U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED DECEMBER
31, 2004
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES
EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM
TO .
COMMISSION FILE NUMBER 000-23661
GLOBAL DIGITAL SOLUTIONS, INC.
------------------------------
(Exact name of registrant as specified in its charter)
NEW JERSEY 22-3392051
---------- -----------
(State or jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
10370 Old Placerville Road
Suite 107
Sacramento, California 95827
----------------------------
(Address of Principal Executive Offices)
Registrant's telephone number: 916-640-1832
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12 (g) of the Act:
Common Stock: $.001 Par Value
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) been
subject to such filing requirements for the past 90 days. Yes [x]
No [ ].
As of February 18, 2005, the Registrant had 29,826,323 shares of common
stock issued and outstanding.
Transitional Small Business Disclosure Format (check one): Yes [ ]
No [X]
2
GLOBAL DIGITAL SOLUTIONS, INC.
------------------------------
Quarterly Report on Form 10-QSB for the Quarterly
Period Ending December 31, 2004
Table of Contents
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Condensed Consolidated Balance Sheet:
December 31, 2004
Condensed Consolidated Statements of Losses:
Three and Six Months Ended December 31, 2004 and 2003
Condensed Consolidated Statements of Cash Flows:
Six Months Ended December 31, 2004 and 2003
Notes to Condensed Consolidated Financial Statements:
December 31, 2004 and 2003
Item 2. Management Discussion and Analysis of Interim
Financial Condition and Results of Operations
Item 3. Controls and Procedures
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Item 2. Changes in Securities
Item 3. Defaults upon Senior Securities
Item 4. Submission of Matters to a Vote of Security Holders
Item 5. Other Information
Item 6. Exhibits
3
GLOBAL DIGITAL SOLUTIONS, INC.
CONDENSED CONSOLIDATED BALANCE SHEET
December 31, 2004
(Unaudited)
Current assets:
Cash and cash equivalents $ 16,920
Accounts receivable, net 1,249,349
Other current assets 7,500
Inventory 1,200
Costs in Excess of Billings 28,262
----------
Total current assets 1,303,231
Property, plant and equipment, net of accumulated
depreciation and amortization 185,313
Other assets 15,814
----------
TOTAL ASSETS $1,504,358
==========
Current liabilities:
Current portion of notes payable $1,295,423
Current portion of capital leases 43,251
Accounts payable 2,965,085
Accrued expenses 491,761
Billings in Excess of Costs 19,626
----------
Total current liabilities 4,815,146
----------
Total Liabilities 4,815,146
----------
Stockholders' Equity:
Preferred stock, $0.001 per share, 10,000,000
shares authorized; shares issued and outstanding -
Common stock, authorized 100,000,000 shares;
$0.001 par value, 29,826,323 issued and outstanding 29,826
Additional paid in capital 4,696,566
Accumulated deficit (8,037,180)
----------
Total deficiency in Stockholders' Equity (3,310,788)
----------
TOTAL LIABILITIES AND EQUITY $1,504,358
==========
The accompany notes form an integral part of these consolidated
condensed financial statements.
4
GLOBAL DIGITAL SOLUTIONS, INC.
CONDENSED CONSOLIDATED STATEMENT OF LOSSES
(Unaudited)
For the Three Months For the Six Months
Ended December 31, Ended December 31,
2004 2003 2004 2003
---------- ---------- ---------- ----------
<s> <c> <c> <c> <c>
Revenue 396,988 3,311,717 2,270,206 5,989,760
Cost of sales 352,023 2,318,860 1,210,226 5,467,861
---------- ---------- ---------- ----------
Gross profit 44,965 992,857 1,059,980 521,899
Selling, general and administrative
expenses 762,576 743,024 1,731,391 1,439,053
Depreciation and amortization 225,213 29,790 449,079 59,580
---------- ---------- ---------- ----------
Total operating expenses 987,789 772,814 2,180,470 1,498,633
---------- ---------- ---------- ----------
Income (Loss) from operations (942,824) 220,043 (1,120,490) (976,734)
Interest expense 675,183 58,367 731,486 140,758
---------- ---------- ---------- ----------
Net Loss (1,618,007) 161,676 (1,851,976) (1,117,492)
========== ========== ========== ==========
Basic and diluted loss per
common share ($0.05) $0.01 ($0.07) ($0.04)
========== ========== ========== ==========
Weighted average common shares
outstanding 29,585,440 27,374,467 28,486,763 27,374,467
========== ========== ========== ==========
The accompany notes form an integral part of these consolidated
condensed financial statements.
