GLOBAL DIGITAL SOLUTIONS INC - Annual Report: 2014 (Form 10-K)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

(Mark One)

For the fiscal year ended December 31, 2014

or

For the transition period from: _____________ to _____________

Commission file number: 000-26361

GLOBAL DIGITAL SOLUTIONS, INC.

(Exact Name of Registrant as Specified in Its Charter)

Securities registered pursuant to Section 12(b) of the Act: None

Securities registered pursuant to Section 12(g) of the Act: Common Stock, par value $.001 per share

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☐  No þ

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ☐  No þ

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

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232-405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files.)   Yes þ  No ☐

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ☐

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

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

As of the last business day of our most recently completed second fiscal quarter, i.e. June 30, 2014, the aggregate market value of the voting and non-voting common stock held by non-affiliates was approximately $17.03 million, computed by reference to the price at which the stock was last sold on that date of $0.31 per share as reported on the OTCQB Market.

Indicate the number of shares outstanding of each of the registrant’s classes of common stock, as of the latest practicable date:

DOCUMENTS INCORPORATED BY REFERENCE: NONE

TABLE OF CONTENTS

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

This Annual Report on Form 10-K (“Annual Report” or “Form 10-K”) contains forward-looking statements that involve risks and uncertainties. Many of the forward-looking statements are located in “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”  Forward-looking statements provide current expectations of future events based on certain assumptions and include any statement that does not directly relate to any historical or current fact. Forward-looking statements can also be identified by words such as “anticipates,” “believes,” “estimates,” “expects,” “intends,” “plans,” “predicts,” and similar terms. Forward-looking statements are not guarantees of future performance and the Company’s actual results may differ significantly from the results discussed in the forward-looking statements. Forward-looking statements are only predictions based on our current expectations and projections, or those of third parties, about future events and involve risks and uncertainties. Factors that might cause such differences include, but are not limited to, those discussed in the subsection entitled “Risk Factors” under Part I, Item 1A of this Form 10-K. The Company assumes no obligation to revise or update any forward-looking statements for any reason, except as required by law.

All forward-looking statements attributable to us, or persons acting on our behalf, are expressly qualified in their entirety by the cautionary statements included in this Annual Report.

PART I

Unless the context provides otherwise, when we refer to the “Company,” “we,” “our,” or “us” in this Annual Report, we are referring to Global Digital Solutions, Inc. and, where applicable, our wholly-owned subsidiaries.

Overview

We were incorporated in New Jersey as Creative Beauty Supply, Inc. (“Creative”) in August 1995.  In March 2004, Creative acquired Global Digital Solutions, Inc., a Delaware corporation ("Global”). The merger was treated as a recapitalization of Global, and Creative changed its name to Global Digital Solutions, Inc., Global provided structured cabling design, installation and maintenance for leading information technology companies, federal, state and local government, major businesses, educational institutions, and telecommunication companies. Our mission was to target the United States government contract marketplace for audio and video services. Due to capital constraints, our operations team focused mainly in Northern California. On May 1, 2012, we made the decision to wind down our operations in the telecommunications area while concurrently refocusing our efforts in the area of cyber arms technology and complementary security and technology solutions.  We completed the wind down our telecommunications operations in June 2014. As discussed below, from August 2012 through November 2013 we were actively involved in managing Airtronic USA, Inc., and in June 2014 we acquired North American Custom Specialty Vehicles, LLC (“NACSV”).

Implications of Being an Emerging Growth Company

We qualify as an "emerging growth company" as defined in the Jumpstart Our Business Startups Act of 2012, as amended, or the JOBS Act.  As an emerging growth company, we may take advantage of specified reduced disclosure and other requirements that are otherwise applicable generally to public companies. These provisions include: 

We may take advantage of these exemptions for up to five years or such earlier time that we are no longer an emerging growth company. We would cease to be an emerging growth company if we have more than $1.0 billion in annual revenues as of the end of a fiscal year, if we are deemed to be a large-accelerated filer under the rules of the Securities and Exchange Commission, or if we issue more than $1.0 billion of non-convertible debt over a three-year-period.

The JOBS Act permits an emerging growth company to take advantage of an extended transition period to comply with new or revised accounting standards applicable to public companies. We have irrevocably chosen to "opt out" of the exemption for the delayed adoption of certain accounting standards and, therefore, will be subject to the same new or revised accounting standards as other public companies that are not emerging growth companies.

Our Strategy

We believe that technological convergence is the future in the cyber/smart arms arena and we’re eager to leverage our management’s history by helping companies that combine with us navigate the transition from “Analog to Digital”.  Our management has a history of building fast-growing companies through acquisitions and internal growth. The GDSI management team previously executed a private-to-public company roll-up at Applied Digital Solutions, Inc. totaling some 42 acquisitions and growing annual revenue from $1 million to over $350 million over eight years.

Analog to Digital

Since the switch to high definition digital television, most people are aware of an evolution in radio, TV and data transmission from the older analog method to the newer digital method.  Examples of this are the demise of the telephone modem handset cradle and the “bleep-blap” sounds people were familiar with when connecting from their home computers during the early days of the Internet. Even earlier, the cell phone industry went through a transition from analog transmission to digital transmission.  Earmarks of a transition from analog to digital are typically smaller devices, faster data rates and more detail in content.

GDSI uses Analog to Digital to refer to these changes in data transmission protocols and the devices that support them and also as a “meme” to represent other advancements in digital technology and the application of that technology.  In the military, an example would be “The Army of One” – a single soldier outfitted with advanced GPS, wireless and security hardware and software that enables him to know his position at all times, communicate with base operations, his fellow soldiers and other, public sources of information.  People are not the only military assets being deployed with advanced communications and location-awareness capabilities. 

GDSI also uses the Analog to Digital meme to represent the application of any transformative technology.  We are seeking potential acquisition targets that have software, firmware and hardware IP that we believe can be applied to other GDSI divisions (as we acquire more companies) to improve operating efficiencies, upgrade products and services and create new products and services. NACSV’s mobile emergency operations centers (MEOC) can be tailored to the needs of Police, Fire, EMS, Military, Homeland Security, National Guard, FBI, Air National Guard Coast Guard, Chemical/ Petrochemical, Humanitarian Aid, Non-Governmental Organizations, Drug Enforcement”, Immigration & Customs, Bureau of Alcohol, Tobacco, Firearms and Explosives, Water Management, Wildlife Management, D.O.T. Engineering & Maintenance, Air & Water Quality Management (EPA), Meteorological Seismic/Oil & Gas Exploration, IS/Mapping Power Generation (Nuclear & Conventional), Power Transmission and Strategic Infrastructure Security.  The company has already built customized vehicles for customers involved in one or more of the above categories and we see many opportunities to improve NACSV and its products and services through the integration of additional software, hardware and firmware technologies. 

So, for GDSI, Analog to Digital means the literal transition in communications protocols from analog to digital and also the application of transformative technology generally.

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

Our business plan is to acquire between two and three companies by the end of December 2015.  We have and continue to identify companies that provide services and equipment to law enforcement and federal agencies, engineering services and OEM design that will enable us to simulate and analyze prospective inventions and designs prior to making a commitment to license or acquire technology, interoperable communications businesses which combine radio, phones, computers, VoIP and video assets within one interface for local, state and federal agencies, and a satellite network communications company.  We estimate at this time that to complete the potential acquisitions we will need to raise or borrow, through a combination of equity and or debt offerings, approximately $70 - $150 million.  There can be no assurance however, that management will be successful in identifying and closing these acquisitions, or that the Company will be successful in raising the capital it needs to complete the acquisitions. 

Cool Sound Industries

In August 2013 we announced that we had entered into a letter of intent to acquire Cool Sound Industries, Inc. with the intent of developing its technology for use in both commercial and defense-related projects. During the period from August 2013 through February 2014 we commissioned and undertook exhaustive studies both internally and by external consultants to evaluate the feasibility of the technology and its use and application, and we concluded that the technology would not accomplish what we had envisioned. In February 2014 we terminated the letter of intent. 

Gatekeeper

GDSI was exploring various aspects of so-called “Smart Gun” technology i.e. weapons, the use of which are limited only to the owners of the weapon, protecting the owner from his/her weapon being used against them or by an unauthorized person.  Areas of exploration include the market for such weapons, various technologies that can be employed, feasibility, manufacturability and other practical aspects of producing such a weapon.  GDSI is calling this potential future product “Gatekeeper”. Technologies being evaluated included GPS, Wi-Fi, various near-field communication protocols, and RFID. In Q4, 2014, we made the decision to, for the time being, cease pursuing the development of Gatekeeper. We may, in the future continue to explore its possibilities.

Formation of subsidiaries

In December 2012 we incorporated GDSI Florida LLC, and in January 2013 we incorporated Global Digital Solutions, LLC, both Florida limited liability companies. In November 2013, we incorporated GDSI Acquisition Corporation, a Delaware corporation. We pay administrative expense for our Florida office through GDSI Florida LLC; it has no other business operations.  On June 16, 2014, we and GDSI Acquisition Corporation acquired NACSV.  In July 2014, we announced the formation of GDSI International (fka Global Digital Solutions, LLC) to spearhead our efforts overseas. In September 2014, we merged North American Custom Specialty Vehicles, LLC into GDSI Acquisition Corporation, and changed the latter’s name to North American Custom Specialty Vehicles, Inc.

Acquisition of North American Custom Specialty Vehicles

On June 16, 2014, we and our wholly owned subsidiary, GDSI Acquisition Corporation, a Delaware corporation (“Buyer”), entered into an Equity Purchase Agreement (“EPA”) with Brian A. Dekle and John Ramsey (collectively, “Sellers”) and North American Custom Specialty Vehicles, LLC, an Alabama limited liability company (“NACSV”), pursuant to which Buyer purchased all of Sellers’ membership interests in NACSV for total consideration of up to $3.6 million (the “Acquisition”) with (a) $1.2 million payable at closing as follows: (i) a cash payment of $1.0 million and (ii) 645,161 shares of GDSI’s restricted common stock valued at $0.31 per share, or $200,000 in the aggregate, (b) up to $2.4 million of additional post-closing contingent consideration as certain milestones are met as set forth in the EPA through December 31, 2017, and (c) a post closing date purchase price adjustment of the excess, if any, of the total value of closing date audited assets of NACSV over $1.2 million. NACSV specializes in building mobile command/communications and specialty vehicles for emergency management, first responders, national security and law enforcement operations.  In September 2014, we merged North American Custom Specialty Vehicles, LLC into GDSI Acquisition Corporation, and changed the latters name to North American Custom Specialty Vehicles, Inc.

Subsequent to December 31, 2014, we became embroiled in litigation with the Sellers – See Item 3 – Legal Proceedings, below.

The foregoing description of the acquisition of NACSV does not purport to be complete and is qualified in its entirety by reference to the complete text of the EPA which is filed as Exhibit 2.5 hereto and which is incorporated herein by reference.

Airtronic USA, Inc.

On October 22, 2012, we entered into an Agreement of Merger and Plan of Reorganization (“Merger Agreement”) to acquire 70% of Airtronic USA, Inc. (“Airtronic”), a debtor in possession under chapter 11 of the Bankruptcy Code in a case pending in the US Bankruptcy Court for the Northern District of Illinois, Eastern Division (the “Court”) once Airtronic successfully reorganized and emerged from bankruptcy (the “Merger”). During the period from October 2012 through November 2013, GDSI was actively involved in the day to day management of Airtronic pending the completion of the Merger.

On October 22, 2012, we entered into a Debtor In Possession Note Purchase Agreement (“Bridge Loan”) with Airtronic. We agreed to lend Airtronic a maximum of $2,000,000, with an initial advance of $750,000 evidenced by an 8¼% Secured Promissory Note made by Airtronic in favor of the Company (the “Original Note”) and a Security Agreement pledging all of Airtronic’s assets. As of December 31, 2012 we had not advanced any funds to Airtronic under the Bridge Loan and Original Note. The Original Note bears interest at 8¼% per annum, and, unless an event of default shall have previously occurred and be continuing, the full amount of principal and accrued interest under the note shall be due and payable on the consummation of Airtronic’s plan of reorganization.  In March 2013, the Company and Airtronic amended the Bridge Loan to provide for a maximum advance of up to $700,000 in accordance with draws submitted by Airtronic and approved by the Company in accordance with the budget set forth in the amendment.  On June 26, 2013, we agreed to a second modification of the Bridge Loan agreement with Airtronic, and agreed to loan Airtronic up to an additional $550,000 under the Bridge Loan.  On August 5, 2013, we entered into the Second Bridge Loan Modification and Ratification Agreement, received a new 8¼% secured promissory note in principal amount of $550,000 (the “Second Note”), and entered into a Security Agreement with the CEO of Airtronic, which granted a security interest in certain intellectual property for patent-pending applications and trademarks that were registered in the CEO’s name.  On October 10, 2013, we entered into a third modification of the Bridge Loan Agreement, and agreed to loan Airtronic up to an additional $200,000. On October 10, 2013, we entered into the Third Bridge Loan Modification and Ratification Agreement, and received a new 8¼% secured promissory note for $200,000 (the “Third Note”). 

On October 2, 2013, Airtronic’s amended plan of reorganization (the “Plan”) was confirmed by the Court, but the Plan was never substantially consummated and has now been terminated.  Under the terms of the Plan, Airtronic needed to close the Merger with the Company within 60 days following the confirmation date, i.e., on or before December 2, 2013, to obtain the funds necessary to pay its creditors in accordance with the Plan.  Nevertheless, Airtronic refused to close the Merger with the Company on or before December 2, 2013, and as a result the Plan terminated and the reorganized Airtronic re-vested in the bankruptcy estate of Airtronic as debtor in possession.

As the principal funding source for Airtronic during 2013, and as the expectant owner of Airtronic upon the conclusion of the bankruptcy proceedings, the Company took an active roll in managing its investment in Airtronic.

The Company was actively involved in all aspects of Airtronic’s finances. The Company’s CFO took over the day-to-day management of cash, which included the approval of all purchase orders and all expenditures. In addition, GDSI recreated the inventory and fixed asset records from the beginning of 2010, a significant task which involved over 500 man hours. In addition, the Company created GAAP based fixed asset ledgers, reconciled on a monthly basis, starting from January 2010, all the balance sheet accounts. Additionally, the Company rationalized the bidding process, updated Airtronic’s standard costing procedures and costs, and its inventory management system. 

