Adjusted EBITDA in an S-1: What Can Stay?

For a CFO or controller preparing an IPO, Adjusted EBITDA in an S-1 needs a fresh review, even if the board has used it for years. This guide helps you decide which adjustments survive, build the reconciliation and check whether the prospectus gives GAAP results their proper weight.

Key takeaway: A reconciliation proves how you calculated the number. It doesn't prove that every adjustment belongs in it.

Can you show Adjusted EBITDA in an S-1?

Yes, provided the measure meets the applicable SEC requirements. Item 10(e) of Regulation S-K applies to an S-1: show the comparable GAAP measure with equal or greater prominence, reconcile historical amounts, explain investor usefulness and disclose material additional management uses. The SEC Financial Reporting Manual, Section 8130, sets out that framework.

This article addresses domestic operating companies. Foreign private issuers have separate conditions and exceptions that need their own analysis.

Write the usefulness explanation for your business. If management uses the measure to compare performance across periods, explain what the exclusions help investors see and what they leave out; copying another issuer's paragraph won't explain your economics.

Keep non-GAAP measures outside GAAP statements and notes, and off the face of required Article 11 pro formas. Item 10(e) also prohibits confusingly similar GAAP names. See the SEC's adopting release.

Do the same rules apply to a board deck and an earnings release?

No. The communication and the issuer's reporting status change the analysis. Don't treat a private board metric or a furnished earnings-release presentation as proof that the same disclosure belongs in a registration statement.

Regulation G Rule 100 governs covered public disclosures. Rule 101 defines covered registrants by Section 12 registration or Section 15(d) reporting obligations, excluding registered investment companies; Form 8-K supplies the Item 2.02 instruction.

Check whether furnished material is also filed or incorporated by reference. For the separate release workflow, see Finrep's non-GAAP reconciliation walkthrough for earnings releases.

Is your measure performance, liquidity or a covenant calculation?

Classify the measure by its substance before reviewing exclusions. A measure used to describe earnings performance raises different questions from one presented as cash available to run the business or service debt.

Item 10(e) restricts cash-settled exclusions from non-GAAP liquidity measures, with an exception for EBIT and EBITDA. That exception isn't a general permission slip for extra Adjusted EBITDA exclusions. The adopting release explains the narrow exception.

A material debt covenant needs separate attention. SEC C&DI 102.09 addresses required material covenant disclosure; that isn't permission to use the calculation as a headline metric throughout the prospectus.

For performance EBITDA, the starting point is GAAP net income or loss, rather than operating income. In its June 21, 2011 Delphi Automotive letter, comment 14, the staff requested net-income reconciliations for EBITDA and Adjusted EBITDA across the registration statement.

Use a differentiated name when you add exclusions beyond EBITDA's definition. Don't present EBITDA per share. C&DIs 103.01 and 103.02 address those points.

Which adjustments need to change before filing?

Review the economics before the label. Normal recurring cash operating costs, inconsistent period treatment, excluding charges while retaining similar gains, or changing GAAP recognition principles can make a measure misleading. Detailed explanation doesn't necessarily cure it. See C&DIs 100.01 through 100.06.

Sow Good provides a concrete removal request. In its March 8, 2024 letter, comment 6, the staff challenged a $1.9 million inventory write-down excluded from Adjusted EBITDA for the nine months ended September 30, 2023.

The write-down accompanied a pivot from non-candy freeze-dried products toward candy. Staff viewed inventory risk as part of ordinary operations and requested removal of the adjustment, despite its unusual size. This example concerns an S-1 offering; the letter alone doesn't establish the issuer's final response or disposition.

The two-year rule is a separate test. Don't describe an adjusted charge as non-recurring, infrequent or unusual if a similar charge occurred in the prior two years or is reasonably likely to recur within two years. See the adopting release.

Failing that description test doesn't automatically prohibit an adjustment; C&DI 102.03 preserves substantive review.

For your worksheet, separate the expense's business purpose from the reason management wants to exclude it. Payroll, rent, marketing and IPO preparedness costs shouldn't enter a pre-approved addback bucket just because the board deck already contains them.

