UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

 

For the quarterly period ended September 30, 2016

 

or

 

[  ] Transition Report Pursuant Section 13 or 15(d) of the Securities Exchange Act of 1934

 

For the transition period from _____________ to _____________.

 

Commission file number 000-53988

 

DSG GLOBAL, INC.

(Exact name of registrant as specified in its charter)

 

Nevada   26-1134956
(State or other jurisdiction of
incorporation or organization)
 

(I.R.S. Employer

Identification No.)

 

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 [X] No [  ]

 

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):

 

     Large accelerated filer [  ]   Accelerated filer    [  ]
     Non-accelerated filer [  ] (Do not check if smaller reporting company) Smaller reporting company    [X]

 

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 December 1, 2016, the issuer had 30,291,187 shares of common stock issued and outstanding.

 

 

 

     
 

 

DSG GLOBAL, INC.
TABLE OF CONTENTS

 

    Page No.
PART I — FINANCIAL INFORMATION  
     
Item 1. Financial Statements (unaudited) 3
     
  Condensed Consolidated Balance Sheets 4
     
  Condensed Consolidated Statements of Operations 5
     
  Condensed Statements of Comprehensive Loss 6
     
  Condensed Consolidated Statements of Stockholders’ Deficit 7
     
  Condensed Consolidated Statements of Cash Flows 8
     
  Notes to Condensed Consolidated Financial Statements 9
     
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 22
     
Item 3. Quantitative and Qualitative Disclosures About Market Risk 35
     
Item 4. Controls and Procedures 35
     
PART II — OTHER INFORMATION
     
Item 1. Legal Proceedings 36
     
Item 1A. Risk Factors 36
     
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 36
     
Item 3. Defaults Upon Senior Securities 36
     
Item 4. Mine Safety Disclosures 36
     
Item 5. Other Information 36
     
Item 6. Exhibits 37
     
Signatures 40

 

  2  
 

 

PART I: FINANCIAL INFORMATION

 

ITEM 1: Financial Statements (unaudited)

 

The accompanying unaudited consolidated interim financial statements of DSG Global Inc. as at September 30, 2016, 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 nine month period ended September 30, 2016 are not necessarily indicative of the results that can be expected for the year ending December 31, 2016.

 

  3  
 

 

DSG GLOBAL, INC. AND SUBSIDIARY

CONDENSED CONSOLIDATED BALANCE SHEETS

 

    September 30, 2016     December 31, 2015  
    (UNAUDITED)      
ASSETS                
                 
CURRENT ASSETS                
Cash   $ -     $ -  
Trade receivables, net     81,675       73,212  
Inventories     98,453       306,648  
Funds held in trust     -       3,414  
Prepaid expenses and deposits     67,571       155,932  
Other current assets     -       26,902  
Receivable from related party     16,663       91,727  
TOTAL CURRENT ASSETS     264,362       657,835  
                 
NON-CURRENT ASSETS                
Intangible assets, net     16,876       16,984  
Fixed assets, net     5,901       6,971  
Equipment on lease, net     79,235       105,526  
TOTAL NON-CURRENT ASSETS     102,012       129,481  
                 
TOTAL ASSETS   $ 366,374     $ 787,316  
                 
LIABILITIES AND STOCKHOLDERS’ DEFICIT                
                 
CURRENT LIABILITIES                
Bank overdraft   $ 34,501     $ 25,269  
Trade and other payables     2,004,247       1,428,509  
Deferred revenue     161,486       99,739  
Warranty reserve     114,355       108,381  
Convertible note payable to related party     332,871       310,000  
Loans payable     873,330       546,137  
Convertible loans payable     1,338,574       1,139,543  
TOTAL CURRENT LIABILITIES     4,859,364       3,657,579  
                 
MEZZANINE EQUITY                
Redeemable Noncontrolling Interest - Preferred Shares   $ 5,286,731     $ 5,286,731  
                 
STOCKHOLDERS’ DEFICIT                
Common stock, $0.001 par value, 125,000,000 shares authorized and 30,291,187 outstanding at September 30, 2016 and December 31, 2015.     30,291       30,291  
Additional paid in capital     15,849,683       15,873,724  
Other accumulated comprehensive income     1,170,909       1,306,959  
Accumulated deficit     (25,955,168 )     (24,707,197 )
Total sharesholders’ deficit attributable to DSG Global     (8,904,285 )     (7,496,223 )
Noncontrolling interest     (875,436 )     (660,771 )
TOTAL STOCKHOLDERS’ DEFICIT     (9,779,721 )     (8,156,994 )
               
TOTAL LIABILITIES AND STOCKHOLDERS’ DEFICIT   $ 366,374     $ 787,316  

 

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

 

  4  
 

 

DSG GLOBAL, INC. AND SUBSIDIARY

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(UNAUDITED)

 

    Three Months Ended     Nine Months Ended  
    September 30, 2016     September 30, 2015     September 30, 2016     September 30, 2015  
                         
Revenue   $ 243,469     $ 438,445     $ 980,714     $ 1,697,660  
Cost of revenue     191,386       235,298       426,453       964,342  
Gross profit     52,083       203,147       554,261       733,318  
                                 
Operating Expenses                                
Compensation expense     186,453       254,947       569,512       581,264  
Research and development expense     18,088       6,835       54,436       41,684  
General and administration expense     275,106       327,224       795,171       1,073,377  
Warranty expense     49,390       42,663       161,762       148,000  
Bad debt     2       1,160       4,285       10,021  
Depreciation and amortization expense     11,755       6,924       39,692       25,377  
Total operating expense     540,794       639,754       1,624,858       1,879,723  
Loss from operations     (488,711 )     (436,607 )     (1,070,597 )     (1,146,405 )
                                 
Other Income (Expense)                                
Foreign currency exchange     (23,816 )     (27,174 )     27,386       (62,556 )
Other (expenses) Income     (8,407 )     (10,300 )     (9,950 )     (17,430 )
Finance costs     (153,003 )     (47,804 )     (433,516 )     (189,512 )
Total Other Expense     (185,226 )     (85,278 )     (416,080 )     (269,498 )
                                 
Loss from continuing operations before income taxes     (673,937 )     (521,885 )     (1,486,677 )     (1,415,903 )
                                 
Provision for income taxes     -       -       -       -  
                                 
Net loss     (673,937 )     (521,885 )     (1,486,677 )     (1,415,903 )
                                 
Less attributed to noncontolling interest     108,559       82,886       238,706       229,857  
                                 
Net loss attributable to DSG Global   $ (565,378 )   $ (438,999 )   $ (1,247,971 )   $ (1,186,046 )
                                 
Net loss per share                                
                                 
Basic and Diluted:                                
Basic   $ (0.019 )   $ (0.015 )   $ (0.041 )   $ (0.050 )
Diluted   $ (0.019 )   $ (0.015 )   $ (0.041 )   $ (0.050 )
                                 
Weighted average number of shares used in computing basic and diluted net loss per share:                                
                                 
Basic     30,291,187       30,121,003       30,291,187       23,702,297  
Diluted     30,291,187       30,121,003       30,291,187       23,702,297  

 

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

 

  5  
 

 

DSG GLOBAL, INC. AND SUBSIDIARY

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS

(UNAUDITED)

 

    Three Months Ended     Nine Months Ended  
    September 30, 2016     September 30, 2015     September 30, 2016     September 30, 2015  
                         
Net loss   $ (673,937 )   $ (521,885 )   $ (1,486,677 )   $ (1,415,903 )
Other comprehensive income                                
                               
Change in foreign currency translation adjustments     34,481       118,528       (134,103 )     165,037  
Comprehensive loss     (639,456 )     (403,357 )     (1,620,780 )     (1,250,866 )
Less: Comprehensive loss attributable to noncontrolling interest     107,670       77,674       236,759       243,525  
                               
Total comprehensive loss attributable to DSG Global   $ (531,786 )   $ (325,684 )   $ (1,384,021 )   $ (1,007,341 )

 

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

 

  6  
 

 

DSG GLOBAL, INC. AND SUBSIDIARY

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ DEFICIT

(UNAUDITED)

 

    Equity Attributable to Common Shareholders              
    Common Stock     Additional
Paid in
    Accumulated     Accumulated
Comprehensive
    Total Deficit
Attributable
to Common
    Noncontrolling     Total
Stockholders’
 
    Shares     Amount     Capital     Deficit     Income     Shareholders     Interest     Deficit  
                                                 
Balance December 31, 2015     30,291,187     $ 30,291     $ 15,873,724     $ (24,707,197 )   $ 1,306,959     $ (7,496,223 )   $ (660,771 )   $ (8,156,994 )
                                                                 
Adjustment to paid in capital for minority interest                     (24,041 )                    

(24,041

)     24,041          
                                                                 

Net loss for the nine months ended September 30, 2016

                            (1,247,971 )     (136,050 )     (1,384,021 )     (238,706 )     (1,622,727 )
                                                                 
Balance September 30, 2016     30,291,187     $ 30,291     $ 15,849,683     $ (25,955,168 )   $ 1,170,909     $ (8,904,285 )   $ (875,436 )   $ (9,779,721 )

 

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

 

  7  
 

 

DSG GLOBAL, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

 

    Nine Months Ended  
    September 30, 2016     September 30, 2015  
                 
Net loss attributable to the Company   $ (1,486,677 )   $ (1,186,046 )
                 
Adjustments to reconcile net loss to net cash used in operating activities:                
Depreciation and amortization     39,692       25,377  
Inventory write-off     109,170       -  
Non-cash financing costs     -       (85,127 )
Notes issued for services     -       297,700  
                 
(Increase) decrease in assets:                
Trade receivables, net     (4,393 )     (22,100 )
Inventories     145,189       (155,576 )
Funds held in trust     3,573       -  
Prepaid expense and deposits     63,435       255,584  
Related party receivable     79,471       3,415  
Other assets     34,285       13,065  
Increase (decrease) in current liabilities:                
Trade payables and accruals     487,653       557,872  
Warranty reserve     -       -  
Deferred revenue     55,794       3,007  
Net cash used in operating activities     (472,808 )     (292,829 )
                 
