The SEC Division of Corporation Finance's filing review process is a key function utilized by the SEC staff to monitor the critical accounting and disclosure decisions applied by registrants. Our analysis of SEC comment letters issued in relation to Form 10-K and Form 10-Q filings identifies the frequency of topical areas addressed by the SEC staff and how their focus areas changed over time. In addition to providing our insights on the nature of the SEC staff comments, we provide sample text from the SEC staff’s comments and links to where you can learn more about the accounting and disclosure requirements addressed in each topical area.
We have observed that the staff has begun to issue comments related to COVID-19 disclosures; however, clear trends have yet to develop. These comments have focused on company-specific disclosures of pandemic-related risk factors and the discussion of known trends and uncertainties in MD&A, including expectations of the impact on operating results and near- and long-term financial condition, with references to CF Disclosure Guidance: Topic No. 9 for guidance. The staff has also issued comments related to impairment assessments, such as requesting clarification on how COVID-19 impacted the analysis and assumptions and further information about or disclosure of the headroom.
(10/1/2019 – 9/30/2020)*
|Relative change in number of letters compared to the Prior Period*|
|3||Management's discussion and analysis||Up|
|5||Form compliance and exhibits||Flat|
|6||Fair value measurement
|7||Disclosure controls and ICFR||Flat|
|8||Goodwill and other intangibles||Flat|
|10||Debt, quasi-debt, warrants and equity||Flat|
*This analysis was performed based on topical areas assigned by research firm Audit Analytics for comment letters publicly issued in the 12 months ended September 30, 2020 ("Current Period") and the 12 months ended September 30, 2019 ("Prior Period") in relation to Form 10-K and Form 10-Q filings. Total comment letters evaluated during the Current Period and Prior Period were approximately 840 and 1,050, respectively. In addition, we note that the overall comment letter trends remained relatively consistent with the 12 months ended June 30, 2020.
The relative number of comment letters has increased.
The relative number of comment letters has decreased.
The relative number of comment letters has not changed significantly.
Non-GAAP financial measures result in frequent comments regarding compliance with Item 10(e) of Regulation S-K and the related compliance and disclosure interpretations, sometimes resulting in requests to remove or substantially modify non-GAAP metrics. Focus areas have included:
ASC 606, Revenue from contracts with customers, requires more quantitative and qualitative disclosure than prior guidance. The following areas have been addressed in the SEC staff's comments:
The SEC staff’s comments on management’s discussion and analysis have emphasized the requirements in Item 303 of Regulation S-K and the related disclosure objectives, including a focus on:
The discussion and analysis of results of operations, including the description and quantification of unusual or infrequent events or any significant economic changes, including the impacts of COVID-19;
Discussion of known trends or uncertainties, such as those related to COVID-19, that are reasonably expected to impact future results both in the near and long term;
Metrics used by management in assessing performance, including how they are calculated and period over period comparisons;
Critical accounting estimates, including the judgments made in the application of significant accounting policies, and the likelihood of materially different reported results if different assumptions or conditions were to prevail; and
Liquidity and capital resources, including clear discussion of drivers of cash flows and the trends and uncertainties related to meeting known or reasonably likely future cash requirements.
On your earnings call, you indicated that you currently anticipate the subsequent quarter revenue to be down as much as 50% with a significant portion of your global business having been closed since early April. Revise your future periodic filings to disclose known trends and uncertainties related to COVID-19. For example, disclose how you expect COVID-19 to impact your future operating results and near- and long-term financial condition and how that compares to the current period. See Item 303 of Regulation S-K, SEC Release No. 33-8350, and CF Disclosure Guidance Topic No. 9.
If two or more factors contribute to material changes in revenue, please provide disclosure demonstrating the relative magnitude of each factor, such as the percentage or dollar increase in revenue due to onboarding of new customers versus usage from existing customers. In this regard, it appears from your most recent earnings releases that such information is readily available. Refer to Item 303(a)(3)(iii) 303(a)(3)(iii) of Regulation S-K and Section III.D of SEC Release No. 33-6835.
