UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-K
(Mark
One)
| þ ANNUAL
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For
the fiscal year ended December 31, 2014
or
| ☐ TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For
the transition period from: _____________ to _____________
Commission
file number: 000-26361
GLOBAL
DIGITAL SOLUTIONS, INC.
(Exact
Name of Registrant as Specified in Its Charter)
| New
Jersey |
|
22-3392051 |
| (State
or Other Jurisdiction of |
|
(I.R.S.
Employer |
| Incorporation or Organization) |
|
Identification
No.) |
| |
|
|
777
South Flagler Drive, Suite 800 West Tower
West
Palm Beach, Florida |
|
33401 |
| (Address
of Principal Executive Offices) |
|
(Zip
Code) |
| |
|
|
| (561)
515-6163 |
(Registrant’s Telephone Number, Including Area Code)
|
Securities
registered pursuant to Section 12(b) of the Act: None
Securities
registered pursuant to Section 12(g) of the Act: Common Stock, par value $.001 per share
Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☐ No
þ
Indicate
by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ☐
No þ
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 þ No ☐
Indicate
by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive
Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232-405 of this chapter) during the
preceding 12 months (or for such shorter period that the registrant was required to submit and post such files.)
Yes þ No ☐
Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not
contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ☐
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.
| Large
accelerated filer |
☐ |
|
|
Accelerated
filer |
☐ |
| Non-accelerated
filer |
☐ |
(Do
not check if a smaller reporting company) |
|
Smaller
reporting company |
þ |
Indicate
by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ☐ No þ
As of the last business day of our most recently
completed second fiscal quarter, i.e. June 30, 2014, the aggregate market value of the voting and non-voting common stock held
by non-affiliates was approximately $17.03 million, computed by reference to the price at which the stock was last sold on that
date of $0.31 per share as reported on the OTCQB Market.
Indicate
the number of shares outstanding of each of the registrant’s classes of common stock, as of the latest practicable date:
| Class |
|
Outstanding
at March 26, 2015 |
| Common
Stock, $0.001 par value per share |
|
109,170,531
shares |
DOCUMENTS
INCORPORATED BY REFERENCE: NONE
TABLE
OF CONTENTS
SPECIAL
NOTE REGARDING FORWARD-LOOKING STATEMENTS
This
Annual Report on Form 10-K (“Annual Report” or “Form 10-K”) contains forward-looking statements that involve
risks and uncertainties. Many of the forward-looking statements are located in “Management’s Discussion and Analysis
of Financial Condition and Results of Operations.” Forward-looking statements provide current expectations of
future events based on certain assumptions and include any statement that does not directly relate to any historical or current
fact. Forward-looking statements can also be identified by words such as “anticipates,” “believes,” “estimates,”
“expects,” “intends,” “plans,” “predicts,” and similar terms. Forward-looking
statements are not guarantees of future performance and the Company’s actual results may differ significantly from the results
discussed in the forward-looking statements. Forward-looking statements are only predictions based on our current expectations
and projections, or those of third parties, about future events and involve risks and uncertainties. Factors that might cause
such differences include, but are not limited to, those discussed in the subsection entitled “Risk Factors” under
Part I, Item 1A of this Form 10-K. The Company assumes no obligation to revise or update any forward-looking statements for any
reason, except as required by law.
All
forward-looking statements attributable to us, or persons acting on our behalf, are expressly qualified in their entirety by the
cautionary statements included in this Annual Report.
PART
I
Unless
the context provides otherwise, when we refer to the “Company,” “we,” “our,” or “us”
in this Annual Report, we are referring to Global Digital Solutions, Inc. and, where applicable, our wholly-owned subsidiaries.
Overview
We were incorporated in New Jersey as
Creative Beauty Supply, Inc. (“Creative”) in August 1995. In March 2004, Creative acquired Global
Digital Solutions, Inc., a Delaware corporation ("Global”). The merger was treated as a recapitalization of
Global, and Creative changed its name to Global Digital Solutions, Inc., Global provided structured cabling design,
installation and maintenance for leading information technology companies, federal, state and local government, major
businesses, educational institutions, and telecommunication companies. Our mission was to target the United States government
contract marketplace for audio and video services. Due to capital constraints, our operations team focused mainly in Northern
California. On May 1, 2012, we made the decision to wind down our operations in the telecommunications area while
concurrently refocusing our efforts in the area of cyber arms technology and complementary security and technology
solutions. We completed the wind down our telecommunications operations in June 2014. As discussed below,
from August 2012 through November 2013 we were actively involved in managing Airtronic USA, Inc., and in June 2014 we
acquired North American Custom Specialty Vehicles, LLC (“NACSV”).
Implications
of Being an Emerging Growth Company
We
qualify as an "emerging growth company" as defined in the Jumpstart Our Business Startups Act of 2012, as amended,
or the JOBS Act. As an emerging growth company, we may take advantage of specified reduced disclosure and other requirements
that are otherwise applicable generally to public companies. These provisions include:
| |
● |
Reduced
disclosure about our executive compensation arrangements; |
| |
● |
No
non-binding shareholder advisory votes on executive compensation or golden parachute arrangements; |
| |
● |
Exemption from the auditor attestation requirement in the assessment of our internal controls over financial
reporting; and
|
| |
● |
Reduced disclosure of financial information in this Annual Report, including two years of audited financial
information.
|
We
may take advantage of these exemptions for up to five years or such earlier time that we are no longer an emerging growth company.
We would cease to be an emerging growth company if we have more than $1.0 billion in annual revenues as of the end of a fiscal
year, if we are deemed to be a large-accelerated filer under the rules of the Securities and Exchange Commission, or if we issue
more than $1.0 billion of non-convertible debt over a three-year-period.
The
JOBS Act permits an emerging growth company to take advantage of an extended transition period to comply with new or revised accounting
standards applicable to public companies. We have irrevocably chosen to "opt out" of the exemption for the delayed adoption
of certain accounting standards and, therefore, will be subject to the same new or revised accounting standards as other public
companies that are not emerging growth companies.
Our
Strategy
We
believe that technological convergence is the future in the cyber/smart arms arena and we’re eager to leverage our management’s
history by helping companies that combine with us navigate the transition from “Analog to Digital”. Our
management has a history of building fast-growing companies through acquisitions and internal growth. The GDSI management team
previously executed a private-to-public company roll-up at Applied Digital Solutions, Inc. totaling some 42 acquisitions and growing
annual revenue from $1 million to over $350 million over eight years.
Analog
to Digital
Since
the switch to high definition digital television, most people are aware of an evolution in radio, TV and data transmission from
the older analog method to the newer digital method. Examples of this are the demise of the telephone modem handset cradle
and the “bleep-blap” sounds people were familiar with when connecting from their home computers during the early days
of the Internet. Even earlier, the cell phone industry went through a transition from analog transmission to digital transmission.
Earmarks of a transition from analog to digital are typically smaller devices, faster data rates and more detail in content.
GDSI
uses Analog to Digital to refer to these changes in data transmission protocols and the devices that support them and also
as a “meme” to represent other advancements in digital technology and the application of that technology. In
the military, an example would be “The Army of One” – a single soldier outfitted with advanced GPS, wireless
and security hardware and software that enables him to know his position at all times, communicate with base operations, his fellow
soldiers and other, public sources of information. People are not the only military assets being deployed with advanced
communications and location-awareness capabilities.
GDSI also uses the Analog to Digital meme
to represent the application of any transformative technology. We are seeking potential acquisition targets that have software,
firmware and hardware IP that we believe can be applied to other GDSI divisions (as we acquire more companies) to improve operating
efficiencies, upgrade products and services and create new products and services. NACSV’s mobile emergency operations centers
(MEOC) can be tailored to the needs of Police, Fire, EMS, Military, Homeland Security, National Guard, FBI, Air National Guard
Coast Guard, Chemical/ Petrochemical, Humanitarian Aid, Non-Governmental Organizations, Drug Enforcement”, Immigration &
Customs, Bureau of Alcohol, Tobacco, Firearms and Explosives, Water Management, Wildlife Management, D.O.T. Engineering &
Maintenance, Air & Water Quality Management (EPA), Meteorological Seismic/Oil & Gas Exploration, IS/Mapping Power Generation
(Nuclear & Conventional), Power Transmission and Strategic Infrastructure Security. The company has already built customized
vehicles for customers involved in one or more of the above categories and we see many opportunities to improve NACSV and its
products and services through the integration of additional software, hardware and firmware technologies.
So,
for GDSI, Analog to Digital means the literal transition in communications protocols from analog to digital and also the
application of transformative technology generally.
Our growth plan is a unique combination of
experience, technological innovation and broad reach. To implement it we hope to:
| |
● |
Identify,
target, and acquire profitable businesses with proven and established track records of serving Government, Law Enforcement
Agencies, and related Corporate Customers. |
| |
● |
Aggregate
and integrate Product, Service and Technology providers serving this defined customer base. |
| |
● |
Integrate
the significant customer relationships developed from each business to cross sell products and services and expand the GDSI
presence within the Industry. |
| |
● |
Become
a Facilitator in the “Analog to Digital” shift in the Defense and Intelligence Marketplace over the balance of
this decade. |
Our business plan is to acquire between two
and three companies by the end of December 2015. We have and continue to identify companies that provide services and
equipment to law enforcement and federal agencies, engineering services and OEM design that will enable us to simulate and analyze
prospective inventions and designs prior to making a commitment to license or acquire technology, interoperable communications
businesses which combine radio, phones, computers, VoIP and video assets within one interface for local, state and federal agencies,
and a satellite network communications company. We estimate at this time that to complete the potential acquisitions
we will need to raise or borrow, through a combination of equity and or debt offerings, approximately $70 - $150 million. There
can be no assurance however, that management will be successful in identifying and closing these acquisitions, or that the Company
will be successful in raising the capital it needs to complete the acquisitions.
Cool
Sound Industries
In August 2013 we announced that we had entered
into a letter of intent to acquire Cool Sound Industries, Inc. with the intent of developing its technology for use in both commercial
and defense-related projects. During the period from August 2013 through February 2014 we commissioned and undertook exhaustive
studies both internally and by external consultants to evaluate the feasibility of the technology and its use and application,
and we concluded that the technology would not accomplish what we had envisioned. In February 2014 we terminated the letter of
intent.
Gatekeeper
GDSI was exploring various aspects of
so-called “Smart Gun” technology i.e. weapons, the use of which are limited only to the owners of the
weapon, protecting the owner from his/her weapon being used against them or by an unauthorized person. Areas of
exploration include the market for such weapons, various technologies that can be employed, feasibility, manufacturability
and other practical aspects of producing such a weapon. GDSI is calling this potential future product
“Gatekeeper”. Technologies being evaluated included GPS, Wi-Fi, various near-field communication protocols, and
RFID. In Q4, 2014, we made the decision to, for the time being, cease pursuing the development of Gatekeeper. We may, in the
future continue to explore its possibilities.
Formation
of subsidiaries
In December 2012 we incorporated GDSI Florida
LLC, and in January 2013 we incorporated Global Digital Solutions, LLC, both Florida limited liability companies. In November
2013, we incorporated GDSI Acquisition Corporation, a Delaware corporation. We pay administrative expense for our Florida office
through GDSI Florida LLC; it has no other business operations. On June 16, 2014, we and GDSI Acquisition Corporation
acquired NACSV. In July 2014, we announced the formation of GDSI International (fka Global Digital Solutions, LLC)
to spearhead our efforts overseas. In September 2014, we merged North American Custom Specialty Vehicles, LLC into GDSI Acquisition
Corporation, and changed the latter’s name to North American Custom Specialty Vehicles, Inc.
Acquisition
of North American Custom Specialty Vehicles
On
June 16, 2014, we and our wholly owned subsidiary, GDSI Acquisition Corporation, a Delaware corporation (“Buyer”),
entered into an Equity Purchase Agreement (“EPA”) with Brian A. Dekle and John Ramsey (collectively, “Sellers”)
and North American Custom Specialty Vehicles, LLC, an Alabama limited liability company (“NACSV”), pursuant to which
Buyer purchased all of Sellers’ membership interests in NACSV for total consideration of up to $3.6 million (the “Acquisition”)
with (a) $1.2 million payable at closing as follows: (i) a cash payment of $1.0 million and (ii) 645,161 shares of GDSI’s
restricted common stock valued at $0.31 per share, or $200,000 in the aggregate, (b) up to $2.4 million of additional post-closing
contingent consideration as certain milestones are met as set forth in the EPA through December 31, 2017, and (c) a post closing
date purchase price adjustment of the excess, if any, of the total value of closing date audited assets of NACSV over $1.2 million.
NACSV specializes in building mobile command/communications and specialty vehicles for emergency management, first responders,
national security and law enforcement operations. In September 2014, we merged North American Custom Specialty Vehicles,
LLC into GDSI Acquisition Corporation, and changed the latters name to North American Custom Specialty Vehicles, Inc.
Subsequent
to December 31, 2014, we became embroiled in litigation with the Sellers – See Item 3 – Legal Proceedings,
below.
The
foregoing description of the acquisition of NACSV does not purport to be complete and is qualified in its entirety by reference
to the complete text of the EPA which is filed as Exhibit 2.5 hereto and which is incorporated herein by reference.
Airtronic
USA, Inc.
On October 22, 2012, we entered into an Agreement
of Merger and Plan of Reorganization (“Merger Agreement”) to acquire 70% of Airtronic USA, Inc. (“Airtronic”),
a debtor in possession under chapter 11 of the Bankruptcy Code in a case pending in the US Bankruptcy Court for the Northern District
of Illinois, Eastern Division (the “Court”) once Airtronic successfully reorganized and emerged from bankruptcy (the
“Merger”). During the period from October 2012 through November 2013, GDSI was actively involved in the day to day
management of Airtronic pending the completion of the Merger.
On October 22, 2012, we entered into a Debtor
In Possession Note Purchase Agreement (“Bridge Loan”) with Airtronic. We agreed to lend Airtronic a maximum of $2,000,000,
with an initial advance of $750,000 evidenced by an 8¼% Secured Promissory Note made by Airtronic in favor of the Company
(the “Original Note”) and a Security Agreement pledging all of Airtronic’s assets. As of December 31, 2012 we
had not advanced any funds to Airtronic under the Bridge Loan and Original Note. The Original Note bears interest at 8¼%
per annum, and, unless an event of default shall have previously occurred and be continuing, the full amount of principal and
accrued interest under the note shall be due and payable on the consummation of Airtronic’s plan of reorganization. In
March 2013, the Company and Airtronic amended the Bridge Loan to provide for a maximum advance of up to $700,000 in accordance
with draws submitted by Airtronic and approved by the Company in accordance with the budget set forth in the amendment. On
June 26, 2013, we agreed to a second modification of the Bridge Loan agreement with Airtronic, and agreed to loan Airtronic up
to an additional $550,000 under the Bridge Loan. On August 5, 2013, we entered into the Second Bridge Loan Modification
and Ratification Agreement, received a new 8¼% secured promissory note in principal amount of $550,000 (the “Second
Note”), and entered into a Security Agreement with the CEO of Airtronic, which granted a security interest in certain intellectual
property for patent-pending applications and trademarks that were registered in the CEO’s name. On October 10,
2013, we entered into a third modification of the Bridge Loan Agreement, and agreed to loan Airtronic up to an additional $200,000.
On October 10, 2013, we entered into the Third Bridge Loan Modification and Ratification Agreement, and received a new 8¼%
secured promissory note for $200,000 (the “Third Note”).
On
October 2, 2013, Airtronic’s amended plan of reorganization (the “Plan”) was confirmed by the Court, but the
Plan was never substantially consummated and has now been terminated. Under the terms of the Plan, Airtronic needed
to close the Merger with the Company within 60 days following the confirmation date, i.e., on or before December 2, 2013, to obtain
the funds necessary to pay its creditors in accordance with the Plan. Nevertheless, Airtronic refused to close the
Merger with the Company on or before December 2, 2013, and as a result the Plan terminated and the reorganized Airtronic re-vested
in the bankruptcy estate of Airtronic as debtor in possession.
As
the principal funding source for Airtronic during 2013, and as the expectant owner of Airtronic upon the conclusion of the bankruptcy
proceedings, the Company took an active roll in managing its investment in Airtronic.
The Company was actively involved in all aspects
of Airtronic’s finances. The Company’s CFO took over the day-to-day management of cash, which included the approval
of all purchase orders and all expenditures. In addition, GDSI recreated the inventory and fixed asset records from the beginning
of 2010, a significant task which involved over 500 man hours. In addition, the Company created GAAP based fixed asset ledgers,
reconciled on a monthly basis, starting from January 2010, all the balance sheet accounts. Additionally, the Company rationalized
the bidding process, updated Airtronic’s standard costing procedures and costs, and its inventory management system.
GDSI’s CEO was responsible for sales
and marketing for Airtronic. Airtronic’s CEO had been responsible in the past for this and worked closely with the Company’s
CEO to land new OEM orders which resulted in Airtronic finally being awarded a large OEM order in mid 2013. Airtronic’s
team included its CEO, a bookkeeper who also acted as office manager, a part-time engineer who oversaw assembly, one assembly
line worker, one warehouse worker who assisted in assembly, a quality control engineer, an IT assistant and a bidding engineer.
On
March 31, 2014, Airtronic filed a First Amended Modified Plan of Reorganization (“First Modified Plan”) which was
confirmed on April 28, 2014. On May 14, 2014 Airtronic repaid the Original Note, the Second Note and the Third Note
together with all accrued interest thereon.
On
August 12, 2014 we recovered approximately $414,000 for legal fees and expenses. We had filed a claim for $567,806.27. GDSI’s
involvement with Airtronic and its bankruptcy proceedings are now concluded.
Convertible
Notes Payable
DeLos
Reyes Note
In December 2012, we entered into a Promissory
Note Purchase Agreement (“GDL PNPA”), under which Gabriel a De Los Reyes (the “Lender”) agree to lend
us $750,000 evidenced by a secured promissory note (the “GDL Note”) and a Security Agreement (“GDL SA”).
The GDL Note bears interest at 8¼%, is secured by all of our assets and had a maturity date of May 1, 2013. In
connection with the loan, we issued the Lender a warrant to acquire 3,000,000 shares of our common stock at an exercise price
of $0.15, exercisable for a period of three years (the “GDL Warrant”).
On
May 6, 2013, the Company and the Lender entered into an amendment (the “GDL Amendment”) which:
| (1) |
Extended
the GDL Note’s maturity date to July 1, 2013; |
| (2) |
Provided
that on or before the maturity date, we may elect to convert the GDL Note into 3,000,000 shares of our common stock at a conversion
price of $0.25; and |
| (3) |
Reduced
the exercise price of the GDL Warrant from $0.15 to $0.10. |
On
July 1, 2013, the Lender converted the GDL Note into 3,000,000 shares of our restricted common stock. On December 18, 2013, the
Lender partially exercised the GDL Warrant and we issued 1,250,000 shares of our restricted common stock in consideration for
$125,000.
The foregoing description of the GDL PNPA,
the GDL Note, the GDL SA, the GDL Warrant, and the GDL Amendment is not intended to be complete and is qualified in its entirety
by the complete text of the documents listed hereon as Exhibit 10.8, Exhibit 10.9, Exhibit 10.10, Exhibit 10.11 and Exhibit 10.12
respectively.
Charter
Note
On December 8, 2014, the Company entered into
a Securities Purchase Agreement (“Charter SPA”) with Charter 804CS Solutions, Inc. (“Charter”), an affiliate
of Richard J. Sullivan, our Chairman and CEO, providing for the purchase of a Convertible Promissory Note in the principal amount
of $37,500 (“Charter Note”). The Charter Note: contains a $1,500 original issue discount to cover legal fees such
that the cash proceeds received on the closing of Charter Note is $36,000; bears interest at the rate of 8% per annum; is due
and payable on December 8, 2015; and by amendment (the “Charter Amendment”) may be converted by Charter at any time
after 180 days of the date of closing into shares of Company common stock at a fixed conversion price of $0.09 per share of Common
Stock. The Charter Note also contains certain representations, warranties, covenants and events of default, and increases in the
amount of the principal and interest rates under the note in the event of such defaults.
The foregoing description of the Charter SPA,
the Charter Note and the Charter Amendment is not intended to be complete and is qualified in its entirety by the complete text
of the documents listed hereon as Exhibit 10.22, Exhibit 10.23 and Exhibit 10.24, respectively.
Loppert
Note
On December 8, 2014, the Company entered into
a Securities Purchase Agreement (“Loppert SPA”) with David A. Loppert (“Loppert”), our Chief Financial
Officer, providing for the purchase of a Convertible Promissory Note in the principal amount of $31,500 (“Loppert Note”).
The Loppert Note: contains a $1,500 original issue discount to cover legal fees such that the cash proceeds received on the closing
of the Loppert Note is $30,000; bears interest at the rate of 8% per annum; is due and payable on December 8, 2015; and may be
converted by Loppert at any time after 180 days of the date of closing into shares of Company common stock at a conversion price
of $0.09 per share of Common Stock. The Loppert also contains certain representations, warranties, covenants and events of default,
and increases in the amount of the principal and interest rates under the note in the event of such defaults.
The foregoing description of the Loppert SPA,
the Loppert Note and the Loppert Amendment is not intended to be complete and is qualified in its entirety by the complete text
of the documents listed hereon as Exhibit 10.25, Exhibit 10.26 and Exhibit 10.27 respectively.
Convertible Notes Payable entered into
Subsequent to December 31, 2014
Subsequent to December 31, 2014 we entered
into the Convertible Notes Payable described below and received net proceeds in the aggregate amount of $471,630. We determined
that the conversion option within these notes is an embedded derivative that has to be recognized separately from the host (note)
instrument. Accordingly, at inception of the notes we recognized the fair value of the embedded derivative liability and then
re-measure its fair value using the Black-Scholes-Merton pricing model at the end of each period and record the change in the
fair value of the derivative liability as either other income or other expense, as appropriate:
LG
Capital Funding, LLC
On
January 16, 2015, we entered into a Securities Purchase Agreement (LG SPA”) with LG Capital Funding, LLC (“LG Capital”)
providing for the purchase of a Convertible Redeemable Note (“LG Note”) in the aggregate principal amount of $78,750.
The LG Note was funded on January 20, 2015, and we received $67,500 of net proceeds (net of $3,750 legal fees and $7,500 finders
fees). The LG Note bears interest at the rate of 8% per annum; is due and payable on January 16, 2016; is subject to prepayment
penalties up to a 145% multiple of the principal, interest and other amounts owing, as defined. After the expiration
of 180 days following the date of the LG Note, the Company has no right of prepayment; and the note may be converted by LG Capital
at any time after 180 days of the date of closing into shares of our common stock at a conversion price equal to a 40% discount
of the lowest closing bid price for 20 prior trading days including the notice of conversion date.
The foregoing description of the LG SPA and
the LG Note is not intended to be complete and is qualified in its entirety by the complete text of the documents listed hereon
as Exhibit 10.28 and Exhibit 10.29, respectively.
The
estimated fair value of the embedded derivative liability at inception was $128,438, of which $78,750 was discounted against the
note and will be accreted over the term of the note and $49,688 will be recorded as interest expense at inception. Given the significant
amount of non-cash interest expense associated with the conversion option fair value, the effective interest rate is not meaningful.
JSJ
Investments, Inc.
On January 26, 2015 (the “Issuance Date”)
we entered into a financing agreement with JSJ Investments Inc. (“JSJ”) providing for the purchase of a 10% Convertible
Note in the aggregate principal amount of $66,000 (the “JSJ” Note). The JSJ Note contains a $6,000 original issue
discount such that the purchase price of the JSJ Note was $60,000. The JSJ Note was funded on January 27, 2015, and we received
$52,000 of net proceeds (net of $2,000 legal fees and $6,000 due diligence fees). The JSJ Note bears interest at the rate of 10%
per annum; is due and payable on January 26, 2016; may be prepaid until the one hundred and fiftieth (150th) day after the Issuance
Date at a cash redemption of 150%; and the note may be converted by JSJ at any time into shares of our common stock at a conversion
price equal to the lower of (i) a 40% discount of the lowest trading price during the previous twenty (20) trading days prior
to the date of conversion; or (ii) a 40% discount to the lowest trading price during the previous twenty (20) trading days before
the date that the JSJ Note was executed.
The foregoing description of the JSJ Note
is not intended to be complete and is qualified in its entirety by the complete text of the document listed hereon as Exhibit
10.30.
The
estimated fair value of the embedded derivative liability at inception was $132,002, of which $66,000 was discounted against the
note and will be accreted over the term of the note and $66,002 will be recorded as interest expense at inception. Given the significant
amount of non-cash interest expense associated with the conversion option fair value, the effective interest rate is not meaningful.
Adar
Bays, LLC
On
January 26, 2015, we entered into a Securities Purchase Agreement (“AB SPA”) with Adar Bays, LLC (“Adar Bays”)
providing for the purchase of a Convertible Redeemable Note (the “AB Note”) in the aggregate principal amount of $35,000.
The AB Note was funded on January 27, 2015, and we received $29,750 of net proceeds (net of $1,750 of legal fees and $3,500 finders
fees). The AB Note bears interest at the rate of 8% per annum; is due and payable on January 26, 2016; is subject to prepayment
penalties up to a 145% multiple of the principal, interest and other amounts owing, as defined. After the expiration
of 180 days following the date of the AB Note, the Company has no right of prepayment; and the note may be converted by Adar Bays
at any time after 180 days of the date of closing into shares of our common stock at a conversion price equal to a 40% discount
of the lowest closing bid price for 20 prior trading days including the notice of conversion date.
The foregoing description of the AB SPA and
the AB Note is not intended to be complete and is qualified in its entirety by the complete text of the documents listed hereon
as Exhibit 10.31 and Exhibit 10.32, respectively.
The
estimated fair value of the embedded derivative liability at inception was $65,333, of which $35,000 was discounted against the
note and will be accreted over the term of the note and $30,333 will be recorded as interest expense at inception. Given the significant
amount of non-cash interest expense associated with the conversion option fair value, the effective interest rate is not meaningful.
JMJ
Financial
On January 28, 2014, we received an initial
funding of $82,500 (including an original issue discount of $7,500) pursuant to a $250,000 Convertible Note (the “JMJ Note”)
dated January 28, 2015 with JMJ Financial. We received $67,500 of proceeds, net of $7,500 original issue discount and $7,500 finders
fee. The JMJ Note matures twenty four months from the date funded, has a one-time 12% interest charge if not paid within 90 days,
may be prepaid at any time on or before 90 days after the effective date, and is convertible at any time the option of JMJ Financial
into shares of our common stock at the lesser of $0.075 per share or 60% of the average of the trade price in the 25 trading days
prior to conversion.
The foregoing description of the JMJ Note
is not intended to be complete and is qualified in its entirety by the complete text of the document listed hereon as Exhibit
10.33.
The
estimated fair value of the embedded derivative liability at inception was $157,208, of which $82,500 was discounted against the
note and will be accreted over the term of the note and $74,708 will be recorded as interest expense at inception. Given the significant
amount of non-cash interest expense associated with the conversion option fair value, the effective interest rate is not meaningful.
Vista
Capital Investments, LLC
On
February 4, 2015 (the “Issuance Date”), we entered into a Convertible Note (the “Vista Note”) with Vista
Capital Investments, LLC (“Vista”) in the original principal amount of $250,000 (including a 10% original issue discount
(“OID”)). The Company and Vista agreed to an initial funding under the Vista Note of $55,000, including an OID of
$5,000 (“Initial Funding”). Future advances under the Vista Note are at the sole discretion of Vista. We are only
required to repay the amount funded, including the prorated portion of the OID. On February 9, 2015, we received $45,000 of net
proceeds under the Initial Funding, net of $5,000 OID and a $5,000 finders fee. The Vista Note matures twenty four months from
the date funded, has a one-time 12% interest charge if not paid within 90 days; may be prepaid at any time within the 90 day period
immediately following the Issuance Date at a multiple of 145% of the original principal amount; and may be convertible at the
option of Vista at any time after the Issuance Date into shares of our common stock at the lesser of $0.10 per share or 60% of
the lowest trade occurring during the twenty five (25) consecutive trading days immediately preceding the applicable conversion
date on which the holder elects to convert all or part of the Vista Note, subject to adjustment as provided for in the Vista Note.
The foregoing description of the Vista Note
is not intended to be complete and is qualified in its entirety by the complete text of the document listed hereon as Exhibit
10.34.
The
estimated fair value of the embedded derivative liability at inception was $91,712, of which $55,000 was discounted against the
note and will be accreted over the term of the note and $36,712 will be recorded as interest expense at inception. Given the significant
amount of non-cash interest expense associated with the conversion option fair value, the effective interest rate is not meaningful.
KBM
Worldwide, Inc.
On
February 17, 2015, we entered into a Securities Purchase Agreement (“KBM SPA”) with KBM Worldwide, Inc. (“KBM”)
providing for the purchase of a Convertible Promissory Note bearing interest at 8% per annum in the principal amount of $115,000
due February 17, 2016 (the “KBM Note”). The KBM Note includes an $11,000 Original Issue Discount (“OID”).
The KBM Note was funded on February 20, 2015, with the Company receiving net proceeds of $90,000, (net of the $11,000 OID, KBM’s
legal expenses of $4,000, and a finders fee of $10,000. The terms of the KBM SPA also provide, for a period of six months following
the effective date, a right of first refusal to KBM for certain future financings entered into by the Company for amounts less
than $75,000.
The KBM Note can be prepaid, at redemption
premiums ranging from 10% to 35%, until 180 days following the issuance date of the KBM Note, after which we have no right of
repayment. The KBM Note is convertible at a price per share equal to 61% of the average of the lowest three trading prices of
the Company’s common stock during the 10 trading days prior to conversion. If, at any time when the KBM Note is outstanding,
the Company issues or sells, or is deemed to have issued or sold, any shares of its common stock in connection with a subsequent
placement for no consideration or for a consideration per share based on a variable price formula that is less than the conversion
price in effect on the date of such issuance of shares of common stock, then the KBM conversion price will be reduced to the amount
of the consideration per share received for such issuance.
The foregoing description of the KBM SPA and
the KBM Note is not intended to be complete and is qualified in its entirety by the complete text of the documents listed hereon
as Exhibit 10.35 and Exhibit 10.36, respectively.
The
estimated fair value of the embedded derivative liability at inception was $250,590, of which $115,000 was discounted against
the note and will be accreted over the term of the note and $125,590 will be recorded as interest expense at inception. Given
the significant amount of non-cash interest expense associated with the conversion option fair value, the effective interest rate
is not meaningful.
EMA
Financial, LLC
On
February 19, 2015, we entered into a Securities Purchase Agreement (the “EMA SPA”) with EMA Financial, LLC (“EMA”)
providing for the purchase of a Convertible Note bearing interest at 10% per annum in the principal amount of $68,000 due February
19, 2016 (the “EMA Note”). The EMA Note includes an $6,800 Original Issue Discount (“OID”). The EMA Note
was funded on February 23, 2015, with the Company receiving net proceeds of $52,080, (net of the $6,800 OID, EMA’s due diligence
and documentation preparation expenses of $3,000, and a finders fee of $6,120).
The
EMA Note can be prepaid, at a redemption premium of 50%, until 180 days following the issuance date of the EMA Note, after which
the Company has no right of repayment. The EMA Note is convertible at a price per share equal to the lower of either (i) the closing
sale price of the Company’s common stock on the day prior to the closing date, and (ii) 60% of the lowest trade price of
the Company’s common stock Common Stock on the Principal Market during the twenty five (25) consecutive trading days prior
to conversion.
The foregoing description of the EMA SPA and
the EMA Note is not intended to be complete and is qualified in its entirety by the complete text of the documents listed hereon
as Exhibit 10.37 and Exhibit 10.38, respectively.
The
estimated fair value of the embedded derivative liability at inception was $167,167, of which $68,000 was discounted against the
note and will be accreted over the term of the note and $99,167 will be recorded as interest expense at inception. Given the significant
amount of non-cash interest expense associated with the conversion option fair value, the effective interest rate is not meaningful.
Tangiers
Investment Group, LLC
On
March 8, 2015, we entered into a Note Purchase Agreement (the “Tangiers NPA”) with Tangiers Investment Group, LLC
("Tangiers"), for the sale of a 10% convertible promissory note in the principal amount of up to $220,000, plus a 10%
original issue discount (the "Tangiers Note"). On March 10, 2015, the Company closed on an initial funding of $82,500
and received net proceeds of $67,500, after deducting $7,500 retained by Tangiers for the original issue discount for due diligence
and legal bills related to the transaction, and $7,500 that the Company paid to a third party for a finders fee. Tangiers has
the option to finance additional amounts, up to the balance of the $220,000, during the term of the Tangiers Note.
The principal due under the Tangiers Note
bears interest at the rate of 10% per annum. Upon an event of default, interest will accrue at the lower of 20% or the highest
rate permitted by law. Events of default under the note include, among others, failure to pay principal or interest on the note
or comply with certain covenants under the note. All interest and principal must be repaid on or before March 8, 2016. The Tangiers
Note may be prepaid in whole or in part by the Company within 180 days, at redemption premiums ranging from 15% to 35% of the
funded amount of the Tangiers Note plus accrued interest. After 180 days, the Tangiers Note may not be prepaid without the consent
of Tangiers. The principal and interest underlying the Tangiers Note is convertible at any time into common stock, at Tangiers's
option, at a conversion price equal to the lower of $0.04 or 60% of the lowest trading price of the Company's common stock during
the twenty consecutive trading days prior to the date on which Tangiers (or the then-holder of the Tangiers Note) elects to convert
all or part of the Tangiers Note.
The foregoing description of the Tangiers
NPA and the Tangiers Note is not intended to be complete and is qualified in its entirety by the complete text of the documents
listed hereon as Exhibit 10.39 and Exhibit 10.40, respectively.
The
estimated fair value of the embedded derivative liability at inception was $139,078, of which $82,500 was discounted against the
note and will be accreted over the term of the note and 58,578 will be recorded as interest expense at inception. Given the significant
amount of non-cash interest expense associated with the conversion option fair value, the effective interest rate is not meaningful.
Increase
in Authorized Share Capital
On
July 7, 2014, we filed a Certificate of Amendment to Certificate of Incorporation, a copy of which is attached hereto as Exhibit
3.5, to increase the number of our authorized shares of capital stock from 185,000,000 shares to 485,000,000 shares, divided into
two classes: 450,000,000 shares of common stock, par value $0.001 per share (the “Common stock”), and 35,000,000 shares
of preferred stock, par value $0.001 per share (the “Preferred Stock”).
On March 18, 2015, our Board of Directors
approved a resolution recommending that our shareholders approve increasing the number of our authorized shares of common stock
from 450,000,000 to 650,000,000. The Company is in the process of obtaining shareholder approval for the increase and will then
prepare and file an Information Statement pursuant to Section 14(c) of the Securities Exchange Act of 1934. Once that has been
filed and the requisite passage of time has passed, the Company will file an Amendment to its Certificate of Incorporation, at
which time the increase in the number of authorized shares of common stock will become effective.
Financial
Advisor, Investment Banking and Placement Agent Agreements
On
October 16, 2013 we entered into a six-month exclusive placement agent agreement with Midtown Partners & Co LLC (“Midtown”),
in connection with the private placement of the Company’s securities. On April 16, 2014, we agreed to extend
the term through October 16, 2014. We agreed to pay Midtown the following fees for services to be rendered:
(a) A
non-refundable retainer fee of twenty-five thousand dollars ($25,000.00) and a three year warrant to purchase one million (1,000,000)
shares of the Company's restricted common stock at $1.00.
(b) a
placement fee equal to eight percent (8%) of the gross purchase price paid for securities issued in transactions arranged through
Midtown, payable in full, in cash, at a closing for the sale of any of such securities.
(c) at
each closing, the Company shall issue to Midtown, or its permitted assigns, warrants (the “PA Warrants”) to purchase
that number of shares of common stock of the Company equal to eight percent (8%) of the sum of (i) the number of shares of common
stock of the Company issued at each such closing or in the event of a convertible or equity linked security, the number of shares
of common stock issuable by the Company upon exercise or conversion of any and all convertible or equity linked securities issued
at each such closing (including, but not limited to, all convertible promissory notes, convertible preferred stock and all series
of warrants). The PA Warrants shall be transferable by Midtown to its representatives and agents at closing.
