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We have posted the transcript for our webcast “Capital Markets: The Latest Developments.” Maia Gez from White & Case, Anna Pinedo from Mayer Brown, Richard Segal from Cooley and Andy Thorpe from Gunderson discussed the current state of the capital markets, explored financing alternatives and discussed IPO readiness and recent developments impacting public offerings.

On the topic of SEC comment letter trends, Andy Thorpe noted:

The top 3 areas of SEC comments were financial statement-related or financial metrics-related. The top area was non-GAAP financial measures, then MD&A, and finally, segment reporting. For non-GAAP measures, the SEC, in December of 2022, issued new C&DIs related to non-GAAP financial measures. Ever since then, there’s been a real focus and scrutiny on companies’ non-GAAP measures.
They look at whether you presented the GAAP measure with equal or greater prominence as the non-GAAP measure and appropriately reconcile to the most comparable GAAP financial measure. They also look at whether you eliminated cash-settled items on the basis that they aren’t part of core operations. The Staff may object to eliminating recurring items. When you have litigation expenses year in year out and you say, “Yes, but this isn’t part of our core operations,” that’s an area where they’re going to object if you remove those types of cash expenses.

Then another big one is the use of individually tailored accounting principles. This is basically saying, “Under GAAP revenue recognition, this is how we have to present revenue, but if we recognize all the revenue upfront, here is what the number would look like.” The Staff objects to that.

Finally, they want improved disclosure of why management believes the non-GAAP measure provides useful information to investors. Not just how management uses it, but why it is useful to investors.

Moving on to MD&A, the Staff goes back to the 2003 interpretive release. I can’t believe it’s been over 20 years since that release came out, but one of the things in that release and one of the typical areas of comment is to provide more description and quantification of each material factor that impacts a specific change in one of the line items in the financial statements. They don’t want you to say, “Revenue or this expense increased by X because of Y.” They want the intricate intermediate factors.

They want to improve disclosure around known trends or uncertainties. In particular, they were looking at supply chain disruptions, the effects of inflation, and increases in interest rates as well. They’re looking to improve disclosures around liquidity and capital resources.

Now, I will move on to segment disclosures. Basically, the SEC will look at your outside reports, outside press releases, and determine, “Okay, wait. You guys are talking about your business in one certain way, but then you’re presenting one reportable segment.”

They will kick the tires around whether you should break out your operations into multiple segments, and often they’re going to ask for the reporting package that’s delivered to the chief operating and decision maker. If that is basically reflective of segments, they’re going to push towards requiring additional segment disclosures. Then one of the other interesting factors on segments is the use of non-GAAP financial measures. When you’re reporting segments, of course you have to remove certain expenses related to overhead that are not applicable to that one segment.

Just in GAAP, in your financial statements as you report segments, you are using a non-GAAP measure, which of course is now sanctioned by GAAP. If the SEC is saying, “Okay, if you use that or a different measure outside of the financial statements, then that’s non-GAAP and you have to comply with Regulation G.” It’s very complicated, but it’s just something to look out for. It’s definitely a pitfall.

Members of this site can access the transcript of this program. If you are not a member, email sales@ccrcorp.com to sign up today and get access to the full transcript – or sign up online.

– Dave Lynn