Going Concerns Related to Unknown COVID-19 Impacts

As of May 20, 2020, there have been 30 audit opinions for SEC-registered public companies that have cited the COVID-19 pandemic as a contributing factor to substantial doubt about a company’s ability to continue as a going concern for the next twelve months.1

Of the 30 companies that received a going concern audit opinion citing COVID-19 as a contributing factor, 14 were issued their first going concern opinion within the last five years. This means that more than half of the companies receiving a going concern modification in their audit opinion citing COVID-19 were previously experiencing difficulties that could impact their ability to continue operating prior to the pandemic.

For a company that was already struggling, the unknown impacts arising from the COVID-19 pandemic can itself be a risk factor. Considering the magnitude of the unknowns regarding future coronavirus impacts – particularly the uncertainty of how long this pandemic will continue to impact operations and subsequent impacts on incoming revenue and cash flows –  it makes sense that companies that were already struggling would continue to struggle, or would be unable to quantify the total potential future impacts.

While the unknown impacts of COVID-19 have been cited as a contributing factor to substantial doubt about the ability to continue as a going concern, it is not a primary reason. Instead, the pandemic affects other areas of firm financials, and those associated impacts, such as the inability to operate and subsequent liquidity concerns, are the primary issues.

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Direct Operational Impacts

Depending on the industry and type of business, it is evident why the COVID-19 pandemic would significantly impact operations. Travel restrictions have hit the hospitality and tourism industry particularly hard.

Norwegian Cruise Line Holdings [NYSE: NCLH], the company with the highest market capitalization to receive a going concern citing COVID-19, has paused global fleet operations, resulting in a significant impact on operations and liquidity. The interrupted operations, accompanied by ongoing travel restrictions and declining consumer demand for cruises, may complicate the Company’s ability to meet due debt maturities and other upcoming obligations. Norwegian Cruise Line’s annual report contained an unqualified audit opinion, but the Company subsequently filed a Form 8-K which updated the audit opinion with a going concern modification.

Stay-at-home orders and mandatory closures instituted during the pandemic have significantly interrupted operations for brick-and-mortar companies as well, such as entertainment venue owner Dave & Buster’s [Nasdaq: PLAY], retailer Francesca’s Holdings [Nasdaq: FRAN], and the health club operator Town Sports International [Nasdaq: CLUB]. These physical locations have been unable to operate for months, leading to decreased revenues and liquidity concerns.

Decreased revenue and insufficient cash are direct financial impacts, but the interrupted operations can have cascading effects on company financials. Companies with significantly impacted operations contributing to a going concern modification – such as the retailer Francesca’s – may experience ancillary impacts, including a debt covenant violation directly resulting from the going concern modification.

Staffing 360 Solutions [Nasdaq: STAF] is also in violation of compliance with its debt covenant, as callable amounts for the secured debt arrangements are in excess of the Company’s current cash balance. The staffing company had recurring losses prior to COVID-19, but has since disclosed additional uncertainty related to future revenues, gross profit, and cash flows; as the Company’s clients have chosen to or have been required to close, it limits the need for services provided by the Company.

Similarly, JAKKS Pacific [Nasdaq: JAKK], a multi-brand toy company, is at risk of violating financial covenants related to the Company’s term loan within a year if the Company is unable to achieve the required minimum EBITDA. If that were to happen, the debt holders would have the right to demand that the term loan be repaid immediately. Considering it is likely the pandemic will have a material adverse effect on the Company’s sales expectations for fiscal year 2020 and there is prolonged uncertainty related the pandemic, it is no surprise that these conditions raise substantial doubt about the Company’s ability to continue as a going concern. Further affecting operations, JAKKS disclosed $1.7 million in severance and restructuring charges consisting of cash expenses related to a 26% reduction in their workforce during the pandemic.

Unknown Economic Impacts

Though direct impacts on financials related to COVID-19 have been major contributing factors to some going concern modifications, the impacts from the pandemic are extensive and affect many facets of the economy, with subsequent effects on businesses.

For example, some companies that have received a going concern modification have cited plunging oil prices as a contributing factor to future financial uncertainty. Management for both CEMEX [NYSE: CX] – a heavy building materials company – and Mitcham Industries [Nasdaq: MIND] – which sells and leases marine technology products and equipment – disclosed that the decline in oil prices could impact a client’s ability to invest in products or pay for existing projects.

For CEMEX, which operates in many oil-rich nations, the decline in oil prices may impact the ability of those countries to invest in infrastructure and public housing. If those countries choose not to purchase building materials due to the prolonged effects of COVID-19 on oil prices, CEMEX could experience an indirect adverse impact on operating performance; subsequently, this could result in the inability of CEMEX to meet its financial covenants.

Unknown Future Impacts

The potential for future subsequent impacts related to the COVID-19 have also been cited as factors contributing to doubt about the ability to continue as a going concern.

Global Eagle Entertainment [Nasdaq: ENT] currently has no remaining borrowing available after drawing down the remaining $41.8 million under its Revolving Credit Facility, and faces potential delisting from Nasdaq due to a decrease in market capitalization during this turbulent time.

For Navigator Holdings [NYSE: NVGS], the disruption the pandemic has caused on capital markets may lead to issues when senior unsecured bonds become repayable in 2021; refinancing the bond is capital market dependent, and if the situation in the capital markets doesn’t improve, the Company may have to consider alternative plans to repay the bonds.


Many of these companies with a going concern audit opinion citing COVID-19 have taken proactive remedial measures to shore up cash reserves and mitigate the financial impact – including mandated employee furloughs, temporary executive salary reductions, and refinancing existing debt amortization.

It will be important to keep a close eye on companies hit the hardest by COVID-19 fallout, especially considering the pandemic has exacerbated bankruptcy risks. Several high-profile companies, such as Hertz Global Holdings, J.C. Penney, and J. Crew Group have recently filed for Chapter 11 bankruptcy protection; for companies already struggling with excess debt and changing consumer habits, the combination of shuttered operations, decreased revenues, and the uncertainty surrounding the global health crisis could be disastrous.

The ancillary impacts from COVID-19 will continue to effect companies in a multitude of ways. It is evident that the uncertainty from this unprecedented pandemic is having a significant impact – but being unable to determine the full extent of the pandemic leaves companies with preexisting uncertainties in potentially precarious situations.


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1.This analysis is based on audit opinions for publicly traded SEC registrants that have filed an annual or current report containing an audit opinion since February 1, 2020.