UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(MARK ONE)

☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarter ended ~~March~~December 31, 2023

☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission file number: 001-40014

ALLIANCE ENTERTAINMENT HOLDING CORPORATION

(Exact Name of Registrant as Specified in Its Charter)

Delaware

85-2373325

(State or other jurisdiction of

incorporation or organization)

(I.R.S. Employer

Identification No.)

8201 Peters ~~road,~~ Road,Suite 1000

Plantation, FL33324

(Address of principal executive offices)

(954) -255-4000

(Issuer’s telephone number)

Securities registered pursuant to Section 12(b) of the Act:



Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Class A ~~Common Stock,~~common stock, par value $0.0001 per share	AENT	~~OTC Pink Open~~The Nasdaq Stock Market LLC
~~Warrants, each~~Redeemable warrants, exercisable for ~~one share~~shares of Class A ~~Common Stock for~~common stock at an exercise price of $11.50 per share	AENTW	~~OTC Pink Open~~The Nasdaq Stock Market LLC

Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

Indicate by check mark whether the ~~registrant~~Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See ~~definitions~~the definition of “large accelerated filer”, “accelerated filer”, and “smaller reporting ~~company”, and “emerging growth~~ company” in Rule 12b-2 of the Exchange Act.:

Large accelerated filer	☐	Accelerated filer	☒
Non-accelerated filer	☐
~~Non-accelerated filer~~	☒	Smaller reporting company	☒
		Emerging growth company	☐☒

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒

As of ~~May 22, 2023,~~February 9, 2024, there were ~~49,167,170~~50,930,770 shares of Class A common stock, $0.0001 par value, issued and outstanding.*

*Does not include up to 60 million shares of Class E contingent common stock which automatically convert into shares of Class A common in three equal tranches when the price of the Class A common stock reaches $20, $30, and $50 per share, and under a variety of conditions within five, seven and ten years.

Table of Contents

ALLIANCE ENTERTAINMENT HOLDING CORPORATION

FORM 10-Q FOR THE QUARTER ENDED ~~MARCH~~DECEMBER 31, 2023

TABLE OF CONTENTS


		Page
Part I. Financial Information		1
Item 1.	Consolidated Financial Statements	1
	~~Unaudited~~ Condensed Consolidated Balance Sheets as of ~~September 30, 2022~~December 31, 2023 (Unaudited) and June 30, ~~2022~~2023	1
	~~Unaudited~~ Condensed Consolidated Statements of Operations (Unaudited) for the Three and ~~Nine~~Six Months Ended ~~March~~December 31, 2023, and 2022 ~~(Unaudited)~~	2
	~~Unaudited~~ Condensed Consolidated Statements of Changes in Stockholders’ Equity (Unaudited) for the Three and ~~Nine~~Six Months Ended ~~March~~December 31, 2023, and 2022 ~~(Unaudited)~~	3
	~~Unaudited~~ Condensed Consolidated Statements of Cash Flows (Unaudited) for the ~~Nine~~Six Months Ended ~~March~~December 31, 2023, and 2022 ~~(Unaudited)~~	5
	Notes to ~~unaudited~~ Condensed Consolidated Financial Statements (Unaudited)	6
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	2122
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	3132
Item 4.	Controls and Procedures	3132
Part II. Other Information		3335
Item 1.	Legal Proceedings	3335
Item 1A.	Risk Factors	3335
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	3435
Item 3.	Defaults Upon Senior Securities	3435
Item 4.	Mine Safety Disclosures	3435
Item 5.	Other Information	3435
Item 6.	Exhibits	3536
Part III. Signatures		3637

Table of Contents

PART I - FINANCIAL INFORMATION

Item 1. Unaudited Condensed Consolidated Financial Statements.

ALLIANCE ENTERTAINMENT HOLDING CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS


($ in thousands) except share information	March 31, 2023		June 30, 2022
($ in thousands)					December 31, 2023		June 30, 2023
		(Unaudited)			(Unaudited)
Assets
Current Assets
Cash and Cash Equivalents	$	1,034	$	1,469
Cash					$	2,655	$	865
Trade Receivables, Net		79,444		98,699		183,564		104,939
Related Party Receivable		—		245
Inventory, Net		163,057		249,439		113,933		146,763
Other Current Assets		7,852		9,128		6,438		8,299
Total Current Assets		251,387		358,980		306,590		260,866
Property and Equipment, Net		11,266		3,284		12,525		13,421
Operating Lease Right-Of-Use Assets		7,493		8,360
Operating Lease Right-of-Use Assets						3,090		4,855
Goodwill		87,151		79,903		89,116		89,116
Intangibles, Net		24,754		18,764		15,331		17,356
Other Long-Term Assets		270		3,748		274		1,017
Deferred Tax Asset, Net		5,904		—		1,089		2,899
Total Assets	$	388,225	$	473,039	$	428,015	$	389,530
Liabilities and Stockholders' Equity
Liabilities and Stockholders’ Equity
Current Liabilities
Accounts Payable	$	149,780	$	198,187	$	212,297	$	151,622
Accrued Expenses		9,805		11,573		7,982		9,340
Current Portion of Operating Lease Obligations		3,740		4,453		3,252		3,902
Current Portion of Finance Lease Obligations		2,404		—		2,540		2,449
Revolving Credit Facility, Net		127,343		135,968		—		133,281
Contingent Liability						511		150
Promissory Note		472		—		—		495
Income Taxes Payable		—		418
Total Current Liabilities		293,544		350,599		226,582		301,239
Warrants		205		—
Revolving Credit Facility, Net						96,939		—
Shareholder Loan (subordinated), Non-Current						10,000		—
Warrant Liability						41		206
Finance Lease Obligation, Non- Current		5,909		3,377		5,736		7,029
Operating Lease Obligations, Non-Current		4,608		4,864		215		1,522
Deferred Tax Liability		—		5,271
Total Liabilities		304,266		364,111		339,513		309,996
Commitments and Contingencies (Note 12)
Stockholders' Equity
Preferred Stock Par Value $0.0001 per share, Authorized 1,000,000 shares, 0 shares Issued and Outstanding		—		—
Common Stock: Par Value $0.0001 per share, Authorized 550,000,000 shares at March 31, 2023, and 100,000,000 at June 30, 2022; Issued and Outstanding 49,167,170 Shares as of March 31, 2023, and 47,500,000 at June 30, 2022		5		5
Stockholders’ Equity
Preferred Stock: Par Value $0.0001 per share, Authorized 1,000,000 shares, Issued and Outstanding 0 shares as of December 31, 2023 and June 30, 2023						—		—
Common Stock: Par Value $0.0001 per share, Authorized 550,000,000 shares at December 31, 2023, and at June 30, 2023; Issued and Outstanding 50,930,770 Shares as of December 31, 2023, and 49,167,170 at June 30, 2023						5		5
Paid In Capital		44,326		39,995		48,058		44,542
Treasury Stock		—		(2,674)
Accumulated Other Comprehensive Loss		(66)		(66)		(77)		(77)
Retained Earnings		39,694		71,668		40,516		35,064
Total Stockholders' Equity		83,959		108,928
Total Liabilities and Stockholders' Equity	$	388,225	$	473,039
Total Stockholders’ Equity						88,502		79,534
Total Liabilities and Stockholders’ Equity					$	428,015	$	389,530

The accompanying notes are an integral part of the unaudited condensed consolidated financial statements.

Table of Contents

ALLIANCE ENTERTAINMENT HOLDING CORPORATION

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

~~(UNAUDITED)~~

Three Months Ended

Three Months Ended

Nine Months Ended

Nine Months Ended
($ in thousands except share and per share amounts)

March 31, 2023

March 31, 2022

March 31, 2023

March 31, 2022
Net Revenues

$
227,728

$
320,412

$
911,590

$
1,152,198
Cost of Revenues (excluding depreciation and amortization)

200,402

280,274

837,897

998,304
Operating Expenses





Distribution and Fulfillment Expense

14,923

15,755

50,153

48,961
Selling, General and Administrative Expense

14,783

14,754

44,559

44,364
Depreciation and Amortization

1,679

1,957

4,845

6,330
Transaction Costs

3,348

31

4,355

(251)
IC DISC Commissions

—

1,751

2,833

8,014
Loss on Disposal of Fixed Assets

—

—

(3)

—
Total Operating Expenses

34,733

34,248

106,742

107,418
Operating (Loss) Income

(7,407)

5,890

(33,049)

46,477
Other Expenses





Interest Expense, Net

3,207

1,004

9,105

2,740
Total Other Expenses

3,207

1,004

9,105

2,740
(Loss) Income Before Income Tax (Benefit) Expense

(10,614)

4,887

(42,154)

43,737
Income Tax (Benefit) Expense

(2,864)

1,173

(11,380)

10,497
Net (Loss) Income

(7,750)

3,714

(30,774)

33,240
Net (Loss) Income per Share – Basic and Diluted

$
(0.16)

$
0.08

$
(0.64)

$
0.70
Weighted Average Common Shares Outstanding

48,426,206

47,500,000

47,804,228

47,500,000


	Three Months Ended		Three Months Ended		Six Months Ended		Six Months Ended
($ in thousands except share and per share amounts)	December 31, 2023		December 31, 2022		December 31, 2023		December 31, 2022
Net Revenues	$	425,586	$	445,162	$	652,341	$	683,862
Cost of Revenues (excluding depreciation and amortization)		377,883		424,265		578,384		637,495
Operating Expenses
Distribution and Fulfillment Expense		15,144		20,365		26,858		35,230
Selling, General and Administrative Expense		15,116		15,044		29,553		29,777
Depreciation and Amortization		1,412		1,529		3,054		3,166
Transaction Costs		—		367		—		1,007
IC DISC Commissions		—		1,444		—		2,833
Restructuring Cost		—		—		47		—
(Gain) on Disposal of Fixed Assets		—		(3)		—		(3)
Total Operating Expenses		31,672		38,746		59,512		72,010
Operating Income (Loss)		16,031		(17,849)		14,445		(25,643)
Other Expenses
Interest Expense, Net		3,328		3,544		6,468		5,898
Total Other Expenses		3,328		3,544		6,468		5,898
Income (Loss) Before Income Tax Expense (Benefit)		12,703		(21,393)		7,977		(31,541)
Income Tax Expense (Benefit)		3,789		(5,878)		2,525		(8,516)
Net Income (Loss)		8,914		(15,515)		5,452		(23,025)
Net Income (Loss) per Share – Basic and Diluted		0.18		(0.33)	$	0.11	$	(0.48)
Weighted Average Common Shares Outstanding		50,930,770		47,500,000		50,716,470		47,500,000

The accompanying notes are an integral part of the unaudited condensed consolidated financial statements.

Table of Contents

Alliance Entertainment Holding Corporation

Condensed Consolidated Statements of Changes in Stockholders’ Equity

~~Nine~~Three and Six Months Ended ~~March~~December 31, 2023 (unaudited)


							Accumulated
	Common						Other
	Stock Shares				Paid In		Comprehensive		Retained
($ in thousands)	Issued		Par Value		Capital		Loss		Earnings		Total
Balances at June 30, 2023		49,167,170	$	5	$	44,542	$	(77)	$	35,064	$	79,534
Issuance of Common Stock, net of transaction cost of $1.9 million		1,335,000		—		1,332		—		—		1,332
Stock-based Compensation Expense		—		—		1,328		—		—		1,328
Net loss		—		—		—		—		(3,462)		(3,462)
Balances at September 30, 2023		50,502,170	$	5	$	47,202	$	77	$	31,602	$	78,732
Issuance of Common Stock		—		—		798		—		—		798
Stock-based compensation		428,600		—		58		—		—		58
Net Income		—		—		—		—		8,914		8,914
Balances at December 31, 2023		50,930,770	$	5	$	48,058	$	(77)	$	40,516	$	88,502

The accompanying notes are an integral part of the unaudited condensed consolidated financial statements.