GDSI’s CEO was responsible for sales and marketing for Airtronic. Airtronic’s CEO had been responsible in the past for this and worked closely with the Company’s CEO to land new OEM orders which resulted in Airtronic finally being awarded a large OEM order in mid 2013. Airtronic’s team included its CEO, a bookkeeper who also acted as office manager, a part-time engineer who oversaw assembly, one assembly line worker, one warehouse worker who assisted in assembly, a quality control engineer, an IT assistant and a bidding engineer. 

On March 31, 2014, Airtronic filed a First Amended Modified Plan of Reorganization (“First Modified Plan”) which was confirmed on April 28, 2014.  On May 14, 2014 Airtronic repaid the Original Note, the Second Note and the Third Note together with all accrued interest thereon.

On August 12, 2014 we recovered approximately $414,000 for legal fees and expenses. We had filed a claim for $567,806.27.  GDSI’s involvement with Airtronic and its bankruptcy proceedings are now concluded.

Convertible Notes Payable

DeLos Reyes Note

In December 2012, we entered into a Promissory Note Purchase Agreement (“GDL PNPA”), under which Gabriel a De Los Reyes (the “Lender”) agree to lend us $750,000 evidenced by a secured promissory note (the “GDL Note”) and a Security Agreement (“GDL SA”). The GDL Note bears interest at 8¼%, is secured by all of our assets and had a maturity date of May 1, 2013.  In connection with the loan, we issued the Lender a warrant to acquire 3,000,000 shares of our common stock at an exercise price of $0.15, exercisable for a period of three years (the “GDL Warrant”). 

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

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

The foregoing description of the GDL PNPA, the GDL Note, the GDL SA, the GDL Warrant, and the GDL Amendment is not intended to be complete and is qualified in its entirety by the complete text of the documents listed hereon as Exhibit 10.8, Exhibit 10.9, Exhibit 10.10, Exhibit 10.11 and Exhibit 10.12 respectively.

Charter Note

On December 8, 2014, the Company entered into a Securities Purchase Agreement (“Charter SPA”) with Charter 804CS Solutions, Inc. (“Charter”), an affiliate of Richard J. Sullivan, our Chairman and CEO, providing for the purchase of a Convertible Promissory Note in the principal amount of $37,500 (“Charter Note”). The Charter Note: contains a $1,500 original issue discount to cover legal fees such that the cash proceeds received on the closing of Charter Note is $36,000; bears interest at the rate of 8% per annum; is due and payable on December 8, 2015; and by amendment (the “Charter Amendment”) may be converted by Charter at any time after 180 days of the date of closing into shares of Company common stock at a fixed conversion price of $0.09 per share of Common Stock. The Charter Note also contains certain representations, warranties, covenants and events of default, and increases in the amount of the principal and interest rates under the note in the event of such defaults. 

The foregoing description of the Charter SPA, the Charter Note and the Charter Amendment is not intended to be complete and is qualified in its entirety by the complete text of the documents listed hereon as Exhibit 10.22, Exhibit 10.23 and Exhibit 10.24, respectively.

Loppert Note

On December 8, 2014, the Company entered into a Securities Purchase Agreement (“Loppert SPA”) with David A. Loppert (“Loppert”), our Chief Financial Officer, providing for the purchase of a Convertible Promissory Note in the principal amount of $31,500 (“Loppert Note”). The Loppert Note: contains a $1,500 original issue discount to cover legal fees such that the cash proceeds received on the closing of the Loppert Note is $30,000; bears interest at the rate of 8% per annum; is due and payable on December 8, 2015; and may be converted by Loppert at any time after 180 days of the date of closing into shares of Company common stock at a conversion price of $0.09 per share of Common Stock. The Loppert also contains certain representations, warranties, covenants and events of default, and increases in the amount of the principal and interest rates under the note in the event of such defaults.

The foregoing description of the Loppert SPA, the Loppert Note and the Loppert Amendment is not intended to be complete and is qualified in its entirety by the complete text of the documents listed hereon as Exhibit 10.25, Exhibit 10.26 and Exhibit 10.27 respectively. 

Convertible Notes Payable entered into Subsequent to December 31, 2014 

Subsequent to December 31, 2014 we entered into the Convertible Notes Payable described below and received net proceeds in the aggregate amount of $471,630. We determined that the conversion option within these notes is an embedded derivative that has to be recognized separately from the host (note) instrument. Accordingly, at inception of the notes we recognized the fair value of the embedded derivative liability and then re-measure its fair value using the Black-Scholes-Merton pricing model at the end of each period and record the change in the fair value of the derivative liability as either other income or other expense, as appropriate:

LG Capital Funding, LLC

On January 16, 2015, we entered into a Securities Purchase Agreement (LG SPA”) with LG Capital Funding, LLC (“LG Capital”) providing for the purchase of a Convertible Redeemable Note (“LG Note”) in the aggregate principal amount of $78,750. The LG Note was funded on January 20, 2015, and we received $67,500 of net proceeds (net of $3,750 legal fees and $7,500 finders fees). The LG Note bears interest at the rate of 8% per annum; is due and payable on January 16, 2016; is subject to prepayment penalties up to a 145% multiple of the principal, interest and other amounts owing, as defined.  After the expiration of 180 days following the date of the LG Note, the Company has no right of prepayment; and the note may be converted by LG Capital at any time after 180 days of the date of closing into shares of our common stock at a conversion price equal to a 40% discount of the lowest closing bid price for 20 prior trading days including the notice of conversion date.

The foregoing description of the LG SPA and the LG Note is not intended to be complete and is qualified in its entirety by the complete text of the documents listed hereon as Exhibit 10.28 and Exhibit 10.29, respectively.

The estimated fair value of the embedded derivative liability at inception was $128,438, of which $78,750 was discounted against the note and will be accreted over the term of the note and $49,688 will be recorded as interest expense at inception. Given the significant amount of non-cash interest expense associated with the conversion option fair value, the effective interest rate is not meaningful.

JSJ Investments, Inc.

On January 26, 2015 (the “Issuance Date”) we entered into a financing agreement with JSJ Investments Inc. (“JSJ”) providing for the purchase of a 10% Convertible Note in the aggregate principal amount of $66,000 (the “JSJ” Note). The JSJ Note contains a $6,000 original issue discount such that the purchase price of the JSJ Note was $60,000. The JSJ Note was funded on January 27, 2015, and we received $52,000 of net proceeds (net of $2,000 legal fees and $6,000 due diligence fees). The JSJ Note bears interest at the rate of 10% per annum; is due and payable on January 26, 2016; may be prepaid until the one hundred and fiftieth (150th) day after the Issuance Date at a cash redemption of 150%; and the note may be converted by JSJ at any time into shares of our common stock at a conversion price equal to the lower of (i) a 40% discount of the lowest trading price during the previous twenty (20) trading days prior to the date of conversion; or (ii) a 40% discount to the lowest trading price during the previous twenty (20) trading days before the date that the JSJ Note was executed.

The foregoing description of the JSJ Note is not intended to be complete and is qualified in its entirety by the complete text of the document listed hereon as Exhibit 10.30. 

The estimated fair value of the embedded derivative liability at inception was $132,002, of which $66,000 was discounted against the note and will be accreted over the term of the note and $66,002 will be recorded as interest expense at inception. Given the significant amount of non-cash interest expense associated with the conversion option fair value, the effective interest rate is not meaningful.

Adar Bays, LLC

On January 26, 2015, we entered into a Securities Purchase Agreement (“AB SPA”) with Adar Bays, LLC (“Adar Bays”) providing for the purchase of a Convertible Redeemable Note (the “AB Note”) in the aggregate principal amount of $35,000. The AB Note was funded on January 27, 2015, and we received $29,750 of net proceeds (net of $1,750 of legal fees and $3,500 finders fees). The AB Note bears interest at the rate of 8% per annum; is due and payable on January 26, 2016; is subject to prepayment penalties up to a 145% multiple of the principal, interest and other amounts owing, as defined.  After the expiration of 180 days following the date of the AB Note, the Company has no right of prepayment; and the note may be converted by Adar Bays at any time after 180 days of the date of closing into shares of our common stock at a conversion price equal to a 40% discount of the lowest closing bid price for 20 prior trading days including the notice of conversion date.

The foregoing description of the AB SPA and the AB Note is not intended to be complete and is qualified in its entirety by the complete text of the documents listed hereon as Exhibit 10.31 and Exhibit 10.32, respectively. 

The estimated fair value of the embedded derivative liability at inception was $65,333, of which $35,000 was discounted against the note and will be accreted over the term of the note and $30,333 will be recorded as interest expense at inception. Given the significant amount of non-cash interest expense associated with the conversion option fair value, the effective interest rate is not meaningful.

JMJ Financial

On January 28, 2014, we received an initial funding of $82,500 (including an original issue discount of $7,500) pursuant to a $250,000 Convertible Note (the “JMJ Note”) dated January 28, 2015 with JMJ Financial. We received $67,500 of proceeds, net of $7,500 original issue discount and $7,500 finders fee. The JMJ Note matures twenty four months from the date funded, has a one-time 12% interest charge if not paid within 90 days, may be prepaid at any time on or before 90 days after the effective date, and is convertible at any time the option of JMJ Financial into shares of our common stock at the lesser of $0.075 per share or 60% of the average of the trade price in the 25 trading days prior to conversion.   

The foregoing description of the JMJ Note is not intended to be complete and is qualified in its entirety by the complete text of the document listed hereon as Exhibit 10.33. 

The estimated fair value of the embedded derivative liability at inception was $157,208, of which $82,500 was discounted against the note and will be accreted over the term of the note and $74,708 will be recorded as interest expense at inception. Given the significant amount of non-cash interest expense associated with the conversion option fair value, the effective interest rate is not meaningful.

Vista Capital Investments, LLC

On February 4, 2015 (the “Issuance Date”), we entered into a Convertible Note (the “Vista Note”) with Vista Capital Investments, LLC (“Vista”) in the original principal amount of $250,000 (including a 10% original issue discount (“OID”)). The Company and Vista agreed to an initial funding under the Vista Note of $55,000, including an OID of $5,000 (“Initial Funding”). Future advances under the Vista Note are at the sole discretion of Vista. We are only required to repay the amount funded, including the prorated portion of the OID. On February 9, 2015, we received $45,000 of net proceeds under the Initial Funding, net of $5,000 OID and a $5,000 finders fee. The Vista Note matures twenty four months from the date funded, has a one-time 12% interest charge if not paid within 90 days; may be prepaid at any time within the 90 day period immediately following the Issuance Date at a multiple of 145% of the original principal amount; and may be convertible at the option of Vista at any time after the Issuance Date into shares of our common stock at the lesser of $0.10 per share or 60% of the lowest trade occurring during the twenty five (25) consecutive trading days immediately preceding the applicable conversion date on which the holder elects to convert all or part of the Vista Note, subject to adjustment as provided for in the Vista Note.

The foregoing description of the Vista Note is not intended to be complete and is qualified in its entirety by the complete text of the document listed hereon as Exhibit 10.34. 

The estimated fair value of the embedded derivative liability at inception was $91,712, of which $55,000 was discounted against the note and will be accreted over the term of the note and $36,712 will be recorded as interest expense at inception. Given the significant amount of non-cash interest expense associated with the conversion option fair value, the effective interest rate is not meaningful.

KBM Worldwide, Inc.

On February 17, 2015, we entered into a Securities Purchase Agreement (“KBM SPA”) with KBM Worldwide, Inc. (“KBM”) providing for the purchase of a Convertible Promissory Note bearing interest at 8% per annum in the principal amount of $115,000 due February 17, 2016 (the “KBM Note”). The KBM Note includes an $11,000 Original Issue Discount (“OID”). The KBM Note was funded on February 20, 2015, with the Company receiving net proceeds of $90,000, (net of the $11,000 OID, KBM’s legal expenses of $4,000, and a finders fee of $10,000. The terms of the KBM SPA also provide, for a period of six months following the effective date, a right of first refusal to KBM for certain future financings entered into by the Company for amounts less than $75,000.

The KBM Note can be prepaid, at redemption premiums ranging from 10% to 35%, until 180 days following the issuance date of the KBM Note, after which we have no right of repayment. The KBM Note is convertible at a price per share equal to 61% of the average of the lowest three trading prices of the Company’s common stock during the 10 trading days prior to conversion. If, at any time when the KBM Note is outstanding, the Company issues or sells, or is deemed to have issued or sold, any shares of its common stock in connection with a subsequent placement for no consideration or for a consideration per share based on a variable price formula that is less than the conversion price in effect on the date of such issuance of shares of common stock, then the KBM conversion price will be reduced to the amount of the consideration per share received for such issuance.

The foregoing description of the KBM SPA and the KBM Note is not intended to be complete and is qualified in its entirety by the complete text of the documents listed hereon as Exhibit 10.35 and Exhibit 10.36, respectively. 

The estimated fair value of the embedded derivative liability at inception was $250,590, of which $115,000 was discounted against the note and will be accreted over the term of the note and $125,590 will be recorded as interest expense at inception. Given the significant amount of non-cash interest expense associated with the conversion option fair value, the effective interest rate is not meaningful.

EMA Financial, LLC

On February 19, 2015, we entered into a Securities Purchase Agreement (the “EMA SPA”) with EMA Financial, LLC (“EMA”) providing for the purchase of a Convertible Note bearing interest at 10% per annum in the principal amount of $68,000 due February 19, 2016 (the “EMA Note”). The EMA Note includes an $6,800 Original Issue Discount (“OID”). The EMA Note was funded on February 23, 2015, with the Company receiving net proceeds of $52,080, (net of the $6,800 OID, EMA’s due diligence and documentation preparation expenses of $3,000, and a finders fee of $6,120).

The EMA Note can be prepaid, at a redemption premium of 50%, until 180 days following the issuance date of the EMA Note, after which the Company has no right of repayment. The EMA Note is convertible at a price per share equal to the lower of either (i) the closing sale price of the Company’s common stock on the day prior to the closing date, and (ii) 60% of the lowest trade price of the Company’s common stock Common Stock on the Principal Market during the twenty five (25) consecutive trading days prior to conversion.

