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May 31, 2019
David Katzman
Chief Executive Officer
SmileDirectClub, Inc.
414 Union Street
Nashville, Tennessee 37219
Re: SmileDirectClub, Inc.
Draft Registration Statement on Form S-1
Submitted May 3, 2019
CIK No. 0001775625
Dear Mr. Katzman:
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.
Form S-1 Confidentially Submitted on May 3, 2019
Our Company, page 1
1. Where you discuss your potion in the direct-to-consumer clear aligner
industry, balance
your disclosure to clarify your position in the clear aligners market as
a whole.
2. Where you mention 85% of people worldwide suffer from malocclusion,
clarify the
percentage portion that represent your addressable market. Also, define
malocclusion
here and "CRM" on page 9.
David Katzman
FirstName LastNameDavid Katzman
SmileDirectClub, Inc.
Comapany NameSmileDirectClub, Inc.
May 31, 2019
May 31, 2019 Page 2
Page 2
FirstName LastName
3. Clarify the types of products included in your traditional orthodontic
model. In this
regard, does your model include both metal braces and clear aligners?
Also, balance your
disclosure to discuss any material disadvantages of your product
compared to the
traditional orthodontic model.
4. Please provide a breakdown of your calculations for your U.S. and
worldwide opportunity
to clarify how your addressable market calculations are representative
of the markets you
currently serve. For example, do your calculations reflect estimates
of individuals you are
currently able to treat for mild-to-moderate malocclusion or do your
calculations include
estimates of individuals beyond mild-to-moderate malocclusion? Also,
supplementally
provide the Frost and Sullivan report marked to support the relevant
statements in your
prospectus.
SmilePay captive financing..., page 8
5. Revise to include that your SmilePay financing option does not require
a credit check as
well as the delinquency rate and the subsequent reduction in revenue
as disclosed on page
30.
Implications of Being an Emerging Growth Company, page 10
6. Please supplementally provide us with copies of all written
communications, as defined in
Rule 405 under the Securities Act, that you, or anyone authorized to
do so on your behalf,
present to potential investors in reliance on Section 5(d) of the
Securities Act, whether or
not they retain copies of the communications.
Risk Factors, page 23
7. We note your disclosure on page 119 that your chief executive officer
is a consultant and
provides services to several entitites on behalf of Camelot. Please
provide an appropriate
risk factor to disclose the number of hours per week that he devotes
to your operations.
Also address the limitations on the time and attention that he is able
to devote to the
company, any potential conflicts of interest faced by him as a result
of such activity, and
any procedures for addressing potential conflicts of interest.
8. Please provide risk factor disclosure that your dual class structure
could inhibit inclusion
in certain stock market indices, and thus adversely affect share price
and liquidity.
We offer a financing option..., page 32
9. We note your disclosed delinquency rate and resulting reduction in
revenue as of
December 31, 2018. Please provide the delinquency rate and resulting
revenue
reduction for each period presented, and discuss any delinquency rate
volatility or
unpredictability in recent years, given that the financing option does
not require a credit
check.
David Katzman
FirstName LastNameDavid Katzman
SmileDirectClub, Inc.
Comapany NameSmileDirectClub, Inc.
May 31, 2019
May 31, 2019 Page 3
Page 3
FirstName LastName
We are subject to data privacy and security laws and regulations..., page 41
10. Please revise the last paragraph of this risk factor to discuss
Canada's privacy rules.
After the completion of this offering, pursuant to the Voting Agreement...,
page 45
11. Please disclose the percentage of outstanding shares that Class B
holders must keep to
continue to control the outcome of matters submitted to stockholders.
Investors in this offering will experience immediate and substantial dilution,
page 53
12. Please disclose that future issuances of Class B common stock may be
dilutive to Class A
stockholders.
Use of Proceeds, page 61
13. Please quantify the amount of proceeds you intend to cause SDC
Financial to use for each
purpose specified in the second indented paragraph.
Dilution, page 64
14. Please expand to disclose how the amounts and percentages in the table
on page 65 would
change assuming the exercise of all outstanding warrants and
subsequent exchange of
LLC units for Class A common stock on a one-for-one basis.
Key Business Metrics
Average sale price, page 73
15. You describe that average sale price is based on revenue from aligner
orders shipped.
Please clarify if this represents revenue as reflected under U.S. GAAP
or describe how the
amount was determined. In addition, provide us with a calculation
supporting your
average sale price for the years ended December 31, 2018 and 2017.
Unique aligner order shipments, page 73
16. We note from your discussion that unique aligner order shipments were
282,729 and
102,432 for the years ended December 31, 2018 and 2017, respectively.
