**UNITED
STATES**
  **SECURITIES
AND EXCHANGE COMMISSION**
 **Washington,
D.C. 20549**
 
 **___________________**
 
 **FORM
10-QSB**
 
 |X|  QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
 
 For the
quarterly period ended March 31, 2005
 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: 0-21295
 
 GVI
Security Solutions, Inc.
 (Exact
name of registrant as specified in its charter)
 
 Delaware
    77-0436410(State
      or other jurisdiction ofincorporation
      or organization)
    (I.R.S.
      Employer Identification No.)2801
      Trade Center Drive, Suite 120, Carrollton, Texas
    75007(Address
      of principal executive offices)
    (Zip
      code)
 
 (972)
245-7353
 (Registrant’s
telephone number, including area code)
  
 (Former
Name or Former Address, if Changed Since Last Report)
 
  Check
whether the registrant (1) filed all reports required to be filed by Section 13
or 15(d) of the Exchange Act during the past 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.
 þ Yes   ̈ No
  As of May
20, 2004 there were 50,125,793 shares of the registrant’s common stock
outstanding.
 
  Transitional
Small Business Disclosure Format:
  ̈ Yes  þ No
 
 1
  **GVI
Security Solutions, Inc.**
 **FORM
10-QSB**
  **TABLE
OF CONTENTS**
 
 **PART
      I.**
    **FINANCIAL
      INFORMATION**
    **3**Item
      1.Financial Statements.
    3Item
      2.Management’s Discussion and Analysis or Plan of
      Operation.
    10Item
      3.Controls and Procedures.
    13**PART
      II.**
    **OTHER
      INFORMATION**
    **13**Item 4. Unregistered
      Sales of Equity Securities and Use of Proceeds.
    13Item 6.
    Exhibits.
    13
  2
 **PART
I. FINANCIAL INFORMATION**
 
 **Item
1. Financial Statements.**
  **GVI
Security Solutions, Inc.**
 **Consolidated
Balance Sheet**
 **March
31, 2005**
 **(unaudited)**
 
 (In
      thousands, except share and per share amounts)ASSETSCurrent
      AssetsCash
    
    $
    8,750Accounts
      receivable, net
    
    
    7,581Inventory
    
    
    16,338Other
      receivables
    
    
    759Prepaid
      expenses and other current assets
    
    
    1,473Refundable
      income taxes
    
    
    643Total
      Current Assets
    
    
    35,544Property
      and Equipment, Net
    
    
    1,750Other
      AssetsDeferred
      loan origination fee, net of accumulated amortization
    
    
    1,259Intangibles,
      net
    
    
    1,183Investment
    
    
    250Other
    
    
    34Total
      Assets
    
    $
    40,020LIABILITIES
      AND STOCKHOLDERS' EQUITYCurrent
      LiabilitiesAccounts
      payable
    
    $
    11,103Debt
    
    
    1,822Accrued
      expenses
    
    
    1,299Total
      Current Liabilities
    
    
    14,224Debt,
      Non-current portion
    
    
    8,712Total
      Liabilities
    
    
    22,936Commitments
      and ContingenciesStockholders'
      EquityPreferred
      stock, Undesignated, $.001 Par Value, 3,000,000Shares
      authorized, None Issued Or Outstanding
    
    
    —Common
      stock, $.001 par value, 75,000,000 shares authorized; 49,047,949 shares
      issued and outstanding
    
    
    49Additional
      paid-in capital
    
    
    22,807Accumulated
      deficit
    
    
    (5,773
    )Total
      Stockholders' Equity
    
    
    17,084Total
      Liabilities and Stockholders' Equity
    
    $
    40,020
 
 The Notes
to Consolidated Financial Statements are an integral part of these
statements
 
 3
 **GVI
Security Solutions, Inc.**
 **Consolidated
Statements of Operations**
 **(unaudited)**
 
 (In
thousands, except per share amounts)
 March
      31,2005
    
    2004Revenues
    
    $
    23,941
    
    $
    14,989Cost
      of Revenues
    
    
    20,556
    
    
    12,469Gross
      Profit
    
    
    3,385
    
    
    2,520Selling,
      General and Administrative Expenses
    
    
    3,780
    
    
    2,807Operating
      Income (Loss)
    
