4.03 Non-GAAP net income and Adjusted EBITDA remove losses on disposals of property and equipment that occur every year under a caption calling them non-recurring
Company D · a US-listed cloud communications software company · Compliance or disclosure gap
In brief
Both performance measures, non-GAAP net income and Adjusted EBITDA, exclude a line titled 'Non-recurring items not indicative of ongoing operations and other' ([amount] in 2025). The footnote shows that the line contains losses on disposals of property, plant and equipment in every year presented: [amounts], and the prior-year 10-K adds [amount] for 2022. Item 10(e) of Regulation S-K forbids describing a charge as non-recurring when a similar charge arose within the prior two years.
The evidence, as filed
Screenshot withheld to protect the company’s identity. Even with names, figures and dates boxed out, the wording on these pages could be searched back to the filer. Pages relied on: Form 10-K 2024 (prior year), page 76; Form 10-K 2025, page 72; Form 10-K 2025, page 73; Form 10-K 2025, page 74.
What the filing shows, and what the rule requires
| What the filing shows | What the rule requires |
|---|---|
Losses on disposals of property, plant and equipment ([amount] in 2025, [amount] in 2024, [amount] in 2023, [amount] in 2022) excluded from both performance measures under the caption 'Non-recurring items not indicative of ongoing operations and other' | Either stop describing recurring items as non-recurring (move them to a separately captioned adjustment such as 'Loss on disposal of property and equipment', with the usefulness explained) or stop excluding them; keep the 'non-recurring' label only for items that meet the two-year test |
The rule
Regulation S-K Item 10(e)(1)(ii)(B)
Adjust a non-GAAP performance measure 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;
Version: Text in force at the date of this review · Source: 17 CFR 229.10(e)(1)(ii)(B), Regulation S-K (eCFR current text)
SEC Division of Corporation Finance, Non-GAAP Financial Measures interpretations, Question [n]
The prohibition is based on the description of the charge or gain that is being adjusted. It would not be appropriate to state that a charge or gain is non-recurring, infrequent or unusual unless it meets the specified criteria.
Version: Text in force at the date of this review · Source: SEC Corporation Finance Interpretations, Non-GAAP Financial Measures, Question [n] (updated [date]; current as of [date])
Why it applies here. Item 10(e)(1)(ii)(B) prohibits adjusting a performance measure to eliminate items 'identified as non-recurring' when a similar charge arose within the prior two years; the staff interpretation (Question [n]) makes the test turn on the description used. Routine disposal losses that arise every year are identified as non-recurring by the caption, so the description is prohibited even though the adjustment itself could be made under a neutral label. The amounts are small against Adjusted EBITDA of [amount], so the point is one of description, not of size.
Why it matters
The caption tells investors that routine, annually recurring losses will not recur, which the staff treats as a prohibited description under Item 10(e); the realistic outcome is a comment and a relabelled reconciliation.
Exposure
Staff comment letter and future-filings undertaking on the non-GAAP caption; no fine
Our workings
the non-GAAP net income definition lists 'non-recurring items not indicative of ongoing operations and other' as an exclusion and the reconciliations exclude [amount] for 2025 under that caption from non-GAAP net income and Adjusted EBITDA. The footnote lists the contents: foreign exchange charges of [amount], losses on disposals of property, plant and equipment of [amounts] for 2025, 2024 and 2023, [wording masked] a small loss on sale of a business. The 2024 Form 10-K footnote (Form 10-K 2024 (prior year) p.76) shows the same disposal losses for 2024 and 2023 and [amount] for 2022.
disposal losses are present in each of four consecutive years, and in 2025 they are 32.0% of the caption.
| Year | Loss on disposals of property, plant and equipment ($ million) | Source |
|---|---|---|
| 2025 | [n] | p.73 footnote |
| 2024 | [n] | p.73; Form 10-K 2024 (prior year) p.76 |
| 2023 | [n] | p.73; Form 10-K 2024 (prior year) p.76 |
| 2022 | [n] | Form 10-K 2024 (prior year) p.76 |
| 2025 share of the caption | [n] / [n] = 32.0% | thousand |
Management’s best defense, and our reply
Management would say the caption reads 'non-recurring items ... and other', so the disposal losses fall under 'other' and are not themselves described as non-recurring; Question [n] allows the adjustment, and the amounts are small against Adjusted EBITDA. It could add that the staff reviewed the non-GAAP presentation in 2024 and raised only the prominence of measures in the earnings release. However, the footnote presents every item, including the disposal losses, as the content of the 'Non-recurring items not indicative of ongoing operations' caption without separating the 'other' part, so a reader is told the losses are non-recurring; Question [n] permits the adjustment only under a description that does not call the item non-recurring. The 2024 staff letter did not address this caption, and its closing letter leaves responsibility with the company.
The fix
- Split the caption: show 'Loss on disposal of property and equipment' and 'Foreign exchange (gains) losses' as separately named adjustments (or stop adjusting for them), and keep 'non-recurring' only for items with no similar charge in the prior two years and none reasonably likely in the next two.
Evidence relied on
| # | What it shows | Type | Where |
|---|---|---|---|
| 1 | The non-GAAP net income definition excludes items described as non-recurring | Document | Form 10-K 2025, page 72 |
| 2 | Footnote to the non-GAAP net income reconciliation lists what the caption contains | Document | Form 10-K 2025, page 73 |
| 3 | Disposal losses in each of 2025, 2024 and 2023 inside the non-recurring caption | Document | Form 10-K 2025, page 73 |
| 4 | The caption excluded from non-GAAP net income: [amount] in 2025 | Document | Form 10-K 2025, page 73 |
| 5 | The same caption excluded from Adjusted EBITDA | Document | Form 10-K 2025, page 74 |
| 6 | Adjusted EBITDA for scale | Document | Form 10-K 2025, page 74 |
| 7 | The 2024 Form 10-K described disposal losses for 2024, 2023 and 2022 the same way | Document | Form 10-K 2024 (prior year), page 76 |
| 8 | The caption and its amounts in the reconciliation to non-GAAP net income, 2025-2023 | Document | Form 10-K 2025, page 73 |
| 9 | Disposal losses are included in the caption in each of the three years presented | Document | Form 10-K 2025, page 73 |
| 10 | Foreign exchange revaluation charges are also placed in the caption | Document | Form 10-K 2025, page 73 |
| 11 | The same caption in the Adjusted EBITDA reconciliation | Document | Form 10-K 2025, page 74 |
| 12 | The prior-year Form 10-K shows the same item in 2022 as well | Document | Form 10-K 2024 (prior year), page 76 |
Prepared by Pramanex from the company’s public SEC filings, without the company’s involvement, to show how a 10-K Pre-filing Check reads. The company is not named, and nothing on this page is a statement about any identifiable company. Observations are not an audit, review or other attestation or assurance engagement, and not legal advice. An SEC-style question is a question, not a conclusion.
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