The SEC’s Division of Corporation Finance has issued updated disclosure guidance (https://www.sec.gov/news/press-release/2020-73) providing the SEC staff’s current views regarding disclosure and other securities law obligations that companies should consider with respect to COVID-19 and related business and market disruptions. The guidance again reminds companies that where a company has become aware of a risk related to the Coronavirus that would be material to its investors, it should refrain from engaging in securities transactions with the public and discourage directors and officers (and other corporate insiders who are aware of these matters) from initiating such transactions until investors have been appropriately informed about the risk. To the extent the company or insiders are engaged in transactions, or circumstances otherwise warrant it, the company should consider what disclosures are required in order to inform the public of its financial condition. When companies do disclose material information related to the impacts of the Coronavirus, they are reminded to take the necessary steps to avoid selective disclosures and to disseminate such information broadly. Depending on a company’s particular circumstances, it should consider whether it may need to revisit, refresh, or update previous disclosure to the extent that the information becomes materially inaccurate. Companies providing forward-looking information in an effort to keep investors informed about material developments, including known trends or uncertainties regarding the Coronavirus, can take steps to avail themselves of the normal safe harbor for this information.
Among the areas the guidance discusses for companies to consider are the impact of Coronavirus on:
- financial condition and results of operations, plus future operating results and near-and-long-term financial condition;
- capital and financial resources, including overall liquidity position and outlook (and if a material liquidity deficiency has been identified, what course of action the company has taken or proposes to take to remedy the deficiency);
- cost of or access to capital and funding sources, such as revolving credit facilities or other sources, and access to cash;
- material uncertainty about the ongoing ability to meet the covenants of credit agreements;
- the ability to service debt or other financial obligations, access the debt markets, including commercial paper or other short-term financing arrangements, maturity mismatches between borrowing sources and the assets funded by those sources, changes in terms requested by counterparties, changes in the valuation of collateral, and counterparty or customer risk;
- expected incurrence of any material COVID-19-related contingencies, impairments, increases in allowances for credit losses, restructuring charges, other expenses, or changes in accounting judgments that have had or are reasonably likely to have a material impact on the company’s financial statements;
- the ability to maintain operations, including financial reporting systems, internal control over financial reporting and disclosure controls and procedures, and any changes in controls that occurred during the current period that materially affect or are reasonably likely to materially affect the company’s internal control over financial reporting;
- implementing business continuity plans or required material expenditures to do so;
- demand for products or services;
- supply chain or the methods used to distribute products or services;
- human capital resources and productivity; and
- the ability to operate and achieve business goals due to travel restrictions and border closures.
The guidance also reminds companies of their obligations with respect to the presentation of non-GAAP financial measures, noting that to the extent a company presents a non-GAAP financial measure or performance metric to adjust for or explain the impact of COVID-19, it would be appropriate to 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. The guidance acknowledges that there may be instances 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 that may require additional information and analysis to complete. In these situations, the guidance states that the Division of Corporation Finance 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. The provisional amount or range should reflect a reasonable estimate of COVID-19 related charges not yet finalized, such as impairment charges. In addition, the guidance states that if a company presents non-GAAP financial measures that are reconciled to provisional amount(s) or an estimated range of GAAP financial measures, it should limit the measures in its presentation to those non-GAAP financial measures it is using to report financial results to the Board of Directors. If a company presents non-GAAP financial measures that are reconciled to provisional amount(s) or an estimated range of GAAP financial measures, it should explain, to the extent practicable, why the line item(s) or accounting is incomplete, and what additional information or analysis may be needed to complete the accounting.
In addition, as further detailed in our client advisory from last week (https://www.sullivanlaw.com/news-SEC-Provides-Conditional-Regulatory-Relief-for-Public-Companies-Impacted-by-Coronavirus.html), the SEC had offered public companies impacted by coronavirus extensions on their periodic report deadlines for reports due between March 1 and April 30, subject to meeting certain conditions (as described in our advisory). Today, the SEC further extended its relief to filings due between March and July 1.
The SEC has also encouraged companies facing other administrative difficulties in the filing process (e.g., inability to obtain a required signature due to an executive officer being located in a quarantined zone) to contact the staff who will help address these issues on a case-by-case basis in light of their fact-specific nature.