    
    (395
    )
    
    (287
    )Interest
      Expense
    
    
    (113
    )
    
    (88
    )Income
      (Loss) before taxes
    
    
    (508
    )
    
    (375
    )Income
      Tax Expense (Benefit)
    
    
    2
    
    
    (106
    )Net
      Income (Loss)
    
    $
    (510
    )
    $
    (269
    )Income
      (Loss) Per ShareBasic
    
    $
    (0.01
    )
    $
    (0.01
    )Diluted
    
    $
    (0.01
    )
    $
    (0.01
    )Shares
      Used in Calculation of Net Income (Loss) Per ShareBasic
    
    
    49,043
    
    
    28,913Diluted
    
    
    49,043
    
    
    28,913
 
 The Notes
to Consolidated Financial Statements are an integral part of these
statements
 
 4
 **GVI
Security Solutions, Inc.**
 **Consolidated
Statements of Cash Flows**
 **(unaudited)**
 
 (In
      thousands)
    
    March
      31,2005
    
    2004Cash
      Flows From (Used) by Operating ActivitiesNet
      Income (Loss)
    
    $
    (510
    )
    $
    (269
    )Adjustments
      to Reconcile Net Income (Loss) to Net Cash Used InOperating
      ActivitiesDepreciation
    
    
    236
    
    
    36Amortization
      of deferred loan origination fee
    
    
    150
    
    
    5Amortization
      of intangibles
    
    
    37
    
    
    —Changes
      in Assets and LiabilitiesAccounts
      receivable
    
    
    743
    
    
    1,925Inventory
    
    
    (3,775
    )
    
    (1,107
    )Other
      receivables
    
    
    643
    
    
    651Prepaids
      and other current assets
    
    
    (1,093
    )
    
    (160
    )Accounts
      payable
    
    
    (228
    )
    
    1,202Accrued
      expenses
    
    
    (795
    )
    
    (38
    )Deposits
    
    
    —
    
    
    (143
    )Federal
      income tax payable
    
    
    —
    
    
    (440
    )Net
      Cash (Used In)/Provided by Operating Activities
    
    
    (4,592
    )
    
    1,662Cash
      Flows From (Used) by Investing ActivitiesPurchase
      of property and equipment
    
    
    (4
    )
    
    (55
    )Purchase
      of investment
    
    
    —
    
    
    (250
    )Net
      Cash Used in Investing Activities
    
    
    (4
    )
    
    (305
    )Cash
      Flows From (Used) by Financing ActivitiesProceeds
      from line of credit
    
    
    5,100
    
    
    —Payments
      of loan/line of credit
    
    
    (5,110
    )
    
    —Repayments
      of capitalized lease obligations
    
    
    (42
    )
    
    —Proceeds
      from subordinated notes payable
    
    
    —
    
    
    159Repayments
      of prior lines of credit
    
    
    —
    
    
    (625
    )Net
      Cash Provided (Used) by Financing Activities
    
    
    (52
    )
    
    (466
    )Net
      Increase in Cash
    
    
    (4,648
    )
    
    891Cash,
      Beginning of Period
    
    
    13,398
    
    
    69Cash,
      End of Period
    
    $
    8,750
    
    $
    960SUPPLEMENTARY
      CASH FLOW INFORMATIONCash
      paid for interest
    
    $
    26
    
    $
    84Cash
      paid for income taxes
    
    
    2
    
    
    —SUPPLEMENTAL
      SCHEDULE OF NONCASH INVESTING ANDFINANCING
      ACTIVITIESDebt
      principal payment converted to common stock
    
    $
    67
    
    $
    —Liabilities
      Assumed in Acquisition and Recapitalization
    
    
    —
    
    
    1,821Conversion
      of Related Party Note and Loan Payable and Accrued Interest into Preferred
      Series D Stock
    
    
    —
    
    
    1,517Restricted
      cash paid to satisfy stock repurchase obligation
    
    
    10,000
    
    
    —
 
 The Notes
to Consolidated Financial Statements are an integral part of these
statements
 
 5
 **GVI
Security Solutions, Inc.**
 **Notes
to Consolidated Financial Statements**
 
 NOTE 1 ~
BASIS OF PRESENTATION
 
 These
consolidated financial statements should be read in conjunction with a reading
of the Company's Annual Report on Form 10-KSB for the fiscal year ended December
31, 2004.
 
