Business context and reporting period
This unaudited Form 10-Q covers the quarter and six months ended June 30, 2020. The filing is by KBL Merger Corp. IV, a blank-check company seeking a business combination, focused on healthcare and wellness; this differs from the request metadata naming FORUM MARKETS Inc. The company had not commenced operations or generated operating revenue.
The company was pursuing a proposed combination with 180 Life Sciences Corp. under a July 2019 agreement. The proposed consideration was $175 million in company shares, subject to adjustment, including a reduction for 180 liabilities above $5 million. Stockholders subsequently extended the combination deadline to November 9, 2020.
Financial results and liquidity
| Metric | Three months ended June 30 | Six months ended June 30 |
|---|---|---|
| Operating revenue | None | None |
| General and administrative expenses | 2020: $388,039; 2019: $296,377 | 2020: $635,631; 2019: $561,281 |
| Net income (loss) | 2020: $(2,311,388); 2019: $(10,830) | 2020: $(2,528,799); 2019: $220,765 |
| Interest income | 2020: $2,950; 2019: $355,970 | 2020: $38,438; 2019: $948,284 |
2020 losses included $270,257 of interest expense and a $1,657,522 loss on issuance of convertible notes. No operating margin is meaningful because the company had no operating revenue.
At June 30, 2020, total assets were $12.63 million, including $11.28 million in Trust Account investments, $257,601 in cash, and $787,865 in restricted cash. Total liabilities were $3.50 million; current liabilities were also $3.50 million. Current liabilities included $339,497 of payables and accrued expenses, $795,003 due to a related party, $1,379,815 of advances due to 180, a $337,301 related-party promissory note, $431,745 of convertible notes net of discount, and a $214,188 derivative liability. The convertible notes’ stated principal totaled approximately $3.60 million; substantial debt discounts explain the lower balance-sheet carrying amount. Stockholders’ equity was $5.00 million, alongside $4.13 million of common stock classified as subject to possible redemption.
For the first half of 2020, operating activities used $812,973 of cash and restricted cash; investing activities provided $639,742 and financing activities provided $672,061. Ending cash and restricted cash totaled $1,045,466. Management stated that approximately $386,000 of Trust Account interest was available for taxes; none was withdrawn in the first half.
Material changes and unusual items
- Compared with the first half of 2019, the company moved from net income of $220,765 to a net loss of $2.53 million, while Trust Account interest income fell substantially.
- In June 2020, the company issued secured convertible notes to Dominion Capital and Kingsbrook. The notes bear 10% interest, are due February 11, 2021 unless converted, and have a $5.28 conversion price. Their terms include default penalties, minimum-interest provisions and potential mandatory prepayments; conversion could dilute shareholders.
- The company issued commitment and leak-out shares in connection with the financing. The reported issuance of convertible notes produced a $1.66 million charge.
- Underwriters waived a $4.025 million deferred fee in June 2020; the company recorded this as a credit to additional paid-in capital.
- In April 2020, 67,665 shares were redeemed for $728,884. After quarter-end, 106,186 shares were redeemed for $1,160,695 in connection with the July extension; Trust Account assets were reported at $10.28 million after that redemption.
Outlook, risks and contingencies
Management disclosed substantial doubt about the company’s ability to continue as a going concern through the November 9, 2020 liquidation deadline. If no business combination is completed by then, the company must cease operations, redeem public shares from the Trust Account subject to applicable deductions and claims, and liquidate. Rights and warrants would expire worthless if the company fails to complete a combination.
Management warned that additional financing may be needed and may not be available on acceptable terms; without it, the company could need to conserve liquidity or suspend its transaction efforts. COVID-19 could adversely affect the company’s position, operations or target search, but its impact was not determinable. The filing also identifies potential negative interest rates on Trust Account investments as a risk to redemption value. No specific financial guidance was provided.
Investor facts to verify
- Confirm the registrant identity: the supplied filing is for KBL Merger Corp. IV, not FORUM MARKETS Inc.
- Check the status and closing conditions of the proposed 180 Life Sciences transaction, including the required net tangible assets test and any financing commitments.
- Review the July 2020 extension, redemptions and Trust Account balance, and any subsequent extensions or redemptions.
- Examine the convertible-note balances, conversion and default terms, potential dilution, and repayment or prepayment requirements.
- Assess whether available cash outside the Trust Account and related-party support can fund expenses through the transaction deadline; management disclosed substantial doubt about going concern.