Business Context and Reporting Period
The filing is Monocle Acquisition Corporation’s unaudited Form 10-Q for the quarter and six months ended June 30, 2020, rather than a filing by AerSale Corp. Monocle is a blank-check company formed to complete a business combination, with a stated focus on aerospace and defense, industrial, technology, and telecommunications businesses. It had not commenced operating activities or generated operating revenue.
Monocle had entered into a proposed business combination with AerSale Corp. The filing was signed August 13, 2020, and disclosed that the parties were discussing revisions to the transaction terms.
Financial Metrics
| Metric | Three Months Ended June 30, 2020 | Three Months Ended June 30, 2019 | Six Months Ended June 30, 2020 | Six Months Ended June 30, 2019 |
|---|---|---|---|---|
| Operating costs | $358,642 | $162,884 | $645,287 | $246,826 |
| Interest income | $185,100 | $1,053,042 | $807,921 | $1,596,310 |
| Net income (loss) | $(201,934) | $679,520 | $13,791 | $1,035,578 |
| Net income (loss) per redeemable share | $0.01 | $0.05 | $0.03 | $0.07 |
| Net loss per non-redeemable share | $(0.06) | $(0.02) | $(0.11) | $(0.03) |
The company had no operating revenue; interest income on Trust Account investments was its principal source of income. No operating margin or revenue margin is meaningful for this pre-combination entity.
- Cash and cash equivalents outside the Trust Account were $149,321 at June 30, 2020, down from $319,399 at December 31, 2019.
- Trust Account assets were $177.1 million, compared with $176.6 million at December 31, 2019.
- Current liabilities were $720,793, including a $150,000 related-party promissory note.
- Common stock subject to possible redemption was classified as temporary equity at $171.7 million.
- Six-month operating cash flow was negative $680,063. Cash provided by investing activities was $359,985, primarily from Trust Account withdrawals for taxes, and financing activities provided $150,000 from related-party borrowing.
- The company had no long-term debt, capital leases, or off-balance-sheet arrangements reported.
Material Changes Versus Prior Comparable Period
- Second-quarter net income of $679,520 in 2019 became a net loss of $201,934 in 2020, primarily because interest income declined from $1.05 million to $185,100 while operating costs increased from $162,884 to $358,642.
- Six-month net income declined to $13,791 from $1.04 million, as interest income fell approximately 49% and operating costs increased approximately 161%.
- Cash outside the Trust Account declined by $170,078 during the first six months of 2020.
- The company borrowed $150,000 from its founders under non-interest-bearing convertible promissory notes. The notes permit conversion of up to $1.5 million into post-combination units at $10.00 per unit.
- The previously disclosed debt and FILO commitment letters for the AerSale transaction terminated on May 31, 2020.
- On August 13, 2020, Amendment No. 1 extended the merger agreement termination date to September 30, 2020.
Guidance, Outlook, Risks, and Unusual Items
- Monocle had until November 11, 2020 to complete a business combination, with a possible three-month extension to February 11, 2021 if the sponsor deposited $1.725 million into the Trust Account. The sponsor was not obligated to provide the extension funding.
- Management stated that the liquidity condition and mandatory liquidation date raised substantial doubt about the company’s ability to continue as a going concern through November 11, 2020.
- If no business combination is completed within the applicable period, the company must redeem public shares and liquidate. Warrants would expire worthless in a liquidation.
- The proposed AerSale transaction contemplated $400 million of aggregate consideration: $250 million in cash, subject to adjustment, and 15 million NewCo shares valued at $150 million. Up to 2.5 million additional earnout shares could be issued based on specified share-price targets.
- The company and AerSale were discussing revised transaction terms, and the filing provided no assurance that a revised agreement or the business combination would be completed.
- COVID-19 could adversely affect the search for a business combination, financing availability, AerSale’s commercial aviation-related operations, and the ability to close the transaction.
- A contingent $6.04 million fee would be payable to the IPO underwriters upon completion of a business combination. Legal fees related to a successful transaction were also contingent and not determinable.
- The filing identified potential negative interest rates on Trust Account investments as a risk to the per-share redemption amount.
- Disclosure controls and procedures were assessed as effective, with no material change in internal control over financial reporting reported.
Most Important Facts to Verify
- Confirm that the intended filing entity is Monocle Acquisition Corporation, not AerSale Corp., because the supplied filing is a SPAC report.
- Verify whether the AerSale merger agreement was amended, revised, completed, or terminated after the September 30, 2020 extended termination date.
- Verify whether the company obtained the $1.725 million extension funding and whether a liquidation deadline was extended to February 11, 2021.
- Assess the sufficiency of the $149,321 of unrestricted cash relative to $720,793 of current liabilities and ongoing transaction expenses.
- Review financing obtained after June 30, 2020, including any replacement for the terminated debt and FILO commitment letters.
- Reconcile the six-month 2019 net income: the financial statements report $1,035,578, while the MD&A text states $1,034,578.