Table of Contents

Alliance Entertainment Holding Corporation

Condensed Consolidated Statements of Changes in Stockholders’ Equity

Three and Six Months Ended December 31, 2022 (unaudited)


	Common								Accumulated
	Stock						Cost of		Other
	Shares		Par		Paid In		Treasury		Comprehensive		Retained
($ in thousands)	Issued		Value		Capital		Stock		Loss		Earnings		Total
Balances at June 30, 2022		47,500,000	$	5	$	39,995	$	(2,674)	$	(66)	$	71,668	$	108,928
Net loss		—		—		—		—		—		(7,510)		(7,510)
Balances at September 30, 2022		47,500,000	$	5	$	39,995	$	(2,674)	$	(66)	$	64,158	$	101,418
Capital Contribution		—		—		6,592		—		—		—		6,592
Net loss		—		—		—		—		—		(15,515)		(15,515)
Balances at December 31, 2022		47,500,000	$	5	$	46,587	$	(2,674)	$	(66)	$	48,643	$	92,495

The accompanying notes are an integral part of the unaudited condensed consolidated financial statements.

Table of Contents

ALLIANCE ENTERTAINMENT HOLDING CORPORATION

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

Accumulated



Common

Cost of

Other

Stock Shares

Paid In

Treasury

Comprehensive

Retained

($ in thousands)

Issued


Par Value

Capital

Stock

Income (Loss)

Earnings

Total
Balances at June 30, 2022

47,500,000

$
5

$
39,995

$
(2,674)

$
(66)

$
71,668

$
108,928
Net loss

—

—

—

—

—

(7,509)

(7,509)
Balances at September 30, 2022

47,500,000

5

$
39,995

$
(2,674)

$
(66)

$
64,159

$
101,419
Capital Contribution

—

$
—

6,592

6,592
Net loss

—

—

—

—

—

(15,515)

(15,515)
Balances at December 31, 2022

47,500,000

$
5

$
46,587

$
(2,674)

$
(66)

$
48,643

$
92,495
Conversion of Treasury Stock

—

—

(2,674)

2,674

—

—

—
Merger: Reverse Recapitalization

1,667,170

—

(787)

—

—

—

(787)
Fair Value of Contingent Shares

—

—

1,200

—

—

(1,200)

—
Net loss

—

—

—

—

—

(7,750)

(7,750)
Balances at March 31, 2023

49,167,170

$
5

$
44,326

$
—

$
(66)

$
39,694

$
83,959

~~Table of Contents~~

~~Alliance Entertainment Holding Corporation~~

~~Condensed Consolidated Statements of Changes in Stockholders’ Equity~~

~~Nine Months Ended March 31, 2022 (unaudited)~~

Common








Accumulated




Stock

Cost of

Other





Shares

Par

Paid In

Treasury

Comprehensive

Retained

($ in thousands)

Issued

Value

Capital

Stock

Income (Loss)

Earnings

Total
Balances at June 30, 2021

47,500,000

$
5

$
39,995

$
(2,674)

$
(72)

$
43,049

$
80,303
Net Income

—

—

—

—

—

5,672

5,672
Balances at September 30, 2021

47,500,000

$
5

$
39,995

$
(2,674)

$
(72)

$
48,721

$
85,975
Net Income

—

—

—

—

—

23,854

23,854
Balances at December 31, 2021

47,500,000

$
5

$
39,995

$
(2,674)

$
(72)

$
72,575

$
109,829
Capital Contribution

—

—

2,518

—

—

—

2,518
Net Income

—

—

—

—

—

3,714

3,714
Balances at March 31, 2022

47,500,000

$
5

$
42,513

$
(2,674)

$
(72)

$
76,289

$
116,061

~~The accompanying notes are an integral part of the unaudited condensed financial statements.~~

~~Table of Contents~~

~~ALLIANCE ENTERTAINMENT HOLDING CORPORATION~~

~~UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS~~

~~(UNAUDITED)~~


	Nine Months Ended		Nine Months Ended		Six Months Ended		Six Months Ended
($ in thousands)	March 31, 2023		March 31, 2022		December 31, 2023		December 31, 2022
Cash Flows from Operating Activities:
Net (Loss) Income	$	(30,774)	$	33,240
Adjustments to Reconcile Net (Loss) Income to
Net Income (Loss)					$	5,452	$	(23,025)
Adjustments to Reconcile Net Income (Loss) to
Net Cash Provided by (Used in) Operating Activities:
Inventory write-down		10,800		—
Inventory Write-down						—		10,800
Depreciation of Property and Equipment		1,804		2,438		1,027		1,138
Amortization of Intangible Assets		3,041		3,872		2,027		2,028
Amortization of Deferred Financing Costs (Included in Interest)		125		125		159		83
Bad Debt Expense		330		170		333		330
Gain on Disposal of Fixed Assets		(3)		—		—		(3)
Changes in Assets and Liabilities, Net of Acquisitions
Trade Receivables		22,213		(5,539)		(78,957)		(69,193)
Related Party Receivable		245		476		—		245
Inventory		80,814		(108,113)		32,831		68,547
Income Taxes Payable\Receivable		(11,960)		(1,905)		2,557		(9,098)
Operating Lease Right-Of-Use Assets		867		3,190
Operating Lease Right-of-Use Assets						1,764		1,748
Operating Lease Obligations		(969)		(3,391)		(1,957)		(1,943)
Other Assets		5,606		(3,773)		2,217		(5,424)
Accounts Payable		(73,313)		(10,095)		60,675		(28,981)
Accrued Expenses		(512)		5,662		(2,022)		12,088
Net Cash Provided by (Used in) Operating Activities		8,314		(83,643)
Net Cash Provided by (Used In) Operating Activities						26,106		(40,660)
Cash Flows from Investing Activities:
Capital Expenditures						(131)		—
Cash Received for Business Acquisitions, Net of Cash Acquired		1		—		—		1
Net Cash Provided by Investing Activities		1		—
Net Cash (Used In) Provided by Investing Activities						(131)		1
Cash Flows from Financing Activities:
Payments on Financing Leases		—		(773)
Payments on Seller Notes		—		(3,750)
Payments on Revolving Credit Facility		(873,137)		(1,078,603)		(591,057)		(580,484)
Borrowings on Revolving Credit Facility		864,387		1,158,328		558,768		621,048
Proceeds from Financing advancements		—		3,377
Capital Contribution		—		2,518
Net Cash (Used in) Provided by Financing Activities		(8,750)		81,097
Net Decrease in Cash and Cash Equivalents		(435)		(2,546)
Proceeds from Shareholder Note (Subordinated), Non-Current						46,000		—
Payments on Shareholder Note (Subordinated), Current						(36,000)		—
Issuance of common stock, net of transaction costs						3,516		—
Deferred Financing Costs						(4,211)		—
Payments on Financing Leases						(1,201)		—
Net Cash (Used in) Provided By Financing Activities						(24,185)		40,564
Net Increase (Decrease) in Cash						1,790		(95)
Cash, Beginning of the Period		1,469		4,028		865		1,469
Cash, End of the Period	$	1,034	$	1,482	$	2,655	$	1,374
Supplemental disclosure for Cash Flow Information
Cash Paid for Interest	$	10,128	$	1,848	$	6,468	$	5,898
Cash Paid for Income Taxes	$	586	$	2,692	$	44	$	586
Supplemental Disclosure for Non-Cash Investing Activities
Supplemental Disclosure for Non-Cash Investing and Financing Activities
Stock-based compensation conversion to stock					$	1,386	$	—
Fixed Asset Financed with Debt	$	8,252	$	—	$	—	$	8,252
Capital Contribution	$	6,592	$	—
Capital Contribution (Note 13)					$	—	$	6,592

The accompanying notes are an integral part of these condensed consolidated ~~condensed~~ financial statements

Table of Contents

ALLIANCE ENTERTAINMENT HOLDING CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

~~MARCH~~DECEMBER 31, 2023

~~(UNAUDITED)~~

Note 1: Organization and ~~Basis~~Summary of ~~Presentation~~Significant Accounting Policies

Alliance Entertainment Holding Corporation, ~~(“Alliance”) was formed~~established on August 9, ~~2010. The Company provides full-service~~2010, is a comprehensive provider of distribution ofservices for pre-recorded music, video movies, video games, and ~~related~~associated accessories and ~~merchandising to~~merchandise. Primarily serving retailers and ~~other~~ independent customers ~~primarily in~~across the United ~~States. It provides product and commerce~~States, the company offers full-service solutions to both traditional “brick-and-mortar”, stores and e-commerce ~~retailers, and consumer direct websites, while maintaining~~platforms. Alliance maintains robust trading relationships with manufacturers of pre-recorded music, video movies, video games, and related accessories. ~~The~~Additionally, the Company ~~also provides third party~~extends its offerings by providing third-party logistics (3PL) products and ~~services~~services.

Under its retail division, DirectToU, Alliance sells all AENT products through wholly-owned websites, catalogs, and third-party marketplaces. Through these various channels, Alliance Entertainment Holding Corporation remains a key player in the distribution and retail landscape, catering to ~~customers.~~diverse customer needs.

On February 10, 2023, Alliance, Adara Acquisition Corp. ~~(‘‘Adara’’~~(“Adara”) and a Merger Sub consummated the closing of the transactions contemplated by a Business Combination Agreement. Pursuant to the terms of the Business Combination Agreement, a business combination of Legacy Alliance (Alliance Entertainment Holding Corporation ~~pre-Merger,~~Pre-Merger, as defined below) and Adara was affected by the merger of Merger Sub with and into Alliance (the “Merger” or the “Business Combination”), with Alliance surviving the Merger as a wholly- owned subsidiary of Adara. Following the consummation of the Merger on the closing date, Adara changed its name from Adara Acquisition Corp. to Alliance Entertainment Holding Corporation (the “Company”). See Note 16.

Pursuant to the Business Combination Agreement, Adara exchanged (i) 47,500,000 shares of Class A common stock of Adara to holders of common stock of Legacy Alliance and (ii) 60,000,000 shares of Class E common stock of Adara to the Legacy Alliance stockholders were placed in an escrow account to be released to such Legacy Alliance stockholders and converted into Class A common stock upon the occurrence of certain triggering events.

On July 1, 2022, the Company added the assets and liabilities of Think3Fold ~~LTD.~~LLC. to its portfolio.

Consolidated financial statements are presented for Alliance Entertainment Holding Corporation and business operations are conducted through seven subsidiaries. The Company’s corporate offices are headquartered in Plantation, FL, with primary warehouse facilities located in Shepherdsville, KY and Shakopee, MN.

The accompanying unaudited condensed consolidated financial statements include the accounts of the Company. All material intercompany balances and transactions have been eliminated in consolidation.

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial statements. Accordingly, the accompanying unaudited condensed consolidated financial statements do not include certain information and footnotes required by GAAP for complete financial statements.

However, in management’s opinion, the accompanying unaudited condensed consolidated financial statements contain all adjustments (consisting only of normal recurring accruals and adjustments) which are necessary in order to state fairly the Company’s results of operations, financial position, stockholders’ equity and cash flows as of and for the periods presented. The results of operations for interim periods are not necessarily indicative of the results to be expected for the full year or any other future period. The unaudited condensed consolidated financial statements should be read in conjunction with the Company’s audited consolidated financial statements and related notes, including the Summary of Significant Accounting Policies, included in the ~~Registration Statement~~Company’s Annual Report on Form S410-K filed ~~November 30, 2022.~~October 19, 2023. The June 30, ~~2022,~~2023, balance sheet information contained herein was derived from the Company’s audited consolidated financial statements as of that date included therein.

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Basis for Presentation

The preparation of the unaudited condensed consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. The estimates and assumptions made may not prove to be correct, and actual results could differ from the estimates.

Significant estimates inherent in the preparation of the accompanying condensed unaudited consolidated financial statements include ~~management's~~management’s estimates of sales returns, warrants fair value, rebates, inventory valuation, and inventory recoverability. On an ongoing basis, management evaluates its estimates compared to historical experience and trends, which form the basis for making judgments about the carrying value of assets and liabilities.

