Management’s Discussion and Analysis of Financial Condition and Results of Operation (MD&A)
Management’s discussion and analysis of financial condition and results of operation, commonly referred to as MD&A is an integral parts of annual (Form 10-K) and quarterly (Form 10-Q) reports filed with the Securities and Exchange Commission (SEC). MD&A is also included in registration statements filed under both the Securities Exchange Act of 1934 (Form 10) and Securities Act of 1933 (Form S-1). MD&A requires the most input and effort from officers and directors of a company and due to the many components of required information, often generates SEC review and comments. Item 303 of Regulation S-K sets forth the required content for MD&A.
A MD&A discussion for quarterly reports on Form 10-Q is abbreviated from the requirements for annual reports on Form 10-K and registration statements. Although quarterly reports must discuss each item enumerated below the discussion is expected to be more focused concentrating on the most relevant and material items. In addition, as with my other blogs, this discussion will be limited to the requirements for small public companies (i.e. those with revenues of less than $75 million).
The SEC has issued guidance and interpretation on MD&A, which is helpful in understanding its required content. Pursuant to the SEC, MD&A has three primary purposes. These are:
• to provide a narrative explanation of a company’s financial statements that enables investors to see the company through the eyes of management;
• to enhance the overall financial disclosure and provide the context within which financial information should be analyzed; and
• to provide information about the quality of, and potential variability of, a company’s earnings and cash flow, so that investors can ascertain the likelihood that past performance is indicative of future performance.
Management, and company counsel, should keep these purposes in mind in drafting and finalizing MD&A. The content should not be overly technical, but neither should it be a forum for marketing content. Now, onto the specific MD&A requirements as set forth in Item 303 of Regulation S-K.
In each annual report on Form 10-K, and registration statements on either Forms 10 or S-1, a company must discuss its financial condition, changes in financial condition and results of operations. In addition to the four areas of discussion listed below, a company must include any other relevant information within its knowledge, which information provides a better or more complete understanding of their finances and financial condition. The four areas of financial discussion include:
A company must identify any known trends or known demands, commitments, events or uncertainties that will result in or reasonably could result in an increase or decrease in liquidity. In addition, a company must identify sources and uses of liquidity and any known changes thereto. Explanations of the information provided is required. In layman terms, liquidity is a discussion of sources of cash and uses of cash, and factors that could change or impact either, both as reflected in the financial period covered by the subject report, and for the future. Although not all inclusive, the discussion, at a minimum, should address all items included in the statement of cash flows provided as part of the financial statements. This item, together with the second area of discussion, capital resources, are considered so important the SEC has issued an interpretive release addressing these two areas separately from the rest of MD&A.
A discussion of capital resources includes all material commitments for capital expenditures, the purpose and the source of funds for these commitments. This would include outstanding debts and obligations and simply put, where the money will come from to pay them. In addition, capital resources include a discussion of trends, favorable and unfavorable, that could impact capital resources. An obvious example would be a change in government regulation directly related to the company’s business.
Results of operations include four areas of discussion: (i) unusual or infrequent events that have impacted on a company’s financial condition. An example would be a discontinuance of a specific product line, or sale of company subsidiary. (ii) trends that could have an impact on sales or revenues or income in general, including trends impacting costs and expenses; (iii) a narrative discussion of increases or decreases in sale or revenues; and (iv)impact of inflation and other external financial conditions.
Off balance sheet arrangements have gained notoriety as a result of the recent economic turmoil caused by the mortgage scandal. An off balance sheet arrangement is any arrangement that could have an impact on a balance sheet, the most obvious example being a guarantee of a third party’s obligation. Accordingly, if a company has such an arrangement to report, they are required to provide a detailed analysis including the potential impact and relative importance of the arrangement.
Attorney Laura Anthony,
Founding Partner, Legal & Compliance, LLC
Securities, Reverse Mergers, Corporate Transactions
Securities attorney Laura Anthony provides ongoing corporate counsel to small and mid-size public Companies as well as private Companies intending to go public on the Over the Counter Bulletin Board (OTCBB), now known as the OTCQB. For more than a decade Ms. Anthony has dedicated her securities law practice towards being “the big firm alternative.” Clients receive fast and efficient cutting-edge legal service without the inherent delays and unnecessary expense of “partner-heavy” securities law firms.
