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Item 7. Management’s Discussion and Analysis

2023-03-30 compared with 2022-03-28 · 49 added, 22 removed, 65 unchanged (52% of the section changed)

10 unchanged sentences

We cannot assure you that our plans to complete a Business Combination will be successful.

Recent Developments

On February 10, 2023 (the “Closing Date”), Alliance Entertainment Holding Corporation, a Delaware corporation (“Alliance”), Adara Acquisition Corp., a Delaware corporation (“Adara”), and Adara Merger Sub, Inc., a Delaware corporation (“Merger Sub”), consummated the closing of the transactions (the “Closing“) contemplated by the Business Combination Agreement, dated June 22, 2022, by and among Alliance, Adara and Merger Sub (the “Business Combination Agreement”), following their approval at a special meeting of the stockholders of Adara held on January 18, 2023 (the “Special Meeting”),

On June 22, 2022, the Company, Alliance Merger Sub, Inc.

(“Merger Sub”) and Alliance Entertainment Holding Corporation (“Alliance”) entered into the Business Combination Agreement (the “BCA”), pursuant to which the Company and Alliance consummated the Business Combination.

Pursuant to the BCA, Merger Sub merged with and into Alliance, with Alliance being the surviving entity (the “Merger”).

The Merger became effective by the filing of a certificate of merger with the Secretary of State of the State of Delaware, in accordance with the relevant provisions of the Delaware General Corporation Law (such time, “Effective Time”).

The parties held the closing immediately prior to such filing of a certificate of merger, on the closing date.

At the Effective Time, by virtue of the Merger and without any action on the part of Adara, Merger Sub, Alliance or the holders of any of Alliance’s securities:

● Each share of Alliance common stock issued and outstanding immediately prior to the Effective Time will be cancelled and automatically converted into the right to receive the number of shares of the Company surviving the Business Combination (the “Combined Company Common Stock”) equal to the Exchange Ratio;

● No certificates or scrip or shares representing fractional shares of Combined Company Common Stock shall be issued upon the exchange of Alliance common stock and such fractional share interests will not entitle the owner thereof to vote or to have any rights of a stockholder of Adara or a holder of shares of Combined Company Common Stock.

In lieu of any fractional share of Combined Company Common Stock to which each holder of Alliance common stock would otherwise be entitled, the fractional share shall be rounded up or down to the nearest whole share of Combined Company Common Stock, with a fraction of 0.5 rounded up.

No cash settlements shall be made with respect to fractional shares eliminated by rounding.

At the closing, the Company also issued to the Alliance stockholders shares of a to be formed Class E Common Stock (the ”Contingent Consideration Shares”) which were placed into an escrow account pursuant to the Contingent Consideration Shares Agreement and shall not be released from escrow over a ten-year period unless and until they are earned as a result of the occurrence of the applicable triggering event as follows:

20,000,000 Contingent Consideration Shares will be earned upon the occurrence of triggering event I prior to the five-year anniversary of the closing;

20,000,000 Contingent Consideration Shares will be earned upon the occurrence of triggering event II prior to the seven-year anniversary of the closing;

and 20,000,000 Contingent Consideration Shares will be earned upon the occurrence of triggering event III prior to the ten-year anniversary of the closing.

Upon the occurrence of a triggering event, the Contingent Consideration Shares released from the escrow shall automatically convert into an equal number of shares of Combined Company Common Stock.

On August 16, 2022, the Inflation Reduction Act of 2022 (the “IR Act”) was signed into federal law.

The IR Act provides for, among other things, a new U.S.

federal 1% excise tax on certain repurchases of stock by publicly traded U.S.

domestic corporations and certain U.S.

domestic subsidiaries of publicly traded foreign corporations occurring on or after January 1, 2023.

The excise tax is imposed on the repurchasing corporation itself, not its shareholders from which shares are repurchased.

The amount of the excise tax is generally 1% of the fair market value of the shares repurchased at the time of the repurchase.

However, for purposes of calculating the excise tax, repurchasing corporations are permitted to net the fair market value of certain new stock issuances against the fair market value of stock repurchases during the same taxable year.

In addition, certain exceptions apply to the excise tax.

