I was recently featured on the Deep Dive with Dave podcast hosted by Dave Lynn from TheCorporateCounsel.net. Dave and I discussed the following questions:
…
In a prelude of things to come for public companies, on December 4 the Securities and Exchange Commission (SEC) sued restaurant operator The Cheesecake Factory Incorporated for making misleading disclosures regarding the impact of the COVID-19 pandemic on its financial conditions and operations. After issuing warnings and guidance to public companies since the early stages of the pandemic, this is the SEC’s first time charging a public company for misleading disclosures relating to the pandemic.
The allegations against The Cheesecake Factory are straight forward. Early in the pandemic, The Cheesecake Factory disclosed in SEC filings that its restaurants were “operating sustainably.” The SEC alleged this disclosure contradicted internal company documents, which showed that due to the pandemic the company was losing approximately $6 million in cash per week, was projected to run out of cash in 16 weeks, and had notified its landlords that it would not pay rent in April.
The inadequacy of The Cheesecake Factory’s SEC filings was further confirmed according to the SEC when the company later shared the undisclosed financial information with potential private equity investors and lenders in connection with an effort to seek additional liquidity.
…
Continue Reading SEC Files First Charges for Inadequate Public Company COVID-19 Disclosures
On November 17, in response to a formal rulemaking petition that garnered support from nearly 100 public companies, the Securities and Exchange Commission (SEC) issued a final rule amending Regulation S-T and the Electronic Data Gathering, Analysis and Retrieval system (EDGAR) Filer Manual to permit the use of electronic signatures when electronically filing documents with the SEC. The amendments will be effective upon publication in the Federal Register, though the SEC indicated in its November 20 Statement that it will not take enforcement action against issuers who elect to comply with the amendments before their effectiveness so long as signatories comply with the new requirements.
Rule 302(b) of Regulation S-T, as amended, will permit a signatory to an electronic filing to electronically sign the document, provided that the signatory follows certain procedures and the electronic signature meets certain requirements specified in the EDGAR Filer Manual. Under those requirements, the electronic signing process must, at a minimum do the following:
This is a continuation of our series addressing steps companies can take to protect themselves during government enforcement actions related to COVID-19. For more information, see our previous articles addressing corporate best practices and the health care industry.
COVID-19 has affected the financial conditions and operations of all public companies, most in a negative way but some in very positive ways. Regardless of the impact, all public companies must consider the anticipated scrutiny they will receive from the U.S. Securities and Exchange Commission (SEC) and the possible risk they face from SEC Enforcement if they do not proceed with caution. While the rules and landscape may continue to evolve, it seems apparent at this point that SEC scrutiny related to COVID-19 is most relevant in the following ways.
1. SEC Enforcement’s role in monitoring relief funding. In a prior article, we discussed steps health care companies can take to protect themselves against government investigations related to COVID-19. But all companies that received relief funding must be careful.
…
Continue Reading How Public Companies Can Protect Against SEC Scrutiny Related to COVID-19
Subscribers to our blog know that we monitor EDGAR for new SEC comment letters and enjoy bringing attention to the more interesting ones. In today’s blog post, we bring you three new SEC comment letter exchanges.
SEC Staff Wants More Information about a COVID-19 Adjustment in Non-GAAP Net Income
We’ve previously blogged about COVID-19-related adjustments in connection with the presentation of non-GAAP financial measures, including the difficulty that some public companies may have in reasonably quantifying the extent to which incremental expenses were driven by the COVID-19 pandemic as opposed to other factors.…
Continue Reading Recent SEC Comment Letters of Interest Regarding COVID-19 Adjustments, SAB 99 and South Korea
Following up on our prior blog post regarding first quarter COVID-19 risk factor disclosure considerations and our prior blog post regarding second quarter COVID-19 risk factor disclosure considerations, we surveyed the risk factor disclosures of 75 calendar year-end NYSE- and Nasdaq-listed companies included in Quarterly Reports on Form 10-Q (Form 10-Qs) filed for the first and second quarters of 2020.
Of the companies surveyed, we found that 96%, or 72 of the companies surveyed, included standalone risk factors related to COVID-19 (the average number of COVID-19 risk factors was approximately 1.16). None of the companies surveyed included an additional standalone COVID-19 risk factor in the second quarter Form 10-Q that was not in the first quarter Form 10-Q. Approximately 63%, or 47 of the companies surveyed, updated their COVID-19 risk factor disclosure from their first quarter 2020 Form 10-Q in their second quarter 2020 Form 10-Q.
The three companies that did not include a standalone COVID-19 risk factor disclosure during their first or second quarter 2020 Form 10-Q did include language indicating that COVID-19 could exacerbate or heighten the risk factors that were previously included in their 2019 Annual Report on Form 10-K. A small portion of the companies we surveyed repeated the risk factor disclosure from their first quarter Form 10-Q verbatim in their second quarter Form 10-Q. However, most of the companies that did not update their first quarter Form 10-Q COVID-19 risk factor disclosure in their second quarter Form 10-Q incorporated their first quarter Form 10-Q risk factor disclosure by reference.
