SEC Company Response from XTI Aerospace, Inc. (XTIA) (CIK 0001529113) (XTIA) — Jan 21, 2014
XTI Aerospace, Inc. (XTIA) (CIK 0001529113)
Date: Jan. 21, 2014 · CIK: 0001529113 · Accession: 0001398432-14-000011
AI Filing Summary & Sentiment
Reasoning
File numbers found in text: 333-191648
Referenced dates: December 6, 2013, January 2, 2014, October 9, 2013
Letter
Via Edgar Correspondence Division of Corporation Finance Securities and Exchange Commission Sysorex Global Holdings Corp. Amendment No. 2 to Registration Statement on Form S-1 Filed December 9, 2013 File No. 333-191648
Dear Sir or Madam:
This letter is in response to the comments contained in the Staff’s letter to Sysorex Global Holdings Corp. (the “Company”), dated January 2, 2014 (the “Staff’s Letter”), concerning the Company’s Registration Statement on Form S-1 (File No. 333-191648), including all amendments thereto (the “Registration Statement”) filed with the Securities and Exchange Commission. We have filed an amendment to the Registration Statement (the “Amendment No. 3”) concurrently with this letter incorporating and/or responding to the requested changes.
The comments set forth in the Staff’s Letter are repeated below and, for convenience of reference, the number beside each of the following comments corresponds to the same paragraph number in the Staff’s Letter.
Prospectus Summary
The Company
Overview, page 3
1.
Your response to prior comment 3 does not provide sufficient information to support your conclusion that the two segments identified in the second and third bullet points of your response meet the criteria for aggregation. Provide an analysis that presents disaggregated data for each of your three segments and apply each of the quantitative tests set forth in paragraph 12 of ASC 280-10-50. Please ensure that you address each of the criteria in paragraph 12, including 12(b)(1) and 12(b)(2).
The Company has amended the disclosure in its Registration Statement to provide segment reporting disclosure and after discussions with the Staff determined that it would not be necessary to provide the requested analysis. Please refer to pages 44-45 and F-25 of the Amendment No. 3.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Critical Accounting Policies
Stock-Based Compensation, page 40
2.
We note that you have included a lengthy description of the valuation process and certain variables and methods employed. Revise to include a discussion of the process specific to each valuation date. That is, revise to describe how the methods you describe were applied as of March 20, 2013 and August 31, 2013 in order to establish the fair value of your equity shares of $1.00 and $2.03, respectively.
The Company has revised its disclosure in the Registration Statement to include a discussion of the valuation process specific to each valuation date, including a description of how the methods described were applied as of March 20, 2013 and August 31, 2013 in order to establish the fair value of our equity shares of $1.00 ($2.00 post-split) and $2.03 ($4.06 post-split), respectively, after giving effect to the reverse stock split. Please refer to pages 41-43 of the Amendment No. 3.
3.
Discuss the factors that have contributed to the increase in the fair value at the most recent valuation date, August 31, 2013, and the assumed offering price of $5.50, giving effect to any share splits or reverse splits.
The Company has revised its disclosure in the Registration Statement to discuss the factors that have contributed to the increase in the fair value of the Company’s equity shares from $4.06 at the most recent valuation date, August 31, 2013, and the assumed offering price of $5.50, after giving effect to an assumed 1 for 2 reverse stock split. Please refer to page 43 of the Amendment No. 3.
4.
Revise this section in order to provide a narrative from management’s viewpoint. As an example, we note instances where you describe “discussions with management” that may be confusing in this context as the purpose of this disclosure is to explain the steps management took when estimating the fair value of your shares at each point in time.
In response to the Staff’s comment, the Company has revised its disclosure accordingly.
Sysorex Global Holdings, Corp.
Notes to Condensed Consolidated Financial Statements (Unaudited)
Note 3 – Significant Accounting Policies and Recent Accounting Pronouncements
Revenue Recognition, page F-10
5.
We note that in response to prior comment 4 you have expanded your disclosure describing the terms of Lilien’s long-term contracts. Your revised disclosure indicates that “customers may cancel and request a refund of unused maintenance/warranty services.” Please tell us whether customers have a unilateral right to cancel and receive a refund and when such cancellation and refund privileges lapse. Explain how you considered these provisions in determining whether your fees are fixed or determinable. Refer to SAB Topic 13A4.
