As we are now moving past the middle of July, many of us are reviewing draft Form 10-Qs and grappling with how to disclose the impact of COVID-19’s disruption and uncertainty.  Here are a few thoughts for your review process.

1. Don’t forget to update and tailor your risk factors. Even if the impact of COVID-19 on your business has not been dramatic, consider your specific situation and think about whether risk factors should be updated.  As we know more about this situation now than we did at the end of the first quarter, risk factors may need to be adjusted for new information.  Here is an example from Home Depot, where the company added issues related to COVID-19:

Disruptions in our supply chain and other factors affecting the distribution of our merchandise could adversely impact our business.

A disruption within our logistics or supply chain network could adversely affect our ability to deliver inventory in a timely manner, which could impair our ability to meet customer demand for products and result in lost sales, increased supply chain costs, or damage to our reputation. Such disruptions may result from damage or destruction to our distribution centers; weather-related events; natural disasters; international trade disputes or trade policy changes or restrictions; tariffs or import-related taxes; third-party strikes, lock-outs, work stoppages or slowdowns; shortages of truck drivers; shipping capacity constraints; third-party contract disputes; supply or shipping interruptions or costs; military conflicts; acts of terrorism; public health issues, including pandemics or quarantines (such as the recent COVID-19 coronavirus outbreak); or other factors beyond our control. Any such disruption could negatively impact our financial performance or financial condition.

Also, don’t forget to update your 1995 Private Securities Litigation Reform Act safe harbor cautionary statements for uncertainties surrounding COVID-19.

2. Don’t shy away from forward-looking information where it is required. This is the “known-trend” disclosure in MD&A.  If a company “reasonably expects” (a less than 50% probability threshold) that an uncertainty could have a material impact on future operations it should be disclosed in MD&A.  Here is an example SEC comment, related to a March 31, 2020 Form 10-Q, about this forward-looking information requirement.

We note that your revenue significantly declined by $65 million, or 92%, from $71 million for the three months ended March 31, 2019 to $5 million for the three months ended March 31, 2020. You indicate this was due to the decrease in the number of railcars delivered (11 versus 641 units) due to lower industry demand, which was partially offset by a higher average selling price for new railcars in 2020. We also note from your earnings call that the lower demand was due to the combination of timing and weakness in the backlog, line changeovers, and a loss of 8 production days at the end of the first quarter related to the Coronavirus. Revise your results of operations to provide qualitative reasons as to why demand was lower. To the extent possible, quantify how the differing factors impacted the overall change in your results of operations. Additionally, quantify how your expected deliveries are expected to ramp up through the year to the extent possible to provide further insight into known trends and uncertainties. We also note from your earnings call a withdrawal of the 2020 guidance for deliveries and capital expenditures, and although no order cancellations, you are not building any railcars that do not have a firm order behind them, and as the Mexico facility is expected to begin production during the third quarter but not without a firm customer order, please address how you expect deliveries to ramp up for the year. See Item 303 of Regulation S-K and SEC Release No. 33-8350.

3. Don’t forget that in addition to MD&A disclosures ASC 275 requires disclosure in the financial statements of material uncertainties. Here is an example from MGM Resorts’ first-quarter Form 10-Q:

Financial Impact of COVID-19. The novel coronavirus (“COVID-19”) pandemic has caused, and is continuing to cause, significant disruption in the financial markets both globally and in the United States, and will continue to impact, possibly materially, our business, financial condition and results of operations. As of March 17, 2020, all of the Company’s domestic properties were temporarily closed to the public and have remained closed pursuant to state and local government requirements as a result of the unprecedented public health crisis from the COVID-19 pandemic. As a result, the Company’s domestic properties are effectively generating no revenue.  In Macau, pursuant to a request from the government of Macau, MGM China suspended all operations at MGM Macau and MGM Cotai for a 15-day period that commenced on February 5, 2020,  other than operations that were necessary to provide sufficient non-gaming facilities to serve any remaining hotel guests in that period. While the properties have since re-opened, several travel and entry restrictions in Macau, Hong Kong, and certain cities and regions in mainland China remain in place (including the temporary suspension of the visa scheme, the temporary suspension of ferry services and other modes of transportation, and bans on entry or enhanced quarantine requirements), significantly impacting visitation to the Company’s Macau properties, which continues to have a material impact on MGM China’s results of operations. The Company cannot predict the degree, or duration, to which its operations will be affected by the COVID-19 outbreak, and the effects could be material.