Liquidity

For the fiscal year ended June 30, 2023 and the three-month period ended September 30, 2023, Alliance disclosed substantial doubt regarding its ability to continue as a going concern, citing operational losses, a working capital deficit, and the approaching December 31, 2023 maturity date of the Revolver with Bank of America (the Revolver).

On December 21, 2023, the Company secured a new three-year $120 million credit facility, replacing the Revolver (see Note 9). Additionally, the Company has implemented certain strategic initiatives to reduce expenses and focus on the sale of higher margin products. As a result of the new credit facility, combined with these initiatives and the Company’s financial performance for the three and six months ended December 31, 2023, the Company has concluded that it has sufficient cash to fund its operations and obligations (from its cash on hand, operations, working capital and availability on the credit facility) for at least twelve months from the issuance of these consolidated financial statements.

Concentration of Credit Risk

Concentration of Credit Risk consists of the following at:

Revenue


	3 Months Ended		3 Months Ended		6 Months Ended		6 Months Ended
($ in thousands)	December 31, 2023		December 31, 2022		December 31, 2023		December 31, 2022
Customer #1	15.0	%	22.0	%	15.8	%	19.3	%
Customer #2	10.8	%	*		10.9	%	*

* Less than 10%

Receivables Balance


	December 31, 2023		June 30, 2023
Customer #1	20.5	%	15.5	%
Customer #2	*	%	12.1	%
Customer #3	*	%	10.5	%

*Less than 10%

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Purchases

~~Liquidity and Going Concern~~


	3 Months Ended		3 Months Ended		6 Months Ended		6 Months Ended
($ in thousands)	December 31, 2023		December 31, 2022		December 31, 2023		December 31, 2022
Supplier #1	35.8	%	11.8	%	28.5	%	16.4	%
Supplier #2	15.9	%	*		17.5	%	20.4	%

* Less than 10%

Payables Balance


	December 31, 2023		June 30, 2023
Supplier #1	17.2	%	12.3	%
Supplier #2	12.7	%	*	%

*Less than 10%

Accounting Pronouncements

In October 2021, The ~~accompanying unaudited~~FASB issued ASU No. 2021-08, Accounting for contract Assets and Contract Liabilities from contracts with customers (Topic 805) (“ASU 2021-08”). ASU 2021-08 requires an acquirer in a business combination to recognize and measure contract assets and contract liabilities (deferred revenue) from acquired contracts using the revenue recognition guidance in Topic 606. At the acquisition date, the acquirer applies the revenue model as if it had originated the acquired contracts. ASU 2021-08 is effective for annual periods beginning after December 15, 2022, including interim periods within those fiscal years. The company adopted this ASU using the prospective approach method in July 2023. There have been no acquisitions since adoption and thus did not have a material impact on the Company’s condensed consolidated financial statements have been prepared assuming the Company will continue as a going concern. The going concern basis of presentation assumes that the Company will continue in operation one year after the date these financial statements are issued and will be able to realize its assets and discharge its liabilities and commitments in the normal course of business.

Pursuant to the requirements of the Financial Accounting Standards Board’s (the “FASB”) Accounting Standards Codification (“ASC”) Topic 205-40, Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern, management must evaluate whether there are conditions or events, considered in the aggregate, that raise substantial doubt about the Company’s ability to continue as a going concern for one year from the date these financial statements are issued. This evaluation does not take into consideration the potential mitigating effect of management’s plans that have not been fully implemented or are not within control of the Company as of the date the financial statements are issued. When substantial doubt about the Company’s ability to continue as a going concern exists, management evaluates whether the mitigating effect of its plans sufficiently alleviates the substantial doubt. The mitigating effect of management’s plans, however, is only considered if both (1) it is probable that the plans will be effectively implemented within one year after the date that the financial statements are issued, and (2) it is probable that the plans, when implemented, will mitigate the relevant conditions or events that raise substantial doubt about the Company’s ability to continue as a going concern within one year after the date that the financial statements are issued.statements.

The Company’s principal source of liquidity is its borrowing capacity under the revolving credit facility (the “Revolver”) with Bank of America, which matures on September 29, 2023, and cash generated from operations. The Company has suffered losses from operations for the nine-month period ended March 31, 2023, and has a working capital deficit. Management is in active discussions with lenders to renew the Revolver prior to its maturity. These conditions raise substantial doubt regarding the Company’s ability to continue as a going concern for a period of at least one year from the date of issuance of these unaudited condensed consolidated financial statements. Management is currently evaluating cost reduction opportunities, process efficiencies, and its overall growth and diversification strategy. If the Company is unable to get an extension of its Revolver and implement sufficient mitigation efforts, the Company may be forced to limit its business activities or be unable to continue as a going concern, which would have a material adverse effect on its results of operations and financial condition.

Recently Issued but Not Yet Adopted Accounting Pronouncements

Accounting Standard Update 2023-09, Improvements to Income Tax Disclosures (“ASU 2023-09”). In ~~August 2020,~~December 2023, the ~~Financial Accounting Standards Board ("FASB")~~FASB issued ~~Accounting Standards Update ("ASU") 2020-06, Debt—Debt~~ASU 2023-09, which requires more detailed income tax disclosures. The guidance requires entities to disclose disaggregated information about their effective tax rate reconciliation as well as expanded information on income taxes paid by jurisdiction. The disclosure requirements will be applied on a prospective basis, with ~~Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging— Contracts in Entity’s Own Equity (Subtopic 815-40)~~the option to ~~improve, simplify, and enhance the financial reporting requirements for convertible instruments and contracts in an entity’s own equity. ASU 2020-06~~apply them retrospectively. The standard is effective ~~for public business entities that meet the definition of an SEC filer, excluding entities eligible to be smaller reporting companies as defined by the SEC,~~ for fiscal years beginning after December 15, ~~2021, including interim periods within those fiscal years. For all other entities,~~2024, with early adoption permitted. We are evaluating the ~~amendments are~~disclosure requirements related to the new standard.

Accounting Standard Update 2023-07, Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures (“ASU 2023-07”). In November 2023, the FASB issued ASU 2023-07, which is intended to improve reportable segment disclosure requirements, primarily through additional disclosures about significant segment expenses. The standard is effective for fiscal years beginning after December 15, 2023, ~~including~~and interim periods within ~~those~~ fiscal ~~years.~~years beginning after December 15, 2024, with early adoption permitted. The ~~Company adopted this ASU using~~amendments should be applied retrospectively to all prior periods presented in the ~~modified retrospective method on July 1, 2022. The adoption did not result in any cumulative adjustment~~financial statements. We are evaluating the disclosure requirements related to the ~~opening balance of retained earnings.~~new standard.

Note 2: Summary of Significant Accounting Policies

There have been no material changes or updates to the Company’s significant accounting policies from those described in Note 1 to the Company’s audited consolidated financial statements included in the Annual Report on Form 10-K for the fiscal year ended June 30, 2023.

Restricted Cash

During the six months ended December 31, 2023, the company had restricted cash of $1.2 million reported on the balance sheet in Cash. The restricted funds are being held to fulfill the collateral requirements associated with a secured line of credit for company used credit cards. These funds are not readily available for general operating purposes and have been set aside to secure the credit line, as required by the terms of the agreement with the financial institution providing the line of credit.

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The Company anticipates that the restricted cash will continue to be held in accordance with the terms of the credit facility. Any changes to the amount or release of restrictions will be disclosed in subsequent financial statements, as applicable.

Earnings per Share

Basic Earnings Per Share (“EPS”) is computed by dividing net income available to common shareholders by the weighted average shares outstanding during the period. Diluted EPS takes into account the potential dilution that could occur if securities or other contracts to issue shares, such as stock options, warrants, and unvested restricted stock units, were exercised and converted into common shares and the impact would not be antidilutive. Diluted EPS is computed by dividing net income available to common shareholders by the weighted average shares outstanding during the period, increased by the number of additional shares that would have been outstanding if the potential shares had been issued and were dilutive. Contingently issuable shares are included in basic net loss per share only when there is no circumstance under which those shares would not be issued.

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As a result of the Merger (see Note 16), the Company has retroactively adjusted the weighted average shares outstanding prior to February 10, 2023, to give effect to the Exchange Ratio used to determine the number of shares of Class A Common Stock into which they were converted.

The following table sets forth the computation of basic and diluted net earnings (loss) per share of Class A Common Stock for the three and ~~nine~~six months ended ~~March~~December 31, 2023, and 2022:


	Three Months Ended		Three Months Ended		Nine Months Ended		Nine Months Ended		Three Months Ended		Three Months Ended		Six Months Ended		Six Months Ended
	March 31, 2023		March 31, 2022		March 31, 2023		March 31, 2022		December 31, 2023		December 31, 2022		December 31, 2023		December 31, 2022
Net (loss) Income (in thousands)	$	(7,750)	$	3,714	$	(30,774)	$	33,240
Net Income (Loss) (in thousands)									$	8,914	$	(15,515)	$	5,452	$	(23,025)
Basic and diluted shares		—		—		—		—
Weighted-average Class A Common Stock outstanding		48,426,206		47,500,000		47,804,228		47,500,000		50,930,770		47,500,000		50,716,470		47,500,000
Loss per share for Class A Common Stock		—		—		—		—
Income (Loss) per share for Class A Common Stock
— Basic and Diluted	$	(0.16)	$	0.08	$	(0.64)	$	0.70	$	0.18	$	(0.33)	$	0.11	$	(0.48)

~~There~~For the three and six months ended December 31, 2023, there are 60,000,000 shares of contingently issuable Class A Common Stock that were not included in the computation of basic earnings (loss) per share since the contingencies for the issuance of these shares have not been met as of ~~March~~December 31, 2023. There are also 9,920,000 warrants outstanding that have been excluded from diluted earnings per share because they are anti-dilutive.

~~The Company does not have any other~~ There were no potentially dilutive securities ~~therefore,~~in the ~~weighted average number of common shares outstanding used to calculate both basic and diluted net loss per share is the same.~~

There have been no other material changes to the Company’s significant accounting policies from those described in Note 1 to the Company’s audited consolidated financial statements for the fiscal yearthree or six months ended ~~June 30,~~December 31, 2022.

Note 3: Trade Receivables, Net

Trade Receivables, Net consists of the following at:


($ in thousands)	March 31, 2023		June 30, 2022		December 31, 2023		June 30, 2023
Trade Receivables	$	82,187	$	101,064	$	186,332	$	106,467
Less:
Allowance for Credit Losses		(286)		(557)		(380)		(235)
Sales Returns Reserve, Net		(1,694)		(1,898)		(1,685)		(1,470)
Customer Rebate and Discount Reserve		(763)		90		(703)		177
Total Allowances		(2,743)		(2,366)		(2,768)		(1,528)
Trade Receivables, Net	$	79,444	$	98,699	$	183,564	$	104,939

~~Concentration~~Trade Receivables, Net as of ~~Credit Risk~~

~~Concentration of Credit Risk consists of the following at:~~

~~Revenue~~June 30, 2022, were $98.7 million.

Nine Months Ended

Nine Months Ended

($ in thousands)

March 31, 2023

March 31, 2022

Customer #1

13.0
%
23.6
%
Customer #2

10.9
%
*

*~~Less than 10%~~

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~~Receivables Balance~~

($ in thousands)

March 31, 2023

June 30, 2022

Customer #1

17.3
%
21.4
%
Customer #2

15.3
%
*

Customer #3

10.0
%
14.2
%

*~~Less than 10%~~

Note 4: Inventory, Net

The Company completed an evaluation of the net realizable value of our inventory during the nine months ended March 31, 2023. As a result of this evaluation, the Company recorded a $10.8 million inventory write down to reflect it at its net realizable value, which is recorded in cost of revenue in the condensed consolidated financial statements.

