)
Income (loss) per common share - Basic:
Net Income(loss)	(0.00)	0.01	(0.00)	(0.01)
Loss per common share - diluted:
Net Income(loss)	(0.00)	0.01	(0.00)	(0.01)
Shares used in computing net income(loss) per share:
Basic	530,806,571	111,142,278	530,806,571	111,142,278
Diluted	530,806,571	135,560,247	530,806,571	111,142,278

 

The accompanying footnotes are in integral part of these unaudited condensed consolidated financial statements.

 

 

GLOBAL DIGITAL SOLUTIONS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

 

	For the Six Months Ended
	June 30, 2016	June 30, 2015
Operating Activities		(Restated)
Net loss	$(230,264)	$(1,469,462)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization	4,920	5,320
Stock- based compensation expense	(126,554)	472,416
Common stock and warrants issued in payment of services	-	64,132
Convertible debt discount amortization	34,380	-
Change in fair value of derivative liability	64,779	(703,832)
Debt discount accretion	-	757,671
Accounts receivable	-	(3,280)
Inventory	-	57,877
Prepaid expenses	76,514	42,597
Accounts payable	150,178	(2,607)
Accrued expenses	77,722	(245,947)
Financed insurance policy	(53,660)
Contingent consideration payable	-	(92,961)
Net cash used in operating activities	(1,985)	(1,118,076)
Investing Activities
Capital expenditures	-	(1,890)
Deposits
Net cash used in investing activities	-	(1,890)
Financing Activities
Payments on notes payable	-	(38,879)
Proceeds from convertible notes	-	1,137,174
Payment on convertible notes	-	(40,707)
Net cash provided by financing activities	-	1,057,588
Net decrease in cash	(1,985)	(62,378)
Cash at beginning of period	2,944	160,102
Cash at end of period	$959	$97,724
Supplementary disclosure of cash flow information
Cash paid during the year for:
Interest	$-	$13,048
Taxes	$-	$-
Supplementary disclosure of non-cash investing and financing activities
Purchase of NACSV with common shares	$-	$1,081,945

 

The accompanying footnotes are in integral part of these unaudited condensed consolidated financial statements.

 

   

GLOBAL DIGITAL SOLUTIONS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

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.

 

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 six months ended June 30, 2016 we incurred a net loss of $230,264 and used net cash of $1,985 to fund operating activities. At June 30, 2016, we had cash of $959, an accumulated deficit of $31,897,649, a working capital deficit of $1,316,885 and stockholders’ deficit of $1,314,470. We have funded our activities to date almost exclusively from equity and debt financings.

 

Our cash position is critically deficient, and payments essential to our ability to operate are not being made in the ordinary course. Failure to raise capital in the coming days to fund our operations and failure to generate positive cash flow to fund such operations in the future will have a material adverse effect on our financial condition. These factors raise substantial doubt about our ability to continue as a going concern.

 

We are in default under the terms of our loan agreements, as more fully discussed in Note 5. 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. On December 22, 2017, the Company entered into a financing agreement with an accredited investor for $1.2 million (Note 10).

 

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.

 

 

 

Principles of Consolidation

 

The accompanying consolidated financial statements include the accounts of the Company and our wholly owned subsidiaries, NACSV, GDSI Florida, LLC and Global Digital Solutions, LLC, dba GDSI International. All intercompany accounts and transactions have been eliminated in consolidation.

 

Basis of Presentation

 

The accompanying unaudited financial information as of and for the three and six months ended June 30, 2016 and 2015 has been prepared in accordance with accounting principles generally accepted in the U.S. for interim financial information and with the instructions to Quarterly Report on Form 10-Q and Article 10 of Regulation S-X. In the opinion of management, such financial information includes all adjustments (consisting only of normal recurring adjustments, unless otherwise indicated) considered necessary for a fair presentation of our financial position at such date and the operating results and cash flows for such periods. Operating results for the three and six months ended June 30, 2016 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, 2015 included in our Annual Report on Form 10-K filed with the SEC on May 31, 2018.

 

The condensed consolidated balance sheet at December 31, 2015 has been derived from the audited financial statements at that date, but does not include all of the information and footnotes required by generally accepted accounting principles in the U.S. for complete financial statements.

