All posts by George Wilson

A Timely Form 12b-25 Reminder from SEC Enforcement!

Reporting

On April 29, 2021, with deadlines for first-quarter reports rapidly approaching, the SEC Enforcement Division sent an important message about using Form 12b-25 to request due date extensions.  Form 12b-25 is short and simple.  And while the extensions of 15 calendar days for an annual report and 5 calendar days for a quarterly report are not particularly long, they can be helpful to avoid becoming a non-timely filer and losing Form S-3 for twelve months. Yet, like all other SEC reports, if a 12b-25 is not complete there are consequences.

The likely source of problems with 12b-25 lies in “Part III – Narrative.”  Part III provides this instruction:

State below in reasonable detail why Forms 10-K, 20-F, 11-K, 10-Q, 10-D, N-CEN, N-CSR, or the transition report or portion thereof, could not be filed within the prescribed time period.

(Attach extra Sheets if Needed)

As we discuss in our Workshops, it is important to make complete disclosures of all the reasons for any delay. One example we cite is a February 2005 enforcement case – FFP Marketing Company, Inc., Warner Williams, and Craig Scott, CPA.  In February 2002, FFP Marketing Company discovered its financial statements were materially misstated.  In a Form 12b-25 to extend the due date of its December 31, 2001 Form 10-K, the CFO/CLO failed to disclose this fact.  When the restatement came to light, the SEC enforced, sanctioned the company, and barred the CFO/CLO from SEC practice for three years.

While the FFP Marketing case was many years ago, on April 29, 2021, just before the due dates for first-quarter reports, the SEC  announced Form 12b-25 enforcement cases against eight companies.  Using data analytics, the SEC found that these companies filed Form 12b-25s that failed to disclose that “anticipated restatements” caused the delays.  Each of the companies entered into cease and desist orders and paid fines ranging from $25,000 to $50,000.

The loss of Form S-3 for twelve months, while not stated in the enforcement release, is also another likely consequence in this type of case.

As always, your thoughts and comments are welcome!

SEC Revenue Recognition Disclosure Comments

Comment of the Week, Reporting

Revenue recognition is always at or near the top of frequent SEC comment areas.  This comment letter provides two great examples.  The first asks for deeper analysis in MD&A and the second probes the company’s ASC 606 disaggregated revenue disclosures.

MD&A

This MD&A comment asks the company to disclose quantified reasons for changes in international revenues. The comment raises an interesting inconsistency in how the company discussed and analyzed changes in domestic versus international revenues.

  1. Your discussion of changes in international wholesale segment sales attributes the decrease in sales to pandemic related store closures, which does not appear to provide enough context for the changes in revenue during the periods presented. Similar to your discussion of revenue changes in domestic wholesale sales, please revise to disclose sales volume, changes in average selling price, and/or other underlying drivers for the change in international wholesale segment sales.

The company responded that it would provide incremental disclosure in future filings and provided the SEC this example disclosure:

Our international wholesale segment sales decreased $164.4 million, or 29.9%, to $385.2 million for the three months ended June 30, 2020 compared to sales of $549.6 million for the three months ended June 30, 2019. Our international wholesale sales consist of direct sales by our foreign subsidiaries, including our joint ventures, that we make to department stores and specialty retailers and to our distributors, who in turn sell to retailers in various international regions where we do not sell directly. Direct sales by our foreign subsidiaries, including our joint ventures, was $341.7 million, a decrease of $104.0 million, or 23.3%, and our distributor sales was $43.5 million, a decrease of $60.3 million or 58.1%.

The $164.4 million decrease in segment sales was due to the effects of the pandemic and related store closures impacting our wholesale and distributor customers. Substantially all of the decrease was due to a volume reduction of 29.1% in the number of units sold. The average selling price decreased 1.3%.

ASC 606 Disaggregated Revenue Disclosures

This second comment focuses on ASC 606 disaggregated revenue disclosures.  The staff noted that, from their perspective, the company did not address a key revenue driver.