Inventory, Net (all finished goods) consists of the following at:


($ in thousands)	March 31, 2023		June 30, 2022		December 31, 2023		June 30, 2023
Inventory	$	173,029	$	255,236	$	121,599	$	156,016
Less: Reserves		(9,972)		(5,797)		(7,666)		(9,253)
Inventory, Net	$	163,057	$	249,439	$	113,933	$	146,763

Note 5: Other Current and Long-Term Assets

Other Current and Long-Term Assets consists of the following at:


($ in thousands)	March 31, 2023		June 30, 2022		December 31, 2023		June 30, 2023
Other Assets - Current
Prepaid Intellectual Property	$	3,007	$	2,443	$	3,099	$	2,890
Prepaid Insurance		532		431		385		1,365
Prepaid Acquisitions		—		2,243
Prepaid Freight		143		216
Prepaid Manufacturing Components		104		79		275		164
Prepaid Rent		1,302		—		—		1,054
Prepaid Maintenance		1,209		885		1,824		1,572
Prepaid Shipping Supplies		1,555		2,831		855		1,254
Total Other Assets - Current	$	7,852	$	9,128	$	6,438	$	8,299

Other Long-Term Assets
Income tax receivable						—		747
Deposits	$	270	$	3,748	$	274	$	270
Total Other Long-Term Assets	$	270	$	3,748	$	274	$	1,017

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Note 6: Property and Equipment, Net

Property and Equipment, Net consists of the following at:


($ in thousands)	March 31, 2023		June 30, 2022		December 31, 2023		June 30, 2023
Property and Equipment
Leasehold Improvements	$	1,680	$	1,680	$	1,680	$	1,680
Machinery and Equipment		26,963		19,440		29,458		29,537
Furniture and Fixtures		1,749		3,530		1,749		1,749
Capitalized Software		10,508		11,451		10,508		10,508
Equipment Under Capital Leases		12,488		12,917		12,488		12,488
Computer Equipment		1,626		2,662		1,626		1,626
Construction in Progress		154		154		—		154
		55,168		51,834		57,509		57,742
Less: Accumulated Depreciation and Amortization		(43,902)		(48,550)		(44,984)		(44,321)
Total Property and Equipment, Net		11,266	$	3,284		12,525	$	13,421

Depreciation Expense for the three months ended ~~March~~December 31, 2023, and 2022 was ~~$0.7~~$0.4 million and $0.5 million respectively, and for the ~~nine~~six months ended ~~March~~December 31, 2023, and 2022 was ~~$1.8~~$1.0 million and ~~$2.5~~$1.1 million, respectively.

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Note 7: Goodwill and Intangibles, Net


			December 31, 2023		June 30, 2023
($ in thousands)
Goodwill, as of June 30, 2022	$	79,903
Goodwill, beginning of period			$	89,116	$	79,903
Additions from business acquisition		7,248		—		9,213
Goodwill, as of March 31, 2023	$	87,151
Goodwill, end of period			$	89,116	$	89,116

Intangibles, Net consists of the following at:


($in thousands)	March 31, 2023		June 30, 2022		December 31, 2023		June 30, 2023
Intangibles:
Customer Relationships	$	78,000	$	78,000	$	78,000	$	78,000
Trade Name - Alliance		5,200		5,200		5,200		5,200
Covenant Not to Compete		10		10		10		10
Mecca Customer Relationships		8,023		8,023		8,023		8,023
Customer List		18,792		9,760		12,760		12,760
Total	$	110,025	$	100,993	$	103,993	$	103,993
Accumulated Amortization		(85,271)		(82,229)		(88,662)		(86,637)
Intangibles, Net	$	24,754	$	18,764	$	15,331	$	17,356

During the three months ended ~~March~~December 31, 2023, and 2022, the Company recorded amortization expense of $1.0 million, and ~~$1.3 million, respectively, and~~ during the ~~nine~~six months ended ~~March~~December 31, 2023, and 2022, the Company recorded amortization expense of ~~$3.0 million and $3.9 million, respectively.~~$2.0 million.

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Expected amortization over the next five years including the remainder of fiscal ~~2023~~2024 and thereafter, as of ~~March~~December 31, 2023, is as follows:


($ in thousands)	Intangible Assets		Intangible Assets
Year Ended June 30
2023	$	1,767
2024		4,223	$	1,951
2025		3,651		3,326
2026		3,339		3,014
2027		3,289		2,954
2028				1,931
Thereafter		8,485		2,155
Total Expected Amortization	$	24,754	$	15,331

Note 8: Accrued Expenses

Accrued Expenses consists of the following at:


($ in thousands)	March 31, 2023		June 30, 2022		December 31, 2023		June 30, 2023
Marketing Funds Accruals	$	3,762	$	2,738	$	3,553	$	5,203
Payroll and Payroll Tax Accruals		2,214		3,904		2,704		2,765
Accruals for Other Expenses		3,829		4,931		1,725		1,372
Total Accrued Expenses	$	9,805	$	11,573	$	7,982	$	9,340

Note 9: ~~Lines of~~Revolving Credit ~~and Long-Term Obligation~~Facility

~~Line of Credit~~

~~The~~On December 21, 2023, the Company ~~executed an amendment to~~terminated its ~~Credit Facility~~old credit facility with Bank of America which had a maturity on January 24, 2022, (retroactive to January 1, 2022), to transition the interest rate benchmark from Libor to a Secured Overnight Financing Rate (SOFR). The effective interest rate on the revolver using SOFR for the nine months ended MarchDecember 31, 2023, ~~was 5.48% (SOFR plus~~and established a spread of 2.11%). The effective interest rate for the nine months ended March 31, 2022, was 2.21%. All assets (with certain capitalized lease exceptions) and interest in assets of the Company are pledged as collateral under the Credit Facility.

~~The~~new Credit Facility ~~matures on September 29, 2023,~~ with ~~a variable annual interest rate equal to the higher of the Prime rate, Federal Funds rate plus~~ ~~.5%~~ orWhite Oak Commercial Financing, LLC.

The Bank of America ~~Libor rate plus 2%, up to January 1, 2022, and SOFR plus a spread of 2.11% going forward. On June 30, 2022, the~~ Credit Facility, ~~with Bank of America was increased from $175 million to $225 million. On April 21, 2023,~~which underwent adjustments in ~~connection with Amendment No. 12 as defined below, the Credit Facility with Bank of America was reduced from $225 million to $175 million.~~

~~The Credit Facility contains certain financial covenants with which the Company is required to comply. Failure to comply with the financial covenants contained in the Credit Facility could result~~its limit, has been fully terminated, resulting in an ~~event~~outstanding revolver balance of default. An event of default, if not cured or waived, would permit acceleration of any outstanding indebtedness under the Credit Facility. The Company obtained a waiver for non-compliance with one non-financial covenant related to its delivery of the monthly unaudited financial statements and compliance certificates for the periods pertaining to June 30, 2022, July 31, 2022, and August 31, 2022. These non-compliances resulted in events of default under the Revolving Credit Facility and accordingly, the Credit Facility was classified as a current liability$0 million as of ~~June 30, 2022.~~

On April 21, 2023, certain subsidiaries of the Company, as Borrowers thereunder (the “Borrowers”), entered into an Amendment Number Twelve and Waiver (“Amendment No. 12”) to the Credit Facility. Amendment No. 12 provides for the waiver by Bank of America and the Required Lenders (as defined in the Credit Facility) of certain specified events of default under the Credit Facility, including the failure by the Borrowers to meet the Fixed Charge Coverage Ratio covenant requirement for the twelve trailing months ended November 30, 2022, December 31, 2022, January 31, 2023 and February 28, 2023 and certain other non-financial covenant breaches, and modifies the Credit Facility to, among other things, (i) suspend the Fixed Charge Coverage Ratio covenant requirement until the first calendar month end for which the Borrowers are in compliance with such requirement (the “Fixed Charge Coverage Compliance Date”), and (ii) add an additional covenant requiring the Borrowers to maintain specified minimum levels of EBITDA,2023.

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~~which requirement~~White Oak Commercial Finance, LLC.

On December 21, 2023, the company entered a new credit facility with White Oak Commercial Financing, LLC with a maturity date of December 21, 2026. The new credit facility includes a $120 million asset based revolving credit facility (the “Revolving Credit Facility”). Borrowings under the new Revolving Credit Facility bear interest at the 30-day SOFR rate, subject to a floor rate of 2.00% plus a margin of 4.50% to 4.75%, depending on the level of the Company’s utilization of the facility and consolidated fixed charge coverage ratio. The effective interest rate as of December 31, 2023 was 8.9%. The Revolving Credit Facility also includes an unused commitment fee of 0.5%. Upon the reduction or termination of the commitments under the Revolving Credit Facility prior to the Revolving Credit Facility maturity date, the Company will ~~remain in effect until the Fixed Charge Coverage Compliance Date. Pursuant to Amendment No. 12, the Borrowers agreed~~be required to pay an early termination fee of 2.0% if reduced or terminated prior to ~~Agent a waiver fee in the~~December 21, 2024, or 1.0% if reduced or terminated after December 21, 2024, but before August 21, 2025 plus an amount of ~~approximately $180 thousand.~~

~~Availability~~minimum interest if reduced or terminated on or prior to June 21, 2025. Maximum borrowings under the Revolving Credit Facility are calculated pursuant to a formula based on eligible accounts receivable and eligible inventory, subject to adjustment at the discretion of the lenders. The Revolving Credit Facility also contains customary representations and warranties, events of default, financial reporting requirements, and affirmative covenants, including a fixed charge coverage ratio at the end of each month (on a trailing twelve months (TTM) basis) of at least 1.0 to 1.1, and certain additional covenants, including restrictions limiting the Company’s ability to incur additional indebtedness, grant liens, pay dividends, hold unpermitted investments, or make material changes to the business. The Revolving Credit Facility is ~~limited~~secured by a first priority security interest on the ~~Company's borrowing base calculation,~~Company’s and the borrowers’ and other guarantors’ cash, accounts receivable, books and records and related assets.

The Company was in compliance with its covenants as ~~defined in the~~December 31, 2023.

Revolving Credit Agreement. In addition, there is a commitment fee of 0.25% for unused credit line with fees for the nine months ended March 31, 2023, and 2022 of $134 thousand and $120 thousand, respectively. Availability at March 31, 2023, was $24 million with an outstanding revolver balance of $127 million. Availability at June 30, 2022 was $48 million with an outstanding revolver balance of $136 million.

~~Revolver~~Facility Balance consists of the following at:

($ in thousands)

March 31, 2023

June 30, 2022
Bank of America Revolving Credit Agreement

$
127,426

$
136,176
Less: Deferred Finance Costs

(83)

(208)
Revolving Credit, Net

$
127,343

$
135,968


($in thousands)	December 31, 2023		June 30, 2023
White Oak Revolving Credit Facility Outstanding Balance	$	101,033	$	—
Less: Deferred Finance Costs		(4,094)		—
Revolving Credit Facility, Net	$	96,939	$	—


($ in thousands)	December 31, 2023		June 30, 2023
Bank of America Revolving Credit Outstanding Balance	$	—	$	133,323
Less: Deferred Finance Costs		—		(42)
Revolving Credit, Net	$	—	$	133,281

Note 10: Employee Benefits

Company Health Plans

The Company sponsors the Alliance Health & Benefits Plan (AHBP) consisting of the following plans: self-insured medical (PPO and HDHP), dental (PPO and HMO), vision, life Insurance, and short & long-term disability. The medical insurance is self-insured to a maximum company exposure of ~~$200 thousand~~$225,000 per individual occurrence, at which time a stop loss policy covers the balance of covered claims. The Company contributes various percentages to different levels of premium coverage. As of ~~March~~December 31, 2023, the Company fully accrued for estimated run out exposure on a mature claim basis, as provided and calculated by our plan administrator.

The Dental insurance HMO is self-insured to a maximum per individual procedure based on a published schedule which measures exposure. The PPO policy is fully insured. The Company contributes various percentages to different levels of premium coverage. As of ~~March~~December 31, 2023, the Company was fully accrued for estimated run out exposure on a mature claim basis, as provided and calculated by the plan administrator. The vision plan, life insurance plan, and short and long-term disability plans are fully insured, sponsored by the Company and premiums are paid by the employer and employee based on various Board approved schedules. At ~~March~~December 31, 2023, and June 30, ~~2022,~~2023, the accrued estimated run out exposure totaled approximately ~~$218 thousand and $234 thousand, respectively,~~$218,000, for the medical and dental insurance plans. Accrued estimated runout exposure is included in accrued expenses on the condensed consolidated balance sheets.

