Category Archives: SEC Comment of the Week

Focus on SEC Comments – Non-GAAP Measure EBITDA Adjustments – Part Two

As we discussed in the preceding post in this series, non-GAAP measures have been at or near the top of frequent SEC comment letter topics for several years.  The earlier post explored Rite Aid’s adjustment for “facility exit and impairment charges” in its computation of Adjusted EBITDA along with a first round SEC comment about this presentation and the company’s initial response.

As a reminder, here is Rite Aid’s reconciliation for adjusted EBITDA:

After receiving the company’s first response, the SEC issued this follow-on comment on March 30, 2023:

With regard to the adjustment to exclude facility exit charges, you state that your presentation of Adjusted EBITDA eliminates charges that “do not reflect ongoing operations and underlying operational performance.” We note, however, that you have incurred facility exit charges, inventory write-downs related to store closings, and restructuring-related costs for the last 6, 6, and 4 years, respectively, and in the 39 week period ending November 26, 2022. We also note from your response that your 2022 strategic initiative resulted in the expectation of closing 195 stores, of which only 48 were closed in 2022. In your third quarter 2023 earnings call, you indicated that in building out your plans for 2024, you will continue to look at opportunities to close stores. Based on the consistency with which you have incurred such costs in the past and the apparent expectation that such costs will be incurred in the future, it appears these costs are normal for your business. Had an investor disregarded such costs several years ago on the basis that they would not be reflective of your future ongoing operations, it appears their expectations would have varied significantly from your actual subsequent results. To the extent you continue to adjust for facility exit charges, inventory write-downs related to store closings, and restructuring-related costs, please revise to disclose a substantive reason, specific to you, of usefulness to investors, to disclose your history of incurring such costs, and to provide appropriate cautionary language regarding the likelihood of you incurring such costs in the future.

The language in this follow-on comment clearly articulates CorpFin’s concerns about how investors could interpret and potentially be misled by this adjustment.

In the company’s next response, it appears there were further discussions with the staff and the company stated:

In response to the Staff’s additional feedback on the Company’s disclosure around continued adjustments to Adjusted EBITDA and Adjusted Net Income (Loss), as applicable, related to facility exit charges, inventory write-downs related to stores closings, and restructuring charges, the Company acknowledges and confirms that in future filings the Company will provide the requested enhanced disclosure. The Company will also continually evaluate the appropriateness of adjustments to its non-GAAP measures based upon the nature of the activity within the specific period presented within the purview of the Company’s current financial reports. Please find attached, as Exhibit A, the supplemental non-GAAP measures disclosure for the upcoming Form 10-K for the fiscal year ended March 4, 2023, which illustrates the Company’s intended revised disclosure, in accordance with the Staff’s comment, in addition to existing reconciliation and related disclosures.

Here is the updated disclosure the company presented to the staff:

We present these non-GAAP financial measures in order to provide transparency to our investors because they are measures that management uses to assess both management performance and the financial performance of our operations and to allocate resources. In addition, management believes that these measures may assist investors with understanding and evaluating our initiatives to drive improved financial performance and enables investors to supplementally compare our operating performance with the operating performance of our competitors including with those of our competitors having different capital structures. While we have excluded certain of these items from historical non-GAAP financial measures, there is no guarantee that the items excluded from non-GAAP financial measures will not continue into future periods. For instance, we expect to continue to experience charges for facility exit and impairment charges and inventory write-downs related to store closures as the Company continues to complete a multi-year strategic initiative designed to improve overall performance. We also expect to continue to experience and report restructuring-related charges associated with continued execution of our strategic initiatives.

Adjusted EBITDA, Adjusted Net Income (Loss), Adjusted Net Income (Loss) per Diluted Share or other non-GAAP measures should not be considered in isolation from, and are not intended to represent an alternative measure of, operating results or of cash flows from operating activities, as determined in accordance with GAAP. Our definition of these non-GAAP measures may not be comparable to similarly titled measurements reported by other companies, including companies in our industry.