Cash flows from investing activities                

Purchase of property and equipment

    (6,925 )     (9,152 )
Return (purchase) of equipment on lease     1,214       34,120  
Purchase of intangible assets     (1,002 )     (4,380 )
Cash acquired from merger     -       85,531  

Net cash (used in) provided by investing activities

    (6,713 )     106,119  
                 
Cash flows from financing activities                
Bank overdraft     4,003       -  
Payments on notes payable     (70,128 )     (123,729 )
Proceeds from note payable     551,028       265,802  
Related party loan payable, net     -       (164 )
Net cash provided by financing activities     484,903       141,909  
                 
Net increase in cash and cash equivalents     5,382       (44,801 )
                 
Effect of exchange rate changes on cash and cash equivalents     (5,382 )     (7,915 )
                 
Cash and cash equivalents at beginning of period     -       91,840  
                 
Cash and cash equivalents at the end of the period   $ -     $ 39,123  
                 
Supplemental disclosures                
Cash paid during the period for:                
Income tax payments   $ -     $ -  
Interest payments   $ 4,066     $ 5,803  
                 
Supplemental schedule of non-cash financing activities:                
Issuance of stock for financing costs   $ -     $ (85,127 )
Noncontrollling interest change to mezzanine equity   $ -     $ -  

 

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

 

  8  
 

 

DSG GLOBAL, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

Note 1 – ORGANIZATION

 

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 for sale to movie studios and production companies.

 

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 effect 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.

 

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 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, 2015. 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, 2015 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 and nine months ended September 30, 2016 are not necessarily indicative of the results that may be expected for the year ending December 31, 2016.

 

Principles of Consolidation

 

The 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 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 condensed consolidated financial statements in the period they are determined.

 

  9  
 

 

Exchange (Loss) Gain

 

During the three and nine months ended September 30, 2016, and 2015, the transactions of the Company and its subsidiaries were denominated in foreign currencies and were recorded in Canadian dollar (CAD), or British Pounds (GBP), at the rates of exchange in effect when the transactions occurred. Exchange gains and losses are recognized for the different foreign exchange rates applied when the foreign currency assets and liabilities are settled.

 

Foreign Currency Translation and Comprehensive (Loss) Income

 

The accounts of the Company and its subsidiaries were maintained, and its financial statements were expressed, in CAD and GBP. Such financial statements were translated into United States dollars (USD) with the CAD or GBP as the functional currency. All assets and liabilities were translated at the exchange rate at the balance sheet date, stockholders’ deficit is translated at the historical rates and income statement items are translated at the average exchange rate for the period. Transactions in foreign currencies are initially recorded at the functional currency rate ruling at the date of transaction. Any differences between the initially recorded amount and the settlement amount are recorded as a gain or loss on foreign currency transaction in the consolidated statements of operations. The resulting translation adjustments are reported under other comprehensive income as a component of shareholders’ equity.

 

Reportable Segment

 

The Company has one reportable segment. The Company’s activities are interrelated and each activity is dependent upon and supportive of the other. Accordingly, all significant operating decisions are based on analysis of financial products provided as a single global business.

 

Revenue Recognition

 

The Company recognizes 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. The Company accrues for warranty costs, sales returns, and other allowances based on its historical experience.

 

Research and Development

 

Research and development expenses include payroll, employee benefits, and other headcount-related expenses associated with product development. Research and development expenses also include third-party development and programming costs, localization costs incurred to translate software for international markets, and the amortization of purchased software code and services content. Such costs related to software development are included in research and development expense until the point that technological feasibility is reached. Research and development is expensed and is included in operating expenses.

 

Income Taxes

 

The Company utilizes the liability method of accounting for income tax. Under the liability method, deferred income tax assets and liabilities are provided based on the difference between the financial statements and tax basis of assets and liabilities measured by the current enacted tax rates in effect for the years in which these differences are expected to reverse.

 

The Company has adopted accounting standards for the accounting for uncertain income taxes. These standards provide guidance for the accounting and disclosure about uncertain tax positions taken. Management believes that all of the positions taken in its federal and states income tax returns are more likely than not to be sustained upon examination.

 

  10  
 

 

Concentration of Credit Risk

 

Financial instruments that potentially subject the Company to concentrations of credit risk are cash, accounts receivable and other receivables arising from its normal business activities. The Company places its cash in what it believes to be credit-worthy financial institutions. The Company has a diversified customer base, most of which are in Canada, United States and the United Kingdom. The Company controls credit risk related to accounts receivable through credit approvals, credit limits and monitoring procedures. The Company routinely assesses the financial strength of its customers and, based upon factors surrounding the credit risk, establishes an allowance, if required, for uncollectible accounts and, as a consequence, believes that its accounts receivable credit risk exposure beyond such allowance is limited.

 

Risks and Uncertainties

 

The Company is subject to risks from, among other things, competition associated with the industry in general, other risks associated with financing, liquidity requirements, rapidly changing customer requirements, limited operating history, foreign currency exchange rates and the volatility of public markets.

 

Contingencies

 

Certain conditions may exist as of the date the financial statements are issued, which may result in a loss to the Company but which will only be resolved when one or more future events occur or fail to occur. The Company’s management and legal counsel assess such contingent liabilities, and such assessment inherently involves judgment. In assessing loss contingencies related to legal proceedings that are pending against the Company or unasserted claims that may result in such proceedings, the Company’s legal counsel evaluates the perceived merits of any legal proceedings or unasserted claims as well as the perceived merits of the amount of relief sought or expected to be sought.

 

If the assessment of a contingency indicates it is probable that a material loss has been incurred and the amount of the liability can be estimated, then the estimated liability would be accrued in the Company’s financial statements. If the assessment indicates that a potential material loss contingency is not probable but is reasonably possible, or is probable but cannot be estimated, then the nature of the contingent liability, together with an estimate of the range of possible loss if determinable and material would be disclosed. Loss contingencies considered to be remote by management are generally not disclosed unless they involve guarantees, in which case the guarantee would be disclosed.

 

Cash and Cash Equivalents

 

Cash and equivalents include cash in hand and cash in demand deposits, certificates of deposit and all highly liquid debt instruments with original maturities of three months or less. At September 30, 2016 and December 31, 2015, there were no uninsured balances for accounts in Canada, the United States and the United Kingdom. The Company has not experienced any losses in such accounts and believes it is not exposed to any risks on its cash in bank accounts.

 

Trade Receivable

 

All trade receivables are due thirty (30) days from the date billed. If the funds are not received within thirty (30) days the customer is contacted to arrange payment. The Company uses the allowance method to account for uncollectable trade receivables. The allowance for doubtful accounts as of September 30, 2016, and December 31, 2015 was $14,239 and $14,368, respectively.

 

Financing Receivables and Guarantees

 

The Company provides financing arrangements, including operating leases and financed service contracts for certain qualified customers. Lease receivables primarily represent sales-type and direct-financing leases. Leases typically have two- to three-year terms and are collateralized by a security interest in the underlying assets. The Company makes an allowance for uncollectible financing receivables based on a variety of factors, including the risk rating of the portfolio, macroeconomic conditions, historical experience, and other market factors. At September 30, 2016 and December 31, 2015 management determined that there was no allowance necessary. The Company also provides financing guarantees, which are generally for various third-party financing arrangements to channel partners and other customers. The Company could be called upon to make payment under these guarantees in the event of nonpayment to the third party.

 

  11  
 

 

Advertising Costs

 

The Company expenses all advertising costs as incurred. Advertising costs were $335,034 and $278,516 for the nine months ended September 30, 2016 and 2015, respectively.

 

Inventory

 

Inventories are valued at the lower of cost (determined on a weighted average basis) or market. Management compares the cost of inventories with the market value and allowance is made to write down inventories to market value, if lower. As of September 30, 2016 and December 31, 2015, inventory only consisted of finished goods. During the third quarter, we determined that the touch tablets we ordered from our supplier in China in 2015 were no longer suitable for installations due to technical and quality issues that we discovered over the last year at various installation sites. An estimated value of $109,170 has been written off from inventory.

 

Fixed Assets

 

Fixed assets are stated at cost and depreciated using the straight line method over the shorter of the estimated useful life of the asset or the lease term. The useful life for rental equipment was adjusted for the tag to 5 years from 10 years, and for the Touch/Text, the useful life was adjusted to 5 years from 8 years. The adjustment properly reflects the average lease term for the rental equipment and the average life of the product. The estimated useful lives of our property and equipment are generally as follows:

 

Rental equipment  
Tag 5 year useful life
Touch/Text 5 year useful life
Office furniture and equipment 5 year useful life
Computer equipment 3 year useful life

 

As of September 30, 2016 and December 31, 2015, fixed assets consisted of the following:

 

    September 30, 2016     December 31, 2015  
Furniture and equipment   $ 21,330     $ 20,216  
Computer equipment     28,049       24,695  
Accumulated Depreciation     (43,479 )     (37,940 )
    $ 5,900     $ 6,971  

 

As of September 30, 2016 and December 31, 2015, leased equipment consisted of the following:

 

    September 30, 2016     December 31, 2015  
Tags   $ 134,275     $ 141,400  
Text     27,813       26,195  
Touch     41,243       20,386  
Accumulated Depreciation     (124,096 )     (82,455 )
    $ 79,235     $ 105,526  

 

For the three months ended September 30, 2016 and 2015, total depreciation expense was $11,755 and $6,924 for the fixed assets and leased equipment, respectively.

 

  12  
 

 

For the nine months ended September 30, 2016 and 2015, total depreciation expense was $39,692 and $25,377 for the fixed assets and leased equipment, respectively.

