Correspondence 0001104659-23-120725 from Tuya Inc. (TUYA) (CIK 0001829118) (TUYA)
Tuya Inc. (TUYA) (CIK 0001829118)
Date: Nov. 22, 2023 · CIK: 0001829118 · Accession: 0001104659-23-120725
AI Filing Summary & Sentiment
File numbers found in text: 001-40210
Letter
Division of Corporation Finance Response dated September 29, 2023 File No. 001-40210 Attn: Office of Technology VIA EDGAR
Dear Melissa Kindelan and Christine Dietz:
This letter sets forth the responses of Tuya Inc. (the “Company”) to the comments (the “Comments”) contained in a letter the Company received from the staff (the “Staff”) of the Securities and Exchange Commission (the “SEC”) on October 16, 2023.
For the Staff’s convenience, we have included herein the Comments in bold, and the Company’s responses are set forth immediately below the Comments.
1. You indicated in response to prior comment 2 that the Company has maintained significant “cash amounts” for its “working capital needs.” Your response to prior comment 4 further states that, as of September 30, 2023, short-term deposits were approximately 82.2% of the Company’s total assets on a consolidated basis and that such short-term deposits “resulted from the Company’s recent IPO.”
● Please provide further analysis as to how the Company’s significant holdings in “short-term deposits,” which carry maturity dates of up to one year, are consistent with the statement that you maintain significant “cash amounts” for “working capital needs,” particularly in light of the availability of more liquid investments.
CONFIDENTIAL TREATMENT REQUESTED BY TUYA INC.
At the time of its U.S. IPO in March 2021 (of American Depositary Shares (“ADS”), the Company was able to raise substantial capital of approximately USD904.7 million, largely attributable to the prevailing high valuations of cloud-based PaaS/SaaS firms, software firms, cloud infrastructure firms and firms with the business model of development platforms, particularly within the cloud development platform model in the internet-of-things (“IoT”) sector. The Company initially used the capital raised in its U.S. IPO to execute its plans for business growth and geographic expansion. In fact, following its U.S. IPO, the Company's revenues increased approximately 145% in the first half of 2021 due to its unique product and strong market demand compared to the same period in the prior year, and the significant growth in the Company’s business was accompanied by substantial expansions in both personnel1 and operational scale. In the third quarter of 2021, right before the start of the downward cycle of the global economy discussed below, the Company's total number of employees achieved a peak of approximately 3,800, marking an increase of nearly 68% compared to the 2,258 employees as of December 31, 2020 prior to the U.S. IPO. The capital raised in its U.S. IPO was critical for the Company’s growth in 2021, as such high-speed growth required extensive expenditures.2
However, in 2022 and 2023, macroeconomic and industry-specific factors, including a global microchip shortage, rising shipping costs, supply chain disruptions, rising global inflation, the Russia-Ukraine conflict, the ongoing impact of COVID-19, and reduced discretionary consumer spending on IoT devices, led to declining purchases of the Company’s services and products. This caused the Company to shift its operations from rapid expansion of its products and services in IoT devices and application scenarios to a more conservative approach, and as such, the deployment of cash became more gradual and cautious than anticipated at the time of the U.S. IPO. Cash items were shifted into slightly longer term instruments (e.g., bank time deposits with one year or less but more than three months of maturity) (which is a general and common way to hold on to such funds in the PRC) to preserve their value in the face of increasing inflation pending future development in the Company’s business, given the longer time horizon for the expected use of cash.3
1 As noted below, as of September 30, 2023, the Company had approximately [***] employees, of which only 4 employees are responsible for managing the Company’s investment securities and short-term deposits.
2 The Company notes that for the years ended December 31, 2021 and 2022, USD126.1 million and USD70.7 million, respectively, were spent on operating activities. Additionally, total operating expenses of USD311.4 million and USD257.6 million, respectively, were incurred for the years ended December 31, 2021 and December 31, 2022, primarily due to employee related costs, purchases of technical and professional services, as well as research and development activities and sales and marketing activities (including branding and promotion activities).
3 In addition, since September 2021, the Company has repurchased approximately USD115 million in ADS, which also shows that the Company has not been unnecessarily retaining cash.
