By Jesse Fishman and Laura Holm

In Quarterly Reports on Form 10-Q, companies are required to disclose any material changes to risk factors that were included in their most recent Annual Report on Form 10-K.  Many companies do not update risk factors in their first quarter 10-Q filing because no material changes have occurred since the filing of the Form 10-K.  However, the world changed drastically in the first and second quarters of 2020 and many companies have felt that impact of COVID 19.

Companies need to consider whether additional risk factor disclosure in their 10-Q filings is appropriate to address material risks exacerbated or introduced in connection with COVID-19.  Some risk factors that companies may wish to consider are:

Risks related to changes to in demand;

  • Risks related to cybersecurity issues;
  • Risks related to supply chain disruption;
  • Risks related to financial markets and economic conditions; and
  • Risks related to general uncertainty.

Some special considerations should be made by those in the travel industry where stay at home orders and corporate restrictions on travel have greatly affected their revenues in Q1 and may affect their revenue projections in the coming months.  Additionally, because of stay at home orders, more employees are working from home.  This situation presents unique opportunities for cyber criminals and exposure to phishing attacks.

SEC’s guidance stresses companies to tailor the risks to their company and to avoid generic risk factors that could apply to any issuer or offering.  If the company has experienced a situation which requires risk factor disclosure, the company should be careful to avoid posing that situation as a hypothetical.

Reviewing peer companies and companies who have the same SIC code as your company are important practices.  You can also look at risk factors for companies in industries who have been severely impacted by the pandemic, such as the travel, restaurants and retail industry.