Which matters are required to be covered in management Discussion and analysis report?

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 each material factor, offsetting factors, unusual or infrequent events, and economic developments causing changes in results between periods;
• the discussion of known trends or uncertainties that are reasonably expected to impact near and long term results;
• metrics used by management in assessing performance, including how they are calculated and period over period changes;
• critical accounting estimates, including the judgments made in the application of significant accounting policies, sensitivity to change, and the likelihood of materially different reported results if different assumptions were used; 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.

Comment Examples

Guidance references

• 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 disclosures that the increase in net sales during the current interim period was driven by growth in certain regions and end markets. We also note your disclosure that this is the first full quarter of revenue from a prior acquisition. Please revise your disclosures related to changes in net sales to quantify and more fully explain the reasons for changes in net sales during each period presented. For example, please quantify the impact of sales related to the acquisition and better explain the underlying reasons for sales growth in certain regions and end markets.
• Cost of goods sold is the largest expense item and appears to be material to your results, yet there is no discussion and analysis of it. Please include a discussion and analysis of cost of goods sold as appropriate and material. In your disclosure, consider discussing and quantifying components of costs of goods sold to the extent material to the change in cost of goods sold between periods. Include a description in quantitative and qualitative terms of the underlying reasons associated with any components discussed. Refer to Item 303(a), introductory paragraph of Item 303(b) and Item 303(b)(2) of Regulation S-X and Section III.B.4 of Release No. 33-8350 for guidance.
• We note the increase in the provisions for the allowance for doubtful accounts for each of the fiscal years 2020, 2019, and 2018. Please tell us more about the factors that led to the significant increase in the provision recognized during fiscal year 2020. Please ensure that the Company's MD&A disclosures fully address the facts and circumstances that drove the change and whether the disproportionate fluctuations in trends are expected to recur. See Item 303(a)(3)(i) and (ii) of Regulation S-K. We note in your earnings calls that you discuss net revenue per client and inventory turnover. If these metrics are used by management to manage the business, and promote an understanding of the company's operating performance, they should be identified as key performance indicators and discussed pursuant to Instruction 1 of paragraph 303(a) or Regulation S-K and Section III.B.1 of SEC Release No. 33-8350. Please tell us your consideration of disclosing these metrics, or other key performance indicators used.
• In your earnings conference call, management mentioned that the Company planned to invest during the fourth quarter of the fiscal year in both operating expenses and capital expenditures to address capacity constraints and prepare for an anticipated increase in cloud consumption. There did not appear to be any mention of capacity constraints or planned additional expenditures in your MD&A. Please revise future filings to address the capacity issues encountered and address how these additional investments impacted your operating performance and cash flows. Please describe the extent to which you anticipate these trends will continue in future periods.
• 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.
• We note your disclosure which refers the reader to the Notes to the Consolidated Financial Statements for information regarding the recognition of revenue. Please revise future critical accounting estimates disclosures to provide insight into the judgments that are made in your revenue recognition process. The accounting estimate disclosures are designed to supplement the description of accounting policies in the notes to the financial statements and provide greater insight into the quality and variability of information regarding financial condition and operating performance. Typical disclosures discuss the types of assumptions underlying the most significant and subjective estimates, provide a sensitivity analysis of those assumptions to deviations of actual results, and disclose the circumstances that have resulted in revised assumptions in the past. As an example, we note that significant judgment is used in determining total contract cost for revenue that is recorded over time using the cost-to-cost method.
• Please provide a more robust analysis of the changes in net cash provided by (used in) operating activities. Your analysis should quantify all factors cited and address the material drivers underlying those factors. Please note that merely citing changes in working capital items and other items identified in the statement of cash flows may not provide a sufficient basis to understand how operating cash between comparative periods changed. In addition, please also discuss the underlying drivers responsible for material changes in your cash flows from investing and financing activities for all periods presented. Refer to Section IV.B of SEC Release 33-8350. Quantify variance factors cited pursuant to section 501.04 of the staff's Codification of Financial Reporting Releases for guidance.
• We note that you raised capital in financing transactions and had significant negative cash flows from operations for both the fiscal years presented. Please expand your Liquidity and Capital Resources section to identify any material liquidity deficiencies. Address any known trends or any known demands, commitments, events or uncertainties that will result in or that are reasonably likely to result in liquidity increasing or decreasing in any material way. Your discussion should analyze your ability to meet your liquidity needs both on a long-term and short-term basis. Also, tell us how you considered the going concern guidance in ASC 205-40. Provide us with your proposed future disclosure.
• Please provide more specific and prominent discussion and analysis of the supply shortages, including quantified data and analysis of the impact on your operations, as well as known and anticipated events and trends that may impact your future operations. Discuss your response for managing these events. Please also address the expected impact on your liquidity and capital resources. Refer to Item 303(c) of Regulation S-K and Items 303(b)(1)(i) and 303(b)(2)(ii).

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