Customers that have purchased maintenance/warranty services have a right to cancel and receive a refund of the amounts paid for unused services at any time during the service period upon 30 days advance written notice to Lilien. Such a refund is available only with respect to the portion of the maintenance and warranty services that have not yet been provided. Cancellation and refund privileges with respect to maintenance/warranty services lapse as to any period during the term of the agreement for which such services have already been provided. Customers do not have the right to a refund of paid fees for maintenance/warranty services that Lilien has earned and recognized as revenue. Invoices issued for maintenance/warranty services not yet rendered are recorded as deferred revenue and then recognized as revenue ratably over the service period as the fees are earned. As a result (1) the warranty and maintenance service fees payable by each customer are separately accounted for in each customer purchase order as a separate line item, and (2) upon Lilien’s receipt and acceptance of a request for refund of maintenance/warranty services not yet provided, Lilien’s obligation to perform any additional maintenance/warranty services will end. Therefore, as described in SAB Topic 13A4, paragraph (a), the Company considers fees received for maintenance/warranty services to be fixed and determinable ratably over the stated service period, consistent with the Company’s revenue recognition policy in respect of such fees.
We have amended our Registration Statement in order to clarify the foregoing. Please refer to pages 19 and F-10 of the Amendment No. 3.
6.
We are continuing to evaluate your responses to prior comments 9 and 23 contained in your correspondence dated December 6, 2013 and November 12, 2013, respectively.
The Company is clarifying its prior response to comment 9 and comment 23 contained in our correspondence to the Staff dated December 6, 2013 and November 12, 2013, respectively, to specify that the maintenance service relationship with a customer is generally documented by three separate agreements, including:
(a)
an agreement between Lilien and the customer, which is documented either by the Lilien Master Services Agreement (MSA) and Master Statement of Work or the customer’s service or vendor agreement or statement of work as referenced in our response to comment 34 in our correspondence to the Staff dated October 9, 2013 (in either case, the “Customer Agreement”);
(b)
an agreement between Lilien and the OEM or product distributor (“Distributor Service Agreement”) pursuant to which Lilien has purchased the products or warranty services that are resold to its customers; and
(c)
the previously referenced “three party agreement” which (i) identifies the Lilien customer for whose benefit Lilien purchased the services, with the Lilien customer identified as the end user of such services; (ii) sets forth the maintenance/warranty services sold to Lilien and to which the customer is entitled, whether provided by Lilien or the OEM, as further described below and (iii) identifies the OEM or distributor (the “Customer Service Agreement”).
The Customer Agreement establishes Lilien as the primary obligor to the customer for the provision of maintenance/warranty services to which the customer is entitled, even if such services are ultimately provided by the OEM or distributor. In addition, Lilien is responsible to the OEM for the costs of the OEM associated with providing such services pursuant to the Distributor Service Agreement. The OEM or distributor is only obligated to the Lilien customer as a result of its obligations to Lilien pursuant to the Distributor Service Agreement and Customer Service Agreement. While it is possible that the customer may contact the OEM or distributor for maintenance services, in most cases the customer will first contact Lilien who will diagnose the problem and perform the required services to the extent possible. In order to provide such support services, Lilien has employees who have received the required training and hold certifications issued by the OEMs and industry associations relating to the configuration, installation and servicing of the products purchased. If Lilien’s staff is not able to first resolve the problem directly for the customer, the issue is then referred to the applicable OEM partner for services in accordance with the Distributor Service Agreement and Customer Service Agreement.
As further described below under the response to the first bullet point, while we have some customer relationships that are not documented with a master “Customer Agreement” they are documented with a written quote or purchase order and the Customer Service Agreement or previously referenced “three party agreement”. It is the Company’s policy to process any maintenance/warranty services as described above.
·
Provide us with a copy of the standard “three party agreement” referred to in your response to prior comment 9. Confirm, if true, that all customer agreements are documented in this manner.