CONFIDENTIAL TREATMENT REQUESTED BY TUYA INC.
Due to the Company’s effective implementation of core strategies such as key customer focus and improved cost efficiency, the Company’s total revenue [***] in the third quarter of 2023 since the year-over-year decline began in the first quarter of 2022 noted above due to the headwinds discussed above. The Company has also maintained a steady and rising trend in gross margin levels from 41.1% in the first quarter of 2022 to [***] in the third quarter of 2023. Total operating expenses, net, excluding share-based compensation (since it is a non-cash item), have shown an overall declining trend over the last eight quarters. The loss from operations, excluding share-based compensation and without interest income, has been consistently narrowing from a negative USD37.8 million in the first quarter of 2022 to a [***] in the third quarter of 2023. Notably, the Company first achieved profitability on a non-GAAP basis (by excluding share-based compensation) in the second quarter of 2023 and [***]. Moving forward, the Company is committed to continuously striving for stable and robust operations, and [***].
As of September 30, 2023, the Company continued to hold short-term deposits4 for working capital needs.5 Bank short-term deposits are the most suitable tool for balancing risk, liquidity and value preservation.6 First, such deposits are backed by the creditworthiness of reputable banks, providing a very high level of security for the principal that far exceeds many other instruments. All of the Company’s bank time deposits are held in highly reputable, stable, and highly rated banks including the Bank of China Limited, Agricultural Bank of China Limited, China Merchants Bank Co. Ltd. and China Construction Bank Corporation. The vast majority of the Company's time deposits are held in the Hong Kong accounts of Bank of China and Agricultural Bank of China. According to "The Banker" magazine's "Top 1000 World Banks" list of 2023, ranked by tier one capital, Agricultural Bank of China and Bank of China are ranked third and fourth globally, respectively.7 The international rating agency Fitch Ratings has assigned them the highest short-term default rating of F1+ with an outlook of “stable”, which is on par with the United States' sovereign credit rating and equivalent to the AAA credit rating of U.S. money market funds.8 Furthermore, China Construction Bank is ranked second globally in the same list and has also been awarded an F1+ rating, and China Merchants Bank is ranked eleventh in the same list and has been awarded an F1 rating, which is one of the highest credit ratings.9
For clarity, the Company refers to all time deposits with remaining maturities of 12 months or less as short-term deposits.
The Company, through Tuya (HK) Limited, will also maintain a certain amount of long-term deposits with remaining maturities greater than 12 months to meet its long-term operational needs and plans. During the middle of 2023 to the first half of August 2023, the Company deposited a portion of its cash into bank time deposits with remaining maturities greater than 12 months (i.e., 1 year to 3 years) to preserve their value for such future operating related use. This is because, [***]. As of September 30, 2023, long-term deposits recorded as long-term investments in the Company’s balance sheet totaled to [***]. The Company treats such long-term investments as investment securities for purposes of the 40% Test. Additionally, one of the Company’s subsidiaries, [***] also holds time deposits with remaining maturities greater than 12 months. Such time deposits are transferable and can accrue interest corresponding to the period of time that they are held, even if not held to maturity. As such, their liquidity is effectively equivalent to cash and the Company has the ability to retrieve cash on demand from these time deposits for operating use, such as annual employee bonus payments in the first quarter of 2024. For purposes of the 40% Test, the Company still treats such time deposits as investment securities.
As discussed further below in response to the fourth bullet of Comment 1, the Company's daily business operations require maintaining a substantial amount of cash for turnover every week (which can be tens of millions of dollars during peak periods). Although the Company plans and estimates high-level capital requirements in the tens or hundreds of millions of dollars based on its quarterly and annual operating scale, there is no need for the Company to maintain hundreds of millions of dollars in actual cash at all times and thus the Company generally seeks to preserve the value of the excess funds by holding them in short-term deposits as discussed herein.
See Barbara Pianese, Top 1000 Word Banks 2023, The Banker, July 4, 2023, https://www.thebanker.com/Rankings-data/Top-1000/.