With this explanation, the SEC issued its closing letter and the company, with the additional disclosure, was not required to change its presentation.

As always, your thoughts and comments are welcome.

Focus on SEC Comments – Non-GAAP Measure EBITDA Adjustments – Part One

Non-GAAP measures have been at or near the top of frequent SEC comment letter topics for several years.  While some non-GAAP comments deal with straightforward issues such as not presenting the related GAAP measure with equal or greater prominence, other comments focus on more complex issues.

The presentation that Rite Aid used for “facility exit and impairment charges” in its presentation of Adjusted EBITDA presents one of these complex issues.  Below is Rite Aid’s  reconciliation for its presentation of adjusted EBITDA:

Rite Aid also included this narrative disclosure about adjusted EBITDA:

In addition to net income (loss) determined in accordance with GAAP, we use certain non-GAAP measures, such as “Adjusted EBITDA”, in assessing our operating performance. We believe the non-GAAP measures serve as an appropriate measure in evaluating the performance of our business. We define Adjusted EBITDA as net income (loss) excluding the impact of income taxes, interest expense, depreciation and amortization, LIFO adjustments (which removes the entire impact of LIFO, and effectively reflects the results as if we were on a FIFO inventory basis), charges or credits for facility exit and , goodwill and intangible asset impairment charges, inventory write-downs related to store closings, gains or losses on debt modifications and retirements, and other items (including stock-based compensation expense, merger and acquisition- related costs, non-recurring litigation settlements, severance, restructuring-related costs, costs related to facility closures, gain or loss on sale of assets, the gain or loss on Bartell acquisition, and the change in estimate related to manufacturer rebate receivables). We reference this particular non-GAAP financial measure frequently in our decision-making because it provides supplemental information that facilitates internal comparisons to the historical periods and external comparisons to competitors. In addition, incentive compensation is primarily based on Adjusted EBITDA and we base certain of our forward-looking estimates on Adjusted EBITDA to facilitate quantification of planned business activities and enhance subsequent follow-up with comparisons of actual to planned Adjusted EBITDA.

While these disclosures are detailed, the SEC focused on facility exit and impairment charges in a letter dated February 21, 2023:

  1. We note in calculating Adjusted EBITDA you excluded facility exit charges. The adjustment appears to remove a normal, recurring, operating expense. Additionally, we note you exclude the change in estimate related to manufacturer rebate receivable which appears to result in an individually tailored recognition and measurement method. Please tell us how these adjustments are appropriate or revise your presentation to omit these adjustments. Refer to Questions 100.01 and 100.04 of the Staff’s Compliance and Disclosure Interpretations on Non-GAAP Financial Measures. Our comment also applies to Adjusted Net Income (Loss).

In this post we will discuss the issue surrounding the facility exit charges.  We will explore the manufacturer rebate issue in a later post.  With respect to the facility exit charges, the C&DI that the staff is referring to about this adjustment was updated in December 2022:

Question 100.01

Question: Can certain adjustments, although not explicitly prohibited, result in a non-GAAP measure that is misleading?

Answer: Yes. Certain adjustments may violate Rule 100(b) of Regulation G because they cause the presentation of the non-GAAP measure to be misleading. Whether or not an adjustment results in a misleading non-GAAP measure depends on a company’s individual facts and circumstances.

Presenting a non-GAAP performance measure that excludes normal, recurring, cash operating expenses necessary to operate a registrant’s business is one example of a measure that could be misleading.

When evaluating what is a normal, operating expense, the staff considers the nature and effect of the non-GAAP adjustment and how it relates to the company’s operations, revenue generating activities, business strategy, industry and regulatory environment.