As always, your thoughts and comments are welcome!

As we get closer to second quarter 2020 reporting, addressing the impact of COVID-19 in earnings releases is a top-of-mind issue.  The impact will, of course, differ from company to company.  Here is one example from Carnival Corporation.  Carnival’s fiscal year ends on November 30, so their fiscal second quarter ended on May 31, 2020.  Carnival released earnings on June 18, 2020, providing an early example of how COVID-19 can be reflected in earnings releases.

In their earnings release Carnival was very direct about how COVID-19 has affected their business:

SECOND QUARTER 2020 SUMMARY PRELIMINARY INFORMATION

• S. GAAP net loss of $(4.4) billion, or $(6.07) diluted EPS, for the second quarter of 2020, which includes $2.0 billion of non-cash impairment charges.
• Second quarter 2020 adjusted net loss of $(2.4) billion, or $(3.30) adjusted EPS.
• Total revenues for the second quarter of 2020 were $0.7 billion, lower than $4.8 billion in the prior year.
• The company’s guest cruise operations have been in a pause for a majority of the second quarter. In addition, the company is unable to definitively predict when it will return to normal operations. As a result, the company is currently unable to provide an earnings forecast. The pause in guest operations is continuing to have material negative impacts on all aspects of the company’s business. The longer the pause in guest operations continues the greater the impact on the company’s liquidity and financial position. The company expects a net loss on both a U.S. GAAP and adjusted basis for the second half of 2020.
• Cash burn rate in the second quarter 2020 was generally in line with the previously disclosed expectation.
• Second quarter 2020 ended with $7.6 billion of available liquidity, and the company expects to further enhance future liquidity, including through refinancing scheduled debt maturities. In addition, the company has $8.8 billion of committed export credit facilities that are available to fund ship deliveries originally planned through 2023.
• Total customer deposits balance at May 31, 2020 was $2.9 billion, including $475 million related to cruises during the second half of 2020.

You can read the rest of the details in Carnival’s earnings release here.  As you can see, the company did not pull any punches.

As always, your thoughts and comments are welcome!

In this unprecedented period of disruption in our lives and our businesses, it is crucially important to keep investors informed.  To help you in this regard, this post is a reminder of the on-demand content we have at SEC Institute ready to assist you.

Our on-demand version of the SEC Reporting and Practice Skills Workshop for Lawyers, while primarily for lawyers, offers financial reporting professionals helpful segments on MD&A and 1934 Act reporting.

You can also view our on-demand content on such topics* as:

·       Ethical Challenges for SEC Reporting Professionals

·       Master Form S-1 for an Initial Public Offering

·       Master the SEC Reporting and Research Process – Part One

·       A Deep Dive Into COVID-19’s Impact on Quarter One Goodwill Impairment Testing

·       Master the SEC Reporting and Research Process – Part Two

·       Impairment Testing Considerations for Quarter One in the 2020 Coronavirus Environment

·       COVID-19 Challenges for First Quarter 2020 Form 10-Q and Annual Meetings 

·       SEC’s New Metric Guidance and a Non-GAAP Measure Update

·       Fifth Annual Dealing with MD&A Hot Topics

·       Sixth Annual Form 10-K/Proxy Tune-Up 

(*Please check the “Credit Details” for each of the above programs on our website to confirm if you can receive CPE or CLE credit.  Also, note, we are in the process of qualifying the first three briefings listed above for CPE credit, so please check back in a few weeks.)

You can find links to all our programs including our webcasts of conferences and workshops here.

If you have any suggestions or requests for programs, please reach out and let us know via a comment on this post.  We will be very responsive with our One-Hour Briefings and other tools.

As always, your thoughts and comments are welcome!

