Yesterday, Corp Fin issued CF Disclosure Guidance Topic No. 9, which addresses disclosure and other securities law obligations relating to the COVID-19 crisis. The guidance provides a helpful list of illustrative questions that companies should ask themselves when preparing disclosure documents. Here are some questions Corp Fin recommends that companies should consider when thinking about the pandemic’s impact on their liquidity and capital resources:
How has COVID-19 impacted your capital and financial resources, including your overall liquidity position and outlook? Has your cost of or access to capital and funding sources, such as revolving credit facilities or other sources changed, or is it reasonably likely to change? Have your sources or uses of cash otherwise been materially impacted? Is there a material uncertainty about your ongoing ability to meet the covenants of your credit agreements? If a material liquidity deficiency has been identified, what course of action has the company taken or proposed to take to remedy the deficiency?
Consider the requirement to disclose known trends and uncertainties as it relates to your ability to service your 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. Do you expect to disclose or incur any material COVID-19-related contingencies?
The guidance also addresses insider trading concerns, as well as considerations for earnings releases. When it comes to earnings disclosure, Corp Fin touches on several issues, one of which is non-GAAP financial data. While reminding companies of their obligations under Reg G & Item 10 of Reg S-K, the guidance also indicates some flexibility to the Staff’s approach under current conditions:
We understand 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 Division 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.
As an example, the guidance references the case of a company that intends to disclose EBITDA information on an earnings call. The Staff’s position would permit the company to reconcile that measure to either its GAAP earnings, a reasonable estimate of its GAAP earnings that includes a provisional amount or its reasonable estimate of a range of GAAP earnings. The guidance says that if a provisional amount or range is used, it should reflect a reasonable estimate of COVID-19-related charges not yet finalized, such as impairment charges.
-John Jenkins, TheCorporateCounsel.net March 26, 2020
