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Non-GAAP financial measures result in frequent comments regarding compliance with Item 10(e) of Regulation S-K and the related compliance and disclosure interpretations, sometimes resulting in requests to remove or substantially modify non-GAAP metrics.
In December 2022, the SEC staff updated its C&DIs relating to non-GAAP financial measures. The staff noted that the updates were intended to memorialize existing staff views provided through public statements or comment letters. A key focus of the updates was to provide further guidance on non-GAAP measures that are considered misleading, including guidance on operating expenses that are “normal and recurring,” labeling of non-GAAP measures and adjustments, and measures that represent a tailored accounting principle. Refer to the “Non-GAAP C&DIs” guidance below for further information.
The SEC staff's focus areas have been emphasized through the updated C&DIs:
  • presentation with equal or greater prominence of the most directly comparable GAAP financial measure;
  • reconciliation from the most comparable GAAP financial measure;
  • appropriateness of adjustments to eliminate normal, recurring cash operating expenses or items identified as non-recurring, infrequent, or unusual;
  • use of individually tailored accounting principles; and
  • disclosure of why management believes the non-GAAP presentation provides useful information to investors regarding the financial condition or results of operations of the registrant.
Comment examples (generalized to identify overarching themes, with specific details pertaining to individual companies omitted)
Guidance references
  • As a related matter, we see that Contribution Margin is adjusted to exclude costs in geographies that are in implementation and are not yet generating revenue. Please also revise future filings to remove the adjustment since the costs relate to normal recurring costs to grow your business. Reference Question 100.01 of the CD&I related to nonGAAP Financial Measure Updated December 13, 2022.
  • We note you have included the line item ¨Other expense, net¨ in the reconciliations for Adjusted EBITDA from Net Income from Continuing Operations, Adjusted EBITDA from Income before Income Taxes, and Non-GAAP Adjusted Net Income Attributable to Stockholders, but the amounts attributable to this line item differ between reconciliations. Please tell us what is included in this line item in each of these reconciliations and why you have used the same name for an amount that apparently represents different items.
  • Please provide the disclosures required by item 10(e) of Regulation S-K and Regulation G as it relates to your presentation of the non-GAAP measure, Adjusted EBITDA
  • Your current disclosure discusses management’s use, but not how the presentation of the measure is useful to investors. Please revise your disclosure to include a discussion of investor’s use of these measures.
  • You disclose non-GAAP measures without presenting the comparable GAAP measures with equal or greater prominence. Please ensure any discussion regarding nonGAAP measures is preceded by an equal or more prominent discussion of the comparable GAAP measure.
  • We note your tables that reconcile total taxable income (loss) and total taxable income (loss) on a per share basis to GAAP income (loss) and GAAP income (loss) on a per share basis, respectively, for the years ended December 31, 2020, 2019, and 2018, which appear to be non-GAAP income statements reconciling non-GAAP measures to the most directly comparable GAAP measures. Please tell us how you considered the guidance in Item 10(e)(1)(i)(A) and the guidance in Questions 102.10 and 102.05 of the NonGAAP Financial Measures Compliance and Disclosure Interpretations in your presentation.
  • We note your presentation of the non-GAAP measure total gross margin. Please revise your reconciliation for this non-GAAP measure to the most directly comparable GAAP measure of gross margin in accordance with Item 10(e)(1)(i)(B) of Regulation S-K. If you do not believe gross margin that includes depreciation and amortization is the most directly comparable GAAP measure, please tell us why in your response. In addition, retitle this measure to avoid confusion with the GAAP measure of gross margin.
  • We note you present Adjusted Gross Margin as a non-GAAP measure and that you reconcile this measure to operating income. Please revise to reconcile to a fully loaded GAAP gross profit or tell us why you believe operating income is the most directly comparable GAAP measure. Refer to Item 10(e)(1)(i)(B) of Regulation S-K.
  • We note your disclosure of net debt which is identified in footnote (a) as a non-GAAP financial measure. We also note that the table presents net capitalization, which is the sum of net debt and equity, which appears to be a GAAP measure from the historical financial statements. In light of the fact that net capitalization also appears to represent a nonGAAP financial measure, please review footnote (a) to characterize net capitalization as a non-GAAP financial measure and to include the disclosures required by Item 10(e) of Regulation S-K as they also apply to net capitalization.
  • We note your disclosure of NonGAAP Core Operating Income. This non-GAAP measure includes an adjustment for various realized and unrealized gains and losses. In light of this adjustment, please tell us how you determined it was appropriate to title this measure as core operating income.
  • We note you include adjustments in arriving at net operating profit after taxes that appear to remove your operating lease rent expense under GAAP and replace it with estimated depreciation and include lease adjustments in arriving at average invested capital. As this appears to be an individually tailored method, please remove from your filling or advise. Refer to Question 100.04 of the Non-GAAP Financial Measures Compliance and Disclosure Interpretations.
  • Please tell us and revise future filings to explain your basis for including net change in your valuation allowance in your adjusted net loss. Refer to Compliance and Disclosure Interpretation 100.04.

PwC. All rights reserved. PwC refers to the US member firm or one of its subsidiaries or affiliates, and may sometimes refer to the PwC network. Each member firm is a separate legal entity. Please see www.pwc.com/structure for further details. This content is for general information purposes only, and should not be used as a substitute for consultation with professional advisors.

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