All posts by George Wilson

A Déjà vu Enforcement Case

Reporting

On September 30, 2020, the SEC announced a settled enforcement action against HP Inc.  This is another classic “known-trend” case.  Almost all these actions begin with a large, surprise stock drop.  Here is an excerpt from the SEC’s Accounting and Auditing Enforcement Release (or AAER):

 On June 21, 2016, HP held a “Business Update Call” midway through the company’s third fiscal quarter. On the call, HP announced its change from a push to a pull model, and it explained that the company would be making a “one-time investment to reduce the level of supplies inventory across the channels.” HP disclosed that, “[a]s a result of the channel inventory reduction, the supplies net revenue is expected to be reduced by $225 million in each Q3 and Q4.”

 The $450 million reduction represented 5% of HP’s reported Printing segment net revenue for the second half of 2016. Asked by an analyst about the size of the inventory reduction, HP’s CFO described it as “fairly material, because as I mentioned it’s about $450 million over a couple of quarters.” Following the announcement, HP’s stock price dropped nearly 6%, eliminating more than $1 billion of market capitalization.

One of the causal factors behind this announcement was that HP had pushed inventory into its distribution channels.  Again, from the AAER:

During that period, certain regional managers at HP undertook undisclosed sales practices to increase quarterly operating profit, leading to an erosion of profit margin and an increase in channel inventory, while failing to disclose known trends and uncertainties associated with the conduct.

When distribution channels are “stuffed” there is a real risk that future revenues and profitability will suffer. This is the issue behind the known trend in this case as the SEC points out in the release:

Item 303(a)(3)(ii) of Regulation S-K, 17 C.F.R. § 229.303(a), requires such companies to describe, among other things, “any known trends or uncertainties that have had or that the registrant reasonably expects will have a material favorable or unfavorable impact on net sales or revenues or income from continuing operations” in its annual report on Form 10-K. Instruction 3 to Item 303(a) of Regulation S-K requires that the “discussion and analysis shall focus specifically on material events and uncertainties known to management that would cause reported financial information not to be necessarily indicative of future operating results or of future financial condition.”

In its 2015 Form 10-K, HP failed to disclose the known trend of increased quarter-end discounting leading to margin erosion and an increase in channel inventory, and the unfavorable impact that the trend would have on HP’s sales and income from continuing operations, causing HP’s reported results to not necessarily be indicative of its future operating results. The failure to disclose that material trend caused HP’s 2015 Form 10-K to be materially misleading.

If you are experiencing a deep feeling of déjà vu as you read this post (and were involved in SEC reporting 15 years ago!), you are likely remembering that HP’s case involves exactly the same issue as an enforcement action against Coca-Cola in 2005.  In that case Coke had “gallon-pushed” syrup to certain bottlers.  The following quotes from the Coca-Cola AAER are eerily similar to those from the HP case above:

To encourage bottlers to purchase additional concentrate, CCJC extended more favorable credit terms than usual to bottlers, typically increasing payment terms from eight to twenty-eight or thirty days. No rights of return on gallons sold pursuant to gallon pushing were offered to bottlers, and no concentrate sold pursuant to gallon pushing was returned to CCJC or Coca-Cola. All concentrate sold pursuant to gallon pushing was paid for by the bottlers.

On January 26, 2000, Coca-Cola filed a Form 8-K with the Commission which disclosed, among other things, a worldwide concentrate inventory reduction planned to occur during the first half of the year 2000. The inventory reduction was to be accomplished by Coca-Cola’s operating divisions, specifically including CCJC, ceasing to sell concentrate to bottlers until bottlers naturally reduced their inventory to purported “optimum” levels. The impact on Coca-Cola’s earnings for the first and second quarter of 2000 was estimated to be between $0.11 and $0.13 per share.

A crucial issue in both these cases is that there was no accounting misstatement.  The enforcement issue is about the MD&A known-trend disclosure requirement in S-K Item 303(a)(3)(ii):

 Describe any known trends or uncertainties that have had or that the registrant reasonably expects will have a material favorable or unfavorable impact on net sales or revenues or income from continuing operations. If the registrant knows of events that will cause a material change in the relationship between costs and revenues (such as known future increases in costs of labor or materials or price increases or inventory adjustments), the change in the relationship shall be disclosed.

