SEC Company Response from ONE STOP SYSTEMS, INC. (OSS) (CIK 0001394056) (OSS) — Dec 18, 2017
ONE STOP SYSTEMS, INC. (OSS) (CIK 0001394056)
Date: Dec. 18, 2017 · CIK: 0001394056 · Accession: 0001193125-17-371188
AI Filing Summary & Sentiment
Reasoning
Referenced dates: December 6, 2017
Letter
PROCOPIO
12544 High Bluff Drive
Suite 300
San Diego, CA 92130
T. 858.720.6300
F. 619.235.0398
AUSTIN
DEL MAR HEIGHTS
PHOENIX
SAN DIEGO
SILICON VALLEY
December 18, 2017
VIA EDGAR AND OVERNIGHT DELIVERY
Securities and Exchange Commission
Division of Corporation Finance
100 F Street, N.E.
Washington, D.C. 20549-3720
Attention:
Jan Woo
David Edgar
Kathleen Collins
Edwin Kim
Re:
One Stop Systems, Inc.
Confidential Draft Registration Statement on Form S-1
Submitted November 9, 2017
CIK No. 0001394056
Ladies and Gentlemen:
On behalf of our client, One Stop Systems, Inc. (“OSS” or the “Company”), we submit this letter in response to comments from the staff (the “Staff”) of the Securities and Exchange Commission (the “Commission”) contained in its letter dated December 6, 2017, relating to the above referenced Draft Registration Statement on Form S-1 (the “Registration Statement”). We are concurrently filing via EDGAR this letter and the revised Registration Statement. For the Staff’s reference, we are providing to the Staff by overnight delivery copies of this letter as well as both a clean copy of the Registration Statement and a copy marked to show all changes from the version confidentially submitted on November 9, 2017.
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 comments of the Staff below (which are references to the Registration Statement submitted on November 9, 2017), or as otherwise specifically indicated, all page references herein correspond to the page of the revised Registration Statement.
Securities and Exchange Commission
December 18, 2017
Page
General
1. According to your preliminary fee table and disclosure on page 105, it appears that you will issue warrants to your underwriter, Roth Capital Partners, and seek to register these warrants and common stock underlying these warrants as part of your initial public offering registration statement. If true, please revise your prospectus cover page and offering summary to clarify the issuance and registration of these warrants and underlying common stock.
In response to the Staff’s comment, the Company has revised the disclosures on its prospectus cover page and offering summary to clarify the issuance and registration of the underwriter’s warrants and underlying common stock.
2. We note that you intend to reincorporate from being a California corporation into a Delaware corporation in connection with your offering. Where appropriate, please clarify any procedural or transactional steps needed to accomplish this reincorporation and whether it will be completed prior to the effectiveness of this registration statement.
In response to the Staff’s comment, the Company supplementally advises the Staff that it has completed its reincorporation from a California corporation into a Delaware corporation. The Company has revised disclosures throughout the Registration Statement to reflect this change.
Risk Factors
A limited amount of customers represent a significant portion of our sales …, page 13
3. Please revise to identify your largest customer that represented 29% of your net sales for the year ended December 31, 2016. In the Business section, disclose the material terms of your agreement with this significant customer, including any termination provisions or minimum purchase commitments. Refer to Item 101(c)(1)(vii) of Regulation S-K for further guidance.
In response to the Staff’s comment, the Company has revised the disclosure on page 14 to identify that disguise (formerly d3 Technologies) is the significant customer referenced therein. The Company has also revised the disclosure on page 71 to include the material terms of that certain Original Equipment Manufacturing and Supply Agreement by and between the Company and disguise, dated as of October 1, 2015. The Company further advises the Staff that, based upon its review and consideration of its arrangements and relationship with disguise, will file its agreement with disguise as a material contract as Exhibit 10.13 to a subsequent amendment to the Registration Statement.
We rely on a limited number of parts suppliers to support our manufacturing…, page 13
4. Please identify the two suppliers who accounted for approximately 46% of the materials purchased by the company in 2016 and provide a summary of the material terms of any agreements with these suppliers.