The
foregoing description of the placement agent agreement with Midtown does not purport to be complete and is qualified in its entirety
by reference to the complete text of the placement agent agreement and the addendum, copies of which are filed as Exhibits 10.18
and 10.17, respectively, hereto and which are incorporated herein by reference.
On December 19, 2014, we entered into an agreement
with Carter, Terry & Company (“CTC”) to act, on a non-exclusive basis, as Financial Advisor, Investment Bank and
Placement Agent for the Company on a “best efforts” basis for a period of 12 months with an option by CTC to extend
for an additional 6 months. The agreement may be terminated by either party by written notice to the other. We have agreed to
pay CTC the following fees:
| (i) | A
cash success fee for debt and/or equity capital raised by CTC on behalf of Company shall
be subject to the following fee structure: |
| a. | 10%
of the amount for any equity or hybrid equity capital raised up to $1,000,000; or |
| b. | 8%
of the amount for any equity or hybrid equity capital raised up to $5,000,000; or |
| c. | 6%
of the amount for any equity or hybrid equity capital raised over $5,000,000. |
| (ii) | A success fee which shall be the identical terms as in (i) above of the Aggregate Consideration (except as
further defined in (iii)) received by Company from any Transaction closed, including multiple successive Transactions, with an
Investor Candidate or a Strategic Candidate (or upon closing a Transaction with a Covered Party, including multiple successive
Transactions, within twelve months after the Termination Date), which amount will be paid when the Company receives the proceeds
from the Transaction (capitalized items having the meaning ascribed in the agreement).
|
| (iii) | In connection with the compensation set forth above, the Company agrees to pay CTC an amount of restricted
shares equal to 4% of the capital raised divided by the closing price of the stock on the date of close of the capital raise transaction
facilitated by CTC. These shares shall have piggy back registration rights.
|
The foregoing description of the agreement
with CTC does not purport to be complete and is qualified in its entirety by reference to the complete text of the agreement,
a copy of which is filed hereto as Exhibit 10.41 hereto and which is incorporated herein by reference.
Executive
Offices
Our executive officers are located at 777
South Flagler Drive, Suite 800 West, West Palm Beach, FL 33401 and our telephone number is 561-515-6163. Our executive
office is a virtual office which means that our executives each work from their home offices, but utilize this facility for meetings
and conferences, and telephone and message support.
Patents,
Trademarks, and Licenses
Except for the NACSV trademark, we do not own
any patents or trademarks and we have not entered into any license agreements.
Environmental
Laws and Regulation
In the future we expect that we may be subject
to various federal, state, local, provincial and foreign laws and regulations governing the protection of human health and the
environment. In 2014, we did not make any significant capital expenditures for equipment required by environmental laws
and regulations.
Available
Information
The
Company’s Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and amendments to reports
filed pursuant to Sections 13(a) and 15(d) of the Securities Exchange Act of 1934, as amended (“Exchange Act”), are
filed with the U.S. Securities and Exchange Commission (the “SEC”). Such reports and other information filed by the
Company with the SEC are available free of charge on the Company’s website at www.gdsi.co when such reports are available
on the SEC website. The public may read and copy any materials filed by the Company with the SEC at the SEC’s Public Reference
Room at 100 F Street, NE, Room 1580, Washington, DC 20549. The public may obtain information on the operation of the Public Reference
Room by calling the SEC at 1-800-SEC-0330. The SEC maintains an Internet site that contains reports, proxy and information statements
and other information regarding issuers that file electronically with the SEC at www.sec.gov. The contents of these
websites are not incorporated into this filing or any registration statement that incorporates this Form 10-K by reference. Further,
the Company’s references to the URLs for these websites are intended to be inactive textual references only.
Employees
As
of December 31, 2014, we employed eleven full-time employees. We also use professionals on an as-needed basis. We have
no collective bargaining agreements and believe our relations with our employees are good.
Our
operations could be affected by various risks, many of which are beyond our control. Based on current information, we believe
that the following identifies the most significant risks that could affect our business. Investors should carefully consider the
following risk factors, together with all of the information included in this Annual Report on Form 10-K, in evaluating our
company, our business and our prospects.
Risks
Relating to Our Business
There
is doubt about our ability to continue as a going concern.
Our independent registered public accounting
firm has issued an opinion on our December 31, 2014 financial statements that states that the financial statements were prepared
assuming we will continue as a going concern. As discussed in Note 1 to the financial statements, we have sustained
losses and experienced negative cash flows from operations since inception, and for the year ended December 31, 2014 we incurred
a net loss of $11,657,188, and used net cash of $708,040 to fund operating activities, and net cash of $239,697 for financing
activities. At December 31, 2014, we had an accumulated deficit of $28,515,563, cash and cash equivalents of $160,102, working
capital of $192,628 and stockholders’ equity of $152,406. These matters raise substantial doubt about our ability
to continue as a going concern. Our plan in regards to these matters is also described in Note 1 to our financial statements. The
financial statements do not include any adjustments that might result from the outcome of this uncertainty.
Our
future is dependent on our ability to meet our financing requirements, and complete other identified and unidentified acquisitions.
If we fail for any reason, we might not be able to continue as a going concern.
We
have a limited operating history, limited revenue and may continue to incur losses.
There
can be no assurance that our business will be profitable in the future. We may continue to incur losses and negative cash flows
from operations. This would have a material adverse affect on our financial condition.
We
will need additional financing to fully implement our business plan, and we cannot assure you that we will be successful in obtaining
such financing or in continuing our operations.
We acquired North American Custom Specialty
Vehicles (“NACSV”) in June 2014. NACSV specializes in building mobile command/communications and specialty vehicles
for emergency management, first responders, national security and law enforcement operations. We may acquire complementary businesses
in the future, but there can be no assurance that we will successfully close a future acquisition, or that additional public or
private financing, including debt or equity financing, will be available as needed, or, if available, on terms favorable to us
to close such an acquisition. Any additional equity financing may be dilutive to our stockholders and holders of such additional
equity securities may have rights, preferences or privileges that are senior to those of our existing common or preferred stock.
Furthermore, debt financing, if available, will require payment of interest and may involve restrictive covenants that could impose
limitations on our operating flexibility. Our failure to successfully obtain additional future funding may jeopardize our ability
to continue our business and operations.
While part of our strategy is to pursue
strategic acquisitions, we may not be able to identify businesses that we can acquire on acceptable terms: we may not be able
to obtain necessary financing or may face risks due to additional indebtedness: and our acquisition strategy may incur significant
costs or expose us to substantial risks inherent in the acquired business’s operations.
Our
strategy of pursuing strategic acquisitions may be negatively impacted by several risks, including the following:
| |
● |
We
may not successfully identify companies that have complementary product lines or technological competencies or that can diversify
our revenue or enhance our ability to implement our business strategy. |
| |
● |
We
may not successfully acquire companies if we fail to obtain financing, or to negotiate the acquisition on acceptable terms,
or for other related reasons. |
| |
● |
We
may incur additional expenses due to acquisition due diligence, including legal, accounting, consulting and other professional
fees and disbursements. Such additional expenses may be material, will likely not be reimbursed and would increase the
aggregate cost of any acquisition. |
| |
● |
Any
acquired business will expose us to the acquired company’s liabilities and to risks inherent to its industry.
We may not be able to ascertain or assess all of the significant risks. |
| |
● |
We
may require additional financing in connection with any future acquisition. Such financing may adversely impact, or
be restricted by, our capital structure. |
| |
● |
Achieving
the anticipated potential benefits of a strategic acquisition will depend in part on the successful integration of the operations,
administrative infrastructures and personnel of the acquired company or companies in a timely and efficient manner.
Some of the challenges involved in such an integration include: |
| |
|
● |
demonstrating
to the customers of the acquired company that the consolidation will not result in adverse changes in quality, customer service
standards or business focus; |
| |
|
● |
preserving
important relationships of the acquired company; |
| |
|
● |
coordinating
sales and marketing efforts to effectively communicate the expanded capabilities of the combined company; and |
| |
|
● |
coordinating
the supply chains. |
Any
integration is expected to be complex, time-consuming and expensive and may harm the newly-consolidated company’s business,
financial condition and results of operations.
We
depend upon our senior management and our business may be adversely affected if we cannot retain them.
Our
success depends upon our ability to attract and retain experienced senior management with specialized industry and technical knowledge
and/or industry relationships. On August 12, 2013, Richard J. Sullivan was appointed Chairman and CEO of the Company and David
A. Loppert was appointed CFO. In July 2014, Stephen L. Norris was appointed Vice Chairman and CEO of GDSI International.
Mr. Norris subsequently resigned on January 9, 2015. On December 3, 2014, Jennifer S. Carroll was appointed President of NACSV.
Ms. Carroll resigned on March 7, 2015.
Mr. Sullivan and Mr. Loppert have significant
experience as CEO and CFO, respectively, of public companies. We might not be able to find or replace qualified individuals
to fill the slots of senior management that we anticipate if their services do not become available to us or are no longer available
to us; accordingly the inability to fill positions in, or the loss of critical members of, our anticipated senior management team
could have a material adverse effect on our ability to effectively pursue our business and acquisition strategy. We do not have
key-man life insurance policies covering these employees at this time.
If
we are unable to manage future growth, our business may be negatively affected.
We
are continuing to pursue a strategy of rapid growth, and plan to expand significantly our capability and devote substantial resources
to our marketing, sales, administrative, operational, financial and other systems and resources. Such expansion will place significant
demands on our marketing, sales, administrative, operational, financial and management information systems, controls and procedures.
Accordingly, our performance and profitability will depend on the ability of our officers and key employees to:
| |
● |
manage
our business and our subsidiaries as a cohesive enterprise; |
| |
● |
manage
expansion through the timely implementation and maintenance of appropriate administrative, operational, financial and management
information systems, controls and procedures; |
| |
● |
add
internal capacity, facilities and third-party sourcing arrangements as and when needed; |
| |
● |
maintain
service quality controls; and |
| |
● |
attract,
train, retain, motivate and manage effectively our employees. |
There can be no assurance that we will integrate
and manage successfully new systems, controls and procedures for our business, or that our systems, controls, procedures, facilities
and personnel, even if successfully integrated, will be adequate to support our projected future operations. Any failure to implement
and maintain such systems, controls and procedures, add internal capacity, facilities and third-party sourcing arrangements or
attract, train, retain, motivate and manage effectively our employees could have a material adverse effect on our business, financial
condition and results of operations. In addition, we may incur substantial expenses identifying, investigating and
developing appropriate products and services in our targeted business markets. There can be no assurance that any expenditures
incurred in identifying, investigating and developing such products and services will ever be recouped.
We
will need additional capital to fund ongoing operations, future acquisitions, and to respond to business opportunities, challenges,
acquisitions or unforeseen circumstances. If such capital is not available to us, our business, operating results and
financial condition may be harmed.
At December 31, 2014 we had $160,102 cash
on hand. Subsequent to December 31, 2014, we entered into a number of convertible note transactions, receiving net
proceeds in the aggregate of $471,630. We will continue to seek equity financing to provide funding for operations
but there is no assurance that we will be successful in these efforts. If we are not successful in raising additional
equity capital or generating sufficient cash flows to meet our obligations as they come due, we may not be able to fully fund
our ambitious growth plans. We may then be required to reduce our overhead expenses by the reduction of headcount and other available
measures.
We
may face strong competition from larger, established companies.
We likely will face intense competition from
other companies that provide the same or similar custom specialty vehicle manufacturing and other services that compete with acquired
businesses, virtually all of whom can be expected to have longer operating histories, greater name recognition, larger installed
customer bases and significantly more financial resources, R&D facilities and manufacturing and marketing experience than
we have. There can be no assurance that developments by our potential competitors will not render our existing and future products
or services obsolete. In addition, we expect to face competition from new entrants into the custom specialty vehicle
business. As the demand for products and services grows and new markets are exploited, we expect that competition will become
more intense, as current and future competitors begin to offer an increasing number of diversified products and services. We may
not have sufficient resources to maintain our research and development, marketing, sales and customer support efforts on a competitive
basis. Additionally, we may not be able to make the technological advances necessary to maintain a competitive advantage with
respect to our products and services. Increased competition could result in price reductions, fewer product orders, obsolete technology
and reduced operating margins, any of which could materially and adversely affect our business, financial condition and results
of operations.
If
we are unable to keep up with technological developments, our business could be negatively affected.
If we are successful in acquiring complementary
companies in the future, the markets for our anticipated products and services are expected to be characterized by rapid technological
change and be highly competitive with respect to timely innovations. Accordingly, we believe that our ability to succeed in the
sale of our products and services will depend significantly upon the technological quality of our products and services relative
to those of our competitors, and our ability to continue to develop and introduce new and enhanced products and services at competitive
prices and in a timely and cost-effective manner. In order to develop such new products and services, we will depend
upon close relationships with existing customers and our ability to continue to develop and introduce new and enhanced products
and services at competitive prices and in a timely and cost-effective manner. There can be no assurance that we will be able to
develop and market our new products and services successfully or respond effectively to technological changes or new product and
service offerings of our potential competitors. We may not be able to develop the required technologies, products and services
on a cost-effective and timely basis, and any inability to do so could have a material adverse effect on our business, financial
condition and results of operations.
We may not be able to protect intellectual
property that we hope to acquire, which could adversely affect our business.
The companies that we hope to acquire may
rely on patent, trademark, trade secret and copyright protection to protect their technology. We believe that technological leadership
can be achieved through additional factors such as the technological and creative skills of our personnel, new product developments,
frequent product enhancements, name recognition and reliable product maintenance. Nevertheless, our ability to compete effectively
depends in part on our ability to develop and maintain proprietary aspects of our technology, such as patents. We may not secure
future patents; and patents that we may secure may become invalid or may not provide meaningful protection for our product innovations.
In addition, the laws of some foreign countries do not protect intellectual property rights to the same extent as the United States.
Furthermore, there can be no assurance that competitors will not independently develop similar products, "reverse engineer"
our products, or, if patents are issued to us, design around such patents. We also expect to rely upon a combination
of copyright, trademark, trade secret and other intellectual property laws to protect our proprietary rights by entering into
confidentiality agreements with our employees, consultants and vendors, and by controlling access to and distribution of our technology,
documentation and other proprietary information. There can be no assurance, however, that the steps to be taken by us will not
be challenged, invalidated or circumvented, or that the rights granted thereunder will provide a competitive advantage to us.
Any such circumstance could have a material adverse effect on our business, financial condition and results of operations. While
we are not currently engaged in any intellectual property litigation or proceedings, there can be no assurance that we will not
become so involved in the future or that our products do not infringe any intellectual property or other proprietary right of
any third party. Such litigation could result in substantial costs, the diversion of resources and personnel, and subject us to
significant liabilities to third parties, any of which could have a material adverse effect on our business.
We
may not be able to protect our trade names and domain names.
We
may not be able to protect our trade names and domain names against all infringers, which could decrease the value of our brand
name and proprietary rights. We currently hold the Internet domain names "www.gdsi.co" and “www.nacsvehicles.com”
and we use “GDSI” and “NACS Vehicles” as trade names. Domain names generally are regulated
by Internet regulatory bodies and are subject to change and may be superseded, in some cases, by laws, rules and regulations governing
the registration of trade names and trademarks with the United States Patent and Trademark Office and certain other common law
rights. If the domain registrars are changed, new ones are created or we are deemed to be infringing upon another's trade name
or trademark, we could be unable to prevent third parties from acquiring or using, as the case may be, our domain name, trade
names or trademarks, which could adversely affect our brand name and other proprietary rights.
We
expect a number of factors to cause our operating results to fluctuate on a quarterly and annual basis, which may make it difficult
to predict our future performance.
Our
revenues and operating results could vary significantly from quarter to quarter and year-to-year because of a variety of factors,
many of which are outside of our control. As a result, comparing our operating results on a period-to-period basis
may not be meaningful. In addition to other risk factors discussed in this section, factors that may contribute to
the variability of our quarterly and annual results include:
| |
● |
our
ability to accurately forecast revenues and appropriately plan our expenses; |
| |
● |
the
impact of worldwide economic conditions, including the resulting effect on consumer spending; |
| |
● |
our
ability to maintain an adequate rate of growth; |
| |
● |
our
ability to effectively manage our growth; |
| |
● |
our
ability to attract new customers; |
| |
● |
our
ability to successfully enter new markets and manage our expansion; |
| |
● |
the
effects of increased competition in our business; |
| |
● |
our
ability to keep pace with changes in technology and our competitors; |
| |
● |
our
ability to successfully manage any future acquisitions of businesses, solutions or technologies; |
| |
● |
the
success of our marketing efforts; |
| |
● |
interruptions
in service and any related impact on our reputation; |
| |
● |
the
attraction and retention of qualified employees and key personnel; |
| |
● |
our
ability to protect our intellectual property; |
| |
● |
costs
associated with defending intellectual property infringement and other claims; |
| |
● |
the
effects of natural or man-made catastrophic events; |
| |
● |
the
effectiveness of our internal controls; and |
| |
● |
changes
in government regulation affecting our business. |
As
a result of these and other factors, the results of any prior quarterly or annual periods should not be relied upon as indications
of our future operating performance, and any unfavorable changes in these or other factors could have a material adverse effect
on our business, financial condition and results of operation.
Growth
may place significant demands on our management and our infrastructure.
We
plan for substantial growth in our business, and this growth would place significant demands on our management and our operational
and financial infrastructure. If our operations grow in size, scope and complexity, we will need to improve and upgrade
our systems and infrastructure to meet customer demand. The expansion of our systems and infrastructure will require us to commit
substantial financial, operational and technical resources in advance of an increase in the volume of business, with no assurance
that the volume of business will increase. Continued growth could also strain our ability to maintain reliable service
levels for our customers and meet their expected delivery schedules, develop and improve our operational, financial and management
controls, enhance our reporting systems and procedures and recruit, train and retain highly skilled personnel.
Managing
our growth will require significant expenditures and allocation of valuable management resources. If we fail to achieve the necessary
level of efficiency in our organization as it grows, our business, operating results and financial condition would be harmed.
Confidentiality
agreements with employees and others may not adequately prevent disclosure of trade secrets and other proprietary information.
In
order to protect our proprietary technology and processes, we will rely in part on confidentiality agreements with our employees,
customers, potential customers, independent contractors and other advisors. These agreements may not effectively prevent
disclosure of confidential information and may not provide an adequate remedy in the event of unauthorized disclosure of confidential
information. In addition, others may independently discover trade secrets and proprietary information, and in such
cases we could not assert any trade secret rights against such parties. Costly and time-consuming litigation could
be necessary to enforce and determine the scope of our proprietary rights, and failure to obtain or maintain trade secret protection
could adversely affect our competitive business position.
We
will continue to incur increased costs as a result of being a public reporting company and our management expects to devote substantial
time to public reporting company compliance programs.
As
a public reporting company, we incur significant legal, insurance, accounting and other expenses that we would not incur as a
non-reporting public company. We expect to invest resources to comply with evolving laws, regulations and standards, and this
investment will result in increased general and administrative expenses and may divert management's time and attention from product
development activities. If our efforts to comply with new laws, regulations and standards differ from the activities intended
by regulatory or governing bodies due to ambiguities related to practice, regulatory authorities may initiate legal proceedings
against us and our business may be harmed. We maintain directors' and officers' insurance coverage, which increases our insurance
cost. In the future, it may be more expensive for us to obtain director and officer liability insurance, and we may be required
to accept reduced coverage or incur substantially higher costs to obtain coverage. These factors could also make it more difficult
for us to attract and retain qualified members of our board of directors, particularly to serve on our audit committee and compensation
committee, and qualified executive officers.
In addition, in order to comply with the requirements
of being a public reporting company, we may need to undertake various actions, including implementing new internal controls and
procedures and hiring new accounting or internal audit staff. The Sarbanes-Oxley Act requires that we maintain effective disclosure
controls and procedures and internal control over financial reporting. We are continuing to develop and refine our disclosure
controls and other procedures that are designed to ensure that information required to be disclosed by us in the reports that
we file with the Securities and Exchange Commission is recorded, processed, summarized and reported within the time periods specified
in the Commission's rules and forms, and that information required to be disclosed in reports under the Exchange Act is accumulated
and communicated to our principal executive and financial officers. Any failure to develop or maintain effective controls could
adversely affect the results of periodic management evaluations. In the event that we are not able to demonstrate compliance with
the Sarbanes-Oxley Act, that our internal control over financial reporting is perceived as inadequate, or that we are unable to
produce timely or accurate financial statements, investors may lose confidence in our operating results and the price of our ordinary
shares could decline.
As discussed below, because we are an emerging
growth company, we are exempt from the auditor attestation requirement of Section 404 of the Sarbanes-Oxley Act of 2002,
but that does not preclude us from complying with certain of these rules, which require management to certify financial and other
information in our quarterly and annual reports and provide an annual management report on the effectiveness of our internal control
over financial reporting commencing with our second annual report. This assessment will need to include the disclosure of any
material weaknesses in our internal control over financial reporting identified by our management or our independent registered
public accounting firm.
Our
independent registered public accounting firm will not be required to formally attest to effectiveness of our internal control
over financial reporting until the later of our second annual report or the first annual report required to be filed with the
Commission following the date we are no longer an "emerging growth company" as defined in the JOBS Act. We have identified
certain material weaknesses addressed in Item 9A – Controls and Procedures in this Annual Report on Form 10-K hereof,
and we cannot assure you that there will not be additional material weaknesses or significant deficiencies in our internal controls
in the future.
Risks
Related to our Common and Preferred Stock
We
are eligible to be treated as an "emerging growth company" as defined in the Jumpstart Our Business Startups Act of
2012, and we cannot be certain if the reduced disclosure requirements applicable to emerging growth companies will make our common
stock less attractive to investors.
We
are an "emerging growth company", as defined in the JOBS Act. For as long as we continue to be an emerging growth company,
we may take advantage of exemptions from various reporting requirements that are applicable to other public companies that are
not emerging growth companies, including (1) not being required to comply with the auditor attestation requirements of Section 404
of the Sarbanes-Oxley, (2) reduced disclosure obligations regarding executive compensation in this Form 10-K and our other
periodic reports, and registration and proxy statements and (3) exemptions from the requirements of holding a
nonbinding advisory vote on executive compensation and stockholder approval of any golden parachute payments not previously approved.
In addition, as an emerging growth company, we are only required to provide two years of audited financial statements. We could
be an emerging growth company for up to five years, although circumstances could cause us to lose that status earlier, including
if the market value of our common stock held by non-affiliates exceeds $700.0 million as of any June 30 before that
time (i.e., we become a large accelerated filer) or if we have total annual gross revenue of $1.0 billion or more during
any fiscal year before that time, in which cases we would no longer be an emerging growth company as of the following December 31
or, if we issue more than $1.0 billion in non-convertible debt during any three-year period before that time, we would cease
to be an emerging growth company immediately. Even after we no longer qualify as an emerging growth company, we may still qualify
as a "smaller reporting company" which would allow us to take advantage of many of the same exemptions from disclosure
requirements, including not being required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley
Act and reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements. We cannot
predict if investors will find our common stock less attractive because we may rely on these exemptions. If some investors find
our common stock less attractive as a result, there may be a less active trading market for our common stock and our stock price
may be more volatile.
Under
the JOBS Act, emerging growth companies can also delay adopting new or revised accounting standards until such time as those standards
apply to private companies. We have irrevocably elected not to avail ourselves of this extended transition period and, as a result,
we will adopt new or revised accounting standards on the relevant dates on which adoption of such standards is required for other
public companies that are not emerging growth companies.
We
have not paid dividends in the past and do not expect to pay dividends in the foreseeable future. Any return on investment
may be limited to the value of our common stock.
We
have never paid cash dividends on our common stock and do not anticipate doing so in the foreseeable future. The payment
of dividends on our common stock will depend on earnings, financial condition and other business and economic factors affecting
us at such time as our board of directors may consider relevant. If we do not pay dividends, our common stock may be
less valuable because a return on your investment will only occur if our stock price appreciates. We recently entered into certain
convertible note transactions that prohibit us from paying dividends until the amounts owing under the notes have been satisfied.
There
is currently a limited liquid trading market for our common stock and we cannot ensure that one will ever develop or be sustained.
Our
common stock is quoted for trading on the OTCQB Marketplace (“OTCQB”). As soon as is practicable, we anticipate
applying for listing of our common stock on either the American Stock Exchange, The Nasdaq Capital Market or other national securities
exchange, assuming that we can satisfy the initial listing standards for such exchange. We currently do not satisfy
the initial listing standards, and cannot ensure that we will be able to satisfy such listing standards or that our common stock
will be accepted for listing on any such exchange. Should we fail to satisfy the initial listing standards of such
exchanges, or our common stock is otherwise rejected for listing and remains listed on the OTCQB or suspended from the OTCQB,
the trading price of our common stock could suffer and the trading market for our common stock may be less liquid and our common
stock price may be subject to increased volatility.
Furthermore,
for companies whose securities are traded in the OTCQB, it is more difficult (1) to obtain accurate quotations, (2) to obtain
coverage for significant news events because major wire services generally do not publish press releases about such companies,
and (3) to obtain needed capital.
Our
common stock may be deemed a "penny stock," which would make it more difficult for our investors to sell their shares.
Our common stock may be subject to the "penny
stock" rules adopted under Section 15(g) of the Exchange Act. The penny stock rules generally apply to companies
whose common stock is not listed on The Nasdaq Capital Market or other national securities exchange and trades at less than $4.00
per share, other than companies that have had average revenue of at least $6,000,000 for the last three years or that have tangible
net worth of at least $5,000,000 ($2,000,000 if the company has been operating for three or more years). These rules
require, among other things, that brokers who trade penny stock to persons other than "established customers" complete
certain documentation, make suitability inquiries of investors and provide investors with certain information concerning trading
in the security, including a risk disclosure document and quote information under certain circumstances. Many brokers
have decided not to trade penny stocks because of the requirements of the penny stock rules and, as a result, the number of broker-dealers
willing to act as market makers in such securities is limited. Our shares are currently subject to the penny stock
rules. If we remain subject to the penny stock rules for any significant period, it could have an adverse effect on the market,
if any, for our securities. If our securities are subject to the penny stock rules, investors will find it more difficult
to dispose of our securities.
Offers
or availability for sale of a substantial number of shares of our common stock may cause the price of our common stock to decline.
If
our stockholders sell substantial amounts of our common stock in the public market, including shares issued in our private placements
that were subsequently registered and are free trading, or upon the expiration of any statutory holding period, under Rule 144,
or issued upon the exercise of outstanding options, warrants, convertible debt, contingent consideration and additional shares
issued under price protection agreements, it could create a circumstance commonly referred to as an "overhang" and in
anticipation of which the market price of our common stock could fall. The existence of an overhang, whether or not
sales have occurred or are occurring, also could make more difficult our ability to raise additional financing through the sale
of equity or equity-related securities in the future at a time and price that we deem reasonable or appropriate.
Investor
Relations Activities, Nominal “Float” and Supply and Demand Factors May Affect the Price of our Stock.
We may utilize various techniques such as
non-deal road shows and investor relations campaigns in order to create investor awareness for the Company. These campaigns
may include personal, video and telephone conferences with investors and prospective investors in which our business practices
are described. We have provided in the past, and we will continue to provide, compensation to investor relations firms.
Additionally we may pay for newsletters, websites, mailings and email campaigns that are produced by third-parties based upon
publicly-available information concerning the Company. We will not be responsible for the content of analyst reports
and other writings and communications by investor relations firms not authored by the Company or from publicly available information. We
do not intend to review or approve the content of such analysts’ reports or other materials based upon analysts’ own
research or methods. Investor relations individuals or firms should generally disclose when they are compensated for
their efforts, but whether such disclosure is made or complete is not under our control.
The SEC and the Financial Industry Regulatory
Authority, Inc. (“FINRA”) enforce various statutes and regulations intended to prevent manipulative or deceptive devices
in connection with the purchase or sale of any security and carefully scrutinize trading patterns and company news and other communications
for false or misleading information, particularly in cases where the hallmarks of “pump and dump” activities may exist,
such as rapid share price increases or decreases. The Company and its shareholders may be subjected to enhanced regulatory
scrutiny due to the relatively small number of holders who own the registered shares of the Company’s common stock publicly
available for resale, and the limited trading markets in which such shares may be offered or sold which have often been associated
with improper activities concerning penny stocks, such as the OTCQB Marketplace. The Supreme Court has stated that
manipulative action is a term of art connoting intentional or willful conduct designed to deceive or defraud investors by controlling
or artificially affecting the price of securities. Often times, manipulation is associated by regulators with forces
that upset the supply and demand factors that would normally determine trading prices. The supply of Company common stock for
sale has been and may continue to be limited for an indeterminate amount of time, which could result in higher bids, asks or sales
prices than would otherwise exist. Securities regulators have often cited thinly-traded markets, small numbers of holders,
and awareness campaigns as components of their claims of price manipulation and other violations of law when combined with manipulative
trading, such as wash sales, matched orders or other manipulative trading timed to coincide with false or touting press releases. There
can be no assurance that the Company’s or third-parties’ activities, or the small number of potential sellers or small
percentage of stock in the “float,” or determinations by purchasers or holders as to when or under what circumstances
or at what prices they may be willing to buy or sell stock will not artificially impact (or would be claimed by regulators to
have affected) the normal supply and demand factors that determine the price of the stock.
We
may apply the proceeds of future private placements to uses that ultimately do not improve our operating results or increase the
value of your investment.
We
have used and intend to use the net proceeds from future private placements for general working capital purposes. Our management
has and will have broad discretion in how we use these proceeds. These proceeds could be applied in ways that do not ultimately
improve our operating results or otherwise increase the value of the investment in shares of our common stock sold.
Because
our current directors and executive officers are among our largest stockholders, they can exert significant control over our business
and affairs and have actual or potential interests that may depart from those of subscribers in our private placements.
Our current directors and executive officers
beneficially own or control approximately 42% of our issued and outstanding shares of common stock. Additionally, the
holdings of our directors and executive officers may increase in the future upon vesting or other maturation of exercise rights
under any of the restricted stock grants, options or warrants they may hold or in the future be granted or if they otherwise acquire
additional shares of our common stock. The interests of such persons may differ from the interests of our other stockholders. As
a result, in addition to their board seats and offices, such persons may have significant influence over and may control corporate
actions requiring stockholder approval, irrespective of how the Company's other stockholders may vote, including the following
actions:
| |
● |
to
elect or defeat the election of our directors; |
| |
● |
to
amend or prevent amendment of our Certificate of Incorporation or By-laws; |
| |
● |
to
effect or prevent a transaction, sale of assets or other corporate transaction; and |
| |
● |
to
control the outcome of any other matter submitted to our stockholders for vote. |
Such
persons' stock ownership may discourage a potential acquirer from making a tender offer or otherwise attempting to obtain control
of the Company, which in turn could reduce our stock price or prevent our stockholders from realizing a premium over our stock
price.
Exercise of options and warrants, conversion
rights under convertible notes, and price protection agreements may have a dilutive effect on our common stock.
If the price per share of our common stock
at the time of exercise of any options, or any other convertible securities is in excess of the various exercise or conversion
prices of such convertible securities, exercise or conversion of such convertible securities would have a dilutive effect on our
common stock. As of December 31, 2014, we had: (a) outstanding options to acquire 5,840,000 shares of our common stock at exercise
prices of $0.11 per share for 340,000 options, and $0.64 per share for 5.5 million options, (b) warrants to acquire 4,250,000
shares of our common stock at exercise prices ranging from $0.10 to $1.00, (c) convertible debt of $69,000 potentially convertible
into 76,666 shares of our common stock at $0.09 per shares, and (d) 645,161 shares issued that are subject to price protection
agreements that, if sold at December 31, 2014, would have resulted in us having to issue an additional 1,854,838 shares of our
common stock. Further, any additional financing that we secure may require the granting of rights, preferences or privileges senior
to those of our common stock and which result in additional dilution of the existing ownership interests of our common stockholders.
Subsequent to December 31, 2014, we entered into convertible note transactions that, had they been outstanding at December 31,
2014, are potentially convertible into approximately an additional 12 million shares of our common stock.
Our
certificate of incorporation allows for our board to create new series of preferred stock without further approval by our stockholders,
which could adversely affect the rights of the holders of our common stock.
Our
board of directors has the authority to fix and determine the relative rights and preferences of preferred stock. Our board of
directors also has the authority to issue preferred stock without further stockholder approval. As a result, our board of directors
could authorize the issuance of a series of preferred stock that would grant to holders a preferred right to our assets upon liquidation,
the right to receive dividend payments before dividends are distributed to the holders of common stock and the right to the redemption
of the shares, together with a premium, prior to the redemption of our common stock. In addition, our board of directors could
authorize the issuance of a series of preferred stock that has greater voting power than our common stock or that is convertible
into our common stock, which could decrease the relative voting power of our common stock or result in dilution to our existing
stockholders.
| Item 1B. |
Unresolved
Staff Comments. |
Not
applicable.
Our
corporate headquarters are located in West Palm Beach, Florida. In August 2013 we entered into a twelve-month lease
for a virtual office in West Palm Beach, Florida at a monthly rental of $299 plus taxes. The lease automatically renews on the
anniversary unless terminated by either party on thirty days notice prior to expiration.
NACSV leases its office and manufacturing
facilities in Melbourne, FL under a year-to-year operating lease with monthly rent payments totaling $8,748 in January 2015 and
$5,637 for February – December, 2015. The lease provides that either party may cancel it on thirty day’s notice. In
September 2014, NACSV entered into a 12-month operating lease for a condominium for a vice president with monthly rent payments
of $2,160.
| Item 3. |
Legal
Proceedings. |
The
Company is plaintiff or defendant in two actions:
Dekle, et. al. v. Global Digital
Solutions, Inc. et. al.
Brian A. Dekle and John Ramsay filed
suit against the Company and its wholly owned subsidiary, North American Custom Specialty Vehicles, Inc. (“NACSV”)
in the Circuit Court of Baldwin Alabama, on January 14, 2015, case no. 05-CV-2015-9000050.00, relating to our acquisition of NACSV
(the ''Dekle Action"). Prior to instituting the Dekle Action, in June 2014, the Company had entered into an equity purchase
agreement with Dekle and Ramsay to purchase their membership interest in North American Custom Specialty Vehicles, LLC. The Dekle
Action originally sought payment for $300,000 in post-closing consideration Dekle and Ramsay allege they are owed pursuant to the
equity purchase agreement.
On February 9, 2015, the Company and NACSV
removed the Dekle Action to federal court in the United States District Court in and for the Southern District of Alabama, case
no. 1:15-CV-00069. The Company and NACSV subsequently moved to dismiss the complaint for (1) failing to state a cause of action,
and (2) lack of personal jurisdiction. Alternatively, the Company and NACSV sought a transfer of the case to the United States
District Court in and for Middle District of Florida.
In response to the Company’s and NACSV's
motion to dismiss, Dekle and Ramsay filed an amended complaint on March 2, 2015 seeking specific performance and alleging breach
of contract, violations of SEC Rule 10b-5, and violations of the Alabama Securities Act. The amended complaint also names the
Company’s Chairman, President, and CEO, Richard J. Sullivan (“Sullivan”) as a defendant. On March 17, 2015, the
Company, NACSV and Sullivan filed a motion to dismiss the amended complaint seeking dismissal for failure to state valid causes
of action, for lack of personal jurisdiction, or alternatively to transfer the case to the United States District Court in and
for Middle District of Florida. Dekle and Ramsay’s response is due on or before March 31, 2015 and thereafter the Company
has until April 7, 2015 to file a reply. If the court determines that oral argument is appropriate, the parties will then be notified
and a hearing will be scheduled; otherwise the motion will be taken under submission after April 7, 2015.
Global
Digital Solutions, Inc. et. al. v. Communications Laboratories, Inc., et. al.
