FORUM MARKETS Inc quarterly report, Q2 FY2019

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Business context and reporting period

This is KBL Merger Corp. IV’s unaudited Form 10-Q for the quarter and six months ended June 30, 2019. Although the request identifies FORUM MARKETS Inc, the filing names KBL Merger Corp. IV as the registrant. KBL was a blank-check company seeking a business combination, focused on healthcare and wellness; it had not begun operating activities and reported no operating revenue.

Financial results and position

  • Quarter ended June 30, 2019: net loss of $10,830, versus net income of $211,176 in Q2 2018. Interest income was $355,970; general and administrative expense was $296,377; income tax expense was $70,423.
  • Six months ended June 30, 2019: net income of $220,765, down from $384,634 in the comparable 2018 period. Interest income was $948,284, general and administrative expense was $561,281, and income tax expense was $166,238.
  • Margins: not meaningful because the company had no operating revenue.
  • Cash flow: operating activities used $943,985 in the first half of 2019, compared with $327,907 in 2018. Ending cash outside the Trust Account was $110,293, down from $270,884 at year-end 2018. Investing cash flow included $69.3 million withdrawn from the Trust Account for redemptions, offset by the same amount of redemption payments in financing activities.
  • Assets and liquidity: total assets were $50.24 million, including $50.03 million in Trust Account investments; current assets outside the Trust Account were $208,840. The Trust Account was largely invested in U.S. Treasury bills. Management said only Trust Account interest was available for taxes and other permitted purposes before a business combination.
  • Liabilities: total liabilities were $5.46 million, including $4.03 million of deferred underwriting fees. Current liabilities were $1.43 million, including a $322,043 related-party convertible promissory note, a $400,000 CannBioRx promissory note, and a $650,000 note payable to a target shareholder. These notes were described as non-interest-bearing; the filing reports no long-term debt.

Material changes and transaction developments

Two extension votes led to redemptions of 5,128,523 shares for $52.83 million in March and 1,580,762 shares for $16.48 million in June. Shares subject to possible redemption fell from 10,778,788 at December 31, 2018 to 3,903,924 at June 30, 2019. The filing reports a July 25, 2019 Business Combination Agreement with CannBioRx, after the quarter-end. The proposed consideration was $175 million in KBL shares, subject to adjustment, including a reduction for CannBioRx liabilities above $5 million at closing. Completion remained subject to agreement conditions and other approvals.

Outlook, risks and unusual items

  • The company had until September 9, 2019 to complete a business combination, or December 9, 2019 if it had executed a definitive agreement by September 9. Failure to complete a transaction would trigger winding up and redemption of public shares; warrants and rights would expire worthless.
  • Management concluded that the mandatory liquidation deadline raised substantial doubt about the company’s ability to continue as a going concern through the applicable deadline. It warned that further financing might not be available and that it could have to suspend transaction efforts.
  • The Sponsor agreed to provide monthly trust deposits for extensions, at its discretion. CannBioRx parties had loaned $400,000 for expenses, and a target shareholder agreed to provide equity financing to help satisfy the $5,000,001 minimum net tangible assets test.
  • The filing cites potential dilution from new equity and risks associated with debt financing. It reports no material changes to the risk factors in the 2018 Form 10-K, no legal proceedings, and no off-balance-sheet financing arrangements.

Important facts for investors to verify

  1. Confirm the intended issuer: the supplied filing is for KBL Merger Corp. IV, not FORUM MARKETS Inc.
  2. Reconcile the Trust Account balance: the balance sheet gives $50,028,314, while the MD&A gives $49,933,473 and the notes give $49,993,473 after June redemptions.
  3. Review the final terms, financing, redemption elections, closing conditions, and outcome of the CannBioRx transaction; the agreement was signed after quarter-end.
  4. Confirm the applicable business-combination deadline and available extension funding, given the going-concern warning and Sponsor’s discretion over additional loans.
  5. Assess the related-party and target-shareholder financing terms, including repayment obligations and potential share dilution.