Where a material change in a line item is attributed to two or more factors, including any offsetting factors, the contribution of each identified factor should be described in quantified terms, if reasonably practicable. Please revise your disclosures in future filings accordingly. Similar revisions should be considered throughout your results of operations disclosures, such as in your discussion of the change in research and development and selling, general and administrative expenses. Refer to Item 303(a)(3)(ii) of Regulation S-K and Section III.D of SEC Release No. 33-6835.
We note your disclosure and quantification of capacity utilization. Please revise to describe how this measure is calculated and expand the discussion to include the underlying reasons for any significant fluctuations in the measure from period-to-period. Refer to Item 303(a)(3) of Regulation S-K.
Please provide information for investors to assess the probability of future goodwill impairment charges. For example, please disclose whether your reporting unit is at risk of failing step one of the quantitative impairment test or that the fair value of this reporting unit is substantially in excess of carrying value and is not at risk of failing step one. If the reporting unit is at risk of failing step one, you should disclose:
the percentage by which fair value exceeded carrying value at the date of the most recent step one test;
the amount of goodwill allocated to the reporting unit;
a detailed description of the methods and key assumptions used and how the key assumptions were determined;
a discussion of the degree of uncertainty associated with the assumptions; and
a description of potential events and/or changes in circumstances that could reasonably be expected to negatively affect the key assumptions.
Please describe for us the actuarial methods you utilize to estimate your reserve, including significant assumptions and changes therein and why you believe the methods and assumptions provide a reasonable estimate.
As it relates to your analysis of cash provided by operating activities, please quantify all variance factors cited pursuant to section 501.04 of staff's Codification of Financial Reporting so that investors may readily understand the magnitude of each. Also, please note citing factors such as operating results and changes in balance sheet items may not provide a sufficient basis to understand how operating cash between comparative periods was affected and varied. In this regard, supplement your analysis with the material drivers underlying the factors cited, as appropriate. Refer to section IV.B.1 of Release No. 33-8350 for guidance.
SEC staff frequently question how registrants have identified operating segments and aggregated them into reportable segments, often due to events reported by companies in press releases or Form 8-K disclosures. SEC staff may expect to see changes in segments when the company has disclosed significant acquisitions or dispositions, changes in organizational structure, or changes in key personnel. To resolve segment questions, the SEC staff may request a copy of the reporting package utilized by the chief operating decision maker, or other documents, to evaluate its consistency with management’s reporting conclusions.
The lack of entity-wide information required to be disclosed under ASC 280 has also been highlighted by the SEC staff, Specifically, the SEC staff has focused on the required disclosures of:
Please tell us in detail how you determined all of your operating segments or brands are properly aggregated into one reportable segment. Please be sure to address each of the aggregation criteria in ASC 280-10-50-11.
Please revise future filings to present separately revenues from external customers attributed to your country of domicile. Also, when material, separately disclose the revenues from external customers attributed to an individual foreign country. Refer to ASC 280-10-50-41(a).
Compliance-related comments do not typically require significant effort to address; however, the resolution of such comments may require a registrant to amend previous filings. The SEC staff has focused on:
The omission of required disclosures (e.g., management’s report on internal control over financial reporting);
The omission of required certifications;
Errors in the dates or references included in the certifications; and
The submission of agreements.
Please amend your Form 10-K to provide management's report on internal control over financial reporting, as required by Item 308(a) of Regulation S-K.
Please amend this filing to include a properly signed certification of the Chief Executive Officer and Chief Financial Officer pursuant to Securities Exchange Act of 1934 Rule 13a-14(a) or 15d-14(a). Additionally, revise the title of this certification as it pertains to section 302 of The Sarbanes-Oxley Act of 2002.
Please amend your filing to provide new certifications filed as Exhibits 31.1 and 31.2 to conform exactly to that provided in Item 601(b)(31) of Regulation S-K as it relates to internal controls over financial reporting (ICFR). In this regard, the introductory sentence in paragraph 4 should refer to ICFR as defined in the Exchange Act and certification 4(b) should discuss your obligations related to ICFR.