Securities and Exchange Commission
December 18, 2017
Page
In response to the Staff’s comment, the Company has revised the disclosure on page 15 to identify that Concisys, Inc. and Exact Computers are the two significant suppliers referenced therein. The Company supplementally advises the Staff, that it has no definitive material agreements with the suppliers. In the event either or both of the suppliers ceased doing business or providing materials to the Company, the Company believes it could locate other suppliers of materials sufficient to maintain its business operations.
We have identified material weaknesses in our internal control over financial reporting…, page 17
5. Please disclose the steps you have taken to remediate the material weaknesses in your internal control over financial reporting and what remains to be completed in your remediation plan, if anything. Also, disclose how long you estimate it will take to complete your plan and any material costs you have, or expect to be, incurred.
The Company supplementally advises the Staff that, to date, it has implemented and is continuing to implement a number of measures to address the material weaknesses identified. Specifically, the Company has taken the following steps in its remediation plan:
•
To address the identified weaknesses surrounding segregation of duties, supervision and expertise, in September 2017, the Company hired a chief financial officer with appropriate experience applying GAAP technical accounting guidance and has increased the number of hours worked by its contracted accounting personnel who are responsible for the closing process and external financial reporting. With the introduction of additional personnel, incompatible functions with respect to the segregation of duties and the recording of a transaction (including the review and approval processes) are being reassigned to different personnel to strengthen the control environment.
•
To improve the quality and timing of the Company’s closing process and to improve the accuracy of financial reporting, the Company has begun implementing a formal closing process that follows a closing checklist that includes reconciliation of all major balance sheet accounts, analytical procedures applied to all income statement accounts and review and approval of manual adjustments.
•
To strengthen the weaknesses in the control environment surrounding inventory and inventory valuation, the Company has and continues to evolve a new analytical process to identify slow-moving and obsolete inventory as well as formalizing the methodology for application of labor overhead to inventory. The Company is also strengthening the controls regarding physical verification of inventory on-hand.
•
To improve its expertise with respect to non-recurring transactions, the Company has hired and will continue to hire additional qualified resources with the requisite expertise. The Company is designing additional controls around identification, documentation and application of technical accounting guidance with particular emphasis on events outside the ordinary course of business. These controls are
Securities and Exchange Commission
December 18, 2017
Page
expected to include implementation of additional supervision and review activities by qualified personnel that are independent from the transaction, the preparation of formal accounting memorandum to support the Company’s conclusions on technical accounting matters and the development and use of checklists and research tools to assist in compliance with GAAP with regards to complex accounting issues.
The Company’s remediation plan also includes relevant and appropriate training on technical GAAP topics, as well as SEC reporting requirements.
The Company intends to complete the implementation of its remediation plan during the first and second quarters of 2018. Except for additional personnel costs, the Company has not incurred any material costs on its remediation plan to date as the Company has been implementing the plan internally. As the Company continues to evaluate and take actions to improve its internal control over financial reporting, it may determine to take additional actions to address control deficiencies or determine to modify certain of the remediation measurements that the Company is anticipating to make which may include retaining a third party to assist with the implementation of its remediation plan. The retention of third party service providers for purposes of remediation may involve the Company incurring material costs in the future.
If our involvement in a September 2017 CIO Review Article was held to be in violation…, page 26
6. You provide an update to a financial measure included in the September 2017 CIO Review article, which quotes your CEO Steve Cooper that you are “emerging at a 58% growth margin annually.” Please revise to explain what you mean by “growth margin annually” and disclose the period in which the 58% growth margin relates.
In response to the Staff’s comment, the Company has revised the disclosure on page 28 to include the period in which the revenue growth rate relates and also to update the disclosure to provide the revenue growth rate as of September 30, 2017.
Use of Proceeds, page 29
7. Please identify the lenders for any related party indebtedness. Also, disclose how the company used the loans that were incurred over the past year and will be repaid using the proceeds of this offering. See Instruction 4 of Item 504 of Regulation S-K.
In response to the Staff’s comment, the Company has revised the disclosure on page 30 to identify the lenders for the related party indebtedness and to explain the use of the loan proceeds incurred over the past year.
