(EDGAR Online via COMTEX) -- Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
The following discussion and analysis of the company's financial condition and results of operations should be read in conjunction with our audited financial statements and the notes related thereto which are included in "Item 8. Financial Statements and Supplementary Data" of this Annual Report on Form 10-K. Certain information contained in the discussion and analysis set forth below includes forward-looking statements. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of many factors, including those set forth under "Cautionary Note Regarding Forward-Looking Statements," "Item 1A. Risk Factors" and elsewhere in this Annual Report on Form 10-K.
We are a blank check company formed under the laws of the State of Delaware on August 20, 2018 for the purpose of effecting a merger, share exchange, asset acquisition, stock purchase, recapitalization, reorganization or similar business combination with one or more target businesses. We intend to effectuate our initial business combination using cash from the proceeds of our initial public offering and the sale of private units that occurred simultaneously with the completion of our initial public offering, our common equity or any preferred equity that we may create in accordance with the terms of our charter documents, debt or a combination of cash, common or preferred equity and debt.
The issuance of additional shares of common stock or the creation of one or more classes of preferred stock during our initial business combination:
� may significantly dilute the equity interest of investors in our initial public offering who would not have pre-emption rights in respect of any such issue;
� may subordinate the rights of holders of common stock if the rights, preferences, designations and limitations attaching to the preferred shares are senior to those afforded our shares of common stock and/or our other securities;
� could cause a change in control if a substantial number of shares of common stock are issued, which may affect, among other things, our ability to use our net operating loss carry forwards, if any, and could result in the resignation or removal of our present officers and directors;
� may have the effect of delaying or preventing a change of control of us by diluting the share ownership or voting rights of a person seeking to obtain control of us; and
� may adversely affect prevailing market prices for our shares of common stock.
Similarly, if we issue debt securities or otherwise incur significant indebtedness, it could result in:
� default and foreclosure on our assets if our operating revenues after our initial business combination are insufficient to repay our debt obligations;
� acceleration of our obligations to repay the indebtedness even if we make all principal and interest payments when due if we breach certain covenants that require the maintenance of certain financial ratios or reserves without a waiver or renegotiation of that covenant;
� our immediate payment of all principal and accrued interest, if any, if the debt is payable on demand;
� our inability to obtain necessary additional financing if any document governing such debt contains covenants restricting our ability to obtain such financing while the debt security is outstanding;
� our inability to pay dividends on our shares of common stock;
� using a substantial portion of our cash flow to pay principal and interest on our debt, which will reduce the funds available for dividends on our common stock if declared, expenses, capital expenditures, acquisitions and other general corporate purposes;
� limitations on our flexibility in planning for and reacting to changes in our business and in the industry in which we operate;
� increased vulnerability to adverse changes in general economic, industry and competitive conditions and adverse changes in government regulation; and
� limitations on our ability to borrow additional amounts for expenses, capital expenditures, acquisitions, debt service requirements, execution of our strategy and other purposes and other disadvantages compared to our competitors who have less debt.
We expect to continue to incur significant costs in the pursuit of our acquisition plans. We cannot assure you that our plans to complete a business combination will be successful.
Results of Operations
We have neither engaged in any operations nor generated any revenues to date. Our only activities from inception to December 31, 2019 were organizational activities, those necessary to prepare for our initial public offering, described below, identifying a target company for a business combination and activities in connection with the proposed Business Combination with AerSale. We do not expect to generate any operating revenues until after the completion of our initial business combination. We generate non-operating income in the form of interest income on marketable securities held in the trust account. We incur expenses as a result of being a public company (for legal, financial reporting, accounting and auditing compliance), as well as for due diligence expenses in connection with completing a business combination. We are also incurring expenses in connection with our proposed Business Combination with AerSale.
For the year ended December 31, 2019, we had net income of $963,510, which consists of interest income on marketable securities held in the trust account of $3,164,817, offset by operating costs of $1,573,512 and a provision for income taxes of $627,795.
For the period from August 20, 2018 (inception) through December 31, 2018, we had a net loss of $451, which consists of operating costs.
Liquidity and Capital Resources
As of December 31, 2019, we had cash of $319,399. Until the consummation of our initial public offering, our only source of liquidity was an initial purchase of common stock by our founders and loans from our sponsor.
