Business context and reporting period
KBL Merger Corp. IV filed this unaudited Form 10-Q for the quarter ended March 31, 2020. The registrant is a blank-check company focused on healthcare and wellness; it had not commenced operations or generated operating revenue. Its principal activity was pursuing a business combination, including a proposed transaction with 180 Life Sciences Corp. The filing metadata names FORUM MARKETS Inc., but the filing itself identifies KBL Merger Corp. IV as the registrant.
Financial results and position
- Revenue and earnings: No operating revenue. Q1 2020 general and administrative expense was $247,592; interest income was $35,488; net loss was $217,411, or $0.05 per basic and diluted share. In Q1 2019, net income was $231,595, or $0.06 basic and $0.02 diluted per share.
- Cash flow: Operating cash use was $201,217 in Q1 2020, versus $307,148 in Q1 2019. Investing activities used $66,857, while financing activities provided $4,832. Cash outside the trust declined $263,242 to $283,394.
- Assets and liquidity: At March 31, 2020, total assets were $12.37 million, including $11.98 million held in the trust account and $283,394 of cash outside it. Current assets were $387,885 versus current liabilities of $3.21 million.
- Liabilities: Total liabilities were $7.24 million, including $3.21 million current liabilities, a $4.025 million deferred underwriting fee, a $371,178 related-party convertible promissory note, $795,003 of sponsor advances, and $1.70 million due to 180. Stockholders’ equity was $5.00 million. Trust funds are generally restricted pending a business combination or liquidation.
- Interest and margins: Operating margin and conventional revenue-based profitability measures are not meaningful because the company had no operating revenue. Trust-account interest income fell from $592,314 in Q1 2019 to $35,488 in Q1 2020.
Material changes and transaction developments
The company shifted from net income in Q1 2019 to a net loss in Q1 2020, primarily as trust interest income decreased. Operating expenses declined to $247,592 from $264,904. The trust balance increased from $11.88 million at December 31, 2019 to $11.98 million at March 31, 2020, reflecting interest and sponsor-funded deposits; it fell to $11.27 million after subsequent redemptions.
The proposed business combination would acquire 180 Life Sciences for shares valued at $175 million, subject to adjustment, including a reduction for 180 liabilities exceeding $5 million at closing. The agreement and transaction remained subject to conditions. On April 8, 2020, stockholders extended the deadline to complete a business combination to July 9, 2020; 67,665 shares were redeemed for $728,884.
Outlook, risks and unusual items
- Management stated that the company’s liquidity and potential mandatory liquidation raised substantial doubt about its ability to continue as a going concern through July 9, 2020. It warned that additional financing might be unavailable and that it could need to conserve cash or suspend transaction efforts.
- If no business combination is completed by the applicable deadline, public shares are to be redeemed from the trust, and warrants and rights may expire worthless. The filing describes extensions and transaction timing as subject to stockholder and other approvals.
- Management said the COVID-19 pandemic could adversely affect the company’s financial position, operations, or target search, but the specific impact was not determinable.
- Key transaction-related obligations include $4.025 million of deferred underwriting fees payable upon a business combination and interest-free loans from 180 and related parties. Sponsor-related loans are generally due upon a business combination or liquidation; up to $1 million may be convertible into post-combination units at the lender’s discretion under specified terms.
- The filing reports no material changes to the risk factors in the 2019 Form 10-K. Management reported effective disclosure controls and no material change in internal control over financial reporting during the quarter.
Important facts to verify
- Confirm the transaction’s current status, required approvals, financing commitments, closing conditions, and any later changes to the July 9, 2020 deadline.
- Verify cash available outside the trust, the availability and terms of further sponsor or 180 financing, and the repayment priority of outstanding related-party obligations.
- Reconcile the $4.025 million deferred underwriting fee with the MD&A passage that refers to $750,000 of deferred commissions; the balance sheet and notes report $4.025 million.
- Check subsequent redemptions and the resulting trust balance and public shares outstanding. The filing reports 4,424,102 common shares outstanding as of May 22, 2020.
- Assess the going-concern warning, liquidation risk, and the potential effects of COVID-19 on the transaction and target search.