One of the Securities and Exchange Commission’s (SEC) primary responsibilities is to periodically review securities filings of public companies, specifically by the Division of Corporate Finance. Naturally, issues arise from the staff's reviews, which often require correspondence with the company that submitted the filing. These are commonly known as SEC comment letters.
These letters are often overlooked by investors as they are not regularly disclosed like the Qs and Ks. Hence we highlight recent SEC review blitz, including forced Celsius disclosing contract details about Pepsi, executive incentives disclosure, two firms' poor accounting, energy firm's broad deficiencies, and more at Warner Bros, Enovix, and Fox.
Disclosure from Celsius on PepsiCo
Celsius Holdings $CELH is a challenger brand in the energy drink market. It has seen success and claims to control 11.5% of the market, up from 8.7% last year. One contributing factor is that PepsiCo $PEP became its primary distribution supplier in the US in 2022. Pepsi is Celsius' largest customer and accounted for 59.4% of its 2023 revenue and 69.0% of its accounts receivable.
Below is a series of exchanges from this summer that was recently released in late September.
- The SEC requested that $CELH disclose more about its related party transactions with Pepsi, such as contractual terms, renewal or termination options, and issued preferred stocks. $CELH was also required to include contract termination costs associated with former distributors from its adjusted EBITDA.
(UPLOAD) - $CELH defended that this information is “critical, competitively sensitive regarding our margins and the profitability of our relationship with Pepsi, which would result in competitive harm to the Company.”
(CORRESP) - The SEC did not see any competitive harm and believed the potential of competitive harm is not sufficient to allow non-compliance with disclosure requirements. The SEC respected the confidentiality of the product pricing model.
(UPLOAD) - $CELH agreed and will reflect the related party transactions on all financial statements starting the next 10-Q.
(CORRESP)
Executive incentives matter
The SEC also issued the following critiques on Pay vs. Performance (disclosed in DEF14A) in October.
- Berkshire Hathaway Inc. $BRK.b: Did not provide disclosure regarding the relationship between compensation actually paid and net earnings/loss. (UPLOAD; CORRESP)
- Artivion Inc. $AORT: Inconsistent peer group was used for performance + missing calculation for the Company-Selected Measure of revenue growth. (UPLOAD; CORRESP)
- QCR Holdings $QCRH: missing calculation of Adjusted EPS + incorrect label of graph. (UPLOAD; CORRESP)
- Everquote $EVER: Inconsistent numbers reported for NEO compensation + unclear description of the relationship between compensation, shareholder return, and net loss. (UPLOAD; CORRESP)
- Progyny Inc. $PGNY: Incorrect table headings used to display equity awards granted (UPLOAD; CORRESP)
Poor accounting
- Bloomin' Brands Inc. $BLMN: Excluded the dilutive impact of some 2025 convertible notes from its adjusted diluted earnings per share.
- Interestingly, it also saw recent key executive turnovers for its CEO and Division President.
- HF Sinclair Corp $DINO: Excluded certain expenses relating to inventory valuation for cost of products sold and GAAP gross margin. Misrepresented its non-GAAP margins and did not clearly state its adjusted nature and differences with the GAAP measure.
Deficiencies in energy companies
Dril-Quip Inc. $DRQ
- Excluded certain normal, recurring, cash operating expenses from the “corporate” line in operating income. Lack of discussion on segment revenue. Leasing revenue was incorrectly included in customer revenue, and leasing balance was removed from “Contract Balances”. (UPLOAD; CORRESP)
- On July 8, $DRQ restated its financial statements for FY23 and 1Q24 due to a material weakness in internal control over financial reporting related to the classification of inventory write-downs.
- $DRQ completed its merger with Innovex $INVX on Sep 9, resulting in the turnover of the CEO, CFO, and the President of North America.
Nov Inc. $NOV
- Inadequate disclosure in the discussion of comparative results of various metrics, such as Adj. EBITDA, new orders booked, book-to-bill ratio, and orders shipped.
- Insufficient details for the discussion of materials changes to a financial item and results consolidation for the income statement.
- Lack of detailed disclosure on remaining performance obligations on a quantitative basis (such as specific time bands). (UPLOAD; CORRESP)
In addition, the SEC found various inadequate disclosures at ConocoPhillips $COP, Solaris Oilfield Infrastructure Inc. $SOI, and Oceaneering International Inc. $OII. These deficiencies are generally immaterial and require limited mitigation.
More disclosure deficiencies in the SEC comment letters
Warner Bros Discovery Inc. $WBD failed to quantify the changes to its results for several factors and had to add clarifying details (UPLOAD; CORRESP).
- DTC and ARPU: Added tables and additional language
- AT&T Sportsnet exit: Management did not view this as material to results but nonetheless had to specify the decline in subscribers
- Inter-segment content licensing: Elaborated on the intercompany pricing + excluded the 'Corporate’ line in P&L
Enovix Corp $ENVX: Will provide more detailed disclosures on a breakdown of revenue by product vs. service, in addition to a geographical breakdown of revenue and its long-lived assets (UPLOAD; CORRESP).
Fox Corp $FOXA: Will revise disclosure on results of operations and segment information (including functions leadership, financial reporting, guidance and budget). It also failed to clearly identify non-operating expenses relating to legal settlement costs (CORRESP).
Not sure what SEC comment letters are or how they matter? Learn more here—Everything You Need to Know About SEC Comment Letters.