On
January 19, 2015 the Company and NACSV filed suit against Communications Laboratories, Inc., ComLabs Global, LLC, Roland Lussier,
Brian Dekle, John Ramsay and Wallace Bailey for conversion and breach of contract in a dispute over the payment of a $300,000
accounts receivable that ComLabs owed to NACSV but sent payment directly to Brian Dekle. The case was filed in the Eighteenth
Judicial Circuit in and for Brevard County Florida, case no. 05-2015-CA-012250-XXXX. On February 18, 2015 (i) defendants Communications
Laboratories, Inc., ComLabs Global, LLC and Roland Lussier and (ii) defendant Wallace Bailey filed their respective motions to
dismiss seeking, among other things, dismissal for failure to state valid causes of action, lumping and failure to post a non-resident
bond. On February 26, 2015, defendants Dekle and Ramsay filed their motion to dismiss, or stay action, based on already existing
litigation between the parties. NACSV has posted the bond.
To
the best of our knowledge, no governmental authority is contemplating any proceeding to which we are a party or to which any of
our properties is subject, which would reasonably be likely to have a material adverse effect on our business, financial condition
and operating results.
Legal
Proceedings terminated in the fourth quarter of 2014:
On January 9, 2014, the Company filed a lawsuit
against Merriellyn Kett Murphy (“Kett”) asserting three causes of action against her: Tortious Interference with Contract
and/or with Prospective Economic Advantage; Fraudulent Inducement; and Negligent Misrepresentation. On May 30, 2014,
the Company amended its Complaint to allege four causes of action against Kett: Tortious Interference with Contract and/or with
Prospective Economic Advantage; Fraudulent Inducement; Fraudulent Concealment; and Civil Conspiracy. Kett was the CEO, President
and sole director and stockholder of Airtronic. The Company had entered into a merger agreement with Airtronic and Kett had made
numerous representations to the Company that she would close the merger if the Company met her personal demands, which the Company
believes that it did. Nonetheless, Kett refused to close the merger. The case, captioned Global Digital
Solutions, Inc. v. Merriellyn Kett Murphy, was filed in Palm Beach County Circuit Court and Kett later removed it to
Federal Court in the Southern District of Florida. The case number is 14-cv-80190-DTKH (the “Case”). The Company
was seeking a judgment against Kett, damages, costs and such other relief as may be awarded by the court. On October 27, 2014,
Kett filed a counterclaim against the Company alleging fraud and civil conspiracy seeking damages based on her allegation that
the merger prevented her from getting a better personal employment contract on the open market. The Company denied Kett’s
allegations.
On
December 11, 2014 the Company and Kett (collectively, the “Parties”) entered into a Confidential Settlement Agreement
to settle their disputes. The disputes between the Parties have been resolved, with all of the claims and counterclaims dismissed,
with a payment by Kett of a confidential amount to the Company, which amount is in keeping with recognition of the expense of
litigation, the likely inability to collect any judgment due to financial status, and the prior assignment to Airtronic of Kett’s
proprietary rights to intellectual property relating to Airtronic. Accordingly the Case has been dismissed by the Parties with
prejudice.
| Item 4. |
Mine
Safety Disclosures. |
Not
applicable.
PART
II
| Item 5. |
Market
for the Registrant’s Common Equity, Related Stockholder Matters, and Issuer Purchases of Equity Securities. |
Our
common stock is quoted on the OTCQB Marketplace (“OTCQB”) maintained by the OTC Markets Group under the symbol “GDSI”.
The
following table sets forth the high and low bid prices for our common stock for the periods indicated, as reported by the OTCQB.
| | |
| Fourth
Quarter | | |
| Third
Quarter | | |
| Second
Quarter | | |
| First
Quarter | |
| | |
| | | |
| | | |
| | | |
| | |
| Fiscal
2013 price range per common share | |
$ | .87-
$.26 | | |
$ | 1.11
- $.70 | | |
$ | 1.39
- $.09 | | |
$ | .14
- $.07 | |
| | |
| | | |
| | | |
| | | |
| | |
| Fiscal
2014 price range per common share | |
$ |
.15 - $.07 | | |
$ | .37
- $.08 | | |
$ | .80
- $.27 | | |
$ | .98
- $.41 | |
The last reported sales price of our
Common Stock on the OTCQB on December 31, 2014, was $0.08 and on March 26, 2015, the last reported sales price was $0.12.
Holders
As
of December 31, 2014, there were 196 holders of record of our common stock, which number does not reflect beneficial stockholders
who hold their stock in nominee or “street” name through various brokerage firms.
Dividend
Policy
Any
determination with respect to the payment of dividends on our common stock will be at the discretion of our Board of Directors
and will be dependent upon our financial condition, results of operations, capital requirements, general business conditions,
terms of financing arrangements and other factors that our Board of Directors may deem relevant. We do not anticipate declaring
any cash dividends on our common stock and some of our existing financing agreement currently prohibits the payment of cash dividends
on our common stock while the obligations under the notes issued in the financing are outstanding.
Securities
Authorized for Issuance under Equity Compensation Plans
On
May 19, 2014 our shareholders approved the amended and restated 2014 Global Digital Solutions Equity Incentive Plan (the “Plan”)
and reserved 20,000,000 shares of our common stock for issuance pursuant to awards under the Plan. The Plan is intended as an
incentive, to retain in the employ of, and as directors, officers, consultants, advisors and employees of the Company, persons
of training, experience and ability, to attract new directors, officers, consultants, advisors and employees whose services are
considered valuable, to encourage the sense of proprietorship and to stimulate the active interest of such persons in the development
and financial success of the Company and its subsidiaries. Under the Plan, we are authorized to issue incentive stock options
intended to qualify under Section 422 of the Internal Revenue Code of 1986, as amended, non-qualified stock options, stock
appreciation rights, performance shares, restricted stock and long term incentive awards. The Plan is administered by the Board
of Directors.
The
following table presents information regarding options and rights outstanding under our compensation plans as of December 31,
2014:
| | |
Equity Compensation Plan Information | |
| | |
Number of
securities
to be issued
upon exercise
of outstanding
options, warrants
and rights | | |
Weighted-average
exercise price of
of outstanding
options, warrants
and rights | | |
Number of
securities
available for future issuance
under equity
compensation plans
(excluding securities
reflected in column (a)) | |
| Plan Category | |
(a) | | |
(b) | | |
(c) | |
| Equity compensation plans approved by security holders | |
| 20,000,000 | | |
$ | 0.38 | | |
| 2,500,000 | |
| Equity compensation plans not approved by security holders (1) | |
| 33,000,000 | | |
$ | 0.23 | | |
| - | |
| Total | |
| 53,000,000 | | |
$ | 0.28 | | |
| 2,500,000 | |
(1)
We have granted restricted stock under restricted stock awards made outside of and prior to the approval of our Plan. These grants
were made in lieu of compensation. For further information on our stock incentive plans, see Note 10 to our accompanying consolidated
financial statements.
Recent
Sales of Unregistered Securities/Recent Purchase of Securities
We
did not repurchase any shares of our Common Stock during the year ended December 31, 2014. During the three months ended December
31, 2014, we issued the following shares of our common stock that that were not registered under the Securities Act, and were
not previously disclosed in a Current Report on Form 8-K as follows:
| | On
October 17, 2014 we issued 1,976,306 shares of our common stock to Brian A. Dekle and
658,768 shares of our common stock to John Ramsey for their respective shares of the
“True-Up” payable in connection with our acquisition of NACSV. We valued
these shares at $816,373. |
The
shares of common stock described above were issued without registration in reliance upon the exemption provided, among others,
by Section 4(2) of the Securities Act of 1933, as amended, as a transaction not involving any public offering. Our reliance on
Section 4(2) of the Securities Act was based upon the following factors: (a) the transaction did not involve a public offering;
(b) there were only a limited number of offerees; (c) there were no subsequent or contemporaneous public offerings of the securities
by us; (d) the securities were not broken down into smaller denominations; and (e) the negotiations for the sale of the stock
took place directly between the offeree and us.
| Item 6. |
Selected
Financial Data. |
Not
required because we are a smaller reporting companies.
| Item 7. |
Management’s
Discussion and Analysis of Financial Condition and Results of Operations. |
This
Annual Report contains forward-looking that reflect our current estimates, expectations and projections about our future results,
performance, prospects and opportunities. Forward-looking statements include, without limitation, statements about our market
opportunities, our business and growth strategies, our projected revenue and expense levels, possible future consolidated results
of operations, the adequacy of our available cash resources, our financing plans, our ability to pay dividends, our competitive
position and the effects of competition and the projected growth of the industries in which we intend to operate. Forward-looking
statements are only predictions based on our current expectations and projections about future events and involve risks and uncertainties.
Although
we believe that the expectations reflected in the forward-looking statements contained in this Annual Report are based upon reasonable
assumptions, no assurance can be given that such expectations will be attained or that any deviations will not be material. In
light of these risks, uncertainties and assumptions, the forward-looking statements, events and circumstances discussed in this
Annual Report may not occur and actual results could differ materially and adversely from those anticipated or implied in the
forward-looking statements. Important factors that could cause our actual results, level of performance or achievements to differ
materially from those expressed or forecasted in, or implied by, the forward-looking statements we make in this Annual are discussed
under “Item 1A. Risk Factors” and elsewhere in this Annual Report and include:
| |
● |
our
ability to fund our operations and continue as a going concern; |
| |
● |
our
ability to have excess cash available for future actions; |
| |
● |
our
ability or inability to implement our business plan, including the completion of the acquisitions of companies under letters
of intent; |
| |
● |
anticipated
trends in our business and demographics; |
| |
● |
relationships
with and dependence on technological partners; |
| |
● |
our
future profitability and liquidity and the impact of potential future acquisitions on our financial condition, results of
operations and cash flows; |
| |
● |
our
ability to preserve our intellectual property and trade secrets and operate without infringing on the proprietary rights of
third parties; |
| |
● |
regulatory,
competitive or other economic influences; |
| |
● |
our
operational strategies including, without limitation, our ability to develop or diversify into new businesses; |
| |
● |
our
expectation that we will not suffer costly or material product liability claims and claims that our products infringe the
intellectual property rights of others; |
| |
● |
our
ability to comply with current and future regulations relating to our businesses; |
| |
● |
the
impact of new accounting pronouncements; |
| |
● |
our
ability to establish and maintain proper and effective internal accounting and financial controls; |
| |
● |
the
potential of further dilution to our common stock based on transactions effected involving issuance of shares; and |
| |
● |
our
actual results may differ materially from those reflected in forward-looking statements as a result of (i) the risk factors
described under the heading “Risk Factors” set forth in Item 1A hereof, (ii) general economic, market or business
conditions, (iii) the opportunities (or lack thereof) that may be presented to and pursued by us, (iv) competitive actions
by other companies, (v) changes in laws, and (vi) other factors, many of which are beyond our control. |
In
some cases, you can identify forward-looking statements by terms such as “may,” “should,” “could,”
“would,” “anticipates,” “expects,” “attempt,” “intends,” “plans,”
“hopes,” “believes,” “seeks,” “estimates” and similar expressions intended to
identify forward-looking statements. These forward-looking statements are not guarantees of future performance and are subject
to risks and uncertainties that could cause actual results to differ materially from estimates or forecasts contained in the forward-looking
statements. Some of these risks and uncertainties are beyond our control. Also, these forward-looking statements represent our
estimates and assumptions only as of the date the statement was made.
The
following discussion and analysis of our financial condition and results of operations should be read in conjunction with the
accompanying audited consolidated financial statements and related footnotes included in Item 8 of this Annual Report.
Business:
Our
operations presently consist of the business we operate through NACSV. NACSV specializes in building mobile command/communications
and specialty vehicles for emergency management, first responders, national security and law enforcement operations. We
presently manufacture the following specialty vehicles:
| ● | Mobile
Command Centers: A properly equipped mobile command center is a response and recovery
vehicle that facilitates an agency's ability to expand their command and control capabilities
to a remote location. Full interoperable communications are a standard for the
mobile command center. For the emergency management agency, the vehicle is an extension
of the fixed base emergency operations center. The vehicle should be built with long-term
deployment in mind but also be easy to operate in order to allow for quick deployment
by minimum personnel if necessary. The successful design of a mobile command center
will dictate the frequency of use. In other words, the more difficult to move and
operate, the fewer deployments. |
| ● | Command
and Control: In the law enforcement environment, the vehicle can be utilized for
command and control as well as hostage negotiations and even as a mobile precinct. Full
law enforcement dispatch capabilities can be installed as well as back-up systems to
the 9-1-1 Center. |
| ● | Incident
Command: The fire service unit, properly equipped, gives the incident commander the
visibility and informational flow along with space for ICS functional personnel all in
one area. A meeting area for functional ICS officers to share and evaluate information
with the IC is necessary. |
We
build fiberglass reinforced bodies, the most rugged, lightweight, and weather tolerant body available. The roof design is
a unique walk-on surface that provides the greatest flexibility for that space. All vehicle production is done in-house.
We build out the body, electrical, and install all equipment. All systems are integrated onsite: satellite, IT, radios, audio/video,
electrical and metal fabrication. We provide video surveillance cameras and special lighting packages for night operations and
general security. We provide custom requirements, including custom graphics, NIMS and other required compatibility options.
Impact
of Recently Issued Accounting Standards
For information
regarding recent accounting pronouncements and their expected impact on our future consolidated results of operations or financial
condition, see Note 1 to our accompanying consolidated financial statements.
Critical
Accounting Policies and Estimates
Listed
below are descriptions of the accounting policies that our management believes involve a high degree of judgment and complexity,
and that, in turn, could materially affect our consolidated financial statements if various estimates and assumptions were changed
significantly. The preparation of our consolidated financial statements requires that we make certain estimates and judgments
that affect the amounts reported and disclosed in our consolidated financial statements and related notes. We base our estimates
on historical experience and on other assumptions that we believe to be reasonable under the circumstances. Actual results may
differ from these estimates. For more detailed information on our significant accounting policies, see Note 1 to our accompanying
consolidated financial statements.
Principles
of Consolidation
We
consolidate all subsidiaries in which we hold a greater than 50% voting interest, which requires that we include the revenue,
expenses, assets and liabilities of such subsidiaries in our financial statements. As of December 31, 2014, we owned 100% of our
active subsidiaries.
Use
of Estimates
The preparation of financial statements in
conformity with generally accepted accounting principles, or GAAP in the United States of America, or U.S., requires management
to make certain estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes.
Although these estimates are based on the knowledge of current events and actions we may undertake in the future, they may ultimately
differ from actual results. Included in these estimates are assumptions used in: (i) determining the lives of long-lived assets;
(ii) Black-Scholes-Merton, or BSM, valuation models used to estimate the fair value of stock-based compensation and warrants;
(iii) determining the value of a promissory note with an embedded convertible option; (iv) the amount of beneficial conversion
feature of convertible debt; (v) the liability for estimated contingent consideration payable and (vi) determining valuation allowances
for deferred tax assets, among other items.
Goodwill
and Intangible Asset
Goodwill
represents the excess of purchase price over the fair value assigned to the net assets acquired in business combinations. Goodwill
is allocated to reporting units as of the acquisition date for the purpose of goodwill impairment testing. Currently, we operate
in only one reporting unit. Our goodwill arose from our acquisition of NACSV in June 2014. Intangible assets deemed to have an
indefinite life such as goodwill are not amortized, but instead are reviewed at least annually for impairment. Intangible assets
with finite lives are amortized over their estimated useful lives. As of December 31, 2014, other than goodwill, we had no intangible
assets with indefinite lives. We tested our goodwill for impairment during the fourth quarter as a part of our annual business
planning cycle. Goodwill is also required to be tested between testing dates if an impairment condition or event is determined
to have occurred.
In
September 2011, the FASB issued revised goodwill impairment guidance. Under the revised guidance, entities have an option to perform
a qualitative assessment to determine whether the two-step impairment testing described in ASC 350, “Intangibles —
Goodwill and Other,” is necessary. The two-step impairment test is required only if the entity concludes that it is more
likely than not that a reporting unit’s fair value is less than its carrying value. Management believed that it was more
likely than not that a goodwill impairment existed as of December 31, 2014, such that a qualitative assessment was not required
and that it was appropriate to proceed directly to the two-step impairment testing. In making such determination, we placed emphasis
on the historical results of NACSV’s operations, which had declined from our initial expectations in part due to recent
changes in senior management, changes in its customer base, and the reduction in the existing backlog of customer orders.
Under
Step 1 of the two-step impairment testing, management used an income valuation approach and prepared a discounted cash flow model
that calculated what management believed to be the fair value of the reporting unit. The approach considered the likelihood of
future cash flows that management expects our NACSV business to generate over the next ten years, along with a terminal value
based on a long-term sustainable growth rate subsequent to 2015 of 1%, which were discounted using a 20% discount rate. The fair
value of the reporting unit was then compared to the carrying value of the reporting unit. Since the carrying value was more than
the fair value, management proceeded to Step 2 of the impairment testing. Under Step 2, management calculated the implied fair
value of the existing net assets, excluding goodwill. The implied fair value of the existing net assets was then compared to fair
value of the reporting unit. This resulted in an implied fair value of goodwill of nil. Accordingly, we recorded a $1,156,192
goodwill impairment charge in the fourth quarter of 2014.
We
have one other intangible asset consisting of customer relationships, which is being amortized over its expected economic life
of five years. The life was determined based upon the expected use of the asset, and other contractual provisions associated with
the asset, the estimated average life of NACSV’s products, the stability of the industry, and other factors deemed appropriate.
In accordance with ASC 350 and ASC 360, we continually evaluate whether events or circumstances have occurred that indicate the
remaining estimated useful life of our customer relationships asset may warrant revision or that the remaining balance of such
asset may not be recoverable. We use an estimate of the related discounted cash flows over the remaining life of the asset in
measuring whether the asset is recoverable.
Revenue
Recognition
We
follow specific and detailed guidelines in measuring revenue; however, certain judgments affect the application of our revenue
policy. The complexity of the estimation process and all issues related to the assumptions, risks and uncertainties inherent with
our revenue recognition policies affect the amounts reported in our financial statements. A number of internal and external factors
affect the timing of our revenue recognition, including estimates of customer service/warranty periods, estimates of customer
returns and the timing of customer acceptance. Our revenue results are difficult to predict, and any shortfall in revenue or delay
in recognizing revenue could cause our operating results to vary significantly from quarter to quarter and year to year.
Stock-Based
Compensation
At December 31, 2014, we had one stock-based
employee compensation plan. In accordance with ASC 718, awards granted are valued at fair value and compensation cost is recognized
on a straight line basis over the service period of each award.
Income
Taxes
We
adopted ASC subtopic 740-10, Income Taxes which requires the recognition of deferred tax liabilities and assets for the expected
future tax consequences of events that have been included in the financial statement or tax returns as more fully discussed in
our consolidated financial statements.
Loss
Per Common Share and Common Share Equivalent
Basic
and diluted loss per common share has been computed by dividing the loss by the weighted average number of common shares
outstanding for the period. Since we have incurred losses attributable to common stockholders, diluted loss per common share
has not been computed by giving effect to all potentially dilutive common shares that were outstanding during the period. Dilutive
common shares consist of incremental shares issuable upon exercise of stock options, warrants and convertible notes payable to
the extent that the average fair value of our common stock for each period is greater than the exercise/conversion price of the
derivative securities.
Results
of Continuing Operations
Revenue and cost of revenue in the year ended
December 31, 2014 were $695,022 and $662,307, respectively. Revenue was from fixed-price and modified fixed-price construction
contracts that are recognized using the percentage-of-completion method of revenue recognition as well as from service and refurbishment
work which are recognized on the completion of the job. Cost of revenue include all direct material and labor costs and indirect
costs related to contract performance. We had no revenue, or cost of revenue, in the year ended December 31, 2013.
Selling, General and Administrative expense
increased by $2,545,371, or 30.4%, from $8,384,247 in the year ended December 31, 2013 to $10,929,618 in the year ended December
31, 2014, and were comprised of:
| | |
2014 | | |
2013 | | |
Increase / (decrease) | | |
% Change | |
| Stock based compensation expense | |
$ | 7,687,566 | | |
$ | 5,158,208 | | |
$ | 2,529,358 | | |
| 49.0 | % |
| Acquisition costs | |
| 754,572 | | |
| - | | |
| 754,572 | | |
| 100.0 | % |
| Advertising | |
| 13,000 | | |
| - | | |
| 13,000 | | |
| 100.0 | % |
| Communications | |
| 6,768 | | |
| 5,016 | | |
| 1,752 | | |
| 34.9 | % |
| Compensation and benefits | |
| 480,667 | | |
| 320,000 | | |
| 160,667 | | |
| 50.2 | % |
| Debt issuance costs | |
| 100,000 | | |
| 1,385,000 | | |
| (1,285,000 | ) | |
| -92.8 | % |
| Facility costs | |
| 102,610 | | |
| 13,275 | | |
| 89,335 | | |
| 673.0 | % |
| Investment banking fees | |
| 412,498 | | |
| 514,808 | | |
| (102,310 | ) | |
| -19.9 | % |
| Investor relations and marketing | |
| 600,552 | | |
| 380,944 | | |
| 219,608 | | |
| 57.6 | % |
| Marketing and trade shows | |
| 65,843 | | |
| - | | |
| 65,843 | | |
| 100.0 | % |
| Office supply and support | |
| 257,275 | | |
| 55,231 | | |
| 202,044 | | |
| 365.8 | % |
| Professional fees | |
| 236,212 | | |
| 519,908 | | |
| (283,696 | ) | |
| -54.6 | % |
| Travel and entertainment | |
| 131,361 | | |
| 31,857 | | |
| 99,504 | | |
| 312.3 | % |
| Depreciation and amortization | |
| 80,694 | | |
| - | | |
| 80,694 | | |
| 100.0 | % |
| | |
$ | 10,929,618 | | |
$ | 8,384,247 | | |
$ | 2,545,371 | | |
| 30.4 | % |
Stock-based compensation expense increased by $2,529,358,
or 49.0%, from $5,128,208 in the year ended December 31, 2013 to $7,687,566 in the year ended December 31, 2014, and was comprised
of:
| | |
2014 | | |
2013 | |
| Fair value expense of restricted stock grants | |
$ | 3,047,012 | | |
$ | 5,158,208 | |
| Fair value expense of stock option grants | |
| 3,527,620 | | |
| - | |
| Fair value expense of restricted stock unit grants | |
| 1,112,934 | | |
| - | |
| | |
$ | 7,687,566 | | |
$ | 5,158,208 | |
| |
● |
We
granted restricted stock to officers and advisors which vest ratably through June 2016. $3,047,012 was expensed
in the year ended December 31, 2014, compared to $5,158,208 in the year ended December 31, 2013. |
| |
● |
Options
with a fair market value of $3,557,400 were granted in 2014 and $3,527,620 was expensed in the year ended December 31, 2014.
We had no such expense in 2013. |
| |
● |
We
granted performance based restricted stock units to an officer/director and an employee and expensed $1,112,934 in the year
ended December 31, 2014. We had no such expense in 2013. |
See Note 10 to our consolidated financial
statements and Item 11 – Executive Compensation for additional information on stock-based compensation.
Acquisition
costs were related to the NACSV acquisition in the year ended December 31, 2014 and comprised of non-cash charges totaling $729,572
comprising (i) non-cash compensation costs of $664,000 to advisors paid in shares of our common stock, (ii) discount expense of
$65,572 on shares issue to the NACSV sellers, and (iii) cash expenses of $25,000 paid for due diligence services.
Compensation and benefits increased by $160,667,
or 50.2% to $480,667 in the year ended December 31, 2014 compared to $320,000 in the year ended December 31, 2013 comprised:
| | |
2014 | | |
2013 | |
| Officer compensation | |
$ | 294,000 | | |
$ | 310,000 | |
| Payroll | |
| 186,667 | | |
| 10,000 | |
| | |
$ | 480,667 | | |
$ | 320,000 | |
| |
● |
Officer
compensation represents amounts paid or accrued as payable to officers in the years ended December 31, 2014 and 2013, respectively. |
| |
● |
Payroll
represents non-officer salaries and wages for the years ended December 31, 2014 and 2013. |
See Item 11 – Executive Compensation
for additional information on officer compensation.
Debt issuance costs decreased by $(1,285,000),
or (92.8)% from $1,385,000 in the year ended December 31, 2013 to $100,000 in the year ended December 31, 2014. In
connection with the issuance of convertible notes payable in prior years, we issued a warrant to a consultant which vested over
one year. In year ended December 31, 2014 we expensed $100,000 for amortization of the warrant. In the year ended December 31,
2013 we amortized $1,350,000 of expense related to warrants and for a debt guaranty issued by an affiliate of our CEO, and $35,000
was paid in cash for loan fees.
Facility costs increased by $89,335, or 673.0%
from $13,275 in the year ended December 2013 to $102,610 in the year ended December 31, 2014. The increased costs were attributable
to NACSV’s facility costs, which include rent, taxes and insurance.
Investment
banking fees decreased by $(102,310), or (19.9)% from $514,808 in the year ended December 2013 to $412,498 in the year ended December
31, 2014. In the year ended December 31, 2014 the $412,498 expense represented the amortization of a cash fee and the fair value
of a warrant granted to an investment banking company. In the year ended December 31, 2013, $413,498 of the expense represented
the amortization of a cash fee and the fair value of a warrant granted to an investment banking company and $101,310 were for
placement fees in connection with private placements.
Investor
relations and marketing expense increased by $219,608, or 57.6%, from $380,944 in the year ended December 2013 to $600,552 in
the year ended December 31, 2014. In the year ended December 31, 2014, we amortized the fair value of warrants and shares of our
common stock totaling $584,169 issued to IR consultants for IR services, and we paid $16,383 related to issuing press releases
and wire fees. In the year ended December 31, 2013, we amortized the fair value of warrants and shares of our common stock totaling
$318,331 issued to IR consultants, and we paid $62,613 for public relations, press releases, wire fees, shareholder communication
costs and other associated costs.
Marketing and trade show expense was $65,843
in the year ended December 31, 2014 and related to NACSV expenses of attending trade shows and associated marketing costs. We
had no such expense in 2013.
Office
supply and support expenses increased by $202,044 or 365.8% from $55,231 in the year ended December 2013 to $257,275 in the year
ended December 31, 2014. In the year ended December 31, 2014, the expense included a bad debt charge of $104,085, $87,465 for
directors and officers liability insurance, $37,052 for key life and commercial insurance, and $28,673 for other office related
expenses, which included costs from NACSV. In the year ended December 31, 2013, the expense included $20,386 for directors
and officers liability insurance, $12,000 for research and development, $8,050 for key life and commercial insurance, $6,250 for
web development expense and $8,545 for other office related expenses.
Professional fees for the year ended December
31, 2014 decreased by $(283,696), or (54.6)% from the prior year. In the years ended December 31, 2014 and 2013, such
fees consisted of:
| | |
2014 | | |
2013 | |
| Accounting and auditing fees | |
$ | 141,043 | | |
$ | 99,802 | |
| Consulting fee | |
| 61,914 | | |
| 57,869 | (1) |
| Legal fees | |
| (18,279 | ) | |
| 353,978 | |
| Directors fees | |
| 30,000 | | |
| - | |
| Other | |
| 21,534 | | |
| 8,259 | |
| | |
$ | 236,212 | | |
$ | 519,908 | |
| (1) | $34,500
classified as consulting in 2013 had been reclassified. |
Major
changes in professional and filing fees include:
| |
● |
Accounting
and auditing fees increased by $41,241 or 41.3%. In 2014 the amount included $45,300 for our annual audit and quarterly
reviews, $1,500 for the review of our registration statement, $71,454 for the preparation of audited and reviewed financial
statements for NACSV required for our SEC filings and closing, $10,989 for internal audit fees, $10,000 for tax return preparation,
and $1,800 for other services. In 2013 the amount included $32,500 for our annual audit and reviews, $2,465 for review of
other SEC filings, $58,556 for the audit of Airtronic USA, Inc., and $6,281 for other expenses. |
| |
● |
Consulting fees in 2014 include $30,000 NACSV paid to a sales and marketing consultant, $24,057 for due diligence
reviews, and $7,857 for other miscellaneous services. In 2013, the amount included $45,369 for reconstructive accounting
work in connection with our proposed acquisition of Airtronic and $12,500 for other consulting services.
|
| |
● |
Legal fees decreased by $(372,257) or (105.2)%. In 2014 we recovered $414,761 of legal fees in the Airtronic
bankruptcy matter, reduced by $396,482 of legal fees incurred of which approximately $65,000 was in connection with the NACSV acquisition,
$150,000 in connection with the Airtronic bankruptcy, $157,000 in connection with litigation against Kett, and $24,000 for other
legal services. In 2013 we incurred approximately $238,000 in connection with the Airtronic bankruptcy, $99,000 in connection with
the acquisition of Airtronic and $17,000 for other legal services.
|
| |
● |
Directors
fees include a monthly payment of $6,000 to one of our directors from July – November 2014. We had no such
expense in 2013. |
| |
● |
Other includes $19,445 of SEC related fees for filing of SEC reports and XBRL fees, OTC fees and other filing
and reporting fees.
|
Depreciation
and amortization in the year ended December 31, 2014 consists of $72,469 of amortization of intangible assets which are being
amortized over five years and $8,225 of depreciation. We had no such expense in in the year ended December 31, 2013.
Gain on extinguishment of debt in in the year
ended December 31, 2014 consists of $350,000 for forgiveness on the payoff of a convertible note payable, and the recapture of
$37,642 of interest not paid. We had no such income in the year ended December 31, 2013.
Interest
income is the interest on the bridge loans we made to Airtronic. Interest expense was expense incurred on notes payable and convertible
notes payable.
There
is no income tax benefit for the losses for the years ended December 31, 2014 and 2013 since we determined that the realization
of the net deferred tax asset is not more likely than not to be realized and we created a valuation allowance for the entire amount
of such benefit.
Loss
from discontinued operations were $2,832 and $271,221 in in the years ended December 31, 2014 and 2013, respectively, and represented
the direct costs and loss on sale of assets we incurred as we completed the wind down our telecommunications business.
Our
results of operations for the years ended December 31, 2014 and 2013 did not contain any unusual gains or losses from transactions
not in our ordinary course of business or discussed above.
Liquidity
and Capital Resources
As
of December 31, 2014, we had cash and cash equivalents totaling $160,102 and working capital of $192,628. For the year ended December
31, 2014, we incurred a net loss of $11,657,188, and at December 31, 2014, we had an accumulated deficit of $28,515,563 and total
stockholders’ equity of $152,406. We expect to incur losses in fiscal 2015. There is no guarantee that we will ultimately
be able to generate sufficient revenue or reduce our costs in the anticipated time frame to achieve and maintain profitability
and have sustainable cash flows.
We
do not have any material commitments for capital expenditures during the next twelve months. Any required expenditure
will be completed through internally generated funding or from proceeds from the sale of common or preferred stock, or borrowings.
Cash
Flows
Cash
used in operating activities
Net cash used in operating activities totaled
$708,040 for the year ended December 31, 2014 compared to $983,345 for the year ended December 31, 2013. In the year ended December
31, 2014, cash was used to fund a net loss of $11,657,188, increased by a gain on extinguishment of debt of $387,642, and reduced
by depreciation and amortization of $80,694, loss on disposal of fixed assets of $12,500, a goodwill impairment loss of $1,156,192,
non-cash stock-based compensation expense of $7,687,566, amortization expense of common stock and warrants issued for services
of $1,009,168, acquisition expenses settled with shares of common stock valued at $664,000, non-cash discount on stock issued
for acquisition of $65,572, convertible debt discount amortization of $2,011, non cash interest expense of $11,696, and changes
in operating assets and liabilities of $647,391.
In the year ended December 31, 2013, cash
was used to fund a net loss of $9,297,253, reduced by non-cash stock-based compensation of $5,158,208, amortization expense of
common stock and warrants issued for services of $1,080,230, a beneficial conversion feature of debt and warrant of $676,487,
common stock issued for a debt guaranty of $360,000, and amortization of warrant expense of $750,000, changes in operating assets
and liabilities of $43,238 and cash provided by discontinued operations of $245,745.
Cash
used in investing activities
Net cash provided by investing activities
totaled $598,615 for the year ended December 31, 2014. During the period we, received cash of $1,465,874 from Airtronic for the
repayment of the bridge loans, reduced by net cash of $864,575 paid for the acquisition of NACSV and $2,684 for deposits.
Net
cash used in investing activities for the year ended December 31, 2013, totaled $1,446,072 and comprised $1,465,874 of advances
to Airtronic under a bridge loan and $198 for deposits.
Cash
from financing activities
Net cash used in financing activities was
$239,697 in the year ended December 31, 2014. We received proceeds of $125,000 from the exercise of warrants and $162,242 from
issuing notes payable, reduced by $376,939 used to repay notes payable and $150,000 used to pay off a convertible note payable.
Net cash provided by financing activities
was $2,573,500 in the year ended December 31, 2013. We received $1,966,100 of proceeds from the sale of common stock, $300,000
from the proceeds of warrants exercised, $374,900 from the issuance of notes payable, reduced by $67,500 used to repay notes payable.
Financial
Condition
As of December 31, 2014, we had cash and cash
equivalents totaling $160,102, working capital of $192,628 and stockholders’ equity of $152,406. We do not have a line of
credit facility and have relied on short-term borrowings and the sale of common stock to provide cash to finance our operations.
We believe that we will need to raise additional capital in 2015 to sustain our operations and fund future acquisitions. We plan
to seek additional equity and debt financing to provide funding for operations and future acquisitions.
At
December 31, 2014 our registered independent public accounting firm expressed substantial doubt as to our ability to continue
as a going concern because we have incurred substantial losses and negative cash flows from operations. Management’s plans
in order to meet our operating cash flow requirements include (i) financing activities such as private placements of common stock,
and issuances of debt and convertible debt instruments, (ii) the establishment of strategic relationships which we expect will
lead to the generation of additional revenue or acquisition opportunities and (iii) the acquisition of complementary businesses.
We will need to secure additional funds to
finance our operations in 2015, but there are no assurances that such additional funding will be achieved or that we will succeed
in our future operations. The consolidated financial statements do not include any adjustments relating to the recoverability
and classification of recorded asset amounts or the amounts and classification of liabilities that might be necessary should we
be unable to continue as a going concern.
Inflation
We do not
believe that inflation has had a material effect on our results of operations.
Off-Balance
Sheet Arrangements
We had no
off-balance sheet arrangements for the year ended December 31, 2014.
| Item 7A. |
Quantitative
and Qualitative Disclosures about Market Risk. |
As
a smaller reporting company, we are not required to provide the information required by this item.
| Item 8. |
Financial
Statements and Supplementary Data. |
All
financial statement schedules have been omitted, since the required information is not applicable or is not present in amounts
sufficient to require submission of the schedule, or because the information required is included in the consolidated financial
statements and notes thereto.
| Item 9. |
Changes
in and Disagreements with Accountants on Accounting and Financial Disclosure. |
None.
| Item 9A. |
Controls
And Procedures |
Evaluation
of Disclosure Controls and Procedures
Based
on an evaluation under the supervision and with the participation of the Company’s management, the Company’s principal
executive officer and principal financial officer have concluded that the Company’s disclosure controls and procedures as
defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act were not effective as of December 31, 2014, to provide reasonable
assurance that information required to be disclosed by the Company in reports that it files or submits under the Exchange Act
is (i) recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission
rules and forms, and (ii) accumulated and communicated to the Company’s management, including its principal executive officer
and principal financial officer, as appropriate, to allow timely decisions regarding required disclosure.