5
GLOBAL DIGITAL SOLUTIONS, INC.
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)
For the Six Months
Ended December 31,
2004 2003
---------- ----------
Net income (loss) $(1,851,976) $(1,117,492)
Adjustment to reconcile net loss to cash
provided by (used in) in operating activities
Amortization of discount on note payable 494,569 -
Depreciation and amortization 449,079 59,580
Issuance of stock warrants for service 374,000 -
Interest and loan fees 236,917 -
Issuance cost of convertible note 302,333 -
Changes in assets and liabilities
Accounts receivable (1,874,444) 1,149,718
Inventory (1,200) (12,824)
Other current assets 211,110 -
Costs in excess 140,050 806,470
Deposits and other assets 69,748 (40,938)
Accounts payable 600,457 (462,294)
Other current liabilities (598,038) -
Billing in excess (137,259) 257,101
---------- ----------
Net cash provided by (used in)
in operating activities (1,584,654) 639,321
---------- ----------
Cash flow from Investing Activities
Purchase of property and equipment - (5,116)
---------- ----------
Net cash provided by (used in) in
investing activities - (5,116)
---------- ----------
Cash flow from Financing Activities
Stock sold for cash 429,000 (4,117)
Stock sold for cash upon warrant exercise 205,150 -
Proceeds from (repayment of) line of credit 580,429 (1,547,211)
Proceeds from (repayment of) notes payable
and capital leases 350,921 (1,626)
Borrowings under receivables factoring
arrangement - 712,687
Advances from (repayments to) Jetcom, Inc. - (124,301)
Capital contribution by Jetcom, Inc. - 500,000
---------- ----------
Net cash provided by (used in) in
financing activities 1,565,500 (464,568)
---------- ----------
Net Increase (Decrease) in cash (19,154) 169,637
6
GLOBAL DIGITAL SOLUTIONS, INC.
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS (Continued)
(Unaudited)
For the Six Months
Ended December 31,
2004 2003
---------- ----------
Cash and cash equivalents at Beginning of year 36,074 -
---------- ----------
Cash and cash equivalents at End of year $ 16,920 $ 169,637
========== ==========
Cash paid during the period for:
Interest $ - $ -
========== ==========
Taxes $ - $ -
========== ==========
Supplemental disclosure of non-cash transactions:
Amortization of discount on note payable
associated with Beneficial conversion
feature $ 494,569 $ -
========== ==========
Interest imputed on note payable $ 81,650 $ -
========== ==========
Issuance cost associated with
convertible note $ 302,333 $ -
========== ==========
Shares issued for services $ 640,000 $ -
========== ==========
The accompany notes form an integral part of these consolidated
condensed financial statements.
7
GLOBAL DIGITAL SOLUTIONS, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2004
(UNAUDITED)
NOTE A - SUMMARY OF ACCOUNTING POLICIES
General
- -------
The accompanying unaudited condensed financial statements have been
prepared in accordance with the instructions to Form 10-QSB, and
therefore, do not include all the information necessary for a fair
presentation of financial position, results of operations and cash
flows in conformity with accounting principles generally accepted in
the United States of America for a complete set of financial
statements.
In the opinion of management, all adjustments (consisting of normal
recurring accruals) considered necessary for a fair presentation have
been included. The results from operations for the three-month and
six-month periods ended December 31, 2004 are not necessarily
indicative of the results that may be expected for the year June 30,
2005. The unaudited condensed consolidated financial statements should
be read in conjunction with the June 30, 2004 financial statements and
footnotes thereto included in the Company's Annual Report on Form 10-
KSB.