The foregoing description of the EMA SPA and the EMA Note is not intended to be complete and is qualified in its entirety by the complete text of the documents listed hereon as Exhibit 10.37 and Exhibit 10.38, respectively. 

The estimated fair value of the embedded derivative liability at inception was $167,167, of which $68,000 was discounted against the note and will be accreted over the term of the note and $99,167 will be recorded as interest expense at inception. Given the significant amount of non-cash interest expense associated with the conversion option fair value, the effective interest rate is not meaningful.

Tangiers Investment Group, LLC

On March 8, 2015, we entered into a Note Purchase Agreement (the “Tangiers NPA”) with Tangiers Investment Group, LLC ("Tangiers"), for the sale of a 10% convertible promissory note in the principal amount of up to $220,000, plus a 10% original issue discount (the "Tangiers Note"). On March 10, 2015, the Company closed on an initial funding of $82,500 and received net proceeds of $67,500, after deducting $7,500 retained by Tangiers for the original issue discount for due diligence and legal bills related to the transaction, and $7,500 that the Company paid to a third party for a finders fee. Tangiers has the option to finance additional amounts, up to the balance of the $220,000, during the term of the Tangiers Note.

The principal due under the Tangiers Note bears interest at the rate of 10% per annum. Upon an event of default, interest will accrue at the lower of 20% or the highest rate permitted by law. Events of default under the note include, among others, failure to pay principal or interest on the note or comply with certain covenants under the note. All interest and principal must be repaid on or before March 8, 2016. The Tangiers Note may be prepaid in whole or in part by the Company within 180 days, at redemption premiums ranging from 15% to 35% of the funded amount of the Tangiers Note plus accrued interest. After 180 days, the Tangiers Note may not be prepaid without the consent of Tangiers. The principal and interest underlying the Tangiers Note is convertible at any time into common stock, at Tangiers's option, at a conversion price equal to the lower of $0.04 or 60% of the lowest trading price of the Company's common stock during the twenty consecutive trading days prior to the date on which Tangiers (or the then-holder of the Tangiers Note) elects to convert all or part of the Tangiers Note.

The foregoing description of the Tangiers NPA and the Tangiers Note is not intended to be complete and is qualified in its entirety by the complete text of the documents listed hereon as Exhibit 10.39 and Exhibit 10.40, respectively.

The estimated fair value of the embedded derivative liability at inception was $139,078, of which $82,500 was discounted against the note and will be accreted over the term of the note and 58,578 will be recorded as interest expense at inception. Given the significant amount of non-cash interest expense associated with the conversion option fair value, the effective interest rate is not meaningful.

Increase in Authorized Share Capital

On July 7, 2014, we filed a Certificate of Amendment to Certificate of Incorporation, a copy of which is attached hereto as Exhibit 3.5, to increase the number of our authorized shares of capital stock from 185,000,000 shares to 485,000,000 shares, divided into two classes: 450,000,000 shares of common stock, par value $0.001 per share (the “Common stock”), and 35,000,000 shares of preferred stock, par value $0.001 per share (the “Preferred Stock”). 

On March 18, 2015, our Board of Directors approved a resolution recommending that our shareholders approve increasing the number of our authorized shares of common stock from 450,000,000 to 650,000,000. The Company is in the process of obtaining shareholder approval for the increase and will then prepare and file an Information Statement pursuant to Section 14(c) of the Securities Exchange Act of 1934. Once that has been filed and the requisite passage of time has passed, the Company will file an Amendment to its Certificate of Incorporation, at which time the increase in the number of authorized shares of common stock will become effective.

Financial Advisor, Investment Banking and Placement Agent Agreements

On October 16, 2013 we entered into a six-month exclusive placement agent agreement with Midtown Partners & Co LLC (“Midtown”), in connection with the private placement of the Company’s securities.  On April 16, 2014, we agreed to extend the term through October 16, 2014.  We agreed to pay Midtown the following fees for services to be rendered:

(a)      A non-refundable retainer fee of twenty-five thousand dollars ($25,000.00) and a three year warrant to purchase one million (1,000,000) shares of the Company's restricted common stock at $1.00.

(b)      a placement fee equal to eight percent (8%) of the gross purchase price paid for securities issued in transactions arranged through Midtown, payable in full, in cash, at a closing for the sale of any of such securities.

(c)      at each closing, the Company shall issue to Midtown, or its permitted assigns, warrants (the “PA Warrants”) to purchase that number of shares of common stock of the Company equal to eight percent (8%) of the sum of (i) the number of shares of common stock of the Company issued at each such closing or in the event of a convertible or equity linked security, the number of shares of common stock issuable by the Company upon exercise or conversion of any and all convertible or equity linked securities issued at each such closing (including, but not limited to, all convertible promissory notes, convertible preferred stock and all series of warrants). The PA Warrants shall be transferable by Midtown to its representatives and agents at closing. 

The foregoing description of the placement agent agreement with Midtown does not purport to be complete and is qualified in its entirety by reference to the complete text of the placement agent agreement and the addendum, copies of which are filed as Exhibits 10.18 and 10.17, respectively, hereto and which are incorporated herein by reference.

On December 19, 2014, we entered into an agreement with Carter, Terry & Company (“CTC”) to act, on a non-exclusive basis, as Financial Advisor, Investment Bank and Placement Agent for the Company on a “best efforts” basis for a period of 12 months with an option by CTC to extend for an additional 6 months. The agreement may be terminated by either party by written notice to the other. We have agreed to pay CTC the following fees: 

The foregoing description of the agreement with CTC does not purport to be complete and is qualified in its entirety by reference to the complete text of the agreement, a copy of which is filed hereto as Exhibit 10.41 hereto and which is incorporated herein by reference.

Executive Offices

Our executive officers are located at 777 South Flagler Drive, Suite 800 West, West Palm Beach, FL 33401 and our telephone number is 561-515-6163.  Our executive office is a virtual office which means that our executives each work from their home offices, but utilize this facility for meetings and conferences, and telephone and message support. 

Patents, Trademarks, and Licenses

Except for the NACSV trademark, we do not own any patents or trademarks and we have not entered into any license agreements.

Environmental Laws and Regulation

In the future we expect that we may be subject to various federal, state, local, provincial and foreign laws and regulations governing the protection of human health and the environment.  In 2014, we did not make any significant capital expenditures for equipment required by environmental laws and regulations.

Available Information

The Company’s Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and amendments to reports filed pursuant to Sections 13(a) and 15(d) of the Securities Exchange Act of 1934, as amended (“Exchange Act”), are filed with the U.S. Securities and Exchange Commission (the “SEC”). Such reports and other information filed by the Company with the SEC are available free of charge on the Company’s website at www.gdsi.co when such reports are available on the SEC website. The public may read and copy any materials filed by the Company with the SEC at the SEC’s Public Reference Room at 100 F Street, NE, Room 1580, Washington, DC 20549. The public may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. The SEC maintains an Internet site that contains reports, proxy and information statements and other information regarding issuers that file electronically with the SEC at www.sec.gov. The contents of these websites are not incorporated into this filing or any registration statement that incorporates this Form 10-K by reference. Further, the Company’s references to the URLs for these websites are intended to be inactive textual references only.

Employees

As of December 31, 2014, we employed eleven full-time employees.  We also use professionals on an as-needed basis. We have no collective bargaining agreements and believe our relations with our employees are good.

Our operations could be affected by various risks, many of which are beyond our control. Based on current information, we believe that the following identifies the most significant risks that could affect our business. Investors should carefully consider the following risk factors, together with all of the information included in this Annual Report on Form 10-K, in evaluating our company, our business and our prospects.

Risks Relating to Our Business

There is doubt about our ability to continue as a going concern.

Our independent registered public accounting firm has issued an opinion on our December 31, 2014 financial statements that states that the financial statements were prepared assuming we will continue as a going concern.  As discussed in Note 1 to the financial statements, we have sustained losses and experienced negative cash flows from operations since inception, and for the year ended December 31, 2014 we incurred a net loss of $11,657,188, and used net cash of $708,040 to fund operating activities, and net cash of $239,697 for financing activities. At December 31, 2014, we had an accumulated deficit of $28,515,563, cash and cash equivalents of $160,102, working capital of $192,628 and stockholders’ equity of $152,406.  These matters raise substantial doubt about our ability to continue as a going concern.  Our plan in regards to these matters is also described in Note 1 to our financial statements.  The financial statements do not include any adjustments that might result from the outcome of this uncertainty.

Our future is dependent on our ability to meet our financing requirements, and complete other identified and unidentified acquisitions. If we fail for any reason, we might not be able to continue as a going concern.

We have a limited operating history, limited revenue and may continue to incur losses.

There can be no assurance that our business will be profitable in the future. We may continue to incur losses and negative cash flows from operations. This would have a material adverse affect on our financial condition.

We will need additional financing to fully implement our business plan, and we cannot assure you that we will be successful in obtaining such financing or in continuing our operations.

We acquired North American Custom Specialty Vehicles (“NACSV”) in June 2014. NACSV specializes in building mobile command/communications and specialty vehicles for emergency management, first responders, national security and law enforcement operations. We may acquire complementary businesses in the future, but there can be no assurance that we will successfully close a future acquisition, or that additional public or private financing, including debt or equity financing, will be available as needed, or, if available, on terms favorable to us to close such an acquisition. Any additional equity financing may be dilutive to our stockholders and holders of such additional equity securities may have rights, preferences or privileges that are senior to those of our existing common or preferred stock. Furthermore, debt financing, if available, will require payment of interest and may involve restrictive covenants that could impose limitations on our operating flexibility. Our failure to successfully obtain additional future funding may jeopardize our ability to continue our business and operations.

While part of our strategy is to pursue strategic acquisitions, we may not be able to identify businesses that we can acquire on acceptable terms: we may not be able to obtain necessary financing or may face risks due to additional indebtedness: and our acquisition strategy may incur significant costs or expose us to substantial risks inherent in the acquired business’s operations. 

Our strategy of pursuing strategic acquisitions may be negatively impacted by several risks, including the following:

Any integration is expected to be complex, time-consuming and expensive and may harm the newly-consolidated company’s business, financial condition and results of operations.

We depend upon our senior management and our business may be adversely affected if we cannot retain them.

Our success depends upon our ability to attract and retain experienced senior management with specialized industry and technical knowledge and/or industry relationships. On August 12, 2013, Richard J. Sullivan was appointed Chairman and CEO of the Company and David A. Loppert was appointed CFO.  In July 2014, Stephen L. Norris was appointed Vice Chairman and CEO of GDSI International. Mr. Norris subsequently resigned on January 9, 2015. On December 3, 2014, Jennifer S. Carroll was appointed President of NACSV. Ms. Carroll resigned on March 7, 2015.

Mr. Sullivan and Mr. Loppert have significant experience as CEO and CFO, respectively, of public companies.  We might not be able to find or replace qualified individuals to fill the slots of senior management that we anticipate if their services do not become available to us or are no longer available to us; accordingly the inability to fill positions in, or the loss of critical members of, our anticipated senior management team could have a material adverse effect on our ability to effectively pursue our business and acquisition strategy. We do not have key-man life insurance policies covering these employees at this time.

If we are unable to manage future growth, our business may be negatively affected.

We are continuing to pursue a strategy of rapid growth, and plan to expand significantly our capability and devote substantial resources to our marketing, sales, administrative, operational, financial and other systems and resources. Such expansion will place significant demands on our marketing, sales, administrative, operational, financial and management information systems, controls and procedures. Accordingly, our performance and profitability will depend on the ability of our officers and key employees to:

There can be no assurance that we will integrate and manage successfully new systems, controls and procedures for our business, or that our systems, controls, procedures, facilities and personnel, even if successfully integrated, will be adequate to support our projected future operations. Any failure to implement and maintain such systems, controls and procedures, add internal capacity, facilities and third-party sourcing arrangements or attract, train, retain, motivate and manage effectively our employees could have a material adverse effect on our business, financial condition and results of operations.  In addition, we may incur substantial expenses identifying, investigating and developing appropriate products and services in our targeted business markets. There can be no assurance that any expenditures incurred in identifying, investigating and developing such products and services will ever be recouped.

We will need additional capital to fund ongoing operations, future acquisitions, and to respond to business opportunities, challenges, acquisitions or unforeseen circumstances.  If such capital is not available to us, our business, operating results and financial condition may be harmed.

At December 31, 2014 we had $160,102 cash on hand.  Subsequent to December 31, 2014, we entered into a number of convertible note transactions, receiving net proceeds in the aggregate of $471,630.  We will continue to seek equity financing to provide funding for operations but there is no assurance that we will be successful in these efforts.  If we are not successful in raising additional equity capital or generating sufficient cash flows to meet our obligations as they come due, we may not be able to fully fund our ambitious growth plans. We may then be required to reduce our overhead expenses by the reduction of headcount and other available measures.

We may face strong competition from larger, established companies.

We likely will face intense competition from other companies that provide the same or similar custom specialty vehicle manufacturing and other services that compete with acquired businesses, virtually all of whom can be expected to have longer operating histories, greater name recognition, larger installed customer bases and significantly more financial resources, R&D facilities and manufacturing and marketing experience than we have. There can be no assurance that developments by our potential competitors will not render our existing and future products or services obsolete.  In addition, we expect to face competition from new entrants into the custom specialty vehicle business. As the demand for products and services grows and new markets are exploited, we expect that competition will become more intense, as current and future competitors begin to offer an increasing number of diversified products and services. We may not have sufficient resources to maintain our research and development, marketing, sales and customer support efforts on a competitive basis. Additionally, we may not be able to make the technological advances necessary to maintain a competitive advantage with respect to our products and services. Increased competition could result in price reductions, fewer product orders, obsolete technology and reduced operating margins, any of which could materially and adversely affect our business, financial condition and results of operations.

If we are unable to keep up with technological developments, our business could be negatively affected.

If we are successful in acquiring complementary companies in the future, the markets for our anticipated products and services are expected to be characterized by rapid technological change and be highly competitive with respect to timely innovations. Accordingly, we believe that our ability to succeed in the sale of our products and services will depend significantly upon the technological quality of our products and services relative to those of our competitors, and our ability to continue to develop and introduce new and enhanced products and services at competitive prices and in a timely and cost-effective manner.  In order to develop such new products and services, we will depend upon close relationships with existing customers and our ability to continue to develop and introduce new and enhanced products and services at competitive prices and in a timely and cost-effective manner. There can be no assurance that we will be able to develop and market our new products and services successfully or respond effectively to technological changes or new product and service offerings of our potential competitors. We may not be able to develop the required technologies, products and services on a cost-effective and timely basis, and any inability to do so could have a material adverse effect on our business, financial condition and results of operations. 