 The probabilistic threshold in this disclosure, reasonably expects, requires a very complex judgment.  The SEC’s 1989 MD&A Release, FR 36, provides this decision model for this judgment:

Where a trend, demand, commitment, event or uncertainty is known, management must make two assessments:

(1) Is the known trend, demand, commitment, event or uncertainty likely to come to fruition? If management determines that it is not reasonably likely to occur, no disclosure is required.

 (2) If management cannot make that determination, it must evaluate objectively the consequences of the known trend, demand, commitment, event or uncertainty, on the assumption that it will come to fruition. Disclosure is then required unless management determines that a material effect on the registrant’s financial condition or results of operations is not reasonably likely to occur

As you can see, this test creates a probability threshold that is essentially below 50%.

The HP case also focuses on disclosure controls and procedures since HP’s disclosure controls failed to detect that the known-trend information was not appropriately disclosed.  More about that in the next post.

All of this brings us back to one of the “Golden Rules” of MD&A – No surprise stock drops!

As always, your thoughts and comments are welcome!

 

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

Reporting, SEC Hot Topic

In this series of posts we are focusing on non-GAAP measure problems and related SEC comments.  As the first, second and third posts in this series did, this post gives you an opportunity to see if you can spot the issue, and then provides the background and SEC guidance behind the issue.

As a brief reminder, the SEC’s guidance about the use of non-GAAP measures is primarily in three places:

  1. Regulation G for non-GAAP measures used anywhere,
  2. S-K Item 10(e), for non-GAAP measures in filed documents, and
  3. Compliance and Disclosure Interpretations.

Just like the first, second and third posts in this series, you can 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.

These excerpts are from Papa John’s International, Inc’s Form 10-K for the fiscal year ended December 29, 2019.  You may recognize this Company as we highlighted their 10-K in our third post in this series.  Can you spot the non-GAAP issue?  As you review this information, focus your thoughts on the “special charges,” and within the detailed list of “special charges” look at the “Royalty relief” line item.

To begin, here is one of the non-GAAP measures presented by Papa John’s:

PapaJohn One

Papa John’s also provided this detail about the special charges:

PapaJohn Two

As you review the list of non-GAAP adjustments, letter (a) about royalty relief to franchisees seems like a typical kind of adjustment.  But the issue here is more complex, as royalty income is a significant source of revenue for Papa John’s.

This is the comment the SEC issued about this non-GAAP adjustment:

Form 10-K for the Fiscal Year Ended December 29, 2019

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations Items Impacting Comparability; Non-GAAP Measures, page 40

  1. Please tell us the consideration you gave to Question 100.04 of the Non-GAAP Financial Measures Compliance and Disclosure Interpretations in adjusting your non-GAAP measures to add revenues you did not receive due to royalty relief.

The C&DI referenced, Question 100.04 makes a very important point:

Question 100.04

Question: A registrant presents a non-GAAP performance measure that is adjusted to accelerate revenue recognized ratably over time in accordance with GAAP as though it earned revenue when customers are billed. Can this measure be presented in documents filed or furnished with the Commission or provided elsewhere, such as on company websites.

Answer: No. Non-GAAP measures that substitute individually tailored revenue recognition and measurement methods for those of GAAP could violate Rule 100(b) of Regulation G. Other measures that use individually tailored recognition and measurement methods for financial statement line items other than revenue may also violate Rule 100(b) of Regulation G.   [May 17, 2016]

This is Papa John’s first of two responses to this comment:

We did consider the guidance in Question 100.04 in connection with our inclusion in “Special charges” of royalty reductions that are above and beyond the level of franchise support the Company would incur in the ordinary course of its business. We also evaluated Rule 100(b) of Regulation G, which states that a registrant may not make public a non-GAAP financial measure that, taken together with the information accompanying the measure, is misleading.   We believe the adjustment reflects the add-back of contractually due and waived franchise royalties in our financial statements rather than the tailoring of the recognition or measurement principles under GAAP.