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401(k) Plan

The Company has the Alliance Entertainment 401(k) Plan (the Plan) covering all eligible employees of the Company. All employees over the age of 18 are eligible to participate in the Plan at the beginning of the month following the date of hire. The Plan has automatic deferral at the beginning of the month following the date of hire. Employees are automatically enrolled in the Plan with a 3% contribution; however, they have the option to increase/decrease their deferrals or opt out of the Plan at any time. The Company currently offers a match contribution of ~~$.50~~$0.50 of every dollar up to 4% of contribution percentage. The Company conducts a retirement plan review on an annual basis.

Note 11: Income Taxes

~~The~~Our effective tax rate was approximately 32% for the six months ended December 31, 2023, compared to 27% for the ~~nine~~same period of 2022.

The federal statutory tax rate is 21.0% and the average state tax rate, net of the associated federal deduction is approximately 7%. For the six months ended March 31, 2023 respectively, compared to 26% for the same periods of 2022. State tax rates vary among states and average approximately 6.0% although some state rates are higher, and a small number of states do not impose an income tax.

~~For the nine months ended March~~December 31, 2023, and 2022, the difference between the Company’s effective tax rate and the federal statutory rate primarily resulted from state income ~~taxes.~~taxes and stock-based compensation.

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Note 12: Commitments and Contingencies

Commitments

The Company enters into various agreements with suppliers for the products it distributes. The Company had no long-term purchase commitments or arrangements with its suppliers as of ~~March~~December 31, 2023, and June 30, ~~2022.~~2023.

Litigation, Claims and Assessments

We are exposed to claims, litigation and/or cyber-attacks of varying degrees arising in the ordinary course of business and use various methods to resolve these matters. When a loss is probable, we record an accrual based on the reasonably estimable loss or range of loss. When no point of loss is more likely than another, we record the lowest amount in the estimated range of loss and, if material, disclose the estimated range of loss. We do not record liabilities for reasonably possible loss contingencies but do disclose a range of reasonably possible losses if they are material and we are able to estimate such a range. If we cannot provide a range of reasonably possible losses, we explain the factors that prevent us from determining such a range. Historically, adjustments to our estimates have not been material. We believe the recorded reserves in our consolidated financial statements are adequate in light of the probable and estimable liabilities. We do not believe that any of these identified claims or litigation will be material to our results of operations, cash flows, or financial condition.

On March 31, 2023, a class action complaint, titled Matthew McKnight v. Alliance Entertainment Holding Corp. f/k/a Adara Acquisition Corp., Adara Sponsor LLC, Thomas Finke, Paul G. Porter, Beatriz Acevedo-Greiff, W. Tom Donaldson III, Dylan Glenn, and Frank Quintero, was filed in the Delaware Court of Chancery against our pre-Business Combination board of directors and executive officers and ~~the~~Adara Sponsor LLC, alleging breaches of fiduciary duties by purportedly failing to disclose certain information in connection with the Business Combination and by approving the Business Combination. We intend to vigorously defend the lawsuit. There can be no assurance, however, that we will be successful. At this time, we are unable to estimate potential losses, if any, related to the lawsuit. The Company has accrued $511,000 and $150,000 as of December 31, 2023, and June 30, 2023, respectively, based on the expected loss.

Note 13: Related Party Transactions

Interest-Charge Domestic International Sales Corporation (“IC-DISC”)

The Company had an affiliate, My Worldwide ~~Market Place,~~Marketplace, Inc., which was an IC-DISC and was established February 12, 2013. The IC-DISC was owned by the same shareholders of the Company, pre-Merger. Effective December 31, 2022, IC-DISC was discontinued and there will be no future accruals or commissions paid out.

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The IC-DISC was organized to manage sales to certain qualified customers and receive commissions from the Company for this activity. The commissions expenses were $0 and ~~$1.8~~$1.4 million for the three months ended ~~March 31, 2023, and 2022, and $2.8 million and $8.4 million for the nine months ended March~~December 31, 2023, and 2022, respectively. For the six months ended December 31, 2023, and 2022 commissions expenses were $0 and $2.8 million, respectively. The ~~commission was~~commissions were determined under formulas and rules defined in the law and regulations of the US tax code, and under these regulations, the ~~commission was~~commissions were deductible by the Company and ~~results~~resulted in a specified profit to the IC-DISC. This net profit was not subject to federal income tax. The IC-DISC distributed the profit to its stockholders, who were taxed on the income as a dividend. The owners of the IC-DISC elected to forgive the commissions earned for the twelve months ended December 31, 2022. The forgiveness of $6.6 million was recorded as a deemed capital contribution by the Company ~~Stockholders.~~Stockholders for the twelve months ended December 31, 2022. There was no similar forgiveness of commissions for the twelve months ended December 31, 2023.

GameFly Holdings, LLC

On February 1, 2023, Alliance entered into a Distribution Agreement (the “Distribution Agreement”) with GameFly Holdings, Inc., a customer of Alliance that is owned by the principal stockholders of Alliance. The Distribution Agreement is effective from February 1, 2023, through March 31, 2028, at which time the Distribution Agreement continues indefinitely until either party provides the other party with six-month advance notice to terminate the Distribution Agreement. During the three months ended December 31, 2023 and 2022 and the six months ended December 31, 2023 and 2022, Alliance had distribution revenue in the amount of $0.1 million, $0, $0.1 million and $0 respectively, recorded as net revenues in the unaudited condensed consolidated statements of operations.

During the three-month periods ended December 31, 2023, and 2022 and the six-month periods ended December 31, 2023, and 2022, the Company had additional sales to GameFly of $4.3 million, $1.6 million, $5.1 million, and $2.3 million, respectively.

~~Captive Insurance Policies~~MVP Logistics, LLC

MVP Logistics is an independent contractor, which, prior to August 31, 2023, was partially owned by Joe Rehak, the SVP of Operations of COKeM International Limited, which was acquired by Alliance in September 2020. Subsequent to August 31, 2023, Mr. Rehak no longer has an equity stake in MVP Logistics. Alliance believes the amounts payable to MVP Logistics are at fair market value.

During the three months ended December 31, 2023 and 2022, Alliance incurred costs with MVP Logistics LLC, in the amount of $0 and $3.5 million respectively and $1.0 million and $5.4 million for the six months ended December 31, 2023, and 2022, respectively, recorded as cost of revenues in the unaudited condensed consolidated statements of operations, for freight shipping fees, transportation costs, warehouse distribution, and MVP 3PL services (for Arcades) at the Redlands, California and South Gates, California distribution facilities.

Ogilvie Loans

On July 3, 2023 the Company entered in a $17 million line of credit (the “Ogilvie Loan”) with Bruce Ogilvie, ~~Executive Chairman and~~ a principal stockholder, whereas it borrowed $10 million on that date, and $5 million on July 10, 2023. Such amounts were repaid on July 26, 2023. The Company borrowed $17 million under the Ogilvie Loan on August 10, 2023 and repaid $7 million on August 28, 2023. As of Alliance, and Jeff Walker, Chief Executive Officer, a director, and a principal stockholder of Alliance, established two insurance companies: Airlie Protection Ins. Co., Inc. and Protection for You Ins. Co., Inc. These insurance companies insured the general assets, liabilities, and claims of Alliance through March 30, 2022, and were not renewed for future periods. Premium payments were allowed basedDecember 31, 2023, $10 million was outstanding on the Ogilvie Loan.

The Ogilvie Loan ~~Agreement dated February 21, 2017. The Company was not a guarantor~~matures on December 22, 2026 and ~~did not have exposure in~~bears interest at the ~~event~~rate of ~~a loss. Total captive policy~~the 30-day SOFR plus 5.5%. Interest expense for the three ~~months March~~and six-months ended December 31, 2023, was $239,219 and ~~2022, were $0.0 million and $0.54 million, respectively, and for the nine months ended March~~$481,000, respectively. The interest rate at December 31, 2023 and 2022, were $0.0 and $1.6 million, respectively, which are included in related party receivables on the consolidated balance sheets. Captive Claims receivable for nine months ended March 31, 2023, and 2022, were $0.0 and $1.0 million, respectively.was 10.8%.

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Other Related Party Transactions

InDuring the year ended June ~~2022,~~30, 2023, two ~~separate $250,000~~ promissory notes of approximately $0.25 million were ~~executed~~outstanding between Adara and two of its then shareholders to provide cash to pay operating costs. The notes dodid not accrue interest and ~~are~~were payable no earlier than when the Merger ~~closes~~closed or February ~~11,~~10, 2023. ~~At March~~As of December 31, 2023, ~~$471,599 was outstanding under the Promissory Note.~~

~~During the three-month periods ended March 31, 2023 and 2022 and the nine-month periods ended March 31, 2023, and 2022, the Company had sales to a~~these two related party ~~company owned by the Company’s shareholders~~promissory notes were paid in full.

Table of $1.2 million, $2.1 million, $3.5 million, and $6.9 million, respectively. During the same periods, the Company had costs incurred with another related party company in the amount of $1.4 million, $2.6 million, $6.8 million and $10.3 million, respectively.Contents

Note 14: Leases

The Company leases ~~office~~offices and ~~warehouse,~~warehouses, computer equipment and vehicles. Certain operating leases may contain one or more options to renew. The renewal terms can extend the lease term from one to 13 years. The exercise of lease renewal options is at the Company’s sole discretion. Renewal option periods are included in the measurement of the Right of Use (ROU) asset and lease liability when the exercise is reasonably certain to occur.

The depreciable lives of assets and leasehold improvements are limited by the expected lease term unless there is a transfer of title or purchase option reasonably certain of exercise.

The Company’s lease agreements do not contain any material residual value guarantees or material restrictive covenants. Payments due under the lease contracts include fixed payments plus, may include variable payments. The Company’s office space leases require it to make variable payments for the Company’s proportionate share of the building’s property taxes, insurance, and common area maintenance. These variable lease payments are not included in lease payments used to determine the lease liability and are recognized as variable costs when incurred. Fixed payments may contain predetermined fixed rent escalations.

Operating leases are included in the following asset and liability accounts on the Company’s Balance Sheet: Operating Lease Right-of-Use Assets, Current Portion of Operating Lease Obligations, and Noncurrent Operating Lease Obligations. ROU assets and liabilities arising from finance leases are included in the following asset and liability accounts on the Company’s Consolidated Balance Sheet: Property & Equipment - Net, Current Portion of Finance Lease Obligation, and Noncurrent Finance Lease Obligations.