See Fitch Ratings: Agricultural Bank of China Limited, https://www.fitchratings.com/entity/agricultural-bank-of-china-limited-80360377 (last visited Nov. 16, 2023); Fitch Ratings: Bank of China Limited, https://www.fitchratings.com/entity/bank-of-china-limited-80361325 (last visited Nov. 16, 2023); and Fitch Ratings: United States, https://www.fitchratings.com/entity/united-states-of-america-80442210 (last visited Nov. 16, 2023).
See Fitch Ratings: China Construction Bank Corporation, https://www.fitchratings.com/entity/china-construction-bank-corporation-80360433 (last visited Nov. 16, 2023) and Fitch Ratings: China Merchants Bank Co. Ltd., https://www.fitchratings.com/entity/china-merchants-bank-co-ltd-80360436 (last visited Nov. 16, 2023).
CONFIDENTIAL TREATMENT REQUESTED BY TUYA INC.
Additionally, the short-term deposits can be converted into current deposits by withdrawing the full principal amount at any time to pay off liabilities or other operational expenses.10 Thus, despite being longer-term on its face than certain other cash items, the Company believes that these short-term deposits provide sufficient liquidity for the Company’s operating business needs.11
● Please provide further analysis addressing the impact of the Company’s significant holdings in “short-term deposits” on the factors outlined in Tonapah Mining Company of Nevada, 26 SEC 426 (1947).
The Company respectfully submits the analysis below with respect to the impact of the Company’s holdings in short-term deposits on the factors outlined in Tonopah Mining Co. (26 S.E.C. 426 (1947)), which demonstrates that the Company is primarily engaged in IoT related product and service offerings, including Platform-as-a-Service and Software-as-a-Service, based on a purpose-built cloud development platform, as well as cloud-based value-added services (collectively, “IoT Business”), and is not and does not hold itself out as being engaged primarily, and does not propose to engage primarily, in the business of investing, reinvesting or trading in securities. Under Tonopah Mining, being “primarily engaged” in a business or businesses other than that of investing, reinvesting, owning, holding or trading in securities was interpreted under the Investment Company Act to depend on a facts and circumstances review, including the following principal factors: (1) an issuer’s historical development, (2) its public representations of policy, (3) the activities of its officers and directors and, most importantly, (4) the nature of its present assets and (5) the sources of its present income. Any one factor is not determinative, and as interpreted by the courts, the overarching objective of the Tonopah Mining analysis is to determine whether reasonable investors would view an issuer “as an operating company rather than a competitor with a closed-end mutual fund.”12 Applying such factors to the Company, it is clear that the Company is primarily engaged in the IoT Business, and not in the business of investing, reinvesting or trading in securities despite its significant holdings in short-term deposits:
Converting such short-term deposits prior to maturity, however, may result in receiving the accrued interest at a much lower demand deposit interest rate instead of the higher interest rate otherwise payable under the certificates of deposits.
Additionally, due to the potential fluctuation in the yield of certain other instruments with greater potential liquidity, such as money market funds, the Company believed that such holdings could have implications on the Company’s financial statements that could potentially distract investors when reviewing such information. Given that, the Company believed that short-term deposits did not implicate such an issue, and therefore were a more appropriate choice for holding its cash amounts for working capital needs than money market funds.
SEC v. Nat'l Presto Indus., 486 F.3d 305 at 26 (7th Cir. 2007) (citing Tonopah Mining (26 S.E.C. 426 (1947)).
CONFIDENTIAL TREATMENT REQUESTED BY TUYA INC.
1) The Company is primarily engaged in the business of providing IoT related products and services. The Company provides a cloud platform that connects a range of devices via the IoT. The development of the Company’s business supports the historical development factor, as it has been primarily engaged in the business of providing IoT related products and services since its establishment in 2014 and the Company does not expect to change its primary business in the future. Following its establishment, the Company first developed its IoT cloud development platform in May 2015, and as of September 30, 2023, the Company’s IoT cloud development platform has accumulated [***] registered developers from over 200 countries and regions cumulatively serving more than 7,600 customers.
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10/F, Building A, Huace Center
Xihu District, Hangzhou City
Zhejiang, 310012
People’s Republic of China
CERTAIN PORTIONS OF THIS LETTER AS FILED VIA EDGAR
HAVE BEEN OMITTED AND FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED FOR THE
OMITTED PORTIONS, WHICH HAVE BEEN REPLACED WITH “[***]” IN THE LETTER FILED VIA EDGAR.
