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Second Quarter Form 10-Q Disclosure Considerations

    Client Alerts
  • July 16, 2020

While it has only been three months since calendar year companies began preparing for their first quarter Form 10-Q filings, in many ways it has felt much longer. In those three months, the U.S. has gone from mostly being under stay at home orders to attempting to reopen amid the COVID-19 pandemic. Many companies transitioned to a remote workforce, others are navigating how employees may return safely to the office, and everyone is warily eyeing what the future might bring. In light of companies’ nimble reactions to COVID-19 over the past quarter, it is important to maintain a sharp focus on public disclosures.

To help companies navigate another challenging Form 10-Q filing preparation period, the Securities and Exchange Commission’s Division of Corporation Finance has provided additional guidance companies should review and consider as they prepare their disclosures. This guidance includes CF Disclosure Guidance: Topic No. 9A (Coronavirus (COVID-19) – Disclosure Considerations Regarding Operations, Liquidity, and Capital Resources; issued June 23, 2020) which supplements CF Disclosure Guidance: Topic No.9 (Coronavirus (COVID-19); issued March 25, 2020).

Summarized below are various second quarter disclosure tips to consider in light of this additional guidance and general pandemic-related market conditions.

Management’s Discussion and Analysis

Given CF Disclosure Guidance: Topic No. 9A’s focus on operations, liquidity and capital resources, the Management’s Discussion and Analysis section of the second quarter Form 10-Q filing should be of significant focus for companies. The Division of Corporation Finance has stated that “[t]hese disclosures should enable an investor to understand how management and the Board of Directors are analyzing the current and expected impact of COVID-19 on the company’s operations and financial condition, including liquidity and capital resources.”

Companies should prepare their operations, liquidity and capital resources disclosures by looking at their businesses holistically. What have been and are currently the company’s material operational and liquidity challenges during the COVID-19 pandemic? How has the company sought to address these challenges? What are the capital resources the company has to meet these challenges and to continue operating? Once the material operational and liquidity challenges have been determined, the company should then consider the list of questions provided in CF Disclosure Guidance: Topic No. 9A (and No. 9) to help inform and guide its disclosures.

Companies should ensure that their internal legal and finance teams tasked with preparing the second quarter Form 10-Q filings are coordinating closely. As the preparation of the first quarter Form 10-Q filings highlighted, changes (especially if a company moved to telework) can have an impact on a company’s financial reporting systems, internal controls over financial reporting, and disclosure controls and procedures. Companies are reminded to disclose any change during the quarter that has materially affected, or is reasonably likely to materially affect, their internal controls over financial reporting in the Form 10-Q filing.

Companies should also ensure close coordination with their external auditors and audit committee during the second quarter Form 10-Q filing preparation process. The COVID-19 pandemic may have changed material assumptions underlying the financial statements that should be discussed with both the external auditors and the audit committee, as well as disclosed in the Form 10-Q filing. Moreover, companies may need to make challenging or subjective judgments, due to COVID-19, as part of preparing the second quarter Form 10-Q filing. If these judgments are material to the financial statements, they could become a critical audit matter.

Companies preparing their second quarter Form 10-Q filings should also take the time to review the materials prepared for its board of directors since the beginning of the COVID-19 pandemic, as well as their Q1 and Q2 earnings releases. By reviewing board materials, a company will be better positioned to provide disclosures that help investors analyze current and expected COVID-19 impacts on its operational and financial conditions. By looking at Q1 and Q2 earnings releases, a company can better understand the concerns and questions investors have regarding its operational and financial conditions. The Division of Corporation Finance also stated in CF Disclosure Guidance: Topic No. 9A that they encourage companies to consider making similar operational and financial condition disclosures in the Management’s Discussion and Analysis section as are in their earnings releases, given the potential materiality of the information. This is a good reminder to companies that reviewing earnings call transcripts as part of its annual and quarterly filing preparation is not only helpful during the COVID-19 pandemic, but should be a regular practice in disclosure preparations.

Risk Factors

In our recent Form 10-Q COVID-19 Disclosure Tips client alert, we encouraged companies to be particularly focused on their risk factor disclosures. When first quarter Form 10-Q filings were being prepared, the COVID-19 pandemic was starting to take hold in the U.S. and most of the quarter had not been impacted. Companies had limited insight at that time as to the effect of COVID-19 on their business, and most likely were focused on trying to manage the beginning of the pandemic as best they could. Risk factor disclosure was one area in the first quarter Form 10-Q filing that companies could start providing information on the potential (or actual) impact of COVID-19.