In the last several days the SEC has added to and updated its guidance about disclosures surrounding COVID-19 disruption and uncertainty and updated its pronouncements about filing and related relief.  These developments include:

June 23, 2020 – CorpFin Release of Disclosure Guidance: Topic 9A – Coronavirus (COVID-19) — Disclosure Considerations Regarding Operations, Liquidity, and Capital Resources

June 23, 2020 – Statement on the Continued Importance of High-Quality Financial Reporting for Investors in Light of COVID-19 from the Chief Accountant

June 25, 2020 – Staff Statement Regarding Rule 302(b) of Regulation S-T in Light of COVID-19 Concerns

June 25, 2020 – Division of Corporation Finance Statement Regarding Requirements for Form 144 Paper Filings in Light of COVID-19 Concerns

June 25, 2020 – Division of Corporation Finance Statement Regarding Requirements for Certain Paper Documents (other than Forms 144) in Light of COVID-19 Concerns

June 26, 2020 – An Update on the Commission’s Targeted Regulatory Relief to Assist Market Participants Affected by COVID-19 and Ensure the Orderly Function of our Markets

Here are details about each of the above releases and pronouncements:

Disclosure Guidance: Topic 9A – Coronavirus (COVID-19) — Disclosure Considerations Regarding Operations, Liquidity, and Capital Resources provides additional staff views “regarding operations, liquidity, and capital resources disclosures companies should consider with respect to business and market disruptions related to COVID-19.”  You can read more about this update to Topic 9 in this blog post.

In his Statement on the Continued Importance of High-Quality Financial Reporting for Investors in Light of COVID-19, Chief Accountant Sagar Teotia provides insights about OCA’s focus on high-quality financial reporting in this challenging period.  He addresses topics including:

• Significant Estimates and Judgments; Reasonable Judgments
• The Importance of Disclosure Controls and Procedures (DCP) and Internal Control over Financial Reporting (ICFR)
• Reminders about an Entity’s Ability to Continue as a Going Concern

He also discusses consulting with OCA about complex or emerging issues, OCA’s work with standard setters and the vital role of audit committees in this period.

In their June 25, 2020 – Staff Statement Regarding Rule 302(b) of Regulation S-T in Light of COVID-19 Concerns, CorpFin essentially continues the relief surrounding manual signature requirements provided in its March 2020 announcement.  The staff also indicated that this relief is temporary and will remain in effect until the staff provides public notice that it will end.  This public notice will be given at least two weeks before the announced termination date.  You can read more about the requirements that must be met to rely on the relief in this blog post.

The two June 25, 2020 announcements regarding paper filings, Division of Corporation Finance Statement Regarding Requirements for Form 144 Paper Filings in Light of COVID-19 Concerns and Division of Corporation Finance Statement Regarding Requirements for Certain Paper Documents (other than Forms 144) in Light of COVID-19 Concerns, both provide that the staff will accept filings that are currently required to be filed in paper form via email in certain circumstances.  The statements enumerate which filings may be provided via email and also contain various requirements that must be met for such paper filings, including signature requirements similar to the Rule 302(b) relief discussed above.  Both also provide that the relief will remain in effect until the staff provides public notice that it will end, and that public notice will be given at least two weeks before the announced termination date.

The Update on the Commission’s Targeted Regulatory Relief to Assist Market Participants Affected by COVID-19 and Ensure the Orderly Function of our Markets was issued by Chair Clayton and the heads of the divisions of Corporation Finance, Investment Management and Trading and Markets.  It summarizes the steps that the SEC has taken in each division to deal with COVID-19 disruption.  Notably, for CorpFin, it indicates that the deadline filing relief that was provided through July 1, 2020 will not be continued.

As always, your thoughts and comments are welcome!

In this series of posts we are exploring examples of COVID-19’s impact on Form 10-Q disclosures for the first calendar quarter of 2020.  This fifth post draws examples from Clorox’s Form 10-Q for the third quarter, which ended on March 31, 2020.

Clorox is an example of a company that has seen both positive and negative impacts from the pandemic, with the positive impact more or less outweighing the negative impact.

In their Form 10-Q for the third quarter ended March 31, 2020, Clorox makes only one mention of COVID-19 in their financial statements.  This is an excerpt from their short-term borrowings note:

 There was $450 outstanding under the Credit Agreement as of March 31, 2020, and no borrowings under the Prior Agreement as of June 30, 2019. The Company borrowed under the Credit Agreement primarily to pay down maturing commercial paper balances in light of current uncertainty in short-term credit markets resulting from the COVID-19 outbreak. As of March 31, 2020, the effective interest of the revolving credit facility was 1.86%.

