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10-Q: MONOCLE ACQUISITION CORP

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(EDGAR Online via COMTEX) -- ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

References in this report (the "Quarterly Report") to "we," "us" or the "Company" refer to Monocle Acquisition Corporation. References to our "management" or our "management team" refer to our officers and directors, and references to the "Sponsor" refer to Monocle Partners, LLC. The following discussion and analysis of the Company's financial condition and results of operations should be read in conjunction with the financial statements and the notes thereto contained elsewhere in this Quarterly Report. Certain information contained in the discussion and analysis set forth below includes forward-looking statements that involve risks and uncertainties.

Special Note Regarding Forward-Looking Statements

This Quarterly Report includes "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933, as amended (the "Securities Act"), and Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), that are not historical facts, and involve risks and uncertainties that could cause actual results to differ materially from those expected and projected. All statements, other than statements of historical fact included in this Form 10-Q including, without limitation, statements in this "Management's Discussion and Analysis of Financial Condition and Results of Operations" regarding the Company's financial position, business strategy and the plans and objectives of management for future operations, including the impact of the recent coronavirus (COVID-19) outbreak on the Company's search for a Business Combination (as defined below), are forward-looking statements. Words such as "expect," "believe," "anticipate," "intend," "estimate," "seek" and variations and similar words and expressions are intended to identify such forward-looking statements. Such forward-looking statements relate to future events or future performance, but reflect management's current beliefs, based on information currently available. A number of factors could cause actual events, performance or results to differ materially from the events, performance and results discussed in the forward-looking statements. For information identifying important factors that could cause actual results to differ materially from those anticipated in the forward-looking statements, please refer to the Risk Factors section of the Company's Annual Report on Form 10-K filed with the U.S. Securities and Exchange Commission (the "SEC") on March 2, 2020. The Company's securities filings can be accessed on the EDGAR section of the SEC's website at www.sec.gov . Except as expressly required by applicable securities law, the Company disclaims any intention or obligation to update or revise any forward-looking statements whether as a result of new information, future events or otherwise.

Overview

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 ("Business Combination"). We intend to effectuate our initial Business Combination using cash from the proceeds of our initial public offering ("Initial Public Offering") and the sale of private units ("Private Units") that occurred simultaneously with the completion of our Initial Public Offering (the "Private Placement"), 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;

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;

� our inability to pay dividends on our shares of common stock;

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 March 31, 2020 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 Corp., a Delaware corporation ("AerSale", and such Business Combination, the "AerSale Business Combination") described below. 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 ("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 the AerSale Business Combination.

For the three months ended March 31, 2020, we had net income of $215,725, which consists of interest income on marketable securities held in the Trust Account of $622,821, offset by operating costs of $286,645 and a provision for income taxes of $120,451.

For the three months ended March 31, 2019, we had a net income of $356,058, which consists of interest income on marketable securities held in the Trust Account of $543,268, offset by operating costs of $83,942 and a provision for income taxes of $103,268.

Liquidity and Capital Resources

Until the consummation of our Initial Public Offering, our only source of liquidity was an initial purchase of common stock (the "Founder Shares") by our Sponsor and Cowen Investments II LLC ("Cowen Investments" and, together with the Sponsor, the "Founders") and loans from our Sponsor.

On February 11, 2019, we consummated our Initial Public Offering of 17,250,000 units ("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. We incurred $4,014,101 in transaction costs, including $3,450,000 of underwriting fees and $564,101 of other costs.

As of March 31, 2020, we had cash and marketable securities held in the Trust Account of $177,046,651. Interest income on the balance in the Trust Account will be used by us to pay franchise and income taxes. Through March 31, 2020, we have withdrawn $965,987 of interest earned on the Trust Account to pay our franchise and income tax obligations, of which $201,718 was withdrawn during the three months ended March 31, 2020.

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.

As of March 31, 2020, we had cash of $138,464. 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 us 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 in the final prospectus for our Initial Public Offering filed with the SEC on February 7, 2019), 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 March 31, 2020. 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.

Contractual Obligations

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 condensed consolidated 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 condensed consolidated financial statements.

AerSale Business Combination

On December 8, 2019, we entered into an Agreement and Plan of Merger (the "Merger Agreement") with Monocle Holdings Inc., a Delaware corporation and our wholly-owned direct subsidiary ("NewCo"), Monocle Merger Sub 1 Inc., a Delaware corporation and wholly-owned direct subsidiary of NewCo ("Merger Sub 1"), Monocle Merger Sub 2 LLC, a Delaware limited liability company and wholly-owned indirect subsidiary of NewCo ("Merger Sub 2"), AerSale, and solely in its capacity as the initial Holder Representative (as defined in the Merger Agreement), Leonard Green & Partners, L.P., a Delaware limited partnership. In connection with the AerSale Business Combination, NewCo filed a registration statement on Form S-4 (File No. 333-235766) (the "S-4 Registration Statement") with the SEC on December 31, 2019, which includes a preliminary proxy statement with respect to our special meeting of stockholders to approve the Merger Agreement, among other matters, that constitutes a preliminary prospectus of NewCo. Amendment No. 1 to the S-4 Registration Statement was filed with the SEC on February 14, 2020.

