LAW OFFICES OF
Naccarato & Associates
1100 Quail Street, Ste. 100
Newport Beach, California 92660
Phone: 949-851-9261
Fax: 949-851-9262
September 2, 2014
VIA EDGAR
Pamela A. Long
Assistant Director
Division of Corporation Finance
U. S. Securities and Exchange Commission
100 F Street, NE
Washington, D.C. 20549
Re: | Global Digital Solutions, Inc. | |
Amendment No 1 to | ||
Draft Registration Statement on Form S-1 | ||
Submitted August 5, 2014 | ||
CIK No. 0001011662 |
Dear Ms. Long:
We are securities counsel to Global Digital Solutions, Inc. (“GDSI” or the “Company”), and on behalf of our client we submit this letter in response tocomments from the Staff (the “Staff”) of the Securities and Exchange Commission (the “Commission”) contained in its letter dated August 27, 2014, relating to the above referenced Amendment No. 1 to Draft Registration Statement on Form S-1 submitted to the Commission on August 5, 2014 (the “Registration Statement”). We are concurrently submitting via EDGAR this letter and a revised draft of the Registration Statement.
In this letter, we have recited the comments from the Staff in italicized, bold type and have followed each comment with the Company’s response. Except for page references appearing in the headings and Staff comments below (which are references to the Registration Statement submitted on August 5, 2014), all page references herein correspond to the page of the revised draft of the Registration Statement.
Confidential Draft Registration Statement on Form S-1 Submitted August 5, 2014
General
1. Please include interimfinancial statements for the periodended June 30,2014. Please similarly update your financialinformationthroughoutthefiling.SeeRule 8-08 of Regulation S-X.
The Company has revised the disclosure in the Registration Statement by adding the interim financial statements on pages F-19 – F-33, and updating the financial information throughout the Registration Statement to address the Staff’s comment.
Pamela A. Long
Assistant Director
Division of Corporation Finance
U. S. Securities and Exchange Commission
September 2, 2014
Page 2 of 9
2.We continue to evaluate yourresponseto commentthree inourletter dated May 2, 2014 withrespecttothe company’s shell company status priorto the acquisition ofNorth American CustomSpecialty Vehicles, LLC. Inthisregard,please address the following:
· | You statethat the winding down of your operations in thetelecommunications industry wasnot completed until June 30, 2014. In light of yourlack of revenues for both years ended 2012 and 2013,includingminimal or no cost of revenues for both years, as wellas noassets ofdiscontinued operationsforthemostrecently completed fiscalyear,pleasehelpus understand the natureofyour winding down operations, following the dispositionof the remaining assets related totheoperationsofBronco in January2013. Inthis regard wenote yourdisclosurein Note 11to your financial statements (pageF-17). |
During 2013 and thru June 30, 2014, GDSI employee William Delgado, who is based in California, was involved with engineering projects for GDSI client Pacific Utility Construction. Pacific Utility Construction was working on various telecommunications projects at UC Davis in Sacramento. GDSI was obligated to complete this work even though it received no revenue during the 2013 –2014 time period. The projects involved Mr. Delgado’s expertise in Outside Plant and Building Engineering. Mr. Delgado, as principal engineer, was responsible for completion of all engineering work, including ongoing adds, moves, and changes. The Company incurred the cost of Mr. Delgado’s compensation during this period, the expense of office facilities for Mr. Delgado in California, telephone, internet and office supply expense.
· | You statethat thecompany, while winding down theformer business andfocusing on entering intoa differentbusinesssegment, had in effectoperations intwoindustries. Based on your prospectus disclosures, itappearsthat your efforts weredirected towards finding acquisition targets rather than being involvedin operatingan actual business. Please clarify your statement accordingly. |
As stated above, Mr. Delgado continued to provide engineering services for Pacific Utility Construction. During the period from January 2013 through November 2013, the Company was actively involved in the business operations of Airtronic as discussed below. This was in addition to looking at acquisition opportunities
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.