November 22,
2023
Division of Corporation
Finance
U.S. Securities & Exchange Commission
100 F Street, NE
Washington, D.C. 20549
Re:
Tuya Inc.
Form 20-F for the Fiscal Year Ended December 31, 2022
Response dated September 29, 2023
File No. 001-40210
Attn:
Office of Technology
VIA EDGAR
Dear Melissa Kindelan and Christine Dietz:
This letter sets forth the responses of Tuya
Inc. (the “Company”) to the comments (the “Comments”) contained in a letter the Company received
from the staff (the “Staff”) of the Securities and Exchange Commission (the “SEC”) on October 16,
2023.
For the Staff’s convenience, we have included
herein the Comments in bold, and the Company’s responses are set forth immediately below the Comments.
1. You indicated in response to prior comment 2 that the Company
has maintained significant “cash amounts” for its “working capital needs.”
Your response to prior comment 4 further states that, as of September 30, 2023, short-term
deposits were approximately 82.2% of the Company’s total assets on a consolidated basis
and that such short-term deposits “resulted from the Company’s recent IPO.”
● Please
provide further analysis as to how the Company’s significant holdings in “short-term
deposits,” which carry maturity dates of up to one year, are consistent with the statement
that you maintain significant “cash amounts” for “working capital needs,”
particularly in light of the availability of more liquid investments.
CONFIDENTIAL TREATMENT
REQUESTED BY TUYA INC.
01
At the time of its U.S. IPO in March 2021 (of American
Depositary Shares (“ADS”), the Company was able to raise substantial capital of approximately USD904.7 million, largely attributable
to the prevailing high valuations of cloud-based PaaS/SaaS firms, software firms, cloud infrastructure firms and firms with the business
model of development platforms, particularly within the cloud development platform model in the internet-of-things (“IoT”)
sector. The Company initially used the capital raised in its U.S. IPO to execute its plans for business growth and geographic expansion.
In fact, following its U.S. IPO, the Company's revenues increased approximately 145% in the first half of 2021 due to its unique product
and strong market demand compared to the same period in the prior year, and the significant growth in the Company’s business was
accompanied by substantial expansions in both personnel1 and operational scale. In the third quarter of 2021, right before
the start of the downward cycle of the global economy discussed below, the Company's total number of employees achieved a peak of approximately
3,800, marking an increase of nearly 68% compared to the 2,258 employees as of December 31, 2020 prior to the U.S. IPO. The capital
raised in its U.S. IPO was critical for the Company’s growth in 2021, as such high-speed growth required extensive expenditures.2
However, in 2022 and 2023, macroeconomic and industry-specific
factors, including a global microchip shortage, rising shipping costs, supply chain disruptions, rising global inflation, the Russia-Ukraine
conflict, the ongoing impact of COVID-19, and reduced discretionary consumer spending on IoT devices, led to declining purchases of the
Company’s services and products. This caused the Company to shift its operations from rapid expansion of its products and services
in IoT devices and application scenarios to a more conservative approach, and as such, the deployment of cash became more gradual and
cautious than anticipated at the time of the U.S. IPO. Cash items were shifted into slightly longer term instruments (e.g., bank time
deposits with one year or less but more than three months of maturity) (which is a general and common way to hold on to such funds in
the PRC) to preserve their value in the face of increasing inflation pending future development in the Company’s business, given
the longer time horizon for the expected use of cash.3
1 As noted below, as of September
30, 2023, the Company had approximately [***] employees, of which only 4 employees are responsible for managing the Company’s investment
securities and short-term deposits.
2 The Company notes that for the
years ended December 31, 2021 and 2022, USD126.1 million and USD70.7 million, respectively, were spent on operating activities. Additionally,
total operating expenses of USD311.4 million and USD257.6 million, respectively, were incurred for the years ended December 31, 2021
and December 31, 2022, primarily due to employee related costs, purchases of technical and professional services, as well as research
and development activities and sales and marketing activities (including branding and promotion activities).
3 In addition, since September 2021,
the Company has repurchased approximately USD115 million in ADS, which also shows that the Company has not been unnecessarily retaining
cash.
