As filed with the Securities and Exchange Commission on September 17, 2014

 

Registration No. 333-

 

 

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM S-1

 

REGISTRATION STATEMENT

 

UNDER THE SECURITIES ACT OF 1933

 

GLOBAL DIGITAL SOLUTIONS, INC.

(Exact name of registrant as specified in its charter)

 

New Jersey   2844   22-3392051

(State or other jurisdiction of

incorporation or organization)

 

(Primary Standard Industrial

Classification Code Number)

 

(I.R.S. Employer

Identification Number)

 

 

777 South Flagler Drive, Suite 800 West Tower

West Palm Beach, Florida 33401

Telephone: (561) 515-6163

(Address, including zip code, and telephone number,
including area

code, of registrant’s principal executive offices)

David A. Loppert

Chief Financial Officer

777 South Flagler Drive, Suite 800 West Tower

West Palm Beach, Florida 33401

Telephone: (561) 515-6163

(Name, address, including zip code, and telephone number,

including area code, of agent for service)

 

Copies to:

Owen Naccarato

Naccarato & Associates

1100 Quail Street, Suite 100

Newport Beach, CA 92660

Office: 949-851-9261

Fax: 949-851-9262

 

Approximate date of commencement of proposed sale to the public: As soon as practicable after the effective date of this registration statement.

 

If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box.   þ

 

If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act of 1933 registration statement number of the earlier effective registration statement for the same offering.   ☐

 

If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.   ☐

 

If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.   ☐

 

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

 

  Large Accelerated Filer  o   Accelerated Filer  o
  Non-Accelerated Filer    o (Do not check if a smaller reporting company)   Smaller Reporting Company  þ

 

 
 

 

CALCULATION OF REGISTRATION FEE
 

 

Title of Each Class of Securities to be Registered  

Amount to be

Registered (1)

   

Proposed

Maximum

Offering Price

per Share

   

Proposed

Maximum

Aggregate

Offering

Price

   

Amount of

Registration

Fee

 
Common stock, par value $.001 per share     27,832,170     $ 0.16 (2)   $ 4,453,147     $ 573.57  
Common stock, par value $.001 per share, upon exercise of warrants issued     4,250,000     $  0.16 (2)   $ 680,000     $ 87.58  
Total     32,082,170     $ 0.16     $ 5,133,147     $ 661.15  

 

(1) Pursuant to Rule 416 under the Securities Act, the shares of common stock offered hereby also include an indeterminate number of additional shares of common stock as may from time to time become issuable by reason of anti-dilution provisions, stock splits, stock dividends, recapitalizations or other similar transactions.

 

(2) With respect to the shares of common stock offered by the selling stockholders named herein, estimated at $0.16 per share, the average of the high and low prices of the common stock as reported on the Over The Counter Market (“OTCQB”) on September 12, 2014, for the purpose of calculating the registration fee in accordance with Rule 457(c) under the Securities Act.

 

THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a), MAY DETERMINE.

 

 

 

 
 

 

The information in this prospectus is not complete and may be changed. We may not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This preliminary prospectus is not an offer to sell these securities and we are not soliciting an offer to buy these securities in any state where the offer or sale is not permitted.

 

SUBJECT TO COMPLETION, DATED SEPTEMBER 17, 2014

PRELIMINARY PROSPECTUS

 

32,082,170 Shares

 

 

Global Digital Solutions, Inc.

 

COMMON STOCK

 

This prospectus relates to the sale by the selling stockholders identified in this prospectus of up to 32,082,170 shares of our common stock consisting of:

 

(i) 11,022,170 shares of our common stock issued or issuable in connection with our acquisition of North American Custom Specialty Vehicles, LLC;
(ii) 5,634,000 shares of our common stock issued to investors in various private placements;
(iii) 4,250,000 shares of our common stock issued and 4,250,000 share issuable upon the conversion of warrants issued in connection with convertible debt, for services, and for investment banking fees;
(iv) 2,676,000 shares of our common stock issued to certain acquisition, investor relations professionals and consultants for acquisition, investor relations and marketing services; and
(v) 4,250,000 shares of our common stock issued for conversion of debt and debt guarantees.

  

All of these shares of our common stock are being offered for resale by the selling stockholders.

 

The prices at which the selling stockholders may sell shares will be determined by the prevailing market price for the shares or in negotiated transactions. We will not receive any proceeds from the sale of these shares by the selling stockholders.

 

We will bear all costs relating to the registration of these shares of our common stock, other than any selling stockholders’ legal or accounting costs or commissions.

 

Our common stock is quoted on the regulated quotation service of the Over The Counter Market (“OTCQB”) under the symbol “GDSI”. The last reported sale price of our common stock as reported by the OTCQB on September 12, 2014, was $0.16 per share.

 

We are an “emerging growth company” under applicable Securities and Exchange Commission rules and will be subject to reduced public company reporting requirements for this prospectus and future filings. See “Prospectus Summary—Implications of Being an Emerging Growth Company.”

 

Investing in our common stock is highly speculative and involves a high degree of risk. You should carefully consider the risks and uncertainties described under the heading “Risk Factors” beginning on page 6 of this prospectus before making a decision to purchase our common stock.

 

Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or passed upon the accuracy or adequacy of this prospectus. Any representation to the contrary is a criminal offense.

 

The date of this prospectus is _________, 2014

 

 
TABLE OF CONTENTS

 

TABLE OF CONTENTS

 

PROSPECTUS SUMMARY 3
SPECIAL NOTE REGARDING FORWARD LOOKING STATEMENTS 6
RISK FACTORS 6
USE OF PROCEEDS 16
MARKET FOR OUR COMMON STOCK AND RELATED STOCKHOLDER MATTERS 16
DIVIDEND POLICY 16
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 17
BUSINESS 23
MANAGEMENT 29
EXECUTIVE COMPENSATION 33
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS 34
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT 35
SELLING STOCKHOLDERS 35
DESCRIPTION OF SECURITIES 38
PLAN OF DISTRIBUTION 41
LEGAL MATTERS 43
EXPERTS 43
WHERE YOU CAN FIND ADDITIONAL INFORMATION 43
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS F-1

 

You should rely only on the information contained in this prospectus. We have not authorized any other person to provide you with different information. If anyone provides you with different or inconsistent information, you should not rely on it. We are not making an offer to sell these securities in any jurisdiction where an offer or sale is not permitted. The information contained in this prospectus is current only as of its date. This prospectus will be updated as required by law.

 

 
TABLE OF CONTENTS

 

PROSPECTUS SUMMARY

 

The following summary highlights information contained elsewhere in this prospectus. This summary may not contain all of the information that may be important to you. You should read this entire prospectus carefully, including the sections entitled “Risk Factors” beginning on page 11 and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our historical financial statements and related notes included elsewhere in this prospectus. In this prospectus, unless the context provides otherwise, the terms “the Company,” “GDSI,” “we,” “us,” and “our” refer to Global Digital Solutions, Inc., a New Jersey corporation, and where appropriate, its 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 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”).

 

Our Strategy

 

  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.

 

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, 2013, 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 had a net loss of $9,297,253 for the year ended December 31, 2013, and used net cash of $983,345 for operating activities. Additionally, at December 31, 2013, we had an accumulated deficit of $16,858,375.  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.

 

Transactions with 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”). Contemporaneously, on October 22, 2012, we entered into a Debtor In Possession Note Purchase Agreement (“Bridge Loans”) with Airtronic in which we agreed to lend them initially up to $750,000, and which was subsequently modified twice to provide for additional loans totaling $500,000 and $200,000. From October 2012 through November 2013 we were actively involved in managing and supervising Airtronic’s operations as we funded their business and planned for its reorganization and successful emergence from bankruptcy. Airtronic’s Plan of Reorganization which approved their Merger with us, was confirmed by the Court on October 2, 2013 and we intended to close the Merger with Airtronic by December 2, 2013; however Airtronic refused to close the Merger and the transaction fell through. Subsequently, in April 2014, Airtronic had a Plan of Reorganization confirmed, and in May 2014 repaid all loans due to the Company under the Bridge Loans. 

 

Acquisition of North American Custom Specialty Vehicles, LLC

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 a discounted price of 80% of the market price of the shares calculated as the average of last reported selling prices of the Company’s shares of common stock for the five trading days ended two business days prior to the date of determination (the Discounted Value”), or $0.31 per share, for $200,000 in the aggregate, (b) up to $2.4 million of additional post-closing contingent consideration payable, at the sellers election, in either in cash or shares of the Company’s common stock issued at the Discounted Value 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 $816,373, the excess of the total value of closing date assets of NACSV over $1.2 million (the “True-Up” payment). NACSV specializes in building mobile command/communications and specialty vehicles for emergency management, first responders, national security and law enforcement operations.

 

Increase in Authorized Share Capital

On July 7, 2014, we filed a Certificate of Amendment to Certificate of Incorporation 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”).  

 

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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 control over financial reporting; and 
  Reduced disclosure of financial information in this prospectus, including two years of audited financial information and two years of selected 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.

 

Selected Risk Factors

Our business is subject to numerous risks, as discussed more fully in the section entitled “Risk Factors” beginning on page 6 of this prospectus. In particular, the following considerations, among others, may offset our competitive strengths or have a negative effect on our growth strategy, which could cause a decline in the price of our common stock and result in a loss of all or a portion of your investment:

 

  There is doubt about our ability to continue as a going concern.
  We have a limited operating history, no revenue and may continue to incur losses.
  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.

 

Where You Can Find Us

Our principal executive office is located at 777 South Flagler Drive, Suite 800 West, West Palm Beach, Florida 33401 and our telephone number is (561) 515-6163.  Our website address is www.gdsi.co. We do not incorporate the information on or accessible through our website into this prospectus, and you should not consider any information on, or that can be accessed through, our website a part of this prospectus.

 

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THE OFFERING

 

Common stock offered by selling stockholders   This prospectus relates to the sale by certain selling stockholders of 32,082,170 shares of our common stock consisting of:
    (i) 11,022,170 shares of our common stock issued or issuable in connection with our acquisition of North American Custom Specialty Vehicles, LLC;
    (ii) 5,634,000 shares of our common stock issued to investors in various private placements;
    (iii) 4,250,000 shares of our common stock issued and 4,250,000 share issuable upon the conversion of warrants issued in connection with convertible debt, for services, and for investment banking fees;
    (iv) 2,676,000 shares of our common stock issued to certain acquisition advisors, investor relations professionals and consultants for acquisition, investor relations and marketing services; and
    (v) 4,250,000 shares of our common stock issued for conversion of debt and debt guarantees.
     
Offering price   Market price or privately negotiated prices.
     
Common stock outstanding before the offering   103,469,278 shares (1)
     
Common stock outstanding after the offering   118,096,287 shares (2)
     
Use of proceeds   We will not receive any proceeds from the sale of the common stock by the selling stockholders. However, we will receive up to $1,400,000 from the proceeds from the exercise of the warrants by the selling stockholders if and when those stockholders exercise their warrants. We expect to use such proceeds, if any, for general working capital purposes.
     
OTC Markets (OTCQB) Symbol   GDSI.
     
Risk Factors   You should carefully consider the information set forth in this prospectus and, in particular, the specific factors set forth in the “Risk Factors” section beginning on page 6 of this prospectus before deciding whether or not to invest in our common stock.