 Papa John’s franchisees are contractually required to pay a 5% royalty on sales. As part of its voluntary program to provide temporary financial assistance for traditional North America franchisees in response to declining North America sales discussed above, the Company extended financial assistance to its traditional North America franchisees in the form of a reduction in the contractually due royalties beginning in the third quarter of 2018, for a limited time period. The decline in sales was due to the negative publicity and consumer sentiment surrounding the Company’s brand as noted in Comment 1 (Note:  See the third post in this series for this information) above. Sales remained negative into 2019, which led the Company to formalize a temporary relief package, publicly announced in July 2019, to provide its franchisees with certainty regarding the availability and schedule of the relief which will continue through the third quarter of 2020. The total royalty relief included in “Special charges” was $19.1 million and $15.4 million for the years ended December 29, 2019 and December 30, 2018, respectively. The scheduled royalty reductions presented in “Special charges” represent the difference between the usual 5.0% contractual royalty rate applicable to North America franchise sales and the reduced royalty rate under our franchisee assistance program ranging from 0.5% to 2.0% of franchise restaurant sales varying by quarter. Additionally, North America franchisees that met certain defined service measures also received a 0.25% reduction in the royalty rate in the third and fourth quarters of 2019.

We believe that presenting these royalty reductions as “Special charges” is consistent with the objectives of our non-GAAP presentation, which is to show the financial performance of our ongoing operations excluding the temporary impact of the Company’s initiative of providing short-term support and financial assistance to the North America franchise system in response to the severe decline in North America sales. The Company did not receive the revenue foregone from its royalty relief program, as it is waiving a contractual right to recognize the revenue earned. We excluded the temporary waiver of this contractual right together with the marketing investments discussed in our response to Comment 1 for internal comparison purposes when evaluating the Company’s underlying operating performance and when analyzing trends. When presented next to the most directly comparable GAAP measure, we believe we are presenting a supplemental measure that shows the impact of our discretionary, non-contractual franchise support and relief program to our operating results. Accordingly, the Company respectfully advises the staff that we have considered the prescribed guidance and we believe that the presentation of royalty relief from our non-GAAP financial results, taken together with the information accompanying the measure, does not cause those results to be misleading.

To help further clarify the nature of the royalty reductions, beginning in our Form 10-Q for the quarter ended March 29, 2020, we will revise the footnoted description of the royalty relief in our “Special charges” table as follows: “Represents financial assistance provided to the North America system in the form of temporary royalty reductions that are above and beyond the level of franchise support the Company would incur in the ordinary course of its business. This temporary financial assistance provides our North America franchisees with certainty regarding the availability and schedule of the temporary relief through the third quarter of 2020. Under the formal relief program, the franchisees pay royalties below the 5.0% contractual rate on franchise restaurant sales with varying rates by quarter as specified under the terms of the program.”

After this first response the SEC and Papa John’s had further phone discussions about this issue.  Interestingly, the SEC did not issue a second comment letter.  While we cannot know the content of these discussions, they were clearly substantive.  They resulted in this final answer by Papa John’s:

Response: As discussed during the phone conversation between the Staff and the Company on April 24, 2020, beginning with the Company’s earnings release for the first quarter of fiscal 2020, the Company will no longer present adjusted (non-GAAP) financial results adjusted to add revenues we did not receive due to royalty relief.

As always, your thoughts and comments are welcome!

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

Comment of the Week, Reporting

In this series of posts we are focusing on non-GAAP measure problems and related SEC comments.  As the first and second posts in this series did, this post gives you an opportunity to see if you can spot the issue, and then provides the background and SEC guidance behind the issue.

As a brief reminder, the SEC’s guidance about the use of non-GAAP measures is primarily in three places:

Regulation G for non-GAAP measures used anywhere,

S-K Item 10(e), for non-GAAP measures in filed documents, and

The related Compliance and Disclosure Interpretations.

 Just like the first and second posts in this series, you can 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.

These excerpts are from Papa John’s International, Inc’s Form 10-K for the fiscal year ended December 29, 2019.  Can you spot the non-GAAP issue?  As you review this information, focus your thoughts on the “special charges” and in particular the “Marketing fund investments.”

To begin, here is one of the non-GAAP measures presented by Papa John’s:

PapaJohn One

Papa John’s also provided this detail about the special charges:

PapaJohn Two

As you review the list of non-GAAP adjustments, letter (b) regarding marketing support to franchisees seems like it is a cash expense.

This is the comment the SEC issued about this non-GAAP adjustment:

Form 10-K for the Fiscal Year Ended December 29, 2019

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations Items Impacting Comparability; Non-GAAP Measures, page 40

  1. Please tell us the consideration you gave to Question 100.01 of the Non-GAAP Financial Measures Compliance and Disclosure Interpretations in adjusting your non-GAAP measures to remove marketing fund investments made by you.