CONFIDENTIAL TREATMENT
REQUESTED BY TUYA INC.
02
Due to the Company’s effective implementation of
core strategies such as key customer focus and improved cost efficiency, the Company’s total revenue [***] in the third quarter
of 2023 since the year-over-year decline began in the first quarter of 2022 noted above due to the headwinds discussed above. The Company
has also maintained a steady and rising trend in gross margin levels from 41.1% in the first quarter of 2022 to [***] in the third quarter
of 2023. Total operating expenses, net, excluding share-based compensation (since it is a non-cash item), have shown an overall declining
trend over the last eight quarters. The loss from operations, excluding share-based compensation and without interest income, has been
consistently narrowing from a negative USD37.8 million in the first quarter of 2022 to a [***] in the third quarter of 2023. Notably,
the Company first achieved profitability on a non-GAAP basis (by excluding share-based compensation) in the second quarter of 2023 and
[***]. Moving forward, the Company is committed to continuously striving for stable and robust operations, and [***].
As of September 30, 2023, the Company continued to
hold short-term deposits4 for working capital needs.5 Bank short-term deposits are the most suitable tool for balancing
risk, liquidity and value preservation.6 First, such deposits are backed by the creditworthiness of reputable banks, providing
a very high level of security for the principal that far exceeds many other instruments. All of the Company’s bank time deposits
are held in highly reputable, stable, and highly rated banks including the Bank of China Limited, Agricultural Bank of China Limited,
China Merchants Bank Co. Ltd. and China Construction Bank Corporation. The vast majority of the Company's time deposits are held in the
Hong Kong accounts of Bank of China and Agricultural Bank of China. According to "The Banker" magazine's "Top 1000 World
Banks" list of 2023, ranked by tier one capital, Agricultural Bank of China and Bank of China are ranked third and fourth globally,
respectively.7 The international rating agency Fitch Ratings has assigned them the highest short-term default rating of F1+
with an outlook of “stable”, which is on par with the United States' sovereign credit rating and equivalent to the AAA credit
rating of U.S. money market funds.8 Furthermore, China Construction Bank is ranked second globally in the same list and has
also been awarded an F1+ rating, and China Merchants Bank is ranked eleventh in the same list and has been awarded an F1 rating, which
is one of the highest credit ratings.9
4
For clarity, the Company refers to all time deposits with remaining maturities of 12 months or less as short-term deposits.
5
The Company, through Tuya (HK) Limited, will also maintain a certain amount of long-term deposits with remaining maturities
greater than 12 months to meet its long-term operational needs and plans. During the middle of 2023 to the first half of August 2023,
the Company deposited a portion of its cash into bank time deposits with remaining maturities greater than 12 months (i.e., 1 year to
3 years) to preserve their value for such future operating related use. This is because, [***]. As of September 30, 2023, long-term deposits
recorded as long-term investments in the Company’s balance sheet totaled to [***]. The Company treats such long-term investments
as investment securities for purposes of the 40% Test. Additionally, one of the Company’s subsidiaries, [***] also holds time deposits
with remaining maturities greater than 12 months. Such time deposits are transferable and can accrue interest corresponding to the period
of time that they are held, even if not held to maturity. As such, their liquidity is effectively equivalent to cash and the Company
has the ability to retrieve cash on demand from these time deposits for operating use, such as annual employee bonus payments in the
first quarter of 2024. For purposes of the 40% Test, the Company still treats such time deposits as investment securities.
6
As discussed further below in response to the fourth bullet of Comment 1, the Company's daily business operations require
maintaining a substantial amount of cash for turnover every week (which can be tens of millions of dollars during peak periods). Although
the Company plans and estimates high-level capital requirements in the tens or hundreds of millions of dollars based on its quarterly
and annual operating scale, there is no need for the Company to maintain hundreds of millions of dollars in actual cash at all times
and thus the Company generally seeks to preserve the value of the excess funds by holding them in short-term deposits as discussed herein.
7
See Barbara Pianese, Top 1000 Word Banks 2023, The Banker, July 4, 2023, https://www.thebanker.com/Rankings-data/Top-1000/.