Capitalization, page 30
8. Please revise your pro forma as adjusted information to reflect the repayment of debt with the proceeds from this offering.
Securities and Exchange Commission
December 18, 2017
Page
The Company supplementally advises the Staff that it will revise the disclosure on page 31 related to pro forma as adjusted information in a subsequent amendment to the Registration Statement to reflect the repayment of debt with the proceeds from this offering once the Company has determined the amount of shares of common stock for sale and initial public offering price per share in this offering.
Management’s Discussion and Analysis of Financial Condition and Results or Operations
Business Developments, page 34
9. Please revise to describe the material terms of your agreements to acquire the source code license to the Ion flash array software from Western Digital and service their existing customer base. For example, clarify if any consideration was paid to Western Digital or if Western Digital will receive a commission, royalties or any revenue sharing from these arrangements.
In response to the Staff’s comment, the Company has revised the disclosure on page 35 to describe the material terms of its agreements with Western Digital. The Company supplementally advises the Staff that it has included additional disclosures related to the Ion transaction with Western Digital in its Unaudited Condensed Consolidated Financial Statements for the nine months ended September 30, 2017 and will supplementally file is Technology and Software Source Code License Agreement and Services Agreement with Western Digital as Exhibits 10.11 and 10.12, respectively, in a subsequent amendment to the Registration Statement.
Liquidity and Capital Resources, page 44
10. You disclose that you were not in compliance with certain financial and non-financial covenants as of June 30, 2017 and December 31, 2016, but that you received waivers. Please specify the covenants with which you were not in compliance and the expiration date of the waivers. State in quantitative terms the extent of such noncompliance with respect to each covenant in each reporting period. See Sections I.D and IV.C of the SEC Interpretive Release No. 33-8350. In a risk factor, also disclose the impact of not meeting these covenants on your borrowing capacity under the agreement.
In response to the Staff’s comment, the Company has revised the disclosure on page 45 to specify the details related to certain financial and non-financial covenants with which the Company is not in compliance and the waivers of such non-compliance. The Company supplementally advises the Staff that it has added an additional risk factor on page 26 regarding its non-compliance and the potential impact of a failure to receive such waivers in the future.
Business
Our Opportunity, page 61
Securities and Exchange Commission
December 18, 2017
Page
11. Please clarify whether you have generated any material amounts of revenue from your Custom Built Servers, Cloud Services or Storage Management Services lines of business.
In response to the Staff’s comment, the Company has revised the disclosure on pages 66 and 70 to clarify its progress on its Cloud Services and Storage Management Services lines of business. The Company supplementally advises the Staff that it has generated substantial revenue from its Custom Built Servers business, but not from its Cloud Services or Storage Management Services lines of business. In addition, the inclusion of the Company’s Unaudited Condensed Consolidated Financial Statements for the nine months ended September 30, 2017 in the Registration Statement provide additional disclosures related to these lines of business and their impact on its financial statements.
Competition, page 70
12. Please revise to describe your competition outside of your OEM customers performing similar services in-house. We note that on pages 12 and 13 you reference established competitors, third party competitive products, and new entrants to the your market.
In response to the Staff’s comment, the Company has revised the disclosure on page 72 to further describe its competition outside of its OEM customers performing similar services in-house.
Management, page 73
13. You disclose that you have two executive officers, CEO Steve Cooper and CFO John W. Morrison, Jr. On your website you list six other members of your management, including a senior vice president and five vice presidents. Please advise us whether you have any additional executive officers, as defined by Rule 405 of Regulation C. To the extent any of these officers are a vice president in charge of a principal business unit, division or function (such as sales, administration or finance), or any other officer who performs a policy making function or any other person who performs similar policy making functions for the registrant, please provide the disclosure required by Item 401(e) of Regulation S-K.
In response to the Staff’s comment, the Company respectfully advises the Staff that, in making its determination of who constitutes an executive officer under the Rules, the Company considered the substantive functions and responsibilities of the management team as opposed to titles and further considered the fact that the Company does not currently have any separate principal business units, divisions or segments.