Additionally, we
note from your timeline on page 73 that this also appears to be the
number of members for
the same periods. Please revise the filing to clarify the relationship
between these two
metrics.
17. We note under U.S. GAAP that your contracts for aligners involve the
delivery and
shipment of different types of aligners under one contract. To assist
investor
understanding, please revise to clarify, if true, that your unique
aligner order shipment
metric represents a single contracted customer and not individual
aligners shipped.
David Katzman
FirstName LastNameDavid Katzman
SmileDirectClub, Inc.
Comapany NameSmileDirectClub, Inc.
May 31, 2019
May 31, 2019 Page 4
Page 4
FirstName LastName
Management's Discussion and Analysis of Financial Condition and Results of
Operations
Results of Operations, page 76
18. Please revise your discussion to provide greater detail and
quantification of the factors that
caused the changes in your results of operations. For example, we
note:
Your analysis of marketing expenses is limited to a discussion of
costs relative to
revenues but it is not clear why your marketing and selling
expenses increased by
approximately $149 million.
You cite several factors when discussing the increase in general
and administrative
expenses but it is not clear why your general and administrative
expenses increased or
how each of the factors impacted your general and administrative
expenses.
Refer to Item 303(a)(3) of Regulation S-K.
19. Please clarify the extent to which the remaining portions of your
increases in
revenues were due to increases in prices or the introduction of new
products.
Revolving credit facility, page 80
20. We note your disclosure regarding your plan to enter into a new
revolving credit facility to
pay the amounts outstanding under the TCW credit facility. Briefly
discuss the costs of
the make-whole provision in your TCW credit facility.
Critical Accounting Policies and Estimates
Equity-based Compensation, page 82
21. We may have additional comments on your accounting for equity
transactions. Once you
have determined an estimated offering price, please provide us an
analysis explaining the
reasons for the differences between the price and the recent
valuations associated with
your equity transactions, including the incentive units issued since
January 1, 2018.
SmileShops, page 97
22. Please provide the material terms of your agreements with CVS and
Walgreens, including
the parties rights and obligations, any payment provisions, and any
termination
provisions.
Management, page 112
23. Clarify the different financial capacities in which Mr. Wailes served
at Intermedix
beginning in 2012.
David Katzman
FirstName LastNameDavid Katzman
SmileDirectClub, Inc.
Comapany NameSmileDirectClub, Inc.
May 31, 2019
May 31, 2019 Page 5
Page 5
FirstName LastName
Elements of Compensation, page 119
24. We note your disclosure that there is no discernable amount of
compensation paid to Mr.
D. Katzman for the discrete services he provided to you; however, we
also note your
disclosure in footnote (f) to your summary compensation table on page
122 that you paid
management fees and expenses in 2017 and 2018 of $1.5 million and $3.3
million for your
two named executive officers and "other Camelot consultants provided
for in the
Management Agreement." Please clarify the amount of management fees,
if any, that you
paid for Mr. D. Katzman's management services to you.
Security Ownership of Certain Beneficial Owners and Management, page 124
25. Revise the last paragraph on page 124 to disclose the duration of the
voting agreement.
Refer to Instruction 7 to Item 403 of Regulation S-K.
Other Related Party Transactions, page 129
26. Please identify the two former employees who are parties to the
promissory notes on
unitholder redemption disclosed on page 130.
Align Supply Agreement, page 130
27. Please tell us whether Align provides most or all of your oral digital
imaging equipment.
Classified Board of Directors, page 135
28. Clarify your disclosure here that your Class B shareholders, pursuant
to the voting
agreement, will control the election of directors, and specify the
terms of your
stockholders agreement relating to the designation of directors by the
Class B holders,
including the number of directors the Class B holders may designate.
Exclusive Forum, page 137
29. We note that your forum selection provision identifies the Court of
Chancery of the State
of Delaware as the exclusive forum for certain litigation, including
any "derivative
action." Please disclose whether this provision applies to actions
arising under the
Securities Act or Exchange Act. In that regard, we note that Section
27 of the Exchange
Act creates exclusive federal jurisdiction over all suits brought to
enforce any duty or
liability created by the Exchange Act or the rules and regulations
thereunder, and Section
22 of the Securities Act creates concurrent jurisdiction for federal
and state courts over all
suits brought to enforce any duty or liability created by the
Securities Act or the rules and
regulations thereunder. If the provision applies to Securities Act
claims, please also revise
your prospectus to state that there is uncertainty as to whether a
court would enforce such
provision and that investors cannot waive compliance with the federal
securities laws and
the rules and regulations thereunder. If this provision does not apply
to actions arising
under the Securities Act or Exchange Act, please also ensure that the
exclusive forum
David Katzman
FirstName LastNameDavid Katzman
SmileDirectClub, Inc.