The C&DI referenced, Question 100.01 makes a very important point:

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. For example, presenting a performance measure that excludes normal, recurring, cash operating expenses necessary to operate a registrant’s business could be misleading. [May 17, 2016]

This is Papa John’s first of two responses to this comment:

We did consider the guidance in Question 100.01 of the Non-GAAP Financial Measures Compliance and Disclosure Interpretations in our presentation of our adjusted (non-GAAP) financial results excluding marketing fund investments identified as “Special charges.” The marketing fund investments included in “Special charges” of $27.5 million and $10.0 million for the years ended December 29, 2019 and December 30, 2018, respectively, represent discretionary, non-contractual marketing fund investments to support national media initiatives. Domestic Company-owned and franchised Papa John’s restaurants are required to contribute a certain minimum percentage of their sales (currently 5.0% of sales) to the Papa John’s Marketing Fund, our national marketing fund, which are not included as part of the “Special charges.” The national marketing fund is responsible for developing and conducting marketing and advertising for the domestic Papa John’s system. Beginning in the fourth quarter of 2018, the Company began making significant discretionary, non-contractual marketing fund investments to supplement the contractual Company-owned and franchised restaurant-level system contributions.  These discretionary, non-contractual marketing fund investments were part of the Company’s previously announced program of increased support and financial assistance to the North America franchise system in response to the severe decline in North America sales. The decline in North America sales followed extensive negative publicity and consumer sentiment as a result of statements by the Company’s founder and former spokesman in late 2017 and July 2018. The discretionary, non-contractual marketing fund investments were made as a response to these extraordinary adverse events to defend and repair the brand’s reputation and were not made in the ordinary course of business.

Question 100.01 notes that a non-GAAP financial measure may be misleading if it excludes “normal, recurring, cash operating expenses necessary to operate a registrant’s business.” The Company does not consider the incremental marketing fund investments to be normal, recurring, cash operating expenses necessary to operate the Company’s business. Furthermore, as stated in the Company’s Form 10-K for the fiscal year ended December 29, 2019, such investments are of a limited duration and are only “expected to continue through the third quarter of 2020”, which further supports the conclusion that the charges are not of a recurring nature. As a result, we do not consider these investments to be representative of our underlying operating performance and thus believe the exclusion in our non-GAAP financial results provides investors with important additional information regarding our underlying operating results and is important for purposes of comparisons to prior year results.  In addition, management uses the non-GAAP financial results to evaluate the Company’s underlying operating performance and to analyze trends. Accordingly, we respectfully advise the staff that we considered the guidance in Question 100.01 and believe that the exclusion of the discretionary marketing fund investments from our non-GAAP financial results and the related presentation and disclosure does not cause those results to be misleading.

To help further clarify the nature of these charges, beginning in our Form 10-Q for the quarter ended March 29, 2020, we will revise the footnoted description of these marketing fund investments in our “Special charges” table as follows: “Represents incremental discretionary marketing fund investments in excess of contractual Company-owned restaurant-level contributions, which were made as part of our previously announced temporary support package to our franchisees.”

After this first response the SEC and Papa John’s had further phone discussions about this issue.  Interestingly, the SEC did not issue a second comment letter.  While we cannot know the content of these discussions, they were clearly substantive.  They resulted in this final answer by Papa John’s:

Response: As discussed during the phone conversation between the Staff and the Company on April 24, 2020, beginning with the Company’s earnings release for the first quarter of fiscal 2020, the Company will no longer present adjusted (non-GAAP) financial results excluding the marketing fund investments made by the Company.

As always, your thoughts and comments are welcome!

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

Comment of the Week, Hot Topic

In this series of posts we are focusing on non-GAAP measure problems and related SEC comments in earnings releases.  As the first post in this series did, this post gives you an opportunity to see if you can spot the issue, and then provides the background and SEC guidance about the issue.

As a brief reminder, the SEC’s guidance about the use of non-GAAP measures is primarily in three places:

Regulation G for non-GAAP measures used anywhere,

S-K Item 10(e), for non-GAAP measures in filed documents, and

The related Compliance and Disclosure Interpretations.

 Just like the first post in this series, you can 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 The Interpublic Group of Companies on April 22, 2020.  Can you spot the non-GAAP issue?