Based, in part, on the recent comment letter from the Staff, senior management of the Company conducted a review of the
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CORRESP
1
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CORRESP
PROCOPIO
12544 High Bluff Drive
Suite 300
San Diego, CA 92130
T. 858.720.6300
F. 619.235.0398
AUSTIN
DEL MAR HEIGHTS
PHOENIX
SAN DIEGO
SILICON VALLEY
December 18, 2017
VIA EDGAR AND OVERNIGHT DELIVERY
Securities and
Exchange Commission
Division of Corporation Finance
100 F
Street, N.E.
Washington, D.C. 20549-3720
Attention:
Jan Woo
David Edgar
Kathleen Collins
Edwin Kim
Re:
One Stop Systems, Inc.
Confidential Draft Registration Statement on Form S-1
Submitted November 9, 2017
CIK No. 0001394056
Ladies and Gentlemen:
On behalf of our client, One Stop Systems, Inc. (“OSS” or the “Company”), we submit this letter in response
to comments from the staff (the “Staff”) of the Securities and Exchange Commission (the “Commission”) contained in its letter dated December 6, 2017, relating to the above referenced Draft Registration
Statement on Form S-1 (the “Registration Statement”). We are concurrently filing via EDGAR this letter and the revised Registration Statement. For the Staff’s reference, we are
providing to the Staff by overnight delivery copies of this letter as well as both a clean copy of the Registration Statement and a copy marked to show all changes from the version confidentially submitted on November 9, 2017.
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 comments of the Staff below (which are references to the Registration Statement submitted on November 9, 2017), or as otherwise specifically indicated, all page references
herein correspond to the page of the revised Registration Statement.
Securities and Exchange Commission
December 18, 2017
Page
2
General
1.
According to your preliminary fee table and disclosure on page 105, it appears that you will issue warrants to your underwriter, Roth Capital Partners, and seek to register these warrants and common stock
underlying these warrants as part of your initial public offering registration statement. If true, please revise your prospectus cover page and offering summary to clarify the issuance and registration of these warrants and underlying common
stock.
In response to the Staff’s comment, the Company has revised the disclosures on its prospectus cover
page and offering summary to clarify the issuance and registration of the underwriter’s warrants and underlying common stock.
2.
We note that you intend to reincorporate from being a California corporation into a Delaware corporation in connection with your offering. Where appropriate, please clarify any procedural or transactional steps
needed to accomplish this reincorporation and whether it will be completed prior to the effectiveness of this registration statement.
In response to the Staff’s comment, the Company supplementally advises the Staff that it has completed its reincorporation from a
California corporation into a Delaware corporation. The Company has revised disclosures throughout the Registration Statement to reflect this change.
Risk Factors
A limited amount of customers
represent a significant portion of our sales …, page 13
3.
Please revise to identify your largest customer that represented 29% of your net sales for the year ended December 31, 2016. In the Business section, disclose the material terms of
your agreement with this significant customer, including any termination provisions or minimum purchase commitments. Refer to Item 101(c)(1)(vii) of Regulation S-K for further guidance.
In response to the Staff’s comment, the Company has revised the disclosure on page 14 to identify that disguise
(formerly d3 Technologies) is the significant customer referenced therein. The Company has also revised the disclosure on page 71 to include the material terms of that certain Original Equipment Manufacturing and Supply Agreement by and between the
Company and disguise, dated as of October 1, 2015. The Company further advises the Staff that, based upon its review and consideration of its arrangements and relationship with disguise, will file its agreement with disguise as a material
contract as Exhibit 10.13 to a subsequent amendment to the Registration Statement.
We rely on a limited number of parts suppliers to support our
manufacturing…, page 13
4.
Please identify the two suppliers who accounted for approximately 46% of the materials purchased by the company in 2016 and provide a summary of the material terms of any agreements with these suppliers.
2
Securities and Exchange Commission
December 18, 2017
Page
3
In response to the Staff’s comment, the Company has revised the disclosure on page 15 to
identify that Concisys, Inc. and Exact Computers are the two significant suppliers referenced therein. The Company supplementally advises the Staff, that it has no definitive material agreements with the suppliers. In the event either or both of the
suppliers ceased doing business or providing materials to the Company, the Company believes it could locate other suppliers of materials sufficient to maintain its business operations.