Pamela A. Long
Assistant Director
Division of Corporation Finance
U. S. Securities and Exchange Commission
September 2, 2014
Page 3 of 9
The Company was actively involved in all aspects of Airtronic’s finances. GDSI’s CFO took over the day-to-day management of cash, which included the approval of all purchase orders and all expenditures. In addition, the Company recreated Airtronic’s inventory and fixed asset records from the beginning of 2010, a significant task which involved over 500 man hours expended by the Company’s CFO and outside professionals. In addition, the Company reconciled on a monthly basis, starting from January 2010, all the balance sheet accounts. Additionally, the Company rationalized the bidding process, updated its standard costing procedures and costs, and its inventory management system.
GDSI’s CEO was responsible for sales and marketing. Airtronic’s CEO was responsible in the past for this and worked closely with GDSI’s CEO to land new OEM orders which resulted in Airtronic finally being awarded a large OEM order in mid 2013.
The Company has now clearly disclosed these facts in Registration Statement on page 27 to address the staff’s comment.
· | Following the signingof the October 22, 2012 Agreement of MergerandPlanof Reorganization with Airtronic, you state that you“took an active roleinthemanagement and day-to-day business operations ofAirtronic.” Please tellus whether yourinvolvement withthemanagement ofAirtronic was a result of a contractual agreement between thetwo parties orwhether it was court approved. In this regard, we notethat the provisions ofArticle Vof themerger agreement regarding the conductofthe businesses duringthe pendency ofthemerger (Exhibit 2.3)are silent withrespect tothe company’s involvement in Airtronic’smanagement and theday-to-day business operations. In addition, pleaseexplain to us the role, ifany, thatthe Airtronic’smanagement team played inmanaging Airtronic’s businesswhile you were also involved withthe day-to-day business operations. |
As discussed in the response above, the Company was actively involved in the day-to-day management of Airtronic to protect its investment and to assure that Airtronic would emerge from bankruptcy as a viable going concern.
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. Additional part-time staff were hired as needed for assembly.
Pamela A. Long
Assistant Director
Division of Corporation Finance
U. S. Securities and Exchange Commission
September 2, 2014
Page 4 of 9
· | At the endof page seven ofyourresponseletter, youlist thedevelopment of the Cool Sound Industry technology and theGDSI Gatekeeper as part ofyour ongoing operations.However, these statements appearto be inconsistent with your disclosures on page 21 where you statethat youhad entered into aletterof intentto acquireCool Sound Industries,Inc., butin the first quarterof 2014 youdecided to no longerpursue the transaction. Similarly, with respect totheGatekeeper technology, you disclose that “[w]hile at AppliedDigital Solutions, Inc., Richard J.Sullivan, [y]our Chairman andCEO, oversaw the production and development of an operational combination ofbio-sensor technology andWeb-enabled wireless telecommunications linked to GPSlocation-tracking system.” It would appear that Gatekeeperwas developed by Applied DigitalSolutions andnot GDSI, and itis unclear whether ornotyou are nowlicensing such technology from Applied Digital Solutions. |
With respect to the development of the Cool Sound Industries technology, the point the Company was making in the letter dated August 5, 2014 was that for a period of approximately seven months, it was engaged in the development of a product which did no work out. The Company has updated the disclosure in the Registration Statement on page 25 to indicate that after it concluded that the technology did not accomplish what the Company envisaged, it terminated the letter of intent.
The Company has revised its disclosure of the Gatekeeper technology on page 25 of the Registration Statement and has removed any reference to Applied Digital Solutions since it is not developing or licensing their technology.
· | Further expand your analysis of the bullet pointsincluded on page eightof your response letter to provide concrete examples for the following claims:(i)that you entered into agreements with customers and vendors;(ii) that youmaintained employees other than your executive officers;and (iii) thatyou incurredmaterial operating expenses. |
(i) (a) On behalf of Airtronic, the Company procured a large order from a well know OEM for approximately $332,000. This was the only external order (i.e. non-military order) Airtronic received in 2013.
(b) The Company commissioned a feasibility study from Parametric Solutions, Inc. to evaluate the Cool Sound Technology.
(c) The Company hired external consultants to assist it with the recreation of Airtronic’s inventory and to implement and write-up controls and procedures.