Inherent
Limitations Over Internal Controls
The
Company’s internal control over financial reporting is designed to provide reasonable assurance regarding the reliability
of financial reporting and the preparation of financial statements for external purposes in accordance with U.S. generally accepted
accounting principles (“GAAP”). The Company’s internal control over financial reporting includes
those policies and procedures that:
| |
(i) |
pertain
to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions
of the Company’s assets; |
| |
(ii) |
provide
reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance
with GAAP, and that the Company’s receipts and expenditures are being made only in accordance with authorizations of
the Company’s management and directors; and |
| |
(iii) |
provide
reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the Company’s
assets that could have a material effect on the financial statements. |
Management,
including the Company’s principal executive officer and principal financial officer, does not expect that the Company’s
internal controls will prevent or detect all errors and all fraud. A control system, no matter how well designed and
operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further,
the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be
considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of internal
controls can provide absolute assurance that all control issues and instances of fraud, if any, have been detected. Also,
any evaluation of the effectiveness of controls in future periods is subject to the risk that those internal controls may become
inadequate because of changes in business conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Management’s
Annual Report on Internal Control Over Financial Reporting
The
Company’s management is responsible for establishing and maintaining adequate internal control over financial reporting
(as defined in Rule 13a-15(f) under the Exchange Act). Management conducted an evaluation of the effectiveness of the
Company’s internal control over financial reporting, and based on the Company’s assessment, management has concluded
that its internal control over financial reporting were not effective as of December 31, 2014, to provide reasonable assurance
regarding the reliability of financial reporting and the preparation of financial statements in accordance with GAAP a result
of the identified material weaknesses in our internal control over financial reporting described below. In making this assessment,
management used the framework set forth in the report entitled Internal Control - Integrated Framework issued by the Committee
of Sponsoring Organizations of the Treadway Commission (1992 framework), or COSO. The COSO framework summarizes each of the components
of a company's internal control system, including (i) the control environment, (ii) risk assessment, (iii) control activities,
(iv) information and communication. and (v) monitoring.
Identified
Material Weaknesses
A
material weakness in our internal control over financial reporting is a control deficiency, or combination of control deficiencies,
that results in more than a remote likelihood that a material misstatement or the financial statements will not be prevented or
detected. Management identified the following material weaknesses during its assessment of internal controls over financial reporting
as or December 31, 2014:
Resources:
As of December 31, 2014, our Chief Financial Officer performed all accounting functions. As a result, there is a lack of proper
segregation of duties.
Audit
Committee: We do not have, and are not required to have, an audit committee. An audit committee would improve oversight in
the establishment and monitoring of required internal controls and procedures.
Management's
Remediation Initiatives
As
we expand, we plan to hire additional accounting staff and implement systems where we have adequate segregation of duties. In
the future we may add an audit committee financial expert to our board and create an audit committee made up of one or more of
our independent directors.
This
Annual Report does not include an attestation report of our registered public accounting firm regarding internal control over
financial reporting. Management’s report was not subject to attestation by our registered public accounting firm as such
report is not required for non-accelerated filers such as us because we are an “emerging growth company” pursuant
to the JOBS Act.
Changes
in Internal Control Over Financial Reporting
There
were no changes in our internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act) during
the quarter ended December 31, 2014, that have materially affected, or are reasonably likely to materially affect, our internal
control over financial reporting.
| Item 9B. |
Other
Information. |
None.
PART
III
| Item 10. |
Directors,
Executive Officers and Corporate Governance. |
Our
executive officers and our directors, their age and business experience are as follows:
| Name | |
|
Age | | |
Title |
| Richard J. Sullivan | |
| 76 | | |
Director, Chairman, President, Chief Executive Officer and Assistant Secretary |
| Stephen L. Norris (1) | |
| 64 | | |
Director, Vice Chairman, CEO GDSI International (1) |
| Arthur F. Noterman | |
| 73 | | |
Director |
| Stephanie S. Sullivan | |
| 26 | | |
Director |
| William J. Delgado | |
| 55 | | |
Director, Executive Vice President |
| Jenifer S. Carroll (2) | |
| 55 | | |
President, NACSV and Senior Advisor GDSI |
| David A. Loppert | |
| 60 | | |
Executive Vice President, Chief Financial Officer, Treasurer and Secretary |
| Gary A. Gray | |
| 62 | | |
Vice President, Chief Technology Officer |
| (1) | –
Mr. Norris resigned as a director and officer on January 9, 2015. |
| (2) | -
Ms. Carroll resigned as President of NACSV, and as a senior advisor of the Company, on
March 7, 2015. |
Richard J. Sullivan (age 76) was elected a
director and appointed Chairman, CEO, President and assistant secretary on August 12, 2013. Prior thereto, from May
2012 through August 2013 Mr. Sullivan served as a consultant to the Company. Mr. Sullivan is responsible for the Company’s
strategy, leadership and day-to-day operational activities. Mr. Sullivan founded and since 1993 has served as Chairman
and CEO of Solutions, Inc. and World Capital Markets, Inc., a both private investment banking companies that specialize in advising
corporations on acquiring other business entities and assisting owners and management who are considering selling all or part
of their business. Mr. Sullivan founded and from 1993 to 2003 served as Chairman and Chief Executive Officer of Applied
Digital Solutions, Inc., a Nasdaq listed technology company that spawned two other listed companies of which he was Chairman of
the Board: Digital Angel Corporation (AMEX) and VeriChip Corporation (Nasdaq). Mr. Sullivan is an “Entrepreneur in Residence”
with Accretive Exit Partners, LLC whose business is taking positions in mid-stage private companies, replacing financing partners
who wish to divest themselves of their equity share of those businesses. He is also co-founder of Vox Equity Partners,
LLC, a specialized private equity fund manager that has been purchasing bank private equity portfolio investments since 2006. Management
believes that Mr. Sullivan’s many years as Chairman and CEO of public companies qualifies him for his positions with the
Company.
Stephen L. Norris (age 64) was elected a director
and CEO of GDSI International on July 2, 2014 and appointed Vice Chairman on July 7, 2014. Mr. Norris resigned as a
director and officer on January 9, 2015.
Arthur
F. Noterman (age 73) was appointed to our Board on August 12, 2013. Mr. Noterman is a Chartered Life Underwriter. Mr.
Noterman has owned an investment and insurance business for over 40 years located in Massachusetts and is a registered FINRA Broker
affiliated with a Cincinnati, Ohio Broker/ Dealer. Mr. Noterman served on the Board of Directors of Applied Digital
Solutions Inc. from 1997 to 2003, serving on the Audit and Compensation Committees. Mr. Noterman attended Northeastern
University, Boston, MA from 1965-1975 and obtained the Chartered Life Underwriter Professional Designation in 1979 from The American
College, Bryn Mawr, Pennsylvania. Management believes that Mr. Noterman’s many years as a director of public
companies, his financial background, and his many years serving on audit and compensation committees uniquely qualifies him for
his position as a director of the Company.
Stephanie
C. Sullivan (age 26) was appointed to our Board on August 12, 2013. Ms. Sullivan is a business entrepreneur and has served, since
May 2011, as financial manager at Alexis Miami, a privately held upscale women’s fashion designer and manufacturer. Ms.
Sullivan graduated from the University of Miami in May 2011 with a Bachelor of Arts in Business Administration. Management believes
that Ms. Sullivan’s marketing and financial background bring a new and young approach that the Board will benefit from.
William
J. Delgado (age 55) has served as our President, Chief Executive Officer and Chief Financial Officer from August 2004 to August
2013. Effective August 12, 2013, Mr. Delgado assumed the position of Executive Vice President, and is responsible, along with
Mr. Sullivan, for business development. Mr. Delgado has over 33 years of management experience including strategic planning, feasibility
studies, economic analysis, design engineering, network planning, construction and maintenance. He began his career with Pacific
Telephone in the Outside Plant Construction. He moved to the network engineering group and concluded his career at Pacific Bell
as the Chief Budget Analyst for the Northern California region. Mr. Delgado founded All Star Telecom in late 1991, specializing
in OSP construction and engineering and systems cabling. All Star Telecom was sold to International FiberCom in April of 1999.
After leaving International FiberCom in 2002, Mr. Delgado became President/CEO of Pacific Comtel in San Diego, California. After
the Company acquired Pacific Comtel in 2004, Mr. Delgado became Director, President, CEO and CFO of the Company. Management believes
that Mr. Delgado’s many years of business experience uniquely qualifies him for his positions with the Company.
Jennifer S Carroll (age 55) was appointed
president of NACSV on December 3, 2014. She resigned from that position on March 7, 2015. She had served as a senior advisor to
the Company since April 2013.
David
A. Loppert (age 60) was appointed Executive Vice President, CFO, Treasurer and Secretary on August 12, 2013. From October 2012
through August 2013 Mr. Loppert served as a consultant to the Company. Mr. Loppert is responsible for the Company’s finance
and administrative functions. He is a financial executive with over 30 years experience. He previously served as chief financial
officer, secretary and treasurer of rVue Holdings, Inc. (OTCQB: RVUE), from May 2010 until June 2012. Prior thereto
he served as Argo Digital Solutions, Inc.’s senior vice president from March 2009 through January 2010, and from March 2010
through May 2010. He was formerly a director, executive vice president and chief financial officer of Surgical Outcome
Support, Inc. from August 2006 through March 2009. From October 2003 through July 2006 he was an independent financial consultant
to public and private companies. From June 2001 until September 2003, he was a vice president and director of QSGI
Inc. (OTCBB: QSGI). From February 1997 through December 2000, he was vice president, chief financial officer and assistant secretary
of Applied Digital Solutions, Inc. (NASDAQ: DIGA) and also served as chief executive officer of SysComm International Corporation,
(NASDAQ: SYCM) a network and systems integrator, and an affiliate of Applied Digital. Mr. Loppert began his financial
career with Price Waterhouse, an international accounting firm, in 1978 in Johannesburg, South Africa, before moving to its Los
Angeles Office in 1980 where over time he became a senior manager. Mr. Loppert earned bachelor's degrees in commerce in 1978 and
in accounting in 1980, and a higher diploma in accounting in 1980, all from the University of the Witwatersrand, Johannesburg,
South Africa, and was designated a Chartered Accountant (South Africa) in 1980.
Gary A. Grey (age 62) was appointed Vice President
and Chief Technology Officer on August 12, 2013. From May 2012 through August 2013 Mr. Gray served as a consultant to the Company.
Mr. Gray was most recently President of Digital Angel Wireless and Software, Riverside, CA, a company that designed and built
GPS/wireless systems for parole and probation tracking. Mr. Gray is past President of Applied Digital Solutions, Inc.,
Delray Beach, Florida (NASDAQ: ADSX) and was President of three divisions of the company: ADS Software, Springfield, MO, Atlantic
Systems, Wall Township, NJ and Thermo Life Energy Corp., Riverside, CA. ADS Software provided custom-developed manufacturing
and wholesale distribution software, Atlantic Systems provides in-store register and accounting systems for retail stores and
Thermo Life is a laboratory specializing in thin-film, renewable energy devices. Mr. Gray was Vice president of Verichip,
Inc., (NASDAQ: CHIP) a company affiliated with Applied Digital. Mr. Gray was previously National Sales Manager for
CAD/CAM company Point Control Corporation, Eugene, Oregon. Point Control’s SmartCAM Computer-Aided Manufacturing
software has been installed at 12,000 locations in 67 countries. Previously, Mr. Gray was the principal developer of
a comprehensive Manufacturing Resource Planning (MRP) software system, one of the first available for the then-newly-introduced
32-bit Digital Equipment Corporation Vax computer platform. The system was installed at approx. 150 locations and several
Fortune 1000 companies. The company, White Hat Systems, Woburn, MA, was later sold to Pacific Telesis. Mr. Gray has
participated in merger and acquisition activities with Richard Sullivan since 1985. He received a bachelor degree in physics from
Hope College, Holland, Michigan in 1974.
Neither
Mr. Noterman nor Ms. Sullivan have been involved in any transaction with the Company that would require disclosure under Item
404(a) of the Regulation S-K. Neither Mr. Noterman, Mr. Delgado nor Mr. Loppert has any family relationship with any officer or
director of the Company. Stephanie C. Sullivan is the daughter of Richard J. Sullivan. Our Board has determined that Mr. Noterman
is independent under the NASDAQ Stock Market Listing Rules.
A
vacancy on our board of directors may be filled by the vote of a majority of the directors holding office. All directors hold
office for one-year terms and until the election and qualification of their successors. Officers are appointed by the board of
directors and serve at the discretion of the board.
Director
or Officer Involvement in Certain Legal Proceedings
Our
directors and executive officers were not involved in any legal proceedings as described in Item 401(f) of Regulation S-K in the
past ten years.
Directors’
and Officers’ Liability Insurance
We
maintain directors' and officers' liability insurance insuring our directors and officers against liability for acts or omissions
in their capacities as directors or officers, subject to certain exclusions. Such insurance also insures us against
losses which we may incur in indemnifying our officers and directors. In addition, we have entered into indemnification
agreements with key officers, directors and consultants, and such persons shall also have indemnification rights under applicable
laws, and our Certificate of Incorporation and Bylaws.
Corporate
Governance
Board
Responsibilities and Structure
The
Board oversees, counsels, and directs management in the long-term interest of GDSI and its shareholders. The Board’s responsibilities
include establishing broad corporate policies and reviewing the overall performance of GDSI. The Board is not, however, involved
in the operating details on a day-to-day basis.
Board
Committees
We
presently have no board committees and are not required to until we elect to seek listing on a national securities exchange. Our
board may appoint an audit committee, compensation committee, or nominating committee in the future.
Code
of Ethics
Our
Board of Directors has approved and we have adopted a Code of Business Conduct and Ethics, or the Code of Conduct, which applies
to all of our directors, officers and employees. Our Board of Directors has also approved and we have adopted a Code of Ethics
for Senior Financial Officers, or the Code for SFO, which applies to our chief executive officer, president and chief financial
officer. The Code of Conduct and the Code for SFO are available upon written request to the Company, Attention: Secretary, 777
South Flagler Drive, Suite 800 West, West Palm Beach, FL 33401. Our Board of Directors is responsible for overseeing the Code
of Conduct and the Code for SFO and they must approve any waivers of the Code of Conduct for directors and executive officers
and any waivers of the Code for SFO.
Board
Diversity
While
we do not have a formal policy on diversity, our Board considers diversity to include the skill set, background, reputation, type
and length of business experience of our Board members as well as a particular nominee’s contributions to that mix. Although
there are many other factors, the Board seeks individuals with experience on public company boards as well as experience with
advertising, marketing, legal and accounting skills.
Board
Assessment of Risk
Our
risk management function is overseen by our Board. Through our policies, our Code of Conduct and Ethics and our Board’s
review of financial and other risks, our management keeps our Board apprised of material risks and provides our directors access
to all information necessary for them to understand and evaluate how these risks interrelate, how they affect the Company, and
how management addresses those risks. Mr. Sullivan, a director and our chief executive officer, and Mr. Loppert, our
chief financial officer, work closely together with the Board once material risks are identified on how to best address such risk. If
the identified risk poses an actual or potential conflict with management, our independent director may conduct the assessment.
Presently, the primary risks affecting GDSI include our ability to close acquisitions and raise sufficient capital to scale our
business. The Board focuses on these key risks and interfaces with management on seeking solutions.
Advisory
Board
Our advisory board, which advises senior management,
was comprised of the following individuals at December 31, 2014:
| Edwin J. Wang | |
Chairman, Advisory Board |
| Jennifer S. Carroll (1) | |
Advisor |
| Matthew K. Kelley | |
Advisor |
| Richard J. Feldman | |
Advisor |
(1) Ms.
Carroll resigned as an advisor on March 7, 2015.
Edwin J. Wang is the Founder and Senior
Managing Director of Accretive Exit Partners and Accretive Capital, Boston, MA. Mr. Wang draws from over 20 years of
experience in private equity, principal investing and cross border merchant banking. From 2002 to 2007, while at predecessor firm
Asymmetry Capital LLC, Mr. Wang led the financial restructuring and liquidation of $450MM in distressed private equity portfolio
assets and monetized value-added liquidity creation in excess of $200MM. These accomplishments were chronicled in two Harvard
Business School case studies and other publications, including The Deal Magazine. Previously, during an eight-year
investment banking career, Mr. Wang led the development of Non-Japan Asia business at Credit Suisse First Boston. He began his
career in financial services as an Associate in the Capital Markets Group at Lehman Brothers. Mr. Wang earned his B.A.
degree in Economics from Columbia University and was a Visiting Fellow in Finance at the MIT Sloan School of Management under
the supervision of the late Nobel laureate, Dr. Franco Modigliani.
Matthew
Kelley is the founder of Vox Equity Partners, LLC, a specialized private equity firm created to manage constructed, primarily
bank (LP) owned, venture capital and private equity investments. Vox Equity Partners was initially formed to manage the assets
of a constructed fund in 2007. The firm continued to acquire the assets of three other funds. Vox Equity Partners is capitalized
to participate in follow-on investments in promising underlying opportunities in the portfolio in order to maximize exit value. From
February 2001 through May 2006 Mr. Kelley was a Partner at Accretive Capital, and from October 1997 through October 2000 Matt
was Director of Private Equity at MB Capital, a mezzanine capital fund management. Mr. Kelley has an AB in Political
Science and Government from Dartmouth College (1987 – 1991), and an MS in Accounting and an MBA, both from Northeastern
University (1993 – 1997). Richard J. Sullivan, our Chairman and CEO, is a co-founder of Vox.
Richard J. Feldman is an attorney specializing
in public affairs, is a former Reagan White House appointee at the Commerce Department, and later became the regional political
director for the National Rifle Association. From 1991-1999, Mr. Feldman served as Executive Director of the American
Shooting Sports Council (ASSC). In his role as chief lobbyist and spokesman for the firearm industry’s national
trade association, Mr. Feldman formulated and implemented national litigation strategy and forged collaborative relationships
with regulatory and law enforcement agencies. He is the author of RICOCHET: Confessions of a Gun Lobbyist, published by John Wiley
& Sons in 2007. Since 2004, Mr. Feldman has served as the founder and CEO of MLS Communication, LLC, a public relations and
political consulting firm. He also serves as President and CEO of the Independent Firearm Owners Association. A
member of the Washington, DC, bar, Mr. Feldman earned his law degree at Vermont Law School and his BA degree from Union College
(NY).
Advisory
Board Compensation
In order to align the advisors with the interest
of the stakeholders of the Company, the Board has granted the advisors restricted stock awards which vest over a period of 12
– 24 months and which are forfeited if the advisor is no longer an advisor on the anniversary of the advisory award. See
Note 10 to our consolidated financial statements for additional information on our Advisory Board compensation.
| Item 11. |
Executive
Compensation. |
The
following Summary Compensation Table sets forth, for the years ended December 31, 2014 and 2013, the compensation earned by our
named executive officers.
| Summary
Compensation Table |
| Name and
Principal Position | |
Year | | |
Salary | | |
Bonus | | |
Stock
Awards (5) | | |
Option
Awards (5) | | |
Non-Equity
Incentive Plan Compensation | | |
All
other compensation (6) | | |
Total | |
Richard J.
Sullivan (1),
Chairman, CEO,
President and | |
| 2014 | | |
$ | 120,000 | | |
$ | 60,000 | | |
$ | - | | |
$ | 1,920,000 | | |
$ | - | | |
$ | 19,000 | | |
$ | 2,119,000 | |
| Assistant Secretary | |
| 2013 | | |
$ | 60,000 | | |
$ | 37,000 | | |
$ | 2,960,000 | | |
$ | - | | |
$ | - | | |
$ | 60,000 | | |
$ | 3,177,000 | |
| | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
David A. Loppert (2),
Executive Vice President, CFO, Treasurer and | |
| 2014 | | |
$ | 60,000 | | |
$ | 30,000 | | |
$ | - | | |
$ | 960,000 | | |
$ | - | | |
$ | - | | |
$ | 1,050,000 | |
| Secretary | |
| 2013 | | |
$ | 30,000 | | |
$ | 18,500 | | |
$ | 1,380,000 | | |
$ | - | | |
$ | - | | |
$ | 30,000 | | |
$ | 1,458,500 | |
| | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
William J. Delgado (3),
Director, Former President,
Chief Executive Officer &
Chief
Financial Officer,
currently Executive Vice | |
| 2014 | | |
$ | - | | |
$ | - | | |
$ | - | | |
$ | - | | |
$ | - | | |
$ | - | | |
$ | - | |
| President | |
| 2013 | | |
$ | 50,000 | | |
$ | - | | |
$ | 260,000 | | |
$ | - | | |
$ | - | | |
$ | - | | |
$ | 310,000 | |
| | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
| Gary A. Gray (4), | |
| 2014 | | |
$ | 24,000 | | |
$ | - | | |
$ | - | | |
$ | - | | |
$ | - | | |
$ | - | | |
$ | 24,000 | |
| Vice President, CTO | |
| 2013 | | |
$ | 12,000 | | |
$ | 2,500 | | |
$ | 260,000 | | |
$ | - | | |
$ | - | | |
$ | 10,000 | | |
$ | 284,500 | |
| | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Jennifer S. Carroll
| |
| 2014 | | |
$ | - | | |
$ | - | | |
$ | - | | |
$ | - | | |
$ | - | | |
$ | - | | |
$ | - | |
President, NACSV (7)
| |
| 2013 | | |
$ | - | | |
$ | - | | |
$ | 425,000 | | |
$ | - | | |
$ | - | | |
$ | - | | |
$ | 425,000 | |
| (1) |
Mr.
Sullivan was appointed Chairman, CEO, President and Assistant Secretary on August 12, 2013. Mr. Sullivan acted as a consultant
to the Company from May 2012 to August 2013 and received compensation of $60,000 during this period included in the “all
other compensation” column in the above table. |
| (2) |
Mr.
Loppert was appointed Executive Vice President, CFO, Treasurer and Secretary on August 12, 2013. Mr. Loppert acted as a consultant
to the Company from October 2012 to August 2013 and received compensation of $30,000 during this period included in the “all
other compensation” column in the above table. |
| (3) |
Mr.
Delgado was appointed Executive Vice President on August 12, 2013. Prior thereto he served as our CEO, President
and CFO. |
| (4) |
Mr.
Gray was appointed Vice President, CTO on August 12, 2013. Mr. Gray acted as a consultant to the Company from May 2012 to
August 2013 and received compensation of $10,000 during this period included in the “all other compensation” column
in the above table. |
| (5) |
The
amounts in these columns represent the fair value of the award as of the grant date as computed in accordance with ASC 718.
These amounts represent restricted stock awards granted to the named executive officers, and do not reflect the actual amounts
that may be realized by those officers. |
| (6) |
In
2014, $19,000 is for reimbursement of unallocable expenses. In 2013, the amounts for Messrs. Sullivan, Loppert
and Gray is compensation paid to them during the period January – August 2013 whilst they served as consultants to the
Company. |
| (7) |
Ms. Carroll was appointed President of NACSV on December 3, 2014 and she resigned on March 7, 2015. She received
no compensation from NACSV in 2014. As a senior advisor to the Company, Ms. Carroll was awarded 2,500,000 restricted shares of
common stock in 2013 with a grant-date fair value of $425,000. Such expense was recognized in accordance with ASC 718 over the
vesting and service period. |
We
have not entered into any employment agreements or arrangements with our named executive officers.
Options
Granted to Named Executives
On
March 5, 2014, we granted 3 million stock options under our 2014 Equity Compensation Plan to Richard J. Sullivan, our CEO, and
1.5 million stock options to David A. Loppert, our CFO. The options were granted at $0.64 per share, the grant date fair value
of our common stock, vested after six months and are exercisable through March 5, 2024.
Outstanding
Equity Awards at Fiscal Year-End
The
following table provides information as of December 31, 2014 regarding unexercised stock options and restricted stock awards granted
to each of our named executive officers:
| | |
Outstanding
Equity Awards at Fiscal Year-End | |
| | |
Option
Awards | |
Stock
Awards | |
| Name | |
Number
of securities underlying unexercised options(#) exercisable | | |
Number
of securities underlying unexercised options(#) unexercisable | | |
Equity
incentive plan awards: number of securities underlying unexercised unearned options (#) | | |
Option
exercise price ($) | | |
Option
expiration date | |
Number of
shares or units of stock that have not vested (#) | | |
Market
value of shares or units of stock that have not vested (#) | | |
Equity
incentive plan awards: number of unearned shares, units or other rights that have not vested (#) | | |
Equity
incentive plan awards: market or payout value of unearned shares, units or other rights that have not vested ($) | |
| | |
| | |
| | |
| | |
| | |
| |
| | |
| | |
| | |
| |
| Richard J. Sullivan | |
| 3,000,000 | | |
| - | | |
| - | | |
$ | 0.64 | | |
| 3/5/2024 | |
| - | | |
$ | - | | |
| - | | |
$ | - | |
| David A. Loppert | |
| 1,500,000 | | |
| - | | |
| - | | |
$ | 0.64 | | |
| 3/5/2024 |
| | - | |
| $ | - | |
| | - | |
| $ | - |
| William J. Delgado | |
| - | | |
| - | | |
| - | | |
$ | - | | |
| - | |
| - | | |
$ | - | | |
| - | | |
$ | - | |
| Gary A. Gray | |
| - | | |
| - | | |
| - | | |
$ | - | | |
| - | |
| - | | |
$ | - | | |
| - | | |
$ | - | |
| Jennifer S. Carroll | |
| | | |
| | | |
| | | |
| | | |
| | |
| 104,167
| | |
$ | 8,333
| | |
| - | | |
$ | - | |
2014
Option Exercises and Stock Vested
The
following table provides information regarding options exercised and restricted stock that vested in the year ended December 31,
2014 for our named executive officers:
| | |
Option Exercises and Stock Vested | |
| | |
Option Awards | | |
Stock Awards | |
| Name | |
Number of shares acquired on exercise (#) | | |
Value realized on exercise ($) | | |
Number of shares acquired on vesting (#) | | |
Value realized on vesting ($)(1) | |
| | |
| | |
| | |
| | |
| |
| Richard J. Sullivan | |
| - | | |
$ | - | | |
| 1,083,333 | | |
$ | 352,696 | |
| David A. Loppert | |
| - | | |
$ | - | | |
| 666,667 | | |
$ | 143,652 | |
| William J. Delgado | |
| - | | |
$ | - | | |
| 83,333 | | |
$ | 32,500 | |
| Gary A. Gray | |
| - | | |
$ | - | | |
| 83,333 | | |
$ | 32,500 | |
| Jennifer S. Carroll | |
| - | | |
$ | - | | |
| 1,406,250
| | |
$ | 239,062
| |
| (1) | These amounts represent the grant date fair value expense amortized in 2014, and do not reflect
the actual amounts that may be realized by those officers. |
Pension
Benefits
None
of our named executive officers is covered by a pension plan or other similar benefit plan that provides for payments or
other benefits at, following, or in connection with retirement.
Nonqualified
Deferred Compensation
None
of our named executive officers is covered by a defined contribution or other plan that provides for the deferral of
compensation on a basis that is not tax-qualified.
Director
Compensation
We
do not have a compensation arrangement in place for members of our Board and we have not finalized any plan to compensate directors
in the future for their services as directors. We anticipate that we will develop a compensation plan for our independent
directors in order to attract qualified persons and to retain them. We expect that the compensation arrangements will generally
be comprised of equity awards and cash for reimbursement of expenses only; however exceptions may be made if circumstances warrant.
| |
Director Compensation |
| Name (1) | |
Fees earned or paid in cash | | |
Stock awards (2) | | |
Option awards (3) | | |
Non-equity incentive plan compensation | | |
All other compensation | | |
Total($) | |
| | |
| | |
| | |
| | |
| | |
| | |
| |
| Arthur F. Noterman | |
$ | - | | |
$ | - | | |
$ | 320,000 | | |
$ | - | | |
$ | - | | |
$ | 320,000 | |
| Stephanie C. Sullivan | |
$ | - | | |
$ | - | | |
$ | 320,000 | | |
$ | - | | |
$ | - | | |
$ | 320,000 | |
| Stephen L. Norris (4) | |
$ | 30,000 | | |
$ | 3,600,000 | | |
$ | - | | |
$ | - | | |
$ | - | | |
$ | 3,630,000 | |
| |
(1) |
Does
not include directors who are named executive officers whose compensation is reflected in the Summary Compensation Table
above. |
| |
(2) |
Represents the fair value of the restricted stock unit award as of the grant date as computed in accordance with ASC 718, and does not reflect the actual amount that may be realized. |
| |
(3) |
Represents the fair value of the award as of the grant date as computed in accordance with ASC 718, and do not reflect the actual amounts that may be realized. |
| |
(4) |
Effective as of July 2, 2014, Stephen L. Norris was appointed a director of the Company In July 2014 and resigned in January 2015. We paid Mr. Norris a monthly fee of $6,000 in cash, monthly in arrears commencing July 31, 2014 through November 30, 2014. |
None of our directors exercised options during the year ended
December 31, 2014.
| Item 12. |
Security
Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters. |
The
following table sets forth the number of shares of our Common Stock beneficially owned as of March 26, 2015, by (i) those persons
known by us to be owners of more than 5% of our Common Stock, (ii) each director (iii) our named executive officers (as disclosed
in the Summary Compensation Table), and (iv) all of our executive officers and directors as a group. Except as otherwise
indicated, the address of each stockholder listed below is: c/o Global Digital Solutions, Inc. 777 South Flagler Drive, Suite
800W, West Palm Beach, FL 33401.
| Name and Address of Beneficial Owner | |
Number of
shares of
Common Stock
Beneficially
Owned (1) | | |
Percent of
Class (%) | |
| Officers and Directors: | |
| | |
| |
| Richard J. Sullivan (2) | |
| 30,240,000 | | |
| 27.7 | % |
| David A. Loppert (3) | |
| 9,500,000 | | |
| 8.7 | % |
| William J. Delgado (4) | |
| 3,322,032 | | |
| 3.0 | % |
| Arthur F. Noterman (5) | |
| 500,000 | | |
| * | |
| Stephanie C. Sullivan (5) | |
| 1,000,000 | | |
| * | |
| Gary A. Gray | |
| 1,500,000 | | |
| 1.4 | % |
| All Directors and Officers | |
| 46,062,032 | | |
| 42.2 | % |
| | |
| | | |
| | |
| 5% or Greater Shareholders: | |
| | | |
| | |
| None known | |
| | | |
| | |
| * |
Less
than 1%. |
| (1)
|
Applicable
percentages are based on 109,170,531 shares outstanding as of March 26, 2015 and includes issued and outstanding shares of
common stock as well as vested but unissued restricted shares. Beneficial ownership is determined under the rules of the SEC
and generally includes voting or investment power with respect to securities. A person is deemed to be the beneficial owner
of securities that can be acquired by such person within 60 days whether upon the exercise of options or otherwise. Shares
of Common Stock subject to options and warrants currently exercisable, or exercisable within 60 days after the date of this
report, are deemed outstanding for computing the percentage of the person holding such securities but are not deemed outstanding
for computing the percentage of any other person. Unless otherwise indicated in the footnotes to this table, the Company believes
that each of the shareholders named in the table has sole voting power. |
| (2)
|
Includes
(a) 3,000,000 currently exercisable stock options, (b) 3,000,000 shares owned by Bay Acquisition Corp., an entity controlled
by Mr. Sullivan, and (c) 530,000 shares owned by Mr. Sullivan's minor son. |
| (3)
|
Includes
1,500,000 currently exercisable stock options. |
| (4) |
Includes
(a) 3,221,032 shares owned by Bronco Communications, LLC, an entity which Mr. Delgado controls and (b) 101,000 shares owned
by Mr. Delgado's minor daughter. |
| (5)
|
Includes
500,000 currently exercisable stock options. |
Securities
Authorized for Issuance Under Equity Compensation Plans
Shares
of our common stock that were authorized for issuance under our equity compensation plans is presented in Item 5 on page 24 of
this Annual Report.
| Item 13. |
Certain
Relationships and Related Transactions, and Director Independence. |
Since
the beginning of our fiscal year 2013, there has not been, and there is not currently proposed, any transaction or series of similar
transactions in which the amount involved exceeded or will exceed the lesser of $120,000 or 1% of the average of our total assets
at year end for the last two completed fiscal years and in which any related person, including any director, executive officer,
holder of more than 5% of our capital stock during such period, or entities affiliated with them, had a material interest, other
than as described in the transactions set forth below:
In
December 2012, we entered into a Promissory Note Purchase Agreement, under which Gabriel a De Los Reyes (the “Lender”)
agree to lend us $750,000 evidenced by a secured promissory note (the “Note”) and a Security Agreement. As part of
the agreement with the Lender, Bay Acquisition Corp. (aka Bay Acquisition LLC), an entity controlled by Richard J. Sullivan, our
Chairman and CEO, agreed to pledge certain collateral as additional security for the loan. In consideration for this
pledge of collateral, we agreed to issue to Bay Acquisition Corp. 3,000,000 shares of our restricted common stock valued at $360,000.
In
January 2013, we granted Richard J. Sullivan and David A. Loppert restricted stock grants of 3,000,000 and 5,000,000 shares of
common stock, respectively. In June 2013, we granted Richard J. Sullivan, David A. Loppert, William J. Delgado and
Gary A. Gray, restricted stock grants of 10,000,000, 3,000,000, 1,000,000 and 1,000,000 shares of common stock, respectively.
The grants vested in January 2014. The shares were valued at $0.12 and $0.26, respectively.
In February 2013, we granted Jennifer
S. Carroll, a Senior Advisor, restricted stock grants of 2,500,000 shares of common stock valued at $0.17.
On
February 4, 2014 we granted 500,000 options exercisable $0.64 per share, to each of Arthur F. Noterman and Stephanie C. Sullivan,
directors. The options vested on August 4, 2014, are exercisable through February 4, 2024, and had an aggregate grant date fair
value of $320,000 each.
On
March 5, 2014 we granted 3,000,000 options to Richard J. Sullivan, and 1,500,000 options to David A. Loppert, exercisable $0.64
per share. The options vested on September 5, 2014, are exercisable through March 5, 2024, and had an aggregate grant date fair
value of $1,920,000 and $960,0000, respectively.
On
August 25, 2014 we granted Stephen L. Norris, then Chairman and CEO of our wholly owned subsidiary, GDSI International, 12 million
restricted stock units (“RSU’s”) convertible into 12 million shares of the Company’s common stock, with
a grant date fair market value of $3,600,000. The grant was made under our 2014 Equity Incentive Plan. Mr. Norris resigned on
January 9, 2015 and forfeited the RSU’s.
On
December 8, 2014, we entered into a Securities Purchase Agreement (“Charter SPA”) with Charter 804CS Solutions, Inc.
(“Charter”), an affiliate of Richard J. Sullivan, our Chairman and CEO, providing for the purchase of a Convertible
Promissory Note in the principal amount of $37,500 (“Charter Note”). The Charter Note: contains a $1,500 original
issue discount to cover legal fees such that the cash proceeds received on the closing of Charter Note is $36,000; bears interest
at the rate of 8% per annum; is due and payable on December 8, 2015; and by amendment (the “Charter Amendment”) may
be converted by Charter at any time after 180 days of the date of closing into shares of Company common stock at a fixed conversion
price of $0.09 per share of Common Stock. The Charter Note also contains certain representations, warranties, covenants and events
of default, and increases in the amount of the principal and interest rates under the note in the event of such defaults.
On
December 8, 2014, we entered into a Securities Purchase Agreement (“Loppert SPA”) with David A. Loppert (“Loppert”),
our Chief Financial Officer, providing for the purchase of a Convertible Promissory Note in the principal amount of $31,500 (“Loppert
Note”). The Loppert Note: contains a $1,500 original issue discount to cover legal fees such that the cash proceeds received
on the closing of the Loppert Note is $30,000; bears interest at the rate of 8% per annum; is due and payable on December 8, 2015;
and may be converted by Loppert at any time after 180 days of the date of closing into shares of Company common stock at a conversion
price of $0.09 per share of Common Stock. The Loppert also contains certain representations, warranties, covenants and events
of default, and increases in the amount of the principal and interest rates under the note in the event of such defaults.