 The
accompanying unaudited consolidated financial statements have been prepared in
accordance with generally accepted accounting principles applicable to interim
financial information and with the requirements of Form 10-QSB and Item 310 of
Regulation S-B of the Securities and Exchange Commission. Accordingly, they do
not include all of the information and footnotes required by accounting
principles generally accepted in the United States of America for complete
financial statements. Interim results are not necessarily indicative of results
for a full year. In the opinion of management, all adjustments considered
necessary for a fair presentation of the financial position and the results of
operations and cash flows for the interim periods have been
included.
 
 In order
to present comparative Earnings Per Share information for the three months ended
March 31, 2004, the shares used in the calculations of net income (loss) per
share have been adjusted as if the preferred stock conversions occurred, as
applicable, and for the one-for-65 reverse common stock split.
 
 NOTE 2 ~
STOCK BASED-COMPENSATION
 
 In
December 2002, the Financial Accounting Standards Board Issued SFAS No. 148,
"Accounting for Stock-Based Compensation - Transition and Disclosure - an
amendment of SFAS No. 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 financial
statements about the method of accounting for stock-based employee compensation
and the effect of the method used on reported results. The Company accounts for
stock-based compensation using Accounting Principles Board (APB) Option No. 25,
"Accounting for Stock Issued to Employees" and has not adopted the recognition
provisions of SFAS No. 123, as amended by SFAS No. 148. The exercise price of
options granted under the stock option plan is equal to the market price of the
underlying stock on the date of grant. Therefore, no compensation cost was
recorded under APB No. 25.
 
 If the
Company had determined compensation cost for the stock-based compensation plan
in accordance with the fair value method prescribed by SFAS No. 123, net income
(loss) for the three month
periods ended March 31, 2005
and 2004, would have been on a pro forma basis as follows (in thousands):
 
 2005
    
    2004Net
      income (loss), as reported
    
    $
    (510
    )
    $
    (269
    )Stock-based
      employee compensation expense, net ofrelated
      tax effects
    
    
    (120
    )
    
    —Net
      Income (loss), pro forma
    
    $
    (630
    )
    $
    (269
    )
 
 The fair
value of each option on the date of grant was estimated using the Black Scholes
option pricing model with the following weighted average
assumptions:
 
 Risk
      free rate of return
    
    
    3.5
    %
    
    3.5
    %Option
      lives in years
    
    
    3.0
    
    
    3.0Annual
      volatility of stock price
    
    
    74
    %
    
    74
    %Dividend
      yield
    
    
    —
    %
    
    —
    %
 
 6
 **** NOTE 3 ~
CREDIT FACILITIES
 
 Laurus
Debt/Lines of Credit
  On May
27, 2004, the Company closed a $15 million convertible debt financing with
Laurus Master Fund, Ltd. under which the Company was provided with a $5 million
term loan and a $10 million accounts receivable loan facility. At closing, the
Company borrowed $5 million under the term loan and $10 million under the
receivable facility, and used $10,016,000 of the proceeds to repay in full the
indebtedness outstanding under the prior revolving credit agreement with
Comerica Bank. Additional proceeds of the financing were used to increase
working capital, pay closing fees to Laurus in the aggregate amount of $617,500,
and pay a finder's fee in the amount of $800,000. As part of the transaction,
Laurus was also issued a seven-year warrant to purchase 940,000 shares of Common
Stock at a price of $3.50 per share. The Company also issued a similar warrant
to purchase 94,000 shares of Common Stock to the finder. Borrowings under the
Laurus financing are secured by all assets of the Company. At March 31, 2005,
$4.48 million in principal was outstanding under the Term Loan and $5.67 million
in principal was outstanding under the accounts receivable facility. The
agreements with Laurus prohibit the payment of dividends on the Company’s common
stock, and contain other customary affirmative and negative
covenants.
  The term
loan is evidenced by a Secured Convertible Term Note and, subject to monthly
adjustments as set forth below, bears interest at an initial rate per annum
equal to the prime rate (as reported in the Wall Street Journal), plus two
percent, subject to a floor of six percent. Interest on the term loan is payable
monthly. Amortizing payments of principal on the term loan commenced September
1, 2004, with a final payment due on May 27, 2007 as set forth in the table
below.
 
