By Joshua Franklin and Lawrence Delevingne

NEW YORK/BOSTON (Reuters) – When American companies recently applied for U.S. government loans meant to help small businesses survive the coronavirus crisis, they had to certify they needed the cash to cover basic needs like salaries and rent. The money, up to $10 million, was meant to tide them over for eight weeks.

Some recipients, though, had considerable cash on hand. Forty-one publicly traded companies that got the emergency aid already had enough to cover basic expenses for two months or more when they applied for the funds, a Reuters analysis found — even if their revenue dropped to zero. Thirty had three months or more of cash. Six had enough to last at least until December, according to the review, which was based on average monthly operating expenses from 2019.

All told, these relatively flush 41 companies were able to secure $104 million in government aid, at a time when legions of smaller companies with little in their coffers were being turned down. Seventeen of the 41 recipients had market capitalizations of at least $100 million.

“It’s disheartening to see relief spending go to companies that don’t appear to desperately need a lifeline,” said Danielle Brian, executive director of the Project On Government Oversight, a Washington-based non-profit that monitors government spending. “This shows just how urgently we need more oversight of this program and the rest of the federal government’s relief spending.”

Reuters examined the latest available financial information for 276 publicly traded companies that applied for the forgivable loans in the first round of the U.S. government’s Paycheck Protection Program (PPP) in April. The list includes companies tracked by data provider FactSquared through the end of April.

A WIDELY CRITICIZED PROGRAM

The PPP program, crafted by Congress to aid small businesses, has come under wide criticism. One critique is that publicly traded companies who received the cash could have raised funds elsewhere, given their easier access to capital markets. Until now, though, the accuracy of the borrowers’ claims about their financial needs to the government has not been closely scrutinized. The Reuters analysis is the most comprehensive to date.

As part of the loan application, company executives had to certify in good faith that “current economic uncertainty makes this loan necessary to support” their ongoing operations. In regulatory filings and in press releases, some of the 41 recipients sounded a different note as they took the loans, signaling optimism about their finances. At least five of the 41 made statements attesting to solid financial health or projecting additional revenues because of the crisis.

Graphic: U.S. companies with cash got emergency loans IMAGE link  

Among them was biotech company Athersys Inc. It issued an upbeat outlook in an April 15 securities filing for a $50 million share offering, in which it also said it had secured a $1.3 million PPP loan.

“As of the date of this prospectus supplement, the COVID-19 pandemic has not had a significant adverse effect on our business,” the company wrote.

Other recipients issued bright outlooks. Medical device maker Repro Med Systems Inc and electronics supplier Micropac Industries Inc said the pandemic had not had a significant impact on their businesses.

Diagnostics company Enzo Biochem Inc said it expected COVID-19 related products to partially offset revenue declines. Infectious disease testing business Accelerate Diagnostics Inc said its first-quarter sales were expected to rise – and entered into a collaboration for coronavirus testing.

‘WE RISKED MISSING THE OPPORTUNITY’

In a statement to Reuters on Tuesday, Athersys said that it fully met the program certification requirements when it applied, due to the uncertain outlook and upcoming costly clinical trials. It said it returned the money after the Treasury Department said in late April that many public companies were unlikely to satisfy the certification criterion. The company was planning to disclose the loan’s return on Thursday, when it releases first-quarter financial results.

“There was uncertainty regarding whether we might be able to complete financing, given market chaos and uncertainty, as well as other factors,” the company said in explaining why it sought the loan. “If we had not applied for the funding at the time we did, we risked missing the opportunity altogether.”

Micropac did not respond to a request for comment on Monday. On Tuesday morning, it said in a securities filing that it planned to return the loan. Enzo, Accelerate and Repro Med did not respond to requests for comment.

The U.S. Treasury, which oversees the program, referred Reuters to Secretary Steven Mnuchin’s recent comments. Mnuchin told reporters last week that he was shocked that some large companies had taken the loans, and said the certifications had been put in the loan application forms to force borrowers to read the requirements. He said there were 26,000 loans over $2 million, and those would likely be audited.

The small business loan program was initially funded with $349 billion. Congress had to top it off with another $310 billion because the money, which was supposed to be handed out on a first-come, first-served basis, ran out while many applicants were still awaiting the grants.

Mnuchin said on Monday that 2.2 million loans worth an average $79,000 had been made in the second round. The $104 million the 41 public companies were granted would have been enough to keep some 1,300 small businesses afloat with an average grant.

‘WHAT THE HELL ARE THEY DOING?’

Jeff Lewis-Mathieu, co-owner of security systems installer Prairie Signal Company Inc, said his small Chicago-based business has been waiting for weeks in its application for a $40,000 PPP loan.

