August 18, 2005
Paul Monsour
Staff Accountant
United States Securities And Exchange Commission
450 Fifth Street, N.W.
Washington, D.C. 20549
Dear Mr. Monsour:
Re: GPS Industries, Inc. ("GPSI")
Form 10-K For The Fiscal Year Ended December 31, 2004 &
Form 10-Q For The Quarter Ended March 31, 2005
Dear Mr. Monsour:
We have received your letter dated August 9 and our comments are noted below for
your review:
2004 10K
1. & 2. Note 2 - Acquisitions, Pages F-6 To F-8.
On November 19, 2005 GPSI acquired 100% of the outstanding common shares of
Optimal Golf Solutions, Inc.("Optimal"). The only asset of real value was US
Patent No. 5,364,093 which had seven years of life left until November 11, 2011.
Our Company needed either to acquire or license this patent from Optimal to be
able to sell our GPS golf management system in the United States, the world's
largest market of golf courses. Because Optimal did not feel we responded to
their licensing offer quickly enough and in good faith (we disputed that), they
elected to deny us a license. We believe this could have been partly inspired by
a fairly close relationship they had with a major competitor that we had in the
US called ProLink Parview, LLC ("PPL"). Optimal then advised prospective and
existing customers of ours that we did not have a license to sell our system in
the US. That became a major stumbling block for us and could have been
disastrous if we did not act quickly. We also became aware that PPL was
attempting to acquire either Optimal or the 093 patent (one in the same really).
Had PPL been successful, they could have denied us a license in the US. Our CEO
took the only action that seemed open to GPSI, which was to acquire Optimal. We
used an experienced senior consultant with a strong background in patents and
their acquisitions to assist us with those negotiations which were conducted on
an arms-length basis. We closed the transaction on November 19, knowing that PPL
was also trying to do the same thing. We tried to pay the lowest price we could
but under the circumstances, Optimal knew that they had us in a difficult
position. Only $1,100,000 of the $5,250,000 purchase price was cash, however,
and balance was to be paid in stock, subject to certain restrictions and
conditions.
During our audit, Sherb & Co took a very strict accounting theory approach to
this acquisition stating that under US GAAP, this intangible asset must be
valued based on the NPV of a future stream of known license revenue which was
approximately $600,000 per year, primarily from our two major competitors, PPL
and UpLink. Our determination of the importance of this patent to us in the USA
and internationally as a major component of our international patent portfolio,
and the potential for us to earn additional license revenue from potential
infringers of the patent, did not affect their valuation approach. Thus, because
we were able to substantiate a NPV of $1,500,000 from these known future cash
flows, that is the value settled on and the difference was immediately applied
to goodwill which they recommended we write-off at our year-end (December 31,
2004), and review the value each year-end thereafter, adjusting as necessary (in
accordance with US GAAP). All R & D costs relating to development of new
products, software and their related patents have been expensed in the year in
which they have been incurred by us. Given the financial position of this
Company, we believe this is the most conservative approach to take at this time
and which we believe follows US GAAP.
We will revise future filings to include the primary reasons for the acquisition
and a description of the factors that contributed to a purchase price that
resulted in the recognition of goodwill.
3. Note 8 - Gain On Extinguishment Of Debt
Following is the additional detail related to the securities that collateralized
the loan we wrote off in 2004 and how we feel it was realized:
In February 2001 the Company received a loan of $1,185,000. This loan was
collateralized by the transfer of 2,044,000 shares of the Company to the lender
from various existing shareholders of the Company. These shares were to be held
as security for the loan but it was not agreed that they could be liquidated.