Interpublic One

The issue here goes back to the concept that companies should not try to create the impression that non-GAAP measures provide a better view of the company than GAAP.  Here is the related SEC comment:

Form 8-K filed April 22, 2020

Exhibit 99.1
Reconciliation of Adjusted Results, page 7

  1. Please tell us your consideration of the guidance in Question 102.10 of the Non-GAAP Compliance and Disclosure Interpretations related to your presentation of full non-GAAP income statements when reconciling non-GAAP measures in your earnings releases.

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]

The issue behind this comment is that the company presented a full non-GAAP income statement.  The SEC does not permit this kind of presentation.

This is the Company’s response to the comment:

The Company acknowledges the Staff’s comment and advises that it had not previously viewed the non-GAAP reconciliation on page 7 to be a full non-GAAP income statement but will revise its disclosures going forward to ensure that future non-GAAP reconciliations in the Company’s earnings releases and other investor materials do not resemble full non-GAAP income statements. Below please find an example of how the Company intends to present future non-GAAP reconciliations, using the quarter ended March 31, 2020 results for illustrative purposes. We note that this presentation is also included in our Investor Presentation which was included as Exhibit 99.2 to Form 8-K filed on April 22, 2020.

Interpublic Fixed

As always, your thoughts and comments are welcome!

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

SEC Comment of the Week

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.

Instructions:

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!

A Big Day in SEC Rulemaking

SEC Hot Topic

On September 23, 2020, the SEC adopted two major Final Rules dealing with two very different issues, shareholder proposals and the whistleblower program.

Shareholder Proposals

The Commission approved changes in its rules for shareholder proposals in three areas.

First, the ownership thresholds for submission of shareholder proposals have been increased to:

  • $2,000 of the company’s securities for at least three years;
  • $15,000 of the company’s securities for at least two years; or
  • $25,000 of the company’s securities for at least one year.

Second, shareholders will no longer be permitted to aggregate holdings to meet the ownership thresholds.

Third, the voting thresholds for resubmission of a proposal have been increased from 3%, 6% and 10% for matters previously voted on once, twice or three or more times in the last five years to thresholds of 5%, 15% and 25% for those respective periods.

You can read more in this Press Release and the Final Rule.  The new shareholder proposal rules will be effective 60 days after publication in the Federal Register.

Whistleblower Program Changes

The commission made numerous changes in its whistleblower program rules affecting areas ranging from increasing efficiencies in how claims are processed to providing the Commission tools to provide rewards appropriate to the nature of a whistleblower’s efforts and contributions.  You can read more in this press release which contains a link to the Final Rule.

Along with the new rules, the Office of the Whistleblower has issued new guidance about how awards are determined which you can read here.

The new whistleblower rules will be effective 30 days after publication in the Federal Register.

As always, your thoughts and comments are welcome!

And the Beat Goes On – The Whistleblower Song

Uncategorized

As we have blogged on many occasions, the SEC’s Whistleblower Program has become an important part of the Enforcement Division’s activities.  On September 17, 2020, the SEC announced payments to joint whistleblowers who had raised concerns internally before blowing the whistle to the SEC.  And this September 14, 2020 Press Release announced a $10,000,000 (yes, million!) payment to a whistleblower “whose information and assistance were of crucial importance to a successful SEC enforcement action.”

To date the program has paid out approximately $521 million to 96 individuals.

If you want more background and detail, check out episode six of PLI’s inSecurities podcast, which features a review of how the whistleblower process works and a discussion of how the explosion of tips created by the program has affected the enforcement process.

As always, your thoughts and comments are welcome!

 

Training and Gearing Up for Third-Quarter and Year-End Reporting

About SECI

In the closing months of 2020, we are all facing new and unique SEC reporting challenges. You may be asking yourself: What will be the appropriate disclosures about the uncertainty and disruption created by COVID-19?  How should risk factors and MD&A be updated?  And how should companies grapple with the SEC’s new business, legal proceedings and risk factor guidance?

To help SEC reporting professionals prepare for these challenges and more, we have built new interactive modular Workshops and new on-demand content.  We are also offering our traditional Workshops and conferences via live Webcast.

New Interactive Modular Workshops

We are now offering three new half-day interactive, virtual Workshops to better fit hectic and sometimes disrupted schedules. Our half-day Workshops are designed in a modular format which allows you to pick and choose the content to meet your educational needs on a schedule that works for you.  Participants will be able to ask questions and speak directly to the discussion leaders through our interactive platform.  SECI is adding more dates and modules in 2021 so please be sure to visit our website to continue customizing your learning curriculum!