We may not be able to protect intellectual property that we hope to acquire, which could adversely affect our business. 

The companies that we hope to acquire may rely on patent, trademark, trade secret and copyright protection to protect their technology. We believe that technological leadership can be achieved through additional factors such as the technological and creative skills of our personnel, new product developments, frequent product enhancements, name recognition and reliable product maintenance. Nevertheless, our ability to compete effectively depends in part on our ability to develop and maintain proprietary aspects of our technology, such as patents. We may not secure future patents; and patents that we may secure may become invalid or may not provide meaningful protection for our product innovations. In addition, the laws of some foreign countries do not protect intellectual property rights to the same extent as the United States. Furthermore, there can be no assurance that competitors will not independently develop similar products, "reverse engineer" our products, or, if patents are issued to us, design around such patents.  We also expect to rely upon a combination of copyright, trademark, trade secret and other intellectual property laws to protect our proprietary rights by entering into confidentiality agreements with our employees, consultants and vendors, and by controlling access to and distribution of our technology, documentation and other proprietary information. There can be no assurance, however, that the steps to be taken by us will not be challenged, invalidated or circumvented, or that the rights granted thereunder will provide a competitive advantage to us. Any such circumstance could have a material adverse effect on our business, financial condition and results of operations.  While we are not currently engaged in any intellectual property litigation or proceedings, there can be no assurance that we will not become so involved in the future or that our products do not infringe any intellectual property or other proprietary right of any third party. Such litigation could result in substantial costs, the diversion of resources and personnel, and subject us to significant liabilities to third parties, any of which could have a material adverse effect on our business. 

We may not be able to protect our trade names and domain names.

We may not be able to protect our trade names and domain names against all infringers, which could decrease the value of our brand name and proprietary rights. We currently hold the Internet domain names "www.gdsi.co" and “www.nacsvehicles.com” and we use “GDSI” and “NACS Vehicles” as trade names. Domain names generally are regulated by Internet regulatory bodies and are subject to change and may be superseded, in some cases, by laws, rules and regulations governing the registration of trade names and trademarks with the United States Patent and Trademark Office and certain other common law rights. If the domain registrars are changed, new ones are created or we are deemed to be infringing upon another's trade name or trademark, we could be unable to prevent third parties from acquiring or using, as the case may be, our domain name, trade names or trademarks, which could adversely affect our brand name and other proprietary rights.

We expect a number of factors to cause our operating results to fluctuate on a quarterly and annual basis, which may make it difficult to predict our future performance.

Our revenues and operating results could vary significantly from quarter to quarter and year-to-year because of a variety of factors, many of which are outside of our control.  As a result, comparing our operating results on a period-to-period basis may not be meaningful.  In addition to other risk factors discussed in this section, factors that may contribute to the variability of our quarterly and annual results include:

As a result of these and other factors, the results of any prior quarterly or annual periods should not be relied upon as indications of our future operating performance, and any unfavorable changes in these or other factors could have a material adverse effect on our business, financial condition and results of operation.

Growth may place significant demands on our management and our infrastructure.

We plan for substantial growth in our business, and this growth would place significant demands on our management and our operational and financial infrastructure.  If our operations grow in size, scope and complexity, we will need to improve and upgrade our systems and infrastructure to meet customer demand. The expansion of our systems and infrastructure will require us to commit substantial financial, operational and technical resources in advance of an increase in the volume of business, with no assurance that the volume of business will increase.  Continued growth could also strain our ability to maintain reliable service levels for our customers and meet their expected delivery schedules, develop and improve our operational, financial and management controls, enhance our reporting systems and procedures and recruit, train and retain highly skilled personnel.

Managing our growth will require significant expenditures and allocation of valuable management resources. If we fail to achieve the necessary level of efficiency in our organization as it grows, our business, operating results and financial condition would be harmed.

Confidentiality agreements with employees and others may not adequately prevent disclosure of trade secrets and other proprietary information.

In order to protect our proprietary technology and processes, we will rely in part on confidentiality agreements with our employees, customers, potential customers, independent contractors and other advisors.  These agreements may not effectively prevent disclosure of confidential information and may not provide an adequate remedy in the event of unauthorized disclosure of confidential information.  In addition, others may independently discover trade secrets and proprietary information, and in such cases we could not assert any trade secret rights against such parties.  Costly and time-consuming litigation could be necessary to enforce and determine the scope of our proprietary rights, and failure to obtain or maintain trade secret protection could adversely affect our competitive business position.

We will continue to incur increased costs as a result of being a public reporting company and our management expects to devote substantial time to public reporting company compliance programs.

As a public reporting company, we incur significant legal, insurance, accounting and other expenses that we would not incur as a non-reporting public company. We expect to invest resources to comply with evolving laws, regulations and standards, and this investment will result in increased general and administrative expenses and may divert management's time and attention from product development activities. If our efforts to comply with new laws, regulations and standards differ from the activities intended by regulatory or governing bodies due to ambiguities related to practice, regulatory authorities may initiate legal proceedings against us and our business may be harmed. We maintain directors' and officers' insurance coverage, which increases our insurance cost. In the future, it may be more expensive for us to obtain director and officer liability insurance, and we may be required to accept reduced coverage or incur substantially higher costs to obtain coverage. These factors could also make it more difficult for us to attract and retain qualified members of our board of directors, particularly to serve on our audit committee and compensation committee, and qualified executive officers.

In addition, in order to comply with the requirements of being a public reporting company, we may need to undertake various actions, including implementing new internal controls and procedures and hiring new accounting or internal audit staff. The Sarbanes-Oxley Act requires that we maintain effective disclosure controls and procedures and internal control over financial reporting. We are continuing to develop and refine our disclosure controls and other procedures that are designed to ensure that information required to be disclosed by us in the reports that we file with the Securities and Exchange Commission is recorded, processed, summarized and reported within the time periods specified in the Commission's rules and forms, and that information required to be disclosed in reports under the Exchange Act is accumulated and communicated to our principal executive and financial officers. Any failure to develop or maintain effective controls could adversely affect the results of periodic management evaluations. In the event that we are not able to demonstrate compliance with the Sarbanes-Oxley Act, that our internal control over financial reporting is perceived as inadequate, or that we are unable to produce timely or accurate financial statements, investors may lose confidence in our operating results and the price of our ordinary shares could decline. 

As discussed below, because we are an emerging growth company, we are exempt from the auditor attestation requirement of Section 404 of the Sarbanes-Oxley Act of 2002, but that does not preclude us from complying with certain of these rules, which require management to certify financial and other information in our quarterly and annual reports and provide an annual management report on the effectiveness of our internal control over financial reporting commencing with our second annual report. This assessment will need to include the disclosure of any material weaknesses in our internal control over financial reporting identified by our management or our independent registered public accounting firm.

Our independent registered public accounting firm will not be required to formally attest to effectiveness of our internal control over financial reporting until the later of our second annual report or the first annual report required to be filed with the Commission following the date we are no longer an "emerging growth company" as defined in the JOBS Act. We have identified certain material weaknesses addressed in Item 9A – Controls and Procedures in this Annual Report on Form 10-K hereof, and we cannot assure you that there will not be additional material weaknesses or significant deficiencies in our internal controls in the future.

Risks Related to our Common and Preferred Stock

We are eligible to be treated as an "emerging growth company" as defined in the Jumpstart Our Business Startups Act of 2012, and we cannot be certain if the reduced disclosure requirements applicable to emerging growth companies will make our common stock less attractive to investors.

We are an "emerging growth company", as defined in the JOBS Act. For as long as we continue to be an emerging growth company, we may take advantage of exemptions from various reporting requirements that are applicable to other public companies that are not emerging growth companies, including (1) not being required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley, (2) reduced disclosure obligations regarding executive compensation in this Form 10-K and our other periodic reports,  and registration and proxy statements and (3) exemptions from the requirements of holding a nonbinding advisory vote on executive compensation and stockholder approval of any golden parachute payments not previously approved. In addition, as an emerging growth company, we are only required to provide two years of audited financial statements. We could be an emerging growth company for up to five years, although circumstances could cause us to lose that status earlier, including if the market value of our common stock held by non-affiliates exceeds $700.0 million as of any June 30 before that time (i.e., we become a large accelerated filer) or if we have total annual gross revenue of $1.0 billion or more during any fiscal year before that time, in which cases we would no longer be an emerging growth company as of the following December 31 or, if we issue more than $1.0 billion in non-convertible debt during any three-year period before that time, we would cease to be an emerging growth company immediately. Even after we no longer qualify as an emerging growth company, we may still qualify as a "smaller reporting company" which would allow us to take advantage of many of the same exemptions from disclosure requirements, including not being required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act and reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements. We cannot predict if investors will find our common stock less attractive because we may rely on these exemptions. If some investors find our common stock less attractive as a result, there may be a less active trading market for our common stock and our stock price may be more volatile.

Under the JOBS Act, emerging growth companies can also delay adopting new or revised accounting standards until such time as those standards apply to private companies. We have irrevocably elected not to avail ourselves of this extended transition period and, as a result, we will adopt new or revised accounting standards on the relevant dates on which adoption of such standards is required for other public companies that are not emerging growth companies.

We have not paid dividends in the past and do not expect to pay dividends in the foreseeable future.  Any return on investment may be limited to the value of our common stock.

We have never paid cash dividends on our common stock and do not anticipate doing so in the foreseeable future.  The payment of dividends on our common stock will depend on earnings, financial condition and other business and economic factors affecting us at such time as our board of directors may consider relevant.  If we do not pay dividends, our common stock may be less valuable because a return on your investment will only occur if our stock price appreciates. We recently entered into certain convertible note transactions that prohibit us from paying dividends until the amounts owing under the notes have been satisfied.

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

Our common stock is quoted for trading on the OTCQB Marketplace (“OTCQB”).  As soon as is practicable, we anticipate applying for listing of our common stock on either the American Stock Exchange, The Nasdaq Capital Market or other national securities exchange, assuming that we can satisfy the initial listing standards for such exchange.  We currently do not satisfy the initial listing standards, and cannot ensure that we will be able to satisfy such listing standards or that our common stock will be accepted for listing on any such exchange.  Should we fail to satisfy the initial listing standards of such exchanges, or our common stock is otherwise rejected for listing and remains listed on the OTCQB or suspended from the OTCQB, the trading price of our common stock could suffer and the trading market for our common stock may be less liquid and our common stock price may be subject to increased volatility.

Furthermore, for companies whose securities are traded in the OTCQB, it is more difficult (1) to obtain accurate quotations, (2) to obtain coverage for significant news events because major wire services generally do not publish press releases about such companies, and (3) to obtain needed capital.

Our common stock may be deemed a "penny stock," which would make it more difficult for our investors to sell their shares.

Our common stock may be subject to the "penny stock" rules adopted under Section 15(g) of the Exchange Act.  The penny stock rules generally apply to companies whose common stock is not listed on The Nasdaq Capital Market or other national securities exchange and trades at less than $4.00 per share, other than companies that have had average revenue of at least $6,000,000 for the last three years or that have tangible net worth of at least $5,000,000 ($2,000,000 if the company has been operating for three or more years).  These rules require, among other things, that brokers who trade penny stock to persons other than "established customers" complete certain documentation, make suitability inquiries of investors and provide investors with certain information concerning trading in the security, including a risk disclosure document and quote information under certain circumstances.  Many brokers have decided not to trade penny stocks because of the requirements of the penny stock rules and, as a result, the number of broker-dealers willing to act as market makers in such securities is limited.  Our shares are currently subject to the penny stock rules. If we remain subject to the penny stock rules for any significant period, it could have an adverse effect on the market, if any, for our securities.  If our securities are subject to the penny stock rules, investors will find it more difficult to dispose of our securities. 

Offers or availability for sale of a substantial number of shares of our common stock may cause the price of our common stock to decline.

If our stockholders sell substantial amounts of our common stock in the public market, including shares issued in our private placements that were subsequently registered and are free trading, or upon the expiration of any statutory holding period, under Rule 144, or issued upon the exercise of outstanding options, warrants, convertible debt, contingent consideration and additional shares issued under price protection agreements, it could create a circumstance commonly referred to as an "overhang" and in anticipation of which the market price of our common stock could fall.  The existence of an overhang, whether or not sales have occurred or are occurring, also could make more difficult our ability to raise additional financing through the sale of equity or equity-related securities in the future at a time and price that we deem reasonable or appropriate. 

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

We may utilize various techniques such as non-deal road shows and investor relations campaigns in order to create investor awareness for the Company.  These campaigns may include personal, video and telephone conferences with investors and prospective investors in which our business practices are described.  We have provided in the past, and we will continue to provide, compensation to investor relations firms. Additionally we may pay for newsletters, websites, mailings and email campaigns that are produced by third-parties based upon publicly-available information concerning the Company.  We will not be responsible for the content of analyst reports and other writings and communications by investor relations firms not authored by the Company or from publicly available information.  We do not intend to review or approve the content of such analysts’ reports or other materials based upon analysts’ own research or methods.  Investor relations individuals or firms should generally disclose when they are compensated for their efforts, but whether such disclosure is made or complete is not under our control.