On February 11, 2019, we consummated our initial public offering of 17,250,000 units at a price of $10.00 per unit, which includes the full exercise by the underwriters of their over-allotment option in the amount of 2,250,000 units, at $10.00 per unit, generating gross proceeds of $172,500,000. Simultaneously with the closing of our initial public offering, we consummated the sale of an aggregate of 717,500 private units to our founders at a price of $10.00 per private unit, generating gross proceeds of $7,175,000.
Following our initial public offering, including the full exercise of the underwriters' over-allotment option, and the sale of the private units, a total of $174,225,000 was placed in the trust account, and we had $1,480,492 of cash held outside of the trust account, after payment of costs related to our initial public offering, and available for working capital purposes. We incurred $4,014,101 in transaction costs, including $3,450,000 of underwriting fees and $564,101 of other costs.
As of December 31, 2019, we had cash and marketable securities held in the trust account of $176,625,548. Interest income on the balance in the trust account will be used by us to pay franchise and income taxes. Through December 31, 2019, we have withdrawn $764,269 of interest earned on the trust account to pay our franchise and income tax obligations.
We intend to use substantially all of the funds held in the trust account, including any amounts representing interest earned on the trust account (less taxes payable) to acquire a target business or businesses and to pay our expenses relating thereto. To the extent that our capital stock or debt is used, in whole or in part, as consideration to complete our initial business combination, the remaining proceeds held in the trust account as well as any other net proceeds not expended will be used as working capital to finance the operations of the target business or businesses. Such working capital funds could be used in a variety of ways including continuing or expanding the target business' operations, for strategic acquisitions and for marketing, research and development of existing or new products. Such funds could also be used to repay any operating expenses or finders' fees which we had incurred prior to the completion of our initial business combination if the funds available to us outside of the trust account were insufficient to cover such expenses.
We intend to use the funds held outside the trust account primarily to identify and evaluate prospective acquisition candidates, perform business due diligence on prospective target businesses, travel to and from the offices, plants or similar locations of prospective target businesses, review corporate documents and material agreements of prospective target businesses, select the target business or businesses to acquire and structure, negotiate and consummate a business combination.
In order to fund working capital deficiencies or finance transaction costs in connection with a business combination, our founders or an affiliate of our founders or certain of our officers and directors or their affiliates may, but are not obligated to, loan us funds as may be required. If we complete a business combination, we will repay such loaned amounts. If a business combination does not close, we may use a portion of the working capital held outside the trust account to repay such loaned amounts but no proceeds from our trust account would be used for such repayment. Up to $1,500,000 of such loans may be convertible into units of the post-business combination entity identical to the private units, at a price of $10.00 per unit at the option of the lender.
If we are unable to raise additional capital, we may be required to take additional measures to conserve liquidity, which could include, but not necessarily be limited to, suspending the pursuit of a potential transaction. We cannot provide any assurance that new financing will be available to it on commercially acceptable terms, if at all.
If we are unable to complete a business combination by November 11, 2020 (or February 11, 2021, if we extend our time to complete a business combination as described elsewhere in this report), we will (i) cease all operations except for the purpose of winding up, (ii) as promptly as reasonably possible but not more than ten business days thereafter, redeem the outstanding public shares, at a per-share price, payable in cash, equal to the aggregate amount then on deposit in the trust account including interest earned on the funds held in the trust account and not previously released to us to pay franchise and income taxes (less up to $100,000 of interest to pay dissolution expenses), divided by the number of then outstanding public shares, which redemption will completely extinguish public stockholders' rights as stockholders (including the right to receive further liquidating distributions, if any), subject to applicable law, and (iii) as promptly as reasonably possible following such redemption, subject to the approval of our remaining stockholders and our board of directors, dissolve and liquidate, subject in each case to our obligations under Delaware law to provide for claims of creditors and the requirements of other applicable law.
In addition, in connection with our assessment of going concern considerations in accordance with Financial Accounting Standard Board's Accounting Standards Update 2014-15, "Disclosures of Uncertainties about an Entity's Ability to Continue as a Going Concern," management has determined that the mandatory liquidation and subsequent dissolution raises substantial doubt about our ability to continue as a going concern.