Merger Agreement

Pursuant to the Merger Agreement, (a) Merger Sub 1 will be merged with and into our Company, with our Company surviving the merger as a wholly-owned direct subsidiary of NewCo (the "First Merger"), and (b) Merger Sub 2 will be merged with and into AerSale, with AerSale surviving the merger as a wholly-owned indirect subsidiary of NewCo (the "Second Merger"). In connection with the AerSale Business Combination, our Company and AerSale will become direct or indirect wholly-owned subsidiaries of NewCo, the new public company after the closing of the AerSale Business Combination (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 common stock of NewCo, par value $0.0001 per share ("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) $250 million payable in cash (the "Aggregate Cash Consideration") (subject to adjustment as described below) and (ii) 15,000,000 shares of NewCo Common Stock, valued at $10 per share (i.e., $150 million in the aggregate). Holders of AerSale common stock, par value $0.01 per share, and AerSale in the money stock appreciation rights will also receive as consideration a contingent right to receive up to 2,500,000 additional shares of NewCo Common Stock in the aggregate, 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 date of the Closing (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

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 AerSale Business Combination and the costs and expenses incurred in connection therewith, we entered into a debt commitment letter with NewCo, Wells Fargo Bank, N.A. and PNC Bank, N.A., dated December 8, 2019, in connection with a $150 million senior secured asset-based revolving credit facility (the "ABL Facility").

Founder Shares Agreement

Concurrently with the execution of the Merger Agreement, our Founders entered into a founder shares agreement (the "Founder Shares Agreement"), pursuant to which they have agreed to defer the vesting of an aggregate of 1,293,750 Founder Shares held by our Founders (representing 30% of the Founder Shares) (the "Unvested 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

Support and Release Agreement

Concurrently with the execution of the Merger Agreement, we entered into a company support and mutual release agreement (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, (iii) the AerSale stockholders have agreed to customary releases in favor of our Company, NewCo and our respective affiliates related to activity on or prior to the Closing, and (iv) NewCo and our Company, on behalf of ourselves and the other Company parties and our respective affiliates, have agreed to customary releases in favor of the AerSale stockholders and their respective affiliates related to activity on or prior to the Closing.

FILO Commitment Letter

On January 26, 2020, we entered into a commitment letter (the "FILO Commitment Letter") with NewCo and Veritas Capital Credit Funding, L.P. ("Veritas"), pursuant to which, and subject to the terms and conditions set forth therein, Veritas has committed to provide us with a senior secured asset-based "first-in/last-out" term loan with an aggregate commitment of up to $75 million (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 AerSale Business Combination. The funding of the FILO Facility under the FILO Commitment Letter is contingent upon the satisfaction of customary conditions. The FILO Facility will mature on (a) the fourth anniversary of the Closing Date, or (b) if the scheduled maturity date of the ABL Facility is extended to after the fourth anniversary of the Closing Date, the earlier of (i) the scheduled maturity date of the ABL Facility and (ii) the fifth anniversary of the Closing Date.

Recent Developments

Effects of Coronavirus (COVID-19) Outbreak

In December 2019, a novel strain of coronavirus (COVID-19) was reported to have surfaced in Wuhan, China, which has and is continuing to spread throughout China and other parts of the world, including the United States. On January 30, 2020, the World Health Organization declared the outbreak of COVID-19 a "Public Health Emergency of International Concern." On January 31, 2020, U.S. Health and Human Services Secretary Alex M. Azar II declared a public health emergency for the United States to aid the U.S. healthcare community in responding to COVID-19, and on March 11, 2020, the World Health Organization characterized the COVID-19 outbreak as a "pandemic."

The COVID-19 outbreak has resulted in a widespread health crisis that has adversely affected the economies and financial markets worldwide, and potential target companies may defer or end discussions for a potential Business Combination with us whether or not COVID-19 affects their business operations. Additionally, we may be unable to complete a Business Combination if continued concerns relating to COVID-19 restrict travel, limit the ability to have meetings with potential investors or the target company's personnel, vendors and services providers are unavailable to negotiate and consummate a transaction in a timely manner. The extent to which COVID-19 impacts our search for a Business Combination will depend on future developments, which are highly uncertain and cannot be predicted, including new information which may emerge concerning the severity of COVID-19 and the actions to contain COVID-19 or treat its impact, among others. If the disruptions posed by COVID-19 or other matters of global concern continue for an extensive period of time, our ability to consummate a Business Combination, or the operations of a target business with which we ultimately consummate a Business Combination, may be materially adversely affected.

Various governmental bodies and private enterprises have implemented preventative or protective measures to contain the COVID-19 outbreak, such as travel bans and restrictions, quarantines, shelter-in-place orders and . . .

May 07, 2020

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