Companies should once again critically review this section to make sure potential risks are disclosed. Three months during a pandemic is a long time for new potential risks to come into focus. Additionally, companies should tailor these disclosures to refrain from presenting risks that could apply generally to any registrant. In the first few weeks of COVID-19, risk factor language may have been more general, given how much was unknown at that time. Now that companies have experienced a full quarter during the COVID-19 pandemic, they can better tailor this disclosure to highlight their specific risks.

COVID-19 may have a broader impact on general risk factor disclosures than just COVID-19 specific risk factors. For example, if a company provides risk factor disclosure regarding its credit facility, this risk factor may need to be updated in light of what occurred during the second quarter, even if the risk factor did not previously mention COVID-19.

Companies should read through their Risk Factors section to make sure they are not describing any risks as hypothetical that have already occurred. Given that companies are many months into the COVID-19 pandemic, potential risks in first quarter Form 10-Q filings may have become actual risks by the time of the second quarter Form 10-Q filing.

Forward-Looking Statements

In CF Disclosure Guidance: Topic No. 9A, the Division of Corporation Finance emphasizes the importance of providing forward-looking disclosures. From encouraging companies “to provide disclosures that allow investors to evaluate the current and expected impact of COVID-19 through the eyes of management” (emphasis added) to asking “[h]ow has a change, or a potential change, to your credit rating impacted your ability to access funding” (emphasis added), companies are on notice that providing historical disclosures may not be enough. Nevertheless, many companies may be reluctant to provide forward-looking disclosures because of the potential risk involved. Forward-looking statements will be looked at many months (or even years) after they were made and a company’s operations, financial condition or stock price may have changed significantly in that intermittent period. This may be particularly true given the uncertainty of the COVID-19 pandemic and its long-term impacts on the economy and businesses.

In an effort to address these concerns, Securities and Exchange Commission Chairman Jay Clayton and Division of Corporation Finance Director William Hinman noted in an April 2020 public statement  that “[g]iven the uncertainty in our current business environment, we would not expect to second guess good faith attempts to provide investors and other market participants appropriately framed forward-looking information”. Nevertheless, companies should carefully document their support for each forward-looking statement, in case they are later questioned as to whether the statement was made in “good faith.” How companies do this may vary from company to company and will depend on the type of forward-looking statement. Moreover, companies should also review their forward-looking statement safe harbor language to make sure it includes specific risks to the company and is not boilerplate language.

Human Capital Disclosures

Many of the newer areas of focus that companies likely need to address in their upcoming second quarter Form 10-Q filing’s Management’s Discussion & Analysis and Risk Factors sections may fall within the broad category of “human capital”. While voluntary human capital disclosures had already generally become more common, the importance of such disclosures as a result of the COVID-19 pandemic has increased.

Human capital is an intangible asset, akin to “goodwill”, that values the collective experience and skills of a company’s workforce. This broad category values intangible attributes such as skill, education, capacity, ability, training, judgment, experience and personality. A company’s human capital disclosures should discuss items of relative or special importance to that specific company.

The Division of Corporation Finance referred directly to COVID-19 related human capital disclosures in CF Disclosure Guidance: Topics No. 9 and 9A, which posed the following questions:

  • Topic No. 9: Will your operations be materially impacted by any constraints or other impacts on your human capital resources and productivity?
  • Topic No. 9A: 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?

When assessing specific company responses to the COVID-19 pandemic, and the impact of any response steps on a company’s employees, disclosures should inform the public of any layoffs, furloughs, terminations or other workforce size reductions. A company may also want to discuss their short-term and long-term plans for returning displaced workers to the office. For example, if a company has had troubles with employees working from home or if such a company’s business is impossible to complete remotely, it may want to consider risk factor disclosures detailing the impact a sustained COVID-19 pandemic would have upon the company’s business. Companies should prepare their disclosures with the goal in mind of assisting the market in understanding why certain business decisions have been made regarding their human capital.

As with many aspects of public disclosures, there is no one size fits all approach to human capital disclosures. However, given the COVID-19 pandemic, investors may place a higher value on understanding how a company has responded to and overcome obstacles within the last quarter, with respect to its workforce. Companies would be well advised to consider the pandemic’s impact on its workforce as they prepare their second quarter Form 10-Q filings.


Because the second quarter was the first full quarter of a COVID-19 effected market, companies are likely to face new challenges and need to provide different disclosures than what was provided in their first quarter Form 10-Q filings. The SEC will continue to look closely at COVID-19 related disclosures and will look to analyze whether companies are helping investors better understand how the pandemic has and is continuing to impact their operations, liquidity and capital resources. While many of us usually look forward to a slower summer pace, the preparation of second quarter Form 10-Q filings no doubt will keep most companies on their toes.

For more information, please contact us or your regular Parker Poe contact.