The Advisors' Blog

If late 2024 PvP comment letters are any indication, there seems to be confusion about what companies need to say about non-GAAP Company-Selected Measures (and additional PvP measures a company may elect to provide). Under Item 402(v)(2)(vi) of Regulation S-K, non-GAAP Company-Selected Measures will not be subject to Regulation G or Item 10(e) of Regulation S-K but companies must disclose how the number is calculated from the audited financial statements. (This requirement intentionally tracked the requirements related to disclosing target levels that are non-GAAP financial measures in CD&A under Instruction 5 to Item 402(b).)

The confusion might stem from the fact that Instruction 5 is limited to target compensation levels. Regulation S-K CDI 118.08 says the instruction does not extend to non-GAAP financial information that does not relate to the disclosure of target levels, so when non-GAAP measures are disclosed in the proxy for other purposes, those are subject to Reg. G and Item 10(e) requirements. But, per the CDI, the Staff will not object if the company provides the disclosure by prominent cross-reference to a proxy statement annex or pages in the Form 10-K. Many companies do this.

It appears that several companies attempted to comply with the requirement to disclose how their non-GAAP Company-Selected Measure in 2024 proxies is calculated from the audited financial statements by cross-referencing other disclosures — either internally in the proxy or to the Form 10-K. But incorporation by reference to a separate filing (even the 10-K) doesn’t work. Cross-referencing disclosure in another section of the proxy statement — like the disclosure intended to comply with Instruction 5 to Item 402(b) — would comply if that section included the full required explanation of how the Company-Selected Measure is calculated from the audited financial statements.

While that explanation will necessarily be tailored to the company and the measure, here’s an explanation provided to the Staff in a response letter from AdaptHealth Corp. of how a Company-Selected Measure — here, Adjusted EBITDA — is calculated from the audited financial statements:

In the 2024 Proxy Statement, the Company calculated Adjusted EBITDA for each year disclosed on the Pay Versus Performance Table as EBITDA, plus loss on extinguishment of debt, equity-based compensation expense, transaction costs, change in fair value of the warrant liability, goodwill impairment, change in fair value of the contingent consideration common shares liability, litigation settlement expense, and certain other nonrecurring items of expense or income. The Company calculated EBITDA as part of the calculation of Adjusted EBITDA for each year disclosed on the Pay Versus Performance Table as net income (loss) attributable to [the company], plus net income (loss) attributable to noncontrolling interests, interest expense, net, income tax expense (benefit), and depreciation and amortization, including patient equipment depreciation.

– Meredith Ervine