SEC Reporting Essentials 101 Workshop

Form 10-K SEC Reporting Essentials Workshop

SEC 10-K Disclosure Best Practices Workshop

 

On-Demand Content

Our on-demand content, including our new Ethical Challenges for SEC Reporting Professionals program, each offer one hour of CPE credit and can be taken anytime and anywhere!

Ethical Challenges for SEC Reporting Professionals

Using Non-GAAP Measures and Metrics to Explain the Impact of COVID-19 

Master the SEC Reporting and Research Process – Part One 

Master the SEC Reporting and Research Process – Part Two 

Master Form S-1 for an Initial Public Offering 

A Deep Dive Into COVID-19’s Impact on Quarter One Goodwill Impairment Testing

Impairment Testing Considerations for Quarter One in the 2020 Coronavirus Environment

SEC’s New Metric Guidance and a Non-GAAP Measure Update

Fifth Annual Dealing with MD&A Hot Topics 

Sixth Annual Form 10-K/Proxy Tune-Up 

 

Our Traditional Workshops via Live Webcast

Our time-tested, high quality Workshops have also been adapted for the Live Webcast format.  These one- or two-day Workshops are continuously updated for the latest SEC and FASB developments.

SEC Reporting Skills Workshop for Financial Professionals

SEC Reporting and Practice Skills Workshop for Lawyers

MD&A In-Depth Workshop

Form 20-F In-Depth Workshop

 

Our Traditional Conferences via Live Webcast

Our 16th Annual SEC Reporting & FASB Forum for Mid-sized & Smaller Companies and our 36th Annual SEC Reporting & FASB Forum will be offered via Live Webcast.  Our conferences will feature the same high-quality content and expert speakers as always, provide a focus on disclosures in the current COVID-19 environment, and include discussion of the latest developments from the SEC and FASB.  Our Webcast platform also provides an easy and convenient way to submit questions to our speakers.

16th Annual SEC Reporting & FASB Forum for Mid-sized & Smaller Companies

36th Annual SEC Reporting & FASB Forum (PDT)

36th Annual SEC Reporting & FASB Forum (EDT)

As always, your thoughts and comments are welcome!

PLI’s inSecurities Podcast

Uncategorized

If you are looking for a wonderfully informative and entertaining podcast to listen to while you work out at home, run or walk outside, or are just relaxing anywhere, check out PLI’s inSecurities podcast.

The hosts of the podcast, Chris Ekimoff, a forensic accountant, and Kurt Wolfe, a securities regulatory attorney, provide insightful practitioner perspectives in their  biweekly podcast.  Podcast episodes have addressed  topics such as insider trading, developments in the SEC’s whistleblower program, the perspectives the SEC Historical Society brings to securities regulation and business development challenges in the COVID-19 environment.  Chris and Kurt have interviewed prominent securities industry professionals including former SEC Commissioner Robert Jackson, NASAA General Counsel Vince Martinez and whistleblower attorney Matt Stock.

The most recent podcast episode focuses on current developments from the SEC, FASB and PCAOB, which were highlighted in the SEC Institute’s Quarterly Newsletter.  SEC Institute Director George Wilson joined Chris and Kurt for this timely discussion which you can listen to here.  You can also find PLI’s podcast at all the usual podcast sources, including Apple, Google and Spotify.

 

 

As always, your thoughts and comments are welcome!

Our New, Virtual, Interactive Form 10-K Disclosure Workshop

Reporting

Our new SEC 10-K Disclosure Best Practices Workshop is a perfect way to help you prepare for this year-end’s unique and complex reporting challenges.  Featured topics include COVID-19 related disclosures, the SEC’s modernization of business, risk factor and legal proceedings disclosures, rules and practice issues surrounding the use of non-GAAP measures and SEC “hot-button” comment areas in the current environment.  Best practice examples from different industries and companies are discussed in each section to illustrate effective disclosure practices.

Featuring open discussion in an interactive, Zoom-based format, this new Workshop will be presented over two afternoons (half days) on October 5_6, 2020, with a start time of 1 p.m. EDT on both days.

The Workshop includes online access to PLI’s SEC Reporting Handbook.

 As always, your thoughts and comments are welcome.