To explain how the company was dealing with COVID-19 and its impact on the company, Clorox included this section after the executive overview in their MD&A:

RECENT EVENTS RELATED TO COVID-19

The novel coronavirus (COVID-19) pandemic has caused a severe global health crisis, along with economic and societal disruptions and uncertainties. As a result, we have taken an active role in addressing the ongoing pandemic’s impact on our employees, operations, customers, and consumers, including taking precautionary measures, such as implementing contingency plans, and making operational adjustments where necessary. The impact of COVID-19 and responses of governments, consumers, and others to the pandemic are affecting our business in many ways; however, we believe that the actions we are taking will help us emerge from this global pandemic operationally sound, and well positioned for continued long-term growth.

Commitment to Support People and Public Health

Our top priorities, from the beginning of this pandemic, have been the health and safety of our employees, our consumers, workers at healthcare facilities, and our communities. For example, we have taken extra precautions at our offices and manufacturing and distribution facilities, consistent with guidance from global, federal and local health authorities, such as social distancing, thermal scanning and partitions in our facilities. We have also implemented global travel restrictions and work-from-home policies for those employees who have the ability to work remotely. In addition, we have enhanced pay for our production employees, provided greater flexibility around sick-pay and work hours and established an employee emergency relief fund to provide COVID-19 related support to our employees. Furthermore, we and our foundations have made cash and product donations to various organizations to help front-line workers and communities respond to COVID-19.

Increasing our Capacity to Provide Needed Products and Changes in Costs

We have significantly increased our manufacturing production capacity for disinfecting cleaning products that are needed during this global health crisis and expect to continue to expand our production capacity for such products over the balance of the calendar year. We have done this, in part, by prioritizing the production of certain high-volume disinfecting cleaning products through significant reduction in the number of different types and sizes of disinfecting cleaning products we currently produce, by increasing production at our third party contract manufacturers and by reducing production employee changeover while managing social distancing. While we have experienced temporary closures of certain facilities, we have not experienced a material impact from a plant closure to date, and all of our plants and the vast majority of our contract manufacturers and suppliers continue to operate.

To date, we have had no material disruption in our access to necessary raw materials and other supplies or with our distribution network; however, we have experienced higher costs in certain areas as a result of COVID-19, such as transportation, logistics and production employee compensation, as well as incremental costs associated with newly added health screenings and enhanced cleaning and sanitation protocols to protect our employees at our facilities. In the future, we may decide to implement additional precautionary measures or operational adjustments as we deem prudent to meet consumer demand or help further ensure employee safety.

Other COVID-19 Items

For our fiscal third quarter ended March 31, 2020, we experienced increased demand for many of our products, especially our disinfecting cleaning products, in response to COVID-19, and expect strong demand for such products will continue throughout the rest of this fiscal year. Nevertheless, the extent of COVID-19’s effect on our operational and financial performance for the remainder of fiscal year 2020 and beyond will depend on future developments, including the duration, spread and intensity of the pandemic, our continued ability to manufacture and distribute our products, as well as any future government actions affecting consumers and the economy generally, all of which are uncertain and difficult to predict considering the rapidly evolving landscape.

COVID-19 has also impacted financial markets, and as such, in March 2020, we took certain actions to provide the Company with additional liquidity and flexibility, as described in the “Financial Position and Liquidity” section below. We will continue to actively monitor the potential impacts of COVID-19 on the commercial paper, credit and capital markets.

For further discussion of the possible impacts of the COVID-19 pandemic on our business, financial conditions and results of operations, see “Risk Factors” in Part II, Item 1A of this Report.

As you would expect, COVID-19 resulted in increased revenues for the company as this section from Clorox’s results of operations discussion shows:

Net sales in the current quarter increased by 15%, reflecting higher shipments across all reportable segments driven by increased demand due to the COVID-19 pandemic. Volume increased by 18% and outpaced net sales growth due to the impact of unfavorable foreign currency exchange rates and unfavorable price mix.

This mention of COVID-19 in Clorox’s capital resources and liquidity discussion mirrors the information in their short-term borrowings note:

There was $450 outstanding under the Credit Agreement as of March 31, 2020, and no borrowings under the Prior Agreement as of June 30, 2019. The Company borrowed under the Credit Agreement primarily to pay down maturing commercial paper balances in light of current uncertainty in short-term credit markets resulting from the COVID-19 outbreak.

The interesting issues in Clorox’s reporting center on the mixed impact of COVID-19, including the overall positive impact on revenues, uncertainty in the supply of raw materials and increased costs in certain areas.

As always, your thoughts and comments are welcome.