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.

  • In the first, the SEC asks the registrant for more information related to a COVID-19-related adjustment in its non-GAAP financial measure.
  • The second involves the SEC questioning, and eventually disagreeing with, the registrant’s materiality analysis under Staff Accounting Bulletin No. 99 (SAB 99).
  • The third letter involves an offering document produced by South Korea.

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

On August 26, the SEC voted to adopt amendments to modernize the description of business (Item 101), legal proceedings (Item 103), and risk factor disclosures (Item 105) that registrants are required to make pursuant to Regulation S-K.  The amendments reflect the SEC’s continued movement to a principles-based, registrant-specific approach to disclosure.

As detailed below, some of the changes are rather significant, particularly the changes to the business disclosures and the requirement to have a new risk factor summary section of no more than two pages if the risk factors exceed 15 pages.  As a result, we expect most companies will need to make revisions and updates to their existing disclosures, specifically in connection with their Annual Report on Form 10-K where Items 101 and 105 of S-K are triggered. The rules are effective 30 days after their publication in the Federal Register.

The following table briefly summarizes the final amendments.  We have presented some practical takeaways following the table.


Continue Reading Practical Takeaways on SEC Amended Disclosure Requirements for Business Description, Legal Proceedings and Risk Factors under Regulation S-K

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.

Risk Factor Survey Results

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).


Continue Reading Approaching COVID-19 Risk Factor Disclosure in Upcoming Quarterly Reports on Form 10-Q

Earlier this year, the Securities and Exchange Commission (SEC) issued interpretive guidance, effective February 25, 2020, regarding the disclosure of key performance indicators and metrics (KPIs) in Management’s Discussion and Analysis of Financial Condition and Results of Operations (MD&A), which we discussed in a previous blog post.

This guidance may not have been at the forefront of disclosure matters under consideration for many companies during the first quarter 2020 reporting cycle given the disclosure and other challenges resulting from the COVID-19 pandemic at that time.

Reminders for Public Companies

With the passage of time and a greater sense of clarity on COVID-19 disclosure matters, some companies may use the second quarter 2020 financial reporting cycle as an opportunity to revisit, review and, to the extent necessary, revise their KPI disclosure to ensure alignment with SEC’s interpretative guidance issued during the first quarter 2020. As companies do so, they should ensure that KPIs and other operating metrics disclosed in the MD&A are appropriately considered. For example, to the extent a company identifies an operating metric as a KPI, the company should ensure that its disclosure aligns with the SEC’s interpretive guidance, which may include current and prior-year period comparative disclosure and analysis of factors contributing to year-over-year changes, to the extent material.


Continue Reading Second Quarter Form 10-Q Disclosure Reminder: SEC Guidance on Key Performance Indicators

Public companies designated as accelerated filers who are preparing their periodic reports for fiscal periods ending on or after June 15, 2020 (i.e., upcoming second quarter 10-Qs for many companies) will be required to comply with the SEC’s previously adopted Inline eXtensible Business Reporting Language (iXBRL) digital reporting guidelines. Per the SEC’s phase-in guidelines, filers will be required to comply beginning with their first Form 10-Q filed for a fiscal period ending on or after the applicable compliance date. Therefore, accelerated filers will need to comply with the new iXBRL rules in their next 10-Q, including cover page tagging and the new Exhibit 104 requirement. (These rules already took effect last year for large accelerated filers and except for accelerated filers as mentioned here, go into effect for all other filers for fiscal periods ending on or after June 15, 2021.)

Continue Reading Reminder for Accelerated Filers – Inline XBRL Rules Now Effective

A recent SEC comment letter contained an exchange in which the Staff, in connection with a 10-K review, reminded the registrant to give equal prominence to the comparable margins computed on a GAAP basis wherever EBITDA margin and adjusted EBITDA margin were disclosed.

As a reminder, in the SEC’s Adopting Release titled “Conditions for Use of Non-GAAP Financial Measures” (Release No. 33-8176), the SEC states, “An example of a ratio that would not be a non-GAAP financial measure would be a measure of operating margin that is calculated by dividing revenues into operating income, where both revenue and operating income are calculated in accordance with GAAP. Conversely, an example of a ratio that would be a non-GAAP financial measure would be a measure of operating margin that is calculated by dividing revenues into operating income, where either revenue or operating income, or both, were not calculated in accordance with GAAP.”

This comment exchange, which is repeated below for reference, is a helpful reminder to our blog readership that non-GAAP continues to a focus of the Staff and that a margin number which is itself derived from one or more adjusted numbers will itself be a non-GAAP financial measure in many cases.


Continue Reading EBITDA Margins Are Non-GAAP Measures Also

On May 21, the SEC finalized amendments to its rules and forms revising the disclosure requirements for financial statements relating to acquisitions and dispositions of businesses, which were adopted in substantially the same form as proposed in May 2019. The amendments were effected “to enhance the quality of information that investors receive while eliminating unnecessary costs and burdens.”

The final amendments will, among other things, update the definition of “significant subsidiary” in Rule 1-02(w) of Regulation S-X, Securities Act Rule 405, and Exchange Act Rule 12b-2 to update the investment and income significance tests in each rule, as summarized in the table below. (Since no substantive changes were made to the asset test, we have not included it in the table below.)


Continue Reading SEC Finalizes Amendments to Financial Disclosures Regarding Significant Acquisitions and Dispositions

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.


Continue Reading Whether to Adjust for COVID-19 in Non-GAAP Financial Measures: A Survey and Overview of First Quarter Disclosure Practices

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