Comapany NameSmileDirectClub, Inc.
May 31, 2019
May 31, 2019 Page 6
Page 6
FirstName LastName
provision in the governing documents states this clearly, or tell us
how you will ensure
that investors will be informed in future filings that the provision
does not apply to any
actions arising under the Securities Act or Exchange Act.
Report of Independent Registered Public Accounting Firm, page F-2
30. Please amend your registration statement to include a signed audit
report as required by
Rule 2-02 of Regulation S-X.
Note 1 - Summary of Significant Accounting Policies, page F-7
31. Please revise the filing to provide all of the disclosures required by
ASC 310-10-50-1
through 50-34 related to your accounts receivables and SmilePay
financing receivables.
Revise to explain how you apply ASC 310-10-35-8 through 35-10 in
determining the
amount and timing of the recognition of losses on receivables and
disclose the amount in
accordance with ASC 310-10-50-4.
Basis of Presentation and Consolidation, page F-7
32. We note that you are consolidating the accounts of affiliated
professional corporations in
which you are the primary beneficiary. Please disclose the carrying
amounts and
classification of the variable interest entities' assets and
liabilities. Refer to ASC 810-10-
50-3(bb).
Revenue Recognition, page F-8
33. We note from your disclosure on page 82 that the transaction price for
customers enrolling
in SmilePay includes variable consideration in the form of implicit
price concessions
based on factors that include historical write-offs. Please address
the following:
Tell us the factors you considered in determining that
collectability should be
accounted for as an implicit price concession under ASC
606-10-32-7(a) and not be
accounted for in accordance with ASC 310. Refer to ASC
606-10-45-4.
Describe to us how you accounted for the significant financing
component of your
agreements under ASC 606-10-32-15 through 32-20.
Disclose the methods, significant inputs and assumptions used to
estimate variable
consideration. Refer to ASC 606-10-50-20.
34. We note that your contracts for aligners involve the following
multiple performance
obligations: initial aligners, modified aligners, and refinement
aligners. Please address the
following:
Clarify the time period over which customers are eligible for
modified and refinement
aligners.
Disclose the methods, significant inputs, and assumptions used for
allocating the
transaction price to your performance obligations. Refer to ASC
606-10-50-20(c).
David Katzman
SmileDirectClub, Inc.
May 31, 2019
Page 7
Inventories, page F-13
35. We note your disclosure that inventories are carried at the lower of
cost or market value.
Please tell us how this is consistent with ASC 330-10-35-1B, which
indicates that
inventories should be valued at the lower of cost or net realizable
value. Alternatively,
revise your disclosures to state, if true, that inventories are stated
at the lower of cost
or net realizable value.
Note 8 - Long-Term Debt, page F-20
36. We note the discussion on pages 78 and F-21 of restrictions and
limitations on the
payment of distributions by your subsidiary. Please tell us your
consideration of
disclosing any restrictions on this subsidiary to transfer funds to you
as dividends, loans,
or advances and any restricted net assets under Rule 4-08(e)(3) of
Regulation S-X.
Note 15 - Segment Reporting, page F-29
37. We note your references throughout the filing to business locations in
Canada and Costa
Rica. Please revise the filing to provide the geographical area
disclosures required by
ASC 280-10-50-41.
Exhibits Index, page II-3
38. Ensure you have filed all agreements required to be filed as exhibits to
your registration
statement. In this regard, we note the TCW credit facility agreement
disclosed on page
80, the CVS agreement disclosed on page 97, the key licensing agreement
disclosed on
page 100, the unit purchase agreement disclosed on page 111, the
management
agreements disclosed on page 118, the restricted unit grant agreement
disclosed on page
120, the Align supply agreement and promissory note agreement disclosed
on page
130, and the stockholder agreement disclosed on page 135.
You may contact Eric Atallah at 202-551-3663 or Kevin Kuhar, Accounting
Branch
Chief, at 202-551-3662 if you have questions regarding comments on the
financial statements
and related matters. Please contact Heather Percival at 202-551-3498 or Amanda
Ravitz,
Assistant Director, at 202-551-3528 with any other questions.
Sincerely,
FirstName LastNameDavid Katzman
Division of
Corporation Finance
Comapany NameSmileDirectClub, Inc.
Office of
Electronics and Machinery
May 31, 2019 Page 7
cc: David J. Goldschmidt, Esq.
FirstName LastName