Fair value measurements often require the application of significant judgment. The SEC staff has focused on the quality of disclosure around those significant judgments and estimates, frequently commenting on:
The focus of the SEC staff’s comments on Internal Control over Financial Reporting (ICFR) has not changed significantly from prior years. They continue to focus on:
The identification and disclosure of material weaknesses. Specifically, the SEC staff continues to question why a restatement or revision did not result in the reporting of a material weakness;
Management’s disclosure around the effectiveness of ICFR and disclosure controls and procedures (DC&P). The SEC staff has questioned registrants when there is no explicit conclusion about the effectiveness of DC&P or when management has concluded that ICFR is ineffective while DC&P is effective; and
Management’s documentation of the changes in ICFR that have materially affected, or are reasonably likely to materially affect the registrant’s ICFR as required by Item 308 of Regulation S-K. Such changes may include updates to internal controls made in the process of (a) remediating previously identified material weaknesses, (b) as a result of the integration of significant acquisitions, (c) due to the implementation of new information technology systems, or (d) implementation of a new accounting standard.
We note management concluded that your disclosure controls and procedures and internal control over financial reporting were effective as of the end of the period covered by your annual report. Given the fact that you have restated your previously issued financial statements due to errors, please tell us why you did not disclose that these restatements were indicative of a material weakness in your internal control over financial reporting to comply with Item 308(a)(3) of Regulation S-K, and tell us how your officers determined that your disclosure controls and procedures were effective despite such material weakness in your internal controls over financial reporting.
Your report states that during your assessment, “management identified no significant deficiencies;” however, your report does not include a statement as to whether or not your internal controls over financial reporting were effective as required by Item 308(a)(3) of Regulation S-K. Please revise management’s report accordingly.
Please revise your report to clarify which version, 1992 or 2013, of the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission’s Internal Control – Integrated Framework you utilized when performing your assessment of internal control over financial reporting.
Please revise to disclose any change in your internal control over financial reporting that occurred during the last fiscal quarter that has materially affected, or reasonably likely to materially affect, your internal control over financial reporting. Refer to Item 308 (c) of Regulation S-K.
We note that management concluded that disclosure controls and procedures were effective as of the end of the fiscal year. We also note management's conclusion that disclosure controls and procedures were not effective as of your fiscal third quarter. The narrative in your Form 10-K, however, states that "during the fourth quarter, there have been no changes in our internal control over financial reporting that have materially affected or are reasonably likely to materially affect our internal controls over financial reporting." Please explain to us how you determined there was a change in the effectiveness of your disclosure controls and procedures, from period-to-period, given that there were no changes in internal controls during your fiscal fourth quarter.
The SEC staff has focused on the quality of the disclosure around significant judgments and estimates associated with goodwill and intangible assets, including impairment assessments, frequently commenting on:
the identification of reporting units, including factors considered when multiple components have been combined into a single reporting unit due to economic similarities;
at risk reporting units, including information about the amount of goodwill and headroom at the reporting unit, discussion of the key assumptions used to determine the reporting unit’s fair value and their associated degrees of uncertainty, and a description of potential events or changes in circumstances, such as the COVID-19 pandemic, that could negatively affect the key assumptions;
triggering events that may indicate that an interim impairment assessment is necessary; and
the timing of goodwill and intangible asset impairment charges.
We note your statement that your reporting units with goodwill are equivalent to your operating segments. Please tell us your operating segments and if your operating segments changed during the year. If you have aggregated any of your operating segments when determining your reportable segments, please revise the segment footnote in your financial statements to disclose that operating segments have been aggregated. See ASC 280-10-50-21(a).
Please tell us how you considered the qualitative factors outlined in ASC 350-20-35-3C when performing your goodwill impairment analysis and clarify whether you performed a qualitative or quantitative assessment, or both. Also, tell us whether any of your reporting units are at risk of failing a quantitative analysis and if true, revise your critical accounting policies to disclose:
The percentage by which fair value exceeded carrying value as of the date of the most recent test;
The amount of goodwill allocated to the reporting unit;
A discussion of the degree of uncertainty, which includes specifics to the extent possible, associated with key assumptions used in your analysis; and
A description of potential events and/or changes in circumstances that could reasonably be expected to negatively affect the key assumptions.
