Effects of Coronavirus on Financial Reporting

With the ongoing developments regarding the coronavirus (COVID-19) pandemic and its effects on financial markets and financial reporting, Audit Analytics is monitoring important disclosures from public companies that reference the illness and the associated impacts. This includes companies that are unable to file required quarterly or annual reports, operational interruptions, companies with employees who have become sick due to the coronavirus, and litigation.

Regulatory Relief and Recommendations

Regulatory agencies across the globe are being faced with the uncertainty brought on by COVID-19 and have taken several steps to mitigate issues that may arise. The United States’ SEC, as well as the Canadian Securities Administrators, have provided a form of regulatory relief, while the European Securities and Markets Authorities has provided extensive guidance surrounding the impacts of the pandemic.

As mentioned in our previous post, the SEC announced that it is providing conditional regulatory relief for publicly traded companies facing challenges from the impact of the coronavirus. Affected companies that seek to take advantage of the regulatory relief and meet the established criteria will be granted an additional 45 days to file certain disclosure reports that would otherwise have been due between March 1 and April 30, 2020.

The first company to take advantage of the SEC order was China-based XT Energy Group, Inc. [OTC: XTEG]. Due to the proximity of the Company’s headquarters with the City of Wuhan – ground zero for COVID-19 – its business operations have been severely restricted. Owing to the operational interruption, XT Energy is requesting additional time to file its quarterly report for the period ended January 31, 2020.

Currently, Audit Analytics has identified 26 companies that have opted to take advantage of the SEC regulatory relief. Several others have also disclosed they would be delaying their financial statements due to or in part because of COVID-19 without referencing the SEC regulatory relief.

Similar to the SEC, the Canadian Securities Administrators (CSA) announced on March 18, 2020 that temporary relief will be provided for some regulatory filings that are required to be filed on or before June 1, 2020. The relief will provide a 45-day extension for periodic filings including financial statements, management’s discussion and analysis, management reports of fund performance, annual information forms, technical reports, and certain other filings.

Although we are not aware of any similar regulatory relief in Europe, we have seen extensive guidance from regulators such as the European Securities and Markets Authority (ESMA), which offered the following recommendations:

Considering the impacts and effects of the coronavirus are continuously evolving, additional guidance and recommendations may be provided by regulatory agencies going forward.

Operational Impacts

Audit Analytics has seen several companies that have had their operations immediately impacted by the coronavirus pandemic. This includes:

  • ICC Holdings, Inc. [Nasdaq: ICCH], an insurance carrier that specializes in insuring restaurants and taverns, suspended all insurance premium billing for 30 days in response to the growing number of businesses that are closed due to COVID-19. ICC does not believe that this action will be material, as the policyholder payments are being deferred and the Company has access to existing credit facilities to cover any short-term liquidity requirements, but ICC wants to relieve the financial burden of their clients during this turbulent time.
  • Galaxy Gaming, Inc. [Nasdaq: GLXZ], a developer and distributor of casino table games and systems, suspended billing to casino customers whose businesses are currently closed as a result of the pandemic. In an attempt to ease the burden on its closed clients, the Company has plans to pro-rate the portions of the bill for the time that the casinos are closed. Galaxy disclosed it has sufficient cash on hand to continue to pay employees, and plans to work with its vendors to defer payments until the industry returns to normal operations.

We have also seen hundreds of companies disclose closures or reduced operations. The most significantly impacted industries have been retailers, restaurants, and casinos – though the impacts have been far reaching.

Impacts on Personnel

With the pandemic leading to increasingly more people in quarantine and isolation, the effects of the coronavirus extend beyond operational interruptions.

Considering the importance of executives, a CEO becoming ill is noteworthy, as it could impact the rest of the company. For example, Century Cobalt Corp. [CCOB: OTC] disclosed that the Company would be issuing their financial statements late due to its CEO being in isolation for COVID-19, though it was unclear if this was precautionary, or because the CEO had tested positive. According to the disclosure, the isolation of the CEO is delaying the availability of documents for the audit, resulting in Century Cobalt’s inability to file its annual report.

On the other hand, on March 13, 2020, London-based telecommunications company BT Group plc [LSE: BT.A; OTC: BTGOF] disclosed in a current report that its CEO had tested positive for COVID-19 but asserts the CEO’s illness will bring no disruption to the business. BT admits, however, there will undoubtedly be challenges arising for the large company with over 100,000 employees.

Due to the rapid and indiscriminate spread of COVID-19, any employee within a company becoming ill with the virus could have additional impacts.