Business And Basis Of Presentation
- ----------------------------------
Global Digital Solutions, Inc. (the "Company"), formerly Creative
Business Solutions, Inc., was formed on August 25, 1995 under the laws
of the state of New Jersey. The Company is engaged in the sale,
servicing and installation of integrated data and voice communications
systems to commercial and industrial users.
During the period November 1, 2002 through February 23, 2004 the
Company completed a two business combinations and corporate restructure
(see Note B).
Principles Of Consolidation
- ---------------------------
The consolidated financial statements include Global Digital Solutions,
Inc. and its wholly owned subsidiary, Pacific Comtel Monterey, Inc. All
significant intercompany accounts and transactions have been eliminated
upon consolidation.
Reclassification
- ----------------
Certain reclassifications have been made to conform to prior periods'
data to the current presentation. These reclassifications had no effect
on reported losses.
8
Liquidity
- ---------
As shown in the accompanying financial statements, the Company incurred
a net loss of $ 1,851,976 and $1,117,492 during the six months ended
December 31, 2004 and 2003, respectively. The Company's current
liabilities exceeded its current assets by $3,511,915 as of December
31, 2004.
Stock Based Compensation
- ------------------------
In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-
Based Compensation-Transition and Disclosure-an amendment of SFAS 123."
This statement amends SFAS No. 123, "Accounting for Stock-Based
Compensation," to provide alternative methods of transition for a
voluntary change to the fair value based method of accounting for
stock-based employee compensation. In addition, this statement amends
the disclosure requirements of SFAS No. 123 to require prominent
disclosures in both annual and interim financial statements about the
method of accounting for stock-based employee compensation and the
effect of the method used on reported results. The Company has chosen
to continue to account for stock-based compensation using the intrinsic
value method prescribed in APB Opinion No. 25 and related
interpretations. Accordingly, compensation expense for stock options
is measured as the excess, if any, of the fair market value of the
Company's stock at the date of the grant over the exercise price of the
related option. The Company has adopted the annual disclosure
provisions of SFAS No. 148 in its financial reports for the year ended
December 31, 2002 and for the subsequent periods. The Company did not
grant any stock options and warrants to employees during the periods
ended December 31, 2004 and 2003.
During the three months ended December 31, 2004, the Company issued
640,000 shares of common stock to consultants for services rendered
during the period. The Company charged the fair market value of
$374,000 to operations during the three months ended December 31, 2004.
NOTE B - LINE OF CREDIT
On July 28, 2004, the Company entered into the two part financing
agreement with Laurus Master Fund (the "Laurus Agreement") that
provides for a $500,000 secured convertible note and $2,500,000 secured
revolving note with an interest rate of WSJ Prime plus 3.0 percent.
The interest rate increases by 2 percent should the Company enter into
a condition of default of the note. The note has a term of three years
expiring on July 28, 2007. The note is collateralized with a first lien
on all assets of the Company, which shall include, but not limited to
accounts receivable, inventory, equipment and general intangibles,
subordination of notes payable to stockholders as well as a corporate
guarantee of a subsidiary, and stocks pledged the stockholders of the
Company.
Availability of the funds are based on accounts receivable at an
advance rate of eligible accounts receivable. The determination by
Laurus Master Fund of whether an account is an eligible U.S. account
9
receivable shall include, without limitation, a review of cross-aging,
customer credit worthiness, concentrations, contra accounts and
dilution.
The initial fixed conversion price to convert the debt to equity was
$0.85 per share. Since the Laurus convertible note was executed when
the price of the Company's common stock Was $0.81 per share, there was
no beneficial conversion feature inherent in the Laurus convertible
note at the time of execution. The initial conversion price is subject
to change should the Company issue shares of common stock at a price
below the initial conversion price. Subsequent to the date of the
loan, the Company issued shares of common stock at a price of $0.35 per
share, and the conversion price of the Laurus convertible note was
reduced to $0.35. This resulted in a beneficial conversion feature
with a value of $494,569. This amount has been charged to interest
expense during the three months ended December 31, 2004.