We have identified material weaknesses in our internal control over financial reporting…, page 17
5.
Please disclose the steps you have taken to remediate the material weaknesses in your internal control over financial reporting and what remains to be completed in your remediation plan, if anything. Also,
disclose how long you estimate it will take to complete your plan and any material costs you have, or expect to be, incurred.
The Company supplementally advises the Staff that, to date, it has implemented and is continuing to implement a number of measures to address
the material weaknesses identified. Specifically, the Company has taken the following steps in its remediation plan:
•
To address the identified weaknesses surrounding segregation of duties, supervision and expertise, in September 2017, the Company hired a chief financial officer with appropriate experience applying GAAP technical
accounting guidance and has increased the number of hours worked by its contracted accounting personnel who are responsible for the closing process and external financial reporting. With the introduction of additional personnel, incompatible
functions with respect to the segregation of duties and the recording of a transaction (including the review and approval processes) are being reassigned to different personnel to strengthen the control environment.
•
To improve the quality and timing of the Company’s closing process and to improve the accuracy of financial reporting, the Company has begun implementing a formal closing process that follows a closing checklist
that includes reconciliation of all major balance sheet accounts, analytical procedures applied to all income statement accounts and review and approval of manual adjustments.
•
To strengthen the weaknesses in the control environment surrounding inventory and inventory valuation, the Company has and continues to evolve a new analytical process to identify slow-moving and obsolete inventory as
well as formalizing the methodology for application of labor overhead to inventory. The Company is also strengthening the controls regarding physical verification of inventory on-hand.
•
To improve its expertise with respect to non-recurring transactions, the
Company has hired and will continue to hire additional qualified resources with the requisite expertise. The Company is designing additional controls around identification, documentation and application of technical accounting guidance with
particular emphasis on events outside the ordinary course of business. These controls are
3
Securities and Exchange Commission
December 18, 2017
Page
4
expected to include implementation of additional supervision and review activities by qualified personnel that are independent from the transaction, the preparation of formal accounting
memorandum to support the Company’s conclusions on technical accounting matters and the development and use of checklists and research tools to assist in compliance with GAAP with regards to complex accounting issues.
The Company’s remediation plan also includes relevant and appropriate training on technical GAAP topics, as well as SEC reporting
requirements.
The Company intends to complete the implementation of its remediation plan during the first and second quarters of 2018.
Except for additional personnel costs, the Company has not incurred any material costs on its remediation plan to date as the Company has been implementing the plan internally. As the Company continues to evaluate and take actions to improve its
internal control over financial reporting, it may determine to take additional actions to address control deficiencies or determine to modify certain of the remediation measurements that the Company is anticipating to make which may include
retaining a third party to assist with the implementation of its remediation plan. The retention of third party service providers for purposes of remediation may involve the Company incurring material costs in the future.
If our involvement in a September 2017 CIO Review Article was held to be in violation…, page 26
6.
You provide an update to a financial measure included in the September 2017 CIO Review article, which quotes your CEO Steve Cooper that you are “emerging at a 58% growth margin annually.” Please revise
to explain what you mean by “growth margin annually” and disclose the period in which the 58% growth margin relates.
In response to the Staff’s comment, the Company has revised the disclosure on page 28 to include the period in which the revenue growth
rate relates and also to update the disclosure to provide the revenue growth rate as of September 30, 2017.
Use of Proceeds, page 29
7.
Please identify the lenders for any related party indebtedness. Also, disclose how the company used the loans that were incurred over the past year and will be repaid using the proceeds of this offering. See
Instruction 4 of Item 504 of Regulation S-K.
In response to the
Staff’s comment, the Company has revised the disclosure on page 30 to identify the lenders for the related party indebtedness and to explain the use of the loan proceeds incurred over the past year.
Capitalization, page 30
8.
Please revise your pro forma as adjusted information to reflect the repayment of debt with the proceeds from this offering.