(1) Represents the number of shares of our common stock outstanding as of September 12, 2014. Excludes (i) 4,250,000 shares of our common stock issuable upon exercise of outstanding warrants, (ii) 4,500,000 shares of our common stock issuable upon the vesting of restricted stock grants, (iii) 10,377,009 shares issuable in the future for the True-Up payment and the contingent consideration in connection with the acquisition of NACSV, (iv) 5,500,000 shares of our common stock issuable upon exercise of options granted and reserved under the 2014 Equity Incentive Plan and (v) 12,000,000 shares issuable upon the vesting of restricted stock units granted and reserved under the 2014 Equity Incentive Plan.
   
(2) Includes (i) 4,250,000 shares of our common stock issuable upon the exercise of outstanding warrants, which shares are offered for sale in this prospectus, and (ii) 10,377,009 shares issuable in the future for the True-Up payment and the contingent consideration in connection with the acquisition of NACSV, which shares are offered for sale in this prospectus. Excludes (i) 4,500,000 shares of our restricted common stock issuable upon the vesting of restricted stock grants, (ii) 5,500,000 shares of our common stock issuable upon exercise of options granted and reserved under the 2014 Equity Incentive Plan, and (iii) 12,000,000 shares issuable upon the vesting of restricted stock units granted and reserved under the 2014 Equity Incentive Plan.

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SPECIAL NOTE REGARDING FORWARD LOOKING STATEMENTS

 

This prospectus contains forward-looking statements that are subject to risks, uncertainties and other factors that may cause our actual results, performance or achievements to be materially different than the results, performance or achievements expressed or implied by the forward-looking statements. Such statements include statements regarding our expectations, hopes, beliefs or intentions regarding the future, including but not limited to statements regarding our market, strategy, competition, development plans (including acquisitions and expansion), financing, revenues, operations, and compliance with applicable laws. Forward-looking statements involve certain risks and uncertainties, and actual results may differ materially from those discussed in any such statement. Factors that could cause actual results to differ materially from such forward-looking statements include the risks described in greater detail in the following paragraphs. All forward-looking statements in this document are made as of the date hereof, based on information available to us as of the date hereof, and we assume no obligation to update any forward-looking statement. Market data used throughout this prospectus is based on published third party reports or the good faith estimates of management, which estimates are based upon their review of internal surveys, independent industry publications and other publicly available information. Although we believe that such sources are reliable, we do not guarantee the accuracy or completeness of this information, and we have not independently verified such information.

 

RISK FACTORS

 

Investing in our common stock involves a high degree of risk. Prospective investors should carefully consider the risks described below, together with all of the other information included or referred to in this prospectus, before purchasing shares of our common stock. There are numerous and varied risks, known and unknown, that may prevent us from achieving our goals.  If any of these risks actually occur, our business, financial condition or results of operations may be materially adversely affected.  In such case, the trading price of our common stock could decline and investors could lose all or part of their investment.

 

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, 2013, 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 had a net loss of $9,297,253 for the year ended December 31, 2013, and used net cash of $983,345 for operating activities. Additionally, at December 31, 2013, we had an accumulated deficit of $16,858,375.  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 recently acquired North American Custom Specialty Vehicles, LLC (“NACSV”) a company that NACSV specializes in building mobile command/communications and specialty vehicles for emergency management, first responders, national security and law enforcement operations. We may acquire complimentary 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.

 

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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.

 

New federal and state laws and regulations may restrict our ability in the future to sell the products that potential acquisition targets currently sell into the domestic commercial market, which could materially adversely affect our future revenues.

Since December 2012, there has been an extremely sharp increase in political and public support for new “gun control” laws and regulations in the United States.  Some proposed legislation, including legislation that has been introduced and is under active consideration in Congress and in state legislatures, would ban and/or restrict the sale of military and law enforcement firearms, in their current configurations, into the commercial market, either throughout the United States or in particular states.  It is also possible that the President of the United States could issue Executive Orders that would adversely affect our ability to sell, or customers’ ability to purchase, our products.  The political environment for enactment of new “gun control” measures at the federal, state and local level is evolving rapidly and additional significant change in the domestic legal and regulatory environment during 2014 is likely.

 

In light of the uncertain and evolving political, legal and regulatory environment, it is not clear what measures might be necessary in order to redesign products to comply with applicable law, nor whether it will even be possible in every instance to do so.  To the extent that redesigns of products are possible, we may need to spend significant amounts of capital in order to effectuate such redesigns and may incur associated sales, marketing, legal and administrative costs in connection with the introduction of new models.  Furthermore, there is no assurance that customers will accept redesigned product.

 

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A substantial decline in the domestic commercial market for any of these reasons could have a material adverse effect on the businesses we acquire.

 

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. Sullivan and Mr. Loppert have significant experience as CEO and CFO, respectively, of public companies.   Mr. Norris is one of five co-founders of the Carlyle Group, a major merchant bank based in Washington, D. and from 1988-1997, served as Carlyle's President. 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, 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 any of our 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 the small arms 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 June 30, 2014, we had $353,087 cash on hand.  In August 2014 we received approximately $414,000 for recovery of legal fees and expenses from Airtronic.  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 generate sufficient cash flows to meet our obligations as they come due, we may not be able to complete the acquisition of Airtronic, and/or 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.

 

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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, 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 those companies, 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 in the arms business. 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 expect to acquire, which could adversely affect our business.

The companies that we expect 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.

 

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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.

 

The effects of the sequester may adversely impact our business, operating results or financial condition.

The sequester and its associated cutbacks in the military and support services has resulted in furloughs and delays in processing and approving of foreign orders that are approved by the United States Department of Defense. This, coupled with continuing changes in economic conditions, including declining consumer confidence, concerns about inflation or deflation, the threat of a continuing recession, increases in the rates of default and bankruptcy and extreme volatility in the credit and equity markets, may lead our customers to cease doing business with us or to reduce or delay that business or their payments to us, and our results of operations and financial condition could be adversely affected by these actions.  These challenging economic conditions also may result in:

 

  increased competition for less spending;
  pricing pressure that may adversely affect revenue;
  difficulty forecasting, budgeting and planning due to limited visibility into the spending plans of current or prospective customers; or
  customer financial difficulty and increased risk of doubtful accounts receivable.

 

We are unable to predict the duration and severity of the sequester and its adverse economic impact on conditions in the U.S. and other countries.

 

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;
  changes in consumer behavior and any related impact on the advertising industry;
  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.

 

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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. We have begun the costly and challenging process of implementing the system and processing documentation needed to comply with such requirements.

 

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We may not be able to complete our evaluation, testing and any required remediation in a timely fashion.

 

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 cannot assure you that there will not be 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 may be unable to register for resale all of the shares of common stock sold in private placements, in which case purchasers in the private placements will need to rely on an exemption from the registration requirements in order to sell such shares.

In connection with our various private placements, we are obligated to include all such common stock sold in our next “resale” registration statement with the SEC. Nevertheless, it is possible that the SEC may not permit us to register all of such shares of common stock for resale. In certain circumstances, the SEC may take the view that the private placements require us to register the resale of the securities as a primary offering. Investors should be aware of the existence of risks that interpretive positions taken with respect to Rule 415, or similar rules or regulations including those that may be adopted subsequent to the date of this report, that could impede the manner in which the common stock may be registered or our ability to register the common stock for resale at all or the trading in our securities. If we are unable to register some or all of the common stock, or if shares previously registered are not deemed to be freely tradable, such shares would only be able to be sold pursuant to an exemption from registration under the Securities Act, such as Rule 144.

 

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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.

 

There is currently a limited liquid trading market for our common stock and we cannot ensure that one will ever develop or be sustained.

To date there has been a nominal liquid trading market for our common stock.  We cannot predict how liquid the market for our common stock might become.  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 Stock 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.  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 upon the effectiveness of the registration statement we expect to file, or upon the expiration of any statutory holding period, under Rule 144, or issued upon the exercise of outstanding options or warrants, 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. The shares of common stock sold in our private placements will be freely tradable upon the earlier of: (i) effectiveness of a registration statement covering such shares, or (ii) the date on which such shares may be sold without registration pursuant to Rule 144 (or other applicable exemption) under the Securities Act.

 

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Investor Relations Activities, Nominal “Float” and Supply and Demand Factors May Affect the Price of our Stock.

We expect to 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 and we will continue to provide compensation to investor relations firms and 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 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.  Until such time as the common stock sold in the private placements are registered and until such time as the restricted shares of the Company are registered or available for resale under Rule 144, there will continue to be a large percentage of shares held by a relatively small number of investors, many of whom acquired such shares in privately negotiated purchase and sale transactions, that will constitute the entire available trading market.  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 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 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 44% 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;

 

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  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 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 June 30, 2014, we had outstanding options to acquire 5,500,000 shares of our common stock at an exercise price of $0.64 per share and warrants to acquire 4,250,000 shares of our common stock at exercise prices ranging from $0.10 to $1.00. 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

 

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.

 

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USE OF PROCEEDS

 

We will not receive any proceeds from the sale of the common stock by the selling stockholders. However, we will receive up to $1,400,000 from the proceeds from the exercise of the warrants by the selling stockholders if and when those stockholders exercise their warrants. We expect to use such proceeds, if any, for general working capital purposes.

 

MARKET FOR OUR COMMON STOCK AND RELATED STOCKHOLDER MATTERS

 

Our common stock is quoted on the OTCQB Marketplace (“OTCQB”) or pink sheets maintained by the OTC Markets Group under the symbol “GDSI”. As of September 12, 2014, there were 201 holders of record of our common stock. The transfer agent for our common stock is Issuer Direct Corporation.

 

The following table sets forth the high and low bid prices for our common stock for the periods indicated, as reported by the OTCQB. The quotations reflect inter-dealer prices, without retail mark-up, mark-down or commission, and may not represent actual transactions.

 

Period  High   Low 
January 1, 2011 through March 31, 2011  $0.002   $0.002 
April 1, 2011 through June 30, 2011  $0.002   $0.002 
July 1, 2011 through September 30, 2011  $0.040   $0.002 
October 1, 2011 through December 31, 2011  $0.023   $0.008 
January 1, 2012 through March 31, 2012  $0.31   $0.055 
April 1, 2012 through June 30, 2012  $0.12   $0.04 
July 1, 2012 through September 30, 2012  $0.095   $0.01 
October 1, 2012 through December 31, 2012  $0.17   $0.02 
January 1, 2013 through March 31, 2013  $0.14   $0.07 
April 1, 2013 through June 30, 2013  $1.39   $0.09 
July 1, 2013 through September 30, 2013  $1.11   $0.70 
October 1, 2013 through December 31, 2013  $0.87   $0.26 
January 1, 2014 through March 31, 2014  $0.98   $0.41 
April 1, 2014 through June 30, 2014  $0.80   $0.27 

 

The last reported sales price of our common stock on the OTCQB on September 12, 2014 was $0.16 per share.

 

DIVIDEND POLICY

 

We have not declared nor paid any cash dividend on our common stock, and we currently intend to retain future earnings, if any, to finance the expansion of our business, and we do not expect to pay any cash dividends in the foreseeable future. The decision whether to pay cash dividends on our common stock will be made by our board of directors, in their discretion, and will depend on our financial condition, results of operations, capital requirements and other factors that our board of directors considers significant.

 

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

The following discussion and analysis should be read in conjunction with our consolidated financial statements and related notes appearing elsewhere in this prospectus. In addition to historical information, this discussion and analysis contains forward-looking statements that involve risks, uncertainties, and assumptions. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of certain factors, including but not limited to those set forth under “Risk Factors”. The various sections of this discussion contain a number of forward-looking statements, all of which are based on our current expectations and could be affected by the uncertainties and risk factors described throughout this Report as well as other matters over which we have no control. See “Forward-Looking Statements.” Our actual results may differ materially.

