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.
Set forth below are key considerations for companies when updating their COVID-19 risk factor disclosure, together with survey results of COVID-19 risk factor disclosures in recent Form 10-Q filings.
Drafting Considerations for Risk Factors
Avoid Generic Disclosure
The Securities and Exchange Commission (SEC) has repeatedly emphasized that risk factors should be tailored to a company’s particular circumstances. Companies need to, therefore, evaluate how the COVID-19 pandemic is specifically impacting their business and tailor their risk factor disclosure to their particular circumstances.
The SEC has provided an illustrative list of COVID-19 effects to consider, including:
- The effect on financial condition and results of operations.
- The effect on capital resources, liquidity, ability to obtain financing, compliance with financial covenants and ability to service indebtedness.
- The effect on the balance sheet and the valuation of assets.
- Potential material impairments.
- The effect of remote work arrangements.
- Changes in demand for products or services.
- The effect on supply chain and logistics.
- The effect of travel restrictions and border closures.
To the extent COVID-19 may be having a similar impact on peer companies, companies should, to the extent available, review peer company risk factor disclosures.
Avoid Hypothetical Disclosure
The SEC has stated that it is potentially misleading and insufficient for a company to disclose that there is a hypothetical risk of an event occurring when the company knows that such an event has already occurred. Instead, the risk factor should clarify that such an event has already occurred and describe the risk prospectively.
As the COVID-19 pandemic has significantly evolved since the time most companies filed their Form 10-K, it is important for companies to reevaluate and, if necessary, revise their risk factors so that investors can clearly understand which COVID-19 risks have already materialized and which remain hypothetical. Such disclosure may change over time as the pandemic evolves, making a thorough quarterly review of a company’s COVID-19 risk factors even more important.
Survey of Risk Factors in Recent Form 10-Q Filings
We surveyed Form 10-Q filings by NYSE- and Nasdaq-listed companies between March 10, 2020 and April 13, 2020. We found that approximately 88.5% of the companies surveyed included at least one new or updated risk factor related to COVID-19.
The companies that did not include any risk factor disclosure were clustered toward the beginning of the period surveyed when the COVID-19 pandemic had not fully materialized in the United States. Of the companies that included COVID-19 risk factor disclosure in their Form 10-Q, the substantial majority included one new or updated risk factor related to COVID-19 (the average number was approximately 1.67).
Further, 100% of the companies that filed after March 19, 2020 included at least one new or updated risk factor related to COVID-19. A limited number of companies elected to provide all of their Form 10-K risk factors, updated as deemed necessary, in their Form 10-Q (including Levi Strauss & Co. and Adobe Inc.).
If you have any questions regarding updating risk factors in your filings or other issues related to the impact of COVID-19 on your business, please feel free to email the authors directly or, if applicable, contact your primary Bass, Berry & Sims relationship attorney.
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Public and private companies of all sizes across a variety of industries turn to Bass, Berry & Sims for counsel on a wide range of corporate matters, including mergers, acquisitions and dispositions, capital markets transactions, executive compensation issues, corporate governance and shareholder activism. We serve as primary corporate and securities counsel to approximately 35 public companies and have counseled on 150 deals ranging in size from $20 million to more than $15 billion over the past two years. Click here to learn more about the Corporate & Securities Practice at Bass, Berry & Sims.