 

Fair Value of Financial Instruments

 

For certain of the Company’s financial instruments, including cash and equivalents, restricted cash, accounts receivable, accounts payable, accrued liabilities and short-term debt, the carrying amounts approximate their fair values due to their short maturities. ASC Topic 820, “ Fair Value Measurements and Disclosures ,” requires disclosure of the fair value of financial instruments held by the Company. ASC Topic 825, “ Financial Instruments ,” defines fair value, and establishes a three-level valuation hierarchy for disclosures of fair value measurement that enhances disclosure requirements for fair value measures. The carrying amounts reported in the consolidated balance sheets for receivables and current liabilities each qualify as financial instruments and are a reasonable estimate of their fair values because of the short period of time between the origination of such instruments and their expected realization and their current market rate of interest. The three levels of valuation hierarchy are defined as follows:

 

Level 1 inputs to the valuation methodology are quoted prices for identical assets or liabilities in active markets.

 

Level 2 inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets, and inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial instrument.

 

Level 3 inputs to the valuation methodology are unobservable and significant to the fair value measurement.

 

The Company analyzes all financial instruments with features of both liabilities and equity under ASC Topic 480, “ Distinguishing Liabilities from Equity ,” and ASC Topic 815, “ Derivatives and Hedging .”

 

As of September 30, 2016 and December 31, 2015, the Company did not identify any assets and liabilities that are required to be presented on the balance sheet at fair value.

 

Basic and Diluted Net Loss per Common Share

 

Basic and diluted net loss per share attributable to common stockholders is computed by dividing net loss attributable to common stockholders by the weighted average number of common shares outstanding during the period. Our potentially dilutive shares, which include outstanding convertible loans and notes, have not been included in the computation of diluted net loss per share attributable to common stockholders for all periods presented, as the results would be antidilutive. Such potentially dilutive shares are excluded when the effect would be to reduce net loss per share.

 

The following table sets forth the computation of basic and diluted earnings per share for the three and nine months ended September 30, 2016 and 2015:

 

    Three Months Ended     Nine months Ended  
    September 30, 2016     September 30, 2015     September 30, 2016     September 30, 2015  
                         
Net loss attributable to DSG Global   $ (565,378 )   $ (438,999 )   $ (1,247,971 )   $ (1,186,046 )
                                 
Net loss per share                                
Basic and Diluted:                                
Basic   $ (0.019 )   $ (0.015 )   $ (0.041 )   $ (0.050 )
Diluted   $ (0.019 )   $ (0.015 )   $ (0.041 )   $ (0.050 )
                                 
Weighted average number of shares used in computing basic and diluted net loss per share:                                
                                 
Basic     30,291,187       30,121,003       30,291,187       23,702,297  
Diluted     30,291,187       30,121,003       30,291,187       23,702,297  

 

  13  
 

 

Intangible Assets

 

The Company records identifiable intangible assets at fair value on the date of acquisition and evaluates the useful life of each asset. Finite-lived intangible assets primarily consist of software development capitalized. Finite-lived intangible assets are amortized on a straight-line basis and are tested for recoverability if events or changes in circumstances indicate that their carrying amounts may not be recoverable. These intangibles have useful lives ranging from 1 to 20 years.

 

Stock-Based Compensation

 

We recognize all share-based payments to employees and to non-employee directors as compensation for service on our board of directors as compensation expense in the consolidated financial statements based on the fair values of such payments. Stock-based compensation expense recognized each period is based on the value of the portion of share-based payment awards that is ultimately expected to vest during the period. Forfeitures are estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates.

 

For share-based payments to consultants and other third-parties, compensation expense is determined at the “measurement date.” The expense is recognized over the vesting period of the award. Until the measurement date is reached, the total amount of compensation expense remains uncertain. We record compensation expense based on the fair value of the award at the reporting date. The awards to consultants and other third-parties are then revalued, or the total compensation is recalculated based on the then current fair value, at each subsequent reporting date.

 

Recently Issued Accounting Pronouncements

 

There have been no new accounting pronouncements during the nine months ended September 30, 2016 that we believe would have a material impact on our financial position or results of operations.

 

Going Concern

 

As reflected in the accompanying financial statements, the Company had an accumulated deficit of $25,955,168 as of September 30, 2016 and had a net loss of $1,486,677 for the nine months ended September 30, 2016.

 

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.

 

  14  
 

 

Note 3 – TRADE RECEIVABLES, NET

 

As of September 30, 2016 and December 31, 2015, trade receivables consist of the following:

 

    September 30, 2016     December 31, 2015  
Trade receivables   $ 95,914     $ 87,580  
Allowance for bad debt     (14,239 )     (14,368 )
Total trade receivables, net   $ 81,675     $ 73,212  

 

Note 4 – OTHER ASSETS

 

Other assets consist of the following as of September 30, 2016 and December 31, 2015:

 

    September 30, 2016     December 31, 2015  
GST/VAT Receivable   $ -     $ 26,902  
    $ -     $ 26,902  

 

Note 5 – INTANGIBLE ASSETS

 

Intangible assets consist of the following as of September 30, 2016 and December 31, 2015:

 

    September 30, 2016     December 31, 2015  
Intangible Asset - Patent   $ 21,253     $ 20,473  
Accumulated Depreciation     (4,377 )     (3,489 )
    $ 16,876     $ 16,984  

 

The estimated useful life of the Patent is 20 years. Patents are amortized on a straight-line basis. For the three months ended September 30, 2016 and 2015, total depreciation expense was $296 and $283, respectively. For the nine months ended September 30, 2016 and 2015, total depreciation expense was $888 and $849, respectively.

 

The following table summarizes our five year estimated amortization of intangible assets as of September 30, 2016:

 

September 30,        
2017   $ 1,184  
2018     1,184  
2019     1,184  
2020     1,184  
2021     1,184  
2022 & Thereafter     10,956  
    $ 16,876  

 

Note 6 – TRADE AND OTHER PAYABLES

 

As of September 30, 2016 and December 31, 2015, trade and other payables consist of the following:

 

    September 30, 2016     December 31, 2015  
Accounts payable   $ 825,694     $ 742,256  
Accrued expenses     28,436       35,113  
Accrued interest     1,088,872       622,902  
Other liabilities     61,245       28,238  
Total payables   $ 2,004,247     $ 1,428,509  

 

  15  
 

 

Note 7 – LOANS PAYABLE

 

Loans Payable   September 30, 2016     December 31, 2015  
Unsecured, due on demand, interest 15% per annum   $ 190,592     $ 180,636  
                 
Unsecured, due on demand, interest 36% per annum     46,625       50,501  
                 
Unsecured, loan payable, interest 18% per annum     317,500       315,000  
                 
Unsecured, loan payable, fee for services payable
on the original loan amount of 5% by May 6, 2016,
10% payable by June 5, 2016, or 20% payable by
July 5, 2016
    68,613       -  
                 
Unsecured, loan payable, interest 10% per annum,
with a minimum interest amount of $25,000, due
July 22, 2016.
    250,000       -  
                 
Total current portion   $ 873,330     $ 546,137  

 

Note 8 – CONVERTIBLE LOANS

 

Convertible Loans

 

    September 30, 2016     December 31, 2015  
Unsecured, interest 15.2% per annum, mature from February 28, 2015 to December 31, 2015. Principal is repayable in cash or Tags units. Convertible at the average closing price of the 60 days period prior to conversion date   $ 938,574     $ 889,543  
                 
Unsecured, interest 10% per annum. Principal plus interest repayable in cash or common shares due on demand. Convertible at the average closing price of the 60 days period prior to conversion date     250,000       250,000  
                 

Unsecured, interest 2% per month. Principal plus interest repayable in cash or common shares. Due 45 days from August 5, 2016 or upon filing of registration statement, convertible at $0.27 per share

    150,000       -  
                 
Total   $ 1,338,574     $ 1,139,543  
                 
Current portion     1,338,5746       1,139,543  
                 
Long term portion   $ -     $ -  
                 
Convertible Loans to Related Party                
                 

Unsecured, 8% annual rate for one month; if not paid by July 16, 2016, 4% per month thereafter; convertible at $0.08 per share

    22,871       -  
                 
Unsecured, interest 5% per annum, matures March 30, 2016, and is convertible at $1.25/per share   $ 310,000     $ 310,000  
                 
Total current portion   $ 332,871     $ 310,000  

 

  16  
 

 

Note 9 – MEZZANINE EQUITY

 

DSG TAG has 150,000,000 shares of undesignated preferred stock authorized, each having a par value of $0.001 as of September 30, 2016 and December 31, 2015. 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. At any time on or after the issuance date any holder of Series A Shares may convert to common stock based on predetermined conversion price of $1.25 per share. The preferred shares are recorded in the consolidated financial statements as Mezzanine Equity. The Series A Shares are subject to a redemption obligation pursuant to which the Company must redeem at a price of $1.25 per share the following amounts on the following dates if it is successful in raising financing capital of $2,500,000 as of August 1, 2016, $2,500,000 as of September 1, 2016 and $5,000,000 as of October 1, 2016; 900,000 Series A Shares ($1,250,000) by May 1, 2016, an additional 900,000 Series A Shares ($1,250,000) by June 1, 2016, and the remaining 2,429,384 Series A Shares ($3,136,730) by July 1, 2016. As of December 31, 2015, 80,000 preferred shares were purchased by an unrelated third-party and exchanged for 80,000 shares of common stock of DSG Global, Inc.

 

Note 10 – STOCKHOLDERS’ DEFICIT

 

Common Stock

 

The Company has 125,000,000 shares of common stock authorized, each having a par value of $0.001, as of September 30, 2016 and December 31, 2015. According to the Share Exchange Agreement dated April 13, 2015, we agreed to acquire not less than 75% and up to 100% of the issued and outstanding common shares of DSG TAG in exchange for the issuance to the subscribing shareholders of up to 20,000,000 shares of our common stock on the basis of 1 common share of DSG Global, Inc. for 5.4935 common shares of DSG TAG. The Company also issued an additional 179,823 common shares to a director of DSG TAG to meet debt agreement obligations. There were 30,291,187 shares of common stock of the Company issued and outstanding as of September 30, 2016 and December 31, 2015. Each share of common stock is entitled to one (1) vote.