 

Results of Continuing Operations

 

Three months ended June 30, 2014 and 2013

 

Revenue and cost of revenue in the three month period ended June 30, 2014 were $111,405 and $69,346, respectively. Revenue was from fixed-price and modified fixed-price construction contracts that are recognized using the percentage-of-completion method of revenue recognition. 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 three-month period ended June 30, 2013.

 

Selling, general and administrative (“S, G & A”) were $3,834,260 and $1,368,497 in three-month periods ended June 30, 2014 and 2013, respectively.  S, G &A was comprised of:

 

   Three Months Ended
June 30,
   Increase/   % 
   2014   2013   (decrease) Change 
Compensation and benefits  $2,620,767   $907,848   $1,712,919    188.7%
Acquisition costs   754,572    -    754,572    - 
Debt issuance costs   25,000    204,286    (179,286)   -87.8%
Investment banking fees   -    71,610    (71,610)   -100.0%
Investor relations and marketing   84,666    84,933    (267)   -0.3%
Office support and supply   48,778    1,669    47,108    2821.9%
Professional and filing fees   276,092    90,876    185,216    203.8%
Depreciation and amortization   12,830    -    12,830    - 
Other   11,555    7,275    4,281    58.8%
   $3,834,260   $1,368,497   $2,465,763    180.2%

 

Compensation and benefits increased by $1,712,919, or 188.7% % to $2,620,767 in 2014 compared to $907,848 in 2013. In the three-month period ended June 30, 2014 compensation and benefits comprised:

 

   2014   2013 
Fair value expense of stock option grants  $1,759,998   $- 
Fair value expense of restricted stock grants   743,613    841,848 
Officer salaries   96,000    66,000 
Payroll   21,156    - 
   $2,620,767   $907,848 

 

Major changes in compensation and benefits include:

 

  Options with a fair market value of $3,520,000 were granted in 2014 and $1,759,998 was expensed in the quarter.
  We have granted restricted stock to officers and advisors which vest ratably through June 2016 and $743,613 was expensed in 2014 compared to $841,848 in 2013.

 

Acquisition costs were related to the NACSV acquisition in 2014 and comprised non-cash compensation of (i) $664,000 of costs to advisors paid in shares of our common stock, and (ii) $65,572 in stock discount expense for payments to the sellers of NACSV in our common stock at a price which resulted in a $0.02 discount to fair value, and $25,000 paid in cash for due diligence services.

 

Debt issuance costs decreased by $(179,286), or (87.8)%.   In connection with the issuance of notes payable and convertible notes payable in prior years, we issued a warrant to a consultant which vested over one year. In three-month period ended June 30, 2014 we expensed $25,000 for amortization of the warrant.  In three-month period ended June 30, 2013, $204,286 was for amortization of warrants issued related to the loans, including to the consultant and to the noteholder.

 

We had no investment banking fees in 2014. In 2013 we paid placement fees of $71,610 in connection with private placements.

 

Investor relations and marketing expense include $79,170 in 2014 and $80,033 paid to consultants for services in shares of our common stock or compensation through the issuance of a warrant which is being amortized over the term of the consulting agreement.

 

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Office supply and support expenses increased by $47,108 or 2,821.9% to $48,778 in 2014 compared to $1,669 in 2013.  In the three-month period ended June 30, 2014, the expense included $30,504 of reimbursable expenses to an officer and advisors, $13,608 of directors and officers liability insurance and key man life insurance of $7,249.  In the three-month period ended June 30, 2013, the expense included $6,250 of web development fees.

 

Professional and filing fees increased $185,216, or 203.8% to $276,092 in 2014 compared to $90,876 in 2013.  In the three-month periods ended June 30, 2014 and 2013, such fees consisted of:

 

   2014   2013 
Accounting and & auditing fees  $11,445   $16,000 
Consulting fees   30,000    7,173 
Legal fees   229,555    67,173 
SEC filing costs   4,844    - 
Other   248    530 
   $276,092   $90,876 

 

Major changes in professional and filing fees include:

 

  Consulting fees increased by $22,827 which incudes $15,000 we paid on a monthly retainer to identify and introduce us to potential acquisitions, and $15,000 paid for the commission of a report.
  Legal fees increased by $162,382. In 2014 we incurred legal fees of approximately $85,000 in connection with litigation against Kett (See Part II, Item 1), approximately $46,000 for services in connection with the NACSV acquisition, approximately $65,000 in connection with the Airtronic bankruptcy and $33,000 for other legal services. In 2013 legal fees were primarily in connection with the Airtronic bankruptcy.

 

Depreciation and amortization in 2014 consists of $12,322 of amortization of intangible assets which are being amortized over five years and $508 of depreciation. We had no such expense in 2013.

 

Gain on extinguishment of debt in 2014 consists of $350,000 forgiveness on the principal payoff of the convertible note payable to Laurus, and $37,642 of interest forgiven. We had no such income in 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 three-month periods ended June 30, 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 $567 in 2014 and $25,477 in 2013 and represented direct costs incurred as we continued to wind down our telecommunications business.

 

Our results of operations for the three-month period ended June 30, 2014 contained a gain of $350,000 from the extinguishment of debt not in our ordinary course of business. Our results of operations for the three-month period ended June 30, 2013 did not contain any unusual gains or losses from transactions not in our ordinary course of business.

 

Six months ended June 30, 2014 and 2013

 

Revenue and cost of revenue in the six-month period ended June 30, 2014 were $111,405 and $69,346, respectively. Revenue was from fixed-price and modified fixed-price construction contracts that are recognized using the percentage-of-completion method of revenue recognition. 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 six-month period ended June 30, 2013.

 

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Selling, general and administrative (“S, G & A”) were $6,690,676 and $2,047,696 in six-month periods ended June 30, 2014 and 2013, respectively.  S, G &A was comprised of:

 

   Six Months Ended
June 30,
   Increase/   % 
   2014   2013   (decrease)   Change 
Compensation and benefits  $4,690,065   $1,213,387   $3,476,679    286.5%
Acquisition costs   754,572    -    754,572    - 
Debt issuance costs   100,000    433,571    (333,571)   -76.9%
Investment banking fees   412,498    71,610    340,888    476.0%
Investor relations and marketing   186,163    154,057    32,106    20.8%
Office support and supply   71,871    8,507    63,364    744.8%
Professional and filing fees   446,023    152,323    293,700    192.8%
Depreciation and amortization   12,830    -    12,830    - 
Other   16,654    14,240    2,414    17.0%
   $6,690,676   $2,047,696   $4,642,980    226.7%

 

Compensation and benefits increased by $3,476,679 or 286.5% % to $4,690,065 in 2014 compared to $1,213,387 in 2013. In the three-month period ended June 30, 2014 compensation and benefits comprised:

 

   2014   2013 
Fair value expense of stock option grants  $2,453,330   $- 
Fair value expense of restricted stock grants   2,068,579    1,063,387 
Officer salaries   147,000    100,000 
Payroll   21,156    - 
   $4,690,065   $1,163,387 

 

Major changes in compensation and benefits include:

 

  Options with a fair market value of $3,520,000 were granted in 2014 and $2,453,330 has been expensed in 2014.
  We have granted restricted stock to officers and advisors which vest ratably through June 2016 and $2,068,579 was expensed in 2014 compared to $1,063,387 in 2013.

 

Acquisition costs were related to the NACSV acquisition in 2014 and comprised non-cash compensation of (i) $664,000 of costs to advisors paid in shares of our common stock, and (ii) $65,572 in stock discount expense for payments to the sellers of NACSV in our common stock at a price which resulted in a $0.02 discount to fair value, and $25,000 paid in cash for due diligence services.

 

Debt issuance costs decreased by $(333,571), or (76.9)%.   In connection with the issuance of notes payable and convertible notes payable in prior years, we issued a warrant to a consultant which vested over one year. In three-month period ended June 30, 2014 we expensed $100,000 for amortization of the warrant.  In three-month period ended June 30, 2013, $358,571 was for amortization of warrants issued related to the loans, including to the consultant and to the noteholder, and $75,000 was paid in cash for loan fees.

 

Investment banking fees in 2014 represented the amortization of a cash fee and the fair value of a warrant granted to an investment banking company. In 2013 we paid placement fees of $71,610 in connection with private placements.

 

Investor relations and marketing expense include $179,169 in 2014 and $148,807 paid to consultants for services in shares of our common stock or compensation through the issuance of a warrant which is being amortized over the term of the consulting agreement.

 

Office supply and support expenses increased by $63,364 or 744..8% to $71,871 in 2014 compared to $8,507 in 2013.  In the six-month period ended June 30, 2014, the expense included $30,504 of reimbursable expenses to an officer and advisors, $27,216 of directors and officers liability insurance and key man life insurance of $14,498.  In the six-month period ended June 30, 2013, the expense included $6,250 of web development fees.

 

Professional and filing fees increased $293,700, or 192.8% to $446,023 in 2014 compared to $152,323 in 2013.  In the six-month periods ended June 30, 2014 and 2013, such fees consisted of:

 

   2014   2013 
Accounting and & auditing fees  $42,895   $30,500 
Consulting fee   50,447    17,173 
Legal fees   342,631    104,120 
Public company/SEC related fees and expenses   8,651    - 
Other   1,399    530 
   $446,023   $152,323 

 

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Major changes in professional and filing fees include:

 

  Consulting fees increased by $33,274 which incudes $15,000 we paid on a monthly retainer to identify and introduce us to potential acquisitions, and $15,000 paid for the commission of a report.
  Legal fees increased by $238,511. In 2014 we incurred legal fees of approximately $109,000 in connection with litigation against Kett (See Part II, Item 1), approximately $46,000 for services in connection with the NACSV acquisition, approximately $131,000 in connection with the Airtronic bankruptcy, and $55,000 for other legal services. In 2013 legal fees we incurred $101,000 of fees in connection with the Airtronic bankruptcy.

 

Depreciation and amortization in 2014 consists of $12,322 of amortization of intangible assets which are being amortized over five years and $508 of depreciation. We had no such expense in 2013.

 

Gain on extinguishment of debt in 2014 consists of $350,000 for forgiveness on the payoff of the convertible note payable to Laurus, and the recapture of $37,642 of interest not paid. We had no such income in 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 three-month periods ended June 30, 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 in 2014 and $271,221 in 2013 and represented the direct costs and loss on sale of assets we incurred as we continued to wind down our telecommunications business.

 

Our results of operations for the six-month period ended June 30, 2014 contained a gain of $350,000 from the extinguishment of debt not in our ordinary course of business. Our results of operations for the six-month period ended June 30, 2013 did not contain any unusual gains or losses from transactions not in our ordinary course of business.

 

Year ended December 31, 2013 and 2012

We had no revenue from continuing operations in either 2013 or 2102.  Cost of revenue from continuing operations was $0 in 2013 compared to $300 in 2012.  Selling, general and administrative expenses (“S,G & A”) were $8,384,247 in 2013 compared to $301,284 in 2012, a $8,082,963 increase, or 2682.8%.  S,G & A was comprised of:

 

   2013   2012   Increase/ (decrease)   % Change 
Communications  $5,016   $1,226   $3,790    309.1%
Compensation and benefits   5,443,707    200,000    5,243,707    2,621.9%
Debt issuance costs   1,385,000    -    1,385,000    100.0%
Facility expense   13,275    -    13,275    100.0%
Investment expense   514,808    -    514,808    100.0%
Investor relations and marketing   380,944    81,125    299,819    369.6%
Office supply and support   55,231    3,205    52,026    1,623.3%
Professional and filing fees   554,408    11,075    543,333    4,905.9%
Travel and entertainment   31,858    4,653    27,205    584.7%
   $8,384,247   $301,284   $8,082,963    2,682.8%

 

Compensation and benefits increased by $5,243,707, or 2,621.9%.  In 2013 we granted restricted stock awards to our senior officers and advisors and amortized the fair market value  - $5,158,207 - over the vesting period. We had no such expense in 2012. Salaries and consulting fees to officers were $285,500 in 2013 compared to $200,000 in 2012.