Laurus has also been issued a seven-year warrant to purchase 1,111,111
shares of common stock of the Company at an exercise price of $1.07.
The Company is currently in default under the terms of both loan
agreements.
On September 27, 2004, Laurus Funds and Global Digital entered into a
standstill/forbearance agreement for a period of sixty days. At March
11, 2005, Laurus and Global Digital are in the process of negotiating a
settlement to the default situation.
NOTE C - CAPITAL STOCK
The Company is authorized to issue 10,000,000 shares of preferred
stock, $0.001 par value per share and 100,000,000 shares of common
stock, $0.001 par value per share. There are no preferred shares
outstanding at December 31, 2004.
Pursuant to the Merger with Creative, the Company issued an aggregate
of 23,879,817 shares of its common stock in exchange for all previously
outstanding common stock owned by Global Delaware stockholders.
Pursuant to the Laurus Agreement, the Company issued 1,225,714 shares
of Common Stock at $0.35 per share for consideration of $429,000. In
addition, 1,225,714 common stock warrants at $0.35 per share were
issued as additional consideration pursuant to the Laurus Agreement.
The Company has charged the amount of $302,333 for financing costs
related to the Laurus Agreement. As previously discussed in Note B,
Laurus Funds were granted warrants to purchase 1,111,111 shares of
common stock at $1.07/share.
During the thee months ended December 31, 2004, warrants were exercised
representing 586,142 shares of common stock at $0.35 per share for
total consideration of $205,150.
Also during the three months ended December 31, 2004, the Company
issued 640,000 shares of common stock with a fair value of $374,000 to
consultants for services rendered during the period. The shares issued
10
to the consultants and employees were based upon the value of the
services received, which did not differ materially from the value of
the stock issued.
There are 29,826,323 shares of common stock issued and outstanding as
of February 18, 2005.
NOTE D - WARRANTS AND STOCK OPTIONS
The following table summarizes the changes in warrants outstanding and
the related prices for the shares of the Company's common stock issued
to shareholders at December 31, 2004.
Warrants Outstanding Warrants Exciseable
Weighted
Average Weighted Weighted
Remaining Average Average
Exercisable Number Contractual Exercise Number Exercise
Prices Outstanding Life (Years) Price Exercisable Price
- ------------ ------------ ------------ ------------ ------------ ------------
<s> <c> <c> <c> <c> <c>
$ 2.00 100,000 4.50 $ 2.00 100,000 $ 2.00
1.00 370,000 4.25 1.00 370,000 1.00
1.07 1,111,111 7.00 1.07 1,111,111 1.07
0.50 2,100,000 4.25 0.50 2,100,000 0.50
0.35 639,572 0.10 0.35 639,572 0.35
- ------------ ------------ ------------ ------------ ------------ ------------
4,320,683 $ 0.70 4,320,683
=========== ============ ============
Transactions involving the Company's warrant issuance are summarized as
follows:
Weighted
Average
Number of Price Per
Shares Share
---------- ----------
Outstanding at July 1, 2003 - $ -
Granted - -
Exercised - -
Canceled or expired - -
---------- ----------
Outstanding at July 1,2004 - $ -
Granted 2,570,000 0.63
Exercised - -
Canceled or expired - -
----------- ----------
Outstanding at June 30, 2004 2,570,000 $ 0.63
=========== ==========
Granted 2,336,825 0.69
Exercised - -
Canceled or expired - -
---------- ----------
11
Outstanding at September 30, 2004 4,906,825 $ 0.66
========== ==========
Granted -
Exercised 586,142 0.35
Canceled or expired - -
---------- ----------
Outstanding at December 31, 2004 4,320,683 0.70
========== ==========
The Company did not grant any stock options and warrants to employees
during the period ended December 31, 2004 and 2003. If the Company
recognized compensation cost for the stock options and warrants for the
non-qualified employee stock option plan in accordance with SFAS No.
