Long SEC Reviews Quarterly Update # 2
What are unresolved SEC comments, and why are they important?
SEC comment letters refer to issues or concerns the U.S. Securities and Exchange Commission raised during the regulatory review of publicly traded companies' financial reports, particularly in their 10-K and 20-F filings. The routine reviews aim to enhance transparency, accuracy, and compliance in these companies' accounting and disclosure practices.
When the SEC identifies deficiencies or unclear aspects in a company's financial reports, it issues comment letters to request clarification or corrections. Companies are expected to address these comments promptly within ten business days of receiving the comments. The number of comments received and the time taken to address them (duration) are often used as metrics in academic literature to evaluate the significance of concerns raised by the SEC (Cunnigham and Leidner, 2022). While SEC comments are typically resolved within 40 to 50 days and through one or two rounds of comments, some inquiries remain unresolved for an extended period, sometimes up to a year.
Companies are generally not required to disclose ongoing SEC reviews. However, "Item 1B Unresolved Staff Comments" of 10-K filings requires companies to report unresolved SEC comments issued at least 180 days before the fiscal year-end. This extended duration of unresolved comments could indicate more complex or significant issues that require additional time and effort to rectify (see further discussion of outcomes of unresolved SEC comments here).
Item 1B Unresolved SEC comments – quarterly update # 2 for the quarter ending March 31, 2024
Five companies disclosed unresolved SEC comments during the March 31, 2024, quarter.
TERAWULF INC (Ticker: WULF) disclosed on March 20, 2024, that on March 8, 2024, the Company received comments from the SEC concerning the S-3 registration statement that is not yet effective. The Company responded to the SEC and amended the S-3 registration prospectus. The EFFECT notice was filed on April 1, 2024, implying that as of that date, the comments were resolved. SEC comment letters related to a registration prospectus are typically released on EDGAR 20 business days after the registration effectiveness date. (See also a discussion of SEC comments to Terawulf related to impairment testing of mining equipment.)
MARATHON DIGITAL HOLDINGS, INC. (Ticker: MARA) disclosed on February 28, 2024, that during the years ending December 31, 2022, December 31, 2023, and December 31, 2024, the SEC issued comments on the Company’s restated financial statements, some of which are still unresolved. SEC concerns were related to the Company’s revenue recognition practices, calculations of the price used to test bitcoins for impairment, investments in equity of investees, leases, and bitcoins used as collateral in lending arrangements. Following SEC’s review, the Company restated its financial statements at least twice – to correct accounting for bitcoin impairment and to correct presentation of the proceeds from sales of digital assets on the statement of the cash flow - and substantially expanded its disclosure of digital assets used as collateral used in lending arrangements. (See October 17, 2023, update for more information.)
The language describing unresolved SEC comments in the company’s annual report for the year ending December 31, 2023, is substantially similar to that of the year ending December 31, 2022. Yet, the Company noted additional comments issued in 2024. Notably, the issue of bitcoin used as collateral in lending agreements is still unresolved, and the Company is "cooperating with the SEC" to resolve the outstanding matters.
SEC review of Marathon Digital’s financials likely started before July 1, 2022, implying that the review has been ongoing for more than 18 months – much longer than an average 40-to-50-day typical SEC review.
Stronghold Digital Mining, Inc. (Ticker: SDIG) disclosed on March 8, 2024, that during the year ending December 31, 2023, the Company received SEC comments on recognizing Bitcoin revenue using fair value on the day of receipt versus contract inception, revenue recognized under hosting arrangements, and impairment of Bitcoin—concerns similar to those raised in Marathon Digital’s review.
Additionally, the Company disclosed that the SEC requested more clarity about adjusting for impairments on digital currencies and the realized gain on the sale of digital currencies in the Company’s presentation of Adjusted EBITDA. Impairment of digital assets d Company’s Adjusted EBITDA for the year ending December 31, 2023, by $0.91 million, while realized gains on the sale of digital assets decreased the Adjusted EBITDA metric by a similar amount of $0.97 million.
Notably, in December 2021, the SEC issued comments to MicroStrategy (Ticker: MSTR), objecting to MicroStategy’s non-GAAP adjustments for bitcoin impairment losses and gains on sale and prompting the Company to change its calculations of the non-GAAP metrics.
JONES LANG LASALLE INC (Ticker: JLL) disclosed on February 27, 2024, that the Company received SEC comments related to the removal of “Gross contract costs” in the presentation of non-GAAP “Fee revenue” and non-GAAP “Fee-based operating expenses” metrics. The Company defines “Gross contract costs” as “costs associated with client-dedicated employees and third-party vendors and subcontractors” that are “directly or indirectly reimbursed through the fees.”
SEC concerns cited Question 100.04 of C&DIs, tailored non-GAAP accounting, which is misleading and is prohibited under Regulation G. Questions related to tailored non-GAAP accounting are more substantial and harder to resolve than the more common non-GAAP comment that require presentation of the comparable GAAP metrics with at least equal prominence. Between January 2019 and August 2023, roughly 12.7% of all non-GAAP comments cited Question 100.04.
Following SEC comments, the Company agreed to remove the Fee revenue and Free-based operating expenses metrics starting from the first quarter of 2024. The conversation, which included nine back-and-forth letters issued over 328 days, was publicly released on EDGAR on March 21, 2024.
MEDICAL PROPERTIES TRUST INC (Ticker: MPW) disclosed on February 29, 2024, that the SEC requested that the Company amend its annual 10-K report for the fiscal year ending December 31, 2022, to include audited financial statements of the Company’s investee Steward Health Care System LLC (“Steward”).
The SEC stated in a comment letter that the financial statements of Steward are required to understand the Company’s results of operations because the Company has “…significant assets concentration with Steward”. The Company agreed to file the requested audited financial statements but noted the difficulty in complying, citing the Company’s lack of control and liquidity issues at Steward.
Based on the Company’s 10-K filing, Medical Properties Trust has a 9.9% equity interest in Steward, accounted at cost less any impairments.
Operating and liquidity challenges at Steward prompted Medical Properties to record $700 million in charges - including reserving for all unpaid rent and receivables due from Steward - and move Steward to the cash basis of accounting for revenue effective December 31, 2023.
In addition to the request to file Steward’s audited financial statements, the SEC also asked questions about the presentation of non-GAAP Total Adjusted Gross Assets and AFFO metrics and requested clarity about loans to Steward. The conversation, which included 17 back-and-forth letters issued over 533 days, was publicly released on EDGAR on March 28, 2024.
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Correction: This piece was updated from the previous version to update the duration and number of comments in SEC’s review of MPW’s financial statements. Previous version stated that the conversation with the SEC included ten back-and-forth letters issued over 241 days.