 

Debt issuance costs increased by $1,385,000.  We had no such expense in 2012.  In connection with the issuance of notes payable and convertible notes payable, we issued warrants and restricted stock to the lender and certain consultants who facilitated the loan.  The fair value of the warrants and restricted stock was determined using the Black-Scholes valuation model and the expense was amortized over the life of the debt.

 

Investment expense in 2013 includes (i) $400,000 of amortization of the fair market value of a warrant issued to an investment bank for services to be rendered, (ii) and placement fees of $43,200 settled in shares of our common stock. We had no such expense in 2012.

 

Investor relations and marketing expense increased by $299,819 or 369.6%, and were primarily for services rendered paid in shares of our common stock.

 

Professional and filing fees increased by $543,333, or 4,905.9% to $554,408 in 2013 compared to $11,075 in 2012.  In the year ended December 31, 2012 they consisted primarily of legal fees, Edgar filing and OTC filing fees.  In the year ended December 31, 2013, such fees consisted of:

 

  Accounting and & auditing fees of $99,802;
  Consulting fees of $92,369;
  Legal fees of $353,978;
   Public company/SEC related fees and expenses of $6,325; and
  Transfer agent fees of $1,934.

 

Gain on extinguishment of debt was $31,712 in 2013 and was in connection with the conversion of convertible notes payable into shares of our common stock.

 

Interest income was $59,701 in 2013 and is the interest on the bridge loans we made to Airtronic.  We had no such interest income in 2012.

 

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Interest expense was $733,198 in 2013 and is comprised as follows:

 

  Interest on notes payable and convertible notes payable of $56,712; and
  The beneficial conversion feature of convertible notes payable of $676,486.

 

We had no such interest expense in 2012.

 

There is no income tax benefit for the losses for the years ended December 31, 2013 and 2012, 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 in the years ended December 31, 2013 and 2012 was comprised as follows, and related to the operations of Bronco:

 

Net sales  $-   $144,337 
Cost of goods sold   -    114,071 
Gross profit   -    30,266 
Selling, general and administrative expenses   25,477    236,564 
Loss on sale of assets of discontinued operations   245,744    - 
Interest expense   -    7,000 
Other income   -    (4,376)
Loss before provision for income taxes   (271,722)   (208,922)
Provision for income taxes   -    - 
Loss from discontinued operations  $(271,722)  $(208,922)

 

Our results of operations for the years ended December 31, 2013 and 2012 did not contain any unusual gains or losses from transactions not in our ordinary course of business.

 

Liquidity and Capital Resources

 

As of June 30, 2014, we had cash and cash equivalents totaling $353,087 and working capital of $268,853. For the six-month period ended June 30, 2014, we incurred a net loss of $6,229,806, and at June 30, 2014, we had an accumulated deficit of $23,088,181 and total stockholders’ equity of $680,424. We expect to incur losses for the remainder of fiscal 2014. 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 $707,346 for the six-month period ended June 30, 2014 compared to $343,249 for the six-month period ended June 30, 2013.

 

In the six-month period ended June 30, 2014, cash was used to fund a net loss of $6,229,806, increased by a gain on extinguishment of debt of $387,642, and reduced by depreciation and amortization of $12,831, non-cash stock-based compensation of $4,521,909, common stock and warrants issued for services of $604,168, non cash interest expense of $9,181, common stock issued for acquisition services of $235,000, other non cash acquisition expenses of $1,822, and changes in operating assets and liabilities of $514,020.

 

In the six-month period ended June 30, 2013, cash was used to fund a net loss of $3,014,794, reduced by non-cash stock-based compensation of $1,371,958, common stock and warrants issued for services of 375,533, amortization of debt discount of $676,487, and changes in operating assets and liabilities totaling $106,774 and cash provided by discontinued operations of $245,745.

 

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Cash used in investing activities

 

Net cash provided by investing activities totaled $601,299 for the six-month period ended June 30, 2014. During the period we advanced $43,182 to Airtronic, received cash of $1,509,056 from Airtronic for the repayment of the bridge loans and $135,425 of cash in connection with the NACSV acquisition, reduced by $1,000,000 paid for the acquisition of NACSV.

 

Net cash used in investing activities totaled $695,961 in the six-month period ended June 30, 2013, and was for advances to Airtronic under the bridge loans.

 

Cash from financing activities

 

Net cash used in financing activities was $50,000 in the six-month period ended June 30, 2013. We received proceeds from the exercise of warrants of $125,000, and we paid off notes payable and convertible notes payable totaling $175,000.

 

Net cash provided by financing activities totaled $1,263,500 in the six-month period ended June 30, 2013. We received net proceeds of $926,100 from private placement sales of our common stock, $374,900 from short-term borrowings, and we repaid $37,500 of short-term borrowings.

 

Financial condition

 

As of June 30, 2014, we had cash and cash equivalents totaling $353,087, working capital of $268,853 and stockholders equity of $680,424. 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 2014 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. On August 12, 2014, we received approximately $414,000 awarded to us for legal fees and expense in the Airtronic bankruptcy case.

 

At December 31, 2013 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 businesses in the areas of cyber arms technology and 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. 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.

 

In May 2014 Airtronic repaid our Bridge Loans to them and in August we received an award of $414,760.83 for legal fees and expenses incurred.  In June 2014 we acquired all of the membership interest in North American Custom Specialty Vehicles, LLC (“NACSV”) for $1,000,000 in cash at closing, $200,000 in shares of our common stock, up to $816,373 for the True-Up payment, payable in shares of our common stock, and additional consideration of up to $2.4 million payable either in cash or in shares of our common stock in the future all as described in the Equity Purchase Agreement attached hereto as Exhibit 2.5.  Established in 1997, NACSV initially provided off-the-shelf RV vehicles with Satellite phone installations for Insurance Companies’ use for post disaster administration for mobile claim centers.  In 2002, in response to a FEMA request, NACSV began to develop the first Mobile Command Centers. As a result, NACSV has developed a strong reputation not only for quality units but also for quality service.  NACSV’s CEO was a co-author of the National Incident Management System (NIMS) Standards issued by FEMA for all Mobile Communications Vehicles purchased using Federal Grant monies. “NIMS is a systematic, proactive approach to guide departments and agencies at all levels of government, nongovernmental organizations, and the private sector to work together seamlessly and manage incidents involving all threats and hazards—regardless of cause, size, location, or complexity—in order to reduce loss of life, property and harm to the environment” 1. NIMS standards range from Type I through Type IV 2. The Company specializes in Type I & II, however provides additional Emergency Response Vehicles for HazMat, Chemical, Biological, Radiological, Nuclear and Enhanced Conventional Weapons as well as other vehicles designed for specific medical uses.

 

Off-Balance Sheet Arrangements

 

Since our inception, except for standard operating leases, we have not engaged in any off-balance sheet arrangements, including the use of structured finance, special purpose entities or variable interest entities.

 

 

1 Per FEMA’s website.

2 The NIMS standards for Mobile Command Centers are set forth in Exhibit 99.1 which is attached hereto and incorporated herein by reference.

 

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BUSINESS

 

Unless the context provides otherwise, when we refer to the “Company,” “we,” “our,” or “us” in this Prospectus, we are referring to Global Digital Solutions, Inc., a New Jersey corporation and, where applicable, its 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 control over financial reporting; and 
  Reduced disclosure of financial information in this prospectus, 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.

 


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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 many of these customer 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.

 

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Our growth plan is a unique combination of experience, technological innovation and global reach.  To implement it we will:

 

  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 5 and six companies by the end of December 2015.  We are in the process of identifying 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 expect that to complete the acquisitions we will need to raise or borrow, through a combination of equity and or debt offerings approximately $70 million to complete these targeted acquisitions.  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 their 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 is 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 include GPS, Wi-Fi, various near-field communication protocols, and RFID.  In order to design and produce the potential future product, GDSI expects to work with third party hardware designers, firmware and software development companies and Original Design Manufacturers (ODM).  There are currently no relationships with these types of companies in place related to the potential future product.

 

Gatekeeper will provide commercial and military customers with three essential safety and security benefits:

 

  Secure, real-time online tracking via encrypted, cloud-enabled databases
  Encrypted, password-protected, digital, trigger-locking capability
  Gatekeeper is a reverse-engineered aftermarket option intended to be purchased at gun and outfitter dealers worldwide.

 

Acquisition and Disposition of Bronco Communications, LLC

On January 1, 2012, we acquired a 51% stake in Bronco Communications, LLC, (“Bronco”) a Nevada-California regional telecommunications subcontractor located in Folsom, CA in consideration for 4,289,029 shares of our restricted common stock valued at $0.035 per share, or $150,116, the fair market value of our common stock on the date the agreement was made. One of our directors and executive officer owns a 10% membership interest in Bronco. On October 15, 2012, we entered into an Amendment to the Purchase Agreement, in which we agreed to relinquish control of Bronco to its minority shareholders effective as of January 1, 2013, in consideration for the assumption of Bronco’s liabilities. Thus, as of January 1, 2013, we no longer held any interest in Bronco. The foregoing description of the acquisition and disposition of Bronco does not purport to be complete and is qualified in its entirety by reference to the complete text of the (i) Purchase Agreement, which is filed as Exhibit 2.1 hereto, and (ii) the Amendment to Purchase Agreement, which is filed as Exhibit 2.2 hereto, each of which is incorporated herein by reference.

 

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 and are in the process of changing the name of Global Digital Solutions, LLC to GDSI International which, under the leadership of Stephen L. Norris, its newly appointed CEO, will spearhead our efforts overseas.

 

Acquisition of North American Custom Specialty Vehicles, LLC.

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.  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.

 

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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 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. 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”).

 

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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, the Company 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 its standard costing procedures and costs, and its inventory management system.

 

The Company’s CEO was responsible for sales and marketing. Airtronic’s CEO was 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 Note Payable

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. The 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 to 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 “Warrant”).

 

On May 6, 2013, the Company and the Lender entered into an amendment (the “Amendment”) which:

 

(1) Extended the Note’s maturity date to July 1, 2013;
(2) Provided that on or before the maturity date, we may elect to convert the 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 Warrant from $0.15 to $0.10.

 

On July 1, 2013, the Lender converted the Note into 3,000,000 shares of our restricted common stock. On December 18, 2013, the Lender partially exercised the Warrant and we issued 1,250,000 shares of our restricted common stock in consideration for $125,000.

 

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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”). 

 

Placement Agent Agreement

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 the Securities, payable in full, in cash, at a Closing for the sale of any of the 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, and have the same terms and conditions of the warrants issued to the Investors.

 

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.

 

Executive Offices

Our executive officers are located at 777 South Flagler Drive, Suite 800 West, West Palm Beach, FL 33410 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.  A copy of the Online Virtual Office Agreement is attached hereto as Exhibit 10.

 

Patents, Trademarks, and Licenses

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 will be subject to various federal, state, local, provincial and foreign laws and regulations governing the protection of human health and the environment.  In 2013, 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 June 30, 2014, we employed four 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.