The SEC and the Financial Industry Regulatory Authority, Inc. (“FINRA”) enforce various statutes and regulations intended to prevent manipulative or deceptive devices in connection with the purchase or sale of any security and carefully scrutinize trading patterns and company news and other communications for false or misleading information, particularly in cases where the hallmarks of “pump and dump” activities may exist, such as rapid share price increases or decreases.  The Company and its shareholders may be subjected to enhanced regulatory scrutiny due to the relatively small number of holders who own the registered shares of the Company’s common stock publicly available for resale, and the limited trading markets in which such shares may be offered or sold which have often been associated with improper activities concerning penny stocks, such as the OTCQB Marketplace. The Supreme Court has stated that manipulative action is a term of art connoting intentional or willful conduct designed to deceive or defraud investors by controlling or artificially affecting the price of securities.  Often times, manipulation is associated by regulators with forces that upset the supply and demand factors that would normally determine trading prices. The supply of Company common stock for sale has been and may continue to be limited for an indeterminate amount of time, which could result in higher bids, asks or sales prices than would otherwise exist.  Securities regulators have often cited thinly-traded markets, small numbers of holders, and awareness campaigns as components of their claims of price manipulation and other violations of law when combined with manipulative trading, such as wash sales, matched orders or other manipulative trading timed to coincide with false or touting press releases.  There can be no assurance that the Company’s or third-parties’ activities, or the small number of potential sellers or small percentage of stock in the “float,” or determinations by purchasers or holders as to when or under what circumstances or at what prices they may be willing to buy or sell stock will not artificially impact (or would be claimed by regulators to have affected) the normal supply and demand factors that determine the price of the stock. 

We may apply the proceeds of future private placements to uses that ultimately do not improve our operating results or increase the value of your investment.

We have used and intend to use the net proceeds from future private placements for general working capital purposes. Our management has and will have broad discretion in how we use these proceeds. These proceeds could be applied in ways that do not ultimately improve our operating results or otherwise increase the value of the investment in shares of our common stock sold.

Because our current directors and executive officers are among our largest stockholders, they can exert significant control over our business and affairs and have actual or potential interests that may depart from those of subscribers in our private placements.

Our current directors and executive officers beneficially own or control approximately 42% of our issued and outstanding shares of common stock.  Additionally, the holdings of our directors and executive officers may increase in the future upon vesting or other maturation of exercise rights under any of the restricted stock grants, options or warrants they may hold or in the future be granted or if they otherwise acquire additional shares of our common stock.  The interests of such persons may differ from the interests of our other stockholders.  As a result, in addition to their board seats and offices, such persons may have significant influence over and may control corporate actions requiring stockholder approval, irrespective of how the Company's other stockholders may vote, including the following actions: 

Such persons' stock ownership may discourage a potential acquirer from making a tender offer or otherwise attempting to obtain control of the Company, which in turn could reduce our stock price or prevent our stockholders from realizing a premium over our stock price.

Exercise of options and warrants, conversion rights under convertible notes, and price protection agreements may have a dilutive effect on our common stock. 

If the price per share of our common stock at the time of exercise of any options, or any other convertible securities is in excess of the various exercise or conversion prices of such convertible securities, exercise or conversion of such convertible securities would have a dilutive effect on our common stock. As of December 31, 2014, we had: (a) outstanding options to acquire 5,840,000 shares of our common stock at exercise prices of $0.11 per share for 340,000 options, and $0.64 per share for 5.5 million options, (b) warrants to acquire 4,250,000 shares of our common stock at exercise prices ranging from $0.10 to $1.00, (c) convertible debt of $69,000 potentially convertible into 76,666 shares of our common stock at $0.09 per shares, and (d) 645,161 shares issued that are subject to price protection agreements that, if sold at December 31, 2014, would have resulted in us having to issue an additional 1,854,838 shares of our common stock. Further, any additional financing that we secure may require the granting of rights, preferences or privileges senior to those of our common stock and which result in additional dilution of the existing ownership interests of our common stockholders. Subsequent to December 31, 2014, we entered into convertible note transactions that, had they been outstanding at December 31, 2014, are potentially convertible into approximately an additional 12 million shares of our common stock.

Our certificate of incorporation allows for our board to create new series of preferred stock without further approval by our stockholders, which could adversely affect the rights of the holders of our common stock.

Our board of directors has the authority to fix and determine the relative rights and preferences of preferred stock. Our board of directors also has the authority to issue preferred stock without further stockholder approval. As a result, our board of directors could authorize the issuance of a series of preferred stock that would grant to holders a preferred right to our assets upon liquidation, the right to receive dividend payments before dividends are distributed to the holders of common stock and the right to the redemption of the shares, together with a premium, prior to the redemption of our common stock. In addition, our board of directors could authorize the issuance of a series of preferred stock that has greater voting power than our common stock or that is convertible into our common stock, which could decrease the relative voting power of our common stock or result in dilution to our existing stockholders.

Not applicable.

Our corporate headquarters are located in West Palm Beach, Florida.  In August 2013 we entered into a twelve-month lease for a virtual office in West Palm Beach, Florida at a monthly rental of $299 plus taxes. The lease automatically renews on the anniversary unless terminated by either party on thirty days notice prior to expiration.

NACSV leases its office and manufacturing facilities in Melbourne, FL under a year-to-year operating lease with monthly rent payments totaling $8,748 in January 2015 and $5,637 for February – December, 2015. The lease provides that either party may cancel it on thirty day’s notice. In September 2014, NACSV entered into a 12-month operating lease for a condominium for a vice president with monthly rent payments of $2,160. 

The Company is plaintiff or defendant in two actions:

Dekle, et. al. v. Global Digital Solutions, Inc. et. al.

Brian A. Dekle and John Ramsay filed suit against the Company and its wholly owned subsidiary, North American Custom Specialty Vehicles, Inc. (“NACSV”) in the Circuit Court of Baldwin Alabama, on January 14, 2015, case no. 05-CV-2015-9000050.00, relating to our acquisition of NACSV (the ''Dekle Action"). Prior to instituting the Dekle Action, in June 2014, the Company had entered into an equity purchase agreement with Dekle and Ramsay to purchase their membership interest in North American Custom Specialty Vehicles, LLC. The Dekle Action originally sought payment for $300,000 in post-closing consideration Dekle and Ramsay allege they are owed pursuant to the equity purchase agreement.

On February 9, 2015, the Company and NACSV removed the Dekle Action to federal court in the United States District Court in and for the Southern District of Alabama, case no. 1:15-CV-00069. The Company and NACSV subsequently moved to dismiss the complaint for (1) failing to state a cause of action, and (2) lack of personal jurisdiction. Alternatively, the Company and NACSV sought a transfer of the case to the United States District Court in and for Middle District of Florida. 

In response to the Company’s and NACSV's motion to dismiss, Dekle and Ramsay filed an amended complaint on March 2, 2015 seeking specific performance and alleging breach of contract, violations of SEC Rule 10b-5, and violations of the Alabama Securities Act. The amended complaint also names the Company’s Chairman, President, and CEO, Richard J. Sullivan (“Sullivan”) as a defendant. On March 17, 2015, the Company, NACSV and Sullivan filed a motion to dismiss the amended complaint seeking dismissal for failure to state valid causes of action, for lack of personal jurisdiction, or alternatively to transfer the case to the United States District Court in and for Middle District of Florida. Dekle and Ramsay’s response is due on or before March 31, 2015 and thereafter the Company has until April 7, 2015 to file a reply. If the court determines that oral argument is appropriate, the parties will then be notified and a hearing will be scheduled; otherwise the motion will be taken under submission after April 7, 2015.

Global Digital Solutions, Inc. et. al. v. Communications Laboratories, Inc., et. al.

On January 19, 2015 the Company and NACSV filed suit against Communications Laboratories, Inc., ComLabs Global, LLC, Roland Lussier, Brian Dekle, John Ramsay and Wallace Bailey for conversion and breach of contract in a dispute over the payment of a $300,000 accounts receivable that ComLabs owed to NACSV but sent payment directly to Brian Dekle. The case was filed in the Eighteenth Judicial Circuit in and for Brevard County Florida, case no. 05-2015-CA-012250-XXXX. On February 18, 2015 (i) defendants Communications Laboratories, Inc., ComLabs Global, LLC and Roland Lussier and (ii) defendant Wallace Bailey filed their respective motions to dismiss seeking, among other things, dismissal for failure to state valid causes of action, lumping and failure to post a non-resident bond. On February 26, 2015, defendants Dekle and Ramsay filed their motion to dismiss, or stay action, based on already existing litigation between the parties. NACSV has posted the bond.

To the best of our knowledge, no governmental authority is contemplating any proceeding to which we are a party or to which any of our properties is subject, which would reasonably be likely to have a material adverse effect on our business, financial condition and operating results.

Legal Proceedings terminated in the fourth quarter of 2014:

On January 9, 2014, the Company filed a lawsuit against Merriellyn Kett Murphy (“Kett”) asserting three causes of action against her: Tortious Interference with Contract and/or with Prospective Economic Advantage; Fraudulent Inducement; and Negligent Misrepresentation.  On May 30, 2014, the Company amended its Complaint to allege four causes of action against Kett: Tortious Interference with Contract and/or with Prospective Economic Advantage; Fraudulent Inducement; Fraudulent Concealment; and Civil Conspiracy. Kett was the CEO, President and sole director and stockholder of Airtronic. The Company had entered into a merger agreement with Airtronic and Kett had made numerous representations to the Company that she would close the merger if the Company met her personal demands, which the Company believes that it did.  Nonetheless, Kett refused to close the merger.  The case, captioned Global Digital Solutions, Inc. v. Merriellyn Kett Murphy, was filed in Palm Beach County Circuit Court and Kett later removed it to Federal Court in the Southern District of Florida.  The case number is 14-cv-80190-DTKH (the “Case”). The Company was seeking a judgment against Kett, damages, costs and such other relief as may be awarded by the court. On October 27, 2014, Kett filed a counterclaim against the Company alleging fraud and civil conspiracy seeking damages based on her allegation that the merger prevented her from getting a better personal employment contract on the open market.  The Company denied Kett’s allegations.  

On December 11, 2014 the Company and Kett (collectively, the “Parties”) entered into a Confidential Settlement Agreement to settle their disputes. The disputes between the Parties have been resolved, with all of the claims and counterclaims dismissed, with a payment by Kett of a confidential amount to the Company, which amount is in keeping with recognition of the expense of litigation, the likely inability to collect any judgment due to financial status, and the prior assignment to Airtronic of Kett’s proprietary rights to intellectual property relating to Airtronic. Accordingly the Case has been dismissed by the Parties with prejudice.

Not applicable.

PART II

Our common stock is quoted on the OTCQB Marketplace (“OTCQB”) maintained by the OTC Markets Group under the symbol “GDSI”.

The following table sets forth the high and low bid prices for our common stock for the periods indicated, as reported by the OTCQB.

The last reported sales price of our Common Stock on the OTCQB on December 31, 2014, was $0.08 and on March 26, 2015, the last reported sales price was $0.12.

Holders

As of December 31, 2014, there were 196 holders of record of our common stock, which number does not reflect beneficial stockholders who hold their stock in nominee or “street” name through various brokerage firms.

Dividend Policy

Any determination with respect to the payment of dividends on our common stock will be at the discretion of our Board of Directors and will be dependent upon our financial condition, results of operations, capital requirements, general business conditions, terms of financing arrangements and other factors that our Board of Directors may deem relevant. We do not anticipate declaring any cash dividends on our common stock and some of our existing financing agreement currently prohibits the payment of cash dividends on our common stock while the obligations under the notes issued in the financing are outstanding.

Securities Authorized for Issuance under Equity Compensation Plans

On May 19, 2014 our shareholders approved the amended and restated 2014 Global Digital Solutions Equity Incentive Plan (the “Plan”) and reserved 20,000,000 shares of our common stock for issuance pursuant to awards under the Plan. The Plan is intended as an incentive, to retain in the employ of, and as directors, officers, consultants, advisors and employees of the Company, persons of training, experience and ability, to attract new directors, officers, consultants, advisors and employees whose services are considered valuable, to encourage the sense of proprietorship and to stimulate the active interest of such persons in the development and financial success of the Company and its subsidiaries. Under the Plan, we are authorized to issue incentive stock options intended to qualify under Section 422 of the Internal Revenue Code of 1986, as amended, non-qualified stock options, stock appreciation rights, performance shares, restricted stock and long term incentive awards. The Plan is administered by the Board of Directors.

The following table presents information regarding options and rights outstanding under our compensation plans as of December 31, 2014:

(1) We have granted restricted stock under restricted stock awards made outside of and prior to the approval of our Plan. These grants were made in lieu of compensation. For further information on our stock incentive plans, see Note 10 to our accompanying consolidated financial statements.

Recent Sales of Unregistered Securities/Recent Purchase of Securities

We did not repurchase any shares of our Common Stock during the year ended December 31, 2014. During the three months ended December 31, 2014, we issued the following shares of our common stock that that were not registered under the Securities Act, and were not previously disclosed in a Current Report on Form 8-K as follows:

The shares of common stock described above were issued without registration in reliance upon the exemption provided, among others, by Section 4(2) of the Securities Act of 1933, as amended, as a transaction not involving any public offering. Our reliance on Section 4(2) of the Securities Act was based upon the following factors: (a) the transaction did not involve a public offering; (b) there were only a limited number of offerees; (c) there were no subsequent or contemporaneous public offerings of the securities by us; (d) the securities were not broken down into smaller denominations; and (e) the negotiations for the sale of the stock took place directly between the offeree and us.

Not required because we are a smaller reporting companies.

This Annual Report contains forward-looking that reflect our current estimates, expectations and projections about our future results, performance, prospects and opportunities. Forward-looking statements include, without limitation, statements about our market opportunities, our business and growth strategies, our projected revenue and expense levels, possible future consolidated results of operations, the adequacy of our available cash resources, our financing plans, our ability to pay dividends, our competitive position and the effects of competition and the projected growth of the industries in which we intend to operate. Forward-looking statements are only predictions based on our current expectations and projections about future events and involve risks and uncertainties.

Although we believe that the expectations reflected in the forward-looking statements contained in this Annual Report are based upon reasonable assumptions, no assurance can be given that such expectations will be attained or that any deviations will not be material. In light of these risks, uncertainties and assumptions, the forward-looking statements, events and circumstances discussed in this Annual Report may not occur and actual results could differ materially and adversely from those anticipated or implied in the forward-looking statements. Important factors that could cause our actual results, level of performance or achievements to differ materially from those expressed or forecasted in, or implied by, the forward-looking statements we make in this Annual are discussed under “Item 1A. Risk Factors” and elsewhere in this Annual Report and include:

In some cases, you can identify forward-looking statements by terms such as “may,” “should,” “could,” “would,” “anticipates,” “expects,” “attempt,” “intends,” “plans,” “hopes,” “believes,” “seeks,” “estimates” and similar expressions intended to identify forward-looking statements. These forward-looking statements are not guarantees of future performance and are subject to risks and uncertainties that could cause actual results to differ materially from estimates or forecasts contained in the forward-looking statements. Some of these risks and uncertainties are beyond our control. Also, these forward-looking statements represent our estimates and assumptions only as of the date the statement was made.