 

Noncontrolling Interest

 

DSG TAG has 150,000,000 shares of undesignated preferred stock authorized, each having a par value of $0.001 as of September 30, 2016 and December 31, 2015. 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 were not exchanged for securities of DSG Global, Inc. as part of the Share Exchange Agreement. Noncontrolling interest as of September 30, 2016 and December 31, 2015 was $875,436 or 16.18% or $660,771 or 16.18%, respectively.

 

  17  
 

 

Note 11 – STOCK OPTIONS AND WARRANTS

 

Stock Compensation to employees and officers

 

On March 1, 2013, the Company extended warrants issued in 2008 to five employees and officers that were to expire on March 31, 2013 to December 31, 2016. The Company issued warrants to these individuals to purchase an aggregate of 7,006,098 shares of common stock. The warrants had an exercise price of $0.23 per share. The fair value of the warrants at the time they were extended was estimated at $769,760 using a Black-Scholes model with the following assumptions: expected volatility of 17%, risk free interest of 0.38%, expected life of 3 years and no dividends. The fair value of the warrants were recorded as equity and compensation expense. On January 18, 2015, DSG TAG cancelled 5,913,898 of the warrants. The remaining 1,092,200 of the warrants have not yet been exercised and are currently outstanding as of September 30, 2016. These warrants are exercisable into shares of common stock of DSG Global, Inc. at the rate of 1 share of DSG Global for each 5.4935 shares of DSG TAG.

 

Note 12 – RELATED PARTY TRANSACTIONS

 

On March 31, 2015 the Company entered into an agreement with a marketing firm that is owned by one of the directors of the Company. The terms included cash payment of $17,500 and a note in the amount of $310,000, with 5% interest per annum, convertible at the election of the holder into 248,000 shares of Common Stock of DSG Global, Inc. at a price of $1.25 per share, maturing on March 30, 2016. As of September 30, 2016, it was estimated that approximately 90% of the marketing services related to the agreement have been provided in the amount of $280,000 and the remaining $30,000 is recorded as a prepaid deposit. As of September 30, 2016, the Director of the Company has filed a notice of default on March 31, 2016 in regards to the related party convertible note on the financial statements of DSG TAG. The note was issued in lieu of marketing services, the note maturity date is March 31, 2016. DSG TAG is currently in arbitration in regards to this matter. (See Note 16).

 

On June 16, 2016, a convertible loan was received from a related party in the amount of $22,871. Interest is 8% annual rate for one month and 4% monthly rate thereafter if not paid by July 16, 2016. The note is convertible at $0.08 per share. (See Note 8).

 

Amount due from a related party at September 30, 2016 and December 31, 2015 was $16,663 and $91,727, respectively. The amounts consist of advances to a director and officer of the Company. These amounts are unsecured, non-interest bearing and due on demand.

 

Note 13 – INCOME TAX

 

The following is the income tax expense reflected in the Statement of Operations for the nine months ended September 30, 2016 and 2015.

   

Income Tax Expense     Three month ended       Nin e month ended  
      September 30, 2016       September 30, 2015       September 30, 2016       September 30, 2015  
Current   $ -     $ -     $ -     $ -  
Deferred     -       -       -       -  
Total   $ -     $ -     $ -     $ -  

 

The following are the components of income before income tax reflected in the Statement of Operations for the nine months ended September 30, 2016 and 2015:

 

Component of Loss Before Income Tax and Noncontrolling Interest

 

    Three month ended     Nin e month ended  
    September 30, 2016     September 30, 2015     September 30, 2016     September 30, 2015  
Loss before income tax and
noncontrolling Interest
  $ (673,937 )   $ (521,885 )   $ (1,486,677 )   $ (1,415,903 )
                                 
Income Tax   $ -     $ -     $ -     $ -  
                                 
Effective tax rate     0 %     0 %     0 %     0 %

 

  18  
 

 

Deferred income taxes arise from temporary differences between the tax and financial statement recognition of revenue and expense. In evaluating the ability to recover the deferred tax assets within the jurisdiction from which they arise, the Company considered all available positive and negative evidence, including scheduled reversals of deferred tax liabilities, projected future taxable income, tax planning strategies and recent financial operations. In projecting future taxable income, the Company began with historical results adjusted for changes in accounting policies and incorporates assumptions including the amount of future pretax operating income, the reversal of temporary differences, and the implementation of feasible and prudent tax planning strategies. These assumptions require significant judgment about the forecasts of future taxable income and are consistent with the plans and estimate the Company are using to manage the underlying businesses. In evaluating the objective evidence that historical results provide, the Company consider three years of cumulative operating income (loss).

 

As of September 30, 2016, the Company had net operating losses, or NOLs, of approximately $26.0 million to offset future taxable income in Canada and the United Kingdom. The deferred tax assets at September 30, 2016 were fully reserved. Management believes it is more likely than not that these assets will not be realized in the near future.

 

Note 14 – GEOGRAPHIC SEGMENT INFORMATION

 

As a result of the reverse merger on May 6, 2015, the Company operates in three regions: Canada, United Kingdom and the United States of America. All inter-company transactions are eliminated in consolidation. Prior to the merger, the Company operated in two regions.

 

For the three and nine months ended September 30, 2016 and 2015, geographic segment information is as follows:

 

For the Three Months Ended September 30, 2016

 

    Canada     United Kingdom     United States     Elimination     Consolidated  
                               
Revenue   $ 204,192     $ 40,542     $ -     $ (1,265 )   $ 243,469  
Cost of Revenue     159,228       33,423       -       (1,265 )     191,386  
Total Expenses     471,017       66,812       2,965       -       540,794  
Other Income (Expenses)     (186,801 )     1,490       87       -       (185,224 )
Noncontrolling Interest     108,559       -       -       -       108,559  
Net loss attributable to DSG Global     (504,295 )     (58,203 )     (2,878 )     -       (565,376 )
Assets     551,883       28,707       58,561       (272,777 )     366,374  
Liabilities     4,802,372       316,011       13,758       (272,777 )     4,859,364  

 

For the Three Months Ended September 30, 2015

 

    Canada     United Kingdom     Elimination     Consolidated  
                         
Revenue   $ 380,510     $ 53,396     $ 4,539     $ 438,445  
Cost of Revenue     201,020       29,739       4,539       235,298  
Total Expenses     600,878       38,877       -       639,754  
Other Income (Expenses)     (86,544 )     1,266       -       (85,278 )
Non-controlling Interest     82,886       -       -       82,886  
Net loss attributable to DSG Global     (425,045 )     (13,954 )     -       (438,999 )
Assets     1,060,633       82,083       (78,839 )     1,063,877  
Liabilities     3,086,898       116,729       (78,839 )     3,124,788  

 

  19  
 

 

For the Nine Months Ended September 30, 2016

 

    Canada     United Kingdom     United States     Elimination     Consolidated  
                               
Revenue   $ 780,268     $ 208,592     $ -     $ (8,146 )   $ 980,714  
Cost of Revenue     339,337       95,262       -       (8,146 )     426,453  
Total Expenses     1,347,620       267,856       9,382       -       1,624,858  
Other Income (Expenses)     (394,119 )     (20,225 )     (1,736 )     -       (416,080 )
Noncontrolling Interest     238,706       -       -       -       238,706  
Net loss attributable to DSG Global     (1,062,102 )     (174,751 )     (11,118 )     -       (1,247,971 )
Assets     551,883       28,707       58,561       (272,777 )     366,374  
Liabilities     4,802,372       316,011       13,758       (272,777 )     4,859,364  

 

For the Nine Months Ended September 30, 2015

 

    Canada     United Kingdom     Elimination     Consolidated  
                         
Revenue   $ 1,407,687     $ 524,035     $ (234,062 )   $ 1,697,660  
Cost of Revenue     861,984       336,420       (234,062 )     964,342  
Total Expenses     1,699,205       180,519       -       1,879,723  
Other Income (Expenses)     (252,886 )     (16,612 )     -       (269,498 )
Non-controlling Interest     229,857       -       -       229,857  
Net loss attributable to DSG Global     (1,176,530 )     (9,516 )     -       (1,186,046 )
Assets     1,060,633       82,083       (78,839 )     1,063,877  
Liabilities     3,086,898       116,729       (78,839 )     3,124,788  

 

Note 15 – COMMITMENTS AND CONTINGENCIES

 

Lease Obligations

 

The Company leases offices in Canada under a renewable operating lease which will expire on January 31, 2017, following which the term of the lease is month to month, with 30 days’ notice to terminate. The lease term was extended by an additional nine months subject to leasing our current space or another office in the building. The annual rent for the premises in Canada is approximately $66,000. For the nine months ended September 30, 2016 and 2015, the aggregate rental expense was $52,695 and $62,110, respectively. Rent expense included other amounts paid in Canada and the United Kingdom for warehouse storage and offices on a month-to-month or as-needed basis.

 

The Company signed an operating lease agreement through National Leasing for a photocopier. The lease terms are for 60 months commencing on May 22, 2015 and ending April 22, 2020 with a monthly lease payment of approximately $183.

 

The following table summarizes our future minimum payments under these arrangements as of September 30, 2016:

 

September 30:      
2017   $ 34,132  
2018     2,200  
2019     2,200  
2020     1,281  
    $ 39,813  

 

  20  
 

 

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 December 31, 2015 the Company has set up a reserve for future warranty costs, at September 30, 2016 the recorded reserve was $115,305. The Company’s past experience with warranty related costs was used as a basis for the reserve. Prior to December 31, 2015 the Company expensed warranty costs as incurred. The warranty expense incurred was $161,762 and $148,000 for the nine months ended September 30, 2016 and 2015, respectively.