 

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MANAGEMENT

 

Our Officers and Directors are as follows:

 

Name   Title
Richard J. Sullivan   Director, Chairman, President, Chief Executive Officer and Assistant Secretary
Stephen L. Norris   Director, Vice Chairman, CEO GDSI International
Arthur F. Noterman   Director
Stephanie S. Sullivan   Director
William J. Delgado   Director, Executive Vice President
David A. Loppert   Executive Vice President, Chief Financial Officer, Treasurer and Secretary
Gary A. Gray   Vice President, Chief Technology Officer

 

Richard J. Sullivan (age 74) 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 specializes 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.  Currently serving as Chairman of Stephen Norris Capital Partners, LLC, Mr. Norris has substantial expertise in structuring, negotiating and implementing leveraged buy-outs, cash-flow-based investments and financing strategies in the public and private capital markets.  Mr. Norris is one of five co-founders of the Carlyle Group, a major merchant bank based in Washington, D.C.  From 1988-1997, Mr. Norris served as Carlyle's President.  He was a principal participant and key advisor in Carlyle's numerous investments in various public and private companies.  While at Carlyle, Mr. Norris, along with other senior members of the Carlyle team, participated in the acquisition, disposition, strategic focusing and financing (in public and private markets) of numerous companies involving several billion dollars of equity capital.  Carlyle invested in leveraged buyouts (LBOs), venture capital (particularly telecommunications and wireless companies in the pre-Internet days), and real estate.  Today, Carlyle is one of the largest and most successful private equity firms in the world.  Prior to co-founding Carlyle, Mr. Norris was a Corporate Vice President of Marriott Corporation in Washington, D.C. He was a principal strategist and advisor for Marriott's substantial public and private financings, limited partnerships, acquisitions and divestitures from 1981 to mid-1987.  In 1992, Mr. Norris was appointed by President George Bush, and confirmed by the U.S. Senate, as one of the five board members of the approximately (at the time) $68 billion Federal Retirement Thrift Investment Board. During his tenure (1992-1995), Mr. Norris successfully advocated for the right of Federal employees to allocate a greater portion of their savings into public equities.  Until late 1996, Mr. Norris served on the Advisory Committee of SEAG, Inc. which advises the Saudi Government on economic development and diversification within the Kingdom of Saudi Arabia. Mr. Norris was a Fellow at Yale Law School (1977) and received a B.S. and J.D. (1972, 1975) with honors from the University of Alabama, and an L.L.M. from New York University (1976). Management believes that Mr. Norris’ past experience qualifies him for his positions with the Company.

 

Arthur F. Noterman (age 71) was appointed to our Board on August 12, 2014.  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 25) was appointed to our Board on August 12, 2014. 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 54) 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.

 

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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: DIGA) 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. Norris, 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.

 

Our Board has determined that Messrs. Norris and Noterman are independent under the NASDAQ Stock Market Listing Rules.

 

In December 2012 we entered into an agreement with an investor to lend us $750,000. As part of that agreement, Bay Acquisition Corp., an entity controlled by Richard J. Sullivan, a director and officer of the Company, 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 LLC 3,000,000 shares of our restricted common stock valued at $360,000.

 

On January 1, 2012, we acquired a 51% stake in Bronco Communications, LLC, (“Bronco”) a Nevada-California regional telecommunications subcontractor located in Folsom, CA in consideration for 4,289,029 shares of our restricted common stock valued at $0.035 per share, or $150,116. William J. Delgado, a director and officer of the Company, owns a 10% membership interest in Bronco. On October 15, 2012, we entered into an Amendment to Purchase Agreement, and we agreed to relinquish control of Bronco to its minority shareholders effective as of January 1, 2013, in consideration for the assumption of liabilities. Thus, at January 1, 2013, we no longer have an interest in Bronco.

 

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 for services rendered to the Company in negotiating the Bridge Loan 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. 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 to $0.26 per share.

 

On August 25, 2014 we granted Stephen L. Norris, Chairman and CEO of our wholly owned subsidiary, GDSI International, 12 million restricted stock units (“Units”) convertible into 12 million shares of the Company’s common stock, with a 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 Units 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 below.  If less than 90% of the target is achieved in respect of any such fiscal year, then the number of Units 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 Units 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 Units 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.

 

Revenue Targets     
July 1, 2014 - June 30, 2015  $9,911,000 
July 1, 2015 - June 30, 2016  $18,921,000 
July 1, 2016 - June 30, 2017  $24,327,000 

  

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Percentage vesting based on revenue targets:

 

Revenue as a % of Target  % Vest 
90% - 100%   100%
80% - 90%   90%
70% - 80%   80%
60% - 70%   70%
50% - 60%   60%
40% - 50%   50%
30% - 40%   40%
20% - 30%   30%
10% - 20%   20%
less than 10%   0%

 

Neither Mr. Norris, 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.

 

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 intend to appoint such persons to the Board and committees of the Board as are expected to be required to meet the corporate governance requirements imposed by a national securities exchange, although we are not required to comply with such requirements until we elect to seek listing on a national securities exchange. We intend to appoint directors in the future so that a majority of our directors will be independent directors, of which at least one director will qualify as an “audit committee financial expert,” within the meaning of Item 407(d)(5) of Regulation S-K, as promulgated by the SEC. We have not appointed an audit committee, compensation committee, or nominating committee although we expect to do so in the near future.

 

Code of Ethics

Our Board has approved, and we have adopted, a Code of Conduct and Ethics that applies to all of our directors, officers, employees, consultants and agents. We will provide a copy of the Code of Conduct and Ethics free of charge upon request to any person submitting a written request to our chief executive officer.

 

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.

 

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Advisory Board

Our advisory board, which advises senior management, consists of the following individuals:

 

Edwin J. Wang Chairman, Advisory Board
Jennifer S. Carroll Advisor
Matthew K. Kelley Advisor
Richard J. Feldman Advisor
Thomas W. Janes Advisor

 

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. He is the founder of Accretive Capital.  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. 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. Richard J. Sullivan, our Chairman and CEO, is an “Entrepreneur in Residence, at Accretive Exit Partners.

 

Jennifer S Carroll was Florida’s 18th Lieutenant Governor. She was the first female elected as Lieutenant Governor in Florida and the first African-American elected Statewide. Ms. Carroll was a state legislator for over seven years, a small business owner, former Executive Director of Florida Department of Veterans’ Affairs responsible for over 1.8 million veterans and a Navy veteran. In addition to her duties assisting the Governor with economic development, Ms. Carroll oversaw the Florida Department of Military Affairs, Florida Department of Veterans Affairs, and was Chairperson of Space Florida. Ms. Carroll She was also the Governor’s Designee on the Florida Defense Support Task Force, and Chairperson on the Governor’s Task Force on Citizen Safety and Protection. As a legislator, Ms. Carroll worked to pass meaningful legislation that enhanced economic development, which included procuring $2.9 million to fund the Florida Export Finance Corporation to help employers have access to short term loans in order to retain and create jobs. She sponsored the Entertainment Economic Development Legislation that created thousands of jobs for Floridians who were paid over $485 million in wages. Ms. Carroll also served as Deputy Majority Leader from 2003-2004, Majority Whip from 2004-2006, Vice Chair of the Transportation and Economic Development Committee 2003-2004, Chair of the Finance Committee from 2006-2008 and Chair of the Economic and Development Council from 2008-2010.  Ms. Carroll holds an MBA degree from St. Leo University.

 

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 and is among the top public affairs consultants. A former Reagan White House appointee at the Commerce Department, he 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.  For more information, visit www.MLSCommunication.com. 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).

 

Thomas W. Janes has a 25-year track record of working with management teams in the middle market. Prior to founding Kerry Capital Advisors, he was a Managing Director of Lincolnshire and head of Lincolnshire's Boston Office, where he started in 2003. Mr. Janes has served as a member of the Board of Directors of the following Lincolnshire portfolio companies: Cutters Wireline Services, Inc., Dalbo Holdings, Inc., and Paddock Pool and Construction, Inc.  Prior to Lincolnshire, Mr. Janes was a co-founder and Managing Director of Triumph Capital Group, where he served as a senior member of a private equity team that successfully sourced and managed approximately $900 million in private equity capital. During his tenure at Triumph Capital, he led numerous investments in middle market companies in a variety of recapitalization, growth financing, leveraged buyout, and consolidation transactions, and served as a Board member of several Triumph portfolio companies. Prior to co-founding Triumph Capital, he was an investment banker at Drexel Burnham, First Boston, and Lazard Freres & Co., where he led numerous corporate finance and merger and acquisition transactions. Early in his career, Mr. Janes worked as a consultant in Bain and Co.'s Boston and London offices. Mr. Janes has served on the Boards of numerous private companies and the following public companies: Alarmguard Holdings, Inc., Ascent Pediatrics, Inc., CAPE Systems, Inc., DairyMart Convenience Stores, Inc., and Providence Health Care, Inc. Mr. Janes had held a National Association of Securities Dealers Register Principal (Series 24) and Register Representative (Series 7) designation and a Massachusetts Uniform Securities Agent (Series 63).  He has served on the Board of Directors of the Harvard Business School Association of Boston, The Boston University School of Public Health and The Arthritis Foundation of Massachusetts, as well as a member of numerous professional organizations. He has been a frequent speaker at private equity and financial management conferences. Mr. Janes has served as an alumni representative to the Advisory Committee on Shareholder Responsibility (which advises the Harvard Corporation with respect to certain proxy issues) and is a member of the Board of Directors of many charitable organizations. A frequent speaker at industry events, including commenting on private equity issues at the annual Chicago Federal Reserve Forum, he has written more than 100 articles for such publications as The New York Times, The New York Times Annual Economic Review, The Boston Globe and The World Paper. He has an AB degree with honors from Harvard College and MBA from Harvard Business School.

 

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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 and advisor on the anniversary of the advisory award, as follows:

 

Name   Date of Grant  

Number of

Shares

  Vest from   Vest To
                 
Edwin J. Wang   4/17/13   1,250,000   4/30/13   3/31/14
    4/17/13   1,250,000   2/28/14   1/31/15
    2/4/14   1,500,000   2/4/14   1/31/15
                 
Jennifer S. Carroll   4/17/13   1,250,000   4/30/13   3/31/14
    4/17/13   1,250,000   2/28/14   1/31/15
                 
Mathew Kelley   4/17/13   1,250,000   4/30/13   3/31/14
    4/17/13   1,250,000   2/28/14   1/31/15
                 
Richard J. Feldman   4/30/14   500,000   4/30/14   3/30/15
        500,000   4/30/15   3/30/16
                 
Thomas W. Janes   5/7/14   500,000   5/7/14   4/30/14
        500,000   5/30/15   4/30/16

 

EXECUTIVE COMPENSATION

 

The following Summary Compensation Table sets forth, for the years ended December 31, 2013 and 2012, the compensation earned by our named executive officers.

 

Name and Principal Position   Year   Salary ($)     Bonus ($)    

Stock awards

($) (5)

   

All other

compensation

($) (6)

    Total ($)  
(a)   (b)   (c)     (d)     (e)     (i)     (j)  
Richard J. Sullivan (1),   2013   $ -     $ -     $ 2,635,000     $ 157,000     $ 2,792,000  
Chairman, CEO, President and Assistant Secretary   2012   $ -     $ -                     $ -  
                                             
David A. Loppert (2),   2013   $ -     $ -     $ 1,282,500     $ 78,500     $ 1,361,000  
Executive Vice President, CFO, Treasurer and Secretary   2012   $ -     $ -     $ -     $ -     $ -  
                                             
William J. Delgado (3),   2013   $ 50,000     $ -     $ 227,500     $ -     $ 277,500  
Director,  Former President, Chief Executive Officer & Chief Financial Officer, currently Executive Vice President   2012   $ 199,990     $ -     $ -     $ -     $ 199,990  
                                             
Gary A. Gray (4)   2013   $ -     $ -     $ 227,500     $ 24,500     $ 252,000  
Vice President, CTO   2012   $ -     $ -                     $ -  

 

 

(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.
(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.
(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.
(5) The amounts in this column represent the fair value of the award as of the grant date as computed in accordance with FASB ASC Topic 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) Paid as consulting fees.

