January 14, 2020
Tim Weller
Chief Executive Officer
Merritt Topco, Inc.
101 Merritt 7
Norwalk, CT 06851
Re: Merritt Topco, Inc.
Draft Registration Statement on Form S-1
Submitted December 18, 2019
CIK No. 0001724570
Dear Mr. Weller:
We have reviewed your draft registration statement and have the
following comments. In
some of our comments, we may ask you to provide us with information so we may
better
understand your disclosure.
Please respond to this letter by providing the requested information and
either submitting
an amended draft registration statement or publicly filing your registration
statement on
EDGAR. If you do not believe our comments apply to your facts and circumstances
or do not
believe an amendment is appropriate, please tell us why in your response.
After reviewing the information you provide in response to these comments
and your
amended draft registration statement or filed registration statement, we may
have additional
comments.
Draft Registration Statement on Form S-1 furnished December 18, 2019
Prospectus Cover Page, page 1
1. The name of your company on the registration statement cover page is
Merritt Topco,
Inc., but you identify yourself as Datto on the prospectus cover page.
Please clarify
whether it is your intention to rename Merritt Topco, Inc. prior to the
close of your initial
public offering. Further, please provide consistent definitions for the
term "Datto" and
clarify in the summary how you will refer to your operating subsidiary
Datto, Inc. to
distinguish it from the public parent entity.
2. On your cover page or summary, please highlight that Vista Equity
Partners and its
affiliates ("Vista") will have the right to nominate all but one of the
directors of the
company.
Tim Weller
Merritt Topco, Inc.
January 14, 2020
Page 2
Prospectus Summary, page 1
3. Please disclose the percentage of annual recurring revenue ("ARR")
generated from the
700 MSP partners that accounted for more than $100,000 ARR for each
period presented.
Risk Factors
We are an "emerging growth company" and we expect to elect to comply with
reduced public
company reporting requirements...., page 52
4. You state that you have elected to take advantage of the extended
transition period for
complying with new or revised accounting standards and, therefore,
will not be subject to
the same new or revised accounting standards as other public companies
that comply with
such new or revised accounting standards on a non-delayed basis.
Please revise to further
clarify that as a result of such election, your financial statements
may not be comparable
to companies that comply with public company effective dates.
Provisions of our corporate governance documents could make an acquisition of
us more
difficult ...., page 53
5. Please consider providing a separate risk factor that discusses the
risks associated with
your business combination provision that will contain similar
protections as Section 203
of the Delaware General Corporations Law. We note it appears that only
the Board may
be required to approve interested transactions under this provision.
Please discuss how
this provision would apply to interested transactions involving Vista
and portfolio
companies in its affiliated funds. For example, employees or members
of affiliates of
Vista are members of your board and Vista currently has nomination
rights for all but one
of your directors. Also, please discuss the resulting conflict of
interests of any transaction
involving Vista and how this provision expires in 3 years.
A significant amount of our total outstanding shares are restricted from
immediate resale ....,
page 56
6. Please expand this risk factor to clarify that in addition to the fact
that future resales of
your shares may depress the market price for your shares, you may have
difficulty raising
additional capital. Further, clarify that you have a registration
rights agreement with
Vista, and that if Vista resells a significant amount of its shares
pursuant to this agreement
you will not receive the proceeds from those offerings.
Use of Proceeds, page 62
7. We note that you plan on using a portion of the proceeds from this
offering to repay
FirstName LastNameTim Weller
outstanding borrowings under your term loan facility. We also note that
your equity
Comapany NameMerritt your predecessor Datto, Inc. in 2017. Disclose whether a
significant
sponsor acquired Topco, Inc.
January 14, 2020 your borrowings was used to pay the purchase price for Datto,
Inc.
portion of Page 2
FirstName LastName
Tim Weller
FirstName LastNameTim Weller
Merritt Topco, Inc.
Comapany NameMerritt Topco, Inc.