Ms. Anthony’s focus includes but is not limited to compliance with the reporting requirements of the Securities Exchange Act of 1934, as amended, (“Exchange Act”) including Forms 10-Q, 10-K and 8-K and the proxy requirements of Section 14. In addition, Ms. Anthony prepares private placement memorandums, registration statements under both the Exchange Act and Securities Act of 1933, as amended (“Securities Act”). Moreover, Ms. Anthony represents both target and acquiring companies in reverse mergers and forward mergers, including preparation of deal documents such as Merger Agreements, Stock Purchase Agreements, Asset Purchase Agreements and Reorganization Agreements. Ms. Anthony prepares the necessary documentation and assists in completing the requirements of the Exchange Act, state law and FINRA for corporate changes such as name changes, reverse and forward splits and change of domicile.
Contact Legal & Compliance LLC for a free initial consultation or second opinion on an existing matter.
« Form 10-Q – Quarterly Reports SEC Staff Review of Super 8-K’s »
Form 10-Q – Quarterly Reports
All companies that are subject to the reporting requirements of the Securities Exchange Act of 1934, as amended (the “Exchange Act”) are required to file quarterly reports on Form 10-Q. As my clients are all smaller reporting companies (less than $75 million a year in revenues) and non-accelerated filers, this article will be limited to a discussion of those filers. Form 10-Q must be filed within 45 days of the end of each of the first 3 fiscal quarters of the Company.
A Form 10-K is filed following the end of the fourth fiscal quarter and will be the subject of an upcoming article.
Each filer has the right to file for an extension on Form 12b-25 which will not result in the filing being deemed delinquent. Extensions must be filed no later than the due date of the 10-Q and extends the filing time for up to 5 calendar days.
The cover page of the Form 10-Q contains basic company information, including the type and date of the report, the companies’ name and address, SEC filer name, federal tax id number and telephone number. In addition, on the cover page each company must state whether it is a shell company or not by checking a yes or no box. This small piece of information has big ramifications.
Companies that are, or ever were a shell company are severely restricted in the use of Rule 144, may not register the sale of securities accept in accordance with Rule 419 and must file a Super 8-K containing Form 10 type information within four days of a transaction resulting in them no longer being a shell. Attorney practitioners requested to perform services, or investors considering an investment (either through a PIPE or on the open market) should make it standard operating procedure to review historical 10-Q’s for shell company status.
Item 1 of Part I and the bulk of the Form 10-Q are the financial statements. Rule 8-03 regarding interim financial statements for smaller reporting companies provides that “Interim financial statements may be unaudited; however, before filing, interim financial statements included in quarterly reports on Form 10-Q must be reviewed by an independent public accountant using professional standards and procedures for conducting such reviews, as established by generally accepted auditing standards, as may be modified or supplemented by the Commission.”
Interim financial statements must include a balance sheet as of the end of the companies’ most recent fiscal quarter, a balance sheet as of the end of the preceding fiscal year, and income statements and statements of cash flows for the interim period up to the date of such balance sheet and the comparable period of the preceding fiscal year. In addition, the financial statements must include footnotes.
Item 2 of Part I of the Form 10-Q is the Management’s Discussion and Analysis of Financial Condition and Results of Operations (MD&A). In addition to the financial statements, MD&A is arguably the most important part of a Company’s reporting requirement. Moreover, it is MD&A that requires the most effort and care by company management. In a separate blog, following this blog, I will discuss in-depth the requirements for MD&A. However, in short MD&A is a discussion, in layman’s terms, of a Company’s plans of operation, results of operations, liquidity and capital resources.
Item 3 of Part I of the Form 10-Q, Quantitative and Qualitative Disclosures About Market Risk, is not applicable to smaller reporting companies.