Components of lease expense were as follows for the three and six months ended December 31, 2023, and 2022:


	Three Months		Three Months		Six Months		Six Months
	Ended		Ended		Ended		Ended
	December 31,		December 31,		December 31,		December 31,
Lease Cost ($ in thousands)	2023		2022		2023		2022
Finance Lease Cost:
Amortization of Right of Use Assets	46		51		93		102
Interest on lease liabilities	1		3		3		7
Capitalized Operating Lease Cost	920		1,013		1,853		2,092
Variable Lease Cost	1,367		—		1,592		—
Total Lease Cost	2,334		1,067		3,541		2,201

Other Information
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows from finance leases	1		3		3		7
Operating cash flows from Capitalized Operating leases	1,026		1,105		2,046		2,264
Financing cash flows from finance leases	50		53		99		105

Right of use assets obtained in exchange for new finance lease liabilities	—		—		—		—
Right of use assets obtained in exchange for new Capitalized Operating lease liabilities	8,681		—		8,681		—
Net ROU remeasurement	(0)		(9)		(0)		(9)

Weighted average remaining lease term - finance leases (in Years)	0.64		1.59		0.64		1.59
Weighted average remaining lease term - Capitalized Operating leases (in Years)	1.05		1.94		1.05		1.94
Weighted average discount rate - finance leases	3.64	%	3.70	%	3.64	%	3.70	%
Weighted average discount rate - Capitalized Operating leases	4.16	%	4.13	%	4.16	%	4.13	%

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Maturities of operating and finance lease liabilities as of December 31, 2023 are as follows:


($ in thousands)	Operating Leases	Finance Leases
Remaining in fiscal 2024	1,987	1,531
2025	1,415	3,062
2026	113	2,977
2027	14	1,688
2028	3	—
Total Lease Payments	3,532	9,258
Less Imputed Interest	(65)	(982)
Total	3,467	8,276

~~Components of lease expense were as follows for the three and nine months ended March 31, 2023, and 2022:~~

Three Months

Three Months

Nine Months

Nine Months

Ended

Ended

Ended

Ended

March 31,

March 31,

March 31,

March 31,

2023

2022

2023

2022
Lease Cost








Finance Lease Cost:








Amortization of Right of Use Assets

51

122

153

597
Interest on lease liabilities

3

5

9

23
Operating Lease Cost

949

1,133

3,137

3,399
Short - Term Lease Cost

14

—

36

—
Total Lease Cost

1,017

1,260

3,335

4,019

Other Information




Cash paid for amounts included in the measurement of lease liabilities:




Operating cash flows from finance leases

3

6

10

26
Operating cash flows from operating leases

1,043

1,218

3,387

3,614
Financing cash flows from finance leases

53

190

158

968

Right of use assets obtained in exchange for new finance lease liabilities

10,457

—

10,457

—
Right of use assets obtained in exchange for new operating lease liabilities

—

—

—

—
Net Right of use asset remeasurement

—

—

(9)

(1,190)

Weighted average remaining lease term - finance leases (in Years)

10.4

2.1

10.4

2.1
Weighted average remaining lease term - operating leases (in Years)

1.7

2.6

1.7

2.6
Weighted average discount rate - finance leases

3.7

3.7

3.7

3.7
Weighted average discount rate - operating leases

4.1

4.1

4.1

4.1

~~Maturities of operating and finance lease liabilities as of March 31, 2023 are as follows:~~

($ in thousands)

Operating Leases

Finance Leases
2023

2,770

585
2024

4,033

2,449
2025

1,415

2,635
2026

130

2,748
2027

—

1,176
Total Lease Payments

8,562

9,807
Less Imputed Interest

(214)

(1,494)
Total

8,348

8,313

Note 15: Business Acquisition

On July 1, 2022, Alliance purchased ~~100%~~the Assets and Liabilities of ~~the stock of~~ Think3Fold, LLC, a collectibles distribution company for no consideration. The transaction expanded and diversified the Company’s portfolio of products and enabled scale and fixed cost leverage.

The results of operations of the acquired entity ~~are~~have been included in the Consolidated Financial Statements ~~from~~since July 1, ~~2022, through March 31, 2023.~~2022. The Company recognized ~~$694 thousand of acquisition-related~~$1.0 million in acquisition related costs ~~that were expensed~~ in the ~~current period. These costs~~six months ended December 30, 2022, which are included in the consolidated statements of operations and comprehensive income within transaction costs.

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Think3Fold revenue and earnings included in the Company’s consolidated statements of operations for the three- and six-month periods ended December 31, 2022, were $2.4 million and $3.8 million, and $0.6 and $0.8 respectively.

As part of the Think3Fold acquisition, a contingent consideration, or earn-out, arrangement was established. The contingent consideration is contingent upon the achievement of certain predefined performance milestones from July 1, 2022, ~~through March~~to June 30, 2025. The fair value of the contingent consideration was zero as of December 31, 2023, ~~are~~and as ~~follows:~~

Three Months Ended

Nine Months Ended
($ in thousands)

March 31, 2023

March 31, 2023
Revenue

$
2,614

$
13,219
Net Income

364

1,450

of June 30, 2023. Any subsequent changes in the fair value of the contingent consideration will be accounted for as an adjustment to the statement of operations and comprehensive (loss) income.

The Think3Fold acquisition was treated for accounting purposes as a purchase of Think3Fold using the acquisition method of accounting in accordance with ASC 805, Business Combination. Under the acquisition method of accounting, the aggregate consideration was allocated to the acquired assets and assumed liabilities, in each case, based on their respective fair value as of the closing date, with the excess of the consideration transferred over the fair value of the net assets acquired (or net liabilities assumed) being allocated to intangible assets and goodwill.

The initial accounting for this business acquisition is incomplete and the following assets and liabilities are recognized on a provisional basis, since the Company is currently assessing the purchase price allocation and the fair value measurements. During the nine-month period ended March 31, 2023, the Company recorded a measurement period adjustment to reduce the fair value of the inventory acquired by $5.2 million, which resulted in a corresponding increase in goodwill.

~~Provisional~~ Allocation of purchase price consideration ($ in thousands)


Cash Acquired	$	1	$	1
Trade Receivables		3,289		2,212
Inventory		5,232		7,853
Intangibles		9,031		3,000
Other Assets		19		19
Accounts Payable		(24,820)		(22,298)
Total identifiable net assets (liabilities)		(7,248)		(9,213)
Goodwill		7,248		9,213
Total Consideration	$	—	$	—

Goodwill resulting from the Think3Fold acquisition is not deductible for tax purposes. This non-deductibility arises from the intrinsic nature of the transaction and applicable tax regulations. The recognized goodwill associated with the Think3Fold acquisition primarily comprises expected synergies, since the acquisition is expected to generate synergies in various aspects, including operational efficiencies and revenue growth. These synergies are a significant component of recognized goodwill, as they are anticipated to enhance the overall value of the combined entity.

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Note 16: Merger

As disclosed in Note 1, on February 10, 2023, the Company completed the Merger with Adara and a Merger Sub, resulting in the Company becoming a publicly traded company. While Adara was the legal acquirer in the Merger, for financial accounting and reporting purposes under U.S. GAAP, ~~Legacy~~Pre-Merger Alliance was the accounting acquirer, and the Merger was accounted for as a ~~"reverse~~“reverse recapitalization."” A reverse recapitalization (i.e., a capital transaction involving the exchange of stock by Adara for ~~Legacy Alliance's~~Pre-Merger Alliance’s stock) does not result in a new basis of accounting, and the consolidated financial statements of the combined entity represent the continuation of the consolidated financial statements of ~~Legacy~~Pre-Merger Alliance. Accordingly, the consolidated assets, liabilities, and results of operations of ~~Legacy~~Pre-Merger Alliance became the historical consolidated financial statements of the combined company, and ~~Adara's~~Adara’s assets, liabilities and results of operations were consolidated with ~~Legacy~~Pre-Merger Alliance beginning on the acquisition date. Operations prior to the Merger are presented as those of ~~Legacy~~Pre-Merger Alliance in future reports. The net assets of Adara were recognized at historical cost (which was consistent with carrying value), with no goodwill or other intangible assets recorded.

At the closing of the Merger, each of the then issued and outstanding shares of Alliance common stock were cancelled and automatically converted into the right to receive the number of shares of Adara common stock equal to the exchange ratio (determined in accordance with the Business Combination Agreement). The Company’s 900 shares of previously outstanding common stock were exchanged for 47,500,000 shares of Class A Common Stock. In addition, the treasury stock was cancelled. This change in equity structure has been retroactively reflected in the financial statements for all periods presented.

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The following table summarizes the shares of Class A outstanding following consummation of the Merger:


~~Adara~~Alliance Public Shares		167,170
~~Adara~~Alliance Sponsor Shares		1,500,000
~~Legacy~~Pre - Merger Alliance Shares		47,500,000
Total Shares of Common Stock Outstanding after Merger		49,167,170

Prior to the Merger, the Company had three major shareholders owning 50%, 32% and 18% stake in the Company. Following the completion of the Merger, the shareholder structure has changed with the three major shareholders owning 46.4%, 30.9%, and 17.4% of the company’s Class A Common Stock. In addition, upUp to 60 million additional shares of Class ~~E shares~~A common stock may be issued to the ~~three major~~Legacy Alliance shareholders at no cost and upon automatic conversion of the 60 million shares of Class E common stock based on future performance of the ~~company’s~~Company’s stock price and ~~9.9 million~~ warrants ~~(Class A)~~ that can be exercised ~~for~~to purchase shares of Class A common ~~shares~~stock at $11.50 per share (See Note 17). The 60 million shares of Class E ~~shares ae set aside~~common stock are held in an escrow account as additional consideration contingent on triggering events occurring within 10 years after the Merger. Upon reaching the following triggering events, the Class E shares will be released from the escrow account to the three major shareholders, and converted to Class A shares on a 1:1 basis:

●

If the stock price increases to $20 per share within 5five years from the closing of the Merger, 20 million Class E shares will be released.

●

If the stock price increases to $30 per share within 7seven years from the closing of the Merger, 20 million Class E shares will be released.

●

If the stock price increases to $50 per share within 10ten years from the closing of the Merger, 20 million Class E shares will be released.

Each share of Class A and Class E common stock has one vote, and the common shares collectively will possess all voting power and will have the exclusive right to vote for the election of directors and on all other matters properly submitted to a vote of the stockholders. Since the Class E shares are subject to vesting conditions and meet the contingent exercise and settlement provisions to be considered indexed to the Company’s stock, they are accounted for as equity instruments, and are reflected as a reduction of retained earnings, at their fair value on the date of the Merger.

The Company incurred total transaction costs of approximately $3.3 million, including legal, financial advisory and other professional fees related to the Merger, which was recorded as an expense as the offering costs exceeded the proceeds received.

In connection with the Merger, the Company’s 2023 Omnibus Equity Incentive Plan (the “2023 Plan”) became effective. The 2023 Plan is a comprehensive incentive compensation plan under which the Company can grant equity-based and other incentives awards to based officers, employees and directors of, and consultants and advisers to, Alliance and its subsidiaries. The Company has reserved a total of 600,000 shares of common stock for issuance as or under awards to be made under the 2023 Plan. To the extent that an award lapses, expires, is canceled, is terminated unexercised or ceases to be exercisable for any reason, or the rights of its holder terminate,

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any common stock subject to such award shall again be available for the grant of a new award. The 2023 Plan shall continue in effect, unless sooner terminated, until the tenth anniversary of the date on which it iswas adopted by the Board of Directors (except as to awards outstanding on that date), and the Board of Directors in its discretion may terminate itthe 2023 Plan at any time with respect to any shares for which awards have not theretofore been granted, provided certain conditions are met, in accordance with the 2023 Plan. The price at which a share may be purchased upon exercise of a share option shall be determined by the Plan Committee; provided, however, that such option price (i) shall not be less than the fair market value of a share on the date such share option is granted, and (ii) shall be subject to adjustment as provided in the 2023 Plan. As of ~~March~~December 31, 2023, ~~no awards have been granted~~449,000 shares were vested, and 14,800 shares were forfeited under the 2023 Plan.

Note 17: Warrants

As a result of the Merger, at ~~March 31,~~June 30, 2023, there were 5,750,000 Public Warrants, 4,120,000 Private Placement Warrants and 50,000 Representatives Warrants issued and outstanding, ~~with~~each exercisable to purchase one share of Class A common stock at an exercise price of $11.50 (the “Warrants”).

The Company will not be obligated to deliver any shares of Class A common stock pursuant to the exercise of a warrant and will have no obligation to settle such warrant exercise unless a registration statement under the Securities Act covering the issuance of the shares of Class A common stock underlying the ~~warrants~~Warrants is then effective and a prospectus relating thereto is current, subject to the Company satisfying its obligations with respect to registration. ~~No warrant~~Additionally, no Warrant will be exercisable, and the Company will not be obligated to issue shares of Class A common stock upon exercise of a warrant unless Class A common stock issuable upon such warrant exercise has

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been registered, qualified, or deemed to be exempt under the securities laws of the state of residence of the registered holder of the ~~warrants.~~Warrants.

