While monitoring SEC comment letters, we recently came across the batch of SEC comment letters issued to Uber Technologies, Inc. in connection with its IPO registration statement that was declared effective on May 9, 2019. The company’s response letters (with SEC comments repeated as is customary) are available below:
Presented below are five interesting takeaways from the letters that may have general application:
- 36 comments were issued in the first SEC comment letter. The relatively modest number of comments for a high profile offering is consistent with what we’ve seen in our own recent offering experience when serving as issuer counsel. In the initial letter, three comments were issued on the company’s financial statements in the F-pages, with one of those comments probing the company’s segment reporting (a frequent area of SEC comment). The segment comment, repeated below for reference, had multiple subparts and follow-ups issued in later comment letters.
Notes to Consolidated Financial Statements
Note 14 – Segment Information, page F-52
34. We note that you currently manage and operate your business as two operating/reportable segments: Core Platform and Other Bets. Please address the following:
Provide us with details about your management structure and how your company is organized.
Describe the role of your CODM and each of the individuals reporting to the CODM.
Identify and describe the role of each of your segment managers.
Describe the key operating decisions, who makes these decisions, how performance is assessed and how resources are allocated within your business.
Tell us how often the CODM meets with his direct reports, the financial information the CODM reviews in conjunction with those meetings, and the other participants at those meetings.
Explain how budgets are prepared, who approves the budget at each step of the process, the level of detail discussed at each step, and the level at which the CODM makes changes to the budget.
Describe the basis for determining the compensation for each individual that reports to the CODM.
Ultimately, the Staff did not object to Uber’s segment reporting.
- The Staff (not surprisingly perhaps) issued comments on the company’s presentation of “Adjusted Net Revenue.” On this topic, we recall Wes Bricker, the SEC’s Chief Accountant, in 2016 made a speech wherein he discussed non-GAAP financial measures and how revenue adjustments cause concern for the Staff because they often involve the use of individually-tailored accounting principles.
“Revenue adjustments do more than just adjust from GAAP: they change the very starting point from which other performance analyses flow. As the staff monitors current practices and implementation of the new revenue standard, we will be looking to see if the reporting concepts within those standards are supplanted by any number of company-specific non-GAAP alternatives. For all of these reasons, if you present adjusted revenue, you will likely get a comment; moreover, you can expect the staff to look closely, and skeptically, at the explanation as to why the revenue adjustment is appropriate.”
One of the Staff’s comments to Uber on “Adjusted Net Revenue” is presented below:
With respect to the adjustments for the 2018 Divested Operations made to arrive at your non-GAAP financial measures, please tell us: 1) why the adjustment to “Adjusted Net Revenue” reflects an addition to revenue and what it represents; and 2) how you considered the exclusion of the 2018 Divested Operations in light of the guidance provided in Question 100.04 of the Non-GAAP Compliance and Disclosure Interpretations relating to individually tailored recognition and measurement methods.
Ultimately, Uber was able to include the adjusted net revenue metric after some modifications prompted by the Staff’s comments. We point out, however, this sentence in the final prospectus, “Adjusted Net Revenue is lower than revenue in all reported periods.” Query if a different outcome would have occurred if adjusted net revenue was higher than GAAP revenue in the reporting periods.
- An exclusive forum comment was issued. See our prior post on this topic.
You state that the federal district courts will be the exclusive forum for any complaint asserting a cause of action arising under the Securities Act. Please state here and in the carryover risk factor on pages 54-55 that there is uncertainty whether a court would enforce this provision. Additionally, clarify in the risk factor that the provision does not apply to suits brought to enforce a duty or liability created by the Exchange Act.
- The Staff objected to describing non-GAAP adjustments as “non-routine” when the items recurred within the prior two years and were material. The Staff’s comment on this topic is repeated below for reference:
We note your exclusion of “non-routine legal, tax, and regulator reserves and settlements” in your Adjusted EBITDA reconciliation on page 22. Revise to remove the reference to adjustments as “non-routine” throughout your draft registration statement, as these items recurred within the prior two years (2017 and 2018) and were material to Adjusted EBITDA. Please refer to Question 102.03 of the Non-GAAP Compliance and Disclosure Interpretations.
The Staff cited to C&DI Question 102.03, which speaks directly to the prohibition on “adjusting a non-GAAP financial performance to eliminate or smooth items identified as non-recurring, infrequent or unusual when the nature of the charge or gain is such that it is reasonably likely to recur within two years or there was a similar charge or gain within the prior two years.”
