In recent weeks, we’ve seen communications from a variety of sources telling companies what to say in Q1 earnings releases, calls, and 10-Qs. Aside from the fact that each company faces unique business and disclosure challenges arising out of COVID-19, adopting all of these suggestions would cause many companies’ earnings releases and 10-Qs to run to dozens or even hundreds of pages. Consequently, we thought it might be helpful to summarize some key points that may be more appropriate for the small- and mid-cap public companies we represent. Please note that the guidance below was not written with reference to the facts or circumstances of any particular company or industry; rather, it is intended to do nothing more than suggest some approaches to disclosure of what may be the most difficult quarter in recent history. And it’s worth noting that the disclosure challenges we now face are likely to continue for much of 2020.
We also urge you to read the alerts we’ve posted on Gunster’s COVID-19 landing page, including the related SEC releases and statements, using the hyperlinks included in our alerts. And you should also read the SEC’s January 2020 (i.e., pre-pandemic) interpretive release on MD&A disclosure. You can find it and other thoughts about MD&A disclosure in the February 29 posting on our blog, The Securities Edge.
Here goes:
- Disclose the impact(s) that COVID-19 has had and is expected to have on as many aspects as possible of the company’s business and financial condition. The areas of focus would normally include:
- Key drivers/performance metrics, and including not only the impact of COVID-19 on these metrics, but also steps taken or to be taken to mitigate those impacts.
- Liquidity, including the need for additional funds and possible sources of those funds. If the company has received or will be receiving financial assistance under the CARES Act or other federal or state programs, that should be disclosed, including any significant conditions attached to the assistance.
While liquidity and financial condition are not normally disclosed in earnings releases, Q1 is definitely not normal. Consequently, if the company is facing liquidity issues (or is not, due to federal or other programs), consider disclosing that in the Q1 earnings release.
- The company’s workforce, including layoffs, furloughs, or pay reductions (including at the executive level), as well as the actions taken to protect the health and safety of employees. This may not be “material,” and hence may not be required, but it speaks volumes to the “soul” of the company.
- Think carefully about the cautionary statements surrounding forward-looking information customarily included in earnings releases, conference call scripts, and 10-Qs. Boilerplate or rote repetitions of what you’ve said before will damage your credibility and may have other negative consequences.
- Ditto your risk factors disclosures in your Q1 10-Qs. For many companies, the risk factors in your 10-Ks may have been rendered stale or incomplete given the spread of the pandemic and its consequences. In particular, make sure to update your risk factors to reflect risks that are no longer hypothetical and try to be as specific as you can about those risks.
- Do not shy away from forward-looking statements, particularly in your MD&A. SEC Chair Jay Clayton and Corp Fin Director Bill Hinman have urged companies to provide more forward-looking information and have pointed out that “[h]istorical information may be…less significant in the wake of COVID-19” and that “good faith attempts to provide appropriately framed forward-looking information” should not be expected “to be second guessed by the SEC.” (See our April 9 alert for more details.)
In particular, note that for many years MD&As have been required to address “known trends and uncertainties.” The SEC has recently commented on this point and may well be looking for cases on which to base enforcement actions. Among other things, compare what you’ve told your board about the potential impacts of COVID-19 to what you say about it in your MD&A; a disconnect between the two may be problematic. Also, note that forward-looking information or scenario-playing should, where practicable, include disclosure of assumptions used to develop the information in question.
- Consider multiple references to the pandemic in a variety of places in your 10-Qs. This includes the notes to your financial statements, which may need to address fair value and impairment issues, lease accounting matters, and debt modifications, among other things.
As noted above, the challenges posed by the pandemic in Q1 are likely to be with us for a while. We will consider updating this guidance as circumstances warrant. For now, please stay healthy and let us know if we can help in any way.
If you have any questions, please contact Gunster securities law and corporate governance practice leader Bob Lamm.