(d) The Company hired independent accountants to audit Airtronic’s historical financial statements.
(e) The Company engaged legal counsel to represent it in the Airtronic bankruptcy proceedings.
(ii) | The Company has always stated that it has 4 full time employees who also happen to be officers. The Company also uses external professionals on an as needed basis. Please see page 28 of the Registration Statement. |
Pamela A. Long
Assistant Director
Division of Corporation Finance
U. S. Securities and Exchange Commission
September 2, 2014
Page 5 of 9
(iii) | For years ended December 31, 2013 and 2012 the Company incurred the following operating expenses: |
2013 | 2012 | |||||||
Communications | $ | 5,016 | $ | 1,226 | ||||
Compensation and benefits | 5,443,707 | 200,000 | ||||||
Debt issuance costs | 1,385,000 | - | ||||||
Facility expense | 13,275 | - | ||||||
Investment expense | 514,808 | - | ||||||
Investor relations and marketing | 380,944 | 81,125 | ||||||
Office supply and support | 55,231 | 3,205 | ||||||
Professional and filing fees | 554,408 | 11,075 | ||||||
Travel and entertainment | 31,858 | 4,653 | ||||||
$ | 8,384,247 | $ | 301,284 |
For the six months ended June 30, 2014 the Company incurred the following operating expenses:
2014 | ||||
Compensation and benefits | $ | 4,690,065 | ||
Acquisition costs | 754,572 | |||
Debt issuance costs | 100,000 | |||
Investment banking fees | 412,498 | |||
Investor relations and marketing | 186,163 | |||
Office support and supply | 71,871 | |||
Professional and filing fees | 446,023 | |||
Depreciation and amortization | 12,830 | |||
Other | 16,654 | |||
$ | 6,690,676 |
Wemay have additional comments following thereview ofyourresponse.
Prospectus Summary,page 3
Acquisition ofNorthAmerican CustomSpecialtyVehicles,LLC, page 3
3. Please expand your disclosure of thematerial acquisitionterms to disclose that the 645,161 sharesissued atclosinghave a “Discounted Value”of $200,000and thatthe additional post-closingcontingent consideration, consistingofGDSI shares willhave a “Discounted Value of up to, but not exceeding, anaggregateof $2,400,000.”We note thatthe equity purchaseagreement(Exhibit 2.5) defines Discounted Value as 80% of themarket price.
The Company has revised the disclosure in the Registration Statement on page 3 to address the Staff’s comment.
Pamela A. Long
Assistant Director
Division of Corporation Finance
U. S. Securities and Exchange Commission
September 2, 2014
Page 6 of 9
Risk Factors, page 6
General
4.We note your revised disclosures inresponse to comment 16 in ourletterdated May2, 2014. However, we still notereferences totheletters of intent inthe third risk factor on page 6, andthe second risk factoronpage 9. Pleaserevise your disclosures accordingly.
The Company has revised the disclosure in the Registration Statement on pages 6 and 9 to address the Staff’s comment.
We will need additionalfinancing tofully implement our businessplan…, page 6
Wemay face strong competition from larger,establishedcompanies,page 9
Management’ s Discussion and Analysis of FinancialCondition and Results ofOperations, page 17
5. We note your response tocomment 15 in ourletter datedMay2, 2014. Your disclosures, however, continue toreferencethe“knowledge-based and culturallyattuned social consulting” and “unsettled areas” language throughout your registration statement without additional clarification.We re-issue thecomment.
The Company has revised the disclosure in the Registration Statement on pages 6, 9 and 17 to address the Staff’s comment. The Company has removed all reference to “knowledge-based and culturallyattuned social consulting” and “unsettled areas” language throughout the registration statement.
Use ofProceeds, page16
6.We note that you are registering 4,250,000 shares ofcommon stock issuable upon the conversion ofwarrants.To the extentthatthewarrants are convertibleinto shares of common stock upon payment of a warrant exercise price, please reviseyour disclosure to includetheproceeds youmay receive fromthe warrantexercise.
The Company has revised the disclosure in the Registration Statement on pages 5 and 16 to address the Staff’s comment.