 Period
    
    Principal AmountSeptember 2004 through May 2005
    
    $
    75,000 per monthJune 2005 through May 2006
    
    $
    150,000 per monthJune 2006 through April 2007
    
    $
    190,000 per monthMay
      2007
    
    $
    435,000
  The
interest rate under the Term Note is subject to downward adjustment at the end
of each month as follows. If at the end of the applicable month the Company has
registered the shares of Common Stock underlying the Term Note with the SEC,
interest payable on the term loan will be adjusted downward by 200 basis points
(two percent) for each incremental 25 percent increase in the market price of
the Common Stock, at the end of the month, in excess of the conversion price
under the Term Note.
 
 Amounts
outstanding under the Term Note were convertible into Common Stock at Laurus's
option at a conversion price initially equal to $2.70 per share. In December,
2004 the conversion price was reduced to $1.91 under the terms of the
anti-dilution feature of the Term Note. In addition, subject to (i) having an
effective registration statement with respect to the shares of Common Stock
underlying the Term Note, and (ii) limitations based on trading volume of the
Common Stock, scheduled principal and interest payments under the Term Note will
be made in shares of Common Stock valued at the conversion price. Prepayments
under the Term Note are subject to a premium in the amount of 20% of the
principal being prepaid.
 
 Subject
to monthly adjustments as set forth below, borrowings under the receivable
facility bear interest at an initial rate per annum equal to the prime rate
minus two percent. The interest rate under the receivable facility is subject to
downward adjustment at the end of each month in the same manner as provided for
under the Term Note. In addition, on and after November 26, 2004, if the market
price of the Common Stock is below the fixed conversion price at the end of a
month, the interest rate under the receivable facility will be reset to equal
the prime rate plus two percent. The receivable facility terminates, and
borrowings thereunder become due, on May 27, 2007.
 **** Amounts
outstanding under the receivable facility were convertible to Common Stock at
Laurus's option at a conversion price initially equal to $3.38 per share. In
December, 2004 the conversion price was reduced to $2.22 under the terms of the
anti-dilution feature of the facility. To the extent the Company repays loans
outstanding under the receivable facility and/or Laurus converts loans under the
receivable facility into Common Stock, the Company may reborrow or make
additional borrowings under the receivable facility, provided that aggregate
loans outstanding under the receivable facility at any time may not exceed the
lesser of $10 million or a borrowing base equal to the sum of 90% of "eligible
accounts" plus 60% of "eligible inventory" (with borrowings based on eligible
inventory limited to $2 million).
 
 The loan
documents with Laurus required the Company’s Common Stock to be quoted on the
NASD Over the Counter Bulletin Board by July 27, 2004, which date was extended
to September 27, 2004 and further extended to December 31, 2004. In
consideration for extending the deadlines, the Company issued Laurus additional
seven-year warrants to purchase an aggregate of 400,000 shares of Common Stock
at a price of $3.50 per share. The Company’s Common Stock began being quoted on
the NASD Over the Counter Bulletin Board on December 13, 2004. Compensation
expense of approximately $16,000 was recorded for the issuance of these
warrants.
  7
 Loan
Origination Fees
 
 The loan
origination and finders fees of $1.8 million for the Laurus loans and line of
credit were capitalized and will be amortized to interest expense over three
years. Included in loan origination fees is compensation of $112,000 relating to
the issuance of warrants to purchase 1,034,000 shares of the company's common
stock.
 
 Capitalized
Leases
 
 There are
four capital leases for a trade show booth, warehouse racking, and 2 office
furniture leases that have a total value of $430. These leases will be paid over
terms ranging from 24 to 60 months and payments will be allocated to debt and
interest expense over the term of the leases.
 
 Amortization
Table: ($ in thousands)
 
 2005
    
    2006
    
    2007
    
    2008
    
    2009Capital
      Leases
    
    $
    130
    
    $
    118
    
    $
    77
    
    $
    51
    
    $
    12
 
 NOTE 4 ~
COMMITMENTS & CONTINGENCIES
 
 Sales to
certain consumers of video surveillance and other security products may be
subject to sales tax requirements and possible audits by state taxing
authorities. The Company estimates that any liability that it may have for sales
taxes would not have a material effect on its financial condition or results of
operations.
 