The liquidity condition and date for mandatory liquidation raise substantial doubt about our ability to continue as a going concern through November 11, 2020, the currently scheduled liquidation date. No adjustments have been made to the carrying amounts of assets or liabilities should we be required to liquidate after November 11, 2020.
Off-Balance Sheet Arrangements
We have no obligations, assets or liabilities, which would be considered off-balance sheet arrangements as of December 31, 2019. We do not participate in transactions that create relationships with unconsolidated entities or financial partnerships, often referred to as variable interest entities, which would have been established for the purpose of facilitating off-balance sheet arrangements. We have not entered into any off-balance sheet financing arrangements, established any special purpose entities, guaranteed any debt or commitments of other entities, or purchased any non-financial assets.
We do not have any long-term debt obligations, capital lease obligations, operating lease obligations, purchase obligations or long-term liabilities, other than as described below.
We are obligated to pay an affiliate of our sponsor a monthly fee of $10,000 for office space and general and administrative services. We began incurring these fees on February 7, 2019 and will continue to incur these fees monthly until the earlier of the completion of a business combination and our liquidation.
We engaged the underwriters of our initial public offering to provide advisory services to us in connection with our initial business combination, such as holding meetings with our stockholders to discuss a potential business combination and the target business's attributes, introducing us to potential investors that are interested in purchasing our securities in connection with the potential business combination, assisting us in obtaining stockholder approval for the potential business combination and assisting us with our press releases and public filings in connection with the potential business combination. We will pay the underwriters a cash fee for such services upon the consummation of our initial business combination in an amount equal to $6,037,500.
In addition, we have engaged a law firm to assist us with its legal matters in identifying, negotiating, and consummating a business combination, as well as assisting with other legal matters. In the event of a successful business combination, the amount of fees to be paid will be agreed upon between us and the law firm in light of all the facts and circumstances at that point in time. If a business combination does not occur, we will not be required to pay this contingent fee. Management is unable to determine the amount of the legal fees to be paid at this time. There can be no assurance that we will complete a business combination.
Critical Accounting Policies
The preparation of financial statements and related disclosures in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements, and income and expenses during the periods reported. Actual results could materially differ from those estimates. We have not identified any critical accounting policies.
Recent accounting pronouncements
Management does not believe that any recently issued, but not yet effective, accounting standards, if currently adopted, would have a material effect on our consolidated financial statements.
Proposed Business Combination
On December 8, 2019, we entered into the Merger Agreement with NewCo, Merger Sub 1, Merger Sub 2, AerSale, and solely in its capacity as the initial Holder Representative, LGP, pursuant to which (a) Merger Sub 1 will be merged with and into our company, with our company surviving the First Merger as a wholly-owned direct subsidiary of NewCo, and (b) Merger Sub 2 will be merged with and into AerSale, with AerSale surviving the Second Merger as a wholly-owned indirect subsidiary of NewCo. In connection with the proposed Business Combination, our company and AerSale will become direct or indirect wholly-owned subsidiaries of NewCo, the new public company after the Closing.
Under the Merger Agreement and pursuant to the First Merger, (i) all of the issued and outstanding shares of our common stock will be exchanged on a one-for-one basis for shares of NewCo Common Stock, (ii) each outstanding and unexercised warrant to purchase our common stock will be exchanged on a one-for-one basis for a warrant to purchase NewCo Common Stock, in the same form and on the same terms and conditions as such warrants to purchase our common stock, and (iii) each issued and outstanding share of common stock of Merger Sub 1 will be canceled and converted into and become, on a one-for-one basis, a share of our common stock.
Under the Merger Agreement and pursuant to the Second Merger, NewCo will acquire AerSale for aggregate consideration equal to $400 million, consisting of (i) the Aggregate Cash Consideration (subject to adjustment as described below) and (ii) the Aggregate Common Stock Consideration. AerSale stockholders and SAR holders will also receive as consideration a contingent right to receive up to 2,500,000 Earnout Shares, half of which will be issued at such time as the NewCo Common Stock price is greater than $12.50 per share for any period of twenty (20) trading days out of thirty (30) consecutive trading days on or prior to the fifth anniversary of the Closing Date and the other half of which will be issued at such time as the NewCo Common Stock price is greater than $14.00 per share for any period of twenty (20) trading days out of thirty (30) consecutive trading days on or prior to the fifth anniversary of the Closing Date. The Earnout Shares will also be issued upon the occurrence of a Liquidity Event, solely to the extent the Liquidity Event Consideration is greater than $12.50, in which case half of the Earnout Shares will be issued, or $14.00, in which case the other half of the Earnout Shares will also be issued. Earnout Shares that have not been issued on or prior to the fifth anniversary of the Closing Date will be cancelled.
