Public companies with a December 31 fiscal year end are now in the process of preparing their Form 10-Q reports for the quarter ended June 30, 2020.
When preparing the MD&A section of the Form 10-Q, management should be mindful of the recently released SEC Division of Corporation Finance guidance, “Coronavirus (COVID-10 – Disclosure Considerations Regarding Operations, Liquidity, and Capital Resources”.
In the release, the SEC Staff advises management to revise and update MD&A disclosure proactively, and to consider disclosing known trends and uncertainties regarding the following items (among others), with particular attention to the effect of such items on the company’s short- and long-term liquidity prospects:
- Impact of COVID-19 on revenues and sources and uses of funds;
- Management’s assumptions regarding the magnitude and duration of the impact of COVID-19 on revenues and operations;
- Financing activities, including uses of revolving lines of credit;
- Access to traditional funding sources on the same or reasonably similar terms, including with respect to collateral levels and guarantees;
- Changes in credit rating;
- Limits, contractual or otherwise, on the ability to obtain additional funding;
- Reductions in capital expenditures, dividends or share repurchases;
- Operational changes related to the implementation of health and safety policies, remote working of employees and the return of employees to work;
- Suspensions of material business operations or product lines, and whether such actions are expected to be temporary;
- Material modifications of payment terms and other arrangements with customers, suppliers, distributors, landlords, lenders and other third parties;
- Reliance on supplier finance programs, supply chain financing, structured trade payables, reverse factoring or vendor financing to manage cash flow, and the material terms of such arrangements;
- Inability to service debt and other obligations timely;
- Compliance with covenants under credit and other agreements, and the likelihood of continuing to remain in compliance with such covenants; and
- Receipt of CARES Act loans and the ability to comply with terms of such loans, such as the requirement to maintain certain employment levels (and whether any operational changes are likely when restrictions lapse).
Additionally, the SEC Staff advises that management consider whether conditions and events, taken as a whole, raise substantial doubts about the company’s ability to meet its obligations as they become due within one year after the issuance of the financial statements and, accordingly, whether there is substantial doubt about the company’s ability to continue as a going concern. If so, management should disclose its plans to address these challenges.