 

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 16 – LEGAL MATTERS

 

On December 30, 2012 a corporation filed an action against the Company in the United States courts claiming patent infringement. On March 8, 2013 the parties agreed to a settlement, with the Company admitting no wrongdoing, in the amount of $125,000. The settlement is to be paid over an 18 month period in equal installments of $7,500 with annual interest at a rate of 8%. The Company has accrued all liabilities related to this matter in the financial statements.

 

On June 4, 2015, a shareholder of the Company’s subsidiary filed a lawsuit to recover a loan of CAD$100,000 which was made on October 16, 2012 and was due on July 16, 2013 with accrued interest. A response to the claim was submitted on June 29, 2015. On August 13, 2015 a settlement was reached between both parties to pay the loan amount remaining plus interest, for a total of $119,700. In addition, the shareholder’s outstanding shares of DSG TAG were converted into 18,422 shares of common stock of DSG Global, Inc. on October 22, 2015. On February 16, 2016, a new agreement was reached after a breach of the settlement agreement dated August 13, 2015. DSG TAG defaulted on the settlement agreement and both parties agreed to new terms. DSG TAG Systems agreed to pay the plaintiff $86,780 CDN in monthly installations of $5,423.75 CDN over a period of sixteen consecutive months, the first payment commencing April 20, 2016. DSG TAG failed to make further payments after 2 scheduled payments in May and June 2016. On September 27, the shareholder filed a Subpoena to Debtor at the Supreme Court of British Columbia for a hearing on October 17, 2016. The Company has accrued liabilities related to this matter in the financial statements.

 

A Director of the Company, representing their company Adore Creative Agency Inc. (Adore) has filed a notice of default in regards to the related party convertible note on the financial statements of DSG TAG. The note was issued in lieu of marketing services, the note maturity date is March 31, 2016. Adore and DSG TAG are currently in arbitration in regards to this matter.

 

On September 7, 2016, Chetu Inc. has filed a Complaint for Damage in Florida to recover 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.

 

Note 17 – SUBSEQUENT EVENTS

 

Management has evaluated events subsequent through December 15, 2016, for transactions and other events that may require adjustment of and/or disclosure in such financial statements.

 

On October 17, 2016 the Supreme Court of British Columbia made an order in relating to the above discussed lawsuit from a shareholder to recover a loan of CAD$100,000. DSG TAG was ordered to repay the remaining loan plus costs in the amount of $77,589 to the shareholder in 14 monthly payments of $5,500 each plus $589 at the 15th month, starting February 15, 2017.

 

On November 7, 2016, we entered into a securities purchase agreement with Coastal Investment Partners. Pursuant to the agreement, Coastal Investment provided us with cash proceeds of $125,000 on November 10, 2016. In exchange, we issued a secured convertible promissory note in the principal amount of $138,888.89 (the “$138,888.89 Note”), inclusive of an 8% original issue discount, which bears interest at 8% per annum to the holder. The $138,888.89 Note matures six months from issuance and is convertible at the option of the holder into our common shares at a price per share that is the lower of $0. 12 or the closing price of our common stock on the conversion date. In addition, under the same terms, the company also issued a secured convertible note of $50,000 in consideration of cash proceeds of $10,000 and another secured convertible note of $75,000 in consideration of cash proceeds of $10,000.

 

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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:

 

  our future financial and operating results;
     
  our intentions, expectations and beliefs regarding anticipated growth, market penetration and trends in our business;
     
  the timing and success of our business plan;
     
  our plans regarding future financings;
     
  our ability to attract and retain customers;
     
  our dependence on growth in our customers’ businesses;
     
  the effects of market conditions on our stock price and operating results;
     
  our ability to maintain our competitive technological advantages against competitors in our industry;
     
  the expansion of our business in our core golf market as well as in new markets like commercial fleet management and agriculture;
     
  our ability to timely and effectively adapt our existing technology and have our technology solutions gain market acceptance;
     
  our ability to introduce new offerings and bring them to market in a timely manner;
     
  our ability to maintain, protect and enhance our intellectual property;
     
  the effects of increased competition in our market and our ability to compete effectively;
     
  the attraction and retention of qualified employees and key personnel;
     
  future acquisitions of or investments in complementary companies or technologies; and
     
  our ability to comply with evolving legal standards and regulations, particularly concerning requirements for being a public company.

 

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.

 

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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 state in United States Dollars (US$) and are prepared in accordance with United States Generally Accepted Principles. The following discussion should be read in conjunction with our unaudited 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 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.

 

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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:

 

  ●  Systems Sales Revenue , which consists of the sales price paid by those customers who purchase or lease our TAG system hardware.
     
  Monthly Service Fees are paid by all customers for the wireless data fee charges required to operate the GPS tracking on the TAG systems.
     
  Monthly Rental Fees are paid by those customers that rent the TAG system hardware. The amount of a customer’s monthly payment varies based on the type of equipment rented (a TAG, a TAG and TEXT, or a TAG and TOUCH).
     
  Advertising Revenue is a new source of revenue that we believe has the potential to be strategic for us in the future. We are in the process of implementing and designing software to provide advertising and other media functionality on our TOUCH units.

 

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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.

 

  Hardware purchases. Our equipment purchases consist primarily of TAG system control units, TEXT display, and TOUCH display tablets. The TAG system control unit is sold as a stand-alone unit or in conjunction with our TEXT alphanumeric display or TOUCH high definition “touch activated” display. Hardware purchases also include costs of components used during installations, such as cables, mounting solutions, and other miscellaneous equipment.
     
  Wireless data fees. Our wireless data fees consist primarily of the data fees charged by outside providers of GPS tracking used in all of our TAG system control units.
     
  Mapping. Our mapping costs consist of aerial mapping, course map, geofencing, and 3D flyovers for golf courses. This cost is incurred at the time of hardware installation.
     
  Installation. Our installation costs consist primarily of costs incurred by our employed service technicians for the cost of travel, meals, and miscellaneous components required during installations. In addition, these costs also include fees paid to external contractors for installations on a project by project basis.
     
  Freight expenses and Inventory adjustments. Our freight expenses consist primarily of costs to ship hardware to courses for installations. Our inventory adjustments include inventory write offs, write downs, and other adjustments to the cost of inventory.
     
  Operating Expenses & Other Income (Expenses) We classify our operating expenses and other income (expenses) into six categories: compensation, research and development, general and administrative, warranty, foreign currency exchange, and finance costs. Our operating expenses consist primarily of sales and marketing, salaries and wages, consulting fees, professional fees, trade shows, software development, and allocated costs. Allocated costs include charges for facilities, office expenses, telephones and other miscellaneous expenses. Our other income (expenses) primarily consists of financing costs and foreign exchange gains or losses.
     
  Compensation expense. Our compensation expenses consist primarily of personnel costs, such as employee salaries, payroll expenses, and employee benefits. This includes salaries for management, administration, engineering, sales and marketing, and service support technicians. Salaries and wages directly related to projects or research and development are expensed as incurred to their operating expense category.

 

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  ●  Research and development . Our research and development expenses consist primarily of personnel costs and professional services associated with the ongoing development and maintenance of our technology.
     
  ●  Research and development expenses include payroll, and other headcount-related expenses associated with product development. Research and development expenses also include third-party development and programming costs. Such costs related to software development are included in research and development expense until the point that technological feasibility is reached. Research and development is expensed and is included in operating expenses.
     
  ●  General and administrative . Our general and administrative expenses consist primarily of sales and marketing, commissions, travel, trade shows, consultant fees, insurance, and compliance and other administrative functions, as well as accounting and legal professional services fees, allocated costs and other corporate expenses. Sales and marketing includes brand marketing, marketing materials, and media management.
     
  ●  Warranty expense. Our warranty expenses consist primarily of associated material product costs, labor costs for technical support staff, and other associated overhead. Warranty costs are expensed as they are incurred.
     
  ●  Foreign currency exchange. Our foreign currency exchange consists primarily of foreign exchange fluctuations recorded in Canadian dollar (CAD), British Pounds (GBP), or Euro (EUR) at the rates of exchange in effect when the transaction occurred.
     
  ●  Finance costs. Our finance costs consist primarily of investor interest expense, investor commission fees, and other financing charges for obtaining debt financing.

 

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 $673,937 for the three month period ended September 30, 2016, which was $152,052 more than the net loss of $521,885 for the three month period ended September 30, 2015.

 

We had a net loss of $1,486,677 for the nine month period ended September 30, 2016, which was $70,774 more than the net loss of $1,415,903 for the nine month period ended September 30, 2015.