123, the Company's pro forma net loss attributable to common
shareholders and net loss per share would have been $(.01) and $(.01)
for the period ended December 31, 2004 and $(.05) and $(.05)
for the period ended December 31, 2003, respectively. The Company
granted 2,336,825 of non-compensatory warrants with an intrinsic value
of $302,333 during the period ended September 30, 2004. Accordingly,
the Company charged $302,333 to operations in connection with the
issuance of the warrants during the periods ended December 31, 2004.
NOTE D - GOING CONCERN
The accompanying financial statements have been prepared on a going
concern basis, which contemplates the realization of assets and the
satisfaction of liabilities in the normal course of business. As shown
in the accompanying financial statements, the Company incurred a net
loss of $1,851,976 and $1,117,492 during the six months ended December
31, 2004 and 2003, respectively. The Company's current liabilities
exceeded its current assets by $ 3,511,915 as of December 31, 2004.
These factors among others may indicate that the Company will be unable
to continue as a going concern for a reasonable period of time.
The Company's existence is dependent upon management's ability to
develop profitable operations. The accompanying statements do not
include any adjustments that might result should the Company be unable
to continue as a going concern.
In order to improve the Company's liquidity, the Company's management
is actively pursing additional equity financing through discussions
with investment bankers and private investors. There can be no
assurance the Company will be successful in its effort to secure
additional equity financing.
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
The following unaudited Condensed Consolidated Financial Statements as
of December 31, 2004 and for the three-month and six-month periods
ended December 31, 2004 and 2003 have been prepared by Global Digital
Solutions, Inc.
12
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF INTERIM FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The following discussion of our financial condition and results of
operations should be read together with the financial statements and
related notes included in this Report. This discussion contains
forward-looking statements that involve risks and uncertainties. Our
actual results may differ materially from those anticipated in those
forward-looking statements as a result of certain factors, including,
but not limited to, those contained in the discussion on forward-
looking statements that follows this section.
OVERVIEW
Critical Accounting Estimates
- -----------------------------
The preparation of our financial statements requires our management to
make estimates and assumptions that affect the reported amounts of
assets and liabilities at the date of the financial statements and
revenue and expenses during the applicable period. Future events and
their effects cannot be determined with certainty; therefore, the
determination of estimates requires the exercise of judgment. Actual
results inevitably will differ from those estimates, and such
differences may be material to our financial statements. Our
management continually evaluates its estimates and assumptions, which
are based on historical experience and other factors that we believe to
be reasonable under the circumstances. These estimates and our actual
results are subject to known and unknown risks and uncertainties.
There have been no material changes in our critical accounting
estimates or our application of these estimates in 2004.
RESULTS OF OPERATIONS
COMPARISON OF THE THREE MONTHS ENDED DECEMBER 31, 2004 TO THE THREE
MONTHS ENDED DECEMBER 31, 2003
Revenue
- -------
The Company's total revenue was $396,988 for the three-month period
ended December 31, 2004 compared to $3,311,717 for the same period
ended December 31, 2003, a decrease of $2,914,729, or 88 percent. The
decrease in revenues is a result of lack of working capital to finance
new and existing contracts, and as a result has caused a contraction of
the Company's revenue generating activities.
Gross Profit
- ------------
The Company's gross profit was $44,965 or (11 percent of sales) for the
three months ended December 31, 2004 compared to $992,857 (or 30
percent of sales) for the three months ended December 31, 2003. During
the period changes were made to the Company's organizational structure
and measures undertaken to mitigate the effects of the deterioration of
the Company's financial condition. Management believes that the
favorable gross margin attained during the quarter is a one time
occurrence, resulting from an adjustment to previously recorded
contract costs, and is not indicative of future results and trends.
13
Sales, General and Administrative Expenses
- ------------------------------------------
Sales, general and administrative ("SG&A") expenses (excluding
depreciation and amortization) for the three months ended December 31,
2004 were $762,576, an increase of $19,552 or 3 percent compared to
$743,024 for the three-month period ended December 31, 2003. The
increase is due to increased legal and accounting fees incurred
resulting from the private to public transition. Lack of capital also
caused interest rates to increase because of limited choices the
company had to obtain financing.
