Cheesecake Factory settles SEC's first Covid-related enforcement

The Cheesecake Factory has settled what the SEC says is its first charging of a public company for allegedly making misleading disclosures about the financial impact of the Covid-19 pandemic.

The SEC’s administrative action says The Cheesecake Factory in mid-March faced ‘an unprecedented challenge to its business’ as a result of the health crisis and issued several disclosures regarding the effect of, and its response to, the pandemic. Some of those disclosures failed to adequately inform investors of the extent of the pandemic’s impact on the company’s operations and financial condition in the period from late-March to mid-April 2020, when the company secured additional financing, the agency says.

During this period, the SEC says, The Cheesecake Factory began taking steps to conserve cash and increase short-term liquidity by, for example, informing its landlords that it would not be paying April rent due to the ‘severe decrease in restaurant traffic [due to Covid-19 that] has severely decreased our cash flow and inflicted a tremendous financial blow to our business’, noting that it ‘hope[d] to resume our rent payments as soon as reasonably possible.’

According to the commission, the company by at least March 23 was seeking additional liquidity either by taking on debt or issuing equity to private equity investors. In presentations shared with lenders and potential investors, The Cheesecake Factory disclosed its cash position and projected that the company had cash to support roughly 16 weeks of operations under the prevailing conditions, according to the agency. During this period, internal company documents noted that it was experiencing negative cash flows of $6 million per week, the SEC says.

The agency states that on March 23 The Cheesecake Factory filed a Form 8K disclosing that it was withdrawing previously issued financial guidance due to economic conditions caused by the pandemic and including a copy of its press release announcing that it was transitioning to an ‘off-premise model’ – to-go and delivery services – that was ‘enabling the company’s restaurants to operate sustainably at present under this current model.’ The Form 8K and attached press release did not disclose the landlord letters or the company’s negative cash flow rate, the SEC states.

On April 3 The Cheesecake Factory filed another Form 8K including a copy of an April 2 press release that provided a preliminary Q1 2020 sales update given the impact of the pandemic and stated that ‘the restaurants are operating sustainably at present under this [off-premise] model,’ according to the SEC.

These March 23 and April 3 disclosures regarding the sustainability of the restaurant operations did not disclose that The Cheesecake Factory was excluding expenses attributable to corporate operations from its claim of sustainability; that the company was, in fact, losing roughly $6 million in cash each week; and that it had only around 16 weeks of cash remaining, even after a $90 million draw down on its revolving credit facility, the SEC states.

In addition, the company’s March 23 disclosure that it was ‘evaluating additional measures to further preserve financial flexibility’ did not disclose the March 18 landlord letters stating that the company would not pay April rent, according to the agency. As such, the SEC says, The Cheesecake Factory’s March 23 and April 3 Forms 8K were ‘materially false and misleading.’

On April 20, the company announced a $200 million subscription agreement for the sale of convertible preferred stock to a private equity investor, which enhanced The Cheesecake Factory’s liquidity position, according to the regulator.

The Cheesecake Factory has agreed to pay $125,000 to resolve the matter without admitting or denying wrongdoing. The SEC states that it took into account the company’s co-operation with its officials.

A request for comment from the company was not returned. In a statement filed with the SEC, The Cheesecake Factory notes the settlement and says it fully co-operated with the agency.

‘During the pandemic, many public companies have discharged their disclosure obligations in a commendable manner, working proactively to keep investors informed of the current and anticipated material impacts of Covid-19 on their operations and financial condition,’ SEC chair Jay Clayton says in a statement.

‘As our local and national response to the pandemic evolves, it is important that issuers continue their proactive, principles-based approach to disclosure, tailoring these disclosures to the firm and industry-specific effects of the pandemic on their business and operations. It is also important that issuers [that] make materially false or misleading statements regarding the pandemic’s impact on their business and operations be held accountable.’

Stephanie Avakian, director of the SEC’s enforcement division, says: ‘The enforcement division, including the coronavirus steering committee, will continue to scrutinize Covid-related disclosures to ensure investors receive accurate, timely information, while also giving appropriate credit for prompt and substantial co-operation in investigations.’