Item 4 (4T for smaller companies) of Part I of the Form 10-Q is an attestation of Controls and Procedures. This item requires the Companies’ principal executive and principal financial officers to attest to the Company’s disclosure controls and procedures and financial controls and procedures. This attestation is in addition to the certifications required at the end of both 10-Q’s and 10-K’s. Both this attestation and the certifications are the result of the enactment of the Sarbanes Oxley Act of 2002.
Item I of Part II of Form 10-Q, Legal Proceedings, requires a disclosure of either a new legal proceeding or one in which there has been material development during that particular quarter. Ongoing legal proceedings should be disclosed by reference to the 10-Q in which it was first reported. The disclosure should include the name of the court or agency in which the proceedings are pending, the date instituted, and the principal parties thereto, a description of the factual basis alleged to underlie the proceeding and the relief sought. Moreover, the Company must include similar information as to any such proceedings known to be contemplated by governmental authorities.
Item 1A of Part II of the Form 10-Q, Risk Factors, is not applicable to smaller reporting companies.
Item 2 of Part II of Form 10-Q, Unregistered Sales of Equity Securities and Use of Proceeds, requires that the Company disclose all unregistered issuances of securities, the person(s) to whom issued, the value of the issuance (price paid, debt cancelled, value of services, etc..) and the exemption relied upon for the issuance. Together with registered issuances, an analyst should be able to balance the total reported outstanding securities for each quarter and year, by reviewing a Companies’ Exchange Act reports, including this section of Form 10-Q. The Use of Proceeds disclosure requirement under this Section refers to a disclosure of the Use of Proceeds of any securities sold pursuant to an effective registration statement, if applicable. Finally, a Company must also report any repurchases of its own securities in this section.
Item 3 of Part II of Form 10-Q, Defaults Upon Senior Securities, requires that Companies’ report if there has been any material default in the payment of principal, interest, a sinking or purchase fund installment, or any other material default not cured to any indebtedness exceeding 5% of its total assets.
Item 4 of Part II of Form 10–Q has been removed and is being reserved by the SEC for future use.
Item 5 of Part II of Form 10-Q, Other Information, requires that Companies disclose other material information not otherwise disclosed in this report or previously in a Form 8-K.
Item 6 of Part II of Form 10-Q is a list of exhibits to be included with the Form, including certifications.
A form 10-Q must be signed by the principal executive and principal financial officers. These same individuals are required to execute separate certifications which are attached as exhibits to each Form 10-Q and Form 10-K. By signing the Form 10-Q and certifications, the principal executive and financial officers are attesting personally to the contents of the Form and to the attestations in the certificates and are subject to personal liability therefore.
Attorney Laura Anthony,
Founding Partner, Legal & Compliance, LLC
Securities, Reverse Mergers, Corporate Transactions
Securities attorney Laura Anthony provides ongoing corporate counsel to small and mid-size public Companies as well as private Companies intending to go public on the Over the Counter Bulletin Board (OTCBB), now known as the OTCQB. For more than a decade Ms. Anthony has dedicated her securities law practice towards being “the big firm alternative.” Clients receive fast and efficient cutting-edge legal service without the inherent delays and unnecessary expense of “partner-heavy” securities law firms.
Ms. Anthony’s focus includes but is not limited to compliance with the reporting requirements of the Securities Exchange Act of 1934, as amended, (“Exchange Act”) including Forms 10-Q, 10-K and 8-K and the proxy requirements of Section 14. In addition, Ms. Anthony prepares private placement memorandums, registration statements under both the Exchange Act and Securities Act of 1933, as amended (“Securities Act”). Moreover, Ms. Anthony represents both target and acquiring companies in reverse mergers and forward mergers, including preparation of deal documents such as Merger Agreements, Stock Purchase Agreements, Asset Purchase Agreements and Reorganization Agreements. Ms. Anthony prepares the necessary documentation and assists in completing the requirements of the Exchange Act, state law and FINRA for corporate changes such as name changes, reverse and forward splits and change of domicile.
Contact Legal & Compliance LLC for a free initial consultation or second opinion on an existing matter.
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