…
Continue Reading Updated Risk Factors in Response to COVID-19
In a first-quarter (for calendar year-end companies) SEC disclosure landscape dominated by COVID-19 considerations, almost all public companies included a new risk factor addressing COVID-19 in their first quarter Form 10-Q. Public companies are now considering potential risk factor disclosure in their Form 10-Q related to COVID-19 (see our prior blog post regarding first quarter COVID-19 risk factor disclosure considerations).
With respect to assessing whether to include potential COVID-19 risk factor disclosure in upcoming Form 10-Qs, as a starting point, Part II, Item 1A of Form 10-Q requires that public companies “set forth any material changes from risk factors as previously disclosed in the registrant’s Form 10-K” (emphasis added).
This language from Form 10-Q, on its face, would appear to require public companies to continue to disclose risk factors included in a prior Form 10-Q in any subsequent Form 10-Qs filed before the next Form 10-K in light of the statement about including material changes from the prior Form 10-K (compare the 2005 adopting release of the SEC promulgating this Form 10-Q risk factor requirement, which stated that the Form 10-Q should disclose risk factors “to reflect material changes from risks factors as previously disclosed in Exchange Act reports” (emphasis added).
While practice has not been uniform regarding whether public companies repeat risk factors included in a prior Form 10-Q in subsequent Form 10-Qs, there is a good argument based on the text of Form 10-Q as cited above that public companies should continue to repeat (with updated language, as applicable) risk factors included in a prior Form 10-Q in subsequent Form 10-Qs through the filing of the next Form 10-K (assuming that the risk remains applicable).
One of the key areas of disclosure focus for the Securities and Exchange Commission (SEC) following the emergence of the COVID-19 pandemic was the impact that the pandemic might have on the presentation of non-GAAP financial measures for public companies. For example, when providing disclosure guidance for how registrants should approach COVID-19-related considerations in CF Disclosure Guidance: Topic No. 9, issued by the Division of Corporation Finance on March 25, 2020 (CF Disclosure Topic 9), the Staff stated that, with respect to the disclosure of non-GAAP financial measures in the pandemic environment, “where a GAAP financial measure is not available at the time of the earnings release because the measure may be impacted by COVID-19-related adjustments,” the SEC “would not object to companies reconciling a non-GAAP financial measure to preliminary GAAP results that either include provisional amount(s) based on a reasonable estimate, or a range of reasonably estimable GAAP results.”
Nevertheless, it has been our experience (consistent with the survey results summarized below) that most registrants did not include COVID-19-related adjustments in connection with the presentation of non-GAAP financial measures in the first quarter. This article summarizes our survey results and analyzes factors that may have impacted the determination of most registrants not to include any COVID-19-related adjustments in connection with their presentation of non-GAAP financial measures in first-quarter disclosure materials.
As part of our survey, we reviewed 55 public companies that presented Adjusted EBITDA in their earnings release filed in the period from April 1, 2020, to May 14, 2020. We chose to focus on Adjusted EBITDA in this survey (recognizing that such measure is utilized more frequently in some industries than others) because such measure is commonly utilized by public companies to measure their operational performance and frequently includes adjustments for items that are believed not to reflect the ongoing operational performance of the company. While we limited our survey to registrants that presented Adjusted EBITDA, we believe that the survey results have relevance for companies that present other types of non-GAAP performance measures which are adjusted for special items or items outside of the ordinary course of business.
In case you missed it, we discussed virtual annual meetings at our recent Public Company Town Hall Webinar: Securities Law Guidance for First Quarter Reporting Season. Access the recording here.
Among the numerous considerations related to upcoming annual stockholder meetings being hosted solely using remote (virtual) communication as a result of the novel coronavirus (COVID-19) pandemic, one question that several clients and colleagues have raised is whether management must host a “live” question and answer (Q&A) session on the webcast or whether stockholders must submit their questions in advance (i.e., no “real-time” submission of questions at the meeting).
Based on our survey of company practices in the Fortune 100 (as discussed further below), most companies in our survey are allowing shareholders to ask questions during the virtual annual meeting, with 58% permitting stockholders to submit questions only during the virtual annual meeting and another 32% also permitting stockholders to submit questions in advance of the virtual annual meeting.…
Continue Reading Q&A at Virtual Stockholder Meetings: A Review of Latest Trends
As calendar-year public companies are beginning to prepare their Quarterly Report on Form 10-Q (Form 10-Q) for their first quarter, the novel coronavirus (COVID-19) pandemic and the related societal and economic impact continues to evolve. One important item that companies will need to consider as part of their Form 10-Q preparation is whether any new (or expanded) risk factors relating to COVID-19 should be included in their Form 10-Q.
Form 10-Q requires companies to disclose any material changes to the risk factors that were included in their Annual Report on Form 10-K (Form 10-K). Absent merger and acquisition activity or other material developments, it is not unusual for companies to determine no material changes have occurred since their Form 10-K was filed (and as a result no new risk factor disclosure is required).
However, given the significant impact of COVID-19 on businesses so far this year, we expect most companies will update their existing risk factor disclosure. Investors and other stakeholders are paying particular attention to COVID-19 disclosures, and the risks that COVID-19 poses to a company may not always be obvious to such stakeholders absent robust disclosure.
…
Continue Reading Reevaluating Risk Factors in Response to COVID-19