In the event that, immediately prior to the Closing of the proposed Business Combination, the Available Cash is less than the Necessary Cash, the cash consideration payable in the proposed Business Combination will be reduced by up to $50 million and AerSale stockholders and SAR holders will receive, in lieu of the Available Cash Shortfall Amount, a number of shares of NewCo Convertible Preferred Stock with an aggregate value equal to the Available Cash Shortfall Amount, but in no event more than 500,000 shares of NewCo Convertible Preferred Stock. It is a condition to the obligations of both our company and AerSale to consummate the proposed Business Combination that the Available Cash Shortfall Amount not exceed $50 million.
The Closing is subject to certain conditions, including but not limited to an approval of our stockholders of the Merger Agreement. The Merger Agreement may also be terminated by either party under certain circumstances.
Debt Commitment Letter
In order to finance a portion of the Aggregate Cash Consideration payable in the proposed Business Combination and the costs and expenses incurred in connection therewith, we entered into the Debt Commitment Letter with Wells Fargo and PNC in connection with the ABL Facility.
Founder Shares Agreement
Concurrently with the execution of the Merger Agreement, our founders entered into the Founder Shares Agreement, pursuant to which they have agreed to defer the vesting of an aggregate of 1,293,750 Unvested Founder Shares held by our founders (representing 30% of the founder shares), half of which will vest at such time as the NewCo Common Stock price is greater than $12.50 per share for any period of twenty (20) trading days out of thirty (30) consecutive trading days and the other half of which will vest at such time as the NewCo Common Stock price is greater than $14.00 per share for any period of twenty (20) trading days out of thirty (30) consecutive trading days. The Unvested Founder Shares will also vest upon the occurrence of a Liquidity Event on or prior to the fifth anniversary of the date of the Founder Shares Agreement, solely to the extent the Liquidity Event Consideration is greater than $12.50, in which case half of the Unvested Founder Shares which will vest, or $14.00, in which case the other half of the Unvested Founder Shares will also vest. Unvested Founder Shares that have not vested on or prior to the fifth anniversary of the Closing Date will be forfeited.
Support and Release Agreement
Concurrently with the execution of the Merger Agreement, we entered into the Support and Release Agreement with NewCo and the AerSale stockholders, pursuant to which (i) the AerSale stockholders have agreed not to transfer any shares of AerSale capital stock prior to the Closing, (ii) the AerSale stockholders have made certain representations as to their ownership of AerSale capital stock,
Pursuant to the Merger Agreement and as a condition to the Closing, each of the AerSale stockholders will enter into the Lock-Up Agreement with NewCo. Under the Lock-Up Agreement, each holder agrees not to, during the AerSale Lock-Up Period:
Amended and Restated Registration Rights Agreement
Pursuant to the Merger Agreement and as a condition to the Closing, NewCo, our company, our founders, AerSale stockholders and certain other parties named on the signature pages thereto, shall enter into the Amended and Restated Registration Rights Agreement that will amend and restate that certain Registration Rights Agreement, dated February 6, 2019, by and among our company, our founders and certain of our initial investors.
