Alliance Entertainment Holding Corporation Form 8-K Summary
Reporting date: February 10, 2023; filed February 13, 2023. The filing reports the completion of the business combination between Alliance Entertainment, Adara Acquisition Corp. and Adara Merger Sub, Inc. Alliance became a wholly owned subsidiary of the renamed Alliance Entertainment Holding Corporation.
Business Context and Transaction
- The transaction was approved by Adara stockholders on January 18, 2023 and closed on February 10, 2023.
- Adara changed its name to Alliance Entertainment Holding Corporation and ceased to be a shell company.
- Alliance stockholders received 47,500,000 shares of Class A common stock and 60,000,000 Class E contingent consideration shares placed in escrow.
- The contingent shares vest in three tranches of 20,000,000 shares upon specified triggering events occurring within five, seven and ten years, respectively; unearned shares will be forfeited.
Financial Metrics, Capitalization and Liquidity
- The filing does not provide current-period revenue, net income, operating cash flow, margins or a complete balance sheet. Historical Alliance and Adara financial statements and pro forma information are incorporated by reference from the proxy statement and Exhibit 99.2.
- Public stockholders redeemed 11,332,830 shares, or 99.1% of shares eligible for redemption, for aggregate cash payments of approximately $116.6 million, or approximately $10.22 per share.
- Following redemptions, 167,170 public shares remained outstanding and approximately $1.7 million remained in the trust account; the filing states that the remaining trust balance funded the business combination.
- Immediately after closing, the Company had 49,167,170 shares of Class A common stock, 60,000,000 Class E contingent consideration shares, 5,750,000 public warrants, 4,120,000 private warrants and 50,000 underwriter warrants. The warrants have an exercise price of $11.50 per share.
- The filing identifies Alliance as having significant indebtedness and a revolving credit facility but does not state the outstanding balance in this report.
Material Changes Versus the Prior Comparable Period
- Control changed from Adara’s pre-transaction stockholders to Alliance’s former stockholders and management. Former Adara stockholders held approximately 9.2% of the post-closing common stock.
- Adara’s initial stockholders forfeited 1,375,000 shares; 1,500,000 Class B shares converted into Class A shares.
- Adara’s public units separated into their underlying securities and were delisted. The Company’s common stock and public warrants were not trading on a national securities exchange and were expected to be quoted on the OTC Markets.
- The Company changed its fiscal year-end from December 31 to June 30 and expects to report Alliance financial statements for the year ending June 30, 2023.
- Thomas Finke and Paul G. Porter resigned as chief executive officer, chairman and chief financial officer, respectively. Bruce Ogilvie became executive chairman, Jeffrey Walker became chief executive officer and John Kutch became chief financial officer.
- WithumSmith+Brown PC was dismissed as Adara’s independent registered public accounting firm effective after completion of the audit of Adara’s December 31, 2022 financial statements.
Guidance, Outlook, Risks and Unusual Items
- The filing provides no new quantitative financial guidance. Forward-looking information and projections are incorporated from the proxy statement and should not be treated as current guidance.
- Alliance recently breached the fixed charge coverage ratio under its revolving credit facility. A February 8, 2023 lender notice indicated deferred action, but the filing warns that the lender could declare a default and accelerate the outstanding borrowings.
- The Company obtained a waiver for noncompliance with a non-financial covenant relating to late delivery of certain monthly unaudited financial statements and compliance certificates. Future noncompliance could result in default, acceleration and substantial liquidity pressure, including going-concern risk.
- The 99.1% redemption rate substantially reduced cash available to fund operations, growth initiatives and acquisitions and materially reduced the public float and market liquidity.
- Adara received a notice of delisting from NYSE American. Trading on the OTC market may be limited, volatile or unavailable, and the securities could become subject to penny-stock restrictions.
- Other cited risks include supplier and customer concentration, inventory obsolescence, inflation, higher interest rates, supply disruptions, competition, regulatory and litigation exposure, cybersecurity threats, internal-control weaknesses and the need for additional capital.
- Adara previously restated financial statements for warrant classification and the classification of redeemable Class A shares. Management identified a material weakness in internal control over financial reporting related to complex financial instruments and described remediation efforts.
- The Company issued indemnification agreements to directors and executive officers, adopted a new code of ethics, established board committees and adopted the 2022 Equity Incentive Plan.
- Alliance does not currently anticipate paying dividends and intends to retain earnings, if any, for business operations.
Key Facts Investors Should Verify
- Review the audited Alliance financial statements, recent interim results and the unaudited pro forma information incorporated by reference and filed as Exhibit 99.2.
- Confirm the current balance, maturity, collateral, covenant status and lender waiver terms of the revolving credit facility.
- Monitor whether any additional covenant breaches, defaults, acceleration notices or going-concern disclosures arise.
- Verify the listing and trading status, ticker symbols and liquidity of the common stock and warrants following the NYSE American delisting.
- Assess the potential dilution from the 60,000,000 contingent consideration shares and 9,920,000 outstanding warrants.
- Review the amended charter, bylaws, lock-up terms and registration rights, including the Company’s obligation to file a resale registration statement.
- Evaluate the impact of the very small public float, concentrated insider ownership and potential penny-stock restrictions on marketability and valuation.