- The Staff sought additional information about the Reg. S-X, Rule 3-05 significance and materiality of a recent acquisition agreement. In March 2019, Uber entered into an asset purchase agreement to acquire Careem Inc. for approximately $3.1 billion. The Staff noticed this acquisition and its purchase price and asked the company to provide its analysis of the significance of the acquired company pursuant to Rule 3-05 of Regulation S-X. The company’s response is repeated below:
The Company measured the significance of its acquisition of Careem Inc. (“Careem”) pursuant to the three tests required under Rule 3-05 of Regulation S-X (“Rule 3-05”). The Company performed an analysis in accordance with Rule 3-05 using Careem’s unaudited consolidated financial statements and the Company’s consolidated financial statements as of and for the period ended December 31, 2018, and calculated the significance as 15.6% for the income test, 1.0% for the asset test and 12.9% for the investment test.
Pursuant to Rule 3-05(b)(4) of Regulation S-X, the financial statements required by Item 3-05 in respect of Careem may be omitted from the Registration Statement because the acquisition of Careem has not yet been consummated and because Careem’s significance did not exceed the 50% level based on any of the three tests required under Rule 3-05.
The Company will continue to monitor the significance of Careem pursuant to Rule 3-05 and will perform its assessment at the consummation of the acquisition, which is expected to occur in the first quarter of 2020.
As a sidenote, even when an acquisition trips the Rule 3-05 significance tests, the company may consider requesting financial statement relief from the Staff. Section 2020.1 of the Financial Reporting Manual provides, with respect to the tests performed based on the requirements of Rule 3-05 of Regulation S-X, if after performing the required significance tests a registrant believes that the tests specify periods beyond those reasonably necessary to inform investors, the registrant may make a written request to the Division’s Office of Chief Accountant to waive one or more years of financial statements. In addition, Rule 3-13 of Regulation S-X provides that the SEC may, where consistent with the protection of investors, permit the omission of one or more of the financial statements required by Regulation S-X. We have been successful representing clients in the past year in obtaining such waivers.
In the same Uber comment letter, the Staff also asked the company to file the asset purchase agreement with Careem as an exhibit or explain to the Staff why this is not required by Item 601(b)(2) or (b)(10) to Regulation S-K. The company’s response is repeated below:
The Company acknowledges the Staff’s comment and respectfully advises the Staff that it does not believe that the asset purchase agreement with Careem (the “Careem APA”) constitutes a material contract under Item 601(b)(2) or (b)(10) of Regulation S-K. As discussed in response to Comment 1, the acquisition of Careem does not exceed any of the “significance” test thresholds under Rule 3-05. Moreover, the primary obligations of the Company with respect to the proposed acquisition of Careem is the payment of cash and the issuance of notes that have the ability to convert into the Company’s shares of common stock, and the Company does not expect to require additional financing or funding in order for the Company to meet those obligations. In addition, the Careem APA relates to the acquisition of a business that primarily operates ridesharing services in geographic markets where the Company already operates in its ordinary course. The Company does not expect the acquisition to change the Company’s business strategy in any material way, but rather expects the acquisition to further the Company’s growth strategy in the Middle East, North Africa, and Pakistan, which the Company has already disclosed in the Registration Statement. As a result, the Company has determined that it is not substantially dependent on the Careem APA. Finally, the Company believes the material information regarding the Company’s proposed acquisition and its potential impact on the Company are adequately described throughout the Registration Statement and potential investors can obtain all material facts related to the proposed acquisition from such disclosure. Accordingly, the Company does not believe that filing the Careem APA would provide any additional material information that would be meaningful or beneficial to potential investors.
Depending on the facts and circumstances regarding an individual acquisition or material agreement, a registrant may be able to utilize the roadmap set forth in Uber’s response as helpful precedent to assess whether an agreement should be filed as an exhibit under S-K, Item 601(b)(2) or (b)(10).
If you have any questions about this SEC guidance, please feel free to email the authors directly or, if applicable, contact your primary Bass, Berry & Sims relationship attorney.
The Bass, Berry & Sims Corporate & Securities Practice encompasses mergers and acquisitions, capital markets transactions, corporate governance and shareholder activism. We serve as primary corporate and securities counsel to more than 35 public companies and have counseled on 150 deals ranging in size from $20 million to more than $15 billion over past two years. The team and our attorneys have been consistently recognized in leading industry outlets, including Chambers USA – ranked as a top corporate firm in Tennessee since 2003 – and M&A Advisor Award recipient for – “M&A Deal of the Year ($10MM-$25MM)” and “Healthcare and Life Sciences Deal of the Year (Over $100MM-$1B)” in 2018; and “M&A Deal of the Year (From $1B-$5B)” and “Corporate/Strategic Deal of the Year (Over $1B)” in 2017.