In
the twelve-month periods ended December 31, 2014 and 2013 our named executive officers were compensated as per the details in
“Item 11 – Executive Compensation”, as follows:
| Name | |
2014 | | |
2013 | |
| | |
| | |
| |
| Richard J. Sullivan | |
$ | 2,119,00 | | |
$ | 3,177,000 | |
| David A. Loppert | |
| 1,050,000 | | |
| 1,458,500 | |
| William J. Delgado | |
| - | | |
| 310,000 | |
| Gary A. Gray | |
| 24,000 | | |
| 284,500 | |
| Jennifer S. Carroll | |
| - | | |
| 425,000
| |
| Item 14. |
Principal
Accounting Fees and Services. |
Our
Board of Directors reviews and pre-approves audit and permissible non-audit services performed by our independent registered public
accounting firm PMB Helin Donovan LLP (“PMB”) as well as the fees charged for such services. Pre-approval is generally
provided for up to one year and any pre-approval is detailed as to the particular service or category of services and is generally
subject to a specific budget. The independent auditors and management are required to periodically report to our Board of Directors
regarding the extent of services provided by the independent auditors in accordance with this pre-approval, and the fees for the
services performed to date. The Board of Directors may also pre-approve particular services on a case-by-case basis.
In
its review of non-audit service and its appointment of PMB as our independent registered public accounting firm, Our Board considered
whether the provision of such services is compatible with maintaining independence.
The
following table shows the fees for services provided by PMB, and Crow, Shields Bailey, PC (“CSB”) , NACSV’s
prior accounting firm, for the years ended December 31, 2014 and 2013:
| | |
2014 | | |
2013 | |
| Audit Fees - GDSI (1) | |
$ | 45,300 | | |
$ | 32,500 | |
| Audit Related Fees (2) | |
| 1,500 | | |
| 2,465 | |
| Tax Fees (tax-related services) | |
| - | | |
| - | |
| All other fees (3) | |
| - | | |
| 58,556 | |
| Total GDSI Fees Paid to PMB | |
| 46,800 | | |
| 93,521 | |
| Audit Fees – NACSV paid to CSB (3) | |
| 71,453 | | |
| | |
| Total | |
$ | 118,253 | | |
$ | 93,521 | |
| (1) |
Audit
fees — these fees relate to the audit of our annual financial statements and the review of our interim quarterly financial
statements. |
| (2) |
Audit
related fees — these fees relate to assistance with a registration statement. |
| (3) |
All
other fees – these fees relate to fees incurred in connection with the proposed acquisition of Airtronic and the audit
of its historical financial statements. |
| (4) |
Fees
paid to Crow, Shields Bailey, PC, NACSV’s prior accountants for December 31, 2013 and 2012 audit and for review the
review of the June 15, 2014 financial statements. |
All
services performed by PMB were performed by full-time, permanent employees. All services provided by and all fees paid
to PMB in fiscal 2014 and 2013 were pre-approved by our Board of Directors. None of the services described above were approved
pursuant to the exception provided in Rule 2-01(c)(7)(i)(C) of Regulation S-X promulgated by the SEC.
PART
IV
| Item 15. |
Exhibits,
Financial Statement Schedules. |
| (a) |
Documents
filed as part of this report |
| (1) |
All
financial statements |
| (2) |
Financial
Statement Schedules |
All
financial statement schedules have been omitted, since the required information is not applicable or is not present in amounts
sufficient to require submission of the schedule, or because the information required is included in the consolidated financial
statements and notes thereto.
| (b) |
Exhibits
required by Item 601 of Regulation S-K |
See
the Exhibit Index filed as part of this Annual Report.
SIGNATURES
Pursuant
to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report
to be signed on its behalf by the undersigned, thereunto duly authorized.
| |
GLOBAL
DIGITAL SOLUTIONS, INC. |
| |
|
| |
By: |
/s/
Richard J. Sullivan |
| |
|
Richard
J. Sullivan |
| |
|
Chief
Executive Officer |
| |
|
|
| |
Date: |
March
30, 2015 |
Power
of Attorney
KNOW
ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Richard J. Sullivan and
David A. Loppert, jointly and severally, his/her attorneys-in-fact, each with the power of substitution, for him/her in any and
all capacities, to sign any amendments to this Annual Report on Form 10-K, and to file the same, with exhibits thereto and other
documents in connection therewith, with the Securities and Exchange Commission, hereby ratifying and confirming all that each
of said attorneys-in-fact, or his substitute or substitutes, may do or cause to be done by virtue hereof.
Pursuant
to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf
of the registrant and in the capacities and on the dates indicated.
| Name |
|
Title |
|
Date |
| |
|
|
|
|
| /s/
Richard J. Sullivan |
|
Chief
Executive Officer and Chairman of the Board
(Principal
Executive Officer) |
|
March
30, 2015 |
| Richard
J. Sullivan |
| |
|
|
|
|
| /s/
David A. Loppert |
|
Chief
Financial Officer
(Principal
Financial Officer and Principal Accounting Officer) |
|
March
30, 2015 |
| David
A. Loppert |
| |
|
|
|
|
| /s/
William J. Delgado |
|
Director,
Executive Vice President |
|
March
30, 2015 |
| William
J. Delgado |
| |
|
|
|
|
| /s/
Arthur F. Noterman |
|
Director |
|
March
30, 2015 |
| Arthur
F. Noterman |
|
|
|
|
| |
|
|
|
|
| /s/
Stephanie C. Sullivan |
|
Director |
|
March
30, 2015 |
| Stephanie
C. Sullivan |
|
|
|
|
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To
the Board of Directors and Stockholders
Global
Digital Solutions, Inc.
We
have audited the accompanying consolidated balance sheets of Global Digital Solutions, Inc. (“the Company”) as of
December 31, 2014 and 2013, and the related consolidated statements of operations, stockholders’ equity and cash flows for
each of the years in the two-year period ended December 31, 2014. These consolidated financial statements are the responsibility
of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based
on our audits.
We
conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are
free of material misstatement. The company is not required to have, nor were we engaged to perform, an audit of its internal control
over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing
audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness
of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes
examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting
principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In
our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position
of Global Digital Solutions, Inc. as of December 31, 2014 and 2013, and the related consolidated statements of operations, stockholders’
equity and cash flows for the years ended December 31, 2014 and 2013 in conformity with accounting principles generally accepted
in the United States of America.
The
accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern.
As discussed in Note 1 to the financial statements, the Company has sustained a net loss from operations and has an accumulated
deficit. These factors raise substantial doubt about the Company’s ability to continue as a going concern. Management’s
plans in this regard are also described in Note 1. The financial statements do not include any adjustments that might result from
the outcome of this uncertainty.
/s/
PMB Helin Donovan, LLP
PMB
Helin Donovan, LLP
Seattle,
Washington
March
30, 2015
| GLOBAL DIGITAL SOLUTIONS, INC. |
| CONSOLIDATED BALANCE SHEETS |
| | |
December 31, | |
| | |
2014 | | |
2013 | |
| Assets | |
| | | |
| | |
| Current Assets | |
| | | |
| | |
| Cash and cash equivalents | |
$ | 160,102 | | |
$ | 509,224 | |
| Notes receivable | |
| - | | |
| 1,465,874 | |
| Accounts receivable, net | |
| 302,400 | | |
| - | |
| Inventory | |
| 226,897 | | |
| - | |
| Prepaid expenses | |
| 81,498 | | |
| 122,056 | |
| Total current assets | |
| 770,897 | | |
| 2,097,154 | |
| | |
| | | |
| | |
| Property and equipment, net | |
| 9,040 | | |
| - | |
| Intangible assets | |
| 596,471 | | |
| - | |
| Deposits | |
| 2,882 | | |
| 198 | |
| Total assets | |
$ | 1,379,290 | | |
$ | 2,097,352 | |
| | |
| | | |
| | |
| Liabilities and Stockholders' Equity | |
| | | |
| | |
| Current Liabilities | |
| | | |
| | |
| Accounts payable | |
$ | 281,726 | | |
$ | 166,256 | |
| Accrued expenses | |
| 197,578 | | |
| 165,537 | |
| Convertible notes payable | |
| - | | |
| 529,309 | |
| Notes payable | |
| 58,258 | | |
| 25,000 | |
| Convertible notes payable to related parties, net of discount | |
| 40,707 | | |
| - | |
| Total current liabilities | |
| 578,269 | | |
| 886,102 | |
| Contingent consideration payable | |
| 648,615 | | |
| - | |
| Total Liabilities | |
| 1,226,884 | | |
| 886,102 | |
| | |
| | | |
| | |
| Commitments and Contingencies | |
| | | |
| | |
| | |
| | | |
| | |
| Stockholders’ equity | |
| | | |
| | |
| Preferred stock, $0.001 par value, 35,000,000 shares authorized, none issued and outstanding | |
| - | | |
| - | |
| Common stock, $0.001 par value, 450,000,000 and 175,000,000 shares authorized, 108,291,855 and 93,024,117 shares issued and outstanding | |
$ | 108,292 | | |
$ | 93,025 | |
| Additional paid-in capital | |
| 28,559,677 | | |
| 17,976,600 | |
| Accumulated deficit | |
| (28,515,563 | ) | |
| (16,858,375 | ) |
| Total stockholders’ equity | |
| 152,406 | | |
| 1,211,250 | |
| Total liabilities and stockholders' equity | |
$ | 1,379,290 | | |
$ | 2,097,352 | |
The accompanying notes are an integral
part of these consolidated financial statements.
| GLOBAL DIGITAL SOLUTIONS, INC. |
| CONSOLIDATED STATEMENTS OF OPERATIONS |
| | |
For the Years Ended | |
| | |
December 31, | |
| | |
2014 | | |
2013 | |
| | |
| | |
| |
| Revenue | |
$ | 695,022 | | |
$ | - | |
| | |
| | | |
| | |
| Cost of revenue | |
| 662,307 | | |
| - | |
| | |
| | | |
| | |
| Gross profit | |
| 32,715 | | |
| - | |
| | |
| | | |
| | |
| Operating expenses | |
| | | |
| | |
| Selling, general and administrative expenses | |
| 10,929,618 | | |
| 8,384,247 | |
| Other (income)/expense | |
| | | |
| | |
| Goodwill impairment loss | |
| 1,156,192 | | |
| - | |
| Gain on extinguishment of debt | |
| (387,642 | ) | |
| (31,712 | ) |
| Loss on disposal of fixed assets | |
| 12,500 | | |
| - | |
| Interest income | |
| (43,182 | ) | |
| (59,701 | ) |
| Interest expense | |
| 19,585 | | |
| 733,198 | |
| Total costs and expenses | |
| 11,687,071 | | |
| 9,026,032 | |
| | |
| | | |
| | |
| Loss from continuing operations before provision for income taxes | |
| (11,654,356 | ) | |
| (9,026,032 | ) |
| | |
| | | |
| | |
| Provision for income taxes | |
| - | | |
| - | |
| | |
| | | |
| | |
| Loss from continuing operations | |
| (11,654,356 | ) | |
| (9,026,032 | ) |
| | |
| | | |
| | |
| Loss from discontinued operations | |
| (2,832 | ) | |
| (271,221 | ) |
| Net loss | |
$ | (11,657,188 | ) | |
$ | (9,297,253 | ) |
| | |
| | | |
| | |
| Loss per common share | |
| | | |
| | |
| common stockholders - basic and diluted: | |
| | | |
| | |
| Loss from continuing operations | |
$ | (0.11 | ) | |
$ | (0.12 | ) |
| Loss from discontinued operations | |
| - | | |
| - | |
| Net loss | |
$ | (0.11 | ) | |
$ | (0.12 | ) |
| | |
| | | |
| | |
| Shares used in computing net loss per share: | |
| | | |
| | |
| Basic and diluted | |
| 101,755,501 | | |
| 74,484,164 | |
The accompanying notes are an integral
part of these consolidated financial statements.
| GLOBAL DIGITAL SOLUTIONS, INC. |
| CONSOLIDATED STATEMENTS OF STOCKHOLDER'S EQUITY (DEFICIT) |
| FOR THE YEARS ENDED DECEMBER 31, 2013 AND 2014 |
| | |
| | |
| | |
| | |
| | |
Additional | | |
| | |
| | |
| |
| | |
Preferred
Stock | | |
Common
Stock | | |
Paid-In | | |
Accumulated | | |
Noncontrolling | | |
| |
| | |
Shares | | |
Amount | | |
Shares | | |
Amount | | |
Capital | | |
Deficit | | |
Interest | | |
Total | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| |
| Balance, December 31, 2012 | |
| - | | |
$ | - | | |
| 52,263,451 | | |
$ | 52,264 | | |
$ | 7,326,336 | | |
$ | (7,561,122 | ) | |
$ | 115,414 | | |
$ | (67,108 | ) |
| Stock-based compensation expense | |
| - | | |
| - | | |
| 23,000,000 | | |
| 23,000 | | |
| 5,135,208 | | |
| - | | |
| - | | |
| 5,158,208 | |
| Common stock issued for debt guaranty | |
| | | |
| | | |
| 3,000,000
| | |
| 3,000
| | |
| 357,000
| | |
| | | |
| | | |
| 360,000
| |
| Sale of common stock | |
| - | | |
| - | | |
| 5,634,000 | | |
| 5,634 | | |
| 1,960,466 | | |
| - | | |
| - | | |
| 1,966,100 | |
| Shares or warrants issued for
services | |
| - | | |
| - | | |
| 1,876,666 | | |
| 1,877 | | |
| 1,078,353 | | |
| - | | |
| - | | |
| 1,080,230 | |
| Convertible debt beneficial conversion | |
| - | | |
| - | | |
| - | | |
| - | | |
| 676,487 | | |
| - | | |
| - | | |
| 676,487 | |
| Warrant expense, net of discount | |
| | | |
| | | |
| | | |
| | | |
| 400,000
| | |
| | | |
| | | |
| 400,000
| |
| Common stock issued upon conversion
of debt | |
| - | | |
| - | | |
| 3,000,000 | | |
| 3,000 | | |
| 747,000 | | |
| - | | |
| - | | |
| 750,000 | |
| Common stock issued upon exercise
of warrants | |
| - | | |
| - | | |
| 4,250,000 | | |
| 4,250 | | |
| 420,750 | | |
| - | | |
| - | | |
| 425,000 | |
| Stock subscription receivable | |
| - | | |
| - | | |
| - | | |
| - | | |
| (125,000 | ) | |
| - | | |
| - | | |
| (125,000 | ) |
| Loss on disposal of discontinued
operations | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| (115,414 | ) | |
| (115,414 | ) |
| Net loss | |
| - | | |
| - | | |
| - | | |
| - | | |
| | | |
| (9,297,253 | ) | |
| - | | |
| (9,297,253 | ) |
| Balance, December 31, 2013 | |
| - | | |
| - | | |
| 93,024,117 | | |
| 93,025 | | |
| 17,976,600 | | |
| (16,858,375 | ) | |
| - | | |
| 1,211,250 | |
| Stock-based compensation expense | |
| - | | |
| - | | |
| 8,937,503 | | |
| 8,937 | | |
| 7,678,629 | | |
| | | |
| | | |
| 7,687,566 | |
| Common stock issued for acquisition
of business | |
| - | | |
| - | | |
| 3,280,235 | | |
| 3,280 | | |
| 1,078,665 | | |
| | | |
| | | |
| 1,081,945 | |
| Shares or warrants issued for
services | |
| - | | |
| - | | |
| 1,250,000 | | |
| 1,250 | | |
| 1,007,918 | | |
| | | |
| | | |
| 1,009,168 | |
| Common stock issued for services
in connection with acquisitions | |
| | | |
| | | |
| 1,800,000 | | |
| 1,800 | | |
| 662,200 | | |
| | | |
| | | |
| 664,000 | |
| Stock subscription received | |
| - | | |
| - | | |
| | | |
| | | |
| 125,000 | | |
| | | |
| | | |
| 125,000 | |
| Beneficial conversion feature
of convertible notes | |
| - | | |
| - | | |
| | | |
| | | |
| 30,665 | | |
| | | |
| | | |
| 30,665 | |
| Net loss | |
| - | | |
| - | | |
| | | |
| | | |
| | | |
| (11,657,188 | ) | |
| | | |
| (11,657,188 | ) |
| Balance, December 31, 2014 | |
| - | | |
$ | - | | |
| 108,291,855 | | |
$ | 108,292 | | |
$ | 28,559,677 | | |
$ | (28,515,563 | ) | |
$ | - | | |
$ | 152,406 | |
The accompanying notes are an integral
part of these consolidated financial statements.
| GLOBAL DIGITAL SOLUTIONS, INC. |
| CONSOLIDATED STATEMENTS OF CASH FLOWS |
| |
| | |
For the Years Ended | |
| | |
December 31, | |
| | |
2014 | | |
2013 | |
| Operating Activities | |
| | | |
| | |
| Net loss | |
$ | (11,657,188 | ) | |
$ | (9,297,253 | ) |
| Adjustments to reconcile net loss to net cash used in operating activities: | |
| | | |
| | |
| Depreciation and amortization | |
| 80,694 | | |
| - | |
| Gain on extinguishment of debt | |
| (387,642 | ) | |
| - | |
| Loss on disposal of fixed assets | |
| 12,500 | | |
| - | |
| Goodwill impairment loss | |
| 1,156,192 | | |
| - | |
| Stock- based compensation expense | |
| 7,687,566 | | |
| 5,158,208 | |
| Common stock and warrants issued in payment of services | |
| 1,009,168 | | |
| 1,080,230 | |
| Non cash acquisition expense settled with shares | |
| 664,000 | | |
| - | |
| Non-cash discount on price of shares issued | |
| 65,572 | | |
| - | |
| Convertible debt discount amortization | |
| 2,011 | | |
| - | |
| Non cash interest expense | |
| 11,696 | | |
| - | |
| Beneficial conversion feature of debt and warrant | |
| - | | |
| 676,487 | |
| Debt guaranty settled by issuing common stock | |
| - | | |
| 360,000 | |
| Amortization of warrant expense | |
| - | | |
| 750,000
| |
| Changes in operating assets and liabilities: | |
| | | |
| | |
| Accounts receivable | |
| 68,081 | | |
| - | |
| Inventory | |
| (256,991 | ) | |
| - | |
| Costs in excess of billings | |
| 570,787 | | |
| - | |
| Prepaid expenses | |
| 66,561 | | |
| (122,056 | ) |
| Accounts payable | |
| 151,193 | | |
| 166,101 | |
| Accrued expenses | |
| 34,129 | | |
| (807 | ) |
| Billings in excess of costs | |
| 13,631 | | |
| - | |
| Cash provided by discontinued operations | |
| - | | |
| 245,745 | |
| Net cash used in operating activities | |
| (708,040 | ) | |
| (983,345 | ) |
| | |
| | | |
| | |
| Investing Activities | |
| | | |
| | |
| Repayment of loans to Airtronic USA, Inc. | |
| 1,465,874 | | |
| - | |
| Loans to Airtronic USA, Inc. | |
| - | | |
| (1,465,874 | ) |
| Payment for NACSV, net of cash acquired | |
| (864,575 | ) | |
| - | |
| Deposits | |
| (2,684 | ) | |
| (198 | ) |
| Net cash provided by (used in) investing activities | |
| 598,615 | | |
| (1,466,072 | ) |
| | |
| | | |
| | |
| Financing Activities | |
| | | |
| | |
| Proceeds from the sale of common stock | |
| - | | |
| 1,966,100 | |
| Proceeds from the exercise of warrants | |
| 125,000 | | |
| 300,000 | |
| Proceeds from notes payable | |
| 162,242 | | |
| 374,900 | |
| Payments on notes payable | |
| (376,939 | ) | |
| (67,500 | ) |
| Payment on convertible notes | |
| (150,000 | ) | |
| - | |
| Net cash provided by (used in) financing activities | |
| (239,697 | ) | |
| 2,573,500 | |
| | |
| | | |
| | |
| Net increase (decrease) in cash and cash equivalents | |
| (349,122 | ) | |
| 124,083 | |
| Cash and cash equivalents at beginning of year | |
| 509,224 | | |
| 385,141 | |
| | |
| | | |
| | |
| Cash and cash equivalents at end of period | |
$ | 160,102 | | |
$ | 509,224 | |
| | |
| - | | |
| - | |
| Supplementary disclosure of cash flow information | |
| | | |
| | |
| Cash paid during the year for: | |
| | | |
| | |
| Interest | |
$ | 5,878 | | |
$ | - | |
| Taxes | |
$ | - | | |
$ | - | |
| Supplementary disclosure of non-cash investing and financing activities | |
| | | |
| | |
| Purchase of NACSV with common shares | |
$ | 1,081,945 | | |
$ | - | |
| Debt settled with shares of common stock | |
$ | - | | |
$ | 750,000 | |
The accompanying notes are an integral
part of these consolidated financial statements.
GLOBAL
DIGITAL SOLUTIONS, INC.
Notes
to Consolidated Financial Statements
December
31, 2014 and 2013
Note 1 – Organization, Liquidity and Summary of
Significant Accounting Policies
Organization and History
We were incorporated in New Jersey as
Creative Beauty Supply, Inc. (“Creative”) in August 1995. In March 2004, Creative acquired Global Digital
Solutions, Inc., a Delaware corporation ("Global”). The merger was treated as a recapitalization of Global, and Creative
changed its name to Global Digital Solutions, Inc., Global provided structured cabling design, installation and maintenance for
leading information technology companies, federal, state and local government, major businesses, educational institutions, and
telecommunication companies. Our mission was to target the United States government contract marketplace for audio and video services.
Due to capital constraints our operations team focused mainly in Northern California. On May 1, 2012, we made the decision to wind
down our operations in the telecommunications area and to refocus our efforts in the area of cyber arms technology and complementary
security and technology solutions. From August 2012 through November 2013 we were actively involved in managing Airtronic USA,
Inc., and effective as of June 16, 2014 we acquired North American Custom Specialty Vehicles (“NACSV”).
Summary of Significant Accounting Policies
Principles of Consolidation
The accompanying consolidated financial
statements include the accounts of the Company and our wholly owned subsidiaries, NACSV, GDSI Florida, LLC and Global Digital Solutions,
LLC, dba GDSI International. All intercompany accounts and transactions have been eliminated in consolidation.
Use of Estimates
The preparation of financial statements
in conformity with accounting principles generally accepted in the United States of America requires management to make estimates
and assumptions. These estimates and assumptions affect the reported amounts of assets, liabilities, revenues and expenses, and
disclosure of contingent liabilities. Actual results could differ materially from these estimates. Significant estimates include
allowance for doubtful accounts receivable, provision for excess and obsolete inventory, valuation of intangible and long-lived
assets, fair value of convertible debt and derivative liabilities, income taxes and share-based compensation expense.
Financial Condition and Liquidity
The accompanying financial statements
have been prepared assuming we will continue as a going concern, which contemplates the realization of assets and the liquidation
of liabilities in the normal course of business. We have sustained losses and experienced negative cash flows from operations since
inception, and for the year ended December 31, 2014 we incurred a net loss of $11,657,188, used net cash of $708,040 to fund operating
activities, and net cash of $239,697 for financing activities. At December 31, 2014, we had an accumulated deficit of $28,515,563,
cash and cash equivalents of $160,102, working capital of $192,628 and stockholders’ equity of $152,406. We have funded our
activities to date almost exclusively from equity and debt financings.
We will continue to require substantial
funds to continue development of our core business. Management’s plans in order to meet our operating cash flow requirements
include (i) financing activities such as private placements of common stock, and issuances of debt and convertible debt instruments,
(ii) the establishment of strategic relationships which we expect will lead to the generation of additional revenue or acquisition
opportunities and (iii) the acquisition of additional businesses that provide complementary security and technology solutions.
While we believe that we will be successful
in obtaining the necessary financing to fund our operations, there are no assurances that such additional funding will be achieved
or that we will succeed in our future operations. Subsequent to December 31, 2014, we have entered into a series of convertible
debt financings and received net proceeds of $471,630, and we expect to raise additional funds through additional convertible debt
offerings in the future. See Note 16, Subsequent Events.
Our independent registered public accounting
firm has expressed substantial doubt about our ability to continue as a going concern as a result of our history of net losses.
Our ability to achieve and maintain profitability and positive cash flow is dependent upon our ability to successfully execute
the plans to pursue pending acquisitions and raise the funds necessary to complete such acquisitions as described in this Form
10-K. The outcome of these matters cannot be predicted at this time. The consolidated financial statements do not include any adjustments
relating to the recoverability and classification of recorded asset amounts or the amounts and classification of liabilities that
might be necessary should we be unable to continue as a going concern.
Cash and Cash Equivalents
We consider all highly liquid investments
with original maturities of three months or less to be cash equivalents.
Accounts Receivable
We
record accounts receivable at the invoiced amount and we do not charge interest. We maintain an allowance for doubtful accounts
to reserve for potentially uncollectible receivables. We review the accounts receivable by customers which are past due to identify
specific customers with known disputes or collectability issues. In determining the amount of the reserve, we make judgments about
the creditworthiness of significant customers based on ongoing credit evaluations. Allowance for doubtful accounts was $104,085
at December 31, 2014.
Concentrations of Credit Risk
Financial instruments that potentially
subject us to concentrations of credit risk consist primarily of cash and accounts receivable.
Inventory
Inventory consists of the in progress
mobile command units and is stated at the lower of cost (first-in, first-out) or market.
Property and equipment
Property and equipment are carried at
cost. Expenditures which materially increase values or extend useful lives are capitalized while replacements, maintenance and
repairs which do not improve or extend the lives of the respective assets are charged against income as incurred. The net gain
or loss on items retired or otherwise disposed of is credited or charged to operations and the cost and accumulated depreciation
are removed from the accounts.
A provision for depreciation of property
and equipment is made on a basis considered adequate to amortize the related costs (net of salvage value) over their estimated
useful lives using the straight-line method. Estimated useful lives are principally as follows: vehicles, 5 years; furniture and
fixtures and office equipment, 5-10 years; leasehold improvements, term of lease or 15 years, whichever is less; machinery and
equipment 5-10 years.
Goodwill and Intangible Assets
Goodwill represents the excess of purchase
price over the fair value assigned to the net assets acquired in business combinations. Goodwill is allocated to reporting units
as of the acquisition date for the purpose of goodwill impairment testing. Currently, we operate in only one reporting unit. Our
goodwill arose from our acquisition of NACSV in June 2014, as more fully discussed in Notes 2 and 3. Intangible assets deemed to
have an indefinite life such as goodwill are not amortized, but instead are reviewed at least annually for impairment. Intangible
assets with finite lives are amortized over their estimated useful lives. As of December 31, 2014, other than goodwill, we have
no intangible assets with indefinite lives. We tested our goodwill for impairment during the fourth quarter as a part of our annual
business planning cycle. Goodwill is also tested between testing dates if an impairment condition or event is determined to have
occurred. As a result of our annual assessment, we determined that the implied value of our existing goodwill was nil and, therefore,
we recorded a $1,156,192 goodwill impairment charge in the fourth quarter of 2014. In performing our assessment, we placed emphasis
on the estimated future cash flows from NACSV’s operations, which had declined from our initial expectations in part due
to recent changes in its senior management, changes in the customer base, and the reduction in the existing backlog of customer
orders. We based our valuation on the income valuation approach using a discounted cash flow model.
We have one other intangible asset consisting
of customer relationships, which is being amortized over its expected economic life of five years. The life was determined based
upon the expected use of the asset, and other contractual provisions associated with the asset, the estimated average life of NACSV’s
products, the stability of the industry, and other factors deemed appropriate. In accordance with ASC 350 and ASC 360, we continually
evaluate whether events or circumstances have occurred that indicate the remaining estimated useful life of our customer relationships
asset may warrant revision or that the remaining balance of such asset may not be recoverable. We use an estimate of the related
discounted cash flows over the remaining life of the asset in measuring whether the asset is recoverable. See Note 3 for more information
regarding goodwill and intangible assets.
Fair Value Measurements
The carrying amounts of our financial
instruments, including cash and cash equivalents, accounts receivable, accounts payable, and short-term debt approximate fair value
due to their relatively short maturities.
Convertible Notes With Variable Conversion
Options
We have entered into convertible notes
with related parties that contain a variable conversion options, whereby the outstanding principal and accrued interest may be
converted, by the holder, into shares of our common stock at a fixed price which represented a 30% discount to the price of our
common stock at the time of issuance. We measure the fair value of the notes at the time of issuance, which is the result of the
share price conversion discount, and record the discount (beneficial conversion feature) as a reduction of debt. We then accrete
the discount as interest expense utilizing the effective interest rate method over the life of the debt.
Debt Issued with Warrants
We account for the issuance of debt
and related warrants by allocating the debt proceeds between the debt and warrants based on the relative estimated fair values
of the debt security without regard for the warrants and the estimated fair value of the warrants themselves. The amount allocated
to the warrants would then be reflected as both an increase to equity, and as a debt discount that would be amortized over the
term of the debt. However, in circumstances where warrants must be accounted for as a liability, the full estimated fair value
of the warrants is established as both a liability and a debt discount. In some cases, if the value of the warrants is greater
than the principal amount received, an immediate interest expense charge is recorded for the excess.
In accounting for convertible debt instruments,
the proceeds from issuance of the convertible notes are first allocated between the convertible notes and the warrants. If the
amount allocated to convertible notes results in an effective per share conversion price less than the fair value of our common
stock on the date of issuance, the intrinsic value of this beneficial conversion feature is recorded as a further discount to the
convertible debt with a corresponding increase to additional paid in capital.
Revenue and Cost Recognition
In accordance with U.S. generally accepted
accounting principles, the revenue under fixed-price contracts is accounted for on the percentage-of-completion method. This
methodology recognizes revenue and earnings as work progresses on the contract and is based on an estimate of the revenue and earnings
earned to date, less amounts recognized in prior periods. The Company bases its estimate of the degree of completion of the
contract by reviewing the relationship of costs incurred to date to the expected total costs that will be incurred on the project.
Estimated contract earnings are reviewed and revised periodically as the work progresses, and the cumulative effect of any change
in estimate is recognized in the period in which the change is identified. Estimated losses are charged against earnings in the
period such losses are identified. The Company recognizes revenue arising from contract claims either as income or as an
offset against a potential loss only when the amount of the claim can be estimated reliably and realization is probable and there
is a legal basis of the claim. Because of inherent uncertainties in estimating costs, it is possible that the estimates used will
change within the near-term.
Contract costs include all direct material
and labor costs and those indirect costs related to contract performance, such as payroll taxes and worker’s compensation
insurance premiums. Operating expenses are charged to expense as incurred.
The asset, “Costs and estimated
earnings in excess of billings on uncompleted contracts”, represents revenues recognized in excess of amounts billed. The
liability, “Billings in excess of costs and estimated earnings on uncompleted contracts”, represents billings in excess
of revenues recognized.
Revenue for service and refurbishment
work are recognized when the job is complete.
Advertising
All advertising costs are expensed as
incurred.
Provision for Income Taxes
Income taxes are calculated based upon
the asset and liability method of accounting. Deferred income taxes are recorded to reflect the tax consequences in
future years of differences between the tax basis of assets and liabilities and their financial reporting amounts at each year-end. A
valuation allowance is recorded against deferred tax assets if management does not believe the Company has met the “more
likely than not” standard to allow for recognition of such an asset. In addition, realization of an uncertain
income tax position must be estimated as “more likely than not” (i.e., greater than 50% likelihood of receiving a benefit)
before it can be recognized in the financial statements. Further, the recognition of tax benefits recorded in
the financial statements, if any, is based on the amount most likely to be realized assuming a review by tax authorities having
all relevant information.
Stock Based Compensation
We adopted the fair value recognition
provisions of ASC 718, "Compensation – Stock Compensation”. Under the fair value recognition provisions,
we are required to measure the cost of employee services received in exchange for share-based compensation measured at the grant
date fair value of the award.
The Company’s accounting policy
for equity instruments issued to advisors, consultants and vendors in exchange for goods and services follows the provisions of
FASB ASC 505-50. The measurement date for the fair value of the equity instruments issued is determined at the earlier
of (i) the date at which a commitment for performance by the advisor, consultant or vendor is reached or (ii) the date at which
the advisor, consultant or vendor’s performance is complete. In the case of equity instruments issued to advisors and consultants,
the fair value of the equity instrument is recognized over the term of the advisor or consulting agreement. Stock-based compensation
related to non-employees is accounted for based on the fair value of the related stock or options or the fair value of the services,
whichever is more readily determinable.
Basic and Fully Diluted Loss Per
Share
Basic and diluted loss per common share
is computed by dividing the loss by the weighted average number of common shares outstanding for the period. Since we have
incurred losses attributable to common stockholders during each of the two years ended December 31, 2014 and 2013, diluted loss per
common share has not been computed by giving effect to all potentially dilutive common shares that were outstanding during the
period. Dilutive common shares consist of convertible debt and incremental shares issuable upon exercise of warrants and options
to the extent that the average fair value of our common stock for each period is greater than the exercise price of the warrants.
Contingent consideration for business
acquisitions
Acquisitions may include contingent
consideration payments based on future financial measures of an acquired company. Contingent consideration is required to be recognized
at fair value as of the acquisition date. We estimate the fair value of these liabilities based on financial projections of the
acquired companies and estimated probabilities of achievement. At each reporting date, the contingent consideration obligation
is revalued to its estimated fair value and changes in fair value subsequent to the acquisition are reflected in income or expense
in the consolidated statements of operations, and could cause a material impact to our operating results. Changes in the fair value
of contingent consideration obligations may result from changes in discount periods and rates, changes in the timing and amount
of revenue and/or earnings estimates and changes in probability assumptions with respect to the likelihood of achieving the various
earn-out criteria.
Deferred financing fees
The Company amortizes the cost incurred
to obtain debt financing using the straight-line method over the term of the underlying obligations. The amortization of
deferred financing costs is included in interest expense. The Company recognized $5,011 and $393,243 of expense related
to the amortization of deferred financing costs during the years ended December 31, 2014 and 2013, respectively.
Subsequent Events
We evaluate events that occur subsequent
to the balance sheet date of periodic reports, but before financial statements are issued for periods ending on such balance sheet
dates, for possible adjustment to such financial statements or other disclosure.
Reclassifications
Certain
amounts in the 2013 financial statements have been reclassified to conform to the 2014 presentation.
New Accounting Standards Issued But Not Yet Adopted
From time to time, new accounting pronouncements
are issued by the Financial Accounting Standards Board (the “FASB”), which are adopted by the Company as of the specified
date. Unless otherwise discussed, management believes the impact of recently issued standards, which are not yet effective, will
not have a material impact on its consolidated financial statements upon adoption.
In May 2014, the FASB issued ASU
2014-09, Revenue from Contracts with Customers. The guidance establishes
the principles to apply to determine the amount and timing of revenue recognition, specifying the accounting for certain costs
related to revenue, and requiring additional disclosures about the nature, amount, timing and uncertainty of revenues and related
cash flows. The guidance supersedes most of the current revenue recognition requirements, and will be effective January 1,
2017. We are is currently evaluating the impact this guidance, including the method of implementation, will have on our financial
position, results of operations and cash flows, among other items.
In June 2014, the FASB issued ASU No.
2014-12, Compensation—Stock Compensation: Accounting for Share-Based Payments When the Terms of an Award Provide
That a Performance Target Could Be Achieved after the Requisite Service Period. The standard requires that a performance
target that affects vesting and that could be achieved after the requisite service period be treated as a performance condition.
Entities are required to apply the standard for annual periods and interim periods within those annual periods, beginning after
December 15, 2015. Early application is permitted. The Company is currently assessing the impact of this new guidance.
In August 2014, the FASB issued Accounting
Standards Update ("ASU") No. 2014-15, Presentation of Financial Statements-Going Concern (Subtopic 205-40): Disclosure
of Uncertainties about an Entity’s Ability to Continue as a Going Concern. Under the new guidance, management will
be required to assess an entity’s ability to continue as a going concern, and to provide related footnote disclosures in
certain circumstances. The provisions of this ASU are effective for annual periods beginning after December 15, 2016, and for annual
and interim periods thereafter. We are currently evaluating the potential changes from this ASU to our future financial reporting
and disclosures.
Note 2 – Acquisition of North
American Custom Specialty Vehicles (“NACSV”)
On June 16, 2014, we acquired all of
the outstanding membership interest of NACSV in a transaction accounted for using the purchase method of accounting (the “Acquisition”). NACSV
specializes in building mobile emergency operations centers (“MEOC’s”) and specialty vehicles for emergency management,
first responders, national security and law enforcement operations.