The staff would view an operating expense that occurs repeatedly or occasionally, including at irregular intervals, as recurring. [December 13, 2022]

The company’s response on March 13, 2023, reviewed the calculation and explained their rationale for the adjustment for facility exit costs:

Adjusted EBITDA has long been used by the Company’s management and investors as one of the primary measures to evaluate both Company and management performance. The Company believes that the current methodology in calculating Adjusted EBITDA appropriately eliminates certain charges that do not reflect ongoing operations and underlying operational performance. The Company’s facility exit charges are costs associated with the closure of stores, distribution centers and corporate facilities and include establishing, at net present value, a liability for future costs associated with the exit activity pursuant to ASC 420-10. During fiscal year 2022, the Company announced a Board-approved multi-year strategic initiative designed to improve overall performance by reducing costs, driving improved profitability, and ensuring that the Company has a healthy foundation to grow from by eliminating underperforming stores. This initiative resulted in the expectation of closing 195 stores, of which 48 were closed in FY22 with the remainder expected to close in future periods. In addition, the strategic plan also included plans to exit certain corporate facilities as the Company moved toward its remote-first workplace strategy. Because the decision to close these facilities was part of a significant strategic project, the magnitude of the store closures was greater than what would be expected as part of ordinary business, and these facilities no longer have an impact on the Company’s present and go-forward operations, revenue generating activities or business strategy, the Company has determined that these costs do not constitute normal operating activities represented by Adjusted EBITDA and that excluding facility exit charges from its calculation of Adjusted EBITDA does not result in a non-GAAP measure that is misleading under the criteria in Question 100.01 of the Staff’s Compliance and Disclosure Interpretations on Non-GAAP Financial Measures. In addition to using Adjusted EBITDA as a primary measure to evaluate Company and management’s performance, the Company’s senior secured credit facility agreement (“SSCF”) defines Consolidated EBITDA as excluding facility exit charges and, as the calculation of its key credit ratios in the agreement are tied to Consolidated EBITDA, the Company believes that it is appropriate for its publicly disclosed measurement of Adjusted EBITDA to closely conform with the definition of Consolidated EBITDA in its SSCF to provide investors with clear line of sight into its credit metric calculations.

After Rite Aid made this response, the SEC issued a follow-on comment.  Our next post will explore the follow-on comment, the company’s response, and the resulting change in disclosure.

As always, your thoughts and comments are welcome!

An SEC Comment Challenge: Find the Non-GAAP Measure Issue – Post One

As we approach third quarter-end 2020, many of us will be drafting and reviewing earnings releases.  A majority, perhaps most, of these earnings releases will include non-GAAP measures.  The SEC includes earnings releases in their review process and, as you likely already know, frequently comments on the use of non-GAAP measures included in these crucial communication documents.

More often than not the issues raised in these comments are areas that are dealt with in Regulation G, S-K Item 10(e), or the related Compliance and Disclosure Interpretations.  To help avoid non-GAAP problems in earnings releases and other documents, this series of posts focuses on earnings releases that resulted in SEC comments about the use of non-GAAP measures.

To make this a bit more of a challenge, you can first read the excerpt of the release behind the comment and try to spot the issue.  If you prefer, you can read straight through to the comment and explanation that follow.

This excerpt is from an 8-K filed by Dasan Zhone Solutions, Inc. on May 7, 2020.  Can you spot the non-GAAP issue?

Screen Shot 2020-09-24 at 9.41.22 AM

There is a bit of non-GAAP complexity behind the SEC comment on this release.  First, as an earnings release, it is essentially subject to Regulation G, the SEC’s non-GAAP guidance for measures not included in filed documents.

However, since an earnings release is required to be furnished (not filed) with the SEC on an Item 2.02 Form 8-K, it is subject to the Form 8-K instructions which include this “hook” to S-K Item 10(e), the SEC’s rules for non-GAAP measures used in a filed document.


The requirements of paragraph (e)(1)(i) of Item 10 of Regulation S-K (17 CFR 229.10(e)(1)(i)) shall apply to disclosures under this Item 2.02.

The part of S-K Item 10(e) that this instruction makes applicable to an earnings release is:

(e) Use of non-GAAP financial measures in Commission filings.

