Business context and reporting period
Important entity clarification: Although the request identifies Southland Holdings, Inc., this filing is Southland’s proposed SPAC merger partner, Legato Merger Corp. II (Nasdaq: LGTO), Form 10-Q for the quarter ended September 30, 2022. It reports Legato’s pre-merger SPAC activity, not Southland’s operating results. Legato had not commenced operations and reported no revenue.
Financial results and position
| Metric | Three months ended September 30, 2022 | Nine months ended September 30, 2022 |
|---|---|---|
| Revenue | None | None |
| Operating costs | $276,080 | $1,025,775 |
| Trust investment income | $1,406,789 | $1,785,385 |
| Income tax expense | $279,080 | $343,430 |
| Net income | $851,629 | $416,180 |
- At September 30, cash outside the trust was $422,073; working capital was $506,419. Trust investments were $281.5 million, primarily money-market investments in U.S. government securities.
- Total assets were $282.2 million; total liabilities were $9.8 million, including $9.66 million of deferred underwriting commissions. Current liabilities were $161,489. Legato reported no long-term debt or working-capital loans.
- Cash used in operating activities for the nine months was $1.12 million; $442,882 was withdrawn from the trust account, and cash declined by $677,958.
- Profit reflected trust investment income, not operating revenue. The filing does not present operating margins; they are not meaningful for this pre-combination SPAC.
Material changes versus prior comparable period
The filing provides no three-month 2021 comparative; its 2021 results cover only inception on July 14 through September 30 and show a $549 net loss. For the nine-month 2022 period, Legato reported $416,180 net income versus that inception-period loss. Trust investment income drove the 2022 result. From December 31, 2021, cash fell from $1.10 million to $422,073, while trust investments rose from $280.2 million to $281.5 million.
Merger, outlook, risks and contingencies
- Legato and Southland Holdings LLC signed a merger agreement on May 25, 2022. Stated consideration included $343 million in stock, up to $105 million in contingent earnout stock, and $50 million cash, subject to the agreement’s terms and possible use of Southland cash distributions in lieu of cash consideration.
- Earnout shares depend on adjusted EBITDA: 2022 thresholds are $125 million (base) and $145 million (bonus); 2023 thresholds are $145 million (base) and $165 million (bonus). The agreement allows up to 10,344,828 earnout shares in aggregate.
- The filing expected closing in the second half of 2022, subject to stockholder and Southland member approvals and other conditions. That was an expectation, not confirmation of closing.
- Legato had until May 24, 2023 to complete a business combination, absent an approved extension. Failure to complete one could require liquidation and dissolution; management disclosed substantial doubt about Legato’s ability to continue as a going concern and planned to complete the combination by the deadline.
- Management believed available working capital and borrowing capacity would suffice through the earlier of a combination or one year from filing, but warned additional financing might be needed and was not assured. Trust funds are subject to public-share redemptions; significant redemptions could reduce transaction cash.
- The filing identifies possible effects from COVID-19 and the Russia–Ukraine conflict as uncertain. It also warns that the Inflation Reduction Act’s 1% stock-repurchase excise tax, effective for relevant repurchases from 2023, could reduce cash available for a combination or liquidation.
- Related-party administrative services cost $45,000 for the quarter and $135,000 for the nine months. Legato reported effective disclosure controls and no material changes in internal control over financial reporting.
Most important facts for investors to verify
- Confirm the correct issuer and obtain Southland’s own operating financial statements; this 10-Q is Legato’s, not Southland’s.
- Verify whether the merger closed, whether its terms changed, and the actual financing, redemption and dilution outcomes.
- Review Southland’s performance against the contractual adjusted EBITDA earnout thresholds and the agreement’s calculation provisions.
- Assess Legato’s combination deadline, extension or liquidation status, remaining unrestricted cash, and any subsequent financing or share redemptions.
- Evaluate the treatment and payment of deferred underwriting commissions and any applicable excise tax.