COVID-19: GENERAL INFORMATION AND RESOURCES

The outbreak of the novel coronavirus pandemic (COVID-19) has had and will continue to have wide-ranging implications for businesses, governments and institutions across markets and industries. As stated in our last update, Shearman & Sterling (Shearman) has created a dedicated resource hub containing information on the potential impact this pandemic may have on businesses, and what businesses can do to prepare and succeed in this rapidly evolving space going forward. The sections that follow cover select key topics that may be of particular interest at the time of writing. Given that developments in this space continue to evolve rapidly, we urge you to refer to this resource hub for real-time updates, as well as further details and information on these topics and others.

You are encouraged to contact our COVID-19 task force at any time at COVID_19_Task_Force@Shearman.com to discuss any questions or concerns you may have relating to this pandemic.

U.S. DEVELOPMENTS

Developments Related to COVID-19

SEC Provides Additional COVID-19 Disclosure Guidance Regarding Operations, Liquidity and Capital Resources

On June 23, 2020, the SEC's Division of Corporation Finance (Division) issued Disclosure Guidance Topic No. 9A (the Guidance), which provides additional views of the SEC staff (Staff) with regard to operations, liquidity and capital resources disclosures that companies should consider with respect to business and market disruptions related to COVID-19. The Guidance supplements Disclosure Guidance Topic No. 9 issued on March 25, 2020. It states that the Division continues to encourage companies to provide disclosures that allow investors to evaluate the current and expected impact of COVID-19 through the eyes of management and to proactively revise and update disclosures as facts and circumstances change.

The Guidance notes that companies are undertaking a diverse range of operational adjustments in response to COVID-19, which include a transition to telework, supply chain and distribution adjustments, and suspending or modifying certain operations to comply with health and safety guidelines. These may have an effect on the company that would be material to an investment or voting decision. The Guidance indicates that affected companies should carefully consider their obligations to disclose that information to investors. In addition, companies are undertaking a diverse range of financing activities in response to COVID-19. The Guidance indicates that companies should provide robust and transparent disclosure about their response to short- and long-term liquidity and funding risks in the current economic environment, as well as any new uncertainties related to those efforts. While the Staff has observed companies making some of these disclosures in earnings releases, the Staff encourages companies to consider whether any of these disclosures should also be included in the management discussion and analysis (the MD&A.)

General Considerations

The Staff states that companies should consider a broad range of additional questions that are more specifically focused on the evolving impact of COVID-19 on their particular operations, liquidity and capital resources. These include:

  • Operational Challenges. What are the material operational challenges that management and the Board of Directors are monitoring and evaluating? How and to what extent have you altered your operations, such as implementing health and safety policies for employees, contractors and customers to deal with these challenges, including challenges related to employees returning to the workplace? How are the changes impacting or reasonably likely to impact your financial condition and short- and long-term liquidity?
  • Liquidity Position and Outlook. How is your overall liquidity position and outlook evolving? To the extent COVID-19 is adversely impacting your revenues, consider whether such impacts are material to your sources and uses of funds, as well as the materiality of any assumptions you make about the magnitude and duration of COVID-19's impact on your revenues. Are any decreases in cash flow from operations having a material impact on your liquidity position and outlook?
  • Financing Activities. Have you accessed revolving lines of credit or raised capital in the public or private markets to address your liquidity needs? Are your disclosures regarding these actions and any unused liquidity sources providing investors with a complete discussion of your financial condition and liquidity?
  • Funding Sources. Have COVID-19–related impacts affected your ability to access your traditional funding sources on the same or reasonably similar terms as were available to you in recent periods? Have you provided additional collateral, guarantees or equity to obtain funding? Have there been material changes in your cost of capital? How has a change, or a potential change, to your credit rating impacted your ability to access funding? Do your financing arrangements contain terms that limit your ability to obtain additional funding? If so, is the uncertainty of additional funding reasonably likely to result in your liquidity decreasing in a way that would result in you being unable to maintain current operations?
  • Covenants. Are you at material risk of not meeting covenants in your credit and other agreements?
  • Metrics. If you include metrics, such as cash burn rate or daily cash use, in your disclosures, are you providing a clear definition of the metric and explaining how management uses the metric in managing or monitoring liquidity? Are there estimates or assumptions underlying such metrics the disclosure of which is necessary for the metric not to be misleading?
  • Capital Expenditures. Have you reduced your capital expenditures and if so, how? Have you reduced or suspended share repurchase programs or dividend payments? Have you ceased any material business operations or disposed of a material asset or line of business? Have you materially reduced or increased your human capital resource expenditures? Are any of these measures temporary in nature, and if so, how long do you expect to maintain them? What factors will you consider in deciding to extend or curtail these measures? What is the short- and long-term impact of these reductions on your ability to generate revenues and meet existing and future financial obligations?
  • Debt Obligations. Are you able to timely service your debt and other obligations? Have you taken advantage of available payment deferrals, forbearance periods or other concessions? What are those concessions and how long will they last? Do you foresee any liquidity challenges once those accommodations end?
  • Customer Arrangements. Have you altered terms with your customers, such as extended payment terms or refund periods, and if so, how have those actions materially affected your financial condition or liquidity? Did you provide concessions or modify terms of arrangements as a landlord or lender that will have a material impact? Have you modified other contractual arrangements in response to COVID-19 in such a way that the revised terms may materially impact your financial condition, liquidity and capital resources?
  • Supplier Arrangements. Are you relying on supplier finance programs, otherwise referred to as supply chain financing, structured trade payables, reverse factoring or vendor financing, to manage your cash flow? Have these arrangements had a material impact on your balance sheet, statement of cash flows or short- and long-term liquidity, and if so, how? What are the material terms of the arrangements? Did you or any of your subsidiaries provide guarantees related to these programs? Do you face a material risk if a party to the arrangement terminates it? What amounts payable at the end of the period relate to these arrangements, and what portion of these amounts has an intermediary already settled for you?
  • Subsequent Events. Have you assessed the impact material events that occurred after the end of the reporting period, but before the financial statements were issued, have had or are reasonably likely to have on your liquidity and capital resources and considered whether disclosure of subsequent events in the financial statements and known trends or uncertainties in MD&A is required?

To see the full article click here

Originally published July 31, 2020.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.