The Company filed with the SEC on April 11, 2023, its registration statement covering the shares of Class A common stock issuable upon exercise of the ~~warrants,~~Warrants, to cause such registration statement to become effective and to maintain a current prospectus relating to those shares of Class A common stock until the ~~warrants~~Warrants expire or are redeemed, as specified in the warrant agreement. ~~If the~~The registration, ~~statement covering the Class A common stock issuable upon exercise of the warrants is not~~as amended, became effective within a specified period following the consummation of the Merger, warrant holders may, until such time as there is an effective registration statement and during any period when the Company shall have failed to maintain an effective registration statement, exercise warrants on a cashless basis pursuant to the exemption provided by Section 3(a)(9) of the Securities Act, provided that such exemption is available. If that exemption, or another exemption, is not available, holders will not be able to exercise their warrants on a cashless basis.June 29, 2023.

Public ~~Warrants:~~Warrants

The Public Warrants qualify for the derivative scope exception under ASC 815 and are therefore classified as ~~equity.~~equity on the consolidated balance sheets. They may only be exercised for a whole number of shares. The Public Warrants are currently exercisable at $11.50 per share and will expire five years after the completion of the Merger or earlier upon redemption or liquidation. The Company may redeem for cash the outstanding Public Warrants:

●~~in whole and not in part.~~

●~~at a price of $0.01 per Public Warrant;~~

●~~upon not less than 30 days’ prior written notice of redemption after the warrants become exercisable to each warrant holder; and~~

●if, and only if, the reported last sale price of the Class A common stock equals or exceeds $18.00 per share (as adjusted for stock splits, stock dividends, reorganizations, recapitalizations, and the like) for any 20 trading days within a 30-trading day period commencing once the warrants become exercisable and ending three business days before the Company sends the notice of redemption to the warrant holders. If and when the warrants become redeemable by the Company, the Company may exercise its redemption right.

●

in whole and not in part;

●

at a price of $0.01 per Public Warrant;

●

upon not less than 30 days’ prior written notice of redemption after the Warrants become exercisable to each warrant holder; and

●

if, and only if, the reported last sale price of the Class A common stock equals or exceeds $18.00 per share (as adjusted for stock splits, stock dividends, reorganizations, recapitalizations, and the like) for any 20 trading days within a 30-trading day period commencing once the Public Warrants become exercisable and ending three business days before the Company sends the notice of redemption to the warrant holders. If and when the Public Warrants become redeemable by the Company, the Company may exercise its redemption right even if it is unable to register or qualify the underlying securities for sale under all applicable state securities laws.

~~Even if it is unable to register or qualify the underlying securities for sale under all applicable state securities laws.~~

If the Company calls the Public Warrants for redemption, management will have the option to require all holders that wish to exercise the Public Warrants to do so on a “cashless basis,” as described in the warrant agreement. The exercise price and number of shares of Class A common stock issuable upon exercise of the ~~warrants~~Public Warrants may be adjusted in certain circumstances including in the event of a stock dividend, or recapitalization, reorganization, merger, or consolidation. However, the ~~warrants~~Public Warrants will not be adjusted for issuances of Class A common stock at a price below its exercise price. Additionally, in no event will the Company be required to net cash to settle the ~~warrants.~~Public Warrants.

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Private Placement Warrants:

The Private Placement Warrants are identical to the Public Warrants underlying the Units sold in the ~~Initial Public Offering~~initial public offering but are classified as liabilities on the consolidated balance sheet as they are not considered indexed to the ~~company’s~~Company’s own stock. Additionally, the Private Placement Warrants are exercisable on a cashless basis and are non-redeemable, ~~except as described above,~~ so long as they are held by the initial purchasers or their permitted transferees. If the Private Placement Warrants are held by someone other than the initial purchasers or their permitted transferees, the Private Placement Warrants will be redeemable by the Company and exercisable by such holders on the same basis as the Public ~~Warrants.~~Warrants as described above.

Representative Warrants

The Company issued ~~50,000 warrants (the “Representative Warrants”),~~Representative Warrants, for minimal consideration to ~~Think Equity,~~ThinkEquity, a division of Fordham Financial Management, Inc. (and/or its designees), in a private placement simultaneously with the closing of ~~Adara’s initial~~Alliance’s public offering, which are also classified as ~~liabilities.~~liabilities on the consolidated balance sheet. The Representative Warrants are identical to the ~~Public~~Private Warrants except that ~~each Representative Warrant entitles the holder thereof to purchase one share of Class A common stock at a price of $11.50 per share, subject to adjustment, and~~ so long as the Representative Warrants are held by ~~Think Equity~~ThinkEquity (and/or its designees) or its permitted

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transferees, the Representative Warrants (i) will not be redeemable by the Company, (ii) may be exercised by the holders on a cashless basis, (iii) are entitled to registration rights and (iv) ~~for so long as they are held by Think Equity (and/or its designees),~~ are not exercisable more than five years from the effective date of the Merger.

Note 18: Fair Value

The Company complies with the provisions of FASB ASC 820, Fair Value Measurements, for its financial and non-financial assets and liabilities. ASC 820 defines fair value, establishes a framework for measuring fair value and expands disclosure for each major asset and liability category measured at fair value on either a recurring or nonrecurring basis.

The Company accounts for certain assets and liabilities at fair value. The hierarchy below lists three levels of fair value based on the extent to which inputs used in measuring fair value are observable in the market. The ~~company~~Company categorizes each of its fair value measurements in one of these three levels based on the lowest level input that is significant to the fair value measurement in its entirety. These levels are:

1.Level 1 – Quoted prices are available in active markets for identical assets or liabilities at the reporting date. Generally, this includes debt and equity securities that are traded in an active market.

2.Level 2 – Observable inputs other than Level 1 prices such as quote prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities. Generally, this includes debt and equity securities that are not traded in an active market.

3.Level 3 – Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. Level 3 assets and liabilities include financial instruments whose value is determined using pricing models, discounted cash flow methodologies, or other valuation techniques, as well as instruments for which the determination of fair value requires significant management judgment or estimation. As of ~~March~~December 31, 2023, the Company has classified the private placement warrants and the representative warrants as Level 3 fair value measurements. Management evaluates a variety of inputs and then estimates fair value based on those inputs. As discussed below, the Company utilized the Lattice Model in valuing the Warrants.

The fair value of cash and restricted cash, ~~equivalents,~~ other assets, ~~line of~~revolving credit facility, shareholder loan, accounts payable and accrued expenses approximate their carrying value due to the short-term maturities of these items. The fair value of the ~~company’s line of~~Company’s revolving credit facility and shareholder loan, which isare considered a Level 2 fair value ~~measurement,~~measurements, approximates ittheir carrying value because ~~it has~~they have a variable market interest rate.

The Company recomputes the fair value of the Private and the Representative Warrants at the issuance date and the end of each quarterly reporting period. Such value computation includes subjective input assumptions that are consistently applied each period. If the Company were to alter its assumptions or the numbers input based on such assumptions, the resulting fair value could be materially different.

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The Company utilized the following assumptions to estimate fair value of the Private Warrants and Representative Warrants as of ~~March~~December 31, 2023.


Stock Price	$	3.30		$	0.93
Exercise price per share	$	11.50		$	11.50
Risk-free interest rate		3.58	%		3.88	%
Expected term (years)					4.1
Expected volatility		28.6	%		48.60	%
Expected dividend yield		—			—

The significant assumptions using the Lattice model approach for valuation of the Warrants were determined in the following manner:

(i)

Risk-free interest rate: the risk-free interest rate is based on the U.S. Treasury rate with a term matching the time to expiration.

(ii)

~~(ii)~~Expected term: the expected term is estimated to be equivalent to the remaining contractual term.

(iii)

Expected volatility: expected stock volatility is based on daily observations of the Company’s historical stock value and implied by market price of the public warrants, adjusted by guideline public company volatility.

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~~(iii)~~(iv)

Expected dividend yield: expected dividend yield is based on the Company’s anticipated dividend payments. As the Company has never issued dividends, the expected dividend yield is 0% and this assumption will be continued in future calculations unless the Company changes its dividend policy.

The table below presents the balances of assets and liabilities measured at fair value on a recurring basis by level within the hierarchy as (in thousands):


	As of March 31, 2023								As of December 31, 2023
	Total		Level 1		Level 2		Level 3		Total		Level 1		Level 2		Level 3
Warrants	$	205	$	—	$	—	$	205
Private Placement and Representative Warrants									$	41	$	—	$	—	$	41

~~Note 19: Subsequent Events~~

~~As disclosed~~The table below presents the change in ~~Note 9, on April 21, 2023,~~number and fair value of the ~~Company executed an amendment to its Credit Facility with Bank~~Private and Representative Warrants since June 30, 2023: (in thousands, except the number of America and obtained a waiver of specified events of default and release related to the non-compliance with the Fixed Charge Coverage Ratio for the twelve trailing months ended November 30, 2022 and December 31, 2022, January 31, 2023 and February 28, 2023. This amendment also establishes new covenant requirements and minimum EBITDA measurements at the end of each calendar month date until December 31, 2023.shares)


	Private Warrants			Representative Warrants			Total
	Shares	Value		Shares	Value		Shares	Value
June 30, 2023	4,120,000	$	203	50,000	$	3	4,170,000	$	206
Exercised	—		—	—		—	—		—
Change in value	—	$	(122)	—	$	(2)	—	$	(124)
September 30, 2023	4,120,000	$	81	50,000	$	1	4,170,000	$	82
Exercised	—		—	—	$	—	—	$	—
Change in value	—		(41)	—	$	—	—	$	(41)
December 31, 2023	4,120,000	$	40	50,000	$	1	4,170,000	$	41

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Note 19: Stock-Based Compensation

As part of the Merger with Adara on February 10, 2023, 600,000 shares were authorized for a one-time employee stock plan, the 2023 Plan. Total restricted stock awards of 463,800 shares were granted to employees on June 15, 2023, by approval of the compensation committee, which administers the 2023 Plan. The shares fully vested on October 4, 2023.The Company does not have an annual stock-based compensation program.


		Number of RSAs
Outstanding and Unvested as of June 30, 2023		459,200
Vested		(449,000)
Forfeited		(10,200)
Outstanding and Unvested as of December 31, 2023		—

In connection with awards granted, for the three and six months ended December 31, 2023 the Company recognized $0.06 million and $1.4 million respectively in stock-based compensation expense.

Note 20 – Issuance of Common Stock

During the six months ended December 31, 2023, the Company sold 1,335,000 shares of its Class A common stock at $3.00 per share, resulting in net proceeds of approximately $1.3 million after deducting underwriter discounts and offering and other expenses. This capital raise allowed the Company to generate gross proceeds, with a portion allocated to underwriting discounts, offering related expenses, Representative’s Warrants and outstanding accounts payable. Net proceeds were determined after accounting for these expenses.

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The objective for the “Management’s Discussion and Analysis of Financial Condition and Results of Operations” is to provide information the Company’s management team believes is necessary to achieve an understanding of its financial condition and the results of business operations with particular emphasis on the Company’s future and should be read in conjunction with the Company’s audited consolidated financial statements, and footnotes.

This analysis contains forward-looking statements concerning the Company’s performance expectations and estimates. Other than statements with historical context, commentary should be considered forward- looking and carries with it risks and uncertainties. See “Statement Regarding Forward-Looking Statements” and Part I, Item 1A. Risk Factors, of this Form 10-Q for a discussion of other uncertainties, risks and assumptions associated with these statements.

Alliance is a leading global wholesaler and a key player in the entertainment industry, boasts a diverse portfolio of owned brands, including Critics’ Choice, Collectors’ Choice, Movies Unlimited, DeepDiscount, popmarket, blowitoutahere, Fulfillment Express, Importcds, GamerCandy, WowHD, and others. As a leading global wholesaler, direct-to-consumer (“DTC”) distributor, and e-commerce provider, ~~for the entertainment industry.~~ Alliance ~~serves~~operates as the ~~gateway~~vital link between ~~well-known~~renowned international ~~branded~~ manufacturers of entertainment content, such as Universal Pictures, Warner Brothers Home Video, Walt Disney Studios, Sony Pictures, Lionsgate, Paramount, Universal Music Group, Sony Music, Warner

Music Group, Microsoft, Nintendo, Take Two, Electronic Arts, Ubisoft, Square Enix, and ~~others,~~others.