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the accompanying audited consolidated financial statements and related footnotes included in Item 8 of this Annual Report.

Business:

Our operations presently consist of the business we operate through NACSV. NACSV specializes in building mobile command/communications and specialty vehicles for emergency management, first responders, national security and law enforcement operations.  We presently manufacture the following specialty vehicles:

We build fiberglass reinforced bodies, the most rugged, lightweight, and weather tolerant body available. The roof design is a unique walk-on surface that provides the greatest flexibility for that space. All vehicle production is done in-house. We build out the body, electrical, and install all equipment. All systems are integrated onsite: satellite, IT, radios, audio/video, electrical and metal fabrication. We provide video surveillance cameras and special lighting packages for night operations and general security. We provide custom requirements, including custom graphics, NIMS and other required compatibility options.

Impact of Recently Issued Accounting Standards 

For information regarding recent accounting pronouncements and their expected impact on our future consolidated results of operations or financial condition, see Note 1 to our accompanying consolidated financial statements.

Critical Accounting Policies and Estimates 

Listed below are descriptions of the accounting policies that our management believes involve a high degree of judgment and complexity, and that, in turn, could materially affect our consolidated financial statements if various estimates and assumptions were changed significantly. The preparation of our consolidated financial statements requires that we make certain estimates and judgments that affect the amounts reported and disclosed in our consolidated financial statements and related notes. We base our estimates on historical experience and on other assumptions that we believe to be reasonable under the circumstances. Actual results may differ from these estimates. For more detailed information on our significant accounting policies, see Note 1 to our accompanying consolidated financial statements.

Principles of Consolidation

We consolidate all subsidiaries in which we hold a greater than 50% voting interest, which requires that we include the revenue, expenses, assets and liabilities of such subsidiaries in our financial statements. As of December 31, 2014, we owned 100% of our active subsidiaries.

Use of Estimates  

The preparation of financial statements in conformity with generally accepted accounting principles, or GAAP in the United States of America, or U.S., requires management to make certain estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Although these estimates are based on the knowledge of current events and actions we may undertake in the future, they may ultimately differ from actual results. Included in these estimates are assumptions used in: (i) determining the lives of long-lived assets; (ii) Black-Scholes-Merton, or BSM, valuation models used to estimate the fair value of stock-based compensation and warrants; (iii) determining the value of a promissory note with an embedded convertible option; (iv) the amount of beneficial conversion feature of convertible debt; (v) the liability for estimated contingent consideration payable and (vi) determining valuation allowances for deferred tax assets, among other items. 

Goodwill and Intangible Asset

Goodwill represents the excess of purchase price over the fair value assigned to the net assets acquired in business combinations. Goodwill is allocated to reporting units as of the acquisition date for the purpose of goodwill impairment testing. Currently, we operate in only one reporting unit. Our goodwill arose from our acquisition of NACSV in June 2014. Intangible assets deemed to have an indefinite life such as goodwill are not amortized, but instead are reviewed at least annually for impairment. Intangible assets with finite lives are amortized over their estimated useful lives. As of December 31, 2014, other than goodwill, we had no intangible assets with indefinite lives. We tested our goodwill for impairment during the fourth quarter as a part of our annual business planning cycle. Goodwill is also required to be tested between testing dates if an impairment condition or event is determined to have occurred.

In September 2011, the FASB issued revised goodwill impairment guidance. Under the revised guidance, entities have an option to perform a qualitative assessment to determine whether the two-step impairment testing described in ASC 350, “Intangibles — Goodwill and Other,” is necessary. The two-step impairment test is required only if the entity concludes that it is more likely than not that a reporting unit’s fair value is less than its carrying value. Management believed that it was more likely than not that a goodwill impairment existed as of December 31, 2014, such that a qualitative assessment was not required and that it was appropriate to proceed directly to the two-step impairment testing. In making such determination, we placed emphasis on the historical results of NACSV’s operations, which had declined from our initial expectations in part due to recent changes in senior management, changes in its customer base, and the reduction in the existing backlog of customer orders.

Under Step 1 of the two-step impairment testing, management used an income valuation approach and prepared a discounted cash flow model that calculated what management believed to be the fair value of the reporting unit. The approach considered the likelihood of future cash flows that management expects our NACSV business to generate over the next ten years, along with a terminal value based on a long-term sustainable growth rate subsequent to 2015 of 1%, which were discounted using a 20% discount rate. The fair value of the reporting unit was then compared to the carrying value of the reporting unit. Since the carrying value was more than the fair value, management proceeded to Step 2 of the impairment testing. Under Step 2, management calculated the implied fair value of the existing net assets, excluding goodwill. The implied fair value of the existing net assets was then compared to fair value of the reporting unit. This resulted in an implied fair value of goodwill of nil. Accordingly, we recorded a $1,156,192 goodwill impairment charge in the fourth quarter of 2014.

We have one other intangible asset consisting of customer relationships, which is being amortized over its expected economic life of five years. The life was determined based upon the expected use of the asset, and other contractual provisions associated with the asset, the estimated average life of NACSV’s products, the stability of the industry, and other factors deemed appropriate. In accordance with ASC 350 and ASC 360, we continually evaluate whether events or circumstances have occurred that indicate the remaining estimated useful life of our customer relationships asset may warrant revision or that the remaining balance of such asset may not be recoverable. We use an estimate of the related discounted cash flows over the remaining life of the asset in measuring whether the asset is recoverable.

Revenue Recognition 

We follow specific and detailed guidelines in measuring revenue; however, certain judgments affect the application of our revenue policy. The complexity of the estimation process and all issues related to the assumptions, risks and uncertainties inherent with our revenue recognition policies affect the amounts reported in our financial statements. A number of internal and external factors affect the timing of our revenue recognition, including estimates of customer service/warranty periods, estimates of customer returns and the timing of customer acceptance. Our revenue results are difficult to predict, and any shortfall in revenue or delay in recognizing revenue could cause our operating results to vary significantly from quarter to quarter and year to year.

Stock-Based Compensation 

At December 31, 2014, we had one stock-based employee compensation plan. In accordance with ASC 718, awards granted are valued at fair value and compensation cost is recognized on a straight line basis over the service period of each award.

Income Taxes 

We adopted ASC subtopic 740-10, Income Taxes which requires the recognition of deferred tax liabilities and assets for the expected future tax consequences of events that have been included in the financial statement or tax returns as more fully discussed in our consolidated financial statements. 

Loss Per Common Share and Common Share Equivalent 

Basic and diluted loss per common share has been computed by dividing the loss by the weighted average number of common shares outstanding for the period. Since we have incurred losses attributable to common stockholders, diluted loss per common share has not been computed by giving effect to all potentially dilutive common shares that were outstanding during the period. Dilutive common shares consist of incremental shares issuable upon exercise of stock options, warrants and convertible notes payable to the extent that the average fair value of our common stock for each period is greater than the exercise/conversion price of the derivative securities.

Results of Continuing Operations

Revenue and cost of revenue in the year ended December 31, 2014 were $695,022 and $662,307, respectively. Revenue was from fixed-price and modified fixed-price construction contracts that are recognized using the percentage-of-completion method of revenue recognition as well as from service and refurbishment work which are recognized on the completion of the job. Cost of revenue include all direct material and labor costs and indirect costs related to contract performance. We had no revenue, or cost of revenue, in the year ended December 31, 2013. 

Selling, General and Administrative expense increased by $2,545,371, or 30.4%, from $8,384,247 in the year ended December 31, 2013 to $10,929,618 in the year ended December 31, 2014, and were comprised of:

Stock-based compensation expense increased by $2,529,358, or 49.0%, from $5,128,208 in the year ended December 31, 2013 to $7,687,566 in the year ended December 31, 2014, and was comprised of:

See Note 10 to our consolidated financial statements and Item 11 – Executive Compensation for additional information on stock-based compensation.

Acquisition costs were related to the NACSV acquisition in the year ended December 31, 2014 and comprised of non-cash charges totaling $729,572 comprising (i) non-cash compensation costs of $664,000 to advisors paid in shares of our common stock, (ii) discount expense of $65,572 on shares issue to the NACSV sellers, and (iii) cash expenses of $25,000 paid for due diligence services.

Compensation and benefits increased by $160,667, or 50.2% to $480,667 in the year ended December 31, 2014 compared to $320,000 in the year ended December 31, 2013 comprised:

See Item 11 – Executive Compensation for additional information on officer compensation.

Debt issuance costs decreased by $(1,285,000), or (92.8)% from $1,385,000 in the year ended December 31, 2013 to $100,000 in the year ended December 31, 2014.   In connection with the issuance of convertible notes payable in prior years, we issued a warrant to a consultant which vested over one year. In year ended December 31, 2014 we expensed $100,000 for amortization of the warrant. In the year ended December 31, 2013 we amortized $1,350,000 of expense related to warrants and for a debt guaranty issued by an affiliate of our CEO, and $35,000 was paid in cash for loan fees. 

Facility costs increased by $89,335, or 673.0% from $13,275 in the year ended December 2013 to $102,610 in the year ended December 31, 2014. The increased costs were attributable to NACSV’s facility costs, which include rent, taxes and insurance. 

Investment banking fees decreased by $(102,310), or (19.9)% from $514,808 in the year ended December 2013 to $412,498 in the year ended December 31, 2014. In the year ended December 31, 2014 the $412,498 expense represented the amortization of a cash fee and the fair value of a warrant granted to an investment banking company. In the year ended December 31, 2013, $413,498 of the expense represented the amortization of a cash fee and the fair value of a warrant granted to an investment banking company and $101,310 were for placement fees in connection with private placements.

Investor relations and marketing expense increased by $219,608, or 57.6%, from $380,944 in the year ended December 2013 to $600,552 in the year ended December 31, 2014. In the year ended December 31, 2014, we amortized the fair value of warrants and shares of our common stock totaling $584,169 issued to IR consultants for IR services, and we paid $16,383 related to issuing press releases and wire fees. In the year ended December 31, 2013, we amortized the fair value of warrants and shares of our common stock totaling $318,331 issued to IR consultants, and we paid $62,613 for public relations, press releases, wire fees, shareholder communication costs and other associated costs.

Marketing and trade show expense was $65,843 in the year ended December 31, 2014 and related to NACSV expenses of attending trade shows and associated marketing costs. We had no such expense in 2013. 

Office supply and support expenses increased by $202,044 or 365.8% from $55,231 in the year ended December 2013 to $257,275 in the year ended December 31, 2014. In the year ended December 31, 2014, the expense included a bad debt charge of $104,085, $87,465 for directors and officers liability insurance, $37,052 for key life and commercial insurance, and $28,673 for other office related expenses, which included costs from NACSV.  In the year ended December 31, 2013, the expense included $20,386 for directors and officers liability insurance, $12,000 for research and development, $8,050 for key life and commercial insurance, $6,250 for web development expense and $8,545 for other office related expenses.

Professional fees for the year ended December 31, 2014 decreased by $(283,696), or (54.6)% from the prior year.  In the years ended December 31, 2014 and 2013, such fees consisted of: 

Major changes in professional and filing fees include:

Depreciation and amortization in the year ended December 31, 2014 consists of $72,469 of amortization of intangible assets which are being amortized over five years and $8,225 of depreciation. We had no such expense in in the year ended December 31, 2013.

Gain on extinguishment of debt in in the year ended December 31, 2014 consists of $350,000 for forgiveness on the payoff of a convertible note payable, and the recapture of $37,642 of interest not paid. We had no such income in the year ended December 31, 2013. 

Interest income is the interest on the bridge loans we made to Airtronic. Interest expense was expense incurred on notes payable and convertible notes payable.

There is no income tax benefit for the losses for the years ended December 31, 2014 and 2013 since we determined that the realization of the net deferred tax asset is not more likely than not to be realized and we created a valuation allowance for the entire amount of such benefit.

Loss from discontinued operations were $2,832 and $271,221 in in the years ended December 31, 2014 and 2013, respectively, and represented the direct costs and loss on sale of assets we incurred as we completed the wind down our telecommunications business.

Our results of operations for the years ended December 31, 2014 and 2013 did not contain any unusual gains or losses from transactions not in our ordinary course of business or discussed above.

Liquidity and Capital Resources

As of December 31, 2014, we had cash and cash equivalents totaling $160,102 and working capital of $192,628. For the year ended December 31, 2014, we incurred a net loss of $11,657,188, and at December 31, 2014, we had an accumulated deficit of $28,515,563 and total stockholders’ equity of $152,406. We expect to incur losses in fiscal 2015. There is no guarantee that we will ultimately be able to generate sufficient revenue or reduce our costs in the anticipated time frame to achieve and maintain profitability and have sustainable cash flows.  

We do not have any material commitments for capital expenditures during the next twelve months.  Any required expenditure will be completed through internally generated funding or from proceeds from the sale of common or preferred stock, or borrowings.

Cash Flows

Cash used in operating activities  

Net cash used in operating activities totaled $708,040 for the year ended December 31, 2014 compared to $983,345 for the year ended December 31, 2013. In the year ended December 31, 2014, cash was used to fund a net loss of $11,657,188, increased by a gain on extinguishment of debt of $387,642, and reduced by depreciation and amortization of $80,694, loss on disposal of fixed assets of $12,500, a goodwill impairment loss of $1,156,192, non-cash stock-based compensation expense of $7,687,566, amortization expense of common stock and warrants issued for services of $1,009,168, acquisition expenses settled with shares of common stock valued at $664,000, non-cash discount on stock issued for acquisition of $65,572, convertible debt discount amortization of $2,011, non cash interest expense of $11,696, and changes in operating assets and liabilities of $647,391.

In the year ended December 31, 2013, cash was used to fund a net loss of $9,297,253, reduced by non-cash stock-based compensation of $5,158,208, amortization expense of common stock and warrants issued for services of $1,080,230, a beneficial conversion feature of debt and warrant of $676,487, common stock issued for a debt guaranty of $360,000, and amortization of warrant expense of $750,000, changes in operating assets and liabilities of $43,238 and cash provided by discontinued operations of $245,745.

