Earlier this week, the SEC announced settled enforcement actions against five companies for deficient disclosure in Forms 12b-25 that they filed regarding late reports. Why? On the heels of filing those Forms 12b-25, the companies announced financial restatements or corrections that were not even alluded to in those late notification filings. Over two years ago, the SEC charged eight companies for similar violations detected through the use of data analytics in an initiative aimed at Form 12b-25 filings that were soon followed by announcements of financial restatements or corrections. (See this PubCo post.) Apparently, the SEC believes that companies are still flubbing this one and does not seem to consider these errors to be just harmless foot faults. In connection with the 2021 enforcement actions, the Associate Director of Enforcement hit on a central problem from the SEC’s perspective with deficiencies of this type: “In these cases, due to the companies’ failure to include required disclosure in their Form 12b-25, investors relying on the deficient Forms NT were kept in the dark regarding the unreliability of the company’s financial reporting or anticipated material changes in operating results.” These charges should serve as a reminder that completing the late notification is not, to borrow a phrase, a trivial pursuit and could necessitate substantial time and attention to provide the narrative and quantitative data that, depending on the circumstances, could be required.
Public companies are required to file Forms 12b-25 when they are requesting additional time to file a periodic report. If the company was unable to file the periodic report on a timely basis without unreasonable effort or expense and complies with all of the requirements of the Rule, the late report will be deemed to be timely filed—essentially giving the company an extension.
More precisely, under Rule 12b-25, if a company fails to file a Form 10-K or 10-Q within the prescribed time period, the company must file a Form 12b-25 with the SEC no later than one business day after the report’s due date. The Form 12b-25 must disclose that the company is unable to timely file and explain the reason why. The company is also required to affirm that the periodic report will be filed within 15 calendar days, for a Form 10-K, or within five calendar days, for a Form 10-Q, of the original due date, and is then required to file the report within that timeframe.
Importantly, for purposes of these charges, Form 12b-25 also requires the company to indicate whether it anticipates that “any significant change in results of operations from the corresponding period for the last fiscal year will be reflected by the earnings statements to be included in the subject report or portion thereof.” If so, the company must explain “the anticipated change, both narratively and quantitatively, and, if appropriate, state the reasons why a reasonable estimate of the results cannot be made.”
In the five Orders, the SEC found that the subject companies announced restatements or corrections to financial reporting within a range of three to 21 days after filing their Forms 12b-25 but did not disclose in those filings “that anticipated restatements or corrections were among the principal reasons for their late filings” or that “management anticipated significant changes in results of operations.” The companies were required to cease and desist and to pay civil penalties of either $35,000 or, if another filing was also late, $60,000.
Let’s take a deeper dive into one of the Orders. In the Order for Vivic Corp., a Nevada-based travel agency engaged in the manufacture, rental and sale of yachts, the SEC found that a Form 12b-25 filed by Vivic in May 2022 failed to provide sufficient detail explaining why its Q1 2022 Form 10-Q could not be timely filed, nor did it acknowledge “anticipated, significant changes” in Vivic’s results of operations for Q1 2022 as compared with Q1 2021, or provide an explanation of the changes.
More specifically, the SEC found that, on May 11, 2022, Vivic filed a Form 12b-25 disclosing that it could not timely file its Q1 2022 Form 10-Q “because ‘[i]nformation necessary for the filing of a complete and accurate Form 10-Q could not be gathered and reviewed within the prescribed time period without unreasonable effort and expense,’” and affirmed that it did not anticipate that the subject Form 10-Q would reflect any significant change in its results of operations from the corresponding period of the prior fiscal year. Then, about 21 days later, on June 1, 2022, Vivic filed a Form 8-K disclosing that, on May 28, 2022, its board of directors had concluded that, due to de-consolidation of Vivic’s subsidiary, the unaudited financial statements in three prior Forms 10-Q “‘should no longer be relied upon’ because Vivic had incorrectly accounted, in those financial statements, for a subsidiary’s investment.”
The SEC, however, found that Vivic understood, prior to May 11, 2022, “that its inability to meet the filing deadline for its first-quarter FY2022 Form 10-Q was due, in large part, to the discovery, and ongoing correction, of errors” in its prior Forms 10-Q. In addition, Vivic “was aware that its first-quarter FY2022 financial results, when reported, would differ significantly from its first-quarter FY2021 financial results, including a 96% decrease in quarterly gross profit versus first quarter FY2021. In its Form 12b-25, however, Vivic failed to disclose any of this information, much less provide the detailed narratives and quantitative explanation specifically called for by the form.”
It’s also instructive here that the SEC found Vivic to be late in filing its Form 8-K. Vivic used May 28 as the Form 8-K trigger date, the date that its board had concluded that its financial statements could no longer be relied upon, filing its Form 8-K on June 1. The SEC begged to differ, instead finding the trigger date to be May 12, the date that Vivic’s auditor had informed Vivic’s board that Vivic needed to restate previously filed financial statements. As a result, the SEC determined that Vivic failed to file its Form 8-K within the required four-business day period.
Vivic was found to have violated Section 13(a) of the Exchange Act and Rules 12b-25 and 13a-11 and was ordered to cease and desist from these violations and to pay a civil penalty of $60,000.
It’s worth noting that, among these five Orders, some of the SEC’s charges involved only financial revisions, not more material financial restatements. For example, in the Order regarding ReShape Lifesciences, Inc., a Delaware corporation that provides weight-loss solutions to treat obesity and metabolic disease, the SEC found that the company filed a Form 12b-25 on August 16, 2022, regarding a late Form 10-Q for Q2 2022. In the Form 12b-25, the company disclosed that it could not timely file its Q2 2022 Form 10-Q “because management ‘is unable, without unreasonable effort or expense, to file its Form 10-Q…within the prescribed time period as it requires additional time to complete the compilation of information for its financial statements and related disclosures.’” Three days later, ReShape filed its Form 10-Q disclosing “revisions” of its statements of operations for a number of prior periods “to reflect the correction of an immaterial error in the computation of the weighted average shares used to compute basic and diluted net loss per share. This revision has no impact on the Company’s net loss or accumulated deficit.” But here again, the SEC found that ReShape understood, prior to August 16, that its inability to timely file “was due, in large part, to the discovery, and ongoing correction, of errors in its computation of the weighted average shares” in prior periods. Moreover, the SEC charged that the company was aware that its Q2 2022 financial results, when reported, would “differ significantly” from its financial results for Q2 2021, including a 153% increase in quarterly operating loss relative to the corresponding period of the prior year. Nevertheless, in its Form 12b-25, “ReShape failed to disclose any of this information,” the SEC charged, “much less provide the detailed narratives and quantitative explanation specifically called for by the form.”
ReShape was found to have violated Section 13(a) of the Exchange Act and Rule 12b-25 and was ordered to pay a civil penalty of $35,000.