January 14, 2020
Page 3
January 14, 2020 Page 3
FirstName LastName
Management's Discussion and Analysis of Financial Condition and Results of
Operations
Overview, page 70
8. We note your discussion throughout your prospectus of the numerous
risks that Brexit
poses to the company's financial condition and results of operations.
Please expand this
discussion to disclose what steps, if any, management is preparing to
take to mitigate and
manage the risks posed to the company's business if a "hard" Brexit
occurs (e.g. no
agreements on data migration between the U.K. and the European Union).
Key Performance Metrics, page 74
9. You state that your contracts typically begin with a 1-year or 3-year
term and auto-renew
on a monthly or annual basis thereafter. Please tell us whether your
ARR calculations
include the annualized value of monthly contracts, and if so, explain
your basis for
annualizing revenue from such customers. In your response, please
provide us with
cancellation/attrition rates or, alternatively, renewal rates for your
monthly subscribers
and tell us the amount of revenue recognized from monthly subscriber
for each period
presented. Also, revise your disclosures related to the ARR
calculations to address the
inclusion of monthly subscriptions, to the extent material.
10. The pricing of your subscription services appears to be dependent upon
SMB user seats,
MSP seats, or endpoints. Please provide a description of these terms
and advise us
whether they would be considered key performance indicators.
Business, page 89
11. Please include a discussion regarding the development and description
of each of the
company and its primary operating subsidiaries, Merritt HoldCo, Inc.
and Datto, Inc.
Also, describe further the transactions between Vista and both Datto,
Inc. and Autotask
Superior Holding, Inc. that formed the basis of your operating
company. Include a
description of the consideration transferred and clarify whether these
transactions included
any related party interests. Refer to Item 101(a)(1) of Regulation
S-K.
Our Market Opportunity, page 96
12. Please provide a more detailed discussion of how Frost & Sullivan
estimated your
addressable market to be approximately $28 billion in 2019. Include
any material
assumptions Frost & Sullivan made and provide a more detailed
explanation of their
methodology. Further, given that 77% of your revenues are generated in
the United
States, please clarify, if known, how much of your addressable market
was based on
foreign markets and/or markets in which you currently do not have
operations.
Our Products, page 97
13. We note that you derive approximately $50.5 million in revenue from
devices in both your
Unified Continuity and Networking Solutions. Please provide a clearer
description of
Tim Weller
FirstName LastNameTim Weller
Merritt Topco, Inc.
Comapany NameMerritt Topco, Inc.
January 14, 2020
January 14, 2020 Page 4
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FirstName LastName
what products within each solution comprise device revenue, and
whether
devices constitute a material amount of revenue in each category. For
example, it is
unclear whether Networking Solutions are mostly device sales, and what
percentage of
Unified Continuity revenues are from devices.
14. Please clarify how you obtain your devices. You reference the use of
manufacturing
partners, but it is unclear whether you are designing proprietary
devices that are protected
through patents and made through the use of contract manufacturers.
The risk factor on
page 24 mentions the use of manufacturing partners, but does not
indicate whether your
third party manufactured devices are off-the-shelf existing products
or are significantly
different from products offered to MSPs by other vendors.
15. Please consider disclosing the revenue for Unified Continuity,
Networking, and Business
Management Solutions. It is unclear how significant each product
category is to your
business.
16. Please explain further the termination provisions included in the MSP
partner agreements.
In this regard, on page 21 you state that such agreements may be
terminated for any
reason by either party with advance notice prior to each annual or
monthly renewal date.
For example, clarify whether an MSP partner can terminate their annual
subscription in
the middle of the subscription term or whether termination can only be
effective upon the
renewal date. If the former is the case, state whether the MSP is
subject to penalties if
they terminate before the end of the contract term.
Marketing and Sales, page 103
17. Please clarify whether your sales teams operate across your different
solutions. For
example, it is not clear whether each MSP is assigned separate sales
representatives for
each solution category, or if they are assigned a single sales team or
representative that
provides sales for all of your solutions.