(1) Whenever one or more non-GAAP financial measures are included in a filing with the Commission:

(i) The registrant must include the following in the filing:

(A) A presentation, with equal or greater prominence, of the most directly comparable financial measure or measures calculated and presented in accordance with Generally Accepted Accounting Principles (GAAP); 

(B) A reconciliation (by schedule or other clearly understandable method), which shall be quantitative for historical non-GAAP measures presented, and quantitative, to the extent available without unreasonable efforts, for forward-looking information, of the differences between the non-GAAP financial measure disclosed or released with the most directly comparable financial measure or measures calculated and presented in accordance with GAAP identified in paragraph (e)(1)(i)(A) of this section;

(C) A statement disclosing the reasons why the registrant’s management believes that presentation of the non-GAAP financial measure provides useful information to investors regarding the registrant’s financial condition and results of operations; and

(D) To the extent material, a statement disclosing the additional purposes, if any, for which the registrant’s management uses the non-GAAP financial measure that are not disclosed pursuant to paragraph (e)(1)(i)(C) of this section;

This company included non-GAAP measures in the headline of their earnings release without presenting the related GAAP measure with equal or greater prominence.  This resulted in this comment:

Form 8-K furnished May 7, 2020 Exhibit 99.1, page 1

  1. We note your presentation of the non-GAAP measures, Adjusted EBITDA and Net Income (loss) attributable to DZS – Non-GAAP, on page 1 of your earnings release. Please revise to present the most directly comparable GAAP measure (i.e. net loss) with equal or greater prominence to avoid placing undue prominence on the non-GAAP measures. Refer to the guidance outlined in Question 102.10 in the Division of Corporation Finance’s Compliance and Disclosure Interpretations surrounding Non-GAAP Financial Measures.

The C&DI mentioned states:

Question 102.10

Question: Item 10(e)(1)(i)(A) of Regulation S-K requires that when a registrant presents a non-GAAP measure it must present the most directly comparable GAAP measure with equal or greater prominence. This requirement applies to non-GAAP measures presented in documents filed with the Commission and also earnings releases furnished under Item 2.02 of Form 8-K. Are there examples of disclosures that would cause a non-GAAP measure to be more prominent?

 Answer: Yes. Although whether a non-GAAP measure is more prominent than the comparable GAAP measure generally depends on the facts and circumstances in which the disclosure is made, the staff would consider the following examples of disclosure of non-GAAP measures as more prominent:

  • Presenting a full income statement of non-GAAP measures or presenting a full non-GAAP income statement when reconciling non-GAAP measures to the most directly comparable GAAP measures;
  • Omitting comparable GAAP measures from an earnings release headline or caption that includes non-GAAP measures;
  • Presenting a non-GAAP measure using a style of presentation (e.g., bold, larger font) that emphasizes the non-GAAP measure over the comparable GAAP measure;
  • A non-GAAP measure that precedes the most directly comparable GAAP measure (including in an earnings release headline or caption);
  • Describing a non-GAAP measure as, for example, “record performance” or “exceptional” without at least an equally prominent descriptive characterization of the comparable GAAP measure;
  • Providing tabular disclosure of non-GAAP financial measures without preceding it with an equally prominent tabular disclosure of the comparable GAAP measures or including the comparable GAAP measures in the same table;
  • Excluding a quantitative reconciliation with respect to a forward-looking non-GAAP measure in reliance on the “unreasonable efforts” exception in Item 10(e)(1)(i)(B) without disclosing that fact and identifying the information that is unavailable and its probable significance in a location of equal or greater prominence; and
  • Providing discussion and analysis of a non-GAAP measure without a similar discussion and analysis of the comparable GAAP measure in a location with equal or greater prominence. [May 17, 2016]

This is the Company’s response to the comment:

DZS acknowledges the Staff’s comment and will undertake to adjust, in future Forms 8-K related to financial results, the presentation of financial information to ensure that the most directly comparable GAAP measure is presented with equal or greater prominence relative to non-GAAP measures.