Cash used in investing activities

Net cash provided by investing activities totaled $598,615 for the year ended December 31, 2014. During the period we, received cash of $1,465,874 from Airtronic for the repayment of the bridge loans, reduced by net cash of $864,575 paid for the acquisition of NACSV and $2,684 for deposits.

Net cash used in investing activities for the year ended December 31, 2013, totaled $1,446,072 and comprised $1,465,874 of advances to Airtronic under a bridge loan and $198 for deposits. 

Cash from financing activities

Net cash used in financing activities was $239,697 in the year ended December 31, 2014. We received proceeds of $125,000 from the exercise of warrants and $162,242 from issuing notes payable, reduced by $376,939 used to repay notes payable and $150,000 used to pay off a convertible note payable. 

Net cash provided by financing activities was $2,573,500 in the year ended December 31, 2013. We received $1,966,100 of proceeds from the sale of common stock, $300,000 from the proceeds of warrants exercised, $374,900 from the issuance of notes payable, reduced by $67,500 used to repay notes payable.

Financial Condition

As of December 31, 2014, we had cash and cash equivalents totaling $160,102, working capital of $192,628 and stockholders’ equity of $152,406. We do not have a line of credit facility and have relied on short-term borrowings and the sale of common stock to provide cash to finance our operations. We believe that we will need to raise additional capital in 2015 to sustain our operations and fund future acquisitions. We plan to seek additional equity and debt financing to provide funding for operations and future acquisitions.

At December 31, 2014 our registered independent public accounting firm expressed substantial doubt as to our ability to continue as a going concern because we have incurred substantial losses and negative cash flows from operations. Management’s plans in order to meet our operating cash flow requirements include (i) financing activities such as private placements of common stock, and issuances of debt and convertible debt instruments, (ii) the establishment of strategic relationships which we expect will lead to the generation of additional revenue or acquisition opportunities and (iii) the acquisition of complementary businesses.

We will need to secure additional funds to finance our operations in 2015, but there are no assurances that such additional funding will be achieved or that we will succeed in our future operations. The consolidated financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts or the amounts and classification of liabilities that might be necessary should we be unable to continue as a going concern. 

Inflation

We do not believe that inflation has had a material effect on our results of operations.

Off-Balance Sheet Arrangements

We had no off-balance sheet arrangements for the year ended December 31, 2014.

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

All financial statement schedules have been omitted, since the required information is not applicable or is not present in amounts sufficient to require submission of the schedule, or because the information required is included in the consolidated financial statements and notes thereto.

None.

Evaluation of Disclosure Controls and Procedures

Based on an evaluation under the supervision and with the participation of the Company’s management, the Company’s principal executive officer and principal financial officer have concluded that the Company’s disclosure controls and procedures as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act were not effective as of December 31, 2014, to provide reasonable assurance that information required to be disclosed by the Company in reports that it files or submits under the Exchange Act is (i) recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission rules and forms, and (ii) accumulated and communicated to the Company’s management, including its principal executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required disclosure.

Inherent Limitations Over Internal Controls

The Company’s internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with U.S. generally accepted accounting principles (“GAAP”).  The Company’s internal control over financial reporting includes those policies and procedures that:

Management, including the Company’s principal executive officer and principal financial officer, does not expect that the Company’s internal controls will prevent or detect all errors and all fraud.  A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met.  Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs.  Because of the inherent limitations in all control systems, no evaluation of internal controls can provide absolute assurance that all control issues and instances of fraud, if any, have been detected.  Also, any evaluation of the effectiveness of controls in future periods is subject to the risk that those internal controls may become inadequate because of changes in business conditions, or that the degree of compliance with the policies or procedures may deteriorate.

Management’s Annual Report on Internal Control Over Financial Reporting

The Company’s management is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act).  Management conducted an evaluation of the effectiveness of the Company’s internal control over financial reporting, and based on the Company’s assessment, management has concluded that its internal control over financial reporting were not effective as of December 31, 2014, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements in accordance with GAAP a result of the identified material weaknesses in our internal control over financial reporting described below. In making this assessment, management used the framework set forth in the report entitled Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (1992 framework), or COSO. The COSO framework summarizes each of the components of a company's internal control system, including (i) the control environment, (ii) risk assessment, (iii) control activities, (iv) information and communication. and (v) monitoring.

Identified Material Weaknesses

A material weakness in our internal control over financial reporting is a control deficiency, or combination of control deficiencies, that results in more than a remote likelihood that a material misstatement or the financial statements will not be prevented or detected. Management identified the following material weaknesses during its assessment of internal controls over financial reporting as or December 31, 2014:

Resources: As of December 31, 2014, our Chief Financial Officer performed all accounting functions. As a result, there is a lack of proper segregation of duties.

Audit Committee: We do not have, and are not required to have, an audit committee. An audit committee would improve oversight in the establishment and monitoring of required internal controls and procedures.

Management's Remediation Initiatives

As we expand, we plan to hire additional accounting staff and implement systems where we have adequate segregation of duties. In the future we may add an audit committee financial expert to our board and create an audit committee made up of one or more of our independent directors.

This Annual Report does not include an attestation report of our registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by our registered public accounting firm as such report is not required for non-accelerated filers such as us because we are an “emerging growth company” pursuant to the JOBS Act.

Changes in Internal Control Over Financial Reporting

There were no changes in our internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act) during the quarter ended December 31, 2014, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

None.

PART III

Our executive officers and our directors, their age and business experience are as follows:

Richard J. Sullivan (age 76) was elected a director and appointed Chairman, CEO, President and assistant secretary on August 12, 2013.  Prior thereto, from May 2012 through August 2013 Mr. Sullivan served as a consultant to the Company. Mr. Sullivan is responsible for the Company’s strategy, leadership and day-to-day operational activities.  Mr. Sullivan founded and since 1993 has served as Chairman and CEO of Solutions, Inc. and World Capital Markets, Inc., a both private investment banking companies that specialize in advising corporations on acquiring other business entities and assisting owners and management who are considering selling all or part of their business.  Mr. Sullivan founded and from 1993 to 2003 served as Chairman and Chief Executive Officer of Applied Digital Solutions, Inc., a Nasdaq listed technology company that spawned two other listed companies of which he was Chairman of the Board: Digital Angel Corporation (AMEX) and VeriChip Corporation (Nasdaq). Mr. Sullivan is an “Entrepreneur in Residence” with Accretive Exit Partners, LLC whose business is taking positions in mid-stage private companies, replacing financing partners who wish to divest themselves of their equity share of those businesses.  He is also co-founder of Vox Equity Partners, LLC, a specialized private equity fund manager that has been purchasing bank private equity portfolio investments since 2006.  Management believes that Mr. Sullivan’s many years as Chairman and CEO of public companies qualifies him for his positions with the Company.

Stephen L. Norris (age 64) was elected a director and CEO of GDSI International on July 2, 2014 and appointed Vice Chairman on July 7, 2014.  Mr. Norris resigned as a director and officer on January 9, 2015. 

Arthur F. Noterman (age 73) was appointed to our Board on August 12, 2013.  Mr. Noterman is a Chartered Life Underwriter. Mr. Noterman has owned an investment and insurance business for over 40 years located in Massachusetts and is a registered FINRA Broker affiliated with a Cincinnati, Ohio Broker/ Dealer.  Mr. Noterman served on the Board of Directors of Applied Digital Solutions Inc. from 1997 to 2003, serving on the Audit and Compensation Committees.  Mr. Noterman attended Northeastern University, Boston, MA from 1965-1975 and obtained the Chartered Life Underwriter Professional Designation in 1979 from The American College, Bryn Mawr, Pennsylvania.  Management believes that Mr. Noterman’s many years as a director of public companies, his financial background, and his many years serving on audit and compensation committees uniquely qualifies him for his position as a director of the Company.

Stephanie C. Sullivan (age 26) was appointed to our Board on August 12, 2013. Ms. Sullivan is a business entrepreneur and has served, since May 2011, as financial manager at Alexis Miami, a privately held upscale women’s fashion designer and manufacturer.   Ms. Sullivan graduated from the University of Miami in May 2011 with a Bachelor of Arts in Business Administration. Management believes that Ms. Sullivan’s marketing and financial background bring a new and young approach that the Board will benefit from.

William J. Delgado (age 55) has served as our President, Chief Executive Officer and Chief Financial Officer from August 2004 to August 2013. Effective August 12, 2013, Mr. Delgado assumed the position of Executive Vice President, and is responsible, along with Mr. Sullivan, for business development. Mr. Delgado has over 33 years of management experience including strategic planning, feasibility studies, economic analysis, design engineering, network planning, construction and maintenance. He began his career with Pacific Telephone in the Outside Plant Construction. He moved to the network engineering group and concluded his career at Pacific Bell as the Chief Budget Analyst for the Northern California region. Mr. Delgado founded All Star Telecom in late 1991, specializing in OSP construction and engineering and systems cabling. All Star Telecom was sold to International FiberCom in April of 1999. After leaving International FiberCom in 2002, Mr. Delgado became President/CEO of Pacific Comtel in San Diego, California. After the Company acquired Pacific Comtel in 2004, Mr. Delgado became Director, President, CEO and CFO of the Company. Management believes that Mr. Delgado’s many years of business experience uniquely qualifies him for his positions with the Company.

Jennifer S Carroll (age 55) was appointed president of NACSV on December 3, 2014. She resigned from that position on March 7, 2015. She had served as a senior advisor to the Company since April 2013. 

David A. Loppert (age 60) was appointed Executive Vice President, CFO, Treasurer and Secretary on August 12, 2013. From October 2012 through August 2013 Mr. Loppert served as a consultant to the Company. Mr. Loppert is responsible for the Company’s finance and administrative functions. He is a financial executive with over 30 years experience. He previously served as chief financial officer, secretary and treasurer of rVue Holdings, Inc. (OTCQB: RVUE), from May 2010 until June 2012.  Prior thereto he served as Argo Digital Solutions, Inc.’s senior vice president from March 2009 through January 2010, and from March 2010 through May 2010.  He was formerly a director, executive vice president and chief financial officer of Surgical Outcome Support, Inc. from August 2006 through March 2009. From October 2003 through July 2006 he was an independent financial consultant to public and private companies.  From June 2001 until September 2003, he was a vice president and director of QSGI Inc. (OTCBB: QSGI). From February 1997 through December 2000, he was vice president, chief financial officer and assistant secretary of Applied Digital Solutions, Inc. (NASDAQ: DIGA) and also served as chief executive officer of SysComm International Corporation, (NASDAQ: SYCM) a network and systems integrator, and an affiliate of Applied Digital.  Mr. Loppert began his financial career with Price Waterhouse, an international accounting firm, in 1978 in Johannesburg, South Africa, before moving to its Los Angeles Office in 1980 where over time he became a senior manager. Mr. Loppert earned bachelor's degrees in commerce in 1978 and in accounting in 1980, and a higher diploma in accounting in 1980, all from the University of the Witwatersrand, Johannesburg, South Africa, and was designated a Chartered Accountant (South Africa) in 1980.

Gary A. Grey (age 62) was appointed Vice President and Chief Technology Officer on August 12, 2013. From May 2012 through August 2013 Mr. Gray served as a consultant to the Company. Mr. Gray was most recently President of Digital Angel Wireless and Software, Riverside, CA, a company that designed and built GPS/wireless systems for parole and probation tracking.  Mr. Gray is past President of Applied Digital Solutions, Inc., Delray Beach, Florida (NASDAQ: ADSX) and was President of three divisions of the company: ADS Software, Springfield, MO, Atlantic Systems, Wall Township, NJ and Thermo Life Energy Corp., Riverside, CA.  ADS Software provided custom-developed manufacturing and wholesale distribution software, Atlantic Systems provides in-store register and accounting systems for retail stores and Thermo Life is a laboratory specializing in thin-film, renewable energy devices.  Mr. Gray was Vice president of Verichip, Inc., (NASDAQ: CHIP) a company affiliated with Applied Digital.  Mr. Gray was previously National Sales Manager for CAD/CAM company Point Control Corporation, Eugene, Oregon.  Point Control’s SmartCAM Computer-Aided Manufacturing software has been installed at 12,000 locations in 67 countries.  Previously, Mr. Gray was the principal developer of a comprehensive Manufacturing Resource Planning (MRP) software system, one of the first available for the then-newly-introduced 32-bit Digital Equipment Corporation Vax computer platform.  The system was installed at approx. 150 locations and several Fortune 1000 companies. The company, White Hat Systems, Woburn, MA, was later sold to Pacific Telesis.  Mr. Gray has participated in merger and acquisition activities with Richard Sullivan since 1985. He received a bachelor degree in physics from Hope College, Holland, Michigan in 1974.

Neither Mr. Noterman nor Ms. Sullivan have been involved in any transaction with the Company that would require disclosure under Item 404(a) of the Regulation S-K. Neither Mr. Noterman, Mr. Delgado nor Mr. Loppert has any family relationship with any officer or director of the Company. Stephanie C. Sullivan is the daughter of Richard J. Sullivan. Our Board has determined that Mr. Noterman is independent under the NASDAQ Stock Market Listing Rules.

A vacancy on our board of directors may be filled by the vote of a majority of the directors holding office. All directors hold office for one-year terms and until the election and qualification of their successors. Officers are appointed by the board of directors and serve at the discretion of the board.

Director or Officer Involvement in Certain Legal Proceedings

Our directors and executive officers were not involved in any legal proceedings as described in Item 401(f) of Regulation S-K in the past ten years.

Directors’ and Officers’ Liability Insurance

We maintain directors' and officers' liability insurance insuring our directors and officers against liability for acts or omissions in their capacities as directors or officers, subject to certain exclusions.  Such insurance also insures us against losses which we may incur in indemnifying our officers and directors.  In addition, we have entered into indemnification agreements with key officers, directors and consultants, and such persons shall also have indemnification rights under applicable laws, and our Certificate of Incorporation and Bylaws.

Corporate Governance

Board Responsibilities and Structure

The Board oversees, counsels, and directs management in the long-term interest of GDSI and its shareholders. The Board’s responsibilities include establishing broad corporate policies and reviewing the overall performance of GDSI. The Board is not, however, involved in the operating details on a day-to-day basis.

Board Committees

We presently have no board committees and are not required to until we elect to seek listing on a national securities exchange. Our board may appoint an audit committee, compensation committee, or nominating committee in the future.