In response to the Staff’s comment, the Company has provided the Staff on a supplemental basis with a copy of the referenced “three party agreement” (Exhibit A). Customer relationships representing approximately 80% of our revenues are documented in the manner described at the beginning of this comment response with a master “Customer Agreement”. The remainder of our customer relationships are not documented with a master “Customer Agreement” but are documented with a written quote or purchase order and the Customer Service Agreement or previously referenced “three party agreement”. It is the Company’s policy to represent all customers as described herein whether such relationships are subject to a formal written agreement or otherwise.
·
Tell us how suppliers are selected. In this regard, we note from your response that you select providers based on what you believe is the best fit for the customer following your assessment of customers’ needs. Tell us whether these services are typically provided by the OEM of the hardware purchased. In addition, we note that you “generally” do not have separate contracts “with each party of [sic] their maintenance and warranty contracts.” Please explain to which party you refer in your response and quantify the frequency of “generally.” Tell us if your re-sales are subject to any form of master agreements with suppliers.
The Company only sells maintenance services to service the hardware purchased by the customer. Therefore, the supplier selected to provide any purchased maintenance services will be the OEM or distributor of the hardware purchased; provided, however, that Lilien serves as the initial contact to diagnose any issues experienced by the customer and, if possible, to provide the required service prior to notifying the OEM or distributor.
The party that we were referring to in the prior statement that we “generally” do not have separate contracts “with each party of [sic] their maintenance and warranty contracts” is a reference to our customers that have purchased maintenance and warranty services not pursuant to a master Customer Agreement, but with a quote or purchase order as described above in the Company’s response to the first bullet point of this comment. We are clarifying our prior statement to indicate that customers representing approximately 80% of our revenues are documented with a master Customer Agreement, while the remainder are documented with a quote or purchase order. Our re-sales are subject to the Distributor Service Agreements described above which are typically in the form provided by our OEMs and distributors; provided however, that Lilien has the right to resell products and services to its customers at any price that it shall determine to be acceptable.
·
Describe how the price Lilien pays to your suppliers is determined for each three party agreement.
The price paid by Lilien to its suppliers is determined and negotiated between Lilien and the OEM or distributor in accordance with the Distributor Service Agreements.
·
Explain further how you concluded that you are the primary obligor when the warranty is provided by the OEM and technical support and maintenance issues are directly handled by the manufacturer. Further explain why you believe you are responsible for fulfilment in light of your statement in your November 12, 2013 letter that “third-party service provider is responsible for day-to-day maintenance services to [y]our customer.”
The Company is the primary obligor with respect to the customer and the services purchased by the customer, whether such services are ultimately provided by the OEM or distributor in accordance with the terms of the Customer Agreements. Eighty percent of our revenues are covered by master Customer Agreements that obligate the Company to represent and warrant the product and maintenance warranty services purchased by the customer even if delivered by the OEM or distributor. The Company is also required, either in accordance with the terms of the Customer Agreements or pursuant to its own policies, to assist the customer in connection with enforcing any maintenance or warranty services provided by the OEM or distributor, and as stated above will initially diagnose the problem and respond to the initial service request, referring the issue to the OEM or distributor only if Lilien is unable to adequately service the customer first. As a result, the Company is clarifying its prior statement to indicate that Lilien is responsible to the customer for ensuring all day to day maintenance services are provided to the customer, whether such services are ultimately provided by Lilien or by the OEM. To the extent that any customer relationship is not specifically documented with a formal Customer Agreement, it is the Company’s policy to treat all customer relationships as described above.
·
Explain further how you determined that you have inventory risk given that refunds are “often” obtained from suppliers.
There is inventory risk between Lilien and the customer. Customers seeking a valid refund with respect to any products or services provided will generally obtain a credit from Lilien pursuant to the terms of the existing Customer Agreements, irrespective of any refund obtained by Lilien from the supplier. After Lilien has already granted a refund to a customer, Lilien will generally obtain a corresponding refund or credit, but not necessarily, from the supplier pursuant to the terms of the Distributor Service Agreements. Therefore, to the extent that any supplier may determine not to issue a refund or that any product or service is not eligible under a manufacturer warranty, Lilien bears the inventory risk with respect to the customer. To the extent that any customer relationship is not specifically documented with a formal Customer Agreement, it is the Company’s policy to bear such risk.
