Adara Acquisition Corp. Form 10-Q — quarter ended September 30, 2022
Filing identity: This filing is by Adara Acquisition Corp., a SPAC, not Alliance Entertainment Holding Corp. Adara had signed an agreement to merge with Alliance on June 22, 2022. The financial results below are Adara’s, in U.S. dollars.
Business context and reporting period
Adara had not begun operating a business and reported no operating revenue. Its activity consisted of formation, IPO-related matters, and pursuing a business combination. The interim financial statements are unaudited and cover the three and nine months ended September 30, 2022.
Key financial metrics
| Metric | Reported amount |
|---|---|
| Q3 operating and formation costs | $634,642 |
| Q3 net loss | $290,494, or $0.02 per Class A and Class B share |
| Nine-month net income | $1,690,242, or $0.12 per share for each class |
| Cash outside Trust Account | $29,502 at September 30, 2022 |
| Trust Account marketable securities | $116,831,001 |
| Current liabilities | $1,555,982 |
| Working capital deficit | $1,053,620 |
| Promissory notes payable | $436,077; non-interest-bearing related-party notes |
| Net cash used in operating activities | $1,130,985 for the nine months |
Adara reported no operating revenue, so operating margins are not meaningful. Nine-month net income included a $2,976,000 gain from the change in fair value of warrant liabilities and $670,720 of Trust Account interest; these items are not operating earnings. Total liabilities were $3,440,782, including $1,884,800 of warrant liabilities. The filing reports no long-term debt or off-balance-sheet arrangements.
Material changes versus the prior comparable period
- Q3 shifted from net income of $1,041,503 in 2021 to a net loss of $290,494 in 2022. Operating and formation costs rose to $634,642 from $217,525.
- Nine-month net income fell to $1,690,242 from $3,089,413. Operating and formation costs increased to $1,887,001 from $632,695.
- Warrant fair-value movements materially affected reported results: Q3 recorded a $99,200 expense, compared with a $1,256,100 gain in 2021; the nine-month gain was $2,976,000, versus $3,801,300.
- Cash outside the Trust Account declined to $29,502 from $724,410 at December 31, 2021. Trust Account securities increased to $116,831,001 from $116,160,281.
Outlook, risks, and unusual items
- The proposed Alliance transaction remained subject to closing conditions; the filing gives no assurance it would be completed. Adara’s deadline to complete a business combination was February 11, 2023.
- Management stated that limited available working capital and the deadline for mandatory liquidation raise substantial doubt about Adara’s ability to continue as a going concern. It may need additional financing; if it cannot complete a transaction by the deadline, it must cease operations and liquidate.
- The merger terms included up to 60 million contingent consideration shares for Alliance holders, in three 20-million-share tranches tied to triggering events over periods of five, seven, and ten years. ThinkEquity was to receive a fee equal to 3.5% of Trust Account funds remaining after redemptions, payable at closing.
- A new federal 1% excise tax on certain stock repurchases after December 31, 2022 could reduce cash available for a transaction; its applicability and amount were uncertain.
- Management identified COVID-19 and the Russia-Ukraine conflict as sources of uncertainty, with any specific financial impact not determinable. Management reported effective disclosure controls and no material changes in internal control during the quarter.
Important facts for investors to verify
- Confirm the identity and scope of the filing: it reports Adara SPAC results, not Alliance’s operating-company results.
- Check the status and closing conditions of the proposed Alliance merger, including redemptions, financing, fees, and the February 11, 2023 deadline.
- Assess Adara’s limited cash outside the Trust Account, working capital deficit, related-party notes, and stated going-concern uncertainty.
- Separate operating costs and cash flows from non-cash warrant remeasurement and Trust Account interest when evaluating reported income.
- Review the potential excise-tax effect and the dilution or value conditions attached to the contingent consideration shares and warrants.