 

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The following table summarizes key items of comparison and their related increase (decrease) for the three and nine month periods ended September 30, 2016 and 2015:

 

    Three Months ended     Three Months ended     Increase (Decrease)     nine months ended     nine months ended     Increase (Decrease)  
    30-Sep-16     30-Sep-15     2016 from 2015     30-Sep-16     30-Sep-15     2016 from 2015  
    ($)     ($)     (%)     ($)     ($)     (%)  
Revenues   $ 243,469     $ 438,445       -44.5 %   $ 980,714     $ 1,697,660       -42.2 %
Cost of revenue     191,386       235,298       -18.7 %     426,453       964,342       -55.8 %
Gross profit     52,083       203,147       -74.4 %     554,261       733,318       -24.4 %
                                                 
Operating Expenses:                                                
Compensation expense     186,453       254,947       -26.9 %     569,512       581,264       -2.0 %
Research and development expense     18,088       6,835       164.6 %     54,436       41,684       30.6 %
General and administrative expense     275,106       327,224       -15.9 %     795,171       1,073,377       -25.9 %
Warranty expense     49,390       42,663       15.8 %     161,762       148,000       9.3 %
Bad Debt     2       1,160       -99.8 %     4,285       10,021       -57.2 %
Depreciation and amortization expense     11,755       6,924       69.8 %     39,692       25,377       56.4 %
Total Operating Expenses     540,794       639,753       -15.5 %     1,624,858       1,879,723       -13.6 %
Loss from operations     (488,711 )     (436,606 )     11.9 %     (1,070,597 )     (1,146,405 )     -6.6 %
       .                                          
Other Income (Expense):                                                
Foreign currency exchange     (23,816 )     (27,174 )     -12.4 %     27,386       (62,556 )     -143.8 %
Other (expenses) income     (8,407 )     (10,300 )     -18.4 %     (9,950 )     (17,430 )     -42.9 %
Finance costs     (153,003 )     (47,804 )     220.1 %     (433,516 )     (189,512 )     128.8 %
Total Other Expense     (185,226 )     (85,278 )     117.2 %     (416,080 )     (269,498 )     54.4 %
                                                 
Provision for income taxes expense (benefit)     -       -       -       -       -       -  
Net loss     (673,937 )     (521,884 )     29.1 %     (1,486,677 )     (1,415,903 )     5.0 %
Net loss attributable to noncontrolling interest     108,559       82,886       31.0 %     238,706       229,857       3.8 %
Net loss attributable to DSG Global   $ (565,378 )   $ (438,998 )     28.8 %   $ (1,247,971 )   $ (1,186,046 )     5.2 %
                                                 
Net loss per share (basic and diluted)     (0.019 )     (0.015 )     24.0 %     (0.041 )     (0.050 )     -17.8 %

 

Comparison of the three and nine months ended September 30, 2016 and 2015:

 

Revenue

 

    For the Three Months Ended
September 30,
          For the Nine Months Ended
September 30,
       
    2016     2015     % Change     2016     2015     % Change  
                                     
Revenue   $ 243,469     $ 438,445       (44.5 )%   $ 980,714     $ 1,697,660       (42.2 )%

 

Revenue decreased by $194,976, or 44.5%, for the three months ended September 30, 2016 as compared to the three months ended September 30, 2015 and decreased by $716,946, or 42.2% for the nine months ended September 30, 2016 as compared to the nine months ended September 30, 2015. The decreases was primarily due to lower sales in 2016 and continued design and redevelopment of our product line.

 

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 next year.

 

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Cost of Revenue

 

    For the Three Months Ended
September 30,
          For the Nine Months Ended
September 30,
       
    2016     2015     % Change     2016     2015     % Change  
                                     
Cost of revenue   $ 191,386     $ 235,298       (18.7 )%   $ 426,453     $ 964,342       (55.8 )%

 

Cost of revenue decreased by $43,912, or 18.7%, for the three months ended September 30, 2016 as compared to the three months September 30, 2015 and decreased by $537,889 or 55.8% for the nine months ended September 30, 2016 as compared to the nine months ended September 30, 2015. The table below outlines the differences in detail:

 

    For the Three Months Ended     For the Nine Months Ended  
    Sept 30, 2016     Sept 30, 2015     Difference     %
Difference
    Sept 30, 2016     Sept 30, 2015  

 

 

Difference     %
Difference
 
Cost of Goods   $ 21,399     $ 95,810     $ (74,411 )     (77.7 )%   $ 70,379     $ 540,567     $ (470,188 )     (87.0 )%
Labour     -       17,409       (17,409 )     (100 )%     -       46,048       (46,048 )     (100.0 )%
Mapping & Freight Costs     5,329       5,497       (168 )     (3.1 )%     15,682       46,578       (30,896 )     (66.3 )%
Wireless Fees     81,474       117,904       (36,430 )     (30.9 )%     231,224       316,773       (85,549 )      (27 .0)%  
Inventory Write-off/Adjustments     83,184       (1,321 )     84,505       (6397.0 )%     109,170       14,376       94,794       659.4 %
    $ 191,386     $ 235,299     $ (43,912 )     (18.7 )%   $ 426,455     $ 964,342     $ 537,887       (55.8 )%

 

For the three months ended September 30, 2016 as compared to the three months ended September 30, 2015, the decrease was primarily due to lower level of equipment sales. As a result, cost of goods decreased by $74,411 for the three months ended September 30, 2016 in comparison to the three months ended September 30, 2015. Installation costs, such as direct labor decreased by $17,409, mapping and freight costs decreased by $168, and wireless fees decreased by $36,430. During the third quarter, we determined that the touch tablets we ordered from our supplier in China in 2015 were no longer suitable for installations due to technical and quality issues that we discovered over the last year at various installation sites. An estimated value of $85,185 has been written off for the touch tablets.

 

For the nine months ended September 30, 2016 as compared to the nine months ended September 30, 2015, the overall decrease of 55.8% was due to the decrease in hardware leases and sales. Lower costs of revenue as mentioned above was also due to a contract lease renewal that had no hardware costs associated. Lower sales also resulted in lower installation costs, freight charges, mapping, and direct labor costs in the nine months ended in September 30, 2016 in comparison to the nine months ended September 30, 2015. Installation costs, such as direct labor decreased by $46,048, cost of goods decreased by $470,188, mapping and freight costs decreased by $30,896. Wireless fees also decreased by $85,549 which was due to new lower negotiated wireless fee rates. An estimated value of $109,170 has been written off for the touch tablets.

 

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Compensation Expense

 

    For the Three Months Ended
September 30,
          For the Nine Months Ended
September 30,
       
    2016     2015     % Change     2016     2015     % Change  
                                     
Compensation Expense   $ 186,453     $ 254,947       (26.9 )%   $ 569,512     $ 581,264       (2.0 )%

 

Compensation expense decreased by $68,494, or 26.9%, for the three months ended September 30, 2016 as compared to the three months ended September 30, 2015 and decreased by $11,752, or 2.0% for the nine months ended September 30, 2016 as compared to the nine months ended September 30, 2015. The decrease was primarily due to our continued efforts to reduce costs.

 

Research and Development

 

    For the Three Months Ended
September 30,
          For the Nine Months Ended
September 30,
       
    2016     2015     % Change     2016     2015     % Change  
                                     
Research and development expense   $ 18,088     $ 6,835       164.6 %   $ 54,436     $ 41,684       30.6 %

 

Research and development expense increased by $11,253, or 164.6% for the three months ended September 30, 2016 as compared to the three months ended September 30, 2015 and increased by $12,752, or 30.6% for the nine months ended September 30, 2016 as compared to the nine months ended September 30, 2015. As indicated, we expect research and development expenses to increase as we enter new markets like commercial fleet management, agriculture, and advertising. This increase in costs will be required to develop the new 3G/4G GPS cellular device.

 

General and Administration Expense

 

    For the Three Months Ended
September 30,
          For the Nine Months Ended
September 30,
       
    2016     2015     % Change     2016     2015     % Change  
                                     
General & administration expense   $ 275,106     $ 327,224       (15.9 )%   $ 795,171     $ 1,073,377       (25.9 )%

 

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General & administration expense decreased by $52,118, or 15.9% for the three months ended September 30, 2016 compared to the three months ended September 30, 2015 and decreased 278,206, or 25.9% for the nine months ended September 30, 2016 compared to the three months ended September 30, 2015. The table below outlines the differences in detail:

 

    For the Three Months Ended     For the Nine Months Ended  
    September 30, 2016     September 30, 2015     Difference     % Difference     September 30, 2016     September 30, 2015     Difference     % Difference  
Accounting & Legal   $ 16,785     $ 53,215     $ (36,430 )     (68.5 )%   $ 48,603     $ 165,560     $ (116,957 )     (70.6 )%
Marketing & Advertising     164,843       74,568       90,275       121.1 %     335,034       353,085       (18,051 )     (5.1 )%
Subcontractor & Commissions     5,319       54,504       (49,185 )     (90.2 )%     49,832       163,257       (113,425 )     (69.5 )%
Interest Expense     4,005       4,595       (590 )     (12.8 )%     18,274       22,136       (3,862 )     (17.4 )%
Hardware Design     434       668       (234 )     (35.0 )%     13,590       2,480       11,110       448.0 %
Office Expense, Rent, Software, Bank & Credit Card Charges, Telephone, Travel, & Meals     83,720       139,674       (55,954 )     (40.1 )%     329,838       366,859       (37,021 )     (10.1 )%
    $ 275,106     $ 327,224     $ (52,118 )     (15.9 )%   $ 795,171     $ 1,073,377     $ (278,206 )     (25.9 )%

 

For the three months ended September 30, 2016 as compared to the three months ended September 30, 2015, the decrease of $36,430 in accounting and legal fees was due to the costs associated with the merger in May 6, 2015. In the three months ended September 30, 2016, the costs primarily consisted of regular fees associated with the filing requirements. Marketing and advertising increased by $90,274, this was a result of more aggressive marketing efforts. Subcontractors and commissions decreased by $49,185, this was due to the hiring of more employees instead of contract workers. Office expense, rent, software, bank & credit card charges, telephone, and travel and meals combined has decreased by $55,953 or 40%, reflecting increased efforts to minimize costs.

 

For the nine months ended September 30, 2016 as compared to the nine months ended September 30, 2015, the decrease of $116,957 in accounting and legal fees was overall due to the higher costs associated with the merger in May 2015, as well the decrease was also due to efforts in decreasing legal costs for public filing requirements. There was a decrease of $113,425 in subcontractor and commissions due to the hiring of more employees instead of contract workers and lower sales resulting in less commissions being paid. There was an increase of $11,111 in hardware design for the development of the new hardware prototype for tradeshows. Overall, there was a decrease of $278,205 or 26% in office and computer expense, rent, operations software, bank and interest charges, travel, and meals for the nine months ended September 30, 2016 compared to the nine months ended September 30, 2015, reflecting our efforts of saving costs.