 The
Company is also a party to other disputes in the normal course of business.
Management believes the ultimate resolution of such disputes will not have a
material effect on the financial statements.
 
 Licensing
Agreement
 
 The
company entered into a licensing agreement that commenced on January 1, 2005
with Cybasec LTD. Under the agreement, which has an initial term of three years,
but can be cancelled after the first year, Cybasec grants the company the
exclusive license to use, sell, market, distribute, service and customize the
Cybasec Enterprise Security Platform hardware and software applications in
exchange for the Company committing to purchase required amounts of products and
paying related agreed upon fees. Minimum required payments under this licensing
agreement are $1,047,000 for the year ending December 31, 2005.
 
 Settlement
Agreement with William Teitelbaum and Stock Repurchase
 
 Pursuant
to a Settlement Agreement entered into in October 2004, on January 4, 2005 the
Company completed the purchase of 6,666,667 shares from William A. Teitelbaum
for $10 million. The December 31, 2004 balance sheet included restricted cash
and a liability, each in the amount of $10,000,000, and a reduction of
stockholders’ equity, for the purchase of these shares.
 
 8
 NOTE 5 ~
2004 STOCK INCENTIVE PLAN
 
 In
February 2004, the Company adopted the 2004 Long-Term Stock Incentive Plan and
reserved 5,939,913 shares of its common stock. In addition, in February 2004,
the Company granted options under the Plan to purchase 2,675,000 shares of
common stock at $2.60 per share and 2,821,452 shares of common stock at $0.3185
per share. In
January 2005, the Company granted
options under the Plan to purchase 837,500 shares of common stock at $1.50 per
share. No stock based compensation cost is reflected in expense as all options
granted under the plan had an exercise price equal to the fair value of the
underlying stock on the date of grant.
 
 9
  **Item
2. Management’s Discussion and Analysis or Plan of
Operation.**
  *Statements
contained in this Quarterly Report on Form 10-QSB, other than the historical
financial information, constitute “forward-looking statements” within the
meaning of the Private Securities Litigation Reform Act of 1995. All such
forward-looking statements involve known and unknown risks, uncertainties or
other factors which may cause actual results, performance or achievement of the
Company to be materially different from any future results, performance or
achievement expressed or implied by such forward-looking statements. Primary
risk factors include, but are not limited to: reliance on primary supplier;
uncertainty of future profitability, outstanding indebtedness; reliance on a
primary retailer for sales through the retail channel; effective integration of
recently acquired operations and personnel; expansion risks; effective internal
processes and systems; the ability to attract and retain high quality employees;
changes in the overall economy; rapid change in technology; the number and size
of competitors in its markets; law and regulatory policy; the mix of products
and services offered in the company's target markets; and other risks described
herein and in the Company’s 2004 Annual Report on Form 10-KSB.*
  *The
following discussion of results of operations and financial condition is based
upon, and should be read in conjunction with, our consolidated condensed
financial statements and accompanying notes thereto included elsewhere herein.*
 
 **THREE
MONTHS ENDED MARCH 31, 200** **5
Compared to Three Months Ended March 31, 2004**
  **REVENUES**
 Revenues
increased $8.9 million or 59.3% to approximately $23.9 million in the three
months ended March
31 , 2005
from approximately $15.0 million in the three months ended March
31 , 2004.
Contributing to this increase was an increase in sales of our retail products,
which increased $6.0 million or 99% compared to the same three months in 2004,
as well as sales of our professional products, which increased approximately
$3.0 million or 39% compared to the same three months in 2004. The increased
sales of our retail products was primarily due to a large stocking order, in
January 2005, by our exclusive retail distributor while the increase in sales of
our professional products sales was due to increases in sales across the range
of our professional products to distributors, integrators and installers of
products manufactured by Samsung Electronics as well as other manufacturers.
 
 **COST
OF REVENUES**
 Cost of
revenues increased 64.9% to approximately $20.6 million for the three months
ended March
31 , 2005
from approximately $12.5 million for the three months ended March
31 , 2004.
This increase was due to the increased revenue volume, tech support, warranty
costs and freight costs.
 
