Reminders on the risk factors for the next 10-Q | Bryan Cave Leighton Paisner

As companies prepare the next periodic reports, they should focus on carefully reviewing and updating their risk factors. Some of the considerations may include:

• COVID risks. As a number of industries improve, it may be advisable to revise the risk factors associated with COVID to reflect the changing economic climate. In some cases, it may be necessary to focus on the challenges of increasing production, managing supply chains, hiring workers, or meeting growing customer demand. In other cases, companies that have benefited from dramatic changes in the economy during the pandemic peak may need to deal with the potential risks associated with a return to normalcy. For example, consider whether recent growth trends are considered sustainable in light of the MD&A requirement to discuss “known trends or uncertainties” that the company “reasonably expects to have a material favorable or unfavorable impact. on net sales, income or income ”. At the same time, it may be appropriate to continue to warn investors about uncertainties about the future course of the pandemic – especially as concerns about the impact of variants evolve.
• Labor markets. Many sectors and regions are experiencing labor shortages. To the extent that it is important, companies should consider disclosing in the MD&A the effect of labor market conditions on their operating results and discussing possible future impacts on risk factors.
• Hypothetical risks. Risk factors generally include a wide range of matters intended to alert investors to potential adverse events, most of which may not have never materialized. These are included with the aim of providing legal protection – an “insurance policy” – against claims that companies have failed to inform investors of a material risk. However, a recent court and, as before Noted, the SEC rulings make it clear that companies can also be held liable for presenting risks as “hypothetical” when, in fact, a material adverse event has in fact occurred, such as a material cybersecurity breach. In these cases, stating that there has been “no material change” could be considered problematic.
• Current events. While it can be difficult to keep up with the news, businesses should be aware of the potential implications that could have material effects on their businesses, customers, suppliers, employees, or prospects. Recent headlines have included the heat wave and wildfires, ransomware attacks, cyber breaches, social justice protests or boycotts, the presidential decree on consolidation and competition, and international conflicts, among others. To the extent that existing risk factors touch on any of these topics, consideration should be given to updating the discussion to clarify that the risk is not simply hypothetical.

As stated earlier in a previous blog post, the instructions on Form 10-Q request disclosure of any material changes to the risk factors included in the latest 10-K. Therefore, companies should carefully examine existing 10-K (or 10-Q) risk factors to determine whether new risks have arisen, hypothetical risks have become real, or existing risks have changed.

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