We have previously issued a number of alerts regarding the impact of the coronavirus (COVID-19) pandemic on public companies, including ones regarding issues related to annual meetings and periodic and ongoing disclosure obligations. As calendar year-end companies prepare to issue their first quarter earnings releases and file their first quarter Form 10-Qs, they will need to disclose not only the expected impact of the pandemic on their businesses, but also the actual impact they have experienced during the first quarter and continue to experience during the second quarter. We recommend that public companies and their officers and directors consider the following key disclosure issues as part of their first quarter disclosures in connection with recently issued guidance from the SEC. This list expands upon the ongoing disclosure considerations included in our March 17, 2020, alert and the additional guidance we provided in our March 31, 2020, alert, each of which should be reviewed in connection with first quarter disclosures.
- CF Disclosure Guidance: Topic No. 9: As discussed in our previous alert, on March 25, 2020, the Staff of the Securities and Exchange Commission’s (SEC) Division of Corporation Finance issued CF Disclosure Guidance: Topic No. 9 (Topic No. 9), which provides the SEC Staff’s views regarding disclosure and other securities law obligations that public companies should consider with respect to the COVID-19 pandemic. This guidance remains the lynchpin of the SEC’s later guidance to public companies regarding their disclosure obligations with respect to the COVID-19 pandemic. In particular, the key questions that the SEC Staff recommends in Topic No. 9 for each public company to answer through its disclosures are echoed in the SEC statements described below. Thus, this guidance should be the starting point for a public company’s evaluation of its disclosures regarding the impact of the pandemic.
- Forward-Looking Disclosures: On April 8, 2020, Jay Clayton, Chairman of the SEC, and Willian Hinman, Director of the SEC’s Division of Corporation Finance, issued a Public Statement, The Importance of Disclosure – For Investors, Markets and Our Fight Against COVID-19, urging public companies to focus on the current and expected impact of the COVID-19 pandemic on their results of operations, financial condition and ongoing businesses. The Public Statement urges public companies to provide specific disclosures regarding their current operating status and future operating plans, as well as detailed discussions of their current liquidity positions and expected financial resource needs. In particular, the Public Statement emphasizes the need for significant forward-looking information, reminding public companies to avail themselves of available safe harbors for such disclosure. The Public Statement acknowledges the uncertainty that public companies face in the current environment as to providing forward-looking disclosures, noting, for example, that actual financial and operating results may differ substantially from what would now appear to be reasonable estimates. In light of this uncertainty and to encourage public companies’ provision of forward-looking information despite such uncertainty, the Public Statement provides that the SEC “would not expect to second guess good faith attempts to provide investors and other market participants [with] appropriately framed forward-looking information.”
- Risk Factors: Given the emphasis on forward-looking disclosures and the continued uncertainty regarding when stay-at-home orders and other restrictions on the economy will be lifted, public companies should carefully review their risk factors during the first quarter. In particular, as we have previously discussed, disclosures that provided for hypothetical risks associated with the COVID-19 pandemic should now include the actual risks the company has experienced. Hypothetical risks may also need to be added or updated to account for changes to the types or levels of severity of those risks. For example, disclosure committees should be considering the impacts on supply chains, clinical trials, revenues, employees and all other risks that have materialized or may materialize as a result of the pandemic. In addition, the risk factors should be updated in connection with regulatory changes adopted in response to the COVID-19 pandemic (e.g., Nasdaq’s recent relief related to listing compliance).
- Forward-Looking Statements Safe Harbor: A public company that provides a non-exclusive list of the types of statements that are forward-looking in its safe harbor provision for forward-looking statements should update that list to include statements related to the impact of the COVID-19 pandemic and related risks.
- CARES Act and Other Governmental Assistance: If public companies receive financial assistance under the CARES Act or other similar COVID-19-related federal and state programs and such assistance is material to the company, such assistance should (as noted in the April 8, 2020 Public Statement) be disclosed. In addition, as discussed in our March 27, 2020, alert, Tax Provisions in the CARES Act, the CARES Act included a number of business tax provisions, including with respect to the treatment of net operating losses and the business interest deduction. To the extent material, these matters should be considered in connection with a public company’s income tax disclosures.
- Financial Reporting: On April 3, 2020, the Office of the Chief Accountant of the SEC (OCA) issued a Public Statement on the Importance of High-Quality Financial Reporting in Light of the Significant Impacts of COVID-19. The OCA reminds public companies of the need to continue to provide high-quality financial information and referred public companies to Topic No. 9. The OCA also acknowledges that the accounting and financial reporting implications of the COVID-19 pandemic may require public companies to make (and will likely make it difficult for public companies to make) significant judgments and estimates, including with respect to fair value and impairment considerations, leases, debt modifications and restructurings, hedging, revenue recognition, income taxes, going concern, subsequent events and adoption of new accounting standards. The OCA emphasizes the importance of required disclosures of judgments in these and other areas and confirms that it will not object to public companies’ well-reasoned judgments.
- Non-GAAP Financial Measures and Performance Metrics:
- Topic No. 9: Topic No. 9 reminds public companies of their obligations with respect to non-GAAP financial measures under Regulation G and Item 10 of Regulation S-K. In particular, the SEC Staff noted that, to the extent a public company presents a non-GAAP financial measure to adjust for or explain the impact of the COVID-19 pandemic, the company should highlight why management finds the measure or metric useful and how it helps investors assess the impact of COVID-19 on the company’s financial position and results of operations.
- Non-GAAP rules still apply: Public companies should also keep in mind the general requirements with respect to non-GAAP financial measures and performance metrics, including the SEC Staff’s Non-GAAP Financial Measures Compliance and Disclosure Interpretations, which continue to apply during this time. In particular, non-GAAP financial measures should not (i) be misleading; (ii) exclude normal, recurring, cash operating expenses necessary for the public company to operate its business; (iii) exclude nonrecurring charges but not nonrecurring gains; or (iv) substitute individually tailored revenue recognition and measurement methods for those of GAAP.
- Guidance: A significant number of public companies have withdrawn or suspended their earnings guidance for the first quarter or the full year in light of the COVID-19 pandemic. Public companies that have not yet done so should consider whether it will be appropriate to take that step in connection with their first quarter earnings releases. Companies that still desire to provide guidance going forward should be careful to consider and disclose factors that could impact the company’s ability to achieve the guidance and consider giving themselves a wider range or other flexibility in their targets as the impact of the pandemic continues to evolve.
- Safe Harbor Statements: Public companies should be sure to update the safe harbor statements in their earnings releases in light of the COVID-19 pandemic to be consistent with the revisions they will make to the risk factors and safe harbor statements in the Form 10-Q.
If you have any questions related to this alert, please do not hesitate to contact any member of the Public Companies group or your regular Smith Anderson lawyer. Additionally, please visit and bookmark our firm’s Coronavirus (COVID-19) Business Resource Center, which is continuously updated with useful materials and resources related to COVID-19. This tool has been made available to ensure that our clients and the broader business community stay informed on key issues that may impact their operations and to navigate the related business and legal issues during these challenging times.