 As a
result of the changes described above in revenues and cost of revenues, gross
profit in the three months ended March
31 , 2005
increased to approximately $3.4 million from approximately $2.5 million in the
three months ended March
31 , 2004,
and gross profit as a percentage of revenues decreased to 14.1% for the three
months ended March
31 , 2005
compared with 16.8% for the three months ended March
31 , 2004.
The primary factor contributing to the decreased margin was the significantly
higher sales of retail products in the three months ended March 31, 2005 through
our exclusive distributor agreement pursuant to which our mark-up is limited to
8%. This arrangement did not exist during the three months ended March 31, 2004.
 
 **SELLING,
GENERAL AND ADMINISTRATIVE EXPENSES**
 Selling,
general and administrative expenses increased 35.7% to approximately $3.8
million in the three months ended March
31 , 2005
from approximately $2.8 million in the three months ended March
31 , 2004.
 ****
 **Sales
and Marketing** . Sales
and marketing expenses increased 66.7% to approximately $2.0 million in the
three months ended March
31 , 2005
from approximately $1.2 million in the three months ended March
31 , 2004.
The increase was primarily due to increased commissions resulting from the
increased sales of our professional products, salaries related to staffing the
Enterprise Solutions Group which affected only a portion of the quarter in the
prior year period, costs
related to a new product licensing agreement, with no corresponding type costs
in the three months ended March 31, 2004, and the
amortization of demonstration products for which the Company began amortization
in April 2004.
   10
 **General
and Administrative** . General
and administrative expenses increased 12.5% to approximately $1.8 million in the
three months ended March
31 , 2005
from approximately $1.6 million in the three months ended March
31 , 2004.
The increased general and administrative expense was due to increased salaries
and wages associated with additional hires, higher legal and accounting fees
associated with increased transactional activity and being a public company,
which costs were incurred for only a portion of the three month period ended
March 31, 2004, and higher depreciation expense.
 **INTEREST
EXPENSE**
 Interest
expense in the three months ended March
31 , 2005
increased 28.4% to approximately $113,000 from approximately $88,000 in the
three months ended March
31 , 2004.
The increase was primarily related to higher outstanding borrowings during the
three months ended March
31 , 2005,
and the amortization of $150,000 of loan origination fees during the three
months ended March
31 , 2005
compared to amortization of $4,000 of loan fees related to a prior line of
credit during the three months ended March
31 , 2004.
The amount of interest expense for the three months ended March 31, 2005
reflects an offset of $63,000 of interest income earned on bank balances during
the period. No interest income was earned during the three months ended March
31, 2004.
 
 **INCOME
TAX EXPENSE (BENEFIT)**
 The
provision for federal, state and local income tax is an expense of $2,000 for
the three months ended March 31, 2005 compared to a benefit of $106,000 for the
three months ended March
31 , 2004.
The $2,000 expense relates to state franchise taxes that are not determined
based on net income. Any provision for federal and state tax benefits due to our
loss for the three months ended March 31, 2005 would be offset by an equal
increase in a valuation allowance. **** We
established this allowance because, in light of our history, including our
losses following our merger in February 2004, there is uncertainty under
generally accepted accounting principles as to whether we will have future
income against which we can offset our losses to reduce our tax expense in
future periods.
 
 **NET
INCOME**
 As a
result of the items discussed above there was a net loss of $510,000 in the
three months ended March
31 , 2005
compared with a net loss of $269,000 in the three months ended March
31 , 2004.
 
