Monday, July 26, 2010

Penson Worldwide and Comtech Telecommunications Need to Learn How to Properly Calculate EBITDA under SEC Rules


Both Penson Worldwide (NASDAQ: PNSN) and Comtech Telecommunications (NASDAQ: CMTL) have issued recent earnings reports which include a calculation of EBITDA that apparently does not comply with Regulation G governing non-GAAP financial measures. As I will describe below, their EBITDA calculations include an erroneous adjustment for stock-based compensation costs.

How is EBITDA supposed to be calculated?

According to the SEC Compliance & Disclosure Interpretations, EBITDA is means net income before interest, taxes, depreciation, and amortization. See below:
Question 103.01

Question: Exchange Act Release No. 47226 describes EBIT as "earnings before interest and taxes" and EBITDA as "earnings before interest, taxes, depreciation and amortization." What GAAP measure is intended by the term "earnings"? May measures other than those described in the release be characterized as "EBIT" or "EBITDA"? Does the exception for EBIT and EBITDA from the prohibition in Item 10(e)(1)(ii)(A) of Regulation S-K apply to these other measures?

Answer: "Earnings" means net income as presented in the statement of operations under GAAP. Measures that are calculated differently than those described as EBIT and EBITDA in Exchange Act Release No. 47226 should not be characterized as "EBIT" or "EBITDA" and their titles should be distinguished from "EBIT" or "EBITDA," such as "Adjusted EBITDA." These measures are not exempt from the prohibition in Item 10(e)(1)(ii)(A) of Regulation S-K, with the exception of measures addressed in Question 102.09. [Jan. 11, 2010]
In other words, the only way to compute EBITDA is by starting with net income and adding back interest, taxes, depreciation and amortization. Any different calculation cannot be called EBITDA, but can be called "Adjusted EBITDA.”

How did Penson and Comtech calculate EBITDA?

Penson erroneously added back "stock based compensation" and Comtech erroneously added back "amortization of stock-based compensation" to net income to compute EBITDA. Penson’s “stock based compensation” and Comtech’s “amortization of stock-based compensation” are differing names to describe the same exact expense item.

Amortization expense is part of an EBITDA calculation and is derived from the amortization of fixed assets. However, amortization of stock-based compensation is not derived from amortizing a fixed asset. Therefore, stock-based compensation cannot be added back to net income to calculate EBITDA

Penson's highlighted EBITDA calculation:

Comtech's highlighted EBITDA calculation:

Why both Penson and Comtech EBITDA calculations do not comply with SEC Regulation G

The SEC Division of Corporation Finance has told other public companies that stock-based compensation is not properly included in an EBITDA calculation. For example, in 2007, the SEC Division of Corporation Finance told CGG Veritas that its EBITDA calculation erroneously included stock-based compensation:
The acronym EBITDA refers specifically to earning before interest, tax, depreciation and amortization. However, your measure also adjusts earnings for stock option expense. We will not object to your using such a measure as a liquidity measure but request that you rename it to avoid investor confusion.
CGG Veritas replied to the SEC:
In response to the Staff’s comment, we will in future filings refer to the non-GAAP measure in question as “EBITDAS”, which we will define as “earnings before interest, tax, depreciation, amortization and share-based compensation cost…
Likewise, from Q2 2007 to Q2 2008 (NASDAQ: OSTK) improperly included stock-based compensation costs in its EBITDA calculation. After a yearlong public battle,'s embittered CEO Patrick Byrne finally changed his company's EBITDA calculation to comply with Regulation G. For more details, please read Lee Webb Stockwatch article and Richard Sauer's book.

Recently, I exposed even more financial reporting violations at that caused the company to restate its financial reports for the third time in three years. The SEC is investigating’s accounting irregularities


Before Penson Worldwide and Comtech Telecommunications issue any more quarterly press releases touting their financial performance, those companies need change their EBITDA calculations to properly comply with Regulation G. If they still want to use stock-based compensation in their calculations, their non-GAAP measure should be named "Adjusted EBITDA" or "EBITDAS" but not EBITDA.

Written by,

Sam E. Antar


Crain's New York Business: Defense firm offers novel description of earnings by Aaron Elstein
But eagle-eyed accountant Sam Antar, former chief financial officer at electronics retailer Crazy Eddie, points out that things aren't quite as rosy as Comtech made them appear.

In Comtech's world, EBITDA not only means earnings before interest expenses, taxes and the rest, but also $2.3 million in something called amortization of stock-based compensation. That's a no-no, because as Mr. Antar observes, companies may not stray from the Securities and Exchange Commission's definition of EBITDA. If they do, they have to it call their results "adjusted EBITDA" or, perhaps in Comtech's case, "EBITDAASBC."

I sent an email to Comtech asking about this and will provide and update when the company responds.
Proxy Partisans - EBITDA and Stock-Based Compensation by Christopher Faille
Penson has added stock-based compensation into the EBITDA figure, while Comtech has addedf the amortizationof stock-based compensation. Well ... the A does stand for amortization, but not as it happens that amortization.

Of course, if the EBITDA figure itself can be jiggered with in this way, then any ratios of which EBITDA forms a part become less useful for any investors who might be relying on them. If an investor is diligently working out the value-to-EBIDTA ratio, he'll end up with a smaller ratio that he "should" for these firms. Smaller, that is, than he would if the rules were adhered to consistently. That smaller ratio might well lead him to include, "these stocks are at bargain prices."

Sam Antar has done good work bringing these shenanigans to public notice, and I congratulate him on that.

I am a convicted felon and a former CPA. As the criminal CFO of Crazy Eddie, I helped Eddie Antar and other members of his family mastermind one of the largest securities frauds uncovered during the 1980's. I committed my crimes in cold-blood for fun and profit, and simply because I could.

If it weren't for the efforts of the FBI, SEC, Postal Inspector's Office, US Attorney's Office, and class action plaintiff's lawyers who investigated, prosecuted, and sued me, I would still be the criminal CFO of Crazy Eddie today.

There is a saying, "It takes one to know one." Today, I work very closely with the FBI, IRS, SEC, Justice Department, and other federal and state law enforcement agencies in training them to identify and catch white-collar criminals.

I do not seek or want forgiveness for my vicious crimes from my victims. I plan on frying in hell with other white-collar criminals for a very long time.

I do not own any Penson Worldwide, Comtech Telecommunications, or securities long or short. My investigations of their financial disclosures are a freebie for securities regulators to get me into heaven, though I doubt I will ever get there because of my crimes.

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