On January 30, 2020, the Securities and Exchange Commission (“SEC” or “Commission”) published interpretive guidance (the “Guidance”) that companies should consider when disclosing key performance indicators (“KPIs”) and other metrics in Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”). The Guidance, which is consistent with staff comments in this area, describes the type of information that the Commission generally would expect to accompany a presentation of KPIs and other metrics. The Guidance builds on the existing disclosure requirements for MD&A, including the SEC’s emphasis on disclosing critical variables that management uses to manage the business, and provides a framework for presenting KPIs and metrics in MD&A. Measurements that are subject to another disclosure framework, such as non-GAAP financial measures, should not be affected by the Guidance.

Takeaway. Companies should carefully review the new Guidance and consult with counsel in preparing MD&A disclosure in their annual reports for fiscal year 2019, as well as subsequent periodic filings and registration statements. Additional disclosure may be necessary to define the metric and explain why it is useful to management and investors. Although the Guidance does not address the use of KPIs and other metrics outside of MD&A, companies should consider whether similar disclosure is necessary to provide adequate context for KPIs and other metrics in different sections of their SEC filings, investor presentations, earnings releases and other materials.

Background. Item 303 of Regulation S-K requires a company’s MD&A disclosure to include a discussion and analysis of statistical data that the company believes will enhance a reader’s understanding of its financial condition. In previous guidance, the SEC has emphasized the importance of disclosing in MD&A “key variables” that are critical to understanding how a company manages its business. Staff comment letters have focused for some time on the use and presentation of KPIs and other metrics, often directing companies to provide additional context for such disclosure. The new Guidance reflects many of the disclosure issues raised by the staff through the comment process and may address some uncertainties about the type of information that should be disclosed with the presentation of metrics.

Scope of the Guidance. The Guidance reflects the Commission’s views on the appropriate presentation of KPIs and other metrics within MD&A. Examples of metrics identified in the Guidance include: operating margin, same store sales, sales per square foot, total customers/subscribers, average revenue per user, daily/monthly active users/usage, active customers, net customer additions, total impressions, number of memberships, traffic growth, comparable customer transactions increase, voluntary and/or involuntary employee turnover rate, percentage breakdown of workforce, total energy consumed and data security measures. The list of metrics cited by the Commission is not exhaustive and companies should be mindful that KPIs and other metrics differ from company to company and industry to industry. The Guidance also applies to environmental metrics that companies may voluntarily disclose.

The following table provides examples of operating metrics used by companies in certain industry sectors:

SectorExamples of Operating Metrics
HealthcareNet revenues per patient servedInsured tests performedTotal samples processedNet revenue per insured testDirect costs per patient servedDirect costs per sample
Technology, Media & TelecommunicationsDaily active usersMonthly active usersAverage bookings per userMonthly unique usersAverage revenue per userMonthly sessions
Consumer / RetailGross merchandise volumeTotal ordersActive customersComparable salesComparable store inventory turnoverPayroll as a percentage of net salesClient spend retentionMarketplace revenueAverage order valueOrders per customerPercentage of orders placed from mobile devices
Financial ServicesClient dollars investedNet new assetsClient assets under careLoans-to-deposits ratioEfficiency ratioReturn on average total tangible assetsAverage customer loan balanceNumber of new customer loansCustomer acquisition costs
Real EstateRentable square feetConsolidated weighted average square feet and occupancyAnnualized revenue per occupied square footSame store revenueRent coverageAverage sales volume per guestRevPARAverage Daily RateTurnover costs on leases commenced

The Guidance directly addresses the use of KPIs and other metrics in MD&A but does not discuss the use of such measures in other parts of a company’s disclosure filing. Given that the Commission based its Guidance on broad principles of presenting disclosure in a manner that is not misleading, companies generally should consider providing similar disclosures in connection with the presentation of KPIs and other metrics outside of MD&A, including in the description of business and graphics. Companies should pay similar attention to KPIs and metrics presented outside of their SEC filings, such as investor presentations. However, metrics that are covered by other disclosure frameworks, such as U.S. GAAP or the SEC’s rules applicable to non-GAAP financial measures (i.e., Regulation G and Item 10(e) of Regulation S‑K), should not be affected by the Guidance, regardless of whether they appear in MD&A or elsewhere.