 

Warranty Expense

 

    For the Three Months Ended
September 30,
          For the Nine Months Ended
September 30,
       
    2016     2015     % Change     2016     2015     % Change  
                                     
Warranty Expense   $ 49,390     $ 42,663       15.8 %   $ 161,762   $ 148,000       9.3 %

 

Warranty expense increased by $6,727, or 15.8% for the three months ended September 30, 2016 as compared to the three months ended September 30, 2015 and increased by $13,762, or 9.3% for the nine months ended September 30, 2016 as compared to the nine months ended September 30, 2015. The increase in warranty expense was mostly due to the additional repairs required because of the technical issues with our touch tablets that we ordered in 2015 from a supplier in China. As of September 30, 2016, our balance sheet included a reserve of $114,355 for future warranty costs. No reserve was used in prior periods, and warranty costs were expensed as incurred.

 

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Foreign Currency Exchange

 

    For the Three Months Ended
September 30,
          For the Nine Months Ended
September 30,
       
    2016     2015     % Change     2016     2015     % Change  
                                     
Foreign currency exchange   $ (23,816 )   $ (27,174 )     (12.4 )%   $ 27,386     $ (62,556 )     143.8 %

 

For the three months ended September 30, 2016, we recognized a $23,816 loss in foreign currency transaction as compared to $27,174 in foreign currency transaction loss for the three months ended September 30, 2015. For the nine months ended September 30, 2016, we recognized a $27,386 gain in foreign currency transactions as compared to $62,556 in foreign exchange losses for the nine months ended September 30, 2015. The decrease and increase was primarily due to the gains or losses arising from 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

 

    For the Three Months Ended
September 30,
          For the Nine Months Ended
September 30,
       
    2016     2015     % Change     2016     2015     % Change  
                                     
Finance costs   $ 153,003     $ 47,804       220.1 %   $ 433,516     $ 189,512       128.8 %

 

Finance costs increased by $105,199 or 220.1%, for the three months ended September 30, 2016 as compared to the three months ended September 30, 2015 and increased $244,004, or 128.8% for the nine months ended September 30, 2016 compared to the nine months ended September 30, 2015. The increase overall was primarily due to accrued interest expensed from additional loans and note convertible loans obtained after the nine months ended September 30, 2015.

 

Net Loss Attributable to DSG Global

 

    For the Three Months Ended
September 30,
          For the Nine Months Ended
September 30,
       
    2016     2015     % Change     2016     2015     % Change  
                                     
Net loss attributable to DSG Global   $ 565,378     $ 438,999       (28.8 )%   $ 1,247,971     $ 1,186,046       5.2 %

 

As a result of the above factors, net loss after noncontrolling interest attributable to DSG Global increased by $126,379, or 28.8% for the three months ended September 30, 2016 as compared to the three months ended September 30, 2015 and increased $61,925, or 5.2% for the nine months ended September 30, 2016 as compared to the nine months ended September 30, 2015. The overall increase was primarily due to increased finance costs despite of efforts to lower operating costs in general and administrative expenses.

 

In addition, for the months ended September 30, 2016, Total Other Expenses represented 27.5% of the net loss, and for the nine months ended September 30, 2016, Total Other Expenses represented 28.0% of the net loss. These expenses include foreign exchange differences and fluctuations, and accrued interest on loans payable and other convertible notes.

 

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Liquidity and Capital Resources

 

From our incorporation in April 17, 2008 through September 30, 2016, 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 September 30, 2016, we had $2,544,775 in outstanding indebtedness, which all matures within the next twelve months.

 

We had cash in the amount of $0 as of September 30, 2016, as compared to $39,123 as of September 30, 2015. We had a working capital deficit of $ 4,595,002 as of September 30, 2016 compared to working capital deficit of $ 2,267,226 as of September 30, 2015.

 

Liquidity and Financial Condition

 

Our financial position as of September 30, 2016 and 2015, and the changes for the periods then ended are as follows:

 

Working Capital

 

    At September 30, 2016     At December 31, 2015  
Current Assets   $ 264,362     $ 657,835  
Current Liabilities   $ 4,859,364     $ 3,657,579  
Working Capital   $ (4,595,002 )   $ (2,999,744 )

 

Cash Flow Analysis

 

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

 

    September 30  
    2016     2015  
             
Net cash (used in) provided by operating activities   $ (472,808 )   $ (292,829 )
Net cash (used in) provided by investing activities     (6,713 )     106,119  
Net cash provided by financing activities     484,903       141,909  
Net (decrease) increase in cash     5,382       (44,801 )
Cash at beginning of period     0.00       91,840  
Cash at end of period   $ 0.00     $ 39,123  

 

Net Cash (Used in) Provided by Operating Activities . During the nine months ended September 30, 2016, cash used in operations totaled $472,808. This reflects the net loss of $1,486,677 less $1,013,869 provided by changes in operating assets and liabilities and adjustments for non-cash items. Cash provided by working capital items was primarily impacted by a decrease in prepaid expense and deposits of $63,435, a decrease in related party receivable of $79,471, a decrease of $254,359 in inventories, an increase in trade payables of $487,653, and an increase in deferred revenue of $55,794.

 

During the nine months ended September 30, 2015, cash used in operations totaled $292,829. This reflects a net loss of $1,186,046 less $893,217 provided by changes in operating assets and liabilities and adjustments for non-cash items. Cash provided by working capital items was primarily impacted by $297,700 for non-cash financing costs for notes issued for services, a decrease of prepaid expense and deposits of $255,584, an increase of inventory of $155,576, and an increase in trade payables of $557,872.

 

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Net Cash (Used in) Provided by Investing Activities . Investing activities reduced cash by $6,713 in the nine months ended September 30, 2016, and increased cash by $106,119 for the nine months ended September 30, 2015, of which $85,531 was acquired as part of our reverse acquisition transaction.

 

Net Cash Provided by Financing Activities . Net cash from financing activities during the nine months ended September 30, 2016 totaled $484,903, mostly from various note and loan facilities entered during the period. Net cash provided by financing activities during the nine months ended September 30, 2015 was $141,909, from various note and loan facilities entered during the period.

 

Outstanding Indebtedness

 

Our current indebtedness as of September 30, 2016 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.

 

  Unsecured loan payable in the amount of $190,592 bearing interest at 15% per annum and due on demand;
     
  Unsecured loan payable in the amount of $317,500 bearing interest at 18% per annum;
     
  Unsecured note payable in the amount of $46,625, bearing interest at 36% per annum and due on July 20, 2017;
     
  Secured convertible loan payable in the amount of $938,574, bearing interest at 15.2% per annum and due on December 31, 2015;
     
  Unsecured, convertible note payable to related party in the amount of $310,000, bearing interest at 5% per annum and due on March 30, 2016;
     
  Unsecured, convertible note payable in the amount of $250,000, bearing interest at 10% per annum and due on demand;
     
  Unsecured, loan payable in the amount of $250,000, bearing interest 10% per annum, with a minimum interest amount of $25,000, due July 22, 2016.
     
  Unsecured, loan payable in the amount of $68,613, interest payable of 5% if paid by May 6, 2016, interest payable of 10% by June 6, 2016, or interest payable of 20% payable by July 5, 2016.
     
  Unsecured, note convertible in the amount of $22,871, bearing interest at 8% annual rate for one month; if not paid, 4% monthly rate thereafter.
     
  Unsecured loan payable in the amount of $150,000 with interest at 2% per month. Principal plus interest repayable in cash or common shares. The term is 45 days from August 5 2016;

 

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:

 

  ●  On or before August 1, 2016, we must complete a financing for gross proceeds of at least $2.5 million and use at least $1.125 million to redeem a minimum of 900,000 Series A Shares;
     
  ●  On or before September 1, 2016, we must complete an additional financing for gross proceeds of at least $2.5 million and use at least $1.125 million to redeem a minimum of 900,000 additional Series A Shares; and
     
  On or before October 1, 2016, we must complete an additional financing for gross proceeds of at least $5.0 million and use at least $3.14 million to redeem the remaining 2,509,384 Series A Shares.

 

  33  
 

 

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.

 

Prospective Capital Needs

 

We estimate our operating expenses and working capital requirements for the twelve month period beginning October 1, 2016 to be as follows:

 

Estimated Expenses for the Twelve Month Period Beginning October 1, 2016
Management compensation   $ 600,000  
Professional fees   $ 120,000  
General and administrative   $ 2,200,000  
Total   $ 2,920,000  

 

As noted earlier, during the nine months ended September 30, 2016, cash used in operations totaled $472,808. The relatively low level of cash used compared to our estimated working capital needs in the future was the result of accumulation of vendor payables. 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 $2,920,000 that we require for the next 12 months, we had $0 in cash as of December 1, 2016, and a working capital deficit of $4,595,002. 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. To help finance our day to day working capital needs, the founder and CEO of the company has made a total payment of $108,651 since late 2015. 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. We have already suspended payments of management compensation to our CEO since October 2015. 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.

 

On November 7, 2016, we entered into a securities purchase agreement with Coastal Investment Partners. Pursuant to the agreement, Coastal Investment provided us with cash proceeds of $125,000 on November 10, 2016. In exchange, we issued a secured convertible promissory note in the principal amount of $138,888.89 (the “$138,888.89 Note”), inclusive of an 8% original issue discount, which bears interest at 8% per annum to the holder. The $138,888.89 Note matures six months from issuance and is convertible at the option of the holder into our common shares at a price per share that is the lower of $0. 12 or the closing price of our common stock on the conversion date.

 

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.

 

  34  
 

 

Item 3. Quantitative and Qualitative Disclosures About Market Risk

 

Not Applicable

 

Item 4. Controls and Procedures

 

Evaluation of Disclosure Controls and Procedures

 

The phrase “disclosure controls and procedures” refers to controls and procedures designed to ensure that information required to be disclosed in our reports filed or submitted under the Securities Exchange Act of 1934, as amended, or the Exchange Act, such as this Quarterly Report on Form 10-Q, is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the U.S. Securities and Exchange Commission, or SEC. Disclosure controls and procedures are also designed to ensure that such information is accumulated and communicated to our management, including our interim chief executive officer, or Interim CEO, and chief financial officer, or CFO, as appropriate to allow timely decision regarding required disclosure.