As
consideration for the consummation of the Acquisition, at the closing of the Acquisition, the Company paid $1,000,000 in cash
to the selling members, and issued them 645,161 shares of the Company’s common stock valued at $200,000 (the
“Stock Consideration”). In connection with the Acquisition, the Company is required to make a true-up payment of
the excess of total assets over $1.2 million, valued at $816,373 payable in shares of the Company’s common stock (the
“True-Up Payment”), and additional consideration as certain events or transactions occur in the future, up to a
maximum of $2.4 million, payable in shares of the Company’s common stock or in cash at the seller’s option (the
“Contingent Consideration”). Additionally, the Company issued 1.8 million shares of common stock for acquisition
services rendered in conjunction with the Acquisition valued at $664,000. The Company recorded nonrecurring charges of
$843,488 during the year ended December 31, 2014 related to the direct costs of the Acquisition, consisting of the $664,000
value of the shares of common stock issued for acquisition services and $179,488 of cash costs for legal, accounting fees and
due diligence fees which are recorded in general and administrative expenses in the accompanying condensed consolidated
statements of operations.
The purchase price of the Acquisition
totaled $2,713,079, comprised of $1,000,000 in cash, the Stock Consideration of $200,000, the True-Up Payment of $816,373, and
the fair value of the Contingent Consideration of $696,706. The fair value of the Contingent Consideration was estimated based
upon the present value of the expected future payouts. On October 17, 2014, we issued 2,635,074 shares of our common stock valued
at $0.31 as settlement for the True-Up Payment.
Under the purchase method of accounting,
the purchase price of the Acquisition was allocated to NACSV’s net tangible and identifiable intangible assets and liabilities
assumed based on their estimated fair values as of the date of the completion of the Acquisition, as follows:
| Assets
Acquired: | |
| |
| Cash
and cash equivalents | |
$ | 135,425 | |
| Accounts
receivable, net | |
| 370,481 | |
| Inventory | |
| 73,140 | |
| Prepaid
expenses | |
| 26,004 | |
| Costs
in excess of billings | |
| 570,787 | |
| Property
and equipment, net | |
| 68,157 | |
| Customer
relationships | |
| 668,940 | |
| Goodwill | |
| 1,156,192 | |
| | |
| 3,069,126 | |
| Liabilities
assumed: | |
| | |
| Accounts
payable | |
| 35,724 | |
| Accrued
expenses | |
| 2,087 | |
| Notes
payable | |
| 304,605 | |
| Billings
in excess of costs | |
| 13,631 | |
| | |
| 356,047 | |
| Total
purchase price | |
$ | 2,713,079 | |
The fair values
of certain assets and liabilities have been determined by management. No portion of the intangible assets, including goodwill,
is expected to be deductible for tax purposes.
The results of operations of NACSV
are included in the Company’s consolidated statements of operations from the date of the acquisition of June 16, 2014, including
approximately $205,700 of revenue and approximately $317,000 of net loss. The following unaudited supplemental pro forma information
assumes that the Acquisition had occurred as of January 1, 2014 and as of January 1, 2013:
| | |
Year-ended December 31, | |
| | |
2014 | | |
2013 | |
| | |
| | |
| |
| Revenue | |
$ | 2,658,798 | | |
$ | 5,172,955 | |
| Net Loss | |
$ | (11,255,057 | ) | |
$ | (9,509,974 | ) |
| Loss per common share - basic and diluted | |
$ | (0.11 | ) | |
$ | (0.13 | ) |
The
unaudited pro forma financial information is not necessarily indicative of the results that would have occurred if the Acquisition
had occurred on the dates indicated or that may result in the future.
Note 3 - Goodwill and Intangible Assets
Goodwill
Goodwill consists of the excess of cost
over the fair value of net tangible and identifiable intangible assets of acquired businesses. In accordance with ASC 350, “Intangibles
— Goodwill and Other,” we do not amortize goodwill. Instead, we are required to test goodwill for impairment annually
as part of our annual business planning cycle during the fourth quarter of each year or earlier depending on specific changes in
conditions surrounding our reporting units. We currently operate in only one reporting unit. Goodwill arose in connection with
our acquisition of NACSV in June 2014, which is more fully discussed in Note 2. We do not presently have any other intangible assets
with indefinite lives.
In testing our goodwill during the fourth
quarter of 2014, we used an income valuation approach based on information currently available. The approach considered the likelihood
of future cash flows that we expect our NACSV business to generate over the next ten years, along with a terminal value based on
a long-term sustainable growth rate subsequent to 2015 of 1%, which were discounted using a 20% discount rate. Based on our analysis,
the implied value of our goodwill was nil and, accordingly, we recorded a goodwill impairment charge of as of December 31, 2014
as follows:
| | |
December 31, | |
| | |
2014 | | |
2013 | |
| Beginning balance | |
$ | — | | |
$ | — | |
| Acquired goodwill (see Note 2) | |
| 1,156,192 | | |
| — | |
| Goodwill impairment loss | |
| (1,156,192 | ) | |
| — | |
| Ending balance | |
$ | — | | |
$ | — | |
Intangible
Asset
Our
intangible asset consists of customer relationships that we acquired in connection with the acquisition of NACSV in June 2014.
Customer relationships is carried at cost less accumulated amortization, computed using the straight-line method over the estimated
useful life of five years as follows (we did not have any intangible assets with finite lives during 2013):
| | |
December
31, 2014 | |
| | |
Gross
Carrying Amount | | |
Accumulated
Amortization | | |
Net | |
| Customer
relationships | |
$ | 668,940 | | |
$ | (72,469 | ) | |
$ | 596,471 | |
Amortization
of intangible assets amounted to $72,469 for the year ended December 31, 2014. Estimated future amortization expense is as follows:
| 2015 | |
$ | 133,788 | |
| 2016 | |
| 133,788 | |
| 2017 | |
| 133,788 | |
| 2018 | |
| 133,788 | |
| 2019 | |
| 61,319 | |
| | |
$ | 596,471 | |
In
accordance with ASC 360-10, we continually evaluate whether events or circumstances have occurred that indicate the remaining
estimated useful life of our customer relationships asset may warrant revision or that the remaining balance of such asset may
not be recoverable. We use an estimate of the related discounted cash flows attributable to such asset over the remaining life
of the asset in measuring whether the asset is recoverable.
Note
4 – Financial Instruments
Cash
and Cash Equivalents
Cash and
cash equivalents at December 31, 2014 and 2013 consist of the following:
| | |
2014 | | |
2013 | |
| Cash
in bank | |
$ | 160,102 | | |
$ | 509,224 | |
| Cash
and cash equivalents | |
$ | 160,102 | | |
$ | 509,224 | |
We classify
highly liquid temporary investments with an original maturity of three months or less when purchased as cash equivalents. We maintain
cash balances at various financial institutions. Balances at US banks are insured by the Federal Deposit Insurance Corporation
up to $250,000. We have not experienced any losses in such accounts and believe it is not exposed to any significant risk for
cash on deposit. As of December 31, 2013, we had uninsured cash amounts. We maintained this balance with a high quality financial
institution, which we believe limits this risk.
Concentrations
of Credit Risk
Financial
instruments that potentially subject us to concentrations of credit risk consist primarily of cash and accounts receivable.
Note
5 – Fair Value Measurements
Fair
value is the price that would be received upon sale of an asset or paid to transfer a liability in an orderly transaction between
market participants at the measurement date. The following fair value hierarchy is used in selecting inputs, with the highest
priority given to Level 1, as these are the most transparent or reliable:
Level
1 – Quoted prices for identical instruments in active markets.
Level
2 – Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets
that are not active; and model-derived valuations in which all significant inputs are observable directly or indirectly.
Level
3 – Valuations derived from valuation techniques in which one or more significant inputs are unobservable.
We
had no Level 1 or Level 2 assets or liabilities at December 31, 2014 and 2013. The following table sets forth our Level 3 assets
and liabilities measured at fair value, whether recurring or non-recurring, at December 31, 2014 and 2013, and the fair value
calculation input hierarchy level that we have determined applies to each asset and liability category.
| | |
December
31, | |
| | |
2014 | | |
2013 | |
| Assets: | |
| | | |
| | |
| Non-recurring:
Goodwill | |
$ | — | | |
$ | — | |
| | |
| | | |
| | |
| Liabilities: | |
| | | |
| | |
| Recurring:
Contingent Consideration | |
$ | 648,615 | | |
$ | — | |
The following
is a summary of activity of Level 3 assets and liabilities for the twelve months ended December 31, 2014:
| | |
Goodwill | |
| Assets: | |
| |
| Balance December
31, 2013 | |
$ | - | |
| Goodwill
acquired | |
| 1,156,192 | |
| Goodwill
impairment loss | |
| (1,156,192 | ) |
| Balance,
December 31, 2014 | |
$ | - | |
| | |
| | |
| |
Contingent
Consideration | |
| Liabilities: | |
| | |
| Balance at December
31, 2013 | |
$ | - | |
| Contingent
consideration | |
| 696,706 | |
| Offset
amounts due from NACSV seller | |
| (48,091 | ) |
| Balance,
December 31, 2014 | |
$ | 648,615 | |
Contingent Consideration
ASC Topic 805 requires that
contingent consideration be recognized at fair value on the acquisition date and be re-measured each reporting period with subsequent
adjustments recognized in the consolidated statement of operations. We estimate the fair value of contingent consideration liabilities
based on financial projections of the acquired companies and estimated probabilities of achievement and discount the liabilities
to present value using a weighted-average cost of capital. Contingent consideration is valued using significant inputs that are
not observable in the market which are defined as Level 3 inputs pursuant to fair value measurement accounting. We believe our
estimates and assumptions are reasonable, however, there is significant judgment involved. At each reporting date, the contingent
consideration obligation is revalued to its estimated fair value, and changes in fair value subsequent to the acquisitions are
reflected in income or expense in the consolidated statements of operations, and could cause a material impact to, and volatility
in, our operating results. Changes in the fair value of contingent consideration obligations may result from changes in discount
periods, changes in the timing and amount of revenue and/or earnings estimates and changes in probability assumptions with respect
to the likelihood of achieving the various earn-out criteria.
As
of December 31, 2014, contingent consideration included in the other current liabilities on the consolidated balance
sheet totaled $648,615.
Note
6 – Inventory
Inventory
consists of the following at December 31, 2014:
| | |
2014 | |
| Trailer inventory | |
$ | 187,881 | |
| Work in process | |
| 226,897 | |
| | |
| 414,778 | |
| Less: Reserve for inventory loss | |
| (187,881 | ) |
| | |
$ | 226,897 | |
The
Company has established a reserve for inventory loss for certain trailer inventory on hand at NACSV. Pursuant to the terms of
the Equity Purchase Agreement between the Company and the NACSV sellers, all of the proceeds from the sale of this inventory are
to be paid to the NACSV sellers and thus the Company’s potential net realizable value on this inventory is zero.
Note
7 – Acquisition of Airtronic and Notes Receivable from Airtronic
On October 22, 2012, we entered into
an Agreement of Merger and Plan of Reorganization (“Merger Agreement”) to acquire 70% of Airtronic USA, Inc. (“Airtronic”),
a debtor in possession under chapter 11 of the Bankruptcy Code in a case pending in the US Bankruptcy Court for the Northern District
of Illinois, Eastern Division (the “Court”) once Airtronic successfully reorganized and emerged from bankruptcy (the
“Merger”). During the period from October 2012 through November 2013, GDSI was actively involved in the day to da management
of Airtronic pending the completion of the Merger.
Contemporaneously, on October 22, 2012,
we entered into a Debtor In Possession Note Purchase Agreement (“Bridge Loan”) with Airtronic. We agreed to lend Airtronic
a maximum of $2,000,000, with an initial advance of $750,000 evidenced by an 8¼% Secured Promissory Note made by Airtronic
in favor of the Company (the “Original Note”) and a Security Agreement pledging all of Airtronic’s assets. As
of December 31, 2012 we had not advanced any funds to Airtronic under the Bridge Loan and Original Note. In March 2013, the Company
and Airtronic amended the Bridge Loan to provide for a maximum advance of up to $700,000 in accordance with draws submitted by
Airtronic and approved by the Company in accordance with the budget set forth in the amendment. On August 5, 2013,
we entered into the Second Bridge Loan Modification and Ratification Agreement, received a new 8¼% secured promissory note
in principal amount of $550,000 (the “Second Note”), and entered into a Security Agreement with the CEO of Airtronic,
which granted a security interest in certain intellectual property for patent-pending applications and trademarks that were registered
in the CEO’s name. On October 10, 2013, we entered into the Third Bridge Loan Modification and Ratification Agreement,
and received a new 8¼% secured promissory note for $200,000 (the “Third Note”).
On October 2, 2013, Airtronic’s
amended plan of reorganization (the “Plan”) was confirmed by the Court, but the Plan was never substantially consummated
and was terminated. Under the terms of the Plan, Airtronic needed to close the Merger with the Company on or before
December 2, 2013 which Airtronic refused to do, and, as a result, the Plan terminated and the reorganized Airtronic re-vested in
the bankruptcy estate of Airtronic as a debtor-in-possession.
On
March 31, 2014, Airtronic filed a First Amended Modified Plan of Reorganization (“First Modified Plan”) which was
confirmed on April 28, 2014. On May 14, 2014 Airtronic repaid the Original Note, the Second Note and the Third Note
together with all accrued interest thereon in the total amount of $1,509,056. On August
12, 2014, we received $414,761 that we were awarded for legal fees and expenses incurred.
Note
8 – Notes Payable
Convertible
Notes Payable
Convertible
notes payable at December 31, 2014 and December 31, 2013 consisted of the following:
| Type | |
Collateral
(If any) | |
Interest
Rate | | |
Monthly
Payment | | |
Maturity | |
2014 | | |
2013 | |
| Laurus
Master Fund | |
None | |
| 5.00 | % | |
$ | - | | |
May-13 | |
$ | - | | |
$ | 529,309 | |
In
July 2004 we issued convertible notes payable to Laurus Master Fund and received total proceeds of $500,000. The Laurus note is
non interest bearing, and is convertible at a fixed conversion price of $0.35 per share. The Company imputed interest at 5% which
is included in the balance. In January 2013, we entered into a Debt Forgiveness Agreement with Laurus in which we agreed to pay
them $150,000 in full satisfaction of the note on or before June 30, 2014. On May 21, 2014, we paid the balance on the Laurus
note, and recognized a gain on extinguishment of debt of $387,642, of which $350,000 was a discount against the principal and
$37,642 was for accrued imputed interest forgiven.
Notes
Payable
In
December 2012, we entered into a Promissory Note Purchase Agreement, a Secured Promissory Note (“Note”) and Security
Agreement with the Investor to lend us $750,000. The Note bears interest at 8¼%, is secured by all of our assets and was
due on May 1, 2013. In connection with the transaction, we issued to the Investor the Warrant.
On
May 6, 2013, we amended the terms of the Note and (i) extended the maturity date to July 1, 2013, (ii) provided that the Note
may be convertible to shares of our common price at a conversion price of $0.25, and (iii) reduced the exercise price of the Warrant
from $0.15 to $0.10. On July 1, 2013, the Note was converted into 3,000,000 shares of our common stock and on conversion we recognized
a gain of $31,712 as a result of the forgiveness of accrued but unpaid interest on the note.
The $360,000 fair value of the Warrant
was calculated using a Black-Scholes pricing model. We calculated that the fair market value of the beneficial conversion feature
(“BCF”) of the Note at $393,243, and we amortized the BCF over the life of the loan using the effective interest rate
method. At December 31, 2013 the discount was fully amortized to interest expense.
Notes payable
at December 31, 2014 and 2013 consist of the following:
| | |
Collateral | |
Interest | | |
Monthly | | |
| |
December
31, | |
| Type | |
(if
any) | |
Rate | | |
Payments | | |
Maturity | |
2014 | | |
2013 | |
| Premium
finance agreement | |
None | |
| 5.35 | % | |
$ | 9,862 | | |
Jun-15 | |
$ | 58,258 | | |
$ | - | |
| Private | |
None | |
| 10.00 | % | |
$ | - | | |
May-13 | |
| - | | |
| 20,000 | |
| Private | |
None | |
| 5.00 | % | |
$ | - | | |
Demand | |
| - | | |
| 5,000 | |
| Notes
payable | |
| |
| | | |
| | | |
| |
$ | 58,258 | | |
$ | 25,000 | |
On
May 22, 2014 we paid off the balance outstanding on two notes payable for $20,000 and $5,000, respectively. In September 2014
we entered into a premium finance agreement bearing interest at 5.35% with 10 equal monthly payments of principal and interest
of $9,862.
Convertible Notes Payable to Related
Parties
Convertible notes payable to related
parties at December 31, 2014 consist of the following:
| | |
2014 | |
| Convertible note payable to an entity controlled by our Chairman and CEO, bears interest at 8% per annum, due December 8, 2016. After June 6, 2015, at the option of the holder, principal plus accrued interest is convertible into shares of our common stock at $0.09 per share. | |
$ | 37,500 | |
| Convertible note payable to our CFO, bears interest at 8% per annum, due December 8, 2016. After June 6, 2015, at the option of the holder, principal plus accrued interest is convertible into shares of our common stock at $0.09 per share. | |
| 31,500 | |
| | |
| 69,000 | |
| Add: Accrued interest | |
| 363 | |
| Less: Unamortized debt discount | |
| (28,656 | ) |
| Convertible notes payable to related parties at December 31, | |
$ | 40,707 | |
The 8% convertible notes payable to
related parties are convertible into common stock at the rate of $0.09 per share. The Company has determined that the conversion
feature is considered a beneficial conversion feature and determined its value to be $30,667 as of December 8, 2014, which the
Company recorded as a debt discount to the notes. As of December 31, 2014 the Company owed principal of $69,000 and accrued interest
of $363 on these notes.
Note 9 – Commitments and Contingencies
Legal Proceedings terminated in the fourth quarter of
2014
On January 9, 2014, the Company filed
a lawsuit against Merriellyn Kett Murphy (“Kett”) asserting three causes of action against her: Tortious Interference
with Contract and/or with Prospective Economic Advantage; Fraudulent Inducement; and Negligent Misrepresentation. On
May 30, 2014, the Company amended its Complaint to allege four causes of action against Kett: Tortious Interference with Contract
and/or with Prospective Economic Advantage; Fraudulent Inducement; Fraudulent Concealment; and Civil Conspiracy. Kett was the CEO,
President and sole director and stockholder of Airtronic. The Company had entered into a merger agreement with Airtronic and Kett
had made numerous representations to the Company that she would close the merger if the Company met her personal demands, which
the Company did. Nonetheless, Kett refused to close the merger. The case, captioned Global Digital Solutions,
Inc. v. Merriellyn Kett Murphy, was filed in Palm Beach County Circuit Court and Kett later removed it to Federal Court
in the Southern District of Florida. The case number is 14-cv-80190-DTKH (the “Case”). The Company was seeking
a judgment against Kett, damages, costs and such other relief as may be awarded by the court. On October 27, 2014, Kett filed a
counterclaim against the Company alleging fraud and civil conspiracy seeking damages based on her allegation that the merger prevented
her from getting a better personal employment contract on the open market. The Company denied Kett’s allegations.
On December 11, 2014 the Company and
Kett (collectively, the “Parties”) entered into a Confidential Settlement Agreement to settle their disputes. The disputes
between the Parties have been resolved, with all of the claims and counterclaims dismissed, with a payment by Kett of a confidential
amount to the Company, which amount is in keeping with recognition of the expense of litigation, the likely inability to collect
any judgment due to financial status, and the prior assignment to Airtronic of Kett’s proprietary rights to intellectual
property relating to Airtronic. Accordingly the Case has been dismissed by the Parties with prejudice.
See Note 16 - Subsequent Events,
for litigation instituted after December 31, 2014.
Price Protection
In connection with our acquisition of
NACSV, we granted the sellers “price protection” for the shares of restricted common stock they received at the closing
of the transaction. If the sellers sell any such shares of our common stock in arm’s-length transactions within the 12 month
period commencing June 16, 2014, and if the average selling price of the shares sold is less than $0.31 per share, then the Company
shall deliver to the sellers, within 30 days following a request from the sellers, additional shares of our common stock having
a market price at the time of delivery equal to the excess if any of (x) the sales price the sellers would have received if the
shares had sold for $0.31 per share minus the actual sales price received by the sellers; divided by
(y) the actual price per share received by the sellers. At December 21, 2014, the market price of our common stock was $0.13. Therefore,
had the sellers sold the 645,161 shares of the restricted common stock they received at $0.08 per share, we would have been required
to issue an additional 1,854,838 shares valued at $.08 per share or $148,387.
Operating Leases
In August 2013 we entered into a twelve-month
lease for a virtual office in West Palm Beach, Florida at a monthly rental of $299 plus taxes. The lease automatically renewed
for an additional twelve months on its anniversary unless terminated in writing 30 days in advance.
On January 1, 2015, NACSV renewed a
lease agreement for one building under a year-to-year operating lease with monthly rent payments totaling $8,748 in January 2015
and $5,637 for February – December, 2015. The lease provides that either party may cancel it on thirty days notice. In September
2014, NACSV entered into a 12-month operating lease for a condominium for a vice president with monthly rent payments of $2,160.
Future minimum lease payments on all
operating leases at December 31, 2014 are $82,510.
Consulting Agreements
Effective May 9, 2012, we entered into
a one-year “referral compensation agreement” with a third party consulting firm pursuant to which the firm would facilitate
meetings and introductions on our behalf with certain potential investors in return for our agreement to pay the consulting firm
compensation for these introduction. The consulting firm was issued 250,000 shares of restricted shares of commons stock
valued at $15,000.
Effective May 15 2012, we entered into
a one-year “referral compensation agreement” with a third party consulting firm pursuant to which the firm would facilitate
meetings and introductions on our behalf with certain potential investors in return for our agreement to pay the consulting firm
compensation for these introduction. The consulting firm was issued 500,000 shares of restricted shares of commons stock
valued at $25,000.
Effective July 27 2012, we entered into
a one-year “referral compensation agreement” with a third party consulting firm pursuant to which the firm would facilitate
meetings and introductions on our with certain potential investors in return for our agreement to pay the consulting firm compensation
for these introduction. The consulting firm was issued 250,000 shares of restricted shares of commons stock valued a
$13,000.
Effective January 1, 2013, we entered
into a three-month consulting agreement with a consulting firm pursuant to which the firm would provide investor relations services. The
consulting firm was issued 500,000 shares of restricted shares of common stock valued at $50,000 and the expense was recognized
over the three-month service period.
Effective April 3, 2013, we entered
into a twelve-month consulting agreement with a consultant pursuant to which the consultant would provide investor relations services. The
consultant was issued 500,000 shares of restricted shares of common stock valued at $50,000 and the expense is being recognized
over the term of the agreement. In June 2013, we entered into an amendment to the consulting agreement. The consultant agreed to
provide additional services over the remaining term of the agreement and, in consideration, we issued the consultant 250,000 shares
of our restricted common stock valued at $125,000 and we agreed to issue the consultant a warrant to purchase 500,000 shares of
our common stock at an exercise price of $.50, with a fair market value of $250,000. The warrant was issued on July 1, 2013.
Effective July 1, 2014, we entered into
a 12-month consulting agreement with the consultant pursuant to which the consultant would provide investor relations services.
The consultant was issued 1,000,000 shares of restricted shares of common stock with a grant date value of $330,000 and was expensed
to services on the grant date as the shares all vested upon grant.
Effective July 1, 2014, we entered into
a 12-month consulting agreement with the consultant pursuant to which the consultant would provide investor relations services.
The consultant was issued 500,000 shares of restricted shares of common stock with a grant date value of $150,000 which is being
expensed over the twelve-month term of the agreement. At December 31, 2014, 250,000 shares had vested and 250,000 shares were unvested.
The unvested shares had no intrinsic value.
Note 10 - Stockholders’ Equity
Preferred Stock
We are authorized to issue 35,000,000
shares of noncumulative, non-voting, nonconvertible preferred stock, $0.001 par value per share. At December 31, 2014 and 2013,
no shares of preferred stock were outstanding.
Common Stock
We are authorized to issue 450,000,000
shares of common stock, $0.001 par value per share. At December 31, 2014 and 2013, 108,291,855 and 93,024,117 shares were issued,
outstanding, or vested but unissued under stock compensation plans, respectively
During the years ended December 31,
2014 and 2013, we issued the following shares of common stock, and accounted for shares that vested but were unissued under stock
compensation plans as follows:
| In Consideration For |
|
Date of
Issue |
|
Number of
Shares |
|
|
Issue
Price |
|
|
| 2013 |
|
|
|
|
|
|
|
|
|
| Services |
|
01/01/13 |
|
|
1,000,666 |
|
|
$ |
0.10 |
|
|
| Stock-based compensation |
|
01/10/13 |
|
|
11,000,000 |
|
|
$ |
0.12 |
(1) |
|
| Services |
|
04/15/13 |
|
|
500,000 |
|
|
$ |
0.10 |
|
|
| Private placement |
|
04/15/13 |
|
|
250,000 |
|
|
$ |
0.10 |
|
|
| Private placement |
|
05/31/13 |
|
|
200,000 |
|
|
$ |
0.25 |
|
|
| Private placement |
|
06/06/13 |
|
|
2,150,000 |
|
|
$ |
0.25 |
|
|
| Services |
|
06/25/13 |
|
|
310,000 |
|
|
$ |
0.50 |
|
|
| Stock based compensation |
|
06/25/13 |
|
|
15,000,000 |
|
|
$ |
0.26 |
(1) |
|
| Private placement |
|
06/25/13 |
|
|
408,000 |
|
|
$ |
0.45 |
|
|
| Private placement |
|
06/30/13 |
|
|
260,000 |
|
|
$ |
0.50 |
|
|
| Note conversion |
|
07/01/13 |
|
|
3,000,000 |
|
|
$ |
0.25 |
|
|
| Warrant exercise |
|
08/19/13 |
|
|
3,000,000 |
|
|
$ |
0.10 |
|
|
| Private Placement |
|
09/20/13 |
|
|
1,100,000 |
|
|
$ |
0.45 |
|
|
| Private Placement |
|
09/25/13 |
|
|
1,100,000 |
|
|
$ |
0.45 |
|
|
| Services |
|
09/25/13 |
|
|
66,000 |
|
|
$ |
0.45 |
|
|
| Private Placement |
|
11/11/13 |
|
|
100,000 |
|
|
$ |
0.05 |
|
|
| Services |
|
12/11/13 |
|
|
66,000 |
|
|
$ |
0.001 |
|
|
| Warrant Exercise |
|
12/18/13 |
|
|
1,250,000 |
|
|
$ |
0.10 |
|
|
| Net change in shares issued |
|
|
|
|
40,760,666 |
|
|
|
|
|
|
| 2014 |
|
|
|
|
|
|
|
|
|
|
|
| Stock based compensation |
|
01/01/14 |
|
|
1,500,000 |
|
|
$ |
0.88 |
(1) |
|
| Stock based compensation |
|
02/04/14 |
|
|
5,000,000 |
|
|
$ |
0.17 |
(1) |
|
| Stock based compensation |
|
02/04/14 |
|
|
1,500,000 |
|
|
$ |
0.64 |
(1) |
|
| Acquisition services |
|
05/15/14 |
|
|
500,000 |
|
|
$ |
0.47 |
(2) |
|
| Acquisition services |
|
09/15/14 |
|
|
1,300,000 |
|
|
$ |
0.33 |
(2) |
|
| Acquisition of NACSV |
|
06/16/14 |
|
|
645,161 |
|
|
$ |
0.31 |
(2) |
|
| Consulting Services |
|
08/19/14 |
|
|
1,000,000 |
|
|
$ |
0.33 |
|
|
| Consulting Services |
|
08/19/14 |
|
|
500,000 |
|
|
$ |
0.30 |
|
|
| Issued restricted stock award shares forfeited and cancelled |
|
06/03/14 |
|
|
(1,500,000 |
) |
|
$ |
0.001 |
|
|
| True Up Payment - NACSV |
|
10/17/14 |
|
|
2,635,074 |
|
|
$ |
0.31 |
(2) |
|
| Vested but unissued shares issued in connection with awards granted under equity compensation plans |
|
Various |
|
|
2,187,503 |
|
|
$ |
0.001 |
|
|
| Net change in shares issued |
|
|
|
|
15,267,738 |
|
|
|
|
|
|
| |
(1) |
Stock-based compensation was calculated at fair value on the grant date and the expense is being amortized over the vesting period and service period. Amount shown is par value of shares issued. |
| |
(2) |
Issued at $0.31 per share. The fair
market value on the date of issuance was $0.33 per share and the Company recognized an acquisition expense of $12,903 related to
the $0.02 share discount.
As consideration
for the consummation of the Acquisition, at the closing of the Acquisition, the Company paid $1,000,000 in cash to the selling
members, and issued them 645,161 shares of the Company’s common stock valued at $200,000 (the “Stock Consideration”).
Subsequent to the closing, we issued an additional 2,635,074 shares for the “True-Up” valued at $869,042. In connection
with the Acquisition, the Company issued 1,800,000 shares of common stock valued at $664,000 for acquisition services. |
Common Stock Warrants
We have issued warrants, which are fully
vested and available for exercise, as follows:
Class of
Warrant |
|
Issued in connection with or for |
|
Number
Outstanding |
|
|
Exercise
Price |
|
|
Date of
Issue |
|
Date Vest |
|
Date of Expiration |
| A-1 |
|
Debt |
|
|
1,750,000 |
(1) |
|
$ |
0.10 |
|
|
December 2012 |
|
December 2013 |
|
December 2015 |
| A-2 |
|
Services |
|
|
1,000,000 |
|
|
$ |
0.15 |
|
|
May 2013 |
|
May 2014 |
|
May 2018 |
| A-3 |
|
Services |
|
|
500,000 |
|
|
$ |
0.50 |
|
|
June 2013 |
|
June 2014 |
|
June 2018 |
| A-4 |
|
Services |
|
|
1,000,000 |
|
|
$ |
1.00 |
|
|
October 2013 |
|
October 2013 |
|
October 2016 |
| |
(1) |
– 1,250,000 warrants were exercised in 2013. |
We recognize compensation costs of $604,168
related to the amortization of the fair value of the warrants in the year ended December 31, 2014. At December 31, 2014 the fair
value of warrants had been fully amortized.
All warrants are exercisable at any
time through the date of expiration. All agreements provides for the number of shares to be adjusted in the event of a stock split,
a reverse stock split, a share exchange or other conversion or exchange event in which case the number of warrants and the exercise
price of the warrants shall be adjusted on a proportional basis.
The following is a summary of outstanding and exercisable
warrants at December 31, 2014:
| |
|
|
Outstanding |
|
|
Exercisable |
|
Range of Exercise
Prices |
|
|
Weighted
Average
Number
Outstanding
at 12/31/14 |
|
|
Outstanding
Remaining
Contractual
Life (in yrs.) |
|
|
Weighted
Average
Exercise
Price |
|
|
Number
Exercisable
at 12/31/14 |
|
|
Weighted
Average
Exercise
Price |
|
| $ |
0.10 |
|
|
|
1,750,000 |
|
|
|
1.0 |
|
|
$ |
0.10 |
|
|
|
1,750,000 |
|
|
$ |
0.10 |
|
| $ |
0.15 |
|
|
|
1,000,000 |
|
|
|
3.3 |
|
|
$ |
0.15 |
|
|
|
1,000,000 |
|
|
$ |
0.15 |
|
| $ |
0.50 |
|
|
|
500,000 |
|
|
|
3.5 |
|
|
$ |
0.50 |
|
|
|
500,000 |
|
|
$ |
0.50 |
|
| $ |
1.00 |
|
|
|
1,000,000 |
|
|
|
1.8 |
|
|
$ |
1.00 |
|
|
|
1,000,000 |
|
|
$ |
1.00 |
|
| $ |
0.37 |
|
|
|
4,250,000 |
|
|
|
2.40 |
|
|
$ |
0.37 |
|
|
|
4,250,000 |
|
|
$ |
0.37 |
|
The intrinsic value of warrants outstanding
at December 31, 2014 was $0. Aggregate intrinsic value represents the value of the Company’s closing stock price on the last
trading day of the fiscal period in excess of the exercise price of the warrant multiplied by the number of warrants outstanding
or exercisable.
We determined the value of warrants
issued using the Black-Scholes-Merton (“BSM”) valuation model
| Warrant |
|
Fair Value |
|
|
Dividend Yield |
|
|
Volatility |
|
|
Contractual Lives (Yrs.) |
|
|
Risk-Free Rate |
|
| A-1 |
|
$ |
210,000 |
|
|
|
0.00 |
% |
|
|
593.00 |
% |
|
|
2.0 |
|
|
|
1.58 |
% |
| A-2 |
|
$ |
300,000 |
|
|
|
0.00 |
% |
|
|
593.00 |
% |
|
|
5.0 |
|
|
|
0.84 |
% |
| A-3 |
|
$ |
250,000 |
|
|
|
0.00 |
% |
|
|
598.12 |
% |
|
|
5.0 |
|
|
|
1.20 |
% |
| A-4 |
|
$ |
800,000 |
|
|
|
0.00 |
% |
|
|
647.97 |
% |
|
|
3.0 |
|
|
|
0.64 |
% |
The expected life represents an estimate
of the weighted average period of time that options are expected to remain outstanding given consideration to vesting schedules
and the Company’s historical exercise patterns. Expected volatility is estimated based on the historical volatility of the
Company’s common stock. The risk free interest rate is estimated based on the U.S. Federal Reserve’s historical data
for the maturity of nominal treasury instruments that corresponds to the expected term of the option. The expected dividend yield
is 0% based on the fact that we have never paid dividends and have no present intention to pay dividends
Stock Incentive Plans
2014 Global Digital Solutions Equity
Incentive Plan
On May 9, 2014 our shareholders approved
the 2014 Global Digital Solutions Equity Incentive Plan (“Plan”) and reserved 20,000,000 shares of our common stock
for issuance pursuant to awards thereunder, including options, stock appreciation right, restricted stock, restricted stock units,
performance awards, dividend equivalents, or other stock-based awards. The Plan is intended as an incentive, to retain in the employ
of the Company, our directors, officers, employees, consultants and advisors, and to attract new officers, employees, directors,
consultants and advisors whose services are considered valuable, to encourage the sense of proprietorship and to stimulate the
active interest of such persons in the development and financial success of the Company and its subsidiaries.
In accordance with the ACS 718, Compensation
– Stock Compensation, awards granted are valued at fair value at the grant date. The Company recognizes compensation
expense on a pro rata straight-line basis over the requisite service period for stock-based compensation awards with both graded
and cliff vesting terms. The Company recognizes the cumulative effect of a change in the number of awards expected to vest
in compensation expense in the period of change. The Company has not capitalized any portion of its stock-based compensation.
Stock-based compensation expense for
the years ended December 31, 2014 and 2013 is comprised as follows:
| | |
2014 | | |
2013 | |
| Fair value expense of stock option grants | |
$ | 3,527,620 | | |
$ | - | |
| Fair value expense of restricted stock unit grants | |
| 1,112,934 | | |
| - | |
| Fair value expense of restricted stock grants | |
| 3,047,012 | | |
| 5,158,208 | |
| | |
$ | 7,687,566 | | |
$ | 5,158,208 | |
Awards Issued Under Stock Incentive
Plans
Stock Option Activity
We granted 5,840,000 options to directors
and employees during the year ended December 31, 2014 resulting in stock- based compensation expense of $3,527,620 for the year
ended December 31, 2014. The options are exercisable at prices ranging from $0.11 to $0.64 and expire in between February 2024
and September 2024.