Code of Ethics

Our Board of Directors has approved and we have adopted a Code of Business Conduct and Ethics, or the Code of Conduct, which applies to all of our directors, officers and employees. Our Board of Directors has also approved and we have adopted a Code of Ethics for Senior Financial Officers, or the Code for SFO, which applies to our chief executive officer, president and chief financial officer. The Code of Conduct and the Code for SFO are available upon written request to the Company, Attention: Secretary, 777 South Flagler Drive, Suite 800 West, West Palm Beach, FL 33401. Our Board of Directors is responsible for overseeing the Code of Conduct and the Code for SFO and they must approve any waivers of the Code of Conduct for directors and executive officers and any waivers of the Code for SFO. 

Board Diversity

While we do not have a formal policy on diversity, our Board considers diversity to include the skill set, background, reputation, type and length of business experience of our Board members as well as a particular nominee’s contributions to that mix.  Although there are many other factors, the Board seeks individuals with experience on public company boards as well as experience with advertising, marketing, legal and accounting skills.

Board Assessment of Risk

Our risk management function is overseen by our Board.  Through our policies, our Code of Conduct and Ethics and our Board’s review of financial and other risks, our management keeps our Board apprised of material risks and provides our directors access to all information necessary for them to understand and evaluate how these risks interrelate, how they affect the Company, and how management addresses those risks.  Mr. Sullivan, a director and our chief executive officer, and Mr. Loppert, our chief financial officer, work closely together with the Board once material risks are identified on how to best address such risk.  If the identified risk poses an actual or potential conflict with management, our independent director may conduct the assessment. Presently, the primary risks affecting GDSI include our ability to close acquisitions and raise sufficient capital to scale our business. The Board focuses on these key risks and interfaces with management on seeking solutions.

Advisory Board

Our advisory board, which advises senior management, was comprised of the following individuals at December 31, 2014:

(1)    Ms. Carroll resigned as an advisor on March 7, 2015.

Edwin J. Wang is the Founder and Senior Managing Director of Accretive Exit Partners and Accretive Capital, Boston, MA.  Mr. Wang draws from over 20 years of experience in private equity, principal investing and cross border merchant banking. From 2002 to 2007, while at predecessor firm Asymmetry Capital LLC, Mr. Wang led the financial restructuring and liquidation of $450MM in distressed private equity portfolio assets and monetized value-added liquidity creation in excess of $200MM. These accomplishments were chronicled in two Harvard Business School case studies and other publications, including The Deal Magazine.  Previously, during an eight-year investment banking career, Mr. Wang led the development of Non-Japan Asia business at Credit Suisse First Boston. He began his career in financial services as an Associate in the Capital Markets Group at Lehman Brothers.  Mr. Wang earned his B.A. degree in Economics from Columbia University and was a Visiting Fellow in Finance at the MIT Sloan School of Management under the supervision of the late Nobel laureate, Dr. Franco Modigliani. 

Matthew Kelley is the founder of Vox Equity Partners, LLC, a specialized private equity firm created to manage constructed, primarily bank (LP) owned, venture capital and private equity investments. Vox Equity Partners was initially formed to manage the assets of a constructed fund in 2007. The firm continued to acquire the assets of three other funds. Vox Equity Partners is capitalized to participate in follow-on investments in promising underlying opportunities in the portfolio in order to maximize exit value.  From February 2001 through May 2006 Mr. Kelley was a Partner at Accretive Capital, and from October 1997 through October 2000 Matt was Director of Private Equity at MB Capital, a mezzanine capital fund management.  Mr. Kelley has an AB in Political Science and Government from Dartmouth College (1987 – 1991), and an MS in Accounting and an MBA, both from Northeastern University (1993 – 1997).  Richard J. Sullivan, our Chairman and CEO, is a co-founder of Vox.

Richard J. Feldman is an attorney specializing in public affairs, is a former Reagan White House appointee at the Commerce Department, and later became the regional political director for the National Rifle Association.  From 1991-1999, Mr. Feldman served as Executive Director of the American Shooting Sports Council (ASSC).  In his role as chief lobbyist and spokesman for the firearm industry’s national trade association, Mr. Feldman formulated and implemented national litigation strategy and forged collaborative relationships with regulatory and law enforcement agencies. He is the author of RICOCHET: Confessions of a Gun Lobbyist, published by John Wiley & Sons in 2007. Since 2004, Mr. Feldman has served as the founder and CEO of MLS Communication, LLC, a public relations and political consulting firm.  He also serves as President and CEO of the Independent Firearm Owners Association.  A member of the Washington, DC, bar, Mr. Feldman earned his law degree at Vermont Law School and his BA degree from Union College (NY). 

Advisory Board Compensation

In order to align the advisors with the interest of the stakeholders of the Company, the Board has granted the advisors restricted stock awards which vest over a period of 12 – 24 months and which are forfeited if the advisor is no longer an advisor on the anniversary of the advisory award. See Note 10 to our consolidated financial statements for additional information on our Advisory Board compensation.

The following Summary Compensation Table sets forth, for the years ended December 31, 2014 and 2013, the compensation earned by our named executive officers.

We have not entered into any employment agreements or arrangements with our named executive officers.

Options Granted to Named Executives

On March 5, 2014, we granted 3 million stock options under our 2014 Equity Compensation Plan to Richard J. Sullivan, our CEO, and 1.5 million stock options to David A. Loppert, our CFO. The options were granted at $0.64 per share, the grant date fair value of our common stock, vested after six months and are exercisable through March 5, 2024.

Outstanding Equity Awards at Fiscal Year-End

The following table provides information as of December 31, 2014 regarding unexercised stock options and restricted stock awards granted to each of our named executive officers:

2014 Option Exercises and Stock Vested

The following table provides information regarding options exercised and restricted stock that vested in the year ended December 31, 2014 for our named executive officers:

Pension Benefits 

None of our named executive officers is covered by a pension plan or other similar benefit plan that provides for payments or other benefits at, following, or in connection with retirement.

Nonqualified Deferred Compensation 

None of our named executive officers is covered by a defined contribution or other plan that provides for the deferral of compensation on a basis that is not tax-qualified.  

Director Compensation

We do not have a compensation arrangement in place for members of our Board and we have not finalized any plan to compensate directors in the future for their services as directors.  We anticipate that we will develop a compensation plan for our independent directors in order to attract qualified persons and to retain them. We expect that the compensation arrangements will generally be comprised of equity awards and cash for reimbursement of expenses only; however exceptions may be made if circumstances warrant.

None of our directors exercised options during the year ended December 31, 2014.

The following table sets forth the number of shares of our Common Stock beneficially owned as of March 26, 2015, by (i) those persons known by us to be owners of more than 5% of our Common Stock, (ii) each director (iii) our named executive officers (as disclosed in the Summary Compensation Table), and (iv) all of our executive officers and directors as a group.  Except as otherwise indicated, the address of each stockholder listed below is: c/o Global Digital Solutions, Inc. 777 South Flagler Drive, Suite 800W, West Palm Beach, FL 33401.

Securities Authorized for Issuance Under Equity Compensation Plans 

Shares of our common stock that were authorized for issuance under our equity compensation plans is presented in Item 5 on page 24 of this Annual Report.

Since the beginning of our fiscal year 2013, there has not been, and there is not currently proposed, any transaction or series of similar transactions in which the amount involved exceeded or will exceed the lesser of $120,000 or 1% of the average of our total assets at year end for the last two completed fiscal years and in which any related person, including any director, executive officer, holder of more than 5% of our capital stock during such period, or entities affiliated with them, had a material interest, other than as described in the transactions set forth below:

In December 2012, we entered into a Promissory Note Purchase Agreement, under which Gabriel a De Los Reyes (the “Lender”) agree to lend us $750,000 evidenced by a secured promissory note (the “Note”) and a Security Agreement. As part of the agreement with the Lender, Bay Acquisition Corp. (aka Bay Acquisition LLC), an entity controlled by Richard J. Sullivan, our Chairman and CEO, agreed to pledge certain collateral as additional security for the loan.  In consideration for this pledge of collateral, we agreed to issue to Bay Acquisition Corp. 3,000,000 shares of our restricted common stock valued at $360,000.

In January 2013, we granted Richard J. Sullivan and David A. Loppert restricted stock grants of 3,000,000 and 5,000,000 shares of common stock, respectively.  In June 2013, we granted Richard J. Sullivan, David A. Loppert, William J. Delgado and Gary A. Gray, restricted stock grants of 10,000,000, 3,000,000, 1,000,000 and 1,000,000 shares of common stock, respectively. The grants vested in January 2014. The shares were valued at $0.12 and $0.26, respectively.

In February 2013, we granted Jennifer S. Carroll, a Senior Advisor, restricted stock grants of 2,500,000 shares of common stock valued at $0.17.

On February 4, 2014 we granted 500,000 options exercisable $0.64 per share, to each of Arthur F. Noterman and Stephanie C. Sullivan, directors. The options vested on August 4, 2014, are exercisable through February 4, 2024, and had an aggregate grant date fair value of $320,000 each.

On March 5, 2014 we granted 3,000,000 options to Richard J. Sullivan, and 1,500,000 options to David A. Loppert, exercisable $0.64 per share. The options vested on September 5, 2014, are exercisable through March 5, 2024, and had an aggregate grant date fair value of $1,920,000 and $960,0000, respectively.

On August 25, 2014 we granted Stephen L. Norris, then Chairman and CEO of our wholly owned subsidiary, GDSI International, 12 million restricted stock units (“RSU’s”) convertible into 12 million shares of the Company’s common stock, with a grant date fair market value of $3,600,000. The grant was made under our 2014 Equity Incentive Plan. Mr. Norris resigned on January 9, 2015 and forfeited the RSU’s.

On December 8, 2014, we entered into a Securities Purchase Agreement (“Charter SPA”) with Charter 804CS Solutions, Inc. (“Charter”), an affiliate of Richard J. Sullivan, our Chairman and CEO, providing for the purchase of a Convertible Promissory Note in the principal amount of $37,500 (“Charter Note”). The Charter Note: contains a $1,500 original issue discount to cover legal fees such that the cash proceeds received on the closing of Charter Note is $36,000; bears interest at the rate of 8% per annum; is due and payable on December 8, 2015; and by amendment (the “Charter Amendment”) may be converted by Charter at any time after 180 days of the date of closing into shares of Company common stock at a fixed conversion price of $0.09 per share of Common Stock. The Charter Note also contains certain representations, warranties, covenants and events of default, and increases in the amount of the principal and interest rates under the note in the event of such defaults.

On December 8, 2014, we entered into a Securities Purchase Agreement (“Loppert SPA”) with David A. Loppert (“Loppert”), our Chief Financial Officer, providing for the purchase of a Convertible Promissory Note in the principal amount of $31,500 (“Loppert Note”). The Loppert Note: contains a $1,500 original issue discount to cover legal fees such that the cash proceeds received on the closing of the Loppert Note is $30,000; bears interest at the rate of 8% per annum; is due and payable on December 8, 2015; and may be converted by Loppert at any time after 180 days of the date of closing into shares of Company common stock at a conversion price of $0.09 per share of Common Stock. The Loppert also contains certain representations, warranties, covenants and events of default, and increases in the amount of the principal and interest rates under the note in the event of such defaults.

In the twelve-month periods ended December 31, 2014 and 2013 our named executive officers were compensated as per the details in “Item 11 – Executive Compensation”, as follows:

Our Board of Directors reviews and pre-approves audit and permissible non-audit services performed by our independent registered public accounting firm PMB Helin Donovan LLP (“PMB”) as well as the fees charged for such services. Pre-approval is generally provided for up to one year and any pre-approval is detailed as to the particular service or category of services and is generally subject to a specific budget. The independent auditors and management are required to periodically report to our Board of Directors regarding the extent of services provided by the independent auditors in accordance with this pre-approval, and the fees for the services performed to date. The Board of Directors may also pre-approve particular services on a case-by-case basis.

In its review of non-audit service and its appointment of PMB as our independent registered public accounting firm, Our Board considered whether the provision of such services is compatible with maintaining independence.

The following table shows the fees for services provided by PMB, and Crow, Shields Bailey, PC (“CSB”) , NACSV’s prior accounting firm, for the years ended December 31, 2014 and 2013:

All services performed by PMB were performed by full-time, permanent employees.  All services provided by and all fees paid to PMB in fiscal 2014 and 2013 were pre-approved by our Board of Directors. None of the services described above were approved pursuant to the exception provided in Rule 2-01(c)(7)(i)(C) of Regulation S-X promulgated by the SEC.

PART IV

All financial statement schedules have been omitted, since the required information is not applicable or is not present in amounts sufficient to require submission of the schedule, or because the information required is included in the consolidated financial statements and notes thereto.

See the Exhibit Index filed as part of this Annual Report.

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

Power of Attorney

KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Richard J. Sullivan and David A. Loppert, jointly and severally, his/her attorneys-in-fact, each with the power of substitution, for him/her in any and all capacities, to sign any amendments to this Annual Report on Form 10-K, and to file the same, with exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, hereby ratifying and confirming all that each of said attorneys-in-fact, or his substitute or substitutes, may do or cause to be done by virtue hereof.

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Stockholders

Global Digital Solutions, Inc.

We have audited the accompanying consolidated balance sheets of Global Digital Solutions, Inc. (“the Company”) as of December 31, 2014 and 2013, and the related consolidated statements of operations, stockholders’ equity and cash flows for each of the years in the two-year period ended December 31, 2014. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. The company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Global Digital Solutions, Inc. as of December 31, 2014 and 2013, and the related consolidated statements of operations, stockholders’ equity and cash flows for the years ended December 31, 2014 and 2013 in conformity with accounting principles generally accepted in the United States of America.

The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern.  As discussed in Note 1 to the financial statements, the Company has sustained a net loss from operations and has an accumulated deficit.  These factors raise substantial doubt about the Company’s ability to continue as a going concern.  Management’s plans in this regard are also described in Note 1. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.

/s/ PMB Helin Donovan, LLP

PMB Helin Donovan, LLP

Seattle, Washington

March 30, 2015

The accompanying notes are an integral part of these consolidated financial statements.

The accompanying notes are an integral part of these consolidated financial statements.