 

Revenue Recognition

 

The Company recognizes revenue when all of the following conditions are satisfied: (1) there is persuasive evidence of an arrangement; (2) the product or service has been provided to the customer; (3) the amount to be paid by the customer is fixed or determinable; and (4) the collection of such amount is probable. The Company records revenue when it is realizable and earned upon shipment of the finished products or when the service has been provided.

 

Fair Value of Financial Instruments

 

The carrying value of cash, accounts receivable, other receivables, 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. As defined in ASC 820, "Fair Value Measurements and Disclosures," fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (exit price). 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.

 

 

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 even though the exercise price could be less than the average market price of the common shares:

 

	Six Months Ended
	June 30, 2016	June 30, 2015
Convertible notes and accrued interest	84,619,626	766,666
Stock options	13,650,002	5,840,000
Warrants	2,500,000	4,250,000
Vested but unissued restricted stock awards	-	2,187,503
Price protection	-	1,854,838
Potentially dilutive securities	100,769,628	14,899,007

 

	Three Months Ended
	June 30, 2016	June 30, 2015
Convertible notes and accrued interest	84,619,626	766,666
Stock options	13,650,002	5,840,000
Warrants	2,500,000	4,250,000
Vested but unissued restricted stock awards	-	2,187,503
Price protection	-	1,854,838
Potentially dilutive securities	100,769’628	14,899,007

 

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 valuation of derivative liability, 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.

 

Inventory

 

The Company orders inventory/components upon receipt of a signed purchase order from a customer. The Company did not have any inventory at June 30, 2016 or December 31, 2015.

 

 

Recent Accounting Pronouncements

 

In May 2014, the FASB issued Accounting Standards Update (“ASU”) No. 2014-09, Revenue from Contracts with Customers: Topic 606, or ASU 2014-09. ASU 2014-09 establishes the principles for recognizing revenue and develops a common revenue standard for U.S. GAAP. The standard outlines a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and supersedes most current revenue recognition guidance, including industry-specific guidance. In applying the new revenue recognition model to contracts with customers, an entity: (1) identifies the contract(s) with a customer; (2) identifies the performance obligations in the contract(s); (3) determines the transaction price; (4) allocates the transaction price to the performance obligations in the contract(s); and (5) recognizes revenue when (or as) the entity satisfies a performance obligation. The accounting standards update applies to all contracts with customers except those that are within the scope of other topics in the FASB Accounting Standards Codification. The accounting standards update also requires significantly expanded quantitative and qualitative disclosures regarding the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers. This guidance is effective for fiscal years and interim periods within those years beginning after December 15, 2017. The Company is currently evaluating the impact that the implementation of ASU 2014-09 will have on the Company’s financial statements.

 

In August 2014, the FASB issued ASU No. 2014-15, Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern, or ASU 2014-15. ASU 2014-15 will explicitly require management to assess an entity’s ability to continue as a going concern, and to provide related footnote disclosure in certain circumstances. The new standard will be effective for all entities in the first annual period ending after December 15, 2016. Earlier adoption is permitted. The Company is not early adopting ASU 2014-15. The Company is currently evaluating the impact that the implementation of ASU 2014-15 will have on the Company’s financial statements, and the actual impact will be dependent upon the Company’s liquidity and the nature or significance of future events or conditions that exist upon adopting the updated standard.

 

In April 2015, the FASB issued ASU No. 2015-05, Customer’s Accounting for Fees Paid in a Cloud Computing Arrangement, or ASU 2015-05. ASU 2015-05 provides guidance to entities about whether a cloud computing arrangement includes a software license. Under ASU 2015-05, if a software cloud computing arrangement contains a software license, entities should account for the license element of the arrangement in a manner consistent with the acquisition of other software licenses. If the arrangement does not contain a software license, entities should account for the arrangement as a service contract. ASU 2015-05 also removes the requirement to analogize to ASC 840-10, to determine the asset acquired in a software licensing arrangement. For public companies, ASU 2015-05 is effective for annual periods, including interim periods within those annual periods, beginning after December 15, 2015, and early adoption is permitted. The Company does not expect that the adoption of ASU 2015-05 will have a material impact on its financial statements.

