{"id":2227,"date":"2022-08-17T08:47:53","date_gmt":"2022-08-17T12:47:53","guid":{"rendered":"https:\/\/seci.wpenginepowered.com\/?p=2227"},"modified":"2022-08-17T08:47:53","modified_gmt":"2022-08-17T12:47:53","slug":"an-example-of-a-simple-failure-to-disclose-why-revenues-increased-costs-nvidias-5500000-penalty","status":"publish","type":"post","link":"https:\/\/seciblog.pli.edu\/index.php\/an-example-of-a-simple-failure-to-disclose-why-revenues-increased-costs-nvidias-5500000-penalty\/","title":{"rendered":"An Example of a \u201cSimple\u201d Failure to Disclose Why Revenues Increased Costs \u2013 NVIDIA\u2019s $5,500,000 Penalty"},"content":{"rendered":"

Most MD&A enforcement cases focus on a complex issue, failure to disclose a known trend or uncertainty. \u00a0In these cases (e.g., Sony<\/a>, SeaWorld<\/a> and Under Armour<\/a>), company management knows of something that is \u201creasonably likely\u201d to materially affect financial performance in the future but does not disclose this information to investors in a timely manner.\u00a0 This disclosure is probabilistic and subjective.<\/p>\n

The issue in the SEC\u2019s recent enforcement against NVIDIA was far simpler.\u00a0 As detailed in this May 6, 2022, Press Release<\/a> and the related SEC Order<\/a>, NVIDIA Corporation failed to disclose the causal factors behind material increases in revenues<\/strong> in 2018.\u00a0 This disclosure failure resulted in a $5,500,000 penalty.<\/p>\n

The foundation for this case is in Regulation S-K Item 303, language that was formerly part of Financial Release 36<\/a> (No. 33-6835) and Financial Release 72<\/a> (No. 33-8350):<\/p>\n

Where the financial statements reflect material changes from period-to-period in one or more line items, including where material changes within a line item offset one another, describe the underlying reasons for these material changes in quantitative and qualitative terms.<\/p>\n

This disclosure, which is one of the main objectives of MD&A as articulated in S-K Item 303 and Financial Release 72, is to provide material information to help readers \u201cascertain that past performance is indicative of future performance.\u201d<\/p>\n

As you can read in the SEC Order, NVIDIA, which sells powerful computer chips know as graphics processing units (or GPUs), generated material increases in revenue in 2018.\u00a0 Specifically, gaming GPU revenue increased 52% and 25% for the second and third quarters of 2018, respectively.\u00a0 Company management knew that a significant part of this increase was because cryptominers were buying gaming chips, even though the company had built a separate product line for these customers.\u00a0 The company was also aware that cryptomining is a very volatile business.<\/p>\n

In its Form 10-Q for the second and third quarters for 2018, NVIDIA did not disclose that cryptomining was a significant factor in gaming revenue growth.<\/p>\n

Not disclosing this information meant that investors did not have necessary information to \u201cascertain that past performance is indicative of future performance.\u201d<\/p>\n

The SEC Order also focuses on NVIDIA\u2019s failure to maintain effective disclosure controls and procedures.<\/p>\n

The CorpFin review process has consistently emphasized the requirement to disclose qualitative and quantitative information about the causal factors behind financial statement changes.\u00a0 The voice of the Enforcement Division is now reinforcing this message: failure to disclose material information about causal factors behind financial statement changes can result in significant penalties.<\/p>\n

As always, your thoughts and comments are welcome!<\/p>\n","protected":false},"excerpt":{"rendered":"

Most MD&A enforcement cases focus on a complex issue, failure to disclose a known trend or uncertainty. \u00a0In these cases (e.g., Sony, SeaWorld and Under Armour), company management knows of something that is \u201creasonably likely\u201d to materially affect financial performance in the future but does not disclose this information to investors in a timely manner.\u00a0 … Continue reading An Example of a \u201cSimple\u201d Failure to Disclose Why Revenues Increased Costs \u2013 NVIDIA\u2019s $5,500,000 Penalty<\/span> →<\/span><\/a><\/p>\n","protected":false},"author":9,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"jetpack_post_was_ever_published":false,"_jetpack_newsletter_access":"","_jetpack_dont_email_post_to_subs":false,"_jetpack_newsletter_tier_id":0,"_jetpack_memberships_contains_paywalled_content":false,"_jetpack_memberships_contains_paid_content":false,"footnotes":"","jetpack_publicize_message":"","jetpack_publicize_feature_enabled":true,"jetpack_social_post_already_shared":true,"jetpack_social_options":{"image_generator_settings":{"template":"highway","default_image_id":0,"font":"","enabled":false},"version":2},"_wpas_customize_per_network":false},"categories":[14,242],"tags":[],"coauthors":[154],"class_list":["post-2227","post","type-post","status-publish","format-standard","hentry","category-10-k10-q-tips","category-reporting"],"jetpack_publicize_connections":[],"jetpack_featured_media_url":"","jetpack_sharing_enabled":true,"post_mailing_queue_ids":[],"_links":{"self":[{"href":"https:\/\/seciblog.pli.edu\/index.php\/wp-json\/wp\/v2\/posts\/2227","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/seciblog.pli.edu\/index.php\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/seciblog.pli.edu\/index.php\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/seciblog.pli.edu\/index.php\/wp-json\/wp\/v2\/users\/9"}],"replies":[{"embeddable":true,"href":"https:\/\/seciblog.pli.edu\/index.php\/wp-json\/wp\/v2\/comments?post=2227"}],"version-history":[{"count":0,"href":"https:\/\/seciblog.pli.edu\/index.php\/wp-json\/wp\/v2\/posts\/2227\/revisions"}],"wp:attachment":[{"href":"https:\/\/seciblog.pli.edu\/index.php\/wp-json\/wp\/v2\/media?parent=2227"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/seciblog.pli.edu\/index.php\/wp-json\/wp\/v2\/categories?post=2227"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/seciblog.pli.edu\/index.php\/wp-json\/wp\/v2\/tags?post=2227"},{"taxonomy":"author","embeddable":true,"href":"https:\/\/seciblog.pli.edu\/index.php\/wp-json\/wp\/v2\/coauthors?post=2227"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}