A
summary of the stock option activity for our stock options plans for 2014 is as follows:
| | |
Weighted
Number of
Options | | |
Weighted Average
Exercise
Price Per
Share | | |
Average
Remaining
Contractual
Term | | |
Aggregate
Intrinsic
Value | |
| Outstanding at December 31, 2013 | |
| - | | |
| - | | |
| - | | |
| - | |
| Options granted | |
| 5,840,000 | | |
$ | 0.61 | | |
| 9.6 | | |
$ | - | |
| Options exercised | |
| - | | |
| | | |
| | | |
| | |
| Options forfeited | |
| - | | |
| | | |
| | | |
| | |
| Outstanding at December 31, 2014 | |
| 5,840,000 | | |
$ | 0.61 | | |
| 9.6 | | |
$ | - | |
| Exercisable at December 31, 2014 | |
| 5,500,000 | | |
$ | 0.64 | | |
| 9.1 | | |
$ | - | |
We account for our stock-based compensation
plans in accordance with ASC 718-10. Under the provisions of ASC 718-10, the fair value of each stock option is estimated on the
date of grant using a BSM option-pricing formula, and amortizing that value to expense over the expected performance or service
periods using the straight-line attribution method. The weighted average values of the assumptions used to value the options granted
in the year ended December 31, 2014 were as follows: exercise price of $0.11 and $0.64, expected term of 10 years, expected volatility
of 684.6%, risk-free interest rates of 1.83%, and expected dividend yield of 0%. The expected life represents an estimate of the
weighted average period of time that options are expected to remain outstanding given consideration to vesting schedules and the
Company’s historical exercise patterns. Expected volatility is estimated based on the historical volatility of the Company’s
common stock. The risk free interest rate is estimated based on the U.S. Federal Reserve’s historical data for the maturity
of nominal treasury instruments that corresponds to the expected term of the option. The expected dividend yield is 0% based on
the fact that we have never paid dividends and have no present intention to pay dividends
As
of December 31, 2014, there was $29,781 of total unrecognized stock-based compensation cost related to these stock options that
will be recognized through August 2017. The intrinsic value of options outstanding at December 31, 2014 was $0. Aggregate intrinsic
value represents the value of the Company’s closing stock price on the last trading day of the fiscal period in excess of
the exercise price of the option multiplied by the number of options outstanding.
Restricted
Stock Units
In
August 2014 we granted Stephen L. Norris, then Chairman and CEO of our wholly owned subsidiary, GDSI International, 12 million
restricted stock units (“RSU’s”) convertible into 12 million shares of the Company’s common stock, with
a grant date fair market value of $3,600,000 as of July 1, 2014, the effective grant date. The grant was made under our 2014 Equity
Incentive Plan. 4,000,000 RSU’s will vest in respect of each fiscal year of GDSI International from 2015 through 2017 if
the company has achieved at least 90% of the total revenue targets set forth in the agreement. If less than 90% of the target
is achieved in respect of any such fiscal year, then the number of RSU’s vesting for that fiscal year shall be 4,000,000
times the applicable percentage shown below; provided that, if the company shall exceed 100% of the revenue target
for the 2016 or 2017 fiscal year, and shall have failed to reach 90% of the target for a prior fiscal year, the excess over 100%
shall be applied to reduce the deficiency in the prior year(s), and an additional number of RSU’s shall vest to reflect
the increased revenue for such prior fiscal year. Any such excess shall be applied first to reduce any deficiency for the
2015 fiscal year and then for the 2016 fiscal year. The vesting of the RSU’s shall be effective upon the issuance
of the audited financial statements of the Company for the applicable fiscal year, and shall be based upon the total revenue of
GDSI International as reflected in such financial statements. Effective January 9, 2015, Mr. Norris resigned and forfeited all
rights in and to his RSU’s.
On
October 10, 2014 we granted an employee 1 million RSU’s convertible into 1 million shares of the Company’s common
stock, with a grant date fair market value of $100,000. The grant was made under our 2014 Equity Incentive Plan. 333,333 RSU’s
will vest in respect of each calendar year (commencing January 1 and ending December 31) of the Company from 2015 through 2017
if the company has achieved at least 90% of the total revenue and EBITDA midpoint targets set forth in the agreement. If
less than 90% of the target is achieved in respect of any such fiscal year, then the number of RSU’s vesting for that fiscal
year shall be 333,333 times the applicable percentage set forth in the agreement; provided that, if the company shall exceed
100% of the revenue and EBITDA midpoint target for the 2016 or 2017 calendar year, and shall have failed to reach 90% of the target
for a prior calendar year, the excess over 100% shall be applied to reduce the deficiency in the prior year(s), and an additional
number of RSU’s shall vest to reflect the increased revenue for such prior calendar year. Any such excess shall be
applied first to reduce any deficiency for the 2015 calendar year and then for the 2016 calendar year. The vesting of the
RSU’s shall be effective upon the issuance of the audited financial statements of the Company for the applicable calendar
year, and shall be based upon the total revenue and EBITDA of the acquired companies as reflected in such financial statements.
A
summary of RSU’s outstanding as of December 31, 2014 and changes during the year then ended is presented below:
| | |
Number | | |
Weighted
Average Grant Date
Fair Value | | |
Aggregate
Intrinsic
Value | |
| Nonvested at December
31, 2013 | |
| - | | |
| - | | |
| - | |
| Issued | |
| 13,000,000 | | |
$ | 0.28 | | |
$ | 0.00 | |
| Vested | |
| - | | |
| | | |
| | |
| Forfeited | |
| - | | |
| | | |
| | |
| Nonvested
at December 31, 2014 | |
| 13,000,000 | | |
$ | 0.28 | | |
$ | 0.00 | |
We
recorded stock-based compensation expense related to these RSU’s of $1,112,934 for the year ended December 31, 2014. On
January 9, 2015, a recipient of 12 million RSU’s resigned from the Board of Directors of and as an officer of the Company,
and consequently forfeited his 12 million RSU’s. As of December 31, 2014, after taking into account the forfeited 12 million
RSU’s, there was $81,945 of total unrecognized stock-based compensation expense related to 1 million unvested RSU’s
that will be recognized on a straight-line basis over the performance periods of the award through December 2017. The aggregate
intrinsic value of nonvested RSU’s was $0 at December 31, 2014.
Awards Not Issued Under Stock
Incentive Plans
Restricted
Stock Grants Awarded to Employees
Since January 2013, we have granted restricted
stock to officers in lieu of cash compensation as follows:
| | |
| |
| | |
| |
| |
December 31, 2014 | |
| Name | |
Date of
Grant | |
Number of
Shares | | |
Vest from | |
Vest To | |
Vested | | |
Unvested | | |
Forfeited | |
| | |
| |
| | |
| |
| |
| | |
| | |
| |
| Richard J. Sullivan | |
1/10/13 | |
| 3,000,000 | | |
1/10/13 | |
1/31/14 | |
| 3,000,000 | | |
| - | | |
| - | |
| | |
6/2/13 | |
| 10,000,000 | | |
6/2/13 | |
1/31/14 | |
| 10,000,000 | | |
| - | | |
| - | |
| | |
| |
| | | |
| |
| |
| | | |
| | | |
| | |
| David A. Loppert | |
1/10/13 | |
| 5,000,000 | | |
1/10/13 | |
1/31/14 | |
| 5,000,000 | | |
| - | | |
| - | |
| | |
6/2/13 | |
| 3,000,000 | | |
6/2/13 | |
1/31/14 | |
| 3,000,000 | | |
| - | | |
| - | |
| | |
| |
| | | |
| |
| |
| | | |
| | | |
| | |
| Gary A. Gray | |
6/2/13 | |
| 1,000,000 | | |
6/2/13 | |
1/31/14 | |
| 1,000,000 | | |
| - | | |
| - | |
| | |
| |
| | | |
| |
| |
| | | |
| | | |
| | |
| William J. Delgado | |
6/2/13 | |
| 1,000,000 | | |
6/2/13 | |
1/31/14 | |
| 1,000,000 | | |
| - | | |
| - | |
| | |
| |
| | | |
| |
| |
| | | |
| | | |
| | |
| | |
| |
| 23,000,000 | | |
| |
| |
| 23,000,0000 | | |
| - | | |
| - | |
In January 2013, we granted Richard J. Sullivan,
our Chairman and CEO and David A. Loppert, Our CFO, restricted stock grants of 3,000,000 and 5,000,000 shares of common stock,
respectively for services rendered to the Company in negotiating a the bridge loan discussed under notes payable in Note 8, and
for Mr. Loppert’s work with Airtronic in structuring the DIP loan to it. 3 million of the shares to Mr. Sullivan
and Mr. Loppert vested upon the funding of the $750,000 bridge loan to the Company to provide the initial DIP loan to Airtronic
and an additional 2 million shares to Mr. Loppert vested at the time that the bankruptcy court approved the bridge loan modification
and ratification agreement between the Company and Airtronic. The shares were valued at $0.12 per share, and the aggregate grant
date fair value was $960,000 which was recognized as stock-based compensation on a straight line basis over the vesting period.
In June 2013, we granted Richard J.
Sullivan, David A. Loppert, William J. Delgado and Gary A. Gray restricted stock grants of 10,000,000, 3,000,000, 1,000,000 and
1,000,000 shares of common stock, respectively. The grants were fully vested in January 2014. The shares were valued at $0.12
per share, and the aggregate grant date fair value was $3,900,000 which was recognized as stock-based compensation on a straight
line basis over the vesting period.
Restricted Stock Grants Awarded
to Advisors
In
order to align our senior advisors with the interest of the stakeholders of the Company, the Board of Directors of the Company
has granted the advisors restricted stock awards valued at $0.17 to $0.364 per share which vest over a period of 12 – 24
months, subject to remaining and advisor for a minimum of twelve months, and which are forfeited if the advisor is terminated
or is no longer an advisor on the anniversary of the advisory award, as follows:
| | |
| |
| | |
| |
| |
December 31, 2014 | |
| Name | |
Date of
Grant | |
Number of
Shares | | |
Vest from | |
Vest To | |
Vested | | |
Unvested | | |
Forfeited | |
| | |
| |
| | |
| |
| |
| | |
| | |
| |
| Edwin J. Wang | |
4/17/13 | |
| 1,250,000 | | |
4/30/13 | |
3/31/14 | |
| 1,250,000 | | |
| - | | |
| - | |
| | |
4/17/13 | |
| 1,250,000 | | |
2/28/14 | |
1/31/15 | |
| 1,145,834 | | |
| 104,166 | | |
| - | |
| | |
2/4/14 | |
| 1,500,000 | | |
2/4/14 | |
1/31/15 | |
| 1,375,000 | | |
| 125,000 | | |
| - | |
| | |
| |
| | | |
| |
| |
| | | |
| | | |
| | |
| Jennifer S. Carroll | |
4/17/13 | |
| 1,250,000 | | |
4/30/13 | |
3/31/14 | |
| 1,250,000 | | |
| - | | |
| - | |
| | |
4/17/13 | |
| 1,250,000 | | |
2/28/14 | |
1/31/15 | |
| 1,145,833 | | |
| 104,167 | | |
| - | |
| | |
| |
| | | |
| |
| |
| | | |
| | | |
| | |
| Mathew Kelley | |
4/17/13 | |
| 1,250,000 | | |
4/30/13 | |
3/31/14 | |
| 1,250,000 | | |
| - | | |
| - | |
| | |
4/17/13 | |
| 1,250,000 | | |
2/28/14 | |
1/31/15 | |
| 1,145,833 | | |
| 104,167 | | |
| - | |
| | |
| |
| | | |
| |
| |
| | | |
| | | |
| | |
| Scott Brown (1) | |
9/9/13 | |
| 1,500,000 | | |
9/1/13 | |
8/31/14 | |
| - | | |
| - | | |
| 1,500,000 | |
| | |
| |
| | | |
| |
| |
| | | |
| | | |
| | |
| Richard J. Feldman | |
4/30/14 | |
| 500,000 | | |
4/30/14 | |
3/30/15 | |
| 375,000 | | |
| 125,000 | | |
| - | |
| | |
| |
| 500,000 | | |
4/30/15 | |
3/30/16 | |
| | | |
| | | |
| | |
| | |
| |
| | | |
| |
| |
| | | |
| | | |
| | |
| Thomas W. Janes (2) | |
5/7/14 | |
| 500,000 | | |
5/7/14 | |
4/30/14 | |
| - | | |
| - | | |
| 500,000 | |
| | |
| |
| 500,000 | | |
5/30/15 | |
4/30/16 | |
| - | | |
| - | | |
| N/A | |
| | |
| |
| 11,500,000 | | |
| |
| |
| 8,937,500 | | |
| 562,500 | | |
| 2,000,000 | |
| |
(1) |
Mr. Brown resigned from the advisory board in June 2014. Since he had not been an advisor for the minimum period, the shares had not vested, were forfeited, returned to treasury and cancelled. |
| |
(2) |
Forfeited in September 2014 upon termination as an advisor. |
A summary of restricted stock grants outstanding
as of December 31, 2013 and 2014, and the changes during the twelve months then ended is presented below:
| | |
Number | | |
Weighted Average
Grant Date
Fair Value | | |
Aggregate Intrinsic
Value | |
| Nonvested at December 31, 2012 | |
| - | | |
| | | |
| - | |
| Granted | |
| 28,250,000 | | |
$ | 0.24 | | |
| | |
| Vested | |
| (23,284,226 | ) | |
| | | |
| | |
| Forfeited | |
| - | | |
| | | |
| | |
| Nonvested at December 31, 2013 | |
| 4,965,774 | | |
| - | | |
$ | 0.00 | |
| Granted | |
| 6,250,000 | | |
$ | 0.33 | | |
| | |
| Vested | |
| (8,653,274 | ) | |
| | | |
| | |
| Forfeited | |
| (2,000,000 | ) | |
| | | |
| | |
| Nonvested at December 31, 2014 | |
| 562,500 | | |
$ | 0.28 | | |
$ | 0.00 | |
We recorded stock-based compensation expense
related to these restricted stock grants of $3,047,012 and $5,158,208 for the years ended December 31, 2014 and 2013, respectively.
As of December 31, 2014 there was $420,633 of total unrecognized stock-based compensation expense related to these restricted
stock grants that will be recognized through March 2016. The aggregate intrinsic value of nonvested restricted stock grants was
$0 at December 31, 2014.
Note
11 - Income Taxes
We
have incurred losses since inception, which have generated net operating loss carryforwards. Pre-tax losses were $11,657,188 for
the year ended December 31, 2014 and $9,297,253 the year ended December 31, 2013, which includes a pre-tax loss of $9,026,032
from continuing operations and a pre-tax loss of $271,221 from discontinued operations. At December 31, 2014, we had a federal
net operating loss carryforward of approximately $2,075,000 that will expire beginning in 2025. Current or future ownership changes
may limit the future realization of these net operating losses. Our policy is to record interest and penalties associated with
unrecognized tax benefits as additional income taxes in the consolidated statements of operations. As of January 1, 2014, we had
no unrecognized tax benefits, or any tax related interest or penalties. There were no changes in our unrecognized tax benefits
during the year ended December 31, 2014. We did not recognize any interest or penalties during 2014 or 2013 related to unrecognized
tax benefits.
Section 382
of the Internal Revenue Code generally imposes an annual limitation on the amount of net operating loss carryforwards that may
be used to offset taxable income when a corporation has undergone significant changes in its stock ownership. There can be no
assurance that we will be able to utilize any net operating loss carryforwards in the future.
We recognize deferred tax assets
and liabilities for both the expected impact of differences between the financial statements and the tax basis of assets and liabilities,
and for the expected future tax benefit to be derived from tax loss carryforwards. We have established a valuation allowance to
reflect the likelihood of realization of deferred tax assets. There is no income tax benefit for the losses for the years ended
December 31, 2014 and 2013, since management has determined that the realization of the net deferred tax asset is not more likely
than not to be realized and has created a valuation allowance for the entire amount of such benefit.
The
tax effects of temporary differences and carryforwards that give rise to significant portions of deferred tax assets and liabilities
consist of the following:
| | |
December 31, | |
| | |
2014 | | |
2013 | |
| Deferred tax assets (liabilities): | |
| | |
| |
| Stock-based compensation | |
$ | 2,892,008 | | |
$ | 2,075,853 | |
| Accrued expenses and reserves | |
| 215,976 | | |
| 42,159 | |
| Transactions costs | |
| (12,279 | ) | |
| - | |
| Net operating loss | |
| 709,300 | | |
| 1,781,765 | |
| Gross deferred tax assets | |
| 3,805,096 | | |
| 3,899,777 | |
| Valuation allowance | |
| (3,805,096 | ) | |
| (3,899,777 | ) |
| Net deferred tax assets | |
$ | - | | |
$ | - | |
The valuation allowance for deferred tax assets
decreased by approximately $95,000 in 2014 due mainly to the generation of net operating losses and timing differences resulting
from stock-based compensation and accrued expenses and reserves and transaction costs.
The
difference between the effective rate reflected in the provision for income taxes on loss before taxes and the amounts determined
by applying the applicable statutory tax rate are analyzed below:
| | |
2014 | | |
2013 | |
| | |
% | | |
% | |
| Statutory tax/(benefit) rate | |
| (34.0 | ) | |
| (34.0 | ) |
| State income taxes, net of federal benefit | |
| (3.6 | ) | |
| (5.8 | ) |
| Permanent items | |
| 4.3 | | |
| 0.0 | |
| Change in deferred tax assets valuation allowance | |
| 33.3 | | |
| 39.8 | |
| | |
| 0.0 | | |
| 0.0 | |
We
did not have an unrecognized tax benefit at December 31, 2014 and 2013. We file income tax returns in the U.S. federal jurisdiction
and the various states in which we operate. The former members of NACSV are required to file separate federal and state tax returns
for NACSV for the periods prior to our acquisition of NACSV. We will file consolidated tax returns for subsequent periods. We
have not yet filed our U.S. federal and certain state tax returns for 2014 and we do not currently have any examinations ongoing.
Tax returns for the years 2011 onwards are subject to federal, state or local examinations.
Note
12 - Loss Per Common Share
Basic and diluted loss per common share
is computed by dividing the loss by the weighted average number of common shares outstanding for the period. Since we incurred
losses attributable to common stockholders during the years ended December 31, 2014 and 2013, diluted loss per common share has
not been computed by giving effect to all potentially dilutive common shares that were outstanding during the years ended December
31, 2014 and 2013. Dilutive common shares consist of shares issuable on the conversion of debt and incremental shares issuable
upon the exercise of warrants and options to the extent that the average fair value of our common stock for each period is greater
than the exercise price of the warrant.
The
following table sets forth the computation of basic and diluted loss per common share for the years ended December 31, 2014 and
2013:
| | |
2014 | | |
2013 | |
| Numerator: | |
| | |
| |
| Loss from continuing operations | |
$ | (11,654,356 | ) | |
$ | (9,026,032 | ) |
| Loss from discontinued operations | |
| (2,832 | ) | |
| (271,221 | ) |
| Net loss | |
$ | (11,657,188 | ) | |
$ | (9,297,253 | ) |
| | |
| | | |
| | |
| Denominator: | |
| | | |
| | |
| Weighted-average shares outstanding | |
| 101,755,501 | | |
| 74,484,164 | |
| Effect of dilutive securities (1) | |
| - | | |
| - | |
| Weighted-average diluted shares | |
| 101,755,501 | | |
| 74,484,164 | |
| | |
| | | |
| | |
| Loss per common share – basic and diluted: | |
| | | |
| | |
| Continuing operations | |
$ | (0.11 | ) | |
$ | (0.12 | ) |
| Discontinued operations | |
| (0.00 | ) | |
| (0.00 | ) |
| Total – basic and diluted | |
$ | (0.11 | ) | |
$ | (0.12 | ) |
| |
(1) |
The
following common stock equivalents outstanding as of December 31, 2014 and 2013 were not included in the computation of dilutive
loss per share because the net effect would have been anti-dilutive: |
| |
|
|
2014 |
|
|
2013 |
|
| |
Warrants |
|
|
4,250,000 |
|
|
|
4,250,000 |
|
| |
Stock Options |
|
|
5,840,000 |
|
|
|
- |
|
| |
Vested but unissued restricted stock awards |
|
|
2,187,503 |
|
|
|
- |
|
| |
Convertible debt |
|
|
766,666 |
|
|
|
- |
|
| |
Price protection |
|
|
1,854,838 |
|
|
|
- |
|
| |
Total common stock equivalents |
|
|
14,899,007 |
|
|
|
4,250,000 |
|
Note
13 – Discontinued Operations
In
January 2012, we acquired 51% of Bronco Communications LLC. We subsequently discontinued the operations of Bronco and
disposed of its remaining assets in January 2013 although we were responsible for contract oversight which was concluded in June
2014. In accordance with ASC Topic 205, Presentation of Financial Statements - Discontinued Operation, we
have presented the loss from discontinued operations in the accompanying consolidated statements of operations for the year ended
December 31, 2013. The following table details the operating results included of discontinued operations for the year ended December
31, 2013:
| | |
2014 | | |
2013 | |
| Net sales | |
$ | - | | |
$ | - | |
| Cost of goods sold | |
| - | | |
| - | |
| Gross profit | |
| - | | |
| - | |
| Selling, general and administrative expenses | |
| 2,832 | | |
| 25,477 | |
| Loss on sale of assets of discontinued operations | |
| - | | |
| 245,744 | |
| Interest expense | |
| - | | |
| - | |
| Other income | |
| - | | |
| - | |
| Loss before provision for income taxes | |
| 2,832 | | |
| 271,221 | |
| Provision for income taxes | |
| - | | |
| - | |
| Loss from discontinued operations | |
$ | 2,832 | | |
$ | 271,221 | |
Note
14 – Related Party Transactions
Convertible Notes Payable to Related Parties
During the year ended December 31, 2014,
we issued convertible notes payable to an affiliate of our Chairman and CEO, and to our CFO. These notes are further discussed
in Note 8 - Notes Payable – Convertible Notes Payable to Related Parties.
Note
15 – Customer Concentrations
The
Company had revenue from three customers in the year ended December 31, 2014 that were greater than 10% of total revenue:
| | |
Year
Ended
December 31, 2014 | |
| | |
Amount | | |
%
of Total Revenue | |
| Customer
1 | |
$ | 300,000 | | |
| 43.2 | % |
| Customer 2 | |
$ | 161,994 | | |
| 23.3 | % |
| Customer 3 | |
$ | 102,462 | | |
| 14.7 | % |
Accounts
receivable were $302,400, net of allowance of $104,085, at December 31, 2014. One customer accounted for 99.2% of this balance.
The Company expects to continue to have customers with revenues or accounts receivable balances of 10% or more of total revenue
or total accounts receivable in the foreseeable future.
Note
16 – Subsequent Events
We
have completed an evaluation of all subsequent events after the audited balance sheet date of December 31, 2014 through the
date this Annual Report on Form 10-K was submitted to the SEC, to ensure that this filing includes appropriate disclosure
of events both recognized in the financial statements as of December 31, 2014, and events which occurred subsequently but
were not recognized in the financial statements. We have concluded that no subsequent events have occurred that require recognition
or disclosure, except as disclosed within these financial statements and except as described below.
We
have entered into convertible notes payable subsequent to December 31, 2014 and adopted new accounting policies as a result thereof
as follows:
New
Accounting Policies
Derivative
Financial Instruments
We
will account for conversion options embedded in convertible notes payable issued subsequent to December 31, 214 in accordance
with ASC 815, “Derivatives and Hedging”. Subtopic ASC 815-15, Embedded Derivatives generally requires
companies to bifurcate conversion options embedded in the convertible notes from their host instruments and to account for them
as free standing derivative financial instruments. Derivative liabilities are recognized in the consolidated balance sheet at
fair value as Derivative Liabilities and based on the criteria specified in FASB ASC 815-40, Derivatives and Hedging
– Contracts in Entity’s own Equity. The estimated fair value of the derivative liabilities is calculated using
the Black-Scholes-Merton pricing model and such estimates are revalued at each balance sheet date, with changes recorded to other
income or expense as Change in Fair Value – Derivatives in the consolidated statement of operations. The classification
of derivative instruments, including whether such instruments should be recorded as liabilities or equity, is evaluated at the
instrument origination date and reviewed at the end of each event date (i.e. conversions, payments, etc.) and the measurement
period end date for financial reporting, as applicable. Derivative instrument liabilities are classified on the balance sheet
as current or non-current based on whether or not net-cash settlement of the derivative instrument would be required within twelve
months of the balance sheet date.
Convertible
Securities
Based
upon ASC 815-15, we have adopted a sequencing approach regarding the application of ASC 815-40 to convertible securities issued
subsequent to December 31, 2014. We will evaluate our contracts based upon the earliest issuance date. In the event partial reclassification
of contracts subject to ASC 815-40-25 is necessary, due to our inability to demonstrate we have sufficient shares authorized and
unissued, shares will be allocated on the basis of issuance date, with the earliest issuance date receiving first allocation of
shares. If a reclassification of an instrument were required, it would result in the instrument issued latest being reclassified
first.
Convertible
Notes Payable
LG
Capital Funding, LLC
On
January 16, 2015, we entered into a Securities Purchase Agreement with LG Capital Funding, LLC (“LG Capital”) providing
for the purchase of a Convertible Redeemable Note (“LG Note”) in the aggregate principal amount of $78,750. The LG
Note was funded on January 20, 2015, and we received $67,500 of net proceeds (net of $3,750 legal fees and $7,500 finders fees).
The LG Note bears interest at the rate of 8% per annum; is due and payable on January 16, 2016; is subject to prepayment penalties
up to a 145% multiple of the principal, interest and other amounts owing, as defined. After the expiration of 180 days
following the date of the LG Note, the Company has no right of prepayment; and the note may be converted by LG Capital at any
time after 180 days of the date of closing into shares of our common stock at a conversion price equal to a 40% discount of the
lowest closing bid price for 20 prior trading days including the notice of conversion date. The LG Note also contains certain
representations, warranties, covenants and events of default, and increases in the amount of the principal and interest rate under
the Note in the event of such defaults.
The
estimated fair value of the embedded derivative liability at inception was $128,438, of which $78,750 was discounted against the
note and will be accreted over the term of the note and $49,688 will be recorded as interest expense at inception. Given the significant
amount of non-cash interest expense associated with the conversion option fair value, the effective interest rate is not meaningful.
JSJ
Investments, Inc.
On
January 26, 2015 (the “Issuance Date”) we entered into a financing agreement with JSJ Investments Inc. (“JSJ”)
providing for the purchase of a 10% Convertible Note in the aggregate principal amount of $66,000 (the “JSJ” Note).
The JSJ Note contains a $6,000 original issue discount such that the purchase price of the JSJ Note was $60,000. The JSJ Note
was funded on January 27, 2015, and we received $52,000 of net proceeds (net of $2,000 legal fees and $7,500 due diligence fees).
The JSJ Note bears interest at the rate of 10% per annum; is due and payable on January 26, 2016; may be prepaid until the one
hundred and fiftieth (150th) day after the Issuance Date at a cash redemption of 150%; and the note may be converted by JSJ at
any time into shares of our common stock at a conversion price equal to the lower of (i) a 40% discount of the lowest trading
price during the previous twenty (20) trading days prior to the date of conversion; or (ii) a 40% discount to the lowest trading
price during the previous twenty (20) trading days before the date that the JSJ Note was executed. The JSJ Note also contain certain
representations, warranties, covenants and events of default, and increases in the amount of the principal and interest rate under
the JSJ Note in the event of such defaults.
The
estimated fair value of the embedded derivative liability at inception was $132,002, of which $66,000 was discounted against the
note and will be accreted over the term of the note and $66,002 will be recorded as interest expense at inception. Given the significant
amount of non-cash interest expense associated with the conversion option fair value, the effective interest rate is not meaningful.
Adar
Bays, LLC
On
January 26, 2015, we entered into a Securities Purchase Agreement (with Adar Bays, LLC (“Adar Bays”) providing for
the purchase of a Convertible Redeemable Note (the “AB Note”) in the aggregate principal amount of $35,000. The AB
Note was funded on January 27, 2015, and we received $29,750 of net proceeds (net of $1,750 of legal fees and $3,500 finders fees).
The AB Note bears interest at the rate of 8% per annum; is due and payable on January 26, 2016; is subject to prepayment penalties
up to a 145% multiple of the principal, interest and other amounts owing, as defined. After the expiration of 180 days
following the date of the AB Note, the Company has no right of prepayment; and the note may be converted by Adar Bays at any time
after 180 days of the date of closing into shares of our common stock at a conversion price equal to a 40% discount of the lowest
closing bid price for 20 prior trading days including the notice of conversion date. The AB Note also contain certain representations,
warranties, covenants and events of default, and increases in the amount of the principal and interest rate under the AB Note
in the event of such defaults.
The
estimated fair value of the embedded derivative liability at inception was $65,333, of which $35,000 was discounted against the
note and will be accreted over the term of the note and $30,333 will be recorded as interest expense at inception. Given the significant
amount of non-cash interest expense associated with the conversion option fair value, the effective interest rate is not meaningful.
JMJ
Financial
On
January 28, 2014, we received a funding of $82,500 (including an original issue discount of $7,500) pursuant to a $250,000 Convertible
Note (the “JMJ Note”) dated January 28, 2015 with JMJ Financial. We received $67,500 of proceeds, net of $7,500 original
issue discount and $7,500 finders fee. The JMJ Note matures twenty four months from the date funded, has a one-time 12% interest
charge if not paid within 90 days, may be prepaid at ant tome on or before 90 days of h effective date, and is convertible at
any time the option of JMJ Financial into shares of our common stock at the lesser of $0.075 per share or 60% of the average of
the trade price in the 25 trading days prior to conversion. The JMJ Note might be accelerated if an event of default
occurs under the terms of the JMJ Note, including the Company’s failure to pay principal and interest when due, certain
bankruptcy events or if the Company is delinquent in its SEC filings.
The
estimated fair value of the embedded derivative liability at inception was $157,208, of which $82,500 was discounted against the
note and will be accreted over the term of the note and $74,708 will be recorded as interest expense at inception. Given the significant
amount of non-cash interest expense associated with the conversion option fair value, the effective interest rate is not meaningful.
Vista
Capital Investments, LLC
On
February 4, 2015 (the “Issuance Date”), we entered into a Convertible Note (the “Vista Note”) with Vista
Capital Investments, LLC (“Vista”) in the original principal amount of $250,000 (including a 10% original issue discount
(“OID”)). The Company and Vista agreed to an initial funding under the Vista Note of $55,000, including an OID of
$5,000 (“Initial Funding”). Future advances under the Vista Note are at the sole discretion of Vista. We are only
required to repay the amount funded, including the prorated portion of the OID. On February 9, 2015, we received $45,000 of net
proceeds under the Initial Funding, net of $5,000 OID and a $5,000 finders fee. The Vista Note matures twenty four months from
the date funded, has a one-time 12% interest charge if not paid within 90 days; may be prepaid at any time within the 90 day period
immediately following the Issuance Date at a multiple of 145% of the original principal amount; and may be convertible at the
option of Vista at any time after the Issuance Date into shares of our common stock at the lesser of $0.10 per share or 60% of
the lowest trade occurring during the twenty five (25) consecutive trading days immediately preceding the applicable conversion
date on which the holder elects to convert all or part of the Vista Note, subject to adjustment as provided for in the Vista Note.
The
Vista Note might be accelerated if an event of default occurs under the terms of the Vista Note, including the our failure
to pay principal and interest when due, certain bankruptcy events or if we are delinquent in our SEC filings. The Vista Note also
contain certain representations, warranties, covenants and events of default, and increases in the amount of the principal and
interest rate under the Note in the event of such defaults.
The
estimated fair value of the embedded derivative liability at inception was $91,712, of which $55,000 was discounted against the
note and will be accreted over the term of the note and $36,712 will be recorded as interest expense at inception. Given the significant
amount of non-cash interest expense associated with the conversion option fair value, the effective interest rate is not meaningful.
KBM
Worldwide, Inc.
On
February 17, 2015, we entered into a Securities Purchase Agreement (“KBM SPA”) with KBM Worldwide, Inc. (“KBM”)
providing for the purchase of a Convertible Promissory Note bearing interest at 8% per annum in the principal amount of $115,000
due February 17, 2016 (the “KBM Note”). The KBM Note includes an $11,000 Original Issue Discount (“OID”).
The KBM Note was funded on February 20, 2015, with the Company receiving net proceeds of $90,000, (net of the $11,000 OID, KBM’s
legal expenses of $4,000, and a finders fee of $10,000. The terms of the KBM SPA also provide, for a period of six months following
the effective date, a right of first refusal to KBM for certain future financings entered into by the Company for amounts less
than $75,000.
The
KBM Note can be prepaid, at redemption premiums ranging from 10% to 35%, until 180 days following the issuance date of the KBM
Note, after which we have no right of repayment. The KBM Note is convertible at a price per share equal to 61% of the average
of the lowest three trading prices of the Company’s common stock during the 10 trading days prior to conversion. If, at
any time when the KBM Note is outstanding, The Company issues or sells, or is deemed to have issued or sold, any shares of its
common stock in connection with a subsequent placement for no consideration or for a consideration per share based on a variable
price formula that is less than the conversion price in effect on the date of such issuance of shares of common stock, then the
KBM conversion price will be reduced to the amount of the consideration per share received for such issuance.
The
KBM Note contains certain covenants and restrictions including, among others, that for so long as the KBM Note is outstanding
the Company will not pay dividends or dispose of certain assets, and that the Company will maintain our listing on an over-the-counter
market. Events of default under the note include, among others, failure to pay principal or interest on the note or comply with
certain covenants under the note.
The
estimated fair value of the embedded derivative liability at inception was $250,590, of which $115,000 was discounted against
the note and will be accreted over the term of the note and $125,590 will be recorded as interest expense at inception. Given
the significant amount of non-cash interest expense associated with the conversion option fair value, the effective interest rate
is not meaningful.
EMA
Financial, LLC
On
February 19, 2015, we entered into a Securities Purchase Agreement (the “EMA SPA”) with EMA Financial, LLC (“EMA”)
providing for the purchase of a Convertible Note bearing interest at 10% per annum in the principal amount of $68,000 due February
19, 2016 (the “EMA Note”). The EMA Note includes an $6,800 Original Issue Discount (“OID”). The EMA Note
was funded on February 23, 2015, with the Company receiving net proceeds of $52,080, (net of the $6,800 OID, EMA’s due diligence
and documentation preparation expenses of $3,000, and a finders fee of $6,120).
The
EMA Note can be prepaid, at a redemption premium of 50%, until 180 days following the issuance date of the EMA Note, after which
the Company has no right of repayment. The EMA Note is convertible at a price per share equal to the lower of either (i) the closing
sale price of the Company’s common stock on the day prior to the closing date, and (ii) 60% of the lowest trade price of
the Company’s common stock Common Stock on the Principal Market during the twenty five (25) consecutive trading days prior
to conversion.
The
EMA Note contains certain covenants and restrictions including, among others, that for so long as the EMA Note is outstanding
the Company will not pay dividends or dispose of certain assets, and that the Company will maintain its listing on an over-the-counter
market. Events of default under the note include, among others, failure to pay principal or interest on the note or comply with
certain covenants under the note.
The
estimated fair value of the embedded derivative liability at inception was $167,167, of which $68,000 was discounted against the
note and will be accreted over the term of the note and $99,167 will be recorded as interest expense at inception. Given the significant
amount of non-cash interest expense associated with the conversion option fair value, the effective interest rate is not meaningful.
Tangiers
Investment Group, LLC
On
March 8, 2015, we entered into a Note Purchase Agreement (the “Tangiers NPA”) with Tangiers Investment Group, LLC
("Tangiers"), for the sale of a 10% convertible promissory note in the principal amount of up to $220,000, plus a 10%
original issue discount (the "Tangiers Note"). On March 10, 2015, the Company closed on an initial funding of $82,500
and received net proceeds of $67,500, after deducting $7,500 retained by Tangiers for the original issue discount for due diligence
and legal bills related to the transaction, and $7,500 that the Company paid to a third party for a finders fee. Tangiers has
the option to finance additional amounts, up to the balance of the $220,000, during the term of the Tangiers Note.