 

In November 2015, the FASB issued ASU No. 2015-17, Balance Sheet Classification of Deferred Taxes, or ASU 2015-17. ASU 2015-17 provides guidance on balance sheet classification of deferred taxes. The new guidance requires that all deferred tax assets and liabilities, along with any related valuation allowance, be classified as noncurrent on the balance sheet. For public companies, ASU 2015-17 is effective for annual periods, including interim periods within those annual periods, beginning after December 15, 2016, and early adoption is permitted. The Company does not expect that the adoption of ASU 2015-17 will have a material impact on its financial statements.

 

In February 2016, the FASB issued ASU No. 2016-02, Leases, or ASU 2016-02. The new guidance requires lessees to recognize the assets and liabilities arising from leases on the balance sheet. For public companies, ASU 2016-02 is effective for annual periods, including interim periods within those annual periods, beginning after December 15, 2018, and early adoption is permitted. The Company does not expect that the adoption of ASU 2016-02 will have a material impact on its financial statements.

 

 

NOTE 3 – ACCRUED EXPENSES

 

Accrued expenses consist of the following amounts:

 

	June 30, 2016	December 31, 2015
Accrued compensation to executive officers and employees	$57,129	$151,565
Accrued professional fees	19,500	45,735
Accrued personnel costs	151,565	-
Accrued interest	26,732	-
Total accrued expenses	$254,926	$197,300

 

NOTE 4 – FAIR VALUE MEASUREMENTS

 

The Company did not have any Level 1 or Level 2 assets and liabilities at June 30, 2016 and December 31, 2015. The Derivative liabilities are Level 3 fair value measurements.

 

The following is a summary of activity of Level 3 liabilities during the six months ended June 30, 2016:

 

Derivative liability balance at December 31, 2015	$270,080
Change in fair value	64,779
Balance at June 30, 2016	$334,859

 

At June 30, 2016, the fair value of the derivative liabilities of convertible notes was estimated using the following weighted-average inputs: risk free interest rate – 0.26%; term - .25 years; volatility – 284.6%; dividend rate – 0%.

 

Carrying Value of Other Current Assets and Other Current Liabilities

 

The Company’s management considers the carrying values of other current assets and other current liabilities to approximate fair values primarily due to their short-term nature.

 

NOTE 5– NOTE PAYABLE

 

Convertible Notes Payable with Embedded Derivative Liabilities (Conversion Options)

 

	June 30, 2016	December 31, 2015
Convertible note payable for $78,750 to LG Capital Funding, LLC (“LG Capital”) dated January 16, 2015, due January 16, 2016, of which $38,829 was repaid by conversion as of December 31, 2015, bearing interest at the rate of 8% per annum. Note may be converted by LG Capital into shares of our common stock at a conversion price equal to a 40% discount of the lowest closing bid price for 20 prior trading days including the notice of conversion date. (1) (2)	$39,921	$39,921
Convertible note payable for $250,000 to JMJ Financial (“JMJ”) of which $82,500 was deemed funded on January 28, 2015 and $27,500 was deemed funded on April 20, 2015, of which $40,930 was repaid by conversion as of December 31, 2015. The note was issued with an original issue discount of 10% of amounts funded. The principal amount matures 24 months from the date of each funding, had a one-time 12% interest charge as it was not repaid within 90 days of the effective date, and is convertible at any time at the option of JMJ into shares of our common stock at the lesser of $0.075 per share or 60% of the average of the trade price in the 25 trading days prior to conversion. JMJ has the option to finance additional amounts up to the balance of the $250,000 during the term of the note. (1) (2)	$69,070	$69,070
Total convertible notes payable with embedded derivative liability	$108,991	$108,991

 

(1)	The embedded derivative liability associated with the conversion option of the note was bifurcated from the note and recorded at its fair value on the date of issuance and at each reporting date.

 

(2)	Note was due on January 16, 2016. We have not yet repaid this note and it is, therefore, in default. We have also not maintained the required number of shares of our common stock in reserve for this note as more fully discussed below.

