September 8, 2020

Covid-19 Risk Factors: 2nd Quarter Edition

We’ve been keeping an eye on pandemic risk factors since the “Before Time” (seriously, we first mentioned them in January). Most recently, we blogged about how to handle 1st quarter Covid-19 risk factor disclosure in 2nd quarter filings.  Now, this Bass Berry blog takes a look at what kind of pandemic risk factor disclosures companies actually made in their second quarter filings. The blog says that 97% of the 75 Nasdaq & NYSE company filings surveyed included Covid-19 related risk factors. This excerpt provides some insight into the content of those disclosures:

During our review, we noted that updates to the COVID-19 risk factor disclosure included in second quarter Form 10-Qs generally coalesced around certain topics such as uncertainty regarding the duration of the COVID-19 pandemic, impact of the economic downturn, and changes in consumer behaviors both during and potentially after the pandemic.

In addition, some common themes arose in certain industries such as healthcare, with updated disclosures regarding the uncertainty around vaccine efficacy and deployment, and travel and energy, with updated disclosure highlighting potential risks resulting from prolonged social distancing and stay-at-home orders. Such emerging themes reveal that COVID-19 may be having a similar impact on peer companies and, as a result, an ongoing review of peer company risk factor disclosures should be undertaken.

These disclosures don’t appear to be static – according to the blog, approximately 2/3rds of the companies surveyed updated Covid-19 risk factor disclosure from their 1st quarter Form 10-Q disclosure. As for the 3% of companies that didn’t include a specific risk factor, all included language to the effect that the pandemic could exacerbate or heighten the risk factors that were previously disclosed in their Form 10-K.

Non-GAAP: EBITDAC Revisited

During the 1st quarter reporting cycle, some companies that were hit hard by the initial phase of the pandemic attempted to quantify its effect on their operations and present non-GAAP financial data that backed out Covid-19’s impact.  As Liz blogged a couple of months ago, early returns from the 2nd quarter suggested that this practice was growing in popularity.  According to this Brian Cave blog, more recent information on 2nd quarter reporting suggests that companies are shying away from “EBITDAC” disclosure, but that some are getting to the same place in a more stealthy fashion:

While few companies used the EBITDAC label as noted above, some appeared to be using the concept without the label. For example, some adjusted their adjusted EBITDA for COVID-19 expenses or presented gross margin without COVID-19 impacts. Such COVID-19 adjustments may be more likely to draw SEC scrutiny during ordinary periodic filing reviews, especially when viewed in hindsight. The staff has taken the position that “presenting a performance measure that excludes normal, recurring, cash operating expenses necessary to operate a registrant’s business could be misleading.”

The blog reminds companies of the Staff’s position in CF Disclosure Guidance: Topic 9 that it is inappropriate to present non-GAAP financial information “for the sole purpose of presenting a more favorable view of the company” & that management should highlight why it finds the measure useful and how it helps investors assess the pandemic’s impact on the company’s financial position and results of operations.

IPOs: Surfing Legend Joins the Lineup

A company called Laird Superfood recently filed an S-1 for an initial public offering.  The company focuses on “highly differentiated plant-based and functional foods,” and currently offers “Superfood Creamer coffee creamers, Hydrate hydration products and beverage enhancing supplements, and roasted and instant coffees, teas and hot chocolate.”

As someone who once ate McDonald’s at The Louvre, you probably wouldn’t tag me as a guy who’d be real interested in “highly differentiated plant-based and functional foods,” and you’d be right. But it turns out that one of the co-founders of the company is Laird Hamilton, who is a surfing legend & somebody I’ve been a huge fan of ever since I saw him in the 2004 big wave surfing film, “Riding Giants.”

Am I a surfer? Gimme a break – I’m a fat old man who lives in Ohio. But I loved this movie for some reason, and Laird Hamilton is clearly its star. Check out this sequence about his spectacular ride on the “heaviest wave ever” at Teahupo’o (“Chopu”) in Tahiti.

John Jenkins