Depreciation and Amortization expense
- -------------------------------------
Depreciation and amortization expense was $225,213 for the three months
ended December 31, 2004, an increase of $195,423 or 656 percent
compared to $29,790 for the three months ended December 31, 2003. The
increase is due primarily to a charge of $213,000 for the write-off of
intangible assets.
Interest Expense and Finance Charges
- ------------------------------------
The Company incurred $675,186 of interest expense and finance charges
during the three months ended December 31, 2004 compared to $58,367
during the three months ended December 31, 2003, a $616,816 increase.
The increase is due primarily to the $494,569 value assigned to the
beneficial conversion feature inherent in the Laurus convertible note,
and to higher debt balances and to penalties and charges on the Laurus
credit line. The Company has accrued penalties of $63,123 through
December 31, 2004 for failing to file a registration statement for the
common stock underlying the Laurus convertible note.
COMPARISON OF THE SIX MONTHS ENDED DECEMBER 31, 2004 TO THE SIX MONTHS
ENDED DECEMBER 31, 2003
Revenue
- -------
The Company's total revenue was $2,270,206 for the six-month period
ended December 31, 2004 compared to $5,989,760 for the same period
ended December 31, 2003, a decrease of $3,719,554, or 62 percent. The
decrease in revenues is a result of lack of working capital to finance
new and existing contracts, and as a result has caused a contraction of
the Company's revenue generating activities.
Gross Profit
- ------------
The Company's gross profit was $1,059,980 or (47 percent of sales) for
the six months ended December 31, 2004 compared to $521,899 (or 9
percent of sales) for the six months ended December 31, 2003. Changes
were made to the organizational structure and measures were undertaken
to mitigate the effects of the deterioration of the Company's financial
condition. Management believes that the favorable gross margin
attained during the quarter is a one time occurrence, resulting from an
adjustment to previously recorded contract costs, and is not indicative
of future results and trends.
14
Sales, General and Administrative Expenses
- ------------------------------------------
SG&A expenses (excluding depreciation and amortization) were $1,804,391
for the six months ended December 31, 2004, an increase of $365,338 or
25 percent compared to $1,439,053 for the six-month period ended
December 31, 2003. The increase is due to increased legal and
accounting fees incurred resulting from the private to public
transition. Lack of capital also caused interest rates to increase
because of limited choices the company had to obtain financing.
Depreciation and Amortization expense
- -------------------------------------
Depreciation and amortization expense was $449,079 for the six months
ended December 31, 2004, an increase of $389,499 or 654 percent
compared to $59,580 for the six months ended December 31, 2003. The
increase is due primarily to a charge of $425,000 for the write-off of
intangible assets.
Interest Expense and Finance Charges
- ------------------------------------
The Company incurred $731,486 of interest expense during the six months
ended December 31, 2004 compared to $140,758 during the six months
ended December 31, 2003, an increase of $590,728. The increase is due
primarily to the $494,569 value assigned to the beneficial conversion
feature inherent in the Laurus convertible note. Additional causes of
the increase in interest expense include higher debt balances, and
penalties and charges on the Laurus credit line. The Company has
accrued penalties of $63,123 through December 31, 2004 for failing to
file a registration statement for the common stock underlying the
Laurus convertible note.
LIQUIDITY AND CAPITAL RESOURCES
As of December 31, 2004, the Company had a working capital deficit of
$3,511,915. The Company generated a deficit in cash flow from
operations of $1,584,654 for the six month period ended December 31,
2004. The deficit in cash flow from operating activities for the six
month period ended December 31, 2004 is primarily attributable to the
Company's net loss from operations of $1,357,407.
The Company met its cash requirements during the period through
proceeds from the issuance of common stock subscribed of $429,150,
proceeds from line of credit of $580,429, proceeds from notes payable
of $350,921, and cash from the exercise of warrants of $205,150.