8
See Fitch Ratings: Agricultural Bank of China Limited, https://www.fitchratings.com/entity/agricultural-bank-of-china-limited-80360377
(last visited Nov. 16, 2023); Fitch Ratings: Bank of China Limited, https://www.fitchratings.com/entity/bank-of-china-limited-80361325
(last visited Nov. 16, 2023); and Fitch Ratings: United States, https://www.fitchratings.com/entity/united-states-of-america-80442210
(last visited Nov. 16, 2023).
9
See Fitch Ratings: China Construction Bank Corporation, https://www.fitchratings.com/entity/china-construction-bank-corporation-80360433
(last visited Nov. 16, 2023) and Fitch Ratings: China Merchants Bank Co. Ltd., https://www.fitchratings.com/entity/china-merchants-bank-co-ltd-80360436
(last visited Nov. 16, 2023).
CONFIDENTIAL TREATMENT
REQUESTED BY TUYA INC.
03
Additionally, the short-term deposits can be converted
into current deposits by withdrawing the full principal amount at any time to pay off liabilities or other operational expenses.10
Thus, despite being longer-term on its face than certain other cash items, the Company believes that these short-term deposits
provide sufficient liquidity for the Company’s operating business needs.11
● Please
provide further analysis addressing the impact of the Company’s significant holdings
in “short-term deposits” on the factors outlined in Tonapah Mining Company
of Nevada, 26 SEC 426 (1947).
The Company respectfully submits the analysis below with
respect to the impact of the Company’s holdings in short-term deposits on the factors outlined in Tonopah Mining Co. (26
S.E.C. 426 (1947)), which demonstrates that the Company is primarily engaged in IoT related product and service offerings, including
Platform-as-a-Service and Software-as-a-Service, based on a purpose-built cloud development platform, as well as cloud-based value-added
services (collectively, “IoT Business”), and is not and does not hold itself out as being engaged primarily, and does
not propose to engage primarily, in the business of investing, reinvesting or trading in securities. Under Tonopah Mining, being
“primarily engaged” in a business or businesses other than that of investing, reinvesting, owning, holding or trading in
securities was interpreted under the Investment Company Act to depend on a facts and circumstances review, including the following principal
factors: (1) an issuer’s historical development, (2) its public representations of policy, (3) the activities of
its officers and directors and, most importantly, (4) the nature of its present assets and (5) the sources of its present income.
Any one factor is not determinative, and as interpreted by the courts, the overarching objective of the Tonopah Mining analysis
is to determine whether reasonable investors would view an issuer “as an operating company rather than a competitor with a closed-end
mutual fund.”12 Applying such factors to the Company, it is clear that the Company is primarily engaged in the IoT Business,
and not in the business of investing, reinvesting or trading in securities despite its significant holdings in short-term deposits:
10
Converting such short-term deposits prior to maturity, however, may result in receiving the accrued interest at a much lower
demand deposit interest rate instead of the higher interest rate otherwise payable under the certificates of deposits.
11
Additionally, due to the potential fluctuation in the yield of certain other instruments with greater potential liquidity,
such as money market funds, the Company believed that such holdings could have implications on the Company’s financial statements
that could potentially distract investors when reviewing such information. Given that, the Company believed that short-term deposits
did not implicate such an issue, and therefore were a more appropriate choice for holding its cash amounts for working capital needs
than money market funds.
12
SEC v. Nat'l Presto Indus., 486 F.3d 305 at 26 (7th Cir. 2007) (citing Tonopah Mining (26 S.E.C. 426 (1947)).
CONFIDENTIAL TREATMENT
REQUESTED BY TUYA INC.
04
1) The Company is primarily engaged in the business of providing IoT
related products and services. The Company provides a cloud platform that connects a range
of devices via the IoT. The development of the Company’s business supports the historical
development factor, as it has been primarily engaged in the business of providing IoT related
products and services since its establishment in 2014 and the Company does not expect to
change its primary business in the future. Following its establishment, the Company first
developed its IoT cloud development platform in May 2015, and as of September 30,
2023, the Company’s IoT cloud development platform has accumulated [***] registered
developers from over 200 countries and regions cumulatively serving more than 7,600 customers.