 

 

Under the terms of the two convertible promissory notes outstanding at June 30, 2016 and December 31, 2015, we are required to maintain a minimum number of shares of our common stock in reserve for conversions. In the case of the note with JMJ, the reserve amount is set at 26,650,000 shares of our common stock. However, under the terms of the note with LG Capital we are required to maintain a minimum share reserve equal to four times the potential number of shares of our common stock issuable upon conversion, or 66,204,427 shares at December 31, 2015. As a result of declines in the fair value of our common stock, we did not have sufficient authorized shares to maintain this required four times share reserve at December 31, 2015. Accordingly, the note holder had the right to accelerate the payment due (approximately $43,033 of principal and interest was due at December 31, 2015). In addition, they have the right to require that additional shares and/or monies be paid in connection with this technical default. At June 30, 2016, we have not accrued any penalties or penalty interest associated with this note, nor have we been notified by the lender of a technical default. Because the conversion prices vary with changes in the value of our common stock, the number of shares into which the outstanding notes payable and accrued interest are convertible will continue to vary, which may result in additional technical defaults if the price of our common stock decreases. As soon as we are able, we intend to request shareholder approval to increase the number of authorized shares of our common stock in order to satisfy our obligations to maintain sufficient authorized share reserves under the terms of our convertible notes. In addition, the two outstanding convertible notes also contain certain representations, warranties, covenants and other events of default, including in the case of one of the notes maintaining our common stock listing on the OTCQB exchange.

 

Revenue Based Factoring Agreements

 

During the year ended December 31, 2015, we entered into two revenue based factoring agreements with balances as of June 30, 2016 and December 31, 2015 as follows:

 

Factoring agreement with Power Up Lending Group, Ltd. (“Power Up”) dated October 1, 2015, purchase price was $59,000. Company agreed to transfer all NACSV future receipts, accounts, contract rights, etc. arising from accounts receivable or other third party payors at the specified percentage of 24% until such time as $76,700 is paid in full. A daily repayment amount of $457 is required to be made and is credited against the specified percentage due. As of December 31, 2015, we paid $21,458 of the daily specified repayments and we had not made $9,588 of payments that were due. At June 30, 2016 and December 31, 2015, $12,748 and $12,748, respectively, of deferred interest expense related to this agreement is included in current assets. (1) (2) (3)	$55,242
Factoring agreement with Power Up dated October 23, 2015, purchase price was $50,000. Company agreed to transfer all NACSV future receipts, accounts, contract rights, etc. arising from accounts receivable or other third party payors at the specified percentage of 24% until such time as $69,000 is paid in full. A daily repayment amount of $548 is required to be made and is credited against the specified percentage due. As of December 31, 2015, we paid $16,976 of the daily specified repayments and we had not made $10,952 of payments that were due. At June 30, 2016 and December 31, 2015, $14,326 and $14,326, respectively, of deferred interest expense related to this agreement is included in current assets. (2) (3)	$52,024
Total due to factor	$107,266

 

(1)	We used the purchase price proceeds to satisfy in full the obligations under two convertible notes payable with embedded derivative liabilities.

 

(2)

The agreement contains certain protections against default, including prohibiting NACSV from changing its arrangement with its bank in any way that is adverse to Power Up and NACSV interrupting the operation of its business, among others. Events of default include: (i) the violation of any term or covenant under the agreement, (ii) the failure of NACSV to pay its debts when due and (iii) the transfer or sale of all or substantially all of NACSV’s asset, amount others.

 

(3)

We are currently in default under the terms of the two factoring agreements as we have not made the specified daily repayment amounts aggregating $20,540 and $107,266 as of December 31, 2015 and April 9, 2016, respectively, among other items. At June 30, 2016 and December 31, 2015, we have not accrued any penalties or interest that might be due as a result of the defaults.

 

Notes Payable

 

Notes payable at March 31, 2016 and 2015 consist of the following:

 

Type	Collateral (if any)	Interest Rate	Monthly Payments	Maturity	March 31, 2016	December 31, 2015
Premium finance agreement	None	5.10%	$10,507	June-2016	$8,150	$61,810
Premium finance agreement	None	9.25%	$3,414	January-2016	$3,037	$3,037
Total notes payable					$11,187	$64,847

 

 

NOTE 6 – COMMITMENTS AND CONTINGENCIES

 

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.