Note 4 – Business Combination, page F-10
7.
We are continuing to evaluate your response to prior comment 10
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CORRESP 1 filename1.htm CORRESP January 21, 2014 Via Edgar Correspondence Barbara C. Jacobs Assistant Director Division of Corporation Finance Securities and Exchange Commission 100 F Street, N.E. Washington, DC 20549 Re: Sysorex Global Holdings Corp. Amendment No. 2 to Registration Statement on Form S-1 Filed December 9, 2013 File No. 333-191648 Dear Sir or Madam: This letter is in response to the comments contained in the Staff’s letter to Sysorex Global Holdings Corp. (the “Company”), dated January 2, 2014 (the “Staff’s Letter”), concerning the Company’s Registration Statement on Form S-1 (File No. 333-191648), including all amendments thereto (the “Registration Statement”) filed with the Securities and Exchange Commission. We have filed an amendment to the Registration Statement (the “Amendment No. 3”) concurrently with this letter incorporating and/or responding to the requested changes. The comments set forth in the Staff’s Letter are repeated below and, for convenience of reference, the number beside each of the following comments corresponds to the same paragraph number in the Staff’s Letter. Prospectus Summary The Company Overview, page 3 1. Your response to prior comment 3 does not provide sufficient information to support your conclusion that the two segments identified in the second and third bullet points of your response meet the criteria for aggregation. Provide an analysis that presents disaggregated data for each of your three segments and apply each of the quantitative tests set forth in paragraph 12 of ASC 280-10-50. Please ensure that you address each of the criteria in paragraph 12, including 12(b)(1) and 12(b)(2). The Company has amended the disclosure in its Registration Statement to provide segment reporting disclosure and after discussions with the Staff determined that it would not be necessary to provide the requested analysis. Please refer to pages 44-45 and F-25 of the Amendment No. 3. Management’s Discussion and Analysis of Financial Condition and Results of Operations Critical Accounting Policies Stock-Based Compensation, page 40 2. We note that you have included a lengthy description of the valuation process and certain variables and methods employed. Revise to include a discussion of the process specific to each valuation date. That is, revise to describe how the methods you describe were applied as of March 20, 2013 and August 31, 2013 in order to establish the fair value of your equity shares of $1.00 and $2.03, respectively. The Company has revised its disclosure in the Registration Statement to include a discussion of the valuation process specific to each valuation date, including a description of how the methods described were applied as of March 20, 2013 and August 31, 2013 in order to establish the fair value of our equity shares of $1.00 ($2.00 post-split) and $2.03 ($4.06 post-split), respectively, after giving effect to the reverse stock split. Please refer to pages 41-43 of the Amendment No. 3. 3. Discuss the factors that have contributed to the increase in the fair value at the most recent valuation date, August 31, 2013, and the assumed offering price of $5.50, giving effect to any share splits or reverse splits. The Company has revised its disclosure in the Registration Statement to discuss the factors that have contributed to the increase in the fair value of the Company’s equity shares from $4.06 at the most recent valuation date, August 31, 2013, and the assumed offering price of $5.50, after giving effect to an assumed 1 for 2 reverse stock split. Please refer to page 43 of the Amendment No. 3. 4. Revise this section in order to provide a narrative from management’s viewpoint. As an example, we note instances where you describe “discussions with management” that may be confusing in this context as the purpose of this disclosure is to explain the steps management took when estimating the fair value of your shares at each point in time. In response to the Staff’s comment, the Company has revised its disclosure accordingly. Sysorex Global Holdings, Corp. Notes to Condensed Consolidated Financial Statements (Unaudited) Note 3 – Significant Accounting Policies and Recent Accounting Pronouncements Revenue Recognition, page F-10 5. We note that in response to prior comment 4 you have expanded your disclosure describing the terms of Lilien’s long-term contracts. Your revised disclosure indicates that “customers may cancel and request a refund of unused maintenance/warranty services.” Please tell us whether customers have a unilateral right to cancel and receive a refund and when such cancellation and refund privileges lapse. Explain how you considered these provisions in determining whether your fees are fixed or determinable. Refer to SAB Topic 13A4. Customers that have purchased maintenance/warranty services have a right to cancel and receive a refund of the amounts paid for unused services at any time during the service period upon 30 days advance written notice to Lilien. Such a refund is available only with respect to the portion of the maintenance and warranty services that have not yet been provided. Cancellation and refund privileges with respect