How should the Adjusted EBITDA reconciliation work?

Start with GAAP net income or loss and make each reconciling line traceable. Check signs as well as totals: interest income reduces EBITDA rather than behaving like an interest-expense addback.

Reddit's March 11, 2024 S-1/A, page 20, provides this actual 2023 reconciliation. All amounts below are in thousands of dollars, and parentheses indicate negative amounts.

The arithmetic is: -90,824 - 53,281 + 3,801 + 13,702 + 49,086 + 8,098 + 143 = -69,275. The filing also breaks down depreciation and stock compensation by expense category and explains management uses and limitations.

Use the presentation as a traceability example. Its presence in Reddit's filing isn't staff approval of the same exclusions for your business.

Rebuild every period you intend to show from the underlying schedules. A workbook that ties only the latest quarter leaves the earlier prospectus columns exposed.

What GAAP margin belongs next to Adjusted EBITDA margin?

For the performance measure illustrated here, present net-income or net-loss margin alongside Adjusted EBITDA margin. A dollar reconciliation doesn't finish the ratio review: the reader must also see the corresponding GAAP percentage.

In its July 29, 2022 Reborn Coffee letter, comment 1, the staff specifically requested net-loss margin when Adjusted EBITDA margin appeared in the prospectus summary. That's a dated comparator example, rather than evidence of how often the staff raises comments today.

Consider this illustrative scenario, with all dollar amounts in millions. Revenue is $100; GAAP net loss is $10; interest expense is $2; tax expense is $1; depreciation and amortization are $4; and a proposed stock-compensation adjustment is $8.

The proposed reconciliation calculates -$10 + $2 + $1 + $4 + $8 = $5. The scenario checks arithmetic and presentation only: the $8 adjustment still needs substantive review.

Use the same revenue period and denominator. If the $8 exclusion is removed, proposed Adjusted EBITDA becomes -$3 million and its margin becomes -3%; the original 5% must change wherever it appears.

Run a prospectus-wide search for the dollars, percentages and measure name. Review the summary, MD&A, charts, captions and narrative together; C&DI 102.10 extends prominence review beyond the reconciliation table.

Can forward-looking Adjusted EBITDA omit a reconciliation?

Only to the extent reconciling information isn't available without unreasonable efforts. Provide available components, identify what's unavailable and explain its probable significance. This forward-looking exception doesn't excuse a historical reconciliation. See SEC Financial Reporting Manual, Section 8130.

Put exception disclosures where readers see the forecast, with equal or greater prominence, as addressed in C&DI 102.10(b). Don't manufacture a GAAP estimate to fill the gap; an S-1 projection also requires review beyond non-GAAP presentation.

What should the pre-filing review packet contain?

Give reviewers an adjustment-level decision record and a document-wide occurrence list. A useful packet lets reporting, counsel and the auditor assess the same definition, history and disclosure instead of debating different spreadsheet versions.

Retain the original board definition beside the proposed public definition. Explain each change, recalculate affected periods and record unresolved questions before circulating the next draft.

The review is finished when the supported calculation and the prospectus tell the same story.

Frequently asked questions

Can an IPO issuer omit the usefulness explanation because an S-1 isn't an annual report?

Don't assume so. The non-annual-filing exception depends on qualifying prior disclosure in an annual report or more recent filing, updated as needed. An IPO issuer may lack that history. See the Item 10(e) text in the adopting release.

Can we exclude an inventory write-down because it is large?

Size alone didn't persuade staff in the Sow Good letter. Review its relationship to ordinary operations before treating it as an adjustment.

Does a negative GAAP margin disappear if Adjusted EBITDA is positive?

No. In the illustrative panel, the GAAP net-loss margin remains -10% beside the proposed 5% Adjusted EBITDA margin. The Reborn Coffee letter shows the staff's comparator request.

Can we reconcile performance Adjusted EBITDA to operating income?

Use GAAP net income or loss as the performance comparator. The Delphi letter requested that correction for every period presented and across the registration statement.