 

On July 27, 2017, the Company and Dekle and Ramsay came to a Settlement Agreement.  The Company and the plantiff came to the following agreements:

 

The $20,000 settlement was paid in August 2017

 

PowerUp Lending Group, LTD., v. North American Custom Specialty Vehicle, Inc. et.al

 

On September 13, 2017 Power Up received a default judgment against the Company in the amount of $109,302.00.  The Company negotiated a settlement agreement on December 21, 2017 with Power Up to pay $90,000 in three installments of $30,000. As of May 15, 2018 the company has paid the entire amount.

 

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.

  

 

 

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. Juriisidctional discovery was ordered. As of this date, the Court has not issued a decision and Order regarding Defendants’ Motion to Dismiss the Complaint. The Company believes the likelihood of an unfavorable outcome of the dispute is remote.

 

Adrian Lopez v. Global Digital Solutions, Inc. and William J. Delgado Superior Court of New Jersey, Chancery Division, Mercer County, Equity Part, Docket No. MER-L-002126-17

 

On September 28, 2017, Plaintiff Adrian Lopez (“Lopez”) brought an action against Global Digital Solutions, Inc. (“GDSI”) and William J. Delgado (“Delgado”) to compel a meeting of the stockholders of Global Digital Solutions, Inc. pursuant to Section 2.02 of GDSI’s Bylaws and New Jersey Revised Statute § 14A:5-2. On October 27, 2017, Defendants GDSI and Delgado filed a Motion to Stay the Proceeding. On November 24, 2017, Plaintiff filed an Objection to Defendants’ Motion to Stay the Proceeding. On January 19, 2018, Defendants’ Motion to Stay the Proceeding was denied. On February 2, 2018, Defendants filed a Motion to Dismiss the Complaint. On February 20, 2018, Plaintiff filed a Motion to Consolidate Cases. On March 21, 2018, Plaintiff filed an Opposition to Defendants’ Motion to Dismiss the Complaint. On March 23, 2018, Defendants filed a Brief in Reply to Plaintiff’s Opposition to Defendants’ Motion to Dismiss the Complaint. As of this date, the Court has not issued a decision and Order regarding Defendants’ Motion to Dismiss the Complaint. The Company believes the likelihood of an unfavorable outcome of the dispute is remote.

 

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 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).

 

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.

 

 

In the Matter of Global Digital Solutions, Inc., Administrative Proceeding File No. 3-18325. Administrative Proceeding Before the Securities and Exchange Commission

 

On December 26, 2017, the Securities and Exchange Commission instituted public administrative proceedings pursuant to Section 12(j) of the Securities Exchange Act of 1934 (“Exchange Act”) against the Respondent Global Digital Solutions, Inc. On January 8, 2018, Respondent Global Digital Solutions, Inc. (“GDSI”) filed its answer to the allegations contained in the Order Instituting Administrative Proceedings and Notice of Hearing Pursuant to Section 12U) of the Exchange Act. A briefing schedule was entered into and on February 15, 2018, the Securities and Exchange Commission filed a motion for an order of summary disposition against Respondent GDSI on the grounds that there is no genuine issue with regard to any material fact, the Division was entitled as a matter of law to an order revoking each class of GDSI's securities registered pursuant to Section 12 of the Exchange Act. Respondent GDSI opposed the Securities and Exchange Commission’s motion on the grounds that there were material issues of fact. The Securities and Exchange Commission replied and a hearing was held on April 9, 2018. The Administrative Law Judge ordered supplemental evidence and briefing on the issues of material fact. The Company believes the likelihood of an unfavorable outcome of the dispute is reasonably possible, but is not able to reasonably estimate a range of potential loss, should the outcome be unfavorable.

 

NOTE 7 – STOCKHOLDERS’ EQUITY

 

Preferred Stock

 

We are authorized to issue 35,000,000 shares of noncumulative, non-voting, nonconvertible preferred stock, $0.001 par value per share. At June 30, 2016 and December 31, 2015, no shares of preferred stock were outstanding.