  1. We note your disclosures of sales related to e-commerce channels in your MD&A discussion and on your quarterly earnings calls. We also note that sales from your e-commerce channels increased by 428.2% and were a key driver to the quarter ended June 30, 2020. Please tell us your consideration for disclosure of disaggregated revenues for your Direct-to-consumer segment by sales channel (i.e., e-commerce channel and in-store sales) pursuant to ASC 606-10-55-89 through 91. In your response, tell us the amount of e-commerce sales recognized during the periods presented and also for fiscal 2019.

In their response, the company provided a detailed analysis of the decision-making considerations in their disaggregated revenue disclosures.  While they agreed to continue to monitor this area, they did not believe that any disclosure changes were necessary.  The staff’s next letter was the closing letter.

As always, your thoughts and comments are welcome!

CorpFin Updates Guidance for Shareholder Meetings Impacted by COVID-19

Reporting

On April 9, 2021, CorpFin updated its Announcement – “Staff Guidance for Conducting Shareholder Meetings in Light of COVID-19 Concerns.”  The update addresses issues surrounding shareholder proposals when a proponent cannot attend a meeting in person.  This update did not affect existing discussions about changing the date, time or location of a meeting, virtual meetings, and delays in printing and mailing full set proxy materials.

As always, your thoughts and comments are welcome!

Disruption for SPACs – Debt versus Equity and Possible Restatements

Hot Topic, Reporting

Debt versus equity classification for complex financial instruments has caused more public company restatements over the last 15 years than almost any other issue.  SPACs almost always issue warrants in their original formation and subsequent IPO.  These warrants, as it turns out, frequently have complex features that raise debt versus equity questions.

On April 12, 2021, the Acting Director of the Division of Corporation Finance and the Acting Chief Accountant issued a statement – “Staff Statement on Accounting and Reporting Considerations for Warrants Issued by Special Purpose Acquisition Companies (“SPACs”).”

The Statement notes that the staff has recently evaluated fact patterns surrounding SPAC warrants.  It would appear that this review has found situations where SPACs may not have properly accounted for warrants and may need to restate financial statements.  It is important to remember that this complex issue depends on the specific features of each warrant.  Warrants with very similar features can have very different accounting treatments.

The Statement addresses two areas where, if SPACs did not properly apply GAAP, and the amounts involved are material, restatement would be required.  The issues focus on

  1. whether the instruments are “indexed” to the issuer’s equity, and
  2. whether certain redemption provisions could trigger a cash settlement where all equity holders do not participate equally.

The US GAAP “indexation guidance” requires a close link between the fair values of a SPAC’s warrants and equity securities.  If the warrants have features that break this relationship, they are not “indexed to the company’s stock” and must be classified as liabilities.  This technical and complex determination generally depends on the inputs to the warrant’s fair value computation.

The redemption issue focuses on whether a warrant could require a net cash settlement which is outside the control of the issuer.  This generally would require liability classification.  There is an exception to this requirement that if the holders of the warrants and all the underlying securities would receive a cash settlement, equity classification could still be appropriate.  This can be a very complex and technical determination based on the specific provisions of a warrant.

If a SPAC has issued warrants that involve these issues and did not appropriately classify the warrants as liabilities, restatement would be required if the amounts are material.

The Statement provides reminders about the restatement process, related Internal Control Over Financial reporting issues, potential requirements to file an Item 4.02 Form 8-K and communication issues related to Reg FD.

The number of SPAC restatements and the ultimate market impact will unfold in coming weeks.

As always, your thoughts and comments are welcome!

De-SPAC Transaction Liability – A Public Statement from the CorpFin Acting Director

Hot Topic, Reporting

On April 8, 2021, Acting CorpFin Director John Coates issued a Public Statement – “SPACs, IPOs and Liability Risk under the Securities Laws.”

Mr. Coates briefly reviews how SPACs, as shell companies, raise capital in an IPO and use this capital to acquire a private company in a “de-SPACing transaction.”  The de-SPACing transaction is structured so that the SPAC’s public company status and exchange listing survive to the combined entity.  Given the volume and complexity of these transactions, Mr. Coates affirms that the CorpFin staff is “continuing to look carefully at filings and disclosures by SPACs and their private targets.”