Description of Certain Indebtedness, page 124
18. You describe that your business plan includes strategic acquisitions
to supplement the
offerings provided in your platform. The negative covenants described
on page 125 and
in the risk factor on pages 48-49 include making investments, merging,
incurring
contingent obligations and other items. Please clarify the exceptions
to these negative
covenants and whether the negative covenants will significantly
restrict your ability to
proceed with an acquisition strategy, or require a waiver from your
lender.
Description of Capital Stock, page 127
19. In this section, you describe certain anti-takeover provisions, such
as shareholder action
by written consent, the ability to call a special meeting, advanced
notice provisions,
removal of directors, and supermajority voting provisions that will
change if Vista reduces
its beneficial ownership below varying percentages. Please clarify
here and in the related
Tim Weller
FirstName LastNameTim Weller
Merritt Topco, Inc.
Comapany NameMerritt Topco, Inc.
January 14, 2020
January 14, 2020 Page 5
Page 5
FirstName LastName
risk factors that the changes in your corporate governance documents
as Vista reduces its
beneficial ownership below the respective thresholds will increase the
anti-takeover effect
of these provisions. Further, clarify the mechanics of how these
changes will be
implemented, such as whether they will be effective immediately after
Vista files its
beneficial ownership reports showing it holdings are below the
relevant thresholds, or
whether it requires further action by the board or otherwise. Also,
please clarify how you
will notify public investors as to changes in your corporate
governance due to changes in
beneficial ownership of Vista and its affiliates falling below these
ownership thresholds.
Underwriting, page 141
20. Please identify your underwriters in your next amendment. Further, on
page 145, please
describe if your lead underwriters have provided you any material
services beyond their
underwriting activities pursuant to your underwriting agreement, such
as providing
financing.
21. Please clarify the "certain exceptions" to the 180-day lock up
agreement and whether
these exceptions apply to all parties to the agreement.
Notes to Consolidated Financial Statements
Note 7. Goodwill and Intangible Assets, net, page F-22
22. Considering the apparent magnitude of goodwill recognized in the Datto
acquisition,
please explain to us the terms of this transaction and provide us with
the acquisition-date
fair value of the total consideration transferred. Tell us the factors
that make up the
goodwill recognized, such as the specific synergies you identified,
the relative magnitude
of each synergy, the intangible assets that did not qualify for
separate recognition, or other
factors considered. Also, when performing the purchase price
allocation for this
acquisition, explain further how you determined the fair value of the
other intangible
assets acquired. Similar information should be provided as it relates
to the Autotask
transaction, to the extent material.
23. Please tell us how you determined the useful lives of your technology
and customer
relationship intangible assets, citing the relevant accounting
guidance outlined in ASC
350-30-35-1 through 35-5.
18. Subsequent Events
Stock Options Grants, page F-34
24. Please provide us with a breakdown of all options granted in fiscal
2019 and to date in
fiscal 2020, and include the fair value of the underlying common stock
at the date of such
grants as determined by your board of directors. To the extent there
were any significant
fluctuations in the fair value prices from period-to-period, describe
for us the factors that
contributed to these fluctuations, including any intervening events
within the company or
changes in your valuation assumptions or methodology, underlying
common stock used to
value such awards as determined by your board of directors.
Tim Weller
Merritt Topco, Inc.
January 14, 2020
Page 6
You may contact Brittany Ebbertt, Senior Staff Accountant, at (202)
551-3572 or
Kathleen Collins, Accounting Branch Chief, at (202) 551-3499 if you have
questions regarding
comments on the financial statements and related matters. Please contact Edwin
Kim, Attorney-
Advisor, at (202) 551-3297 or Larry Spirgel, Office Chief, at (202) 551-3815
with any other
questions.
Sincerely,
FirstName LastNameTim Weller
Division of
Corporation Finance
Comapany NameMerritt Topco, Inc.
Office of Technology
January 14, 2020 Page 6
cc: Robert E. Goedert, P.C.
FirstName LastName