On Wednesday, March 4th, the US Securities and Exchange Commission (SEC) announced that it is providing conditional regulatory relief for publicly traded companies facing challenges from the impact of the coronavirus.
The effects of COVID-19 may present challenges for certain companies that are required to provide information to trading markets, shareholders, and the SEC. These companies may include U.S. companies with significant operations in the affected areas, as well as companies located in those regions.
The obligation to file SEC forms in a timely manner is usually considered a top priority for public companies and the people who follow them, but when faced with a global health crisis, such things can take a back seat.
The SEC has issued an order that provides these affected companies with an additional 45 days to file certain disclosure reports that would otherwise have been due between March 1 and April 30, 2020.
Companies – and any person(s) required to furnish any filings with respect to such companies – looking to take advantage of this regulatory relief must satisfy the criteria listed below:
In the press release, SEC Chairman Jay Clayton added,
“We also remind all companies to provide investors with insight regarding their assessment of, and plans for addressing, material risks to their business and operations resulting from the coronavirus to the fullest extent practicable to keep investors and markets informed of material developments. How companies plan and respond to the events as they unfold can be material to an investment decision, and I urge companies to work with their audit committees and auditors to ensure that their financial reporting, auditing and review processes are as robust as practicable in light of the circumstances in meeting the applicable requirements. Companies providing forward-looking information in an effort to keep investors informed about material developments, including known trends or uncertainties regarding coronavirus, can take steps to avail themselves of the safe harbor in Section 21E of the Exchange Act for forward-looking statements.”
We’ve seen this type of regulatory aid for publicly traded companies, investment companies, accountants, transfer agents, municipal advisers, and others affected by hurricanes – but this is the first time the SEC has ordered relief for those affected by a recent PHEIC (public health emergencies of international concerns).1
As of today, there have been two companies that filed non-timely (NT) notifications citing the coronavirus: smaller reporting company Advanced Biomedical Technologies Inc. [ABMT] and the non-accelerated filer + smaller reporting company Moxian, Inc. [MOXC]. In its amended late filing notification, Advanced Biomedical Technologies cites the lockdown of the Company’s facilities in Shenzhen, China related to the coronavirus and the subsequent inability to access records as the reason for the delay with filing their annual report. Moxian is unable to file its quarterly report on time due to personnel that are unable to return to work due to travel restrictions.
However, as of March 4, 2020, there were 768 10-Ks and 100 10-Qs filed with the SEC that referenced “coronavirus” or “COVID-19” somewhere in the filing. The deadline to file annual reports for Large Accelerated Filers with a December 31 fiscal year end was March 2, so it comes as no surprise that the number of companies referencing the novel coronavirus has skyrocketed from the 26 companies that disclosed risks and impacts of the virus as of February 11, 2020.
In our previous post discussing 10-K disclosures that reference PHEICs, as defined by the World Health Organization, we found that the number of filings containing references to PHEICs spiked in the year(s) following the declaration of the PHEIC. Interestingly, the number of filings referencing coronavirus is significantly higher than any of the other PHEICs.
As a comparison, consider disclosures regarding the H1N1/Swine Flu, which was declared as a PHEIC in 2009. In 2009, there were less than 100 10-Ks referencing H1N1; in 2010, there were around 250 disclosures. The outbreak of COVID-19 was declared a PHEIC on January 30, 2020 and now, just over a month later, there are over three times as many disclosures referencing COVID-19 as compared to filings that referenced H1N1 a year after the PHEIC declaration.
A contributing factor to the high volume of coronavirus references could be the timing, as it aligns with the time when the majority of large companies are compiling year-end information for their annual reports. Considering many large companies have foreign operations – or work with foreign entities, affiliates or subsidiaries – it makes sense that COVID-19 is currently considered a significant risk factor for a large number SEC filers, thus necessitating a disclosure under Item 1A – Risk Factors in an annual report.
Based on the concerns of the effects of coronavirus on travel, we looked closely at the disclosures made by companies operating hotels and airlines. Many disclosures include coronavirus as a Risk Factor, considering it a “macroeconomic trend” that could affect the company’s operations that is beyond the company’s control. However, some companies are disclosing additional information about the possible financial impact from the virus.
For example, Marriott International Inc. [MAR] included a discussion of the impacts of coronavirus in the Management’s Discussion and Analysis (MD&A) of the Company’s annual report filed on February 27, 2020:
The Coronavirus outbreak currently is impacting our operations in China and other parts of our Asia Pacific segment by necessitating the closure of numerous hotels in mainland China and significantly reducing demand in Greater China and certain other Asia Pacific markets. We cannot presently estimate the overall operational and financial impact, which could be material to our 2020 results, and which is highly dependent on the breadth and duration of the outbreak and could be affected by other factors we are not currently able to predict.
Similarly, MGM Resorts International [MGM] and Las Vegas Sands Corp [LVS] discussed the impacts of the coronavirus in the MD&A section of their annual reports as related to their Macao casinos, primarily due to travel restrictions – with MGM declaring that “Macao has experienced an 83% decrease in visitation… in January 2020, versus the comparable period in 2019.”
However, the hospitality and travel industries are far from the only sectors anticipating impacts. The coronavirus has been referenced frequently by companies in the pharmaceutical and semiconductor industries, partly due to the prevalence of manufacturing and production that takes place in China – the country that has been the most significantly impacted by the outbreak.
For other industries, such as Real Estate Investment Trusts, there is concern that the coronavirus could impact their tenants’ businesses due to disrupted supply chains, delayed transactional activities, closed facilities, etc., that could then impact tenant leasing decisions.
While it is still too soon for many companies to identify quantifiable financial impacts from the novel coronavirus, it is evident that the virus will have far-reaching impacts.
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