Expected Disclosure. If a company includes metrics in its MD&A, the Commission generally expects certain disclosure to accompany the metric:

  • Additional Information Necessary to Understand the Metric. The Guidance advises companies to consider what additional information may be necessary in order for an investor to understand the metric and to make the presentation of the metric, in light of the circumstances under which it is presented, not misleading. Such additional disclosures typically would include (1) a clear definition of the metric and how it is calculated, (2) a statement indicating the reasons why the metric provides useful information to investors and (3) a statement indicating how management uses the metric in managing or monitoring the performance of the business. Companies also should consider whether disclosing estimates or assumptions underlying the metric or its calculation would be necessary for the metric not to be materially misleading.
  • Changes in the Method of Calculating or Presenting the Metric. The Guidance outlines disclosure considerations when a company changes the method by which it calculates or presents the metric from one period to another, including: (1) the differences in the way the metric is calculated or presented compared to prior periods, (2) the reasons for the changes, (3) the effects of any change on the amounts or other information being disclosed and on amounts or other information previously reported and (4) other differences in methodology and results that would reasonably be expected to be relevant to an understanding of the company’s performance or prospects. Companies also should evaluate whether it is necessary to recast prior metrics depending on the significance of the change.

Disclosure Controls and Procedures. The Guidance cites the requirements in Exchange Act Rules 13a-15 and 15d-15 to maintain effective disclosure controls and procedures and advises companies to consider these requirements when disclosing key performance indicators or metrics. Companies should pay close attention to this aspect of the guidance in preparing their upcoming Forms 10-K and 10-Q to ensure the accuracy of their disclosures about the effectiveness of the company’s disclosure controls and procedures.

Takeaway. Disclosure of KPIs and other metrics gives companies an opportunity to tell their stories and share with investors the metrics by which a company measures its own success. The SEC’s Guidance further clarifies how companies can provide the appropriate context when discussing their performance “through the eyes of management.” The Guidance represents not a new turn in MD&A but confirmation that MD&A remains focused on enhancing a reader’s understanding of the company’s financial condition, changes in financial condition and results of operations.

If you have questions about how this new Guidance applies to your business or industry, please contact your Proskauer attorney or one of the capital markets attorneys listed on this alert.

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Photo of Peter Castellon Peter Castellon

Peter represents issuers, underwriters and selling shareholders in connection with offerings of securities, including IPOs, follow-on and secondary offerings, block trades, rights offerings and offerings of convertible and exchangeable bonds.

Peter is active in bar association activities and has served as an officer…

Peter represents issuers, underwriters and selling shareholders in connection with offerings of securities, including IPOs, follow-on and secondary offerings, block trades, rights offerings and offerings of convertible and exchangeable bonds.

Peter is active in bar association activities and has served as an officer of several committees, including the IBA Capital Markets Forum, the International Securities Matters Subcommittee of the ABA Committee on the Federal Regulation of Securities and the ABA International Securities & Capital Markets Committee.

Peter has written several articles on securities law topics, including the following:

  • US Private Placements: When Rule 144A is unavailable, PLC, July, 2015.
  • SAS 72 letters: Seeking comfort, PLC, May, 2013.

  • Another way in, IFLR, March, 2012.

Before joining Proskauer, Peter was Deputy General Counsel for Citi and advised the Equity Capital Markets Division and Investment Banking Division. While at Citi, Peter worked on most of Citi’s ECM transactions in Europe, the Middle East and Africa.

Photo of Michael Choate Michael Choate

Michael Choate is a partner in the Corporate Department and is a member of the Capital Markets Group and both Real Estate Capital Markets and Private Equity Real Estate Groups. Michael’s practice is broad and includes a focus on transactional matters involving both…

Michael Choate is a partner in the Corporate Department and is a member of the Capital Markets Group and both Real Estate Capital Markets and Private Equity Real Estate Groups. Michael’s practice is broad and includes a focus on transactional matters involving both public and private offerings as well as private equity and joint venture transactions along with mergers and acquisitions, corporate governance issues and federal securities compliance matters.