 

Options Granted to Named Executives

 

No option awards were granted in 2013 or 2012.

 

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Outstanding Equity Awards at Fiscal Year-End

 

The following table provides information as of December 31, 2013 regarding restricted stock held by the named executive officers.  There are no outstanding stock options held by the named executive officers.

 

Name  Number of Shares or Units of Stock That Have Not Vested (#)(1)   Market Value of Shares of Stock That Have Not Vested ($)(2)   Equity Incentive Plan Awards: Number of Unearned Shares, Units or Other Rights That Have Not Vested (#)   Equity Incentive Plan Awards: Market or Payout Value of Unearned Shares, Units, or Other Rights That Have Not Vested ($) 
                 
Richard J. Sullivan   13,000,000   $5,850,000    -   $ 
                    
David A. Loppert   8,000,000   $3,600,000    -   $ 
                     
William J. Delgado   1,000,000   $450,000    -   $ 
                     
Gary A. Gray   1,000,000   $450,000    -   $ 

 

 

(1) All restricted stock granted to the named executives vested in January 2014.
(2) Computed by multiplying the closing market price of a share of our common stock on December 31, 2013, or $0.45, by the number of shares of common stock that have not vested.

 

See “Description of Securities - Equity Compensation Plan Information” for a description of our 2014 Equity Incentive Plan.

 

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.

 

Effective as of July 2, 2014, Stephen L. Norris was appointed a director of the Company.  We have agreed to pay Mr. Norris a monthly fee of $6,000 in cash, monthly in arrears commencing July 31, 2014 and continuing monthly thereafter for so long as he continues to serve on our Board.

 

CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

 

Since the beginning of our fiscal year 2012, 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.

 

On January 1, 2012, we acquired a 51% stake in Bronco Communications, LLC, (“Bronco”) a Nevada-California regional telecommunications subcontractor located in Folsom, CA in consideration for 4,289,029 shares of our restricted common stock valued at $0.035 per share, or $150,116, the fair market value of our common stock on the date the agreement was made. One of our directors and an executive officer owns a 10% membership interest in Bronco. On October 15, 2012, we entered into an Amendment to Purchase Agreement, and we agreed to relinquish control of Bronco to its minority shareholders effective as of January 1, 2013.

 

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. The 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 to 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 “Warrant”).

 

On May 6, 2013, the Company and the Lender entered into an amendment (the “Amendment”) which:

 

(1) Extended the Note’s maturity date to July 1, 2013;
(2) Provided that on or before the maturity date, we may elect to convert the 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 Warrant from $0.15 to $0.10.

 

On July 1, 2013, the Lender converted the Note into 3,000,000 shares of our restricted common stock. On December 18, 2013, the Lender partially exercised the Warrant and we issued 1,250,000 shares of our restricted common stock in consideration for $125,000.

 

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.

 

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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.

 

On August 25, 2014 we granted Stephen L. Norris, Chairman and CEO of our wholly owned subsidiary, GDSI International, 12 million restricted stock units (“Units”) convertible into 12 million shares of the Company’s common stock, with a 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. See – Management – Page 30, for additional information.

 

In the twelve-month period ended December 31, 2013 we paid Richard J. Sullivan consulting fees of $157,000.  Mr. Sullivan did not receive a salary in 2013.

 

SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

 

The following table sets forth the number of shares of our Common Stock beneficially owned as of September 12, 2014, 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) 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    29.2%
Stephen L. Norris (3)   0    0.0%
David A. Loppert (4)   9,500,000    9.2%
William J. Delgado (5)   3,322,032    3.2%
Arthur F. Noterman (6)   500,000    * 
Stephanie C. Sullivan (6)   1,000,000    1.0%
Gary A. Gray   1,000,000    1.0%
All Directors and Officers   45,562,032    38.7%
           
5% or Greater Shareholders:          
Gabriel De Los Reyes/ Maria Lourdes De Los Reyes (7)   7,250,000    7.0%
17795 SW 158th Street          
Miami, FL 33187          

 

 

* Less than 1%.
(1) Applicable percentages are based on 103,469,278 shares outstanding as of September 12, 2014.  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) Excludes 12 million restricted stock units convertible into up to 12 million shares of our common stock granted to Mr. Norris which commence to vest on June 30, 2015.
(4) Includes 1,500,000 currently exercisable stock options.
(5) 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.
(6) Includes 500,000 currently exercisable stock options.
(7) Includes 1,750,000 currently exercisable warrants.

 

SELLING STOCKHOLDERS

 

Up to 32,082,170 shares of our common stock are being offered by this prospectus, all of which are being registered for sale for the accounts of the selling security holders and include the following:

 

Each of the transactions by which the selling stockholders acquired their securities from us was exempt under the registration provisions of the Securities Act.

 

The shares of common stock referred to above are being registered to permit public sales of the shares, and the selling stockholders may offer the shares for resale from time to time pursuant to this prospectus. The selling stockholders may also sell, transfer or otherwise dispose of all or a portion of their shares in transactions exempt from the registration requirements of the Securities Act or pursuant to another effective registration statement covering those shares. We may from time to time include additional selling stockholders in supplements or amendments to this prospectus.

 

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The table below sets forth certain information regarding the selling stockholders and the shares of our common stock offered by them in this prospectus. None of the selling stockholders have had a material relationship with us within the past three years other than as described in the footnotes to the table below or as a result of their acquisition of our shares or other securities. To our knowledge, subject to community property laws where applicable, each person named in the table has sole voting and investment power with respect to the shares of common stock set forth opposite such person’s name.

 

None of the selling stockholders listed below are broker-dealers or affiliates of broker-dealers.

 

Beneficial ownership is determined in accordance with the rules of the SEC. Each selling stockholder’s percentage of ownership of our outstanding shares in the table below is based upon 103,469,278 shares of our common stock outstanding as of September 12, 2014.

 

   Ownership Before Offering  After Offering (1) 
Selling Stockholder  Number of Shares of Common Stock Beneficially Owned   Number of
Shares
Offered
  Number of Shares of Common Stock Beneficially Owned   Percentage of Common Stock Beneficially Owned 
David Aurbach   100,000    100,000   (2) , (23)   -    0.00%
Eli Aramooni   270,000    20,000   (2) , (22)   250,000    0.24%
Jeff Brenner   50,000    15,000   (2) , (23)   35,000    0.03%
Nolan Carroll II   20,000    20,000   (2) , (23)   -    0.00%
Jay Cohen   40,000    40,000   (2) , (23)   -    0.00%
Brian A. Dekle   8,266,628    8,266,628   (17)   -    0.00%
John  Ramsay   2,755,542    2,755,542   (18)   -    0.00%
Ken Dalsgaard   100,000    100,000   (2) , (23)   -    0.00%
Tara S. Delgado   1,536,000    636,000   (2), (19) , (26)   900,000    0.87%
Sean Downes   400,000    400,000   (2) , (23)   -    0.00%
Rodger Fauber   150,000    75,000   (2) , (23)   75,000    0.07%
Fine Spotted Partners, LLC   100,000    100,000   (3)   -    0.00%
E. Eldredge Floyd   1,046,000    231,000   (2) , (20)   815,000    0.79%
Lou Forte   50,000    50,000   (2) , (23)   -    0.00%
Philip Forte   40,000    40,000   (2) , (23)   -    0.00%
Kevin J. Heneghan   775,000    775,000   (2) , (24)   -    0.00%
Lookout Dove Partners, LLP   325,000    325,000   (4) , (24)   -    0.00%
Franklin L. Johnson Trustee, Franklin Johnson Revocable Trust   516,667    100,000   (2) , (21)   416,667    0.40%
JBA Enterprises, LLC   1,000,000    1,000,000   (5)   -    0.00%
Gregg Kaminsky   40,000    40,000   (2) , (23)   -    0.00%
Brain Kopelowitz   80,000    80,000   (2) , (23)   -    0.00%
Jeff Kelley   126,000    126,000   (6)   -    0.00%
Philip Land   312,000    187,000   (2) , (23)   125,000    0.12%
Carmine Latanza   60,000    60,000   (2) , (23)   -    0.00%
Michael G. Lee   20,000    20,000   (2) , (22)   -    0.00%
Logan's Run, Inc.   20,000    20,000   (7)   -    0.00%
Midtown Partners & Co., LLC   1,000,000    1,000,000   (8)   -    0.00%
Charles G. Masters, Jr.   900,000    900,000   (14)   -    0.00%
Tonya Phillips   720,000    720,000   (15)   -    0.00%
Robert M. Snibbe, Jr.   180,000    180,000   (16)   -    0.00%
Kimberly Minter   50,000    50,000   (2) , (23)   -    0.00%
Joan O'Leary   100,000    100,000   (2) , (25)   -    0.00%
Peter Rega   40,000    40,000   (2) , (23)   -    0.00%
Gabriel A. De Los Reyes/Maria Lourdes De Los Reyes   7,250,000    7,250,000   (9)   -    0.00%
Artemios Roussos   140,000    100,000   (2) , (21)   40,000    0.04%
Rok Global Solutions, LLC   3,020,000    3,020,000   (10)   -    0.00%
Michael Singer   20,000    20,000   (2) , (23)   -    0.00%
Evan Sullivan   530,000    530,000   (2) , (26)   -    0.00%
K. Brett Thackston   1,750,000    1,250,000   (11)   500,000    0.48%
Scott Weiselberg   1,000,000    1,000,000   (12)   -    0.00%
Family Trust of Eva A Ware, Eva A. Ware Trustee   670,000    170,000   (2) , (22)   500,000    0.48%
David E. Ware   10,000    10,000   (2) , (22)   -    0.00%
Aaron David Ware   20,000    20,000   (2) , (22)   -    0.00%
Jordan Tyler Ware   20,000    20,000   (2) , (22)   -    0.00%
Zoom Cash Advances   120,000    120,000   (13)   -    0.00%
Total   35,738,837    32,082,170       3,656,667      

 

