Comment Letter King #3 (SPACs, ELY, WPP, UFPI, and More)
9 Interesting SEC Comment Letters
Welcome to Comment Letter King – a free weekly newsletter with new interesting comment letters. If you like this content please forward it to others and encourage them to join here.
Comment letters are informal public correspondence between the SEC and public companies about potential disclosure, accounting, or other issues in public filings. There are ~150 letters every week, many of which are not relevant for investors. This newsletter sifts through them all to highlight the ones that deserve extra scrutiny.
UFP Industries (NASDAQ: UFPI — $3.82 billion), a U.S. lumber company, received an SEC comment letter that questioned its method for calculating gross sales and its non-GAAP adjustments “beyond those which are typical.” The letter read, in part,
SEC: “We refer to your presentation of Gross Sales throughout your filing and note it is not a measure recognized under GAAP. Please help us understand what Gross Sales represents. For example, tell us if this amount represents the amount invoiced to your customers, the full retail price of your products, or some other value.”
UFPI: “Gross sales represents revenue recognized under US GAAP and does not include discounts and allowances…”
SEC: “It appears that you have made adjustments in calculating a non-GAAP measure identified as EBITDA beyond those which are typical (e.g., share based compensation, impairments, other non-cash gains / losses). Please revise to present EBITDA or rename the non-GAAP measure you have presented.”
UFPI: “In future filings and public releases, the Company will rename this measure Adjusted EBITDA and update any references to this measure accordingly.”
UFP Industries has had the same CFO for over twenty years and filed a late 10-K because it “needed [additional time] to complete the evaluation of control deficiencies in our internal control over financial reporting.”
Callaway Golf (NYSE: ELY — $2.70 billion), a golf equipment and apparel company, received a comment letter questioning its repeated use of adjustments for “acquisitions and other non-recurring costs.”
SEC: “We note that your presentation of non-GAAP net income and diluted EPS on pages 41 and 46 includes adjustments for ‘acquisition and transition expenses’ or ‘acquisition and other non-recurring expenses.’ … Considering they appear to recur in multiple periods, also tell us how you determined they qualify to be described as ‘non-recurring’ and do not represent normal, recurring cash expenses necessary to operate your business.”
The SEC also sent Callaway Golf two letters about its recent acquisition Topgolf (1, 2). Callaway Golf has had four different CFOs over the last six years.
WPP plc (NYSE: WPP — $15.3 billion), a British multinational advertising firm, received a comment letter questioning the company’s cash balances. In a letter dated, November 25, 2020, WPP’s outside counsel referenced a conversation with the SEC and a newly identified error:
“I am submitting this letter to confirm my conversation with Angela Lumley on November 24 and 25, 2020, regarding the timing of the Company’s response to your comments. As was discussed, the Company has been preparing its response letter, and in so doing, it identified an error in the presentation of cash and cash equivalents on its balance sheet. The Company continues to evaluate whether there are other necessary adjustments related to this presentation error and to assess the impact of any deficiencies in the Company’s internal control over financial reporting.”
A second letter response dated January 8, 2021, read in part,
SEC: “It appears you have bank overdrafts as of the end of each period presented in your Form 20-F and your Form 6-K submitted September 3, 2020. Please tell us how you determined that these bank overdrafts met the criteria in paragraphs 7 to 9 of IAS 7 to be included in cash and cash equivalents.”
WPP: “As described below, the Group’s bank overdrafts arise in three manners: unpresented checks related to bank accounts in the Group’s zero balancing cash pooling arrangements, overdrafts within the Group’s ‘nominal’ cash pooling arrangements and other overdrafts…”
(Please note that comment letters are made public with varying delays.)
HH&L Acquisition Co. (NYSE: HHLA — $410 million), “a Cayman Islands exempted company” that is focused on taking a Chinese healthcare company public through its SPAC, received verbal and written comments from the SEC. The letter read, in part,
“You disclose that after your initial business combination, it is possible that a majority of your directors and officers will live outside the United States… We refer you to certain disclosures in your prospectus of various provisions in your amended memorandum and articles of association that are not included in the form of amended memorandum and articles of association filed as Exhibit 3.2… However, none of these provisions appear to be included in your filed amended memorandum and articles of association. Please revise to address the inconsistencies or advise.”
“Oral Comment 1. Ms. Zhong’s bio has a gap from 2017 to the present. Please clarify.”
“Oral Comment 2. The Principal Shareholders table does not include the independent director nominees, Mr. Jin and Dr. Zang, the chief financial officer, Ms. Zhong, and the chief operation officer and director, Mr. Yang. Please add the independent director nominees…”
In a different letter, the SEC asked the company to “provide a new risk factor… to identify any material risks for foreign entities seeking to operate in China.”
Z-Work Acquisition Corp (NASDAQ: ZWRKU — $230 million), received an SEC comment letter that highlighted typos in its filing and read, in part,
SEC: “Please clearly disclose here and in the Summary that you may pursue business combination opportunities in any industry or sector.”
North Atlantic Acquisition Corporation (NASDAQ: NAACU — $300 million), a Malta-based SPAC, received a comment letter questioning its characterization of a “contingent forward purchase contract.” The letter read, in part,
“We note the new disclosure on the cover page and elsewhere regarding a ‘contingent forward purchase contract.’ However, reference to the form of agreement you filed as exhibit 10.9 makes clear that this agreement provides the sponsor with the option in its ‘sole discretion’ to purchase none, all, or any portion of the securities in connection with any approved business combination. In these circumstances, please revise your disclosure to clarify that the agreement constitutes an option to the sponsor…”
Broadmark Realty Capital (NYSE: BRMK — $1.35 billion), a short-term construction lender that recently went public through a SPAC, received a comment letter questioning its disclosures around how the company guarantees loans. The letter read, in part,
SEC: “We note your statement that “BRMK Lending, LLC may offer … debt securities, and Broadmark Realty Capital Inc. … may guarantee … any such debt securities.” (emphasis added). Please revise your Form S-3 to clarify that BRMK Lending can only issue debt securities on Form S-3 if Broadmark Realty Capital guarantees the debt securities.”
Broadmark also received an “oral comment” from SEC staff and further amended its disclosures about guarantors.
Noah Holdings (NYSE: NOAH — $2.66 billion), a Chinese wealth management company, received an SEC comment letter questioning how it calculates its non-GAAP measure, “Adjusted net income attributable to Noah shareholders.”
Laureate Education (NASDAQ: LAUR — $2.76 billion), a for-profit education company, received a comment letter asking for additional disclosure about its diversity policy. The letter read, in part,
SEC: “In future filings, please discuss whether, and if so how, your nominating and governance committee considers diversity in identifying nominees for director.”
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Please note that comment letters are generally made public with a delay of at least one month. As a result, many of the comment letters profiled may appear dated, even though they are recently uploaded.
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