Business Context and Reporting Period
This filing is the fiscal-year 2019 Form 10-K of Monocle Acquisition Corporation, not an operating-company filing for AerSale Corp. Monocle was a blank-check company formed on August 20, 2018, with no operating business or revenue, established to complete a business combination. The reporting period ended December 31, 2019; the filing was signed March 2, 2020.
On December 8, 2019, Monocle entered into a proposed business combination with AerSale Corp. Under the agreement, NewCo would acquire AerSale for stated aggregate consideration of $400 million, consisting of $250 million in cash and 15 million NewCo common shares valued at $150 million, subject to adjustments and closing conditions.
Financial Metrics and Liquidity
| Metric | Fiscal 2019 | Comparable 2018 period |
|---|---|---|
| Operating revenue | $0 | $0 |
| Interest income | $3.165 million | $0 |
| Operating costs | $1.574 million | $451 |
| Income tax provision | $628 thousand | $0 |
| Net income (loss) | $964 thousand | $(451) |
| Cash used in operating activities | $(1.906) million | $0 |
| Cash and cash equivalents outside the trust | $319 thousand | $41 thousand |
| Trust-account cash and marketable securities | $176.626 million | $0 |
| Total assets | $177.154 million | $418 thousand |
| Current liabilities | $505 thousand | $393 thousand |
| Common stock subject to possible redemption | $171.649 million | $0 |
| Total stockholders’ equity | $5.000 million | $25 thousand |
The company had no operating margins or operating cash flow generation because it had not commenced operations. Reported net income was driven by interest earned on trust-account investments, partially offset by operating expenses and taxes. The filing does not provide a meaningful operating EBITDA or free-cash-flow measure.
The February 2019 IPO raised gross proceeds of $172.5 million, and the concurrent private placement raised $7.175 million. After transaction costs of $4.014 million, $174.225 million was placed in the trust account. The company withdrew $764 thousand of trust-account interest through December 31, 2019 for tax obligations. It had no long-term debt or off-balance-sheet arrangements at year-end.
Material Changes Versus the Prior Comparable Period
- Monocle completed its IPO and private placement in February 2019, materially increasing assets, cash, temporary equity and trust-account investments.
- Interest income increased from zero to $3.165 million, producing net income of $964 thousand compared with a 2018 net loss of $451.
- Operating costs increased to $1.574 million, reflecting public-company compliance, organizational activities, target-search expenses and proposed transaction costs.
- Cash used in operating activities was $1.906 million in 2019, while financing activities provided $175.645 million and investing activities primarily reflected the funding of the trust account.
- On December 8, 2019, Monocle moved from a general target search to a signed merger agreement with AerSale.
- As of December 31, 2019, 16,994,946 public shares were classified as subject to possible redemption at $10.10 per share.
Guidance, Outlook, Risks and Unusual Items
Management expected no operating revenue until completion of an initial business combination. Monocle was required to complete a transaction by November 11, 2020, with a possible three-month extension to February 11, 2021 if the sponsor deposited $1.725 million into the trust account. Failure to close would require redemption of the public shares and liquidation, and the warrants would expire worthless.
The proposed AerSale transaction remained subject to stockholder approval, financing, redemption levels and other customary conditions. Financing commitments included a $150 million senior secured asset-based revolving facility and, after year-end, a commitment for up to $75 million of senior secured first-in/last-out term financing. The financing commitments were subject to conditions and expiration dates, creating execution risk.
If available cash were insufficient, cash consideration could be reduced by up to $50 million and replaced with up to 500,000 shares of 5% Series A Convertible Preferred Stock. AerSale holders could also receive up to 2.5 million earnout shares based on future NewCo share-price thresholds of $12.50 and $14.00.
The auditors issued an unqualified opinion but highlighted substantial doubt about the company’s ability to continue as a going concern because of the mandatory liquidation deadline and limited funds outside the trust account. The financial statements contained no liquidation adjustments.
- Redemption requests could reduce cash available for the AerSale transaction and trigger the transaction’s $50 million shortfall limitation.
- The board did not obtain an independent fairness opinion for the proposed business combination.
- Cowen had potential conflicts because it held founder shares and would receive a $6.038 million fee only if a business combination closed.
- Public warrants were exercisable at $11.50 per share after a business combination and could expire worthless or be redeemed under specified conditions.
- Founder, sponsor and related-party interests could influence transaction approval and the use of redemption or financing alternatives.
- Substantial dilution could result from the 15 million shares issued to AerSale holders, earnout shares, preferred stock, founder shares and warrant exercises.
- The filing states that disclosure controls were effective as of December 31, 2019; management’s internal-control assessment and auditor attestation were not included because of applicable newly public company transition provisions.
Investor Verification Checklist
- Verify that the filing entity is Monocle Acquisition Corporation and distinguish its SPAC financial statements from AerSale’s operating financial statements.
- Review the latest merger agreement, proxy/prospectus and subsequent filings for closing status, redemption levels, financing availability and transaction amendments.
- Reconcile the $176.626 million trust balance with taxes, permitted withdrawals, redemption obligations and the proposed $250 million cash consideration.
- Assess the impact of the ABL and FILO financing commitments, including conditions, maturity dates, collateral and actual funding.
- Model dilution from the 15 million consideration shares, up to 2.5 million earnout shares, potential preferred stock and approximately 18.0 million public and private warrants.
- Review AerSale’s audited historical financial statements, operating trends, debt, customer concentration and government-contract exposure in the S-4 materials.
- Evaluate the going-concern disclosure and the risk that failure to complete a transaction would result in liquidation and worthless warrants.