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(1) Represents the amount of shares that will be held by the selling stockholders after completion of this offering based on the assumptions that (a) all shares registered for sale by the registration statement of which this prospectus is part will be sold and (b) no other shares of our common stock are acquired or sold by the selling stockholders prior to completion of this offering. However, the selling stockholders may sell all, some or none of the shares offered pursuant to this prospectus and may sell other shares of our common stock that they may own pursuant to another registration statement under the Securities Act or sell some or all of their shares pursuant to an exemption from the registration provisions of the Securities Act, including under Rule 144. To our knowledge there are currently no agreements, arrangements or understanding with respect to the sale of any of the shares that may be held by the selling stockholders after completion of this offering or otherwise.
(2) Represents shares issued in a private placement.
(3) Represents shares issued on June 30, 2013 in a private placement. Michael Monier may be deemed to have voting and dispositive power over the securities owned by this stockholder
(4) Represents shares issued in a private placement on September 30, 2013. Kevin J. Heneghan may be deemed to have voting and dispositive power over the securities owned by this stockholder.
(5) Represents shares underlying a warrant that was exercised on, and the shares were issued on, August 19, 2013. Scott Weiselberg may be deemed to have voting and dispositive power over the securities owned by this stockholder.
(6) Represents shares issued for investor relations services in connection with two private placements. 60,0000 shares were issued on June 25, 2013 and 66,000 shares were issued on September 30, 2013.
(7) Represents shares issued on June 30, 2013 in a private placement. Andres Verbal may be deemed to have voting and dispositive power over the securities owned by this stockholder.
(8) Represents shares underlying a warrant that may be exercised through October 15, 2016.  Midtown Partners & Co., LLC is wholly owned by Apogee Financial Investments, Inc. whose President and CEO, Dale E. Phillips, and whose Chief Operating Officer, Richard J. Diamond, may be deemed to have voting and dispositive power over the securities owned by this stockholder.
(9) Represents (1) 3,000,000 shares issued on the conversion of debt on July 1, 2013, (ii) 1,250,000 shares issued upon the exercise of a warrant on December 11, 2013, (iii) 1,750,000 shares underlying a warrant that may be exercised through December 31, 2015, and (iv) 1,250,000 shares assigned to this stockholder by Richard J. Sullivan as an inducement to this stockholder to exercise the warrant granted to him in December 2013.
(10) Represents (i) 1,020,000 shares issued in a private placement on June 30, 2013, and (ii) 2,000,000 shares underlying a warrant that was exercised on, and the shares were issued on, August 19, 2013. Robert Moskowitz may be deemed to have voting and dispositive power over the securities owned by this stockholder.
(11) Incudes (i) 500,000 shares underlying a warrant exercisable through June 30, 2018, 500,000 shares issued on April 15, 2013 for investor relations services in connection with private placements, and (iii) 250,000 shares issued on June 25, 2013 for investor relations services in connection with private placements.
(12) Represents shares underlying a warrant that may be exercised through May 6, 2018.
(13) Represents shares issued in a private placement on June 30, 2013. Charles Bressman may be deemed to have voting and dispositive power over the securities owned by this stockholder.
(14)

Includes (i) 250,000 shares issued on May 19, 2014 and (ii) 650,000 shares issued on September 5, 2014, all in connection with acquisition services rendered in connection with our acquisition of NACSV.

(15) Includes (i) 200,000 shares issued on May 19, 2014 and (ii) 520,000 shares issued on September 5, 2014, all in connection with acquisition services rendered in connection with our acquisition of NACSV.
(16) Includes (i) 50,000 shares issued on May 19, 2014 and (ii) 130,000 shares issued on September 5, 2014, all in connection with acquisition services rendered in connection with our acquisition of NACSV.
(17) Includes (i) 483,871 shares issued on June 16, 2014 as initial purchase consideration, (ii) 1,976,306 shares issuable for the True-Up payment, and (iii) 5,806,451 shares issuable to this shareholder for future consideration in connection with our purchase from this shareholder of his 75% interest in NACSV.
(18) Includes (i) 161,290 shares issued on June 16, 2014 as initial purchase consideration, (ii) ) 658,768 shares issuable for the True-Up payment, and (iii) 1,935,484 shares issuable to this shareholder for future consideration in connection with our purchase from this shareholder of his 75% interest in NACSV.
(19) Tara S. Delgado is the daughter of William J. Delgado, an officer and director of the Company.  Ms. Delgado is not a minor child and William J. Delgado disclaims any beneficial ownership of these securities.
(20) These shares were issued on April 15, 2013.
(21) These shares were issued on May 21, 2013.
(22) These shares were issued on June 25, 2013.
(23) These shares were issued on June 30, 2013.
(24) These shares were issued on September 30, 2013.
(25) These shares were issued on November 11, 2013.
(26) These shares were issued on December 11, 2013.

 

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DESCRIPTION OF SECURITIES

 

Authorized and Outstanding Capital Stock

 

We are authorized to issue 485,000,000 shares of capital stock, of which 450,000,000 are 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”).

 

As of September 12, 2014, we had the following issued and outstanding securities on a fully diluted basis:

 

  103,469,278 shares of common stock;
  No shares of preferred stock;
  Warrants to purchase 4,250,000 shares of common stock at exercise prices ranging from $0.10 - $1.00 per share; and
  Options to acquire 5,500,000 shares of our common stock at an exercise price of $0.64 per share.

 

Common Stock

 

The holders of our common stock are entitled to one vote per share. In addition, the holders of our common stock will be entitled to receive ratably dividends, if any, declared by our board of directors out of legally available funds; however, the current policy of our board of directors is to retain earnings, if any, for operations and growth. Upon liquidation, dissolution or winding-up, the holders of our common stock will be entitled to share ratably in all assets that are legally available for distribution. The holders of our common stock will have no preemptive, subscription, redemption or conversion rights. The rights, preferences and privileges of holders of our common stock will be subject to, and may be adversely affected by, the rights of the holders of any series of preferred stock, which may be designated solely by action of our board of directors and issued in the future.

 

Each outstanding share of common stock is entitled to one vote and each fractional share is entitled to a corresponding fractional vote on each matter submitted to a vote of shareholders. Cumulative voting is allowed in the election of directors of the Company.

 

The holders of a majority of the shares who are entitled to vote at a shareholders meeting and who are present in person or by proxy shall be necessary for and shall constitute a quorum for the transaction of business at shareholder meetings, except as otherwise provided by the New Jersey statutes. If a quorum is not present or represented at a meeting of the shareholders, those present in person or represented by proxy shall have the power to adjourn the meeting from time to time, without notice other than announcement at the meeting, until a quorum is present or represented. At an adjourned meeting where a quorum is present or represented, any business may be transacted which might have been transacted at the meeting as originally notified.

 

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When a quorum is present at a meeting of shareholders, the vote of the holders of a majority of the issued and outstanding shares having voting power, present in person or represented by proxy, shall decide any question brought before the meeting, unless the question is one which, by express provision of the statutes, requires a higher vote in which case the express provision shall govern.  The shareholders present at a duly constituted meeting may continue to transact business until adjournment, despite the withdrawal of enough shareholders holding, in the aggregate, issued and outstanding shares having voting power to leave less than a quorum.”

 

Preferred Stock

 

Our Board of Directors will be authorized, subject to any limitations prescribed by law, without further vote or action by our stockholders, to issue from time to time shares of preferred stock in one or more series. Each series of preferred stock will have such number of shares, designations, preferences, voting powers, qualifications and special or relative rights or privileges as shall be determined by our Board of Directors, which may include, among others, distinct classes or series, dividend rights, voting rights, liquidation preferences, redemption rights, conversion rights and preemptive rights.

 

Warrants

 

In December 2012, we issued a three-year warrant to purchase 3,000,000 shares of our common stock, at an amended exercise price of $0.10 per share, to an investor in connection with our $750,000 Promissory Note Purchase Agreement in December 2012. In December 2013, the investor exercised 1,250,000 shares underlying the warrant and 1,750,000 remain exercisable through December 31, 2015.

 

In May 2013, we issued a five-year warrant to purchase 1,000,000 shares of our common stock at an exercise price of $0.15 per share to an advisor in connection with the modification of the Promissory Note Purchase Agreement Amendment.  The warrant was valued at $300,000.

 

In June 2013, we issued a five-year warrant to purchase 500,000 shares of our common stock at an exercise price of $0.50 per share to a consultant for investor relations services. The warrant was valued at $250,000.

 

In October 2013, we issued a three-year warrant to purchase 1,000,000 shares of our common stock at an exercise price of $1.00 per share to an investment banking company for investment banking services. The warrant was valued at $800,000.

 

Prior to exercise, the warrants do not confer upon holders any voting or any other rights as a stockholder. No fractional shares will be issued upon exercise of the warrants. If, upon exercise of the warrants, a holder would be entitled to receive a fractional interest in a share, we may, in our discretion, upon exercise, round up to the nearest whole number the number of shares of our common stock to be issued to the warrant holder or otherwise equitably adjust the exercise amount and exercise price per share.

 

Options

 

As of June 30, 2014, we have granted options to purchase an aggregate of 5,500,000 shares of our common stock, pursuant to our 2014 Equity Incentive Plan.

 

Restricted Stock Grants

 

As of June 30, 2014 we had awarded 4,500,000 which will vest through June 2016.

 

Restricted Stock Units

 

As of July 1, 2014, we have granted 12 million Restricted Stock Units convertible into 12 million shares of our common stock.

 

Equity Compensation Plan Information

 

The following chart reflects the number of stock options, shares of restricted stock and restricted sock units available for future grants under our incentive plan.

 

Plan  Number Authorized   Number Remaining 
           
2014 Equity Incentive Plan   20,000,000    2,500,000 

 

On May 19, 2014 a majority of our shareholders acting by written consent pursuant to the Company’s ByLaws and the New Jersey Business Corporation Act 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.

 

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Securities Authorized for Issuance under Equity Compensation Plans

 

The following table presents information regarding options outstanding under our compensation plans as of September 12, 2014:

 

    Equity Compensation Plan Information  
                Number of  
    Number of           securities  
    securities           available for  
    to be issued     Weighted-average     future issuance  
    upon exercise     exercise price of     under equity  
    of outstanding     of outstanding     compensation plans  
    options, warrants     options, warrants     (excluding securities  
    and rights     and rights     reflected in column (a))  
Plan Category   (a)     (b)     (c)  
Equity compensation plans approved by security holders     20,000,000     $ 0.20       2,500,000  
Equity compensation plans not approved by security holders     -     -       -  
Total     20,000,000     $ 0.20       2,500,000  

 

Registration Rights

 

We have not entered into any Registration Rights Agreements.  In connection with the sale of our shares of common stock in private placements, we warranted in the subscription agreement to include those shares of common stock, including any warrants issued in connection therewith, or for fees, as well as certain share that have been issued as consideration for services, in our next filed "resale" registration statement with the Securities and Exchange Commission.  All of those shares are included in this registration statement. There are no penalties if we fail not to include any such shares in a registration statement.

 

Transfer Agent

 

Our transfer agent is Issuer Direct Corporation, 500 Perimiter Park Drive, Suite D, Morrisville, NC 27560.

 

Indemnification of Directors and Officers

 

The New Jersey Business Corporation Act (“BCA”) Section 14A:3-5 provide us with the power to indemnify any of our directors and officers. The director or officer must have conducted himself/herself in good faith and reasonably believe that his/her conduct was in, or not opposed to, our best interests. In a criminal action, the director, officer, employee or agent must not have had reasonable cause to believe his/her conduct was unlawful.  Advances for expenses may be made by agreement if the director or officer affirms in writing that he/she believes he/she has met the standards and will personally repay the expenses if it is determined such officer or director did not meet the standards.

 

Our Bylaws include an indemnification provision under which we have the power to indemnify our directors, officers, former directors and officers, or any person who serves or served at our request for our benefit as a director or officer of another corporation or our representative in a partnership, joint venture, trust, or other enterprise (including heirs and personal representatives) against all expenses, liability, and loss actually and reasonably incurred, including an amount paid to settle an action or satisfy a judgment to which the director or officer is made a party.

 

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We also have a director and officer indemnification agreement with our sole director and officer that provides, among other things, for the indemnification to the fullest extent permitted or required by New Jersey law, provided that such indemnitee shall not be entitled to indemnification in connection with any “claim” (as such term is defined in the agreement) initiated by the indemnitee against us or our directors or officers unless we join or consent to the initiation of such claim, or the purchase and sale of securities by the indemnitee in violation of Section 16(b) of the Exchange Act.

 

Any repeal or modification of these provisions approved by our stockholders shall be prospective only, and shall not adversely affect any limitation on the liability of any of our directors or officers existing as of the time of such repeal or modification.

 

We are also permitted to apply for insurance on behalf of any director, officer, employee or other agent for liability arising out of his actions, whether or not the BCA would permit indemnification.