4
Securities and Exchange Commission
December 18, 2017
Page
5
The Company supplementally advises the Staff that it will revise the disclosure on
page 31 related to pro forma as adjusted information in a subsequent amendment to the Registration Statement to reflect the repayment of debt with the proceeds from this offering once the Company has determined the amount of shares of common
stock for sale and initial public offering price per share in this offering.
Management’s Discussion and Analysis of Financial Condition and
Results or Operations
Business Developments, page 34
9.
Please revise to describe the material terms of your agreements to acquire the source code license to the Ion flash array software from Western Digital and service their existing customer base. For example,
clarify if any consideration was paid to Western Digital or if Western Digital will receive a commission, royalties or any revenue sharing from these arrangements.
In response to the Staff’s comment, the Company has revised the disclosure on page 35 to describe the material terms of its
agreements with Western Digital. The Company supplementally advises the Staff that it has included additional disclosures related to the Ion transaction with Western Digital in its Unaudited Condensed Consolidated Financial Statements for the nine
months ended September 30, 2017 and will supplementally file is Technology and Software Source Code License Agreement and Services Agreement with Western Digital as Exhibits 10.11 and 10.12, respectively, in a subsequent amendment to the
Registration Statement.
Liquidity and Capital Resources, page 44
10.
You disclose that you were not in compliance with certain financial and non-financial covenants as of June 30, 2017 and
December 31, 2016, but that you received waivers. Please specify the covenants with which you were not in compliance and the expiration date of the waivers. State in quantitative terms the extent of such
noncompliance with respect to each covenant in each reporting period. See Sections I.D and IV.C of the SEC Interpretive Release No. 33-8350. In a risk factor, also disclose the
impact of not meeting these covenants on your borrowing capacity under the agreement.
In response to the
Staff’s comment, the Company has revised the disclosure on page 45 to specify the details related to certain financial and non-financial covenants with which the Company is not in compliance and the
waivers of such non-compliance. The Company supplementally advises the Staff that it has added an additional risk factor on page 26 regarding its non-compliance and the
potential impact of a failure to receive such waivers in the future.
Business
Our Opportunity, page 61
5
Securities and Exchange Commission
December 18, 2017
Page
6
11.
Please clarify whether you have generated any material amounts of revenue from your Custom Built Servers, Cloud Services or Storage Management Services lines of business.
In response to the Staff’s comment, the Company has revised the disclosure on pages 66 and 70 to clarify its progress on its Cloud
Services and Storage Management Services lines of business. The Company supplementally advises the Staff that it has generated substantial revenue from its Custom Built Servers business, but not from its Cloud Services or Storage Management Services
lines of business. In addition, the inclusion of the Company’s Unaudited Condensed Consolidated Financial Statements for the nine months ended September 30, 2017 in the Registration Statement provide additional disclosures related to these
lines of business and their impact on its financial statements.
Competition, page 70
12.
Please revise to describe your competition outside of your OEM customers performing similar services in-house. We note that on pages 12 and 13 you reference
established competitors, third party competitive products, and new entrants to the your market.
In response to the
Staff’s comment, the Company has revised the disclosure on page 72 to further describe its competition outside of its OEM customers performing similar services in-house.
Management, page 73
13.
You disclose that you have two executive officers, CEO Steve Cooper and CFO John W. Morrison, Jr. On your website you list six other members of your management, including a senior vice president and
five vice presidents. Please advise us whether you have any additional executive officers, as defined by Rule 405 of Regulation C. To the extent any of these officers are a vice president in charge of a principal business unit, division or function
(such as sales, administration or finance), or any other officer who performs a policy making function or any other person who performs similar policy making functions for the registrant, please provide the disclosure required by Item 401(e) of
Regulation S-K.
In response to the Staff’s comment, the Company
respectfully advises the Staff that, in making its determination of who constitutes an executive officer under the Rules, the Company considered the substantive functions and responsibilities of the management team as opposed to titles and further
considered the fact that the Company does not currently have any separate principal business units, divisions or segments.
Based, in
part, on the recent comment letter from the Staff, senior management of the Company conducted a review of the