 **LIQUIDITY
AND CAPITAL RESOURCES**
 Historically,
we have funded our operations primarily through cash generated from operations
as well as borrowings under secured revolving credit facilities. On May 27,
2004, we closed a $15 million convertible debt financing with Laurus Master
Fund, Ltd. under which we were provided with a $5 million term loan and a $10
million accounts receivable loan facility. At closing, we borrowed $5 million
under the term loan and $10 million under the receivable facility, and used
$10,016,000 of the proceeds to repay in full the indebtedness outstanding under
our revolving credit agreement with Comerica Bank. Additional proceeds of the
financing were used to increase working capital, pay closing fees to Laurus in
the aggregate amount of $617,500, and pay a finder's fee in the amount of
$800,000. As part of the transaction, Laurus was also issued a seven-year
warrant to purchase 940,000 shares of our Common Stock at a price of $3.50 per
share. We issued a similar warrant to purchase 94,000 shares of Common Stock to
the finder at a price of $3.50 per share. Borrowings under the Laurus financing
are secured by all of our assets.
  The term
loan is evidenced by a Secured Convertible Term Note and, subject to monthly
adjustments as set forth below, bears interest at an initial rate per annum
equal to the prime rate (as reported in the Wall Street Journal), plus two
percent, subject to a floor of six percent. Interest on the term loan is payable
monthly. Amortizing payments of principal on the term loan commenced September
1, 2004. Remaining monthly payments are set forth in the table
below.
 Period
    
    Principal AmountJanuary 2005 through May 2005
    
    $
    75,000 per monthJune 2005 through May 2006
    
    $
    150,000 per monthJune 2006 through April 2007
    
    $
    190,000 per monthMay
      2007
    
    $
    435,000
  The
interest rate under the Term Note is subject to downward adjustment at the end
of each month as follows. If at the end of the applicable month we have
registered the shares of Common Stock underlying the Term Note with the SEC,
interest payable on the term loan will be adjusted downward by 200 basis points
(two percent) for each incremental 25 percent increase in the market price of
our Common Stock, at the end of the month, in excess of the conversion price
under the Term Note.
  11
 Amounts
outstanding under the Term Note are convertible into Common Stock at Laurus's
option at a conversion price initially equal to $2.70 per share, and currently
equal to $1.91 per share. In addition, subject to (i) having an effective
registration statement with respect to the shares of Common Stock underlying the
Term Note, and (ii) limitations based on trading volume of the Common Stock,
scheduled principal and interest payments under the Term Note will be made in
shares of Common Stock valued at the conversion price. Prepayments under the
Term Note are subject to a premium in the amount of 20% of the principal being
prepaid.
  Subject
to monthly adjustments as set forth below, borrowings under the receivable
facility bear interest at an initial rate per annum equal to the prime rate
minus two percent. The interest rate under the receivable facility is subject to
downward adjustment at the end of each month in the same manner as provided for
under the Term Note. If the market price of Common Stock is below the conversion
price at the end of a month, the interest rate under the receivable facility
will be reset to equal the prime rate plus two percent. The receivable facility
terminates, and borrowings thereunder become due, on May 27, 2007.
  Amounts
outstanding under the receivable facility are convertible to Common Stock at
Laurus's option at a conversion price initially equal to $3.38 per share, and
currently equal to $2.22 per share. To the extent we repay loans outstanding
under the receivable facility and/or Laurus converts loans under the receivable
facility into Common Stock, we may reborrow or make additional borrowings under
the receivable facility, provided that aggregate loans outstanding under the
receivable facility at any time may not exceed the lesser of $10 million or a
borrowing base equal to the sum of 90% of "eligible accounts" plus 60% of
"eligible inventory" (with borrowings based on eligible inventory limited to $2
million).
  The
conversion prices under the Term Note and the receivable facility are subject to
equitable adjustment for stock splits, stock dividends and similar events, and
"weighted average" adjustment for future stock issuances (other than stock
issuances in specifically excepted transactions) in accordance with a formula
specified under our agreements with Laurus.
  From time
to time we deposit cash collateral with financial institutions to secure letters
of credit issued to vendors to purchase products. At March 31, 2005, we had no
letters of credit outstanding.
  On
December 27, 2004, we completed a private placement of approximately 22,620,000
shares of Common Stock at a price of $1.50 per share, for aggregate gross
consideration of $33.9 million. Net cash
proceeds were approximately $31.5 million after compensation to a financial
advisor and other costs of the placement. Approximately $4.7 million of the
proceeds were used to repay borrowings from Laurus, and $1.15 million of the
proceeds were used to repay notes issued in an October 2004 bridge financing.
Pursuant to a Settlement Agreement between us and Mr. Teitelbaum entered into in
October 2004, in January 2005 we used an additional $10 million of the net
proceeds of the private placement to repurchase 6,666,667 shares of Common Stock
from William A. Teitelbaum, a stockholder of the Company.
  At March
31, 2005, we had cash and cash equivalents of approximately $8.8 million,
working capital of approximately $21.3 million, an outstanding balance of $4.48
million under the Laurus Term Loan, and outstanding accounts receivable loans
from Laurus of approximately $5.67 million, with additional borrowing
availability under such facility of approximately $900,000. In comparison, at
December 31, 2004, we had cash and cash equivalents of approximately $13.4
million, working capital of approximately $21.7 million, an outstanding balance
of $4.7 million under the Laurus Term Loan, and outstanding accounts receivable
loans from Laurus of approximately $5.5 million, with additional borrowing
availability under such facility of approximately $3.9 million.
  Cash
decreased from $13.4 million at December 31, 2004 to $8.8 million at March 31,
2005 primarily as a result of (i) an increase in inventory, from $12.6 million
at December 31, 2004 to $16.3 million at March 31, 2005, resulting from
increased purchases we made of high volume selling products in connection with
the relocation and closing of the production facilities of our principal
manufacturer, (ii) a decrease in accounts payable from $11.3 million at December
31, 2004 to $11.1 million at March 31, 2005, primarily as a result of cash
payments we made to reduce our obligations to Samsung in accordance with the
terms of our distribution agreement, and (iii) the financing of our operating
activities primarily with cash on hand without utilizing the full extent of our
borrowing availability under our receivables facility with Laurus. These factors
which contributed to the decrease in our cash were partially offset by a
decrease in accounts receivable from $8.3 million at December 31, 2004 to $7.6
million at March 31, 2005.
  12
 Management
believes that the net proceeds from the private placement we completed in
December 2004 together with cash generated from operations and borrowings
available under our agreements with Laurus, will be sufficient to meet our cash
requirements for calendar 2005.
  **Item
3. Controls and Procedures.**
  Nazzareno
Paciotti, our Chief Executive and Chief Financial Officer has concluded, based
on his evaluation as of March 31, 2005, that our disclosure controls and
procedures are effective to reasonably ensure that information required to be
disclosed by us in the reports we file or submit under the Securities Exchange
Act of 1934, as amended, is recorded, processed, summarized and reported within
the time periods specified in the SEC’s rules and forms.
  There
were no significant changes in our internal controls over financial reporting
that occurred during our first fiscal
quarter that has materially affected, or is reasonably likely to materially
affect, our internal
control over financial reporting.
 