to maintenance/warranty services lapse as to any period during the term of the agreement for which such services have already been provided. Customers do not have the right to a refund of paid fees for maintenance/warranty services that Lilien has earned and recognized as revenue. Invoices issued for maintenance/warranty services not yet rendered are recorded as deferred revenue and then recognized as revenue ratably over the service period as the fees are earned. As a result (1) the warranty and maintenance service fees payable by each customer are separately accounted for in each customer purchase order as a separate line item, and (2) upon Lilien’s receipt and acceptance of a request for refund of maintenance/warranty services not yet provided, Lilien’s obligation to perform any additional maintenance/warranty services will end. Therefore, as described in SAB Topic 13A4, paragraph (a), the Company considers fees received for maintenance/warranty services to be fixed and determinable ratably over the stated service period, consistent with the Company’s revenue recognition policy in respect of such fees. We have amended our Registration Statement in order to clarify the foregoing. Please refer to pages 19 and F-10 of the Amendment No. 3. 6. We are continuing to evaluate your responses to prior comments 9 and 23 contained in your correspondence dated December 6, 2013 and November 12, 2013, respectively. The Company is clarifying its prior response to comment 9 and comment 23 contained in our correspondence to the Staff dated December 6, 2013 and November 12, 2013, respectively, to specify that the maintenance service relationship with a customer is generally documented by three separate agreements, including: (a) an agreement between Lilien and the customer, which is documented either by the Lilien Master Services Agreement (MSA) and Master Statement of Work or the customer’s service or vendor agreement or statement of work as referenced in our response to comment 34 in our correspondence to the Staff dated October 9, 2013 (in either case, the “Customer Agreement”); (b) an agreement between Lilien and the OEM or product distributor (“Distributor Service Agreement”) pursuant to which Lilien has purchased the products or warranty services that are resold to its customers; and (c) the previously referenced “three party agreement” which (i) identifies the Lilien customer for whose benefit Lilien purchased the services, with the Lilien customer identified as the end user of such services; (ii) sets forth the maintenance/warranty services sold to Lilien and to which the customer is entitled, whether provided by Lilien or the OEM, as further described below and (iii) identifies the OEM or distributor (the “Customer Service Agreement”). The Customer Agreement establishes Lilien as the primary obligor to the customer for the provision of maintenance/warranty services to which the customer is entitled, even if such services are ultimately provided by the OEM or distributor. In addition, Lilien is responsible to the OEM for the costs of the OEM associated with providing such services pursuant to the Distributor Service Agreement. The OEM or distributor is only obligated to the Lilien customer as a result of its obligations to Lilien pursuant to the Distributor Service Agreement and Customer Service Agreement. While it is possible that the customer may contact the OEM or distributor for maintenance services, in most cases the customer will first contact Lilien who will diagnose the problem and perform the required services to the extent possible. In order to provide such support services, Lilien has employees who have received the required training and hold certifications issued by the OEMs and industry associations relating to the configuration, installation and servicing of the products purchased. If Lilien’s staff is not able to first resolve the problem directly for the customer, the issue is then referred to the applicable OEM partner for services in accordance with the Distributor Service Agreement and Customer Service Agreement. 2 As further described below under the response to the first bullet point, while we have some customer relationships that are not documented with a master “Customer Agreement” they are documented with a written quote or purchase order and the Customer Service Agreement or previously referenced “three party agreement”. It is the Company’s policy to process any maintenance/warranty services as described above. · Provide us with a copy of the standard “three party agreement” referred to in your response to prior comment 9. Confirm, if true, that all customer agreements are documented in this manner. In response to the Staff’s comment, the Company has provided the Staff on a supplemental basis with a copy of the referenced “three party agreement” (Exhibit A). Customer relationships representing approximately 80% of our revenues are documented in the manner described at the beginning of this comment response with a master “Customer Agreement”. The remainder of our customer relationships are not documented with a master “Customer Agreement” but are documented with a written quote or purchase order and the Customer Service Agreement or previously referenced “three party agreement”. It is the Company’s policy to represent all customers as