Lewis-Mathieu said he is continuing to pay his two employees, but is not paying himself, and doesn’t know how long the business can survive after a roughly 50% drop in revenue. He said he has watched in frustration as larger public companies get millions of dollars in loans.

“When you see that, it’s like, ‘What the hell are they doing?’ They are sucking all the funds out that guys like me actually need,” Lewis-Mathieu said.

Part of the problem, some critics say, is the loose wording of the program’s rules. Virginia Canter, chief ethics counsel at nonprofit watchdog group Citizens for Responsibility and Ethics in Washington, said the administration should have issued clearer guidance about who’s eligible. “The government should have seen this coming and is now trying to clean it up,” Canter said.

The Treasury has offered amnesty to public companies that return any money they borrowed by May 14, saying it would deem they made the application in good faith if they did so. Of the 41 companies identified by Reuters, 12 have said so far that they already had or planned to return the money by the deadline. In one case, the company said it declined the loan before receiving the money.

Mnuchin said last month that companies could be subject to a Department of Justice investigation if they did not return the money. Several white collar defense attorneys said prosecutors would likely probe the most egregious cases of conflicting representations and seek internal communications showing executives knew they didn’t really need the money.

“Federal regulators are going to be looking at discrepancies very closely. If there’s a big disconnect, subpoenas may be on the way,” said Michael Birnbaum, a former U.S. Securities and Exchange Commission enforcement attorney who is now at Morrison & Foerster LLP.

KEY TERMS LOOSELY DEFINED

Such cases may be hard to prove, however. Alan Wink, managing director at accounting firm EisnerAmper, said it was clear from the Reuters analysis that some healthy companies received PPP funds. But he noted that PPP terms were loosely defined by the government, and that key ones, like “current economic uncertainty” and “necessary,” were open to interpretation.

The Reuters analysis of borrowers’ needs has a limitation: The ratio of cash to average operating expenses used by the news agency does not provide a complete picture of a company’s financial health. The analysis is based on financial information disclosed through Wednesday morning.

Still, Wink and two finance professors consulted for this article said the Reuters metric was a conservative way to assess the ability of a business to meet operating expenses.

Some of the companies that took loans said publicly they were financially secure, with some seeing increased demand for their products around the time they asked for the aid.

Athersys, for example, said its stem cell therapy was being tested on COVID-19 patients. The company’s shares have more than doubled since mid-March, giving it a market value of more than $500 million.

In its April 15 announcement, Athersys noted that it had $37.5 million in cash and cash equivalents as of April 9. That’s enough to cover nearly nine months of operating expenses, based on the company’s average expenses for 2019.

In its statement to Reuters, Athersys said the nine-month ratio did not present a complete picture of its financial condition and operational plans, which include two clinical trials. “Our historical spending is not an accurate indicator of our future needs given how our business is evolving,” the company said.

Repro Med said on Monday it was an essential business under New York guidelines and had seen net sales rise 27% in the first quarter. The company said its devices, which are used to help inject drugs, allow high-risk patients to receive treatment at-home, “important advantages during these challenging times.”

“We have not experienced any material disruption to our business thus far,” Chief Executive Don Pettigrew said in the statement. The company, which has a market value of about $430 million, secured some $1.5 million under the PPP in late April.

A HEALTHY RISE IN REVENUE

Accelerate Diagnostics received a $4.78 million PPP loan on April 14. The company has a market value of around $570 million. The next day, the company noted in a press release that first-quarter sales rose 28% to $2.3 million from the same period in 2019, based on preliminary figures. It also announced a new agreement to distribute its coronavirus antibody tests in the United States and abroad.

It said total cash and cash equivalents were $92 million as of March 31. That’s enough to cover average 2019 operating expenses for 13 months, the review found.

Another company, Enzo Biochem, said on April 9 it “expects COVID-19 related products and services to partially offset revenue declines” caused by the crisis. The company, with a market value of about $130 million, said it had $48 million in cash as of March 31. That was enough to cover seven months of its average 2019 operating expenses.

The company applied for and got a PPP loan of nearly $7 million, a regulatory filing shows. On April 23, it announced it had launched its first COVID-19 diagnostic test, sending its shares soaring.

Micropac makes electronic components for the defense, medical and other industries. The company, with a market capitalization of about $34 million, had enough cash to cover eight months of average 2019 operating expenses as of February 29, the review shows.

Micropac “has not experienced significant financial impact directly related to the pandemic,” it said in a regulatory filing on April 14. Three days later, it obtained nearly $2 million in PPP funds.

(Reporting by Lawrence Delevingne and Joshua Franklin. Additional reporting by Noel Randewich. Editing by Paritosh Bansal, Greg Roumeliotis and Michael Williams.)