Comment Letter King #2 (SCI, YY, PLCE, TIRX)
4 Interesting SEC Comment Letters
Welcome to Comment Letter King – a free weekly newsletter with new interesting comment letters. If you like this content please forward to others and encourage them to join here.
Comment letters are informal public correspondence between the SEC and public companies about potential disclosure, accounting, or other issues in public filings. There are ~150 letters every week, many of which are not relevant for investors. This newsletter sifts through them all to highlight the ones that deserve extra scrutiny.
Service Corporation International (NYSE: SCI — $8.09 billion), a funeral company, received two written SEC inquiries and conducted two SEC staff phone calls about its accounting. The first letter read, in part,
SEC: “In discussing your trust investments on page 40, you also state that your market-sensitive instruments and positions are considered to be ‘other-than-trading’. Please tell us how you concluded the cash flows related to your trust investments represent operating activities, rather than investing activities.”
In a 19,036-word response (inclusive of exhibits), the company wrote, in part,
“Our financial reporting for preneed funeral and cemetery contracts with customers has been the subject of significant research, deliberation, consultation, and discussion with the Staff and the Office of the Chief Accountant over the last 15 years. State laws generally require all or a substantial portion of the funds collected for preneed funeral and cemetery merchandise and service contracts to be placed into merchandise and service trusts ("M&S Trusts")… The Trusts hold investments in marketable securities that we have generally considered other-than-trading…”
The SEC was not satisfied with the first response and in a second letter wrote,
“In arriving at your current accounting treatment for the debt securities in your trusts, please tell us how you considered the guidance in ASC 320-10-45-11, which permits the inclusion of cash flows related to trading securities in cash flows from operating activities in certain circumstances, but requires cash flows related to other types of debt securities to be classified as investing activities.”
The company responded, in part,
“We believe that our current presentation most faithfully represents our cash flows… [the] financial statement presentation unique to the death care industry have been the subject of several exchanges between us and the Staff dating back to at least 2006.”
The SEC was apparently not satisfied with the second response either. In a third letter the company acknowledged holding to phone calls with the SEC to resolve the accounting issues:
“Based on further conversation with the Staff on January 19, 2021 and January 21, 2021, we will continue presenting our cash flows from debt securities as operating activities… We acknowledge the Staff’s view in this regard and their agreement that transferring such debt securities from available for sale to trading in accordance with ASC 320-10-35-12 in this rare circumstance is acceptable, given the nature of our debt securities held in trust have the same trading characteristics as our equity securities…”
For both responses, the company requested timetable extensions (1, 2). Comment Letter King believes the correspondence was made public within the last seven days.
Service Corporation International has had the same CEO and CFO for the last 15 years.
JOYY Inc (NASDAQ: YY — $9.55 billion), a Chinese video-based social media platform, received a comment letter questioning how the COVID-19 pandemic could negatively impact the online platform. The letter read, in part,
SEC: “We note that during both the second and third quarters of 2020, the total number of paying users of YY decreased compared to the corresponding periods of 2019. Your disclosures indicate this decline was due to COVID-19 impacts. Please revise future filings and supplementally explain in greater detail how COVID-19 negatively impacted the number…”
JOYY: “As an effort to contain the spread of COVID-19, China took precautionary measures that reduced economic activities, including temporary closure of corporate offices, retail outlets and other business facilities, as well as strict implementation of quarantine measures… The Company acknowledges the Staff’s comment and hereby undertakes to revise the Company’s future filings to explain in greater detail the impacts of COVID-19 on its operations, to the extent material.”
In November 2020 Muddy Waters Research published a video and report on JOYY and alleged the majority of its revenue is fraudulent.
On February 19, 2021, JOYY disclosed its CFO is “pursuing a new job opportunity” and will step down in April.
The Children’s Place, Inc (NASDAQ: PLCE — $1.01 billion), a U.S. retailer, received an SEC Comment letter about its non-GAAP adjustments and COVID-19 related inventory provisions,
“Your non-GAAP results include adjustments for occupancy charges at stores temporarily closed and payroll and benefits for store employees during the period stores were closed. It appears that these are normal, recurring, cash operating expenses… Also, explain in detail how the amount of the inventory provision directly related to COVID-19 was objectively determinable and why it could not be partially attributed to other market factors and conditions.”
In a follow-up letter, the company disclosed two SEC staff phone calls and wrote,
“…beginning with the Company’s earnings release for the fourth quarter of fiscal 2020, the Company will no longer present non-GAAP results excluding occupancy charges at stores temporarily closed and payroll and benefits for store employees during the period stores were closed.”
Tian Ruixiang Holdings (NASDAQ: TIRX — $451 million), a Chinese insurance company, received an SEC comment letter related to its recent IPO that read, in part,
SEC: “…in the case of an initial public offering, the audited financial statements shall be as of a date not older than 12 months. This requirement may be waived in cases where you can represent that you are not required to comply..,”
Company: “…we are not required to comply with the requirement… complying with the requirement is impracticable or involves undue hardship.”
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Comment Letter King
Any opinions on YY's April CFO departure and the chances for Baidu to back out of the Joyy deal by April 30th?