While we have raised capital to meet our working capital and financing
needs in the past, additional financing is required in order to meet
our current and projected cash flow deficits from operations and
development. We are seeking financing in the form of equity in order
to provide necessary working capital. We currently have no commitments
for financing. There is no guarantee that we will be successful in
raising the funds required.
15
By adjusting our operations and development to the level of
capitalization, management believes it has sufficient capital resources
to meet projected cash flow deficits through the next 12 months.
However, if thereafter, we are not successful in generating sufficient
liquidity from operations or in raising sufficient capital resources,
on terms acceptable to us, this could have a material adverse effect on
our business, results of operations, liquidity and financial condition.
CAPITAL EXPENDITURES AND COMMITMENTS
We do not anticipate the sale of any material property , plant or
equipment during the next 12 months. Without substantial financial
resources we do not anticipate the acquisition of any material
property, plant or equipment during the next 12 months.
OFF-BALANCE SHEET ARRANGEMENTS
The Company has not entered into any off-balance sheet arrangements.
We do not anticipate entering into any off-balance sheet arrangements
during the next 12 months.
FORWARD-LOOKING STATEMENTS
The statements in this Report relating to our expectations, including
those relating to implementation of our new business model, our
commencing new operations, our expected success in launching our new
lines of business, our ability to raise capital and the adequacy of our
working capital, are forward-looking statements within the meaning of
the Private Securities Litigation Reform Act of 1995 (the "Act").
Additionally, words such as "expects", "anticipates", "intends",
"believes", "will" and similar words are used to identify forward-
looking statements within the meaning of the Act.
The results anticipated by any or all of these forward-looking
statements might not occur. Important factors, uncertainties and risks
that may cause actual results to differ materially from these forward-
looking statements include (1) general domestic and international
economic and business conditions including political unrest, currency
fluctuations and tariffs, (2) increased competition in our markets and
products, (3) our investment bankers' ability to sell our securities
and (4) our ability to commercialize our new services and attract
customers for them.
We undertake no obligation to publicly update or revise any forward-
looking statements, whether as the result of new information, future
events or otherwise.
The independent auditor's report on the Company's June 30, 2004
financial statements included in this Annual Report states that the
Company's recurring losses raise substantial doubts about the Company's
ability to continue as a going concern.
16
ITEM 3. CONTROLS AND PROCEDURES
(a) EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES
We carried out an evaluation required by Rule 13a-15(b) of the
Securities Exchange Act of 1934 under the supervision and with the
participation of our management, including our chief executive officer
and chief financial officer, of the effectiveness of the design and
operation of our "disclosure controls and procedures" as of the end of
the period covered by this Report.
Disclosure controls and procedures are designed with the objective of
ensuring that (i) information required to be disclosed in an issuer's
reports filed under the Securities Exchange Act of 1934 is recorded,
processed, summarized and reported within the time periods specified in
the SEC rules and forms and (ii) information is accumulated and
communicated to management, including our chief executive officer and
chief financial officer, as appropriate to allow timely decisions
regarding required disclosures.
The evaluation of our disclosure controls and procedures included a
review of our objectives and processes and effect on the information
generated for use in this Report. This type of evaluation will be done
quarterly so that the conclusions concerning the effectiveness of these
controls can be reported in our periodic reports filed with the SEC.
We intend to maintain these controls as processes that may be
appropriately modified as circumstances warrant.
Based on this evaluation, Mr. William Delgado, our chief executive
officer and chief financial officer, has concluded that our disclosure
controls and procedures are effective in timely alerting management to
material information relating to the Company required to be included in
our periodic reports filed with the SEC as of the end of the period
covered by this Report. There were no changes in our internal control
over financial reporting that occurred during our last fiscal quarter
that have materially affected, or are reasonably likely to materially
affect, our internal control over financial reporting. However, a
control system, no matter how well conceived and operated, can provide
only reasonable, not absolute, assurance that the objectives of the
control system are met. Management necessarily applied its judgment in
assessing the benefits of controls relative to their costs. Because of
the inherent limitations in all control systems, no evaluation of
controls can provide absolute assurance that all control issues and
instances of fraud, if any, within the Company have been detected. The
design of any system of controls is based in part upon certain
assumptions about the likelihood of future events, and there can be no
assurance that any design will succeed in achieving its stated goals
under all potential future conditions, regardless of how remote.