Photo of James Gerkis James Gerkis

James P. Gerkis is a partner in the Corporate Department with extensive experience in sophisticated U.S. and global corporate transactions, including mergers & acquisitions, capital markets, venture capital, media, real estate and restructuring transactions.  He has represented a wide variety of financial institutions…

James P. Gerkis is a partner in the Corporate Department with extensive experience in sophisticated U.S. and global corporate transactions, including mergers & acquisitions, capital markets, venture capital, media, real estate and restructuring transactions.  He has represented a wide variety of financial institutions, Fortune 500 companies and growth companies.  James currently focuses on matters for clients in the technology, media and real estate industries.

Among other clients, James has represented iHeartMedia, Preferred Apartment Communities, Financial Guaranty Insurance Company, Oxford Analytica, Olshan Properties, the Creditors Committee in the chapter 11 cases of Westinghouse Electric Company, Lightstone Group, Neuberger Berman and Suburban Propane Partners.

James received his law degree from Columbia University School of Law in 1983, where he was a Harlan Fiske Stone Scholar and a Teaching Fellow.  He did his undergraduate work at Columbia College, where (having been admitted without finishing high school) he received a BA degree in Political Science in 1980.

James has made presentations at numerous industry and bar association conferences and has authored many articles on different legal topics.

James is the President of the Columbia University Club of New York, is active in other Columbia University alumni affairs and has been chosen to receive a 2018 Columbia University Alumni Medal.

James is on the Board of Directors of HABA-Hellenic American Association for Professionals in Finance.  James received the 2017 Attorney of the Year Award from The Hellenic Lawyers Association.

Photo of Steven L. Lichtenfeld Steven L. Lichtenfeld

Steven L. Lichtenfeld is co-head of our market-leading Real Estate Capital Markets and Real Estate Finance Groups and a founding member of our Private Equity Real Estate Group. He regularly advises real estate funds, REITs, sovereign wealth funds, institutional lenders, specialty lenders, hedge…

Steven L. Lichtenfeld is co-head of our market-leading Real Estate Capital Markets and Real Estate Finance Groups and a founding member of our Private Equity Real Estate Group. He regularly advises real estate funds, REITs, sovereign wealth funds, institutional lenders, specialty lenders, hedge funds, and pension advisors regarding public offerings and private placements of real estate-related debt and equity securities, real estate-related mergers and acquisitions, real estate preferred equity investments and joint ventures, real estate-related senior and mezzanine financings and other corporate, partnership and limited liability company matters.

Steven has been widely recognized as a driving force in the real estate capital markets and finance space during his more than thirty-five year career. He has garnered several prestigious accolades in this area, including receiving a coveted ranking from Chambers USA, which has described him as “a brilliant real estate attorney with experience in many asset classes.” Chambers has also described Steven as “highly analytical and highly strategic” and “encyclopedic in terms of his knowledge” in handling a broad spectrum of public and private debt offerings, M&A, joint venture and other corporate real estate matters. Steven is also recommended for Real Estate and REITs by Legal 500 United States and is consistently recognized as a leading real estate lawyer in Best Lawyers in America and Super Lawyers.

Photo of Matthew O'Loughlin Matthew O'Loughlin

Matthew O’Loughlin is a partner in the Corporate Department and is a member of the Mergers & Acquisitions Group. Matthew counsels clients on corporate, strategic and transactional matters, representing public and private companies, entrepreneurs, high-net worth families, investors, private equity groups and investment…

Matthew O’Loughlin is a partner in the Corporate Department and is a member of the Mergers & Acquisitions Group. Matthew counsels clients on corporate, strategic and transactional matters, representing public and private companies, entrepreneurs, high-net worth families, investors, private equity groups and investment banks. He acts as outside corporate counsel, advises boards of directors and assists companies with their day-to-day legal needs. This includes public and private securities offerings, mergers and acquisitions, joint ventures, and other strategic and complex transactions and liquidity events. He also advises clients on SEC reporting matters and corporate governance.

Matthew’s clients are principally in the life science/healthcare, food and beverage, health and wellness, consumer products, technology and entertainment industries. He also has particular experience in cross border transactions.