Department of the Treasury (the “Treasury”) has been given authority to provide regulations and other guidance to carry out and prevent the abuse or avoidance of the excise tax.

Any redemption or other repurchase that occurs after December 31, 2022, in connection with a Business Combination, extension vote or otherwise, may be subject to the excise tax.

Whether and to what extent the Company would be subject to the excise tax in connection with a Business Combination, extension vote or otherwise would depend on a number of factors, including (i) the fair market value of the redemptions and repurchases in connection with the Business Combination, extension or otherwise, (ii) the structure of a Business Combination, (iii) the nature and amount of any “PIPE” or other equity issuances in connection with a Business Combination (or otherwise issued not in connection with a Business Combination but issued within the same taxable year of a Business Combination) and (iv) the content of regulations and other guidance from the Treasury.

In addition, because the excise tax would be payable by the Company and not by the redeeming holder, the mechanics of any required payment of the excise tax have not been determined.

The foregoing could cause a reduction in the cash available on hand to complete a Business Combination and in the Company’s ability to complete a Business Combination.

The Company is permitted to use interest earned on the proceeds placed in the trust account to pay taxes, which could include any excise tax due under the IR Act on any redemptions or stock buybacks by Adara.

Results of Operations

4 unchanged sentences

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.

For the year ended December 31, 2021, we had a net income of $3,244,206, which consists of operating costs of $976,831 and transaction cost incurred in connection with IPO of $86,544, offset by interest income on marketable securities held in the Trust Accounts of $10,281 and change in fair value of warrant liabilities of $4,297,300.

For the period from August 5, 2020 (inception) through December 31, 2020, we had a net loss of $5,476, which consists of operating costs.

For the year ended December 31, 2022, we had net income of $2,943,538, which consists of changes in fair value of the warrant liabilities of $4,166,900 and interest earned on marketable securities held in Trust Account of $1,649,169, offset by operating and formation costs of $2,608,046 and provision for income taxes of $264,485.

For the year ended December 31, 2021, we had a net income of $3,244,206, which consists of interest income on marketable securities held in the Trust Accounts of $10,281 and change in fair value of warrant liabilities of $4,297,300, offset by operating costs of $976,831 and transaction cost incurred in connection with IPO of $86,544.

Liquidity and Capital Resources

2 unchanged sentences

For the year ended December 31, 2022, cash used in operating activities was $1,208,635.

Net income of $2,943,538 was affected by the changes in fair value of the warrant liabilities of $4,166,900 and interest earned on marketable securities held in Trust Account of $1,649,169.

Changes in operating assets and liabilities provided $1,663,896 of cash for operating activities.

For the year ended December 31, 2021, cash used in operating activities was $340,634.

Net income of $3,244,206 was impacted by interest earned on marketable securities held in the Trust Accounts of $10,281, change in fair value of warrant liabilities of $4,297,300 and transaction cost incurred in connection with IPO of $86,544.

Changes in operating assets and liabilities, which provided $636,197 of cash from operating activities.

For the period from August 5, 2020 (inception) through December 31, 2020, cash used in operating activities was $400,594.

Net loss of $5,476 was impacted by changes in operating assets and liabilities, which used $395,118 of cash from operating activities.

As of December 31, 2022, we had marketable securities held in the Trust Account of $117,809,450 (including $1,659,450 of interest income) consisting of U.S.

10 unchanged sentences

Up to $1,500,000 of such Working Capital Loans may be convertible into warrants of the post-Business Combination entity at a price of $1.00 per warrant.

We do not believe we will need to raise additional funds in order to meet the expenditures required for operating our business.

However, if our estimate of the costs of identifying a target business, undertaking in-depth due diligence and negotiating a Business Combination are less than the actual amount necessary to do so, we may have insufficient funds available to operate our business prior to our Business Combination.

Moreover, we may need to obtain additional financing either to complete our Business Combination or because we become obligated to redeem a significant number of our Public Shares upon consummation of our Business Combination, in which case we may issue additional securities or incur debt in connection with such Business Combination.

Going Concern

We have until February 11, 2023 to consummate a Business Combination.

It is uncertain that we will be able to consummate a Business Combination by this time.

