Business context and reporting period
This is Churchill Capital Corp II’s unaudited Form 10-Q for the quarter ended March 31, 2021, filed May 19, 2021—not an operating-company quarterly report from Skillsoft Corp. Churchill was a SPAC and had not commenced operations. Its proposed business combination involved Skillsoft, with a related Global Knowledge transaction also contemplated.
Financial results and position
| Metric | Q1 2021 | Q1 2020 / comparison |
|---|---|---|
| Operating revenue | None; Churchill reported no operating activity or revenue | None |
| Operating and formation costs | $1.58 million | $0.30 million |
| Net income (loss) | $41.74 million | $(8.82) million |
| Derivative-liability gain (loss) | $43.27 million | $(10.35) million |
| Interest income on trust investments | $59,701 | $2.25 million |
| Cash used in operating activities | $1.49 million | $0.53 million |
The 2021 profit primarily reflects a noncash gain from remeasuring derivative liabilities, rather than operating earnings. Trust-account securities were $697.02 million at quarter-end; cash outside the trust was $2.38 million. Total liabilities were $110.39 million, including $85.04 million of derivative liabilities and a $21.37 million deferred underwriting fee payable. Stockholders’ equity was $5.00 million, with $584.12 million of Class A shares presented as temporary equity subject to possible redemption. No operating margins are meaningful because the SPAC had no operating revenue.
Material changes and unusual items
- Net income shifted from a loss to a profit year over year, mainly because derivative liabilities generated a $43.27 million gain in Q1 2021 versus a $10.35 million loss in Q1 2020. The change in fair value is noncash and can make reported earnings volatile.
- Trust-account assets were broadly stable compared with December 31, 2020, while outside cash declined from $3.87 million to $2.38 million. Cash used in operations increased from the prior-year quarter.
- Following the SEC’s April 2021 warrant-accounting statement, management concluded certain warrants and other derivative instruments should be liability-classified and remeasured at fair value. Churchill stated that prior financial statements for 2019 and 2020, including Q1 2020, should no longer be relied upon and were restated. The filing reports a material weakness in disclosure controls related to this accounting issue; controls were deemed ineffective as of March 31, 2021.
Outlook, transaction, and risks
- Churchill expected to use substantially all trust funds, together with potential stock or debt financing, to complete its business combination. Management said available funds should meet needs for a reasonable period, assessed as one year from issuance of the financial statements; additional financing could still be needed to complete the transaction or address significant redemptions.
- The proposed Skillsoft merger required Churchill and Skillsoft shareholder approvals and other closing conditions. The described transaction included $505 million cash and $20 million of second-out debt as consideration related to the redemption of Class C shares. Prosus’s expected PIPE investment was $500 million for 50 million shares; the filing also describes other conditional subscriptions. These were proposed transaction terms, not completed-quarter results.
- The SPAC’s combination deadline was July 1, 2021, extendable to October 1, 2021 if a qualifying agreement was in place by July 1. Failure to complete a transaction would lead to redemption and liquidation; warrants could expire worthless.
- Shareholders had filed, or threatened, lawsuits alleging fiduciary-duty and securities-disclosure violations in connection with the transaction. The company intended to defend the matters but could not estimate potential losses. The filing also disclosed a $21.37 million deferred underwriting fee payable upon a successful combination, subject to waiver if no combination is completed.
- On May 3, 2021, Churchill reported that CFIUS had found no unresolved national-security concerns regarding the Prosus PIPE investment. No financial guidance for Skillsoft’s post-combination operations was provided.
Important facts for investors to verify
- Confirm the eventual closing status and final terms of the Skillsoft and Global Knowledge transactions, including financing, redemptions, debt and dilution.
- Review the restated financial statements and related disclosures, including the valuation methods and assumptions for derivative liabilities.
- Assess remediation of the material weakness in disclosure controls and any subsequent auditor or regulatory developments.
- Check the status and potential financial impact of the transaction-related litigation and the deferred underwriting fee.
- Distinguish Churchill’s SPAC cash, trust assets and mark-to-market earnings from Skillsoft’s operating performance; this filing does not provide Skillsoft operating results or post-merger guidance.