Several companies, including mining companies IAMGOLD Corporation [TSX: IMD; NYSE: IAG] and Kinross Gold Corp. [TSX: K; NYSE: KGC], disclosed that employees contracted the coronavirus, but did not specify the role of the employee within the company.

The two mentioned companies each disclosed having one employee with the virus. Interestingly, both of these employees worked at the Toronto offices of their respective companies. Kinross has activated its business continuity program to ensure office functions are maintained, while IAMGOLD closed its Toronto office for one week to allow for deep cleaning.

Taiwan Semiconductor Manufacturing Co Ltd [NYSE: TCM] disclosed that one employee tested positive for the virus and that 30 others who were in close contact with the individual would also be in quarantine for 14 days.

While employees at any level of a company contracting COVID-19 could have a significant impacts, it’s not the only type of impact on employees that we’ve seen resulting from the pandemic. At First Internet Bancorp [Nasdaq: INBK], Ann D. Murtlow resigned from the board of directors to focus on community welfare. Ms. Murtlow is the President and CEO of United Way of Central India. According to the announcement, Ms. Murtlow’s time will be constrained due to “her CEO position at United Way, and United Way’s leadership role in addressing the human services challenges under these circumstances.”

Impacts on Annual General Meetings

With employees becoming ill, including some executives, and the restriction on large group gatherings, it would be expected that there will be an impact on upcoming Annual General Meetings (AGMs). In fact, the Financial Reporting Council (FRC) in the UK, in conjunction with ICSA (The Chartered Governance Institute), published guidance specifically related to AGMs, suggesting that AGMs be delayed, postponed, adjourned, or conducted in a modified format, in light of coronavirus risks.

One company, Finland-based Cargotec Oyj [Nasdaq Helsinki: CGCBV], cancelled its Annual General Meeting on March 17, 2020, as a result of the precautionary quarantine of its CEO, as well as the Finnish government restriction on gatherings of more than ten persons.

In the US, dozens of companies have implemented restrictions or changed to a virtual meeting, while only a few have canceled their Annual General Meetings.

In Canada, the CSA issued a statement indicating that guidance on making changes to Annual General Meetings, including hosting virtual securityholder meetings, would be forthcoming.

Protracted Impacts and Litigation

As the coronavirus pandemic continues, we expect to see additional impacts extending beyond financial reporting. For example, two securities class actions referencing the coronavirus have already been filed.

Norwegian Cruise Line Holdings Ltd. [NYSE: NCLH] has come under scrutiny for potentially issuing false and/or misleading statements and/or failing to disclose information pertinent to investors. The Company was the subject of a March 9, 2020 Miami Times article that alleged managers were pressuring sales employees to lie to customers about the threat of COVID-19 in an attempt to reduce the number of cancellations. After the article was published, the stock price declined significantly, triggering the call to investigate Norwegian Cruise Line for violations of securities laws.

Another class action security lawsuit has been filed against Inovio Pharmaceuticals, Inc. [Nasdaq: INO]. Inovio claimed that it had developed a COVID-19 vaccine; subsequently, the stock price increased in response to the positive news. However, when the information came to light that Inovio allegedly had not developed a fully completed vaccine as originally claimed, Inovio’s stock price dropped and the Company lost over $640 million in market capitalization over the course of two days.

These are the first class action security lawsuits that we have seen, but it would not be surprising to see more lawsuits over the coming weeks as the market and investors react to the coronavirus pandemic.

Litigation stemming from the effects of coronavirus is not the only direct impact seen so far. Due to extenuating circumstances related to COVID-19, cybersecurity firm Finjan Holdings, Inc. [Nasdaq: FNJN] disclosed that its subsidiary’s trial against ESET LLC in the U.S. District Court for the Southern District of California was declared a mistrial and the jurors were released. The Court indicated to the Company that “upon the conclusion of the national state of emergency, it will contact the parties for further scheduling of court proceedings.”

Expected Economic Impacts

Many companies have revoked guidance, or have elected not to give any guidance, due to uncertainties stemming from the coronavirus. This includes Nordstrom Inc. [NYSE: JWN], HD Supply Holdings, Inc. [Nasdaq: HDS], Verra Mobility Corp. [Nasdaq: VRRM], and Insmed Inc. [Nasdaq: INSM], to name a few.

Additionally, companies are looking to sure up their balance sheets in the face of the uncertainty. Some companies are cancelling share buybacks, drawing on credit facilities, reducing dividends, reducing capital expenditures, and some are even reducing executive pay. Many of these actions will have some kind of quantifiable impact on the economy at large.

Audit Analytics will continue to monitor disclosures regarding impacts of the coronavirus on foreign and US public companies and the subsequent effects on the economy overall.

For more information on this post or to request a demo, please contact us.