 

Common Stock

 

We are authorized to issue 650,000,000 shares of common stock, $0.001 par value per share. At June 30, 2016 and December 31, 2015, 530,806,571 and 530,806,571 shares were issued, outstanding, or vested but unissued under stock compensation plans, respectively

 

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-2

Services

1,000,000

$0.15

May, 2013

May, 2014

May, 2018

A-3

Services

500,000

$0.50

June, 2013

June, 2014

June, 2018

A-4

Services

1,000,000

$1.00

October, 2013

October, 2013

October, 2016

 

All warrants are exercisable at any time through the date of expiration. All agreements provides 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 following is a summary of outstanding and exercisable warrants at June 30, 2016:

 

	Outstanding			Exercisable
Range of Exercise Prices	Weighted Average Number Outstanding at 6/30/16	Outstanding Remaining Contractual Life (in yrs.)	Weighted Average Exercise Price	Number Exercisable at 6/30/16	Weighted Average Exercise Price
$0.15	1,000,000	2.3	$0.15	1,000,000	$0.15
$0.50	500,000	2.5	$0.50	500,000	$0.50
$0.15 to 0.50	1,500,000	1.40	$0.63	1,500,000	$0.63

 

The intrinsic value of warrants outstanding at June 30, 2016, and December 31, 2015 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 expense for the six month and three month periods ended ended June 30, 2016 and June 30, 2015 is comprised as follows:

 

	Three Months Ended		Six Months Ended
	June 30, 2016	June 30, 2015	June 30, 2016	June 30, 2015
Fair value expense of stock option grants	$(52,229)	100,222	$(74,807)	100,222
Fair value expense of restricted stock unit grants	-	-	(51,747)	-
Fair value expense of restricted stock grants	-	-	-	208,280
	$(52,229)	100,222	$(126,554)	308,502

 

Awards Issued Under Stock Incentive Plans

 

Stock Option Activity

 

At June 30, 2016, we have outstanding 13,650,002 stock options, which are fully-vested stock options that were granted to directors, officers and consultants and 0 of which are unvested stock options that were granted to directors, employees and consultants. At December 31, 2015, we had outstanding 15,100,000stock options - 14,116,668 of which are fully-vested stock options that were granted to directors, officers and consultants and 983,332 of which are unvested stock options that were granted to directors, employees 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. During 2016 the 983,332 unvested stock options were either forfeited due to employees leaving the Company, or cancelled by the Board due to performance levels not being met.

 

 

Issuances of Stock Options

 

Effective as of April 10, 2015, David A. Loppert retired as our CFO and as an officer of the Company and we appointed Jerome J. Gomolski as our CFO. In connection with his appointment as our CFO, on April 1, 2015, Mr. Gomolski was granted stock options to acquire 500,000 shares of our common stock pursuant to the Plan. The options have an exercise price of $0.10 per share, vest one-third on each of October, 1 2015, April 1, 2016 and October 1, 2016, expire on April 1, 2025 and had an aggregate grant date fair value of $50,000, which will be recognized as compensation as the options vest. During 2016, the unvested stock options were cancelled, and no further stock compensation was recognized.

 

On April 1, 2015, we granted stock options to acquire 300,000 shares of our common stock to each of two consultants. The options have an exercise price of $0.10 per share, vest one-third on each of October 1, 2015, April 1, 2016 and October 1, 2016 and expire on March 31, 2025. The options had an aggregate grant date fair value of $30,000 each, which will be recognized as compensation as the options vest. During 2016, the unvested stock options were cancelled, and no further stock compensation was recognized.

 

On April 20, 2015 we granted options to acquire 500,000 shares of our common stock exercisable at $0.14 per share to each of William J. Delgado, executive officer and director, and Arthur F. Noterman and Stephanie C. Sullivan, directors. The options vest one-third on each of October 1, 2015, April 1, 2016 and October 1, 2016, are exercisable through March 31, 2025, and had an aggregate grant date fair value of $70,000 each, which will be recognized as compensation as the options vest. During 2016, the unvested stock options were cancelled, and no further stock compensation was recognized.

 

On May 8, 2015, we granted stock options to acquire an aggregate of 300,000 shares of our common stock to four employees. The options have an exercise price of $0.08 per share, vested ratably over a three-year period, expire ten years from the date of grant and had an aggregate grant date fair value of $24,000, which will be recognized as compensation as the options vest. During 2016, the unvested stock options were cancelled, and no further stock compensation was recognized.