If a Business Combination is not consummated by this date, there will be a mandatory liquidation and subsequent dissolution.

Management has determined that the mandatory liquidation, should a Business Combination not occur, and potential subsequent dissolution raises substantial doubt about our ability to continue as a going concern.

No adjustments have been made to the carrying amounts of assets or liabilities should we be required to liquidate after February 11, 2023.

Liquidity Capital Resources and Going Concern

Until the consummation of a Business Combination, the Company will be using the funds not held in the Trust Account for identifying and evaluating prospective acquisition candidates, performing due diligence on prospective target businesses, paying for travel expenditures, selecting the target business to acquire, and structuring, negotiating and consummating the Business Combination.

Until the consummation of the Business Combination, the Company used the funds not held in the Trust Account for identifying and evaluating target businesses, performing due diligence on prospective target businesses, traveling to and from the offices, plants or similar location of prospective target businesses or their representatives or owners, reviewing corporate documents and material agreements of prospective target businesses and structuring, negotiating and completing a Business Combination, which was the Business Combination with Alliance.

The Company completed its Business Combination on February 10, 2023, which was the Business Combination with Alliance, and has raised sufficient capital for its operations.

Off-Balance Sheet Financing Arrangements

6 unchanged sentences

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.

The preparation of 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 consolidated financial statements, and income and expenses during the periods reported.

Actual results could materially differ from those estimates.

3 unchanged sentences

Accordingly, we classify the Warrants as liabilities at their fair value and adjust the Warrants to fair value at each reporting period.

This liability is subject to re-measurement at each balance sheet date until exercised, and any change in fair value is recognized in our statement of operations.

This liability is subject to re-measurement at each consolidated balance sheet date until exercised, and any change in fair value is recognized in our statement of operations.

The Private Warrants and the Public Warrants for periods where no observable traded price was available are valued using a binomial lattice model, specifically a binomial lattice model.

5 unchanged sentences

Our Class A common stock features certain redemption rights that are considered to be outside of our control and subject to occurrence of uncertain future events.

Accordingly, shares of Class A common stock subject to possible redemption are presented as temporary equity, outside of the stockholders’ equity section of our balance sheets.

Accordingly, shares of Class A common stock subject to possible redemption are presented as temporary equity, outside of the stockholders’ deficit section of our consolidated balance sheets.

Net Loss per Common Share

3 unchanged sentences

Recent Accounting Standards

In August 2020, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2020-06, Debt — Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging — Contracts in Entity’s Own Equity (Subtopic 815-40) (“ASU 2020-06”) to simplify accounting for certain financial instruments.

In August 2020, the FASB issued Accounting Standards Update (“ASU”) 2020-06, Debt – Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging – Contracts in Entity’s Own Equity (Subtopic 815-40) (“ASU 2020-06”) to simplify accounting for certain financial instruments.

ASU 2020-06 eliminates the current models that require separation of beneficial conversion and cash conversion features from convertible instruments and simplifies the derivative scope exception guidance pertaining to equity classification of contracts in an entity’s own equity.

1 unchanged sentence

ASU 2020-06 amends the diluted earnings per share guidance, including the requirement to use the if-converted method for all convertible instruments.

ASU 2020-06 is effective January 1, 2022 and should be applied on a full or modified retros

Other than below, management does not believe that any recently issued, but not yet effective, accounting standards, including the standard referenced in the next paragraph, if currently adopted, would have a material effect on our financial statements.

As a smaller reporting company, ASU 2020-06 is effective January 1, 2024 for fiscal years beginning after December 15, 2023 and should be applied on a full or modified retrospective basis, with early adoption permitted beginning on January 1, 2021.

We are currently assessing the impact, if any, that ASU 2020-06 would have on our financial position, results of operations or cash flows.

We have not adopted this guidance as of December 31, 2022.

Management does not believe that any other recently issued, but not yet effective, accounting standards, if currently adopted, would have a material effect on our consolidated financial statements.

Quantitative and Qualitative Disclosures about Market Risk

Not required for smaller reporting companies.

Financial Statements and Supplementary Data

This information appears following Item 15 of this Report and is included herein by reference.

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 7. Management’s Discussion and Analysis