Southland Holdings, Inc. current report, 14 February 2023

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Southland Holdings, Inc. Form 8-K Summary

Filing date: February 14, 2023. The filing reports completion of the business combination between former SPAC Legato Merger Corp. II and Southland Holdings LLC. Legato II changed its name to Southland Holdings, Inc., with Southland Holdings LLC becoming its wholly owned subsidiary.

Business Context and Reporting Period

  • The transaction closed on February 14, 2023 after approval by Legato II stockholders.
  • Southland Holdings, Inc. ceased to be a shell company and began operating as the public holding company for Southland.
  • Common stock and warrants began trading under the symbols SLND and SLNDW, respectively, on February 15, 2023.
  • The filing does not present a new operating-period income statement or cash-flow statement. Historical and pro forma financial information is incorporated by reference from the proxy statement and Exhibit 99.1, including Southland information through September 30, 2022.

Capitalization, Financial Metrics, Debt and Liquidity

  • At closing, the company had 44,407,831 shares of common stock outstanding and 14,385,500 warrants outstanding.
  • Former Southland members received 33,793,111 shares and owned approximately 77.8% of the outstanding common stock immediately after closing, excluding potential earnout shares.
  • Legato II redeemed 25,296,280 shares at approximately $10.30 per share.
  • The company issued $50.0 million of unsecured merger consideration notes bearing interest at 7% annually, with principal and accrued interest due February 14, 2028. No principal or accrued interest installments are required before maturity.
  • The company owed deferred underwriting commissions of $9.66 million, paid through cash and $4.831 million of 8% unsecured underwriter notes. These notes mature February 14, 2024 and require mandatory prepayments equal to 15% of gross proceeds from specified equity financings before maturity.
  • The filing does not provide a clear post-closing cash balance, liquidity amount, revenue, profit, operating cash flow, gross margin, operating margin, or net debt figure.
  • The company has not paid cash dividends and does not anticipate paying dividends in the foreseeable future.
  • There were 14,385,500 warrants, each generally exercisable for one share at $11.50 per share. Warrants may create future dilution and potential financing proceeds if exercised.

Material Changes Versus the Prior Comparable Period

  • The transaction converted Legato II from a shell company into the publicly traded holding company for Southland.
  • Ownership and control shifted substantially to former Southland members, with approximately 77.8% ownership after the closing.
  • The company’s authorized capital increased to 500 million common shares and 50 million preferred shares.
  • The board and executive leadership were reconstituted. Frank S. Renda became Chief Executive Officer and President; Tim Winn and Rudy V. Renda became Co-Chief Operating Officers and Executive Vice Presidents; and Cody Gallarda became Chief Financial Officer, Executive Vice President and Treasurer.
  • The company adopted the 2022 Equity Incentive Plan and issued 173,333 restricted stock units to Mr. Gallarda, vesting in equal portions on February 14, 2024 and February 14, 2025, subject to continued employment.
  • The prior administrative services agreement with Crescendo Advisors II, LLC, which required a fee of $15,000 per month, terminated at closing.

Guidance, Outlook, Risks and Unusual Items

  • The filing provides no quantitative revenue, earnings, margin, cash-flow, or other operating guidance.
  • Executive employment agreements provide base salaries of $650,000 for Frank Renda, $500,000 for Tim Winn, $500,000 for Rudy Renda, and $400,000 for Cody Gallarda. Target annual cash bonuses range from 80% to 200% of base salary but are not guaranteed.
  • Termination without cause or resignation for good reason may trigger severance, accelerated equity vesting, continued benefits, and cash payments generally equal to one times base salary plus target bonus. Certain change-in-control circumstances increase the cash payment to two times those amounts.
  • Key risks include realizing the anticipated benefits of the combination, managing growth profitably, maintaining Nasdaq listing, retaining key personnel, litigation, economic and labor conditions, weather, COVID-19 effects, data and privacy risks, and future acquisitions or business combinations.
  • The $50.0 million merger consideration notes and $4.831 million underwriter notes increase fixed obligations and refinancing or liquidity risk, particularly because the underwriter notes mature in February 2024.
  • Registration rights require the company to file a Form S-1 within 45 days after closing to register specified shares and warrant-related securities for resale, which could increase market supply and dilution pressure.
  • The company entered into indemnification agreements with directors and executive officers and transferred 765,544 shares under a letter agreement with certain Southland members. Legato insiders also transferred 102,532 shares in connection with non-redemption agreements.

Important Facts for Investors to Verify

  1. Review Exhibit 99.1 and the incorporated Southland financial statements for revenue, profitability, operating cash flow, margins, cash, debt, working capital, and pro forma effects.
  2. Confirm the company’s available cash after redemptions, transaction expenses, deferred underwriting commissions, and other closing payments.
  3. Assess the ability to repay or refinance the $4.831 million underwriter notes due February 14, 2024 and the $50.0 million merger consideration notes due February 14, 2028.
  4. Evaluate dilution from the 14.3855 million outstanding warrants, potential earnout shares, equity incentive awards, and shares registered for resale.
  5. Review the company’s subsequent Form 10-K and Form 10-Q filings for updated operating results and management’s liquidity discussion.
  6. Examine the proxy statement’s risk factors, related-party transactions, employment agreements, lock-up provisions, and registration rights for additional obligations and potential conflicts.