Specifically, the Company will include in the headline and table on page 1, with equal or greater prominence, GAAP Net Income (loss) attributable to DZS, as the most directly related GAAP measure to the non-GAAP measures Adjusted EBITDA and Net income (loss) attributable to DZS – Non-GAAP.

As always, your thoughts and comments are welcome!

Comment of the Week – Debt Versus Equity Issues on the Rise?

The genesis of this post is actually a panel discussion from PLI’s 47th Annual Institute on Securities Regulation. This program is one of our major events in the CLE world. The roster of speakers is amazing, starting with a keynote address from Chair White and featuring so many SEC alums, current staffers and industry professionals that an SEC geek simply can’t resist the program.

Anyway, on the first day of the conference the first panel discussed capital market “health” in the current environment. One of the market developments they discussed was financing rounds companies complete shortly before an IPO. In the current environment more and more late round investors are demanding “price protection”. This “price protection” includes instruments like warrants with adjustable prices (ratchets or down-rounds) and preferred stock with adjustable conversions options.

(The staff does write comments about these kinds of instruments, and we have a few examples below.)

It turns out that sometimes the valuations used for these private placements shortly before an IPO don’t follow through to the valuations in the IPO. So the late round investors ask for price protection so they won’t seem to have overpaid shortly before an IPO. (This dovetails very nicely with the recent discussion in the financial press about how valuations for “unicorn” companies may be overstated in the current tech world.)

This is exactly the kind of price protection that has been common in emerging companies that have been far from the IPO process, and it is these kinds of instruments that have been the cause of so many restatements.

If you have ever attended any of our Midyear, Annual or Mid-Sized and Smaller Company SEC Reporting & FASB Forums you are familiar with the continuously updated list of restatement issues we discuss at those conferences. For the last seven years, the number one cause of restatements by public companies has been debt versus equity accounting. Instruments such as warrants with repricing provisions combined with the convoluted, complex accounting guidance in this area have caused more restatements than any other issue.

Being one of the few accountants in the Institute on Securities Regulation it was fascinating listening to the lawyers discuss these complex instruments. The discussion of disclosures that should surround these complex instruments and their unique features was deep and rich. No one however mentioned the accounting issues that they create, and the risk of restatement that goes along with this accounting complexity.

It was a great reminder that as accounting professionals we need to be on the watch for this issue and when we see it raise the accounting issues and assure they are dealt with effectively. This is one of the times when communication between finance, legal and accounting professionals is crucial.

If you would like to review an example of the accounting these instruments create, one of the participants on the panel was from BOX, a successful IPO which had this exact situation. In their first Form 10-K and their S-1 you can find a derivative liability on their balance sheet and a related fair value adjustment in their income statement related to redeemable preferred stock warrants they issued which were derivatives. You can find their Form 10-K at:

And, last, here are a couple of example comments. All of this really emphasizes the need to be aware of this issue and build the skills to recognize the issue and deal with it effectively.

It appears the exchangeable senior notes issued in August 2014 contain redemption features. Provide us your analysis that supports your conclusion that none of the redemption features are required to be bifurcated in accordance with ASC 815-15. Specifically address whether the debt involves a substantial discount in accordance with ASC 815-15-25-40 through [25-43].

We note your disclosure that the 1.25% Notes contain an embedded cash conversion option and that you have determined that this option is a derivative financial instrument that is required to be separated from the notes. Please provide us with the details of your analysis in determining that this conversion option should be accounted for separately as a derivative and refer to the specific accounting literature you relied on.

As always, your thoughts and comments are welcome!

P.S. And, just in case this is relevant to you, here is a link to our new workshop “Debt vs. Equity Accounting for Complex Financial Instruments”. This new case-driven workshop will be presented five times next year.


SEC Comment of the Week – A Favorite Topic


It is hard to believe we are already in mid-October, and the fourth quarter of the calendar year is well underway. Many companies will soon start planning for year-end reporting and being aware of “hot button issues” is a key part of this process. To help in this planning process we are going to highlight key planning issues through our blog posts. Here is the first of these issues we think all companies should be thinking about as year-end approaches.