 

Insofar as indemnification for liabilities arising under the Securities Act may be permitted for our directors, officers and controlling persons pursuant to the foregoing provisions, or otherwise, we have been advised that in the opinion of the SEC such indemnification is against public policy as expressed in the Securities Act and is, therefore, unenforceable.

 

Limitation of Liability of Directors

 

Our Certificate of Incorporation provide a limitation of liability such that no director or officer shall be personally liable to us or any of our stockholders for damages for breach of fiduciary duty as a director or officer, involving any act or omission of any such director or officer, provided there was no intentional misconduct, fraud or a knowing violation of the law, or payment of dividends in violation of BCA Section 14A:6-14.

 

PLAN OF DISTRIBUTION

 

Each selling stockholder and any of their pledgees, assignees and successors-in-interest may, from time to time, sell any or all of their shares of common stock on the over-the-counter market or any other stock exchange, market or trading facility on which the shares are traded, or in private transactions. These sales may be at fixed or negotiated prices. A selling stockholder may use any one or more of the following methods when selling shares:

 

  ordinary brokerage transactions and transactions in which the broker-dealer solicits purchasers;
  block trades in which the broker-dealer will attempt to sell the shares as agent but may position and resell a portion of the block as principal to facilitate the transaction;
  purchases by a broker-dealer as principal and resale by the broker-dealer for its account;
  conducting business in places where business practices and customs are unfamiliar and unknown;
  an exchange distribution in accordance with the rules of the applicable exchange;
  privately negotiated transactions;
  settlement of short sales entered into after the date of this prospectus;
  broker-dealers may agree with the selling stockholders to sell a specified number of the shares at a stipulated price per share;
  through the writing or settlement of options or other hedging transactions, whether through an options exchange or otherwise; 
  a combination of any of these methods of sale; or
  any other method permitted pursuant to applicable law.

 

The selling stockholders may also sell shares under Rule 144 under the Securities Act, if available, rather than under this prospectus.

 

Broker-dealers engaged by the selling stockholders may arrange for other brokers-dealers to participate in sales. Broker-dealers may receive commissions or discounts from the selling stockholders (or, if any broker-dealer acts as agent for the purchaser of shares, from the purchaser) in amounts to be negotiated. Each selling stockholder does not expect these commissions and discounts relating to its sales of shares to exceed what is customary in the types of transactions involved.

 

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FINRA Rule 2710 requires FINRA member firms (unless an exemption applies) to satisfy the filing requirements of Rule 2710 in connection with the resale, on behalf of selling stockholders, of the securities on a principal or agency basis. FINRA Notice to Members 88-101 states that in the event a selling stockholder intends to sell any of the shares registered for resale in this Prospectus through a member of FINRA participating in a distribution of our securities, the member is responsible for ensuring that a timely filing, if required, is first made with the Corporate Finance Department of FINRA and disclosing to FINRA the following:

 

  it intends to take possession of the registered securities or to facilitate the transfer of the certificates;
  the complete details of how the selling shareholders shares are and will be held, including location of the particular accounts;
  whether the member firm or any direct or indirect affiliates thereof have entered into, will facilitate or otherwise participate in any type of payment transaction with the selling shareholders, including details regarding these transactions; and
  in the event any of the securities offered by the selling shareholders are sold, transferred, assigned or hypothecated by any selling shareholder in a transaction that directly or indirectly involves a member firm of FINRA or any affiliates thereof, that prior to or at the time of said transaction the member firm will timely file for review with the Corporate Finance Department of FINRA all relevant documents with respect to these transactions.

 

FINRA has recently proposed rule changes to FINRA Rule 2710 which may, if approved, modify the requirements of its members to make filings under FINRA Rule 2710. Further, no FINRA member firm may receive compensation in excess of that allowable under FINRA rules, including Rule 2710, in connection with the resale of the securities by the selling shareholders, which total compensation may not exceed 8%.

 

Under applicable rules and regulations under the Exchange Act, any person engaged in the distribution of the shares may not simultaneously engage in market making activities with respect to our common stock for a period of two business days prior to the commencement of the distribution. In addition, the selling stockholders will be subject to applicable provisions of the Exchange Act and the rules and regulations thereunder, including Regulation M, which may limit the timing of purchases and sales of shares of our common stock by the selling stockholders or any other person. We have advised the selling stockholders that the anti-manipulation rules of Regulation M under the Exchange Act may apply to sales of shares in the market and to the activities of the selling stockholders and their affiliates. In addition, we will make copies of this Prospectus available to the selling stockholders for the purpose of satisfying the Prospectus delivery requirements of the Securities Act and have informed them of the need to deliver a copy of this prospectus to each purchaser at or prior to the time of the sale.

 

In connection with the sale of our common stock or interests therein, the selling stockholders may enter into hedging transactions with broker-dealers or other financial institutions, which may in turn engage in short sales of the common stock in the course of hedging the positions they assume. The selling stockholders may also sell shares of our common stock short and deliver these securities to close out their short positions, or loan or pledge the common stock to broker-dealers that in turn may sell these securities. The selling stockholders may also enter into option or other transactions with broker-dealers or other financial institutions or the creation of one or more derivative securities which require the delivery to these broker-dealers or other financial institutions of shares offered by this prospectus, which shares these broker-dealers or other financial institutions may resell pursuant to this prospectus (as supplemented or amended to reflect these transactions).

 

The selling stockholders and any broker-dealers or agents that are involved in selling the shares may be deemed to be “underwriters” within the meaning of the Securities Act in connection with these sales. In this event, any commissions received by these broker-dealers or agents and any profit on the resale of the shares purchased by them may be deemed to be underwriting commissions or discounts under the Securities Act. Each selling stockholder has informed us that it does not have any agreement or understanding, directly or indirectly, with any person to distribute the common stock. In no event shall any broker-dealer receive fees, commissions and markups which, in the aggregate, would exceed eight percent (8%).

 

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We are required to pay certain fees and expenses incurred by us incident to the registration of the shares. We have agreed to indemnify the selling stockholders against certain losses, claims, damages and liabilities, including liabilities under the Securities Act.

 

The selling stockholders may agree to indemnify any agent, dealer or broker-dealer that participates in transactions involving sales of the shares against certain liabilities, including liabilities arising under the Securities Act.

 

Because selling stockholders may be deemed to be “underwriters” within the meaning of the Securities Act, they will be subject to the prospectus delivery requirements of the Securities Act. In addition, any securities covered by this prospectus which qualify for sale pursuant to Rule 144 under the Securities Act may be sold under Rule 144 rather than under this prospectus. There is no underwriter or coordinating broker acting in connection with the proposed sale of the shares by the selling stockholders.

 

LEGAL MATTERS

 

Naccarato & Associates, Newport Beach, California, will pass upon the validity of the shares of our common stock to be sold in this offering.

 

EXPERTS

 

The financial statements as of December 31, 2013 and 2012 and for the years then ended, included in this prospectus have been audited by PMB Helin Donovan LLP, an independent registered public accounting firm as set forth in their report, and are included in reliance upon such report given on the authority of such firm as experts in accounting and auditing.

 

WHERE YOU CAN FIND ADDITIONAL INFORMATION

 

We have filed with the SEC a registration statement on Form S-1, together with any amendments and related exhibits, under the Securities Act with respect to our shares of common stock offered by this prospectus. The registration statement contains additional information about us and the shares of common stock that we are offering in this prospectus.

 

We file annual, quarterly and current reports and other information with the SEC under the Exchange Act. 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.  You may also request a copy of those filings, excluding exhibits, from us at no cost. These requests should be addressed to us at: David A. Loppert, Chief Financial Officer, Global Digital Solutions, Inc., 777 South Flagler Drive, Suite 800 West, West Palm Beach, FL 33401. 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 by reference. Further, the Company’s references to the URLs for these websites are intended to be inactive textual references only.

 

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GLOBAL DIGITAL SOLUTIONS, INC. AND SUBSIDIARIES

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

 

  Page
For the Years Ended December 31, 2013 and 2012  
Report of PMB Helin Donovan LLP, Independent Registered Public Accounting Firm F-2
Consolidated Balance Sheets as of December 31, 2013 and 2012 F-3
Consolidated Statements of Operations for the years ended December 31, 2013 and 2012 F-4
Consolidated Statements of Stockholders’ Equity (Deficit) for the years ended December 31, 2013 and 2012 F-5
Consolidated Statements of Cash Flows for the years ended December 31, 2013 and 2012 F-6
Notes to Consolidated Financial Statements F-7 – F-18
   
Interim Financial Statements (unaudited)  
Condensed Consolidated Balance Sheets – June 30, 2014 and December 31, 2013 F-19
Condensed Consolidated Statements of Operations for the three and six months ended June 30, 2014 and 2013 F-20
Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2014 and 2013 F-21
Notes to Condensed Consolidated Financial Statements F-22 – F-33

 

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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, 2013 and 2012, and the related consolidated statements of operations, consolidate statements of stockholders’ equity (deficit) and  consolidated statements of cash flows for each of the years in the two-year period ended December 31, 2013. 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, 2013 and 2012, and the results of its operations and its cash flows for each of the years in the two-year period ended December 31, 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 28, 2014

 

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GLOBAL DIGITAL SOLUTIONS, INC.

CONSOLIDATED BALANCE SHEETS

 

   December 31, 
   2013   2012 
Assets        
Current Assets        
Cash and cash equivalents  $509,224   $385,141 
Notes receivable   1,465,874    - 
Prepaid expenses   122,056    - 
Total current assets   2,097,154    385,141 
           
Assets of discontinued operations   -    395,133 
Deposits   198    - 
Total assets  $2,097,352   $780,274 
           
Liabilities and Stockholders' Equity          
Current Liabilities          
Accounts payable  $166,256   $155 
Accrued expenses   165,537    191,344 
Convertible notes payable   529,309    504,309 
Notes payable   25,000    117,600 
Total current liabilities   886,102    813,408 
Liabilities of discontinued operations   -    33,974 
Total Liabilities   886,102    847,382 
           
Commitments and Contingencies          
           
Stockholders’ equity          
Preferred stock, $0.001 par value, 10,000,000 shares authorized, none issued and outstanding   -    - 
Common stock, $0.001 par value, 175,000,000 shares authorized, 93,024,117 and 52,263,451 shares issued and outstanding   93,025    52,264 
Additional paid-in capital   17,976,600    7,326,336 
Accumulated deficit   (16,858,375)   (7,561,122)
Total Global Digital Solutions, Inc. stockholders' equity (deficit)   1,211,250    (182,522)
Noncontrolling interest   -    115,414 
Total stockholders’ equity (deficit)   1,211,250    (67,108)
           
Total liabilities and stockholders' equity  $2,097,352   $780,274 

 

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GLOBAL DIGITAL SOLUTIONS, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

 

   For the Years Ended 
   December 31, 
   2013   2012 
         
Revenue  $-   $- 
           
Cost of revenue   -    300 
           
Gross profit (loss)   -    (300)
           
Operating expenses          
Selling, general and administrative expenses   8,384,247    301,284 
Other (income)/expense          
Gain on extinguishment of debt   (31,712)   - 
Interest income   (59,701)   - 
Interest expense   733,198    10,000 
Other income   -    (600)
Total costs and expenses   9,026,032    310,684 
           
Loss from continuing operations before provision for income taxes   (9,026,032)   (310,984)
           
Provision for income taxes   -    - 
           
Loss from continuing operations   (9,026,032)   (310,984)
           
Loss from discontinued operations   (271,221)   (208,922)
           
Net loss   (9,297,253)   (519,906)
           
Loss attributable to the noncontrolling interest   -