Financial Condition,page 20
7. Please revise your disclosure to explain what are NIMS standards Type I through Type IV.
The Company has revised the disclosure in the Registration Statement on page 22 to address the Staff’s comment. The NIMS Standards are very detailed and the Company has attached them as Exhibit 99.1 to the Registration Statement.
Pamela A. Long
Assistant Director
Division of Corporation Finance
U. S. Securities and Exchange Commission
September 2, 2014
Page 7 of 9
8. You disclose that your businessplanistoacquire“between 5and six companies bythe end ofDecember 2015.”We directyour attention tothesecond half ofour comment 16 in ourletterdated May2, 2014 related to overstating disclosure of acquisitionswhichare not currently probable.In addition, pleasedisclose whetheryou have currently identified the targetcompanies, whether youhave enteredinto a writtenagreementrelated to any of these acquisitions,andwhetheryouhave any commitments to obtainthe$70million needed to finance them.
Since the Company is in preliminary discussions with potential targets, has not entered into any written agreements with them, has not received a commitment for the $70 million the Company estimated it would need to finance their acquisitions, and cannot state that any are probable at this time, the Company has removed all reference to such potential acquisitions in the Registration Statement.
Business, page 20
Our Strategy, page 20
9. Please revise your disclosure to explain the “Analog to Digital” shiftthat is occurring in the defenseand intelligencemarketplace, andtodescribe therolethat youwillplay asa facilitator.
The Company has revised the disclosure in the Registration Statement on page 24 to address the Staff’s comment.
Proprietary Technology – Gatekeeper, page 21
10. Since Gatekeeper appears to be a technology developed by a thirdparty,pleaseexplain whetheryouhave obtained anylicensingrightsto it. If so,pleasedescribe thematerial terms of the licensingagreement and to the extentrequired, file theagreement as an exhibitto the registration statement.
The Company has revised the disclosure in the Registration Statement on page 25 to address the Staff’s comment.
Management, page 25
11. Please disclose whether the 12million restrictedstock units granted toMr. Norris weremade underthe 2014 Equity Incentive Plan. Pleasefile the RSUagreement as an exhibit tothe registration statement, orotherwise tell uswhy you are notrequired to do so.
The Company has revised the disclosure in the Registration Statement on page 30 to address the Staff’s comment. The Company has filed the Restricted Stock Unit Agreement as Exhibit 10.21 to the Registration Statement.
Pamela A. Long
Assistant Director
Division of Corporation Finance
U. S. Securities and Exchange Commission
September 2, 2014
Page 8 of 9
SellingStockholders, page 31
12.With respecttotheshares issued inprivate placements or in connection with a private placement, pleaserevise relevantfootnote disclosure to indicate thedate and year when the shares wereissued.
The Company has revised the disclosure in the Registration Statement on pages 36 – 38 to address the Staff’s comment.
Exhibits
13.With respectto Exhibits 10.4 through10.7, you indicate that they are incorporated by referencefromForm 10filed on 9/20/13.Itappears thatthese exhibits were filedwith a Form10amendment onSeptember 10, 2014. Please correct the datesas necessary.
The Company has revised the disclosure in the Registration Statement on Exhibit Index page E-1 to address the Staff’s comment.
14. It appearsthat theaddendumtothe Investment Banking Agreement with Midtown Partners is filed as Exhibit10.17 to the registration statement, rather than Exhibit 10.18 asindicated inthe ExhibitIndex. Please correctas necessary.
The Company has amended the Exhibit Index on page E-2 to reflect that the addendum is Exhibit 10.17 rather than Exhibit 10.18 to address the Staff’s comment.
************
Pamela A. Long
Assistant Director
Division of Corporation Finance
U. S. Securities and Exchange Commission
September 2, 2014
Page 9 of 9
Please direct your questions or comments regarding this response to me at (949) 851-9261. Thank you for your assistance.
Very truly yours, | |
/s/ Owen Naccarato | |
Law offices of Naccarato & Associates |
cc: | David A. Loppert |
Global Digital Solutions, Inc. |