He then provides a thoughtful discussion about legal liabilities in disclosures surrounding de-SPACing transactions.  He addresses various “claims” that de-SPACing transactions present reduced liability compared to a traditional IPO transaction.  As an example, part of the discussion addresses how the 1995 Private Securities Litigation Reform Act applies to disclosures, particularly projections, in de-SPACing transactions.  Mr. Coates explores the definition of initial public offering and whether a de-SPACing transaction, where a private company is seen by the public for the first time, could be an initial public offering as contemplated in the 1995 Act.  If this were the case, the 1995 Act safe harbors might not apply to de-SPACing transactions.

There is much relevant discussion along with suggestions for next steps in Mr. Coates statement.

As always, your thoughts and comments are welcome.

ESG and Lending Tied Together in Real Life

Hot Topic, Reporting

On April 6, 2021, BlackRock filed an Item 2.03 Form 8-K disclosing a new credit agreement.  Generally, this is not a particularly newsworthy event.  This agreement though, while increasing the company’s revolving credit line by $400,000,000 to $4,400,000,000, also includes provisions linking the interest rate and commitment fee to various ESG factors.

BlackRock’s lending costs can increase or decrease depending on how well it meets or fails to meet targets related to:

  • Black, African American, Hispanic and Latino Employment Rate,
  • Female Leadership Rate, and
  • Sustainable Investing AUM (Assets Under Management) Amount.

You can find the details of the ESG adjustments in the amendment to the credit agreement filed as an exhibit to the Form 8-K.

You can read more about BlackRock’s ESG perspectives in this Letter to CEOs from BlackRock Chairman and CEO, Larry Fink.

This new lending arrangement puts ESG even more squarely in the spotlight for BlackRock.

As always, your thoughts and comments are welcome.

SPACs in the SEC Spotlight

Hot Topic, Reporting

On March 31, 2021, the SEC published two SPAC related statements:

The SEC’s Acting Chief Accountant, Paul Munter, issued a Public Statement titled “Financial Reporting and Auditing Considerations of Companies Merging with SPACs,”

and

The Division of Corporation Finance issued a “Staff Statement on Select Issues Pertaining to Special Purpose Acquisition Companies.”

Here are highlights of the issues addressed in the two pronouncements.

The Chief Accountant’s Statement addressed considerations in several complex areas related to “de-SPACing” transactions:

Market and Timing, including the challenges that can arise from the limited time a SPAC has to identify an acquisition candidate and the pressures this can create for the candidate to meet the reporting requirements for the de-SPACing transaction and subsequent SEC reporting,

Financial Reporting, including the need for qualified professionals to deal with complex issues frequently found in financial reporting for SPAC related companies,

Internal Control, including both Internal Control Over Financial Reporting and Disclosure Controls and Procedures requirements,

Corporate Governance and Audit Committee issues, with a focus on the need for appropriate board and audit committee oversight after a de-SPACing transaction, and

Auditor matters, in particular the SEC’s requirements for auditor independence as they relate to SPAC transactions.

CorpFin’s Statement focused on:

Shell Company Restrictions, including the requirements for a “Super 8-K” and a reminder that a former shell company will be an “ineligible issuer” for three years following the completion of a business combination,

Books and Records and Internal Control Requirements, with a reminder that after a SPAC related business combination the company will need “the necessary expertise, books and records and internal controls to provide reasonable assurance of timely and reliable financial reporting,” and

Initial Listing Standards of National Securities Exchanges, including reminders about continuing listing and governance requirements.

The issues mentioned above, as well as all the other detailed guidance in both Statements, will be addressed in our April 20 conference, “The SPAC Life Cycle: Business, Legal and Accounting Considerations Forum 2021.”

As always, your thoughts and comments are welcome!

SEC’s New “One-Stop” ESG Web Page

Hot Topic, Reporting

In recent months the SEC has announced a number of ESG iniatives ranging from an increasing focus on ESG matters in the review process to an ESG focused task force in the Enforcement Division.

To help “bring together agency actions and the latest information about environmental, social and governance investing” the SEC has added a new web page – “SEC Response to Climate and ESG Risks and Opportunities.”  You can find a link to the recent “Request for Comment on Climate Disclosure” on the new web page.

As always, your thoughts and comments are welcome!