 
 
  **PART
II.** **other
information**
  **Item
2. Unregistered Sales of Equity Securities and Use of
Proceeds**
   In
January, 2005, Laurus Master Fund converted an aggregate of $66,850 in principal
outstanding under its term loan to us into 35,000 shares of Common Stock at a
conversion price of $1.91 per share in accordance with the terms of the Term
Note. The transaction was exempt from registration under Section 4(2) of the
Securities Act.
  In
addition, as disclosed above, in January 2005 we repurchased 6,666,667 shares of
Common Stock from William A. Teitelbaum for $10 million at a price of $1.50 per
share.
  **Item
6. Exhibits.**
  Number
    Description31
    Certification
      of Nazzareno Paciotti, Chief Executive Officer and Chief Financial Officer
      of the Registrant, pursuant to Rules 13a-14(a) and 15(d)-14(a) of the
      Securities Exchange Act of 1934, as amended.32
    Certification
      of Nazzareno Paciotti, Chief Executive Officer and Chief Financial Officer
      of the Registrant, pursuant to 18 U.S.C.
§1350.
 ****
 13
 **SIGNATURES**
  Pursuant
to the requirements 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.
  ****GVI
      SECURITY SOLUTIONS, INC.****Date:
      May 23, 2005
    By:
    /s/ Nazzareno E. PaciottiName:
      Nazzareno E. Paciotti
      Title:
      Chief Financial Officer
  14
 **EXHIBIT
INDEX**
  Number
    Description31
    Certification
      of Nazzareno Paciotti, Chief Executive Officer and Chief Financial Officer
      of the Registrant, pursuant to Rules 13a-14(a) and 15(d)-14(a) of the
      Securities Exchange Act of 1934, as amended.32
    Certification
      of Nazzareno Paciotti, Chief Executive Officer and Chief Financial Officer
      of the Registrant, pursuant to 18 U.S.C.
§1350.
  15