As we have watched comments in recent weeks, one of the areas that continues to be emphasized is the quantification of analysis in MD&A. The roots of this issue are deep. Way back in 1989 one of the examples in FR 36 laid out the framework:

Revenue from sales of single-family homes for 1987 increased 6% from 1986. The increase resulted from a 14% increase in the average sales price per home, partially offset by a 6% decrease in the number of homes delivered. Revenues from sales of single-family homes for 1986 increased 2% from 1985. The average sales price per home in 1986 increased 6%, which was offset by a 4% decrease in the number of homes delivered.

The increase in the average sales prices in 1987 and 1986 is primarily the result of the Company’s increased emphasis on higher priced single-family homes. The decrease in homes delivered in 1987 and 1986 was attributable to a decline in sales in Texas. The significant decline in oil prices and its resulting effect on energy-related business has further impacted the already depressed Texas area housing market and is expected to do so for the foreseeable future. The Company curtailed housing operations during 1987 in certain areas in Texas in response to this change in the housing market. Although the number of homes sold is expected to continue to decline during the current year as a result of this action, this decline is expected to be offset by increases in average sales prices.

You can find the release at:


In 2003 FR 72 emphasized the importance of understanding the causal factors underlying changes:

  1. Focus on Analysis

MD&A requires not only a “discussion” but also an “analysis” of known material trends, events, demands, commitments and uncertainties. MD&A should not be merely a restatement of financial statement information in a narrative form. When a description of known material trends, events, demands, commitments and uncertainties is set forth, companies should consider including, and may be required to include, an analysis explaining the underlying reasons or implications, interrelationships between constituent elements, or the relative significance of those matters.

You can find the release at:


And, here are a few very recent comments where the staff focuses on these requirements in MD&A. (We have added emphasis to highlight key issues.)

As previously requested, please disclose more detail about the underlying material factors contributing to the increases in comparable store sales in both your year-end and interim results discussions, such as any changes in selling prices, volumes or the introduction or discontinuance of popular products that had a significant impact on your revenue. Refer to Item 303(a)(3)(iii) of Regulation S-K. In this regard, your current disclosures such as stating that comparable store sales increase primarily due to “strong deals in electronics, pets and clothing” do not provide enough insight into the underlying factors that drove the increase in comparable store sales that investors can access the likelihood that past results are indicative of future results. To the extent that multiple offsetting factors influenced your comparable store sales, you should discuss the impact of each significant factor. For example, if “strong deals” indicates that you lowered average prices through increased promotional activity, this would appear to decrease revenue; however, these lower prices may have been more than offset by higher volumes of products being sold. In this case, both the decrease in pricing and the increase in volume should be described.

Throughout your discussion of the results of operations, you refer to various factors that have impacted your results without quantifying the impact of each factor. Where a material change is attributed to two or more factors, including any offsetting factors, the contribution of each identified factor should be described in quantified terms. For example, you attribute the decrease in net sales and unit sales for the (Product A) in 2014 as a result of growth in the Greater China and Japan segments offset by declines in all other segments with no quantification. As another example, you attribute the growth in the Americas segment in 2014 as a result of increased net sales of (Products B, C and D), Software and Services offset by a decline in net sales of (Product E and A) and weakness in foreign currencies but you do not quantify the effects of these individual factors. Please explain to us how you considered quantifying the sources of material changes and offsetting factors throughout your discussion. Refer to Item 303(a)(3)(iii) of Regulation S-K and Section III.D of SEC Release No. 33-6835.

(Bloggers note: The release mentioned here is FR 36 quoted above)

We note you attribute the changes in headcount to explain certain changes in your results of operations but the headcount does not appear to be quantified. Please tell us your consideration of quantifying the headcount at the end of each period as a factor to explain the changes for the line items that are impacted. We refer you to Item 303(a)(3)(iii) of Regulation S-K and Section III.D of SEC Release No. 33-6835.


As always, your thoughts and comments are welcome!