The
principal due under the Tangiers Note bears interest at the rate of 10% per annum. Upon an event of default, interest will accrue
at the lower of 20% or the highest rate permitted by law. Events of default under the note include, among others, failure to pay
principal or interest on the note or comply with certain covenants under the note. All interest and principal must be repaid on
or before March 8, 2016. The Tangiers Note may be prepaid in whole or in part by the Company within 180 days, at redemption premiums
ranging from 15% to 35% of the funded amount of the Tangiers Note plus accrued interest. After 180 days, the Tangiers Note may
not be prepaid without the consent of all parties. The principal and interest underlying the Tangiers Note is convertible at any
time into common stock, at Tangiers's option, at a conversion price equal to the lower of $0.04 or 60% of the lowest trading price
of the Company's common stock during the twenty consecutive trading days prior to the date on which Tangiers (or the then-holder
of the Tangiers Note) elects to convert all or part of the Tangiers Note. In connection therewith, Company agreed to reserve from
its authorized and unissued shares at least four times the number of shares that may be issuable upon conversion of the note.
The
estimated fair value of the embedded derivative liability at inception was $139,078, of which $82,500 was discounted against the
note and will be accreted over the term of the note and 58,578 will be recorded as interest expense at inception. Given the significant
amount of non-cash interest expense associated with the conversion option fair value, the effective interest rate is not meaningful.
Interest expense for these convertible
notes is estimated at approximately $566,000 for the year ended December 31, 2015, and includes approximately $539,000 for the
initial fair value of the embedded derivative (conversion option) of the convertible notes. Given the significant amount
of non-cash interest expense associated with the conversion option fair value, the weighted average effective interest rate for
the above notes for 2015 will not be a meaningful number.
Legal Proceedings
Dekle, et. al. v. Global Digital
Solutions, Inc. et. al.
Brian A. Dekle and John Ramsay filed
suit against the Company and its wholly owned subsidiary, North American Custom Specialty Vehicles, Inc. (“NACSV”)
in the Circuit Court of Baldwin Alabama, on January 14, 2015, case no. 05-CV-2015-9000050.00, relating to our acquisition of NACSV
(the ''Dekle Action"). Prior to instituting the Dekle Action, in June 2014, the Company had entered into an equity purchase
agreement with Dekle and Ramsay to purchase their membership interest in North American Custom Specialty Vehicles, LLC. The Dekle
Action originally sought payment for $300,000 in post-closing consideration Dekle and Ramsay allege they are owed pursuant to the
equity purchase agreement.
On
February 9, 215, the Company and NACSV removed the Dekle Action to federal court in the United States District Court in
and for the Southern District of Alabama, case no. 1:15-CV-00069. The Company and NACSV subsequently moved to dismiss the complaint
for (1) failing to state a cause of action, and (2) lack of personal jurisdiction. Alternatively, the Company and NACSV sought
a transfer of the case to the United States District Court in and for Middle District of Florida.
In response to the Company’s and
NACSV's motion to dismiss, Dekle and Ramsay filed an amended complaint on March 2, 2015 seeking specific performance and alleging
breach of contract, violations of SEC Rule 10b-5, and violations of the Alabama Securities Act. The amended complaint also names
the Company’s Chairman, President, and CEO, Richard J. Sullivan ("Sullivan;') as a defendant. On March 17, 2015, the
Company, NACSV and Sullivan filed a motion to dismiss the amended complaint seeking dismissal
for failure to state valid causes of action, for lack of personal jurisdiction, or alternatively to transfer the case to the United
States District Court in and for Middle District of Florida.
Global Digital Solutions, Inc. et.
al. v. Communications Laboratories, Inc., et. al.
On January 19, 2015 the Company and NACSV filed suit against Communications Laboratories, Inc., ComLabs Global,
LLC, Roland Lussier, Brian Dekle, John Ramsay and Wallace Bailey for conversion and breach of contract in a dispute over the payment
of a $300,000 accounts receivable that ComLabs owed to NACSV but sent payment directly to Brian Dekle. The case was filed in the
Eighteenth Judicial Circuit in and for Brevard County Florida, case no. 05-2015-CA-012250-XXXX. On February 18, 2015 (i) defendants
Communications Laboratories, Inc., ComLabs Global, LLC and Roland Lussier and (ii) defendant Wallace Bailey filed their respective
motions to dismiss seeking, among other things, dismissal for failure to state valid causes of action, lumping and failure to post
a non-resident bond. On February 26, 2015, defendants Dekle and Ramsay filed their motion to dismiss, or stay action, based on
already existing litigation between the parties.
EXHIBIT
INDEX
| | |
| |
Incorporated by Reference |
| Exhibit No. | |
Description | |
Form | |
Filing Date / Period End | |
Exhibit Number |
| 2.1 | |
Purchase Agreement, dated as of January 1, 2012, by and between Global Digital Solution, Inc., and Bronco Communications, LLC | |
10 | |
8/9/13 | |
2.1 |
| 2.2 | |
Amendment to Purchase Agreement dated October 15, 2012, by and between Global Digital Solution, Inc., and Bronco Communications, LLC | |
10 | |
8/9/13 | |
2.2 |
| 2.3 | |
Agreement of Merger and Plan of Reorganization dated as of October __, 2012, by and between Global Digital Solution, Inc., and Airtronic USA, Inc. | |
10/A | |
9/10/13 | |
2.3 |
| 2.4 | |
First Amendment to Agreement of Merger and Plan of Reorganization dated as of August 5, 2013, by and between Global Digital Solution, Inc., and Airtronic USA, Inc. | |
10 /A | |
9/10/13 | |
2.4 |
| 2.5 | |
Equity Purchase Agreement dated June 16, 2014 by and among Brian A. Dekle, John Ramsey, GDSI Acquisition Corporation, Global Digital Solutions, Inc. and North American Custom Specialty Vehicles, LLC. | |
8-K | |
6/19/14 | |
2.1 |
| 3.1 | |
Certificate of Incorporation | |
10 | |
8/9/13 | |
3.1 |
| 3.2 | |
Articles of Merger | |
10 | |
8/9/13 | |
3.2 |
| 3.3 | |
Certificate of Amendment to Certificate of Incorporation | |
10 | |
8/9/13 | |
3.3 |
| 3.4 | |
Bylaws | |
10 | |
8/9/13 | |
3.4 |
| 3.5 | |
Certificate of Amendment to Certificate of Incorporation filed July 7, 2014 | |
8-K | |
7/30/14 | |
3.1 |
| 10.1 | |
Debtor In Possession Note Purchase Agreement by and between the Company and Airtronic USA, Inc. dated October 22, 2012 | |
10 | |
8/9/13 | |
10.1 |
| 10.2 | |
8 1/4% Secured Promissory Note in the original principal amount of $750,000 dated October 22, 2012 in favor of the Company | |
10 | |
8/9/13 | |
10.2 |
| 10.3 | |
Security Agreement by and between the Company and Airtronic USA, Inc. dated October 22, 2012 | |
10 | |
8/9/13 | |
10.3 |
| 10.4 | |
Bridge Loan Modification and Ratification Agreement by and between the Company and Airtronic USA, Inc. dated March __, 2013 | |
10/A | |
9/10/13 | |
10.4 |
| 10.5 | |
Second Bridge Loan Modification and Ratification Agreement by and between the Company and Airtronic USA, Inc. dated as of August 5, 2013 | |
10/A | |
9/10/13 | |
10.5 |
| 10.6 | |
8 1/4% Secured Promissory Note in the original principal amount of $550,000 dated August 5, 2013, in favor of the Company | |
10/A | |
9/10/13 | |
10.6 |
| 10.7 | |
Intellectual Property Security Agreement dated as of August 5, 2013, by and between Merriellyn Kett and the Company | |
10/A | |
9/10/13 | |
10.7 |
| 10.8 | |
Promissory Note Purchase Agreement by and between the Company and the investors listed therein dated December __, 2012 | |
10 | |
8/9/13 | |
10.8 |
| 10.9 | |
Secured Promissory Note in the original principal amount of $750,000 dated December __, 2012 in favor of Gabriel De Los Reyes | |
10 | |
8/9/13 | |
10.9 |
| 10.10 | |
Security Agreement dated December __, 2012 by and between the Company, Bay Acquisition, LLC and the noteholder identified on Schedule A | |
10 | |
8/9/13 | |
10.10 |
| | |
| |
Incorporated by Reference |
| Exhibit No. | |
Description | |
Form | |
Filing Date /
Period End | |
Exhibit Number |
| 10.11 | |
Warrant dated December __, 2012 for 3,000,000 shares of common stock | |
10 | |
8/9/13 | |
10.11 |
| 10.12 | |
Amendment dated May 6, 2013, by and between the Company and Gabriel De Los Reyes | |
10 | |
8/9/13 | |
10.12 |
| 10.13 | |
Form of Subscription Agreement and Securities Purchase Agreement | |
10 | |
8/9/13 | |
10.13 |
| 10.14 | |
Form of Indemnification Agreement | |
10 | |
8/9/13 | |
10.14 |
| 10.15 | |
8 1/4% Secured Promissory Note in the original principal amount of $200,000 dated October 10, 2013, in favor of the Company | |
10-K | |
3/28/14 | |
10.15 |
| 10.16 | |
Third Bridge Loan Modification and Ratification Agreement by and between the Company and Airtronic USA, Inc. dated as of October 10, 2013 | |
10-K | |
3/28/14 | |
10.16 |
| 10.17 | |
Investment Banking Agreement with Midtown Partners & Co, LLC dated October 16, 2013 | |
10-K | |
3/28/14 | |
10.17 |
| 10.18 | |
Addendum dated April 16, 2014 to Investment Banking Agreement with Midtown Partners & Co, LLC dated October 16, 2013 | |
DRS/A | |
8/5/14 | |
10.17 |
| 10.19* | |
Global Digital Solutions, Inc. 2014 Equity Incentive Plan approved by Shareholders May 19, 2014 | |
DRS/A | |
8/5/14 | |
10.19 |
| 10.20 | |
Online Virtual Office Agreement dated August 19, 2013 | |
DRS/A | |
8/5/14 | |
10.20 |
| 10.21* | |
Restricted Stock Unit Agreement dated as of August 25, 2014 between Global Digital Solutions, Inc. and Stephen L. Norris | |
8-K/A | |
8/25/14 | |
10.1 |
| 10.22 | |
Securities Purchase Agreement, dated December 8, 2014, with Charter 804CS Solutions, Inc. | |
8-K | |
12/12/14 | |
10.1 |
| 10.23 | |
Convertible Promissory Note, dated December 8, 2014, with Charter 804CS Solutions, Inc. | |
8-K | |
12/12/14 | |
10.2 |
| 10.24 | |
First Amendment to 8% Convertible Redeemable Note dated February 4, 2015, with Charter 804CS Solutions, Inc. | |
8-K | |
2/9/15 | |
10.2 |
| 10.25 | |
Securities Purchase Agreement, dated December 8, 2014, with David A. Loppert | |
8-K | |
12/12/14 | |
10.3 |
| 10.26 | |
Convertible Promissory Note, dated December 8, 2014, with David A. Loppert | |
8-K | |
12/12/14 | |
10.4 |
| 10.27 | |
First Amendment to 8% Convertible Redeemable Note dated February 4, 2015, with David A. Loppert | |
8-K/A | |
2/9/15 | |
10.3 |
| 10.28 | |
Securities Purchase Agreement, dated January 16, 2015, with LG Capital | |
8-K | |
1/20/15 | |
10.1 |
| 10.29 | |
8% Convertible Redeemable Note, dated January 16, 2015, with LG Capital | |
8-K | |
1/20/15 | |
10.2 |
| 10.30 | |
10% Convertible Note, dated January 26, 2015, with JSJ Investments Inc. | |
8-K | |
1/30/15 | |
10.1 |
| 10.31 | |
Securities Purchase Agreement, dated January 26, 2015, with Adar Bays, LLC | |
8-K | |
1/30/15 | |
10.2 |
| 10.32 | |
8% Convertible Redeemable Note, dated January 26, 2015, with Adar Bays, LLC | |
8-K | |
1/30/15 | |
10.3 |
| 10.33 | |
$250,000 Convertible Note, dated January 28, 2015, with JMJ Financial | |
8-K | |
1/30/15 | |
10.4 |
| 10.34 | |
$250,000 Convertible Note, dated February 4, 2015, with Vista Capital Investments, LLC | |
8-K | |
2/9/15 | |
10.1 |
| 10.35 | |
Securities Purchase Agreement dated February 17, 2015 with KBM Worldwide, Inc. | |
8-K | |
2/24/15 | |
10.1 |
| 10.36 | |
Convertible Promissory Note dated February 17, 2015 with KBM Worldwide, Inc. | |
8-K | |
2/24/15 | |
10.2 |
| |
| |
Incorporated by Reference |
| Exhibit No. | |
Description | |
Form | |
Filing Date /
Period End | |
Exhibit Number |
| 10.37 | |
Securities Purchase Agreement dated February 17, 2015 with EMA Financial, LLC | |
8-K | |
2/24/15 | |
10.3 |
| 10.38 | |
Convertible Promissory Note dated February 17, 2015 with EMA Financial, LLC | |
8-K | |
2/24/15 | |
10.4 |
| 10.39 | |
Note Purchase Agreement dated March 8, 2015 with Tangiers Investment Group, LLC | |
8-K | |
3/13/15 | |
10.1 |
| 10.40 | |
Convertible Promissory Note dated March 8, 2015 with Tangiers Investment Group, LLC | |
8-K | |
3/13/15 | |
10.2 |
| 10.41** | |
Non – exclusive agreement with Carter, Terry & Company dated December 19, 2014 to provide Financial Advisor, Investment Banking and Placement Agent services | |
| |
| |
|
| 21.1** | |
List of Subsidiaries | |
| |
| |
|
| 24.1** | |
Power of Attorney (included on the Signature Page of this Annual Report on Form 10-K) | |
| |
| |
|
| 31.1** | |
Rule 13a-14(a) / 15d-14(a) Certification of Chief Executive Officer | |
| |
| |
|
| 31.2** | |
Rule 13a-14(a) / 15d-14(a) Certification of Chief Financial Officer | |
| |
| |
|
| 32.1*** | |
Section 1350 Certifications of Chief Executive Officer and Chief Financial Officer | |
| |
| |
|
| 99.1 | |
NIMS Standards for Mobile Command Center Vehicles | |
DRS/A | |
9/2/14 | |
99.1 |
| 101. INS | |
XBRL Instance | |
| |
| |
|
| 101. SCH | |
XBRL Taxonomy Extension Scheme | |
| |
| |
|
| 101. CAL | |
XBRL Taxonomy Extension Calculation | |
| |
| |
|
| 101. DEF | |
XBRL Taxonomy Extension Definition | |
| |
| |
|
| 101. LAB | |
XBRL Taxonomy Extension Labels | |
| |
| |
|
| 101. PRE | |
XBRL Taxonomy Extension Presentation | |
| |
| |
|
| * |
Management
contract or compensatory plan or arrangement. |
| ** |
Filed
herewith. |
| *** |
Furnished
herewith. |
50
Exhibit 10.41
Carter,
Terry & Company.
3060
Peachtree Rd, Suite 1200,
Atlanta
GA 30305
Phone:
404-364-3070-Member FINRA SIPC
December 18, 2014
Richard J. Sullivan
Chairman and Chief Executive Officer
Global Digital Solutions, Inc.
777 South Flagler Drive
Suite 800 West
West Palm Beach, FL 33401
Re: Private Placement
Offering for Global Digital Solutions Inc. (GDSI.OTCQB)
Dear Mr. Sullivan:
It is our understanding
that Global Digital Solutions, Inc., a New Jersey corporation (hereinafter, the “Company”), desires to raise capital,
as well as to fund the Company’s continuing general operations. Based on our discussions, our preliminary review of the financial
information submitted to Carter, Terry & Company, (hereinafter, the “AGENT”) and the representations the Company
and its officers have made to us with regard to the present and proposed business activities of the Company, its operations and
financial condition, we would like to confirm our interest in acting as the Company’s non-exclusive Financial Advisor, Investment
Bank and Placement Agent, on a "best efforts" basis.. In such role we would assist the Company in one or more capital
raises which might result in a private placement, merger, acquisition, sale of assets, sale of common stock, sale of ownership
interest or any other financial transaction hereinafter referred to as a "Transaction" upon the basic terms and conditions
set forth herein (the "Agreement"), as well as a full array of additional investment banking services.
Section I: Services to
be rendered
“AGENT” services will include (but
not be limited to) the following:
| (i) | Arranging for one or more institutional investments of capital, as defined in Section I (iii) below,
(an “Investment,” which could include any variation thereof, including common stock, preferred stock, mezzanine debt,
senior secured debt, any other financial instrument or a combination of several financial instruments), on a best efforts basis
(in a form and on terms satisfactory to the Company) to raise capital for use by the Company; |
| (ii) | Any Investment will be placed with only “Accredited Investors” as that term is defined
in Rule 501 of Regulation D of the Securities Act of 1933, and in compliance with valid exemptions from registration or qualification
under federal securities laws, state securities (“blue sky”) laws or foreign securities laws of each jurisdiction in
which any offers of an Investment may be made; |
| (iii) | Utilizing appropriate investment information materials or modifying existing Company business plans
and documents (collectively, the “Information Memorandum”) to be provided to potential sources of financing. “AGENT”
will provide advice with respect to negotiating with all potential financing, merger or acquisition candidates introduced (as defined
in Section II below) to the Company by “AGENT” (as defined below; any such identified and introduced candidates, along
with their affiliates, associates, subsidiaries, divisions and related entities being hereinafter referred to as “Investor
Candidates”) who might be interested or involved in making an Investment in the Company, including reviewing the preliminary
and final documentation relating to any such financing. As used herein, “Investor Candidates” shall mean and include
individual, strategic and institutional investors of all types, introduced (as defined in Section II below) to the Company by “AGENT”
including individuals, trusts, estates, partnerships and associations, banks, thrifts, insurance companies and other financial
institutions, investment companies and other pooled investment vehicles, all tax-exempt organizations such as those subject to
ERISA and other public and private pension funds, endowments and foundations as well as corporations in similar lines of business
to the Company’s, which might be candidates for acquisition by or merger with , together with their affiliates, divisions,
subsidiaries and investment management consultants. All Investor Candidates, if not merger or acquisition candidates, shall be
“accredited investors,” as that term is generally understood in the private equity business; |
In performing services hereunder,
“AGENT” shall be regarded as an independent contractor and marketing representative. “AGENT” shall not
have any right or authority to create any obligations of any kind on behalf of the Company, shall make no representation to any
third party to the contrary, and shall not make any representations about the Company, its operations or finances other than what
the Company provides for inclusion in the Information Memorandum. Nothing contained in this Agreement shall be deemed or
construed to create a partnership or joint venture between Company and “AGENT” or between Company and any Investor
Candidate.
Section II: Fees, Expenses and Term
“AGENT” will
be non-exclusive financial advisor for the next twelve consecutive (12) months commencing on the date of this Agreement, with an
option to extend this Agreement an additional 6 months, provided however, that either party may withdraw from this Agreement at
any time upon written notice to the other party. Otherwise, this engagement and the terms hereunder will continue, subject to the
same right of either party to terminate on written notice to the other party, until a Transaction is successfully completed or
until the Agreement is terminated. Within three business days after the effective date of any termination by the Company (the "Termination
Date"), “AGENT” shall deliver to Company a list of all introduced Investor Candidates, merger or acquisition candidates
and Strategic Investors (the "Covered Parties") with which “AGENT” can confirm that (a) the Company, at “AGENT’s”
instigation or by “AGENTs” introduction, has had discussions concerning a Transaction during the term of this Agreement
and prior to receipt of the notice of termination or (b) such Covered Parties have, prior to such notice of termination, expressed
an interest in considering or pursuing a Transaction with Company. On and after the Termination Date, “AGENT”
shall also either destroy or return to Company any and all Information, Information Memoranda and any other confidential information
of the Company (including extracts thereof), which are in “AGENT’s” possession or control. The provisions concerning
confidentiality, indemnification, compensation and the Company's obligations to pay fees and reimburse expenses contained herein
and the Company's obligations contained in the Indemnification Provisions (as hereinafter defined) will survive any such termination.
“AGENT” agrees not to use any confidential information about the Company for any purposes other than in connection
with a Transaction and directly related matters.
The Company will attach
any investor candidate that is considered already engaged with them on APPENDIX A, following the signature page. The company
agrees any investor candidate introduced by “AGENT” not on the list is considered the “AGENT’s” introduction.
“AGENT” agrees
to introduce the Company to certain potential Investor Candidates. Upon written request from the Company, “AGENT” may
designate independent counsel to prepare the appropriate documents (including subscription and escrow agreement) with regard to
the terms of any financial transactions and the closing thereof. The Company is responsible for any and all reasonable expenses
associated with the Offering and the closing documents, escrow and escrow agent. The AGENT shall obtain the prior written approval
from the Company for all expenses.
If, within the two year
period commencing on the date hereof, the Investor Candidate, singly or with others, purchases debt or equity securities of, or
loans money to the Company, the Company will pay “AGENT” the fees specified below within three business days after
the closing and funding of any such transaction, as follows:
| |
(i) |
Cash Compensation Fees: |
| |
|
|
| |
|
A success fee for debt and/or
equity capital raised by “AGENT” on behalf of Company shall be subject to the following fee structure: |
| |
|
|
| a. | 10% of the amount for any equity or hybrid equity capital raised up to $1,000,000; or |
| b. | 8% of the amount for any equity or hybrid equity capital raised up to $5,000,000; or |
| c. | 6% of the amount for any equity or hybrid equity capital raised over $5,000,000. |
| (ii) | A success fee which shall be the identical terms as in Section II (i) above of the Aggregate Consideration
(except as further defined in (iii)) received by Company from any Transaction closed, including multiple successive Transactions,
with an Investor Candidate or a Strategic Candidate (or upon closing a Transaction with a Covered Party, including multiple successive
Transactions, within twelve months after the Termination Date), which amount will be paid when the Company receives the proceeds
from the Transaction. |
| | | |
| | (iii) | Restricted Stock: |
| | | |
| | | In connection with the compensation set forth above,
the Company agrees to pay “AGENT” an amount of restricted shares equal to 4% of the capital raised divided by the
closing price of the stock on the date of close of the capital raise transaction facilitated by the AGENT. These shares shall
have piggy back registration rights. In the event the shares are not registered within 6 months of the issuance of the shares,
the Company agrees to approve and pay for an opinion of sale under Rule 144. |
For purposes of this Agreement,
"introduced" means that “AGENT” shall have brought the prospective Investor Candidate, Strategic Investor
or Transaction (“Investor Candidate”) to the attention of the Company and “AGENT” shall have been a procuring
cause in its consummation of the matter. “Procuring cause” shall mean that “AGENT” shall have identified
the Investor Candidate, the merger or acquisition candidate or the Strategic Investor to Company and conducted initial qualifying
discussions regarding an Investment in or other Transaction with Company, or caused the parties to have attended meetings for the
purpose of considering a Transaction.
For purposes of this Agreement,
“Aggregate Consideration” shall mean the total value of all cash, securities, other property and any other consideration,
including, without limitation (as, if and when received), any contingent, earned or other assets or consideration, paid or payable,
directly or indirectly, in connection with the Transaction, net of any indebtedness owed upon the same, it being the intention
of this provision that the Aggregate Consideration shall mean the net equity value of any cash, tangible assets or measurable intangible
assets acquired by, invested in, loaned to or transferred to the Company. If any non-cash consideration is a class of newly-issued,
publicly-traded securities, then the fair market value thereof shall be the average of the closing prices for the twenty trading
days subsequent to the fifth trading day after the consummation of the Transaction. If no public market exists for any securities
issued in the Transaction or a class of securities is not intended to be publicly traded or convertible into publicly-traded securities,
then the fair market value thereof shall be determined by the valuation placed upon these securities by the parties to the Transaction.
Section III: Indemnification
The Company agrees to indemnify
and hold “AGENT”, which terms for the purposes of this Agreement include the partners, controlling persons, officers,
employees and agents of “AGENT”, harmless from and against any and all losses, claims, damages, costs, liabilities
or expenses (including reasonable attorney’s fees and expenses), joint or several, to which “AGENT” may become
subject in connection with its performance of the services described herein resulting from Company’s material breach of this
Agreement, gross negligence, willful misconduct or misfeasance, provided, however, that Company shall not be liable in any such
case to the extent that any such loss, claim, damage, liability, cost or expense is found in a final judgment by a court of law
to have directly resulted from the gross negligence or willful misconduct of “AGENT” .
Likewise “AGENT”
agrees to indemnify and hold Company, which terms for the purposes of this paragraph include the subsidiaries, partners, controlling
persons, officers, stockholders and employees of Company, harmless from and against any and all losses, claims, damages, costs,
liabilities or expenses (including reasonable attorney’s fees and expenses), joint or several, to which Company may become
subject resulting from “AGENT’s” material breach of this Agreement, gross negligence, willful misconduct or misfeasance,
provided however, that “AGENT” shall not be liable in any such case to the extent that any such loss, claim, damage,
liability, cost or expense is found in a final judgment by a court of law to have directly resulted from the gross negligence or
willful misconduct of Company.
Section IV: Other
Each party to this Agreement
agrees to keep in strict confidence the proprietary and non-public information of the other party during the term of this Agreement
and thereafter, provided however that the foregoing shall not prohibit disclosures (i) pursuant to the exercise of the parties'
responsibilities under this Agreement; (ii) required by law or legal process (provided notice is given prior to such disclosure);
or (iii) of matters which become public other than by the actions of the disclosing party hereunder.
If “AGENT” completes
the Private Placement or any other Transaction pursuant to the Agreement, “AGENT” may, at its own expense, place an
announcement, subject to Company’s prior consent and approval, in any newspapers and periodicals it may select stating that
“AGENT” has acted as financial advisor, investment banker or placement agent for Company in the Transaction.
Carter, Terry & Company
is a registered broker dealer, whose address is herein below for this contemplated transaction.
Carter, Terry &
Company.
3060 Peachtree
Rd
Suite 1200
Atlanta, GA 30305
Attention: Mr.
Timothy J. Terry
Telephone: (404)
364-2057
This agreement shall be
construed in accordance with the laws of the State of Georgia and the parties agree to submit themselves to the jurisdiction of
the courts located in that state, which shall be the sole tribunals in which either party may institute and maintain a legal proceeding
against the other party arising from any dispute hereunder. The parties further irrevocably consent to the service of any complaint,
summons, notice or other process relating to any such action or proceeding by delivery thereof to such party by hand or by registered
or certified mail in the manner prescribed below. Without in any way limiting the indemnification provisions set forth above, the
prevailing party shall have the right to recover any costs, including reasonable attorneys’ fees, in the event of any action
brought to enforce any of the terms or provisions of this Agreement.
If any agreement, covenant,
warranty or other provision of this Agreement is invalid, illegal or incapable of being enforced by reason of any rule of law or
public policy, all other agreements, covenants, warranties and other provisions of this Agreement shall, nevertheless, remain in
full force and effect. No waiver by either party of a breach or non-performance of any provision or obligation of this Agreement
shall be deemed to be a waiver of any preceding or succeeding breach of the same or any other provision of this Agreement. This
Agreement is the entire agreement of the parties with respect to the subject matter hereof, supersedes all prior agreements and
understandings, oral or written, relating to the subject matter hereof, and may not be amended, supplemented, or modified except
by written instrument executed by all parties hereto. Neither party may assign any of its rights or obligations under this Agreement
without the prior written consent of the other party.
All notices or other communications
under this Agreement must be in writing and sent by prepaid, first class airmail, delivered by hand or transmitted by email to
the email addresses of the recipients set out below or such other address or email address as may be furnished in writing by the
recipient to the other party. The addresses, and email addresses of the parties for purposes of this Agreement are:
| Global Digital Solutions, Inc. |
Carter, Terry & Company |
| 777 South Flagler Drive |
3060 Peachtree Rd |
| Suite 800 West |
Suite 1200 |
| West Palm Beach, FL 33401 |
Atlanta, GA 30305 |
| richardjsullivan@msn.com, and |
acabibi@carterterryco.com |
| dloppert@gdsi.co |
|
************
We are very enthusiastic
about working with your team toward the successful completion of this assignment.
If the foregoing is acceptable
to you, please indicate your approval by signing in the space provided and returning an executed copy of this Agreement to us.
Understood and agreed, this 19th
day of December, 2014.
| Global Digital Solutions, Inc. |
|
Carter, Terry & Company. |
| |
|
|
|
|
| By: |
/s/ Richard J. Sullivan |
|
By: |
/s/ Timothy
J. Terry |
| |
Richard J. Sullivan |
|
|
Timothy J. Terry |
| |
Chief Executive Officer |
|
|
Chief Executive Officer |
APPENDIX A
Excluded from this agreement are any arrangements by the Company,
its subsidiaries or affiliates with any lender who provides inventory or purchase order financing, factoring services or accounts
receivable financing including but not limited to Crossroads Financial, First Growth Capital, LSQ Funding, Bibby Financial, Celtic
Capital, Cash Flow Direct and affiliates and partners, Empire Global Financial Services, LLC, their partners and Affiliates.
IBC Funds, LLC
Magna Equities LLC and affiliates
Exhibit
21.1
List
of Subsidiaries
| Subsidiary | |
| Jurisdiction | |
| GDSI Florida LLC | |
| Florida | |
| Global Digital Solutions LLC, dba GDSI International | |
| Florida | |
| North American Custom Specialty Vehicles, Inc. | |
| Delaware | |
Exhibit 31.1
CERTIFICATIONS
I,
Richard J. Sullivan, certify that:
| 1. | I
have reviewed this Annual Report on Form 10-K of Global Digital Solutions, Inc.; |
| | |
| 2. | Based
on my knowledge, this report does not contain any untrue statement of a material fact
or omit to state a material fact necessary to make the statements made, in light of the
circumstances under which such statements were made, not misleading with respect to the
period covered by this report; |
| | |
| 3. | Based
on my knowledge, the financial statements, and other financial information included in
this report, fairly present in all material respects the financial condition, results
of operations and cash flows of the registrant as of, and for, the periods presented
in this report; |
| | |
| 4. | The
registrant’s other certifying officer and I are responsible for establishing and
maintaining disclosure controls and procedures (as defined in Exchange Act 13a-15(e)
and 15d-15(e)) and internal control over financial reporting (as defined in Exchange
Act Rules 13a-15(f) and 15(d)-15(f)) for the registrant and have: |
| a) | Designed
such disclosure controls and procedures, or caused such disclosure controls and procedures
to be designed under our supervision, to ensure that material information relating to
the registrant, including its consolidated subsidiaries, is made known to us by others
within those entities, particularly during the period in which this report is being prepared; |
| b) | Designed
such internal control over financial reporting, or caused such internal control over
financial reporting to be designed under our supervision, to provide reasonably assurance
regarding the reliability of financial reporting and the preparation of financial statements
for external purposes in accordance with generally accepted accounting principles; |
| c) | Evaluated
the effectiveness of the registrant’s disclosure controls and procedures and presented
in this report our conclusions about the effectiveness of the disclosure controls and
procedures, as of the end of the period covered by this report based on such evaluation;
and |
| d) | Disclosed
in this report any change in the registrant’s internal control over financial reporting
that occurred during the registrant’s most recent fiscal quarter (the registrant’s
fourth fiscal quarter in the case of an annual report) that has materially affected,
or is reasonably likely to materially affect, the registrant’s internal control
over financial reporting; and |
| 5. | The
registrant’s other certifying officer and I have disclosed, based on our most recent
evaluation of internal control over financial reporting, to the registrant’s auditors
and the audit committee of registrant’s board of directors (or persons performing
the equivalent functions): |
| a) | All
significant deficiencies and material weaknesses in the design or operation of internal
control over financial reporting which are reasonably likely to adversely affect the
registrant’s ability to record, process, summarize and report financial information;
and |
| b) | Any
fraud, whether or not material, that involves management or other employees who have
a significant role in the registrant’s internal control over financial reporting. |
| Date:
March 30, 2015 |
/s/
Richard J. Sullivan |
| |
Richard
J. Sullivan |
| |
Chief
Executive Officer
(Principal
Executive Officer) |
Exhibit
31.2
CERTIFICATIONS
I,
David A. Loppert, certify that:
| 1. | I
have reviewed this Annual Report on Form 10-K of Global Digital Solutions, Inc.; |
| 2. | Based
on my knowledge, this report does not contain any untrue statement of a material fact
or omit to state a material fact necessary to make the statements made, in light of the
circumstances under which such statements were made, not misleading with respect to the
period covered by this report; |
| 3. | Based
on my knowledge, the financial statements, and other financial information included in
this report, fairly present in all material respects the financial condition, results
of operations and cash flows of the registrant as of, and for, the periods presented
in this report; |
| 4. | The
registrant’s other certifying officer and I are responsible for establishing and
maintaining disclosure controls and procedures (as defined in Exchange Act 13a-15(e)
and 15d-15(e)) and internal control over financial reporting (as defined in Exchange
Act Rules 13a-15(f) and 15(d)-15(f)) for the registrant and have: |
| a) | Designed
such disclosure controls and procedures, or caused such disclosure controls and procedures
to be designed under our supervision, to ensure that material information relating to
the registrant, including its consolidated subsidiaries, is made known to us by others
within those entities, particularly during the period in which this report is being prepared; |
| b) | Designed
such internal control over financial reporting, or caused such internal control over
financial reporting to be designed under our supervision, to provide reasonably assurance
regarding the reliability of financial reporting and the preparation of financial statements
for external purposes in accordance with generally accepted accounting principles; |
| c) | Evaluated
the effectiveness of the registrant’s disclosure controls and procedures and presented
in this report our conclusions about the effectiveness of the disclosure controls and
procedures, as of the end of the period covered by this report based on such evaluation;
and |
| d) | Disclosed
in this report any change in the registrant’s internal control over financial reporting
that occurred during the registrant’s most recent fiscal quarter (the registrant’s
fourth fiscal quarter in the case of an annual report) that has materially affected,
or is reasonably likely to materially affect, the registrant’s internal control
over financial reporting; and |
| 5. | The
registrant’s other certifying officer and I have disclosed, based on our most recent
evaluation of internal control over financial reporting, to the registrant’s auditors
and the audit committee of registrant’s board of directors (or persons performing
the equivalent functions): |
| a) | All
significant deficiencies and material weaknesses in the design or operation of internal
control over financial reporting which are reasonably likely to adversely affect the
registrant’s ability to record, process, summarize and report financial information;
and |
| b) | Any
fraud, whether or not material, that involves management or other employees who have
a significant role in the registrant’s internal control over financial reporting. |
| Date:
March 30, 2015 |
/s/
David A. Loppert |
| |
David
A. Loppert |
| |
Chief
Financial Officer
(Principal
Financial Officer) |
Exhibit
32.1
CERTIFICATION
OF CHIEF EXECUTIVE OFFICER AND CHIEF FINANCIAL OFFICER
PURSUANT
TO
18
U.S.C. SECTION 1350,
AS
ADOPTED PURSUANT TO
SECTION
906 OF THE SARBANES-OXLEY ACT OF 2002
I,
Richard J. Sullivan, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002, that the Annual Report of Global Digital Solutions, Inc. on Form 10-K for the fiscal year ended December 31, 2014, fully
complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 and that information contained
in such Form 10-K fairly presents in all material respects the financial condition and results of operations of Global Digital
Solutions, Inc.
| /s/
Richard J. Sullivan |
|
| Richard
J. Sullivan |
|
| Chief
Executive Officer and Chairman of the Board |
|
| Date:
March 30, 2015 |
|
I,
David A. Loppert, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002, that the Annual Report of Global Digital Solutions, Inc. on Form 10-K for the fiscal year ended December 31, 2014,
fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 and that information
contained in such Form 10-K fairly presents in all material respects the financial condition and results of operations of Global
Digital Solutions, Inc.
| /s/ David
A, Loppert |
|
| David A.
Loppert |
|
| Chief Financial
Officer |
|
| Date: March
30, 2015 |
|
A
signed original of this written statement required by Section 906 has been provided to Global Digital Solutions, Inc. and will
be retained by Global Digital Solutions, Inc. and furnished to the Securities and Exchange Commission or its staff upon request.
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