The SEC Staff has published additional guidance for public companies about disclosure considerations related to the COVID-19 pandemic. When preparing upcoming SEC disclosure documents, public companies should consider this additional guidance, as well as the SEC Staff’s previous guidance published on this topic, which we summarized in our previous client update, SEC Extends Time Period for Conditional Relief from Filing Deadlines and Issues Guidance for Public Companies Affected by Coronavirus.
The considerations and questions in the Staff’s additional guidance fall into three categories:
- General considerations, including the company’s operations, liquidity, and capital resources.
- The receipt of government assistance under the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) or otherwise.
- The company’s ability to continue as a going concern, when that is at risk.
The following is our summary of the Staff’s additional guidance.
General Considerations – Operations, Liquidity, and Capital Resources
The Staff provided the most significant guidance with respect to general considerations, including, broadly speaking, how companies have had to adjust to the impacts of the COVID-19 pandemic. In crafting their disclosures, companies should carefully consider the following questions to include disclosure in both earnings releases and MD&A:
- What material operational challenges are management and the Board of Directors monitoring and evaluating? How and to what extent have you altered your operations, such as implementing health and safety policies for employees, contractors, and customers, to deal with these challenges, including challenges related to employees returning to the workplace? How are the changes impacting or reasonably likely to impact your financial condition and short- and long-term liquidity?
- How is your overall liquidity position and outlook evolving? If COVID-19 is adversely impacting revenues, consider whether such impacts are material to your sources and uses of funds, as well as the materiality of assumptions you make about the magnitude and duration of COVID-19’s impact on revenues. Are decreases in cash flow from operations having a material impact on liquidity position and outlook?
- Have you accessed revolving lines of credit or raised capital in the public or private markets to address liquidity needs? Are your disclosures regarding these actions and any unused liquidity sources providing investors with a complete discussion of your financial condition and liquidity?
- Have COVID-19-related impacts affected your ability to access traditional funding sources on the same or reasonably similar terms as were available in recent periods? Have you provided additional collateral, guarantees, or equity to obtain funding? Have there been material changes in your cost of capital? How has a change, or a potential change, to your credit rating impacted access to funding? Do your financing arrangements’ terms limit your ability to obtain additional funding? If you answered “yes,” then is the uncertainty of additional funding reasonably likely to result in your liquidity decreasing in a way that would result in you being unable to maintain current operations?
- Are you at material risk of not meeting covenants in your credit and other agreements?
- If your disclosures include metrics, such as cash burn rate or daily cash use, are you clearly defining the metrics and explaining how management uses them in managing or monitoring liquidity? Are there estimates or assumptions underlying such metrics the disclosure of which is necessary for the metric not to be misleading?
- Have you reduced your capital expenditures? If so, how? Have you reduced or suspended share repurchase programs or dividend payments? Have you ceased any material business operations or disposed of a material asset or line of business? Have you materially reduced or increased your human capital resource expenditures? Are any of these measures temporary in nature? If so, how long do you expect to maintain them? What factors will you consider in deciding to extend or curtail these measures? What are the short- and long-term impacts of these reductions on revenues and meeting financial obligations (current and future)?
- Are you able to timely service your debt and other obligations? Have you taken advantage of payment deferrals, forbearance periods, or other concessions? What are those concessions and how long will they last? Do you foresee liquidity challenges once accommodations end?
- Have you altered customer’s terms (e.g., extended payment terms or refund periods)? If so, how have those actions materially affected your financial condition or liquidity? As a landlord or lender, did you provide concessions or modify arrangement terms in a material way? Have you modified other contractual arrangements in response to COVID-19 in a way that revised terms may materially impact your financial condition, liquidity, or capital resources?
- Are you relying on supplier finance programs (e.g., supply chain financing, structured trade payables, reverse factoring, or vendor financing) to manage your cash flow? Have these arrangements had a material impact on your balance sheet, statement of cash flows, or short- and long-term liquidity? If so, how? What are the material terms of the arrangements? Did you/your subsidiaries provide guarantees for these programs? Do you face a material risk if a party to the arrangement terminates it? What amounts payable at the end of the period relate to these arrangements, and what portion of these amounts has an intermediary already settled for you?
- Have you assessed the impact that material events that occurred after the end of the reporting period, but before the financial statements were issued, have had or are reasonably likely to have on liquidity and capital resources? Have you considered whether disclosure of subsequent events in the financial statements and known trends or uncertainties in MD&A is required?
Receipt of Government Assistance
Naturally, additional disclosure analysis is required for companies receiving federal assistance during the COVID-19 pandemic. In its guidance, the Staff identified the following questions for consideration, with a view toward better disclosure:
- How does the federal loan impact your financial condition, liquidity, and capital resources? What are the material terms and conditions of the assistance you received? Do you anticipate being able to comply with them? Do those terms and conditions limit your ability to seek other sources of financing or affect your cost of capital? Do you reasonably expect loan restrictions (e.g., maintaining certain employment levels) to have a material impact on revenues or income from continuing operations, or to cause a material change in the relationship between costs and revenues? Once any such restrictions lapse, do you expect to materially change your operations?
- Are you taking advantage of any recent tax relief, and if so, how does that relief impact your short- and long-term liquidity? Do you expect a material tax refund for prior periods?
- Does the assistance involve new material accounting estimates or judgments that should be disclosed or that materially change a prior critical accounting estimate? What accounting estimates were made (e.g., probability a loan will be forgiven), and what uncertainties are involved in applying the related accounting guidance?
Ability to Continue as a Going Concern
Finally, the Staff suggested questions to consider in the context of MD&A disclosure when management believes there is substantial doubt about the company’s ability to continue as a going concern:
- Are there conditions and events that give rise to the substantial doubt about the company’s ability to continue as a going concern? For example, have you defaulted on outstanding obligations? Have you faced labor challenges or a work stoppage?
- What are your plans to address these challenges? Have you implemented any portion of those plans?
In sum, it is vitally important for public companies to consider thoughtfully the nuances of their disclosure obligations during and because of the COVID-19 pandemic. For more information about recommended steps and for our help in crafting particular disclosures, please contact your Foley relationship partner. For additional web-based resources available to assist you in monitoring the spread of the coronavirus on a global basis, you may wish to visit the CDC and the World Health Organization.
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