 

Our management, with the participation of our CEO and CFO, has evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act), as of September 30, 2016, the end of the period covered by this Quarterly Report on Form 10-Q. Based on such evaluation, our CEO and CFO have concluded that as of September 30, 2016, our disclosure controls and procedures were designed at a reasonable assurance level and were effective to provide reasonable assurance that information we are required to disclose in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the SEC, and that such information is accumulated and communicated to our management, including our CEO and CFO, as appropriate, to allow timely decisions regarding required disclosure.

 

Changes in Internal Control

 

There were no changes in our internal control over financial reporting identified in management’s evaluation pursuant to Rules 13a-15(d) or 15d-15(d) of the Exchange Act during the first quarter of 2016 that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

Limitations on Effectiveness of Controls and Procedures

 

In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives. In addition, the design of disclosure controls and procedures must reflect the fact that there are resource constraints and that management is required to apply judgment in evaluating the benefits of possible controls and procedures relative to their costs.

 

  35  
 

 

PART II: OTHER INFORMATION

 

ITEM 1. LEGAL PROCEEDINGS

 

On June 4, 2015, a lawsuit was commenced against DSG TAG Systems Inc. in the Supreme Court of British Columbia, captioned Amanda McGuire v. DSG TAG Systems Inc., No. S-154634, Vancouver Registry. The plaintiff alleges that a promissory note in the principal amount of $100,000 CDN issued by DSG TAG Systems was not converted into common shares of DSG TAG Systems, as asserted by DSG TAG Systems, and the plaintiff seeks repayment of indebtedness in the amount of $100,000 CDN plus interest and costs. An agreement was reached on August 13, 2015 between DSG TAG Systems and the plaintiff, pursuant to which DSG TAG Systems agreed to pay the plaintiff $119,700 CDN in monthly installations of $17,100 CDN, the first payment commencing on October 1, 2015, and the plaintiff agreed to exchange 101,200 shares of common stock of DSG Tag Systems for 18,422 shares of common stock of DSG Global, which exchange occurred on October 22, 2015.

 

On December 3, 2015, a second action lawsuit was commenced against DSG TAG Systems Inc. in the Supreme Court of British Columbia, captioned Amanda McGuire v. DSG TAG Systems and DSG Global Inc., No. S-1510050, Vancouver Registry. The plaintiff filed a claim for default on the settlement agreement entered in on August 13, 2015 due to non-payment. On February 20, 2016, a new agreement was reached between DSG TAG Systems and the plaintiff, pursuant to which DSG TAG Systems agreed to pay the plaintiff $86,780 CDN in monthly installations of $5,423.75 CDN over a period of sixteen consecutive months, the first payment commencing April 20, 2016.

 

On October 17, 2016, the Supreme Court of British Columbia made a new order after we did not make the above-mentioned payments on schedule to the shareholder per the settlement agreement. DSG TAG was ordered to repay the remaining loan plus costs in the amount of $77,589 to the shareholder in 14 monthly payments of $5,500 each plus $589 at the 15th month starting February 15, 2017.

 

On September 7, 2016, a vendor has filed a Complaint for Damage in Florida (Case Number: CACE-16-016663) to recover 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.

 

We may, from time to time, be party to litigation and subject to claims incident to the ordinary course of business. As our growth continues, we may become party to an increasing number of litigation matters and claims. The outcome of litigation and claims cannot be predicted with certainty, and the resolution of any future matters could materially affect our future financial position, results of operations or cash flows.

 

ITEM 1A. RISK FACTORS

 

As a smaller reporting company we are not required to provide the information required by this item.

 

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

 

None.

 

Item 3. Defaults Upon Senior Securities

 

None.

 

Item 4. Mine Safety Disclosures

 

Not Applicable.

 

Item 5. Other Information

 

Mr. Keith Westergaard has resigned as a Director as of September 30, 2016. His letter of resignation is listed as Exhibit Number 10.17 and is attached to this filing.

 

On November 7, 2016, we entered into a securities purchase agreement with Coastal Investment Partners. Pursuant to the agreement, Coastal Investment provided us with cash proceeds of $125,000 on November 10, 2016. In exchange, we issued a secured convertible promissory note in the principal amount of $138,888.89 (the “$138,888.89 Note”), inclusive of an 8% original issue discount, which bears interest at 8% per annum to the holder. The $138,888.89 Note matures six months from issuance and is convertible at the option of the holder into our common shares at a price per share that is the lower of $0. 12 or the closing price of our common stock on the conversion date. In addition, under the same terms, the company also issued a secured convertible note of $50,000 in consideration of cash proceeds of $10,000 and another secured convertible note of $75,000 in consideration of cash proceeds of $10,000.

 

  36  
 

 

Item 6. Exhibits

 

Exhibit       Filed       Filing      
Number   Exhibit Description   Form   Exhibit   Date   Herewith  
                       
3.1.1   Articles of Incorporation of the Registrant   SB-2   3.1   10-22-07      
                       
3.1.2   Certificate of Change of the Registrant   8-K   3.1   06-24-08      
                       
3.1.3   Articles of Merger of the Registrant   8-K   3.1   02-23-15      
                       
3.1.4   Certificate of Change of the Registrant   8-K   3.2   02-23-15      
                       
3.1.5   Certificate of Correction of the Registrant   8-K   3.3   02-23-15      
                       
3.2.1   Bylaws of the Registrant   SB-2   3.2   10-22-07      
                       
3.2.2   Amendment No. 1 to Bylaws of the Registrant   8-K   3.2   06-19-15      
                       
4.1   Form of the Registrant’s common stock certificate   10-Q     4.1      08-26-16    
                       
4.1.2   DSG Global, Inc. 2015 Omnibus Incentive Plan   10-Q   10.3   11-13-15      
                       
10.1   Subscription Agreement / Debt Settlement, dated September 26, 2014, between DSG TAG Systems Inc. and Westergaard Holdings Ltd.   8-K   10.1   08-17-15      
                       
10.2   Addendum to Subscription Agreement / Debt Settlement, dated October 7, 2014, between DSG TAG Systems Inc. and Westergaard Holdings Ltd.   8-K   10.2   08-17-15      
                       
10.3   Second Addendum to Subscription Agreement / Debt Settlement, dated April 29, 2015, between DSG TAG Systems Inc. and Westergaard Holdings Ltd.   8-K   10.3   08-17-15      
                       
10.4   Third Addendum to Subscription Agreement / Debt Settlement, dated August 11, 2015, between DSG TAG Systems Inc. and Westergaard Holdings Ltd.   8-K   10.4   08-17-15      
                       
10.5   Letter from Westergaard Holdings Ltd., dated September 1, 2015, extending dates of redemption obligations.    8-K   10.1   09-08-15      
                       
10.6   Letter from Westergaard Holdings Ltd., dated November 10, 2015, extending dates of redemption obligations   10-Q   10.1   11-13-15      

 

  37  
 

 

Exhibit       Filed       Filing      
Number   Exhibit Description   Form   Exhibit   Date   Herewith  
                       
10.7   Letter fromWestergaard Holdings Ltd., dated December 31, 2015, extending dates of redemption obligations   8-K   10.1   03-09-16      
                       
10.8   Convertible Note of DSG TAG Systems Inc., dated March 31, 2015, payable to Adore Creative Agency, Inc.   8-K   10.5   08-14-15      
                       
10.9   Convertible Note Agreement, dated August 25, 2015, between the Registrant and Jerry Katell, Katell Productions, LLC and Katell Properties, LLC   10-Q   10.2   11-13-15      
                       
10.10   Agreement (TAG Touch) dated February 15, 2014 between DSG TAG Systems Inc. and DSG Canadian Manufacturing Corp.   8-K   10.1   05-06-15      
                       
10.11   Loan agreement, dated October 24, 2014 between DSG TAG Systems Inc. and A.Bosa & Co (Kootenay) Ltd.   10-K   10.11   05-02-16      
                       
10.12   Lease agreement (Modified), dated January 21, 2016 and February 1, 2016 between DSG TAG Systems Inc. and Benchmark Group   10-K   10.12   05-02-16      
                       
10.13   Loan agreement, dated February 11, 2016 between DSG TAG Systems Inc. and Jeremy Yaseniuk   10-K   10.13   05-02-16      
                       
10.14   Loan agreement, dated March 31, 2016 between DSG TAG Systems Inc. and E. Gary Risler   10-K   10.14   05-02-16      
                       
10.15   Letter from Westergaard Holdings Ltd., dated April 29, 2016   10-K   10.15   05-20-16      
                       
10.16   Security purchase agreement between DSG Global Inc. and Coastal Investment Partners, dated November 7 2016   8-K    10.16   11-15-16      
                       

10.17

 

Letter of Resignation by Board Member Keith Westergaard

   

   

X

 
                       

21.1

 

List of Subsidiaries

 

10-K

 

21.1

 

05-02-16

   

 

  38  
 

 

Exhibit       Filed       Filing      
Number   Exhibit Description   Form   Exhibit   Date   Herewith  
                       
31.1   Certification of Principal Executive Officer Pursuant to Securities Exchange Act Rules 13a-14(a) and 15d-14(a) as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002               X  
                       
32.1#   Certification of Principal Executive Officer and Principal Financial Officer Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002               X  
                       
101 *   Interactive Data File                  
                       
101.INS   XBRL Instance Document               X  
                       
101.SCH   XBRL Taxonomy Extension Schema Document               X  
                       
101.CAL   XBRL Taxonomy Extension Calculation Linkbase Document               X  
                       
101.DEF   XBRL Taxonomy Extension Definition Linkbase Document               X  
                       
101.LAB   XBRL Taxonomy Extension Label Linkbase Document