Photo of Ben Orlanski Ben Orlanski

Ben Orlanski is a partner in the Corporate Department and is a member of the Mergers & Acquisitions Group and the Capital Markets Group. Ben focuses on major corporate transactions and strategically solving critical business challenges. He has significant experience in securities and…

Ben Orlanski is a partner in the Corporate Department and is a member of the Mergers & Acquisitions Group and the Capital Markets Group. Ben focuses on major corporate transactions and strategically solving critical business challenges. He has significant experience in securities and public company representation; mergers and acquisitions; capital markets transactions; special committee, board of directors and general corporate representation; and corporate governance. His experience covers a wide range of industry sectors, including software-as-a-service, REITs, digital media, specialty manufacturing and consumer products.

Capital Formation and Securities

Ben has significant experience in managing, structuring and executing sophisticated securities and capital raising transactions. His approach reflects understanding of market operation, well-designed capital structure and the practical realities of the capital raising process. He represents public companies and investors in public offerings, registered direct transactions, self-tenders, warrant exchanges/flush transactions, recapitalizations, defensive strategies and secondary offerings. He also advises clients on corporate finance transactions for private businesses, ranging from venture capital and private placements to public offerings and debt restructurings.

Mergers and Acquisitions

Ben has completed scores of transactions representing buyers, sellers, investment bankers and financiers through all phases of the M&A process. He is actively involved in planning, structuring, negotiating and documenting strategic merger and acquisition transactions as well as dispositions of sophisticated enterprises.

General Counsel, Public Reporting and Strategic Advice

Ben acts as outside general counsel for numerous public and private companies, applying a business-like approach to produce practical legal solutions to both day-to-day and exceptional legal challenges. In representing his public clients, Ben has successfully guided the public reporting process for clients facing accounting and SEC challenges, proxy contests, cash flow issues, litigation, shareholder activism and strategic alternatives. He frequently advises on issues related to compliance with insider trading laws and major compliance challenges. He also represents boards of directors and special committees of public companies in special situations, including “interested” transactions, investigations, executive succession planning and sensitive corporate governance issues.

Photo of Frank Zarb Frank Zarb

Frank Zarb is a partner in our Corporate Department and a member of the Capital Markets Group, where he concentrates his practice on equity finance and a wide range of regulatory matters under U.S. federal securities laws.

He counsels public and private companies…

Frank Zarb is a partner in our Corporate Department and a member of the Capital Markets Group, where he concentrates his practice on equity finance and a wide range of regulatory matters under U.S. federal securities laws.

He counsels public and private companies, hedge funds and family offices, and market intermediaries and other financial institutions on a wide range of transactional and securities regulatory compliance matters including:

  • Equity investments and dispositions in public and private companies
  • Public company registration, disclosures and preparation of periodic reports
  • Tender offers, equity lines, proxy contests, SPACs, and other highly regulated transactions
  • Regulation M, Regulation SHO, Forms 13F and 13H, insider trading and other trading issues
  • Corporate governance and stock exchange listing standards
  • Federal and state proxy requirements as well as shareholder proposals and communications
  • Regulation of financial intermediaries, including trading of public and private equity, and complex and novel trading structures
  • Advocating with the SEC on behalf of a market intermediary related to back-office processing matters.

Frank’s practice is both domestic and international, beginning with his experience in senior positions with the Securities and Exchange Commission. As a member of the staff of the SEC’s Office of International Corporate Finance, Frank advised U.S. companies seeking to do business in the EU, Asia and the Middle East, as well as companies from those regions doing business in the U.S., or otherwise seeking to comply with the U.S. securities laws.  In the Office of Chief Counsel, he focused on federal proxy rules, and supervised a team of staff members that provided guidance in the course of proxy season.

Prior to joining the Firm, Frank was deputy general counsel/chief securities counsel for Bristol Myers Squibb Co. in a new position required by the SEC. Prior to joining Bristol-Myers, Frank was a corporate partner with Morgan, Lewis & Brockius.

Social Responsibility

Frank is a Trustee of the Gerald R. Ford Presidential Foundation, and he provides significant pro bono assistance to non-profit social service institutions in the Washington, D.C. area.