In October 2022, Chris Brundrett and I facilitated a co-branded webinar with Intelligize, Impairment: Reminders and Hot Topics. In preparation for the webinar, I was researching notable goodwill impairment charges reported by public companies in 2022 and came across Teladoc, which reported a $3.1 billion goodwill impairment during the second quarter of 2022. However, what was going to be used as one of many instances highlighting the fact that goodwill impairments were on the rise, became a poster child of how certain disclosures of non-GAAP financial measures by companies can be misleading and can draw the ire of the SEC.

Non-GAAP financial measures are numerical measures that exclude (or include) amounts that are otherwise included (or excluded) in the comparable measure calculated and presented under GAAP. Those advocating for non-GAAP measures say it helps companies better tell their story, while their opponents (of which I am one) say it helps companies paint a “rosier picture” than otherwise is portrayed under GAAP, like an Instagram filter for GAAP.

And the use of non-GAAP financial measures by public companies is on the rise! According to PwC, in 1996, 59% of S&P 500 companies used at least one non-GAAP financial measure, while in 2020 that number jumped to 94%. That, along with the fact that the SEC recently updated its Compliance & Disclosure Interpretations (C&DIs) regarding non-GAAP financial measures, is why Chris and I decided to devote the first two episodes of our new podcast, GAAP Chats to this very important topic.

I will save the detailed discussion of the rules and issues surrounding non-GAAP financial for the podcast (you’ll just have to listen), but, at a high level, Regulation G prohibits the presentation of any non-GAAP financial measure if it contains a material misstatement or omits information that makes the measure misleading. So, with that, let’s look at the Teladoc example.

Teladoc example:

The excerpt above was taken from Teladoc’s press release announcing its financial results for the second quarter 2022. As you can see, Teladoc reported a net loss of $9.8 billion through the six-month period ending June 30, 2022, but it reported “Adjusted EBITDA” (a non-GAAP measure) for the same period of $101 million. That’s one way to turn that frown upside down, magically transforming a $10 billion loss into a $101 million gain! Way to go, team!

Earnings before interest and taxes (EBIT) and earnings before interest, taxes, depreciation, and amortization (EBITA) are two of the most common non-GAAP financial measures disclosed by companies. Furthermore, such measures are widely understood by investors. Heck, their definition is in the acronym itself!

Another SEC requirement related to non-GAAP financial measures is that companies must reconcile it back to the most comparable GAAP number. You can see in the footnote denoted by the asterisk that Teladoc has provided, as required by SEC rules, a reconciliation between each non-GAAP measure to the most comparable measure under GAAP. Great! Can’t wait to see the reconciliation!

Take a moment to review the reconciliation above. On the positive side, they did start with the most comparable GAAP measure, which was net loss. However, as discussed above, EBITDA is well defined and the “I” doesn’t stand for “Impairment!”. I would expect to see reconciling items for interest, taxes, depreciation, and taxes, but not for the following items they listed:

• Goodwill impairment
• Loss on extinguishment of debt
• Other expense (income), net

Those reconciling items should have been presented after EBITDA when they were reconciling to “Adjusted EBITDA.” But I know why they did it! If EBITDA were calculated the way it should have been, the company still would have shown a MASSIVE net loss and wouldn’t have shown as “rosy” of a picture. And that, ladies and gentlemen of the jury, is the quintessential definition of misleading!

The shares of Teladoc are now trading 92% below their highs, trading at only $23.59 at the time of this post. And, as you’d expect, the class-action lawsuits followed. These lawsuits accuse Teladoc of making false and misleading statements, and alleging the company misled investors about the company’s performance and future growth.

Here’s an excerpt from a press release from law firm Moore Kuehn:

Moore Kuehn is investigating whether Teladoc or its officers and directors breach their fiduciary duties by failing to disclose that: (i) increased competition, among other factors, was negatively impacting Teladoc's BetterHelp and chronic care businesses; (ii) the growth of those businesses was less sustainable than Defendants had led investors to believe; (iii) as a result, Teladoc's revenue and adjusted EBITDA projections for FY 2022 were unrealistic; and (iv) as a result of all the foregoing, Teladoc would be forced to recognize a significant non-cash goodwill impairment charge.

These possible fiduciary breaches were compounded by massive Teladoc stock selling by Teladoc insiders between February 11, 2021 and July 27, 2022. These Teladoc insiders sold approximately $168 million of their Teladoc stock collectively as evidenced by their Form 4s.

The company responded stating these lawsuits had “no factual basis,” adding: “Unfortunately this type of frivolous litigation has become commonplace for public companies today.”

You know what else is commonplace: Misleading investors with non-GAAP financial measures!

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