However we are of the opinion that they were in fact liquidated by the lenders
thus discharging the loan liability. Factors supporting this opinion are:
a) The volume of shares of the Company traded in the two months following
the transfer of these shares to the lenders was 7,976,100 compared to
a volume of 2,065,200 in the two months prior to the transfer, a
nearly fourfold increase in trading activity.
b) The share price at the end of January 2001 was $1.75, this declined to
$0.84 at the end of February, on a trading volume in the month of
3,440,900 shares, and further declined to $0.22 by the end of March
2001 on a monthly trade volume of 4,535,200
c) The Company has received no communication from the lenders since the
initial loan transaction completed.
d) Subsequent efforts by both the Company and its auditors to locate the
lenders have been unsuccessful.
Therefore the Company is of the opinion that the lenders immediately liquidated
in full the shares issued to them for collateral against the loan and realized
their return on the monies lent in this way, to what we believe was the
considerable detriment of the Company's stock trading price and market
capitalization. As the lenders could not be located by the efforts of either our
auditors or GPSI, this loan liability was written off in the fiscal year ended
December 31, 2004. Our auditors concurred in this decision. The full amount of
the book value of the loan was treated as a gain on extinguishment of debt as
the Company is of the opinion that the full value of the loan has been realized
by the lenders through the liquidation of the collateral shares.
We will revise our future filings to include enhanced disclosure regarding this
item.
2005 10 QSB For 3 Months Ended March 31, 2005
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4. The loan from Great White Shark Enterprises ("GWSE") is correctly long-term
debt and should be shown as such on our balance sheet. The term on the loan is
to November, 2011, i.e. seven years and ties into the expiry date of the Optimal
patents which provided some security and license revenue to repay this loan. We
corrected that presentation in our amended 10K, which was filed after our 10QSB
for the Q1 ended March 31, 2005. At the time of filing the 10Q for Q1, however,
we were aware of the change required from current to long-term but our President
was having discussions with GWSE about converting that debt into shares as a
condition of closing a major financing. At the time of filing the 10Q for Q1, we
believed that GWSE were going to agree to do the debt conversion into shares and
thus took what we thought was a conservative position at the time and left the
debt as current debt. Although those discussions continue now, it is less
certain to us that they will convert their debt into shares and thus we are
following the proper accounting treatment of this debt. We will be sure to
include some of this discussion in future filings in Footnote 4 relating to
Debt.
8-K Dated November 26, 2004
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5. The financial statements of Optimal
We discussed and reviewed the various tests for filing the audited financial
statements of Optimal with the 8K. However at the time our understanding was
that they were not required and thus limited our disclosure to the 8K (with all
related agreements) and the 2004 10K. The consolidated audited financial
statements in that 10K included the financial results of Optimal as at December
31, 2004 since the date of acquisition on November 19, 2004. Optimal was a small
private company which had limited license revenue from three patent licensees.
That is the only business in which they were involved. We received and reviewed
their financial statements (which were not audited) prior to acquisition. We are
currently reassessing whether or not we need to file audited financials of
Optimal. If we determine that we do, we will have our independent registered
accountants, Sherb & Co. LLP, audit them and file an Amendment to the 8K as soon
as possible. The accounting records are with the former Optimal shareholders in
Texas and we will have to arrange delivery of them for audit purposes. I look
forward to discussing this issue with you.
Finally, we confirm the following:
1. GPSI is responsible for adequacy and accuracy of the disclosure in the
filings;
2. Staff comments or changes to disclosure in response to SEC staff
comments do not foreclose the Commission from taking any action with
respect to the filings; and
3. GPSI may not assert staff comments as a defence in any proceedings
initiated by the Commission or any person under the federal securities
laws of the United States.
4. We acknowledge that the Division of Enforcement has access to all
information we provide to the staff of the Division of Corporation
Finance in your review of our filings or in response to your comments
on our filings.
We look forward to working with you and your staff and cooperating fully to
answer your questions and clarify any further issues you may have. Please feel
free to call myself or Michael Martin, Corporate Controller at 604-576-7442 at
any time to discuss these matters further.
Yours sincerely,
/s/George Dorin
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George Dorin
Chief Financial Officer
cc. Robert C. Silzer, President & CEO
dd. Michael Martin, Corporate Controller