described herein whether such relationships are subject to a formal written agreement or otherwise. · Tell us how suppliers are selected. In this regard, we note from your response that you select providers based on what you believe is the best fit for the customer following your assessment of customers’ needs. Tell us whether these services are typically provided by the OEM of the hardware purchased. In addition, we note that you “generally” do not have separate contracts “with each party of [sic] their maintenance and warranty contracts.” Please explain to which party you refer in your response and quantify the frequency of “generally.” Tell us if your re-sales are subject to any form of master agreements with suppliers. The Company only sells maintenance services to service the hardware purchased by the customer. Therefore, the supplier selected to provide any purchased maintenance services will be the OEM or distributor of the hardware purchased; provided, however, that Lilien serves as the initial contact to diagnose any issues experienced by the customer and, if possible, to provide the required service prior to notifying the OEM or distributor. The party that we were referring to in the prior statement that we “generally” do not have separate contracts “with each party of [sic] their maintenance and warranty contracts” is a reference to our customers that have purchased maintenance and warranty services not pursuant to a master Customer Agreement, but with a quote or purchase order as described above in the Company’s response to the first bullet point of this comment. We are clarifying our prior statement to indicate that customers representing approximately 80% of our revenues are documented with a master Customer Agreement, while the remainder are documented with a quote or purchase order. Our re-sales are subject to the Distributor Service Agreements described above which are typically in the form provided by our OEMs and distributors; provided however, that Lilien has the right to resell products and services to its customers at any price that it shall determine to be acceptable. · Describe how the price Lilien pays to your suppliers is determined for each three party agreement. The price paid by Lilien to its suppliers is determined and negotiated between Lilien and the OEM or distributor in accordance with the Distributor Service Agreements. · Explain further how you concluded that you are the primary obligor when the warranty is provided by the OEM and technical support and maintenance issues are directly handled by the manufacturer. Further explain why you believe you are responsible for fulfilment in light of your statement in your November 12, 2013 letter that “third-party service provider is responsible for day-to-day maintenance services to [y]our customer.” The Company is the primary obligor with respect to the customer and the services purchased by the customer, whether such services are ultimately provided by the OEM or distributor in accordance with the terms of the Customer Agreements. Eighty percent of our revenues are covered by master Customer Agreements that obligate the Company to represent and warrant the product and maintenance warranty services purchased by the customer even if delivered by the OEM or distributor. The Company is also required, either in accordance with the terms of the Customer Agreements or pursuant to its own policies, to assist the customer in connection with enforcing any maintenance or warranty services provided by the OEM or distributor, and as stated above will initially diagnose the problem and respond to the initial service request, referring the issue to the OEM or distributor only if Lilien is unable to adequately service the customer first. As a result, the Company is clarifying its prior statement to indicate that Lilien is responsible to the customer for ensuring all day to day maintenance services are provided to the customer, whether such services are ultimately provided by Lilien or by the OEM. To the extent that any customer relationship is not specifically documented with a formal Customer Agreement, it is the Company’s policy to treat all customer relationships as described above. · Explain further how you determined that you have inventory risk given that refunds are “often” obtained from suppliers. 3 There is inventory risk between Lilien and the customer. Customers seeking a valid refund with respect to any products or services provided will generally obtain a credit from Lilien pursuant to the terms of the existing Customer Agreements, irrespective of any refund obtained by Lilien from the supplier. After Lilien has already granted a refund to a customer, Lilien will generally obtain a corresponding refund or credit, but not necessarily, from the supplier pursuant to the terms of the Distributor Service Agreements. Therefore, to the extent that any supplier may determine not to issue a refund or that any product or service is not eligible under a manufacturer warranty, Lilien bears the inventory risk with respect to the customer. To the extent that any customer relationship is not specifically documented with a formal Customer Agreement, it is the Company’s policy to bear such risk. Note 4 – Business Combination, page F-10 7. We are continuing to evaluate your response to prior comment 10