Under the Amended and Restated Registration Rights Agreement, our founders, certain of our directors and the AerSale stockholders will be granted certain demand, shelf and piggyback registration rights with respect to the Registrable Securities. The Amended and Restated Registration Rights Agreement provides the AerSale stockholders the right to request one demand registration during the initial 180-day period following expiration of the AerSale Lock-Up Period. After such time, Cowen Investments, holders of at least 50% of the Registrable Securities then-outstanding and held by the AerSale stockholders, or holders of at least 50% of the Registrable Securities then-outstanding and not held by the AerSale stockholders or Cowen Investments, may require NewCo to effect one (1) demand registration in any three-month period thereafter. In addition, the Amended and Restated Registration Rights Agreement grants each of parties unlimited piggyback registration rights with respect to registration statements filed subsequent to the Closing Date, provided the shares held by such party is not subject to a lock-up period. Subject to customary exceptions, NewCo is responsible for all registration expenses in connection with any demand, shelf or piggyback registration by any of the holders, and the holders shall bear all incremental selling expenses relating to the sale of Registrable Securities, such as underwriters' commissions and discounts, brokerage fees, underwriter marketing costs and all reasonable fees and expenses of any legal counsel representing the holders.
Certificate of Designation
In the event that any NewCo Convertible Preferred Stock is required to be issued pursuant to the Merger Agreement, the NewCo board of directors shall approve and adopt the Certificate of Designation, pursuant to which the designations, powers, and preferences as well as the relative, participating, optional and other special rights of the NewCo Convertible Preferred Stock and any qualifications, limitations and restrictions thereof will be established. The rights of the holders of the NewCo Convertible Preferred Stock include, among others, the receipt of cumulative dividends, payable quarterly in arrears, in an amount equal to (a) 5% per annum of the stated value of such share as of the record date for such dividend, and (b) on an as-converted basis, any dividend or other distribution, whether paid in cash, in-kind or in other property, authorized and declared by the NewCo board of directors on the issued and outstanding shares of NewCo Common Stock in an amount determined by assuming that the number of shares of NewCo Common Stock into which such share of such NewCo Convertible Preferred Stock could be converted. Pursuant to the terms and conditions of the Certificate of Designation, if that last sale price of NewCo Common Stock reported has been at least $18.00 per share (subject to certain adjustments) on each of 20 trading days within a 30 consecutive trading day period, NewCo may (but is not required to) effect a conversion of the NewCo Convertible Preferred Stock into a number of shares of NewCo Common Stock equal to the stated value the NewCo Convertible Preferred Stock, plus accrued but unpaid dividends, divided by the conversion price of $12.50 (subject to adjustment as further described in the Certificate of Designation) and an amount in cash in lieu of any fractional share of NewCo Common Stock issuable pursuant to such conversion. Pursuant to the terms and conditions of the Certificate of Designation, (i) all of the shares of NewCo Convertible Preferred Stock can be redeemed at the option of NewCo upon notice, or (ii) all or some of the shares of NewCo Convertible Preferred Stock can be redeemed at the option of the holder (A) on the date that is 54 months after the Closing and thereafter on each twelve-month anniversary of such date or (B) upon the occurrence of a change of control, in each case at a price per share equal to the stated value of such share of NewCo Convertible Preferred Stock plus any accrued but unpaid dividends. In addition, the holders of the NewCo Convertible Preferred Stock will not have any preemptive rights, but will have voting rights equal to the largest number of whole shares of NewCo Common Stock into which all of the shares of NewCo Convertible Preferred Stock held of record by such holder could then be converted as of the record date. The NewCo Convertible Preferred Stock shall, with respect to dividend rights and rights upon a liquidation event, rank junior to any and all existing or future claims in respect of indebtedness of NewCo or any of its subsidiaries. The NewCo Convertible Preferred Stock shall rank on a parity basis with each other class or series of capital stock of NewCo now existing or hereafter authorized, classified or reclassified, the terms of which expressly provide that such class or series ranks on a parity basis with the shares of NewCo Convertible Preferred Stock with respect to dividend rights or rights upon a liquidation event. The holders of the NewCo Convertible Preferred Stock may transfer such NewCo Convertible Preferred Stock freely, subject to the terms of the Lock-Up Agreement.
In connection with the proposed Business Combination, NewCo filed the S-4 Registration Statement with the SEC on December 31, 2019, which includes a preliminary proxy statement/prospectus of our company.
On January 26, 2020, we entered into the FILO Commitment Letter with NewCo and Veritas, pursuant to which, and subject to the terms and conditions set forth therein, Veritas has committed to provide us with the FILO Facility. We intend to use the net proceeds of the FILO Facility to finance a portion of the cash consideration payable in the proposed Business Combination. The funding of the . . .
Mar 02, 2020
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