 

On November 30, 2015, we granted to each of our executive officers, Jerome J. Gomolski and Gary A. Gray, and to an employee options to acquire 1,000,000 shares of our common stock exercisable at $0.006 per share. The options vested on the date of grant and expire on November 30, 2025 and had an aggregate grant date fair value of $50,000 each.

 

On December 9, 2015, we granted to Vox Equity Partners LLC options to acquire 4,000,000 shares of our common stock exercisable at $0.006 per share. The 4,000,000 options vested on the date of grant, expire on December 8, 2025 and had a grant date fair value of $24,000.

 

 On December 15, 2015, we granted to each of William J. Delgado, executive officer and director, and Arthur F. Noterman and Stephanie C. Sullivan, directors options to acquire 750,000 shares of our common stock exercisable at $0.008 per share. The options vested on the date of grant and expire on December 14, 2025. The options had an aggregate grant date fair value of $6,000 each.

 

A summary of the stock option activity for our stock options plans for six months ended June 30, 2016 is as follows:

 

	Number of Options	Exercise Price per Share	Average Remaining Term in Years	Aggregate Intrinsic Value at Date of Grant
Outstanding December 31, 2015	15,100,000	$0.18	8.4	-
Options granted	-	-	-	-
Options exercised	-			-
Forfeited in 2016	(1,449,998)	$0.01
Outstanding June 30, 2016	13,650,002	0.03	-	-
Exercisable at June 30 2016	13,650,002	$0.03	8.4	-
Unvested at June 30, 2016	-	-

 

 

During the three and six months ended June 30, 2016 and 2015, we recorded stock-based compensation cost related to the outstanding stock options of ($52,229) and $100,222, and ($74,807) and $100,222, respectively. At June 30, 2016, the unamortized value of the outstanding stock options was $0. The intrinsic value of options outstanding at June 30, 2016 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.

 

During the six months ended June 30, 2016, 983,332 stock options that had not yet vested were forfeited.

 

Restricted Stock Units

 

A summary of RSU’s outstanding as of June 30, 2016 and changes during the six months then ended is presented below:

 

	Number	Weighted Average Grant Date Fair Value	Aggregate Intrinsic Value
Nonvested at December 31, 2015	1,000,000	$(0.10)	-
Issued	-	-	-
Vested	-	-	-
Forfeited	(1,000,000)	-	-
Nonvested at June 30, 2016	-	-	$0.00

 

We recorded stock-based compensation expense related to these RSU’s of $0 and ($51,747) for the six months ended June 30, 2016 and 2015, respectively. The 1 million unvested RSU’s were forfeited during the six months ended June 30, 2016.

 

Restricted Stock Grants

 

On March 7, 2015, we granted 1,000,000 restricted shares of our common stock to Gary A. Gray, our Executive Vice President. The restricted stock vested on May 30, 2015 and had a grant date fair value of $40,000.

 

On March 7, 2015, we granted 500,000 restricted shares of our common stock to an employee. The restricted stock vested on May 30, 2015 and had a grant date fair value of $20,000.

 

Awards Not Issued Under Stock Incentive Plans

 

Restricted Stock Grants Awarded to Advisors

 

In order to align our senior advisors with the interest of the stakeholders of the Company, the Board of Directors of the Company has granted the advisors restricted stock awards valued at $0.17 to $0.364 per share which vest over a period of 12 – 24 months, subject to remaining and advisor for a minimum of twelve months, and which are forfeited if the advisor is terminated or is no longer an advisor on the anniversary of the advisory award, as follows:

 

					June 30, 2016
Name	Date of Grant	Number of Shares	Vest from	Vest To	Vested	Unvested	Forfeited
Mathew Kelley	4/17/13	1,250,000	4/30/13	3/31/14	1,250,000	-	-
	4/17/13	1,250,000	2/28/14	1/31/15	1,250,000	-	-
Richard J. Feldman	4/30/14	500,000	4/30/14	3/30/15	500,000	-	-
		500,000	4/30/15	3/30/16	500,000	-	-
Gary Gray	3/7/15	1,000,000	3/7/15	5/30/15	1,000,000
Ross Trevino	3/7/15	500,000	3/7/15	5/30/15	500,000
		5,000,000			5,000,000	-	-