If you have determined that estimated fair values substantially exceed the carrying values of your reporting units, please disclose such determination. Refer to Item 303(a)(3)(ii) of Regulation S-K and Section V of SEC Release 33-8350.
We note your disclosure in your Form 10-K that as of the end of your fiscal year, the fair value of your goodwill exceeded the carrying value by a minimal amount. Your stock price has continued to decline and you recognized operating cash flow losses and operating losses during the first quarter. Additionally, we note significant decreases in total revenues for the first quarter of the current year compared to the prior year. Tell us how you considered whether these trends were considered to be a triggering event for an additional goodwill impairment analysis. Please refer to ASC 350-20-35-30.
The accounting for business combinations and the related disclosures are a consistent area of focus for the SEC staff, with frequent comments related to:
Purchase price allocations, including questions about how fair value was determined and the key assumptions used;
Why the registrant omitted the pro forma financial information or other disclosures required by ASC 805; and
Compliance with the Regulation S-X Article 11 pro forma financial information requirements for significant business combinations disclosed on Form 8-K and in certain registration statements.
Please provide more detail regarding the royalty rate for the subject trade name and respective required rates of return used in the relief from royalty calculation. In addition to quantifying the inputs, please tell us how these inputs were determined, if a range of inputs were considered, and the magnitude of the impact on the trade name value if other inputs within the range, if any, had been used.
Please disclose a qualitative description of the factors that make up the goodwill recognized in the transaction in accordance with ASC 805-30-50-1(a).
We note your business combinations during the year were material in the aggregate to total assets for the current and prior year. Please disclose the following pursuant to ASC 805-10-50- 3 or tell us why you believe you are not required to disclose this information:
the amount of acquisition-related costs, the amount recognized as an expense, and the line item or items in the income statement in which those expenses are recognized;
the amounts of revenue and earnings of the acquiree since the acquisition date included in the consolidated income statement for the reporting period; and
the revenue and earnings of the combined entity as though the business combinations that occurred during the current year had occurred as of the beginning of the comparable prior annual reporting period (supplemental pro forma information).
Please tell us how you considered the requirements for pro forma financial information pursuant to Article 11 of Regulation S-X for the sale of your Facilities described in Item 2.01 of Form 8-K.
Debt, quasi-debt, warrants, and equity securities continue to be sources of restatements and revisions due to errors in the application of the relevant guidance. The accounting for such items often includes critical accounting estimates that require significant judgment. The SEC staff has focused on the transparency and quality of the disclosures around these judgments and estimates, frequently requesting:
the registrant’s consideration of conversion and redemption options in determining debt or equity classification;
support for the classification of financing transactions as extinguishments or modifications of debt; and
expanded disclosures of the rights and privileges related to preferred stock and material terms of debt agreements.
Please disclose the nature of the redemption features related to the preferred shares and why amounts are not currently redeemable. Additionally, please disclose the features of the preferred shares that lead you to classify amounts as liabilities as opposed to equity.
Please tell us your consideration of providing a description of the accounting method used to adjust the redemption amount of the redeemable preferred stock for changes in the redemption value and disclosing (1) the redemption amount of the preferred stock as if it were currently redeemable and (2) the reasons why it is not probable that the preferred stock will become redeemable. Please refer to ASC 480-10-S99-24.
Revise future filings to provide all of the disclosures required by paragraphs 50-4 through 50-6 of ASC 470-20 for your convertible debt instruments that may be settled in cash. In this regard, revise to also describe the specific conversion features of each debt arrangement and discuss how the features and the host instrument are accounted for and valued in your financial statements.
We note that you extinguished debt plus accrued interest by issuing common shares to a related party. Please tell us whether you applied extinguishment accounting, and if so, please explain to us how you determined the reacquisition price of the debt. Please refer to ASC 470-50-40-2 and 40-3.
Please disclose the pertinent rights and privileges of the preferred stock, including dividend and liquidation preferences, participation rights, unusual voting rights and other terms. Please refer to ASC 505-10-50-3 through and 50-5.