Because of the inherent limitations in a control system, misstatements
due to error or fraud may occur and may not be detected.
(b) CHANGES IN INTERNAL CONTROLS
There were no significant changes in our internal controls or in other
factors that could significantly affect these controls subsequent to
the evaluation date.
17
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
We are subject to general commercial litigation and other litigation
claims as part of our operations, and we could incur litigation
expenses in defending these claims and could be subject to damages or
other remedies. Litigation in general can be expensive and disruptive
to normal business operations. Moreover, the results of legal
proceedings are difficult to predict. Where Global believes it has
defenses to the cases set forth below we will vigorously defend those
matters. None of the litigation directly arises out of the business
operations of Global, rather, Global assumed these liabilities through
merger.
Construction Supply, Inc. v. Pacific Comtel, Inc., San Diego Superior
Court Case No. SN029730 (filed on October 1, 2004). Breach of contract
case arising out of a materials purchase. The total amount in
controversy is less than $5,000. Notice of Entry of Default filed
November 11, 2004. The Company anticipates settling this case.
F. Michael Allen v. Global Digital Solutions, Inc, Department of
Industrial Relations Case No. 10-55387 LF (filed October 8, 2004) Labor
Board claim arising out of the alleged failure to make reimbursement
payments and alleged failure to deliver final paycheck in a timely
basis. Hearing scheduled in front of Labor Board in January 2005. The
total amount in controversy is less than $15,000. Settlement
negotiations are ongoing. The Company plans to contest the amount in
dispute and any penalties.
In the ordinary course of business, the Company may be involved in
legal proceedings from time to time. Although occasional adverse
decisions or settlements may occur, management believes that the final
disposition of such matters will not have material adverse effect on
its financial position, results of operations or liquidity.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.
(a) During the thee months ended December 31, 2004, warrants were
exercised representing 586,142 shares of common stock at $0.35 per
share for total consideration of $205,150. This issuance is considered
exempt from registration by reason of Section 4(2) of the Securities
Act of 1933.
(b) None.
(c) The following table provides information about purchases by us and
our affiliated purchasers during the quarter ended December 31, , 2004
of equity securities that are registered by us pursuant to Section 12
of the Securities Exchange Act of 1934:
18
ISSUER PURCHASES OF EQUITY SECURITIES
Period (a) (b) (c) (d)
Total Number of Maximum Number (or
Shares (or Units) Approximate Dollar
Purchased as Part Value) of Shares
Total Number of Average Price of Publicly that May Yet Be
Shares (or Units) Paid Per Share Announced Plans Purchased Under the
Purchased) (or Unit) or Programs (1) Plans or Programs (1)
---------------- -------------- ---------------- ---------------------
<s> <c> <c> <c> <c>
07/01/04-
07/31/04 0 $ 0 0 0
08/01/04-
08/31/04 0 $ 0 0 0
09/01/04-
9/30/04 0 $ 0 0 0
(1) We have not entered into any plans or programs under which we may
repurchase its common stock.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None
ITEM 5. OTHER INFORMATION.
None.
ITEM 6. EXHIBITS
(a) Exhibits
31.1 Certification of CEO and CFO
32.1 Section 1350 Certification by CEO and CFO
19
SIGNATURES
In accordance with requirements of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
GLOBAL DIGITAL SOLUTIONS, INC.
(Registrant)
DATE: March 17, 2005 /S/ WILIAM J. DELGADO
- ----------------------- -----------------------------
WILLIAM J. DELGADO
CHIEF EXECUTIVE OFFICER AND
CHIEF FINANCIAL OFFICER