 

 

 

A summary of restricted stock grants outstanding as of June 30, 2016 and December 31, 2015, and the changes during the six months then ended is presented below:

 

	Number	Weighted Average Grant Date Fair Value	Aggregate Intrinsic Value
Nonvested at December 31, 2015	125,000	0.40	$0.00
Granted	-	$-
Vested	-)	-
Forfeited	(125,000)	(0.40)	-
Nonvested at June 30, 2016	-	$-	$0.00

 

We recorded stock-based compensation expense related to these restricted stock grants of $0 and $208.280 for the six months ended June 30, 2016 and 2015, respectively.

 

NOTE 8 – RESTATEMENT

 

The financial statements for the comparative periods in fiscal 2015 have been restated from those previously filed in the Quarterly Reports with the SEC, due to several errors discovered in the quarterly amounts during the December 31, 2015 audit of our financial statements. These changes included adjustments to a write down of Inventory and Accounts receivable, changes in the timing of recognition of some items, and certain reclassifications.

The restated changes for the consolidated balance sheets for June 30, 2015 is presented below:

 

	June 30, 2015	June 30, 2015	June 30, 2015
	As Originally Presented	Changes	Restated
Assets
Current Assets
Cash	$147,840	$(50,116)	$97,724
Accounts receivable	305,679	(299,999)	5,680
Inventory	226,897	(226,897)	-
Debt issuances fees	29,633	(29,633)	-
Prepaid expenses	59,326	(20,424)	38,902
Total current assets	769,375	(627,069)	142,306
Property and equipment, net of accumulated depreciation	6,546	(936)	5,610
Deposits	2,415	20,424	22,839
Total assets	$778,336	$(607,581)	$170,755
Liabilities and Stockholders' Equity
Current Liabilities
Accounts payable	$36,480	$(701)	$35,779
Accrued expenses	181,602	-	181,602
Accrued interest	33,326	-	33,326
Contingent liability	-	555,653	555,653
Derivative liability	830,426	(830,426)	-
Convertible notes payable, net of disount	496,557	(29,633)	466,924
Notes Payable	19,379	-	19,379
Total current liabilities	1,597,770	(305,107)	1,292,663
Derivative liability		991,575	991,575
Deferred purchase price	555,653	(555,653)	-
Total Liabilities	2,153,423	130,815	2,284,238
Commitments and Contingencies (Note 6)
Stockholders’ deficit
Preferred stock	-	-	-
Common stock	$111,142	$955	$112,097
Additional paid-in capital	29,089,265	(599,844)	28,489,421
Accumulated deficit	(30,575,494)	(139,507)	(30,715,001)
Total stockholders’ deficit	(1,375,087)	(738,396)	(2,113,483)
Total liabilities and stockholders' deficit	$778,336	$(607,581)	$170,755

 

 

The restated changes for the statement of operations for the six months ended June 30, 2015 is presented below:

 

	For the Three Months Ended
	June 30
	2015	2015	2015
	As Originally Presented	Changes	(Restated)
Revenue	379,223	(3,313)	375,910
Cost of revenue	256,841	(177,206)	79,635
Gross profit	122,382	173,893	296,275
Operating expenses
Selling, general and administrative expenses	633,428	(38,678)	594,750
Operating loss before other income(expense)	(511,046)	212,571	(298,475)
Other (income)/expense
Change in fair market value of derivatives	(1,575,168)	-	(1,575,168)
Other Income	(190,240)	(30)	(190,270)
Loan Fees		61,020	61,020
Finance Costs		554,778	554,778
Interest expense	582,387	(554,778)	27,609
	(1,183,021)	60,990	(1,122,031)
Income before provision for income taxes	671,975	151,581	823,556
Provision for income taxes	-	-	-
Net income	671,975	151,581	823,556
Net income	$671,975	$151,581	$823,556
Income per common share - Basic:
Net Income	0.01	2.05	0.01
Shares used in computing net income per share:
Basic	111,068,179	74,099	111,142,278
Diluted	136,984,148	-	530,806,571