This pivotal role extends to connecting these manufacturers with top-tier retail partners both domestically and ~~leading retailer customers in the United States and internationally, including~~internationally. Notable partners encompass giants like Walmart, Amazon, Best Buy, Barnes & Noble, Wayfair, Costco, Dell, Verizon, Kohl’s, Target, Shopify, and ~~Shopify, among~~ others. ~~The Company~~

Employing an established multi-channel strategy, Alliance distributes ~~its~~ physical media, entertainment products, hardware, and accessories ~~through an established multi-channel strategy. The Company currently~~across various platforms. Currently, the company sells its products, ~~that it is allowed to~~permitted for export, to more than ~~100~~70 countries ~~around the world.~~worldwide.

Alliance provides state-of-the art warehousing and distribution technologies, operating systems and services that seamlessly enable entertainment product transactions to better serve customers directly or through our distribution affiliates. These technology-led platforms with access to the Company’s in stock inventory of over ~~425,000~~325,000 SKU products, consisting of vinyl records, video games, compact discs, DVD, Blu-Rays, toys, and collectibles, combined with Alliance’s sales and distribution network, create a modern entertainment physical product marketplace that provides the discerning customer with enhanced options on efficient consumer-friendly platforms inventory. Alliance is the retailers’ back office for ~~in store~~in-store and e-commerce solutions. All electronic data interchange (“EDI”) and logistics are operational and ready for existing retail channels to add new products.

Merger and Business Acquisition

Alliance has a proven history of successfully acquiring and integrating competitors and complementary businesses. The Company will continue to evaluate opportunities to identify targets that meet strategic and economic criteria.

On July 1, 2022, Alliance purchased the assets and liabilities of Think3Fold, ~~Inc,~~LLC, a collectibles distribution company. This acquisition resulted in increased shelf space at our largest customer and expanded our product offerings.

On February 10, 2023, AENT Corporation (f/k/a Alliance Entertainment Holding Corporation) (“Legacy Alliance”), Adara Acquisition Corp. (“Adara”) and Adara Merger Sub, Inc. (“Merger Sub”) consummated the closing of the transactions contemplated by the Business Combination ~~Agreement.~~Agreement, dated as of June 22, 2022, by and among Adara, Merger Sub and Legacy Alliance. Pursuant to the terms of the Business Combination Agreement, a business combination of Legacy Alliance and Adara was ~~effected~~affected by the merger of Merger Sub with and into Alliance (the “Merger” or the “Business Combination”), with Alliance surviving the Merger as a wholly-owned subsidiary of Adara. Following the consummation of the Merger on the closing of the Business Combination, Adara changed its name from Adara Acquisition Corp. to Alliance Entertainment Holding ~~Corporation.~~Corporation (the “Company”).

While the legal acquirer in the Business Combination Agreement was Adara, for financial accounting and reporting purposes under U.S. GAAP, Legacy Alliance was the accounting acquirer, and the Merger was accounted for as a “reverse recapitalization.” A reverse recapitalization (i.e., a capital transaction involving the exchange of stock by Adara for Legacy Alliance’s stock) does not result in a new basis of accounting, and the consolidated financial statements of the combined entity represent the continuation of the

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consolidated financial statements of Legacy Alliance in many respects. Accordingly, the consolidated assets, liabilities, and results of operations of Legacy Alliance became the historical consolidated financial statements of the combined company, and Adara’s assets, liabilities and results of operations were consolidated with Legacy Alliance beginning on the acquisition date. Operations prior to the Merger are presented as those of Legacy Alliance in future reports. The net assets of Adara were recognized at historical cost (which was consistent with carrying value), with no goodwill or other intangible assets recorded.

Upon consummation of the Merger, the most significant change in Legacy Alliance’s future reported financial position and results of operations was a decrease in net Equity of ~~$787 thousand~~$787,000 as compared to Legacy Alliance’s consolidated balance sheet.

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As a result of the Merger, Alliance Entertainment became the successor to an SEC-registered company, which requires us to hire additional personnel and implement procedures and processes to address public company regulatory requirements and customary practices. We expect to incur additional annual expenses as a public company for, among other things, directors’ and officers’ liability insurance, director fees and additional internal and external accounting, legal and administrative resources, including increased audit and legal fees.

~~Covid-19 and~~ Macroeconomic Uncertainties

~~The residual~~Unfavorable conditions in the economy in the United States and abroad may negatively affect the growth of our business and have affected our results of operations. For example, macroeconomic events, including rising inflation, the U.S. Federal Reserve raising interest rates, recent bank failures, two wars and the lingering effects of the ~~Covid-19~~COVID-19 pandemic ~~will continue~~have led to ~~directly or indirectly impact~~economic uncertainty globally. The effect of macroeconomic conditions may not be fully reflected in our ~~business and the~~ results of operations until future periods. If, however, economic uncertainty increases or the global economy worsens, our business, financial condition and results of operations may be harmed. For further discussion of the potential impacts of macroeconomic events on our business, financial ~~impact, including expenses~~condition, and ~~employee-related costs, but are highly dependent~~operating results, see the section titled Part I “Item 1A. Risk Factors” in our Annual Report on ~~future developments that are uncertain at this time. While we maintained uninterrupted operations during~~Form 10-K for the pandemic, macroeconomic conditions and supply chain disruptions resulted in downstream shocks. The most pronounced consequences were the exorbitant international shipping costs for arcades, and the incremental Marketing Development Funds in the form of customer rebates recorded during nine monthsfiscal year ended March 31, 2023. The disruptions in the transportation industry resulted in higher landed costs and a $8.2 million write down was recorded for units sold and a $7.1 million write down for gaming arcade units on-hand. In addition, customer rebates of approximately $12.2 million were incurred to spur demand for arcades. Finally, approximately $4 million of incremental storage costs was recognized to warehouse excess arcade inventory.

~~Any new information that emerges concerning Covid-19,~~June 30, 2023, including the ~~actions taken~~risk factor titled “Unstable market and economic conditions have had and may continue to ~~contain or manage, as well as the economic impact~~have serious adverse consequences on ~~local, regional, national customers, suppliers~~our business, financial condition and markets, are uncertain and cannot be predicted at this time. However, the management team is actively monitoring internal and external factors and assessing the potential impact on its financial performance, liquidity, operations, and workforce; however, the full extent of the risk is uncertain.share price.”

Key Performance Indicators

Management monitors and analyzes key performance indicators to evaluate financial performance, including:

Net Revenue: To derive ~~Net Revenue,~~net revenue, the Company reduces total gross sales by customer returns, returns reserve, and allowances including discounts.

Cost of Revenues (excluding depreciation and amortization): Our cost of revenues reflects the total costs incurred to market and distribute products to customers. Changes in cost are impacted primarily by sales volume, product mix, product obsolescence, freight costs, and market development funds (“MDF”).

Operating Expenses: Our Operating Expenses are the direct and indirect costs associated with the distribution and fulfillment of products and services. They include both Distribution and Fulfillment and Selling, General and Administrative (SG&A) Expenses. The Distribution and Fulfillment Expenses are the payroll and operating expenses associated with the receipt, warehousing, and distribution of product.

Margins: To analyze profitability, the Company reviews gross and net margins in dollars and as a percent of revenue by line of business and product line.

Selling, General and Administrative Expenses: The Selling, General and Administrative Expenses are payroll and operating costs for Information Technology, Sales & Marketing, and General & Administrative functions. In addition, we include Depreciation and Amortization expenses and Transaction Costs, if applicable.

Balance Sheet Indicators: The Company views cash, product inventory, accounts payable, and working capital as key indicators of its financial position.

2223

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Alliance Entertainment Holding Corporation

Results of Operations Three Months Ended ~~March~~December 31, 2023, Compared to Three Months Ended

~~March~~December 31, 2022


	Three Months Ended		Three Months Ended		Three Months Ended		Three Months Ended
($ in thousands except shares)	March 31, 2023		March 31, 2022		December 31, 2023		December 31, 2022
Net Revenues	$	227,728	$	320,412	$	425,586	$	445,162
Cost of Revenues (excluding depreciation and amortization)		200,402		280,272		377,883		424,265
Operating Expenses
Distribution and Fulfillment Expense		14,923		15,754		15,144		20,365
Selling, General and Administrative Expense		14,783		14,755		15,116		15,044
Depreciation and Amortization		1,679		1,958		1,412		1,529
Transaction Costs		3,348		31		—		367
IC DISC Commissions		—		1,751		—		1,443
								(3)
Total Operating Expenses		34,733		34,248		31,672		38,746
Operating (Loss) Income		(7,407)		5,891
Operating Income (Loss)						16,031		(17,849)
Other Expenses
Interest Expense, Net		3,207		1,004		3,328		3,544
Total Other Expenses		3,207		1,004		3,328		3,544
(Loss) Income Before Income Tax (Benefit) Expense		(10,614)		4,887
Income Tax (Benefit) Expense		(2,864)		1,173
Net (Loss) Income		(7,750)		3,714
Income (Loss) Before Income Tax Expense (Benefit)						12,703		(21,393)
Income Tax Expense (Benefit)						3,789		(5,878)
Net Income (Loss)						8,914		(15,515)

Net Revenue:Year-over-year, total ~~Net Revenues~~net revenues decreased from ~~$320~~$445 million to ~~$228~~$426 million (-$9319 million, ~~or -29%~~-4.3%) for the three months ended ~~March~~December 31, 2023. Along with other ~~Retailers~~retailers and ~~Distributors~~distributors in the United States, we are not immune to the macroeconomic headwinds caused by ~~increased inflation~~high interest rates and ~~interest rates.~~consumer discretion prompted by reduced buying power. Our business to business (“B2B”) customer base, which are primarily retailers, ~~are reacting relatively conservatively~~benefited from a long holiday season, with ~~their~~32 days between Thanksgiving and Christmas, but were challenged by earlier than usual promotional cycles and labor constraints. Alliance Entertainment stands out as a value-added retail distributor thanks to our exclusive distribution rights for approximately 160 studios and labels in the film and music industry. This extensive portfolio of unique content enables us to cater to bulk B2B and direct-to-consumer (DTC) businesses with a vast selection of products unavailable through other distributors. Our unique DTC suite of distribution and inventory ~~positions due to economic uncertainty and those retailers have their own inventory supply chain challenges. Our~~solutions for the e-commerce retail industry, including our consumer direct ~~to consumer (“DTC”) channels are facing constant competition and it’s important~~subsidiary DirectToU LLC, enabled approximately 45% of our gross sales revenue for our merchants to keep investing while keeping a tight rein on inventories. Our B2B wholesale customer base revenue was down 31% compared to prior year due to their relatively rigorous inventory management. For the three months ended ~~March~~December 31, 2023 ~~our DTC omni-channel sales decreased 26%, although our Direct2You division outperformed with sales only down 3% year over~~versus 37% for the same period prior year.

Year-over-year, gaming sales decreased from $207 million to $192 million (-$15 million, -7%) for the three months ended ~~March~~December 31, ~~2023, vinyl~~2023. The average selling price of gaming products increased 110% and offset by a decrease in volume as we transitioned our strategy for the holiday season to higher dollar margin products. This revenue mix shift of price and volume was ~~the largest single category with~~twofold: First, arcade sales ~~of $75 million representing 33% of net revenue. Gaming products revenue underperformed relative to music and movies, with a sales decline of 57% to $55 million~~were down approximately 30% year over ~~year.~~year as we reduced our inventory footprint and focused on profitable sales; and second, we mixed out of lower priced value games that typically drive volume albeit with less margin. vinyl record sales decreased from $101 million to $97 million (-$4 million, 4%) for the three months ended December 31, 2023. The ~~primary reason is the suppliers’ transition from physical to digital gaming formats and major retailers’ constant evaluation of shelf space dedicated to gaming. While the~~ average selling price of Vinyl was up ~~marginally, it was~~4.4% and offset by decreased ~~volume. The average selling price and~~ volume resulting in ~~Gaming declined year over; however,~~ the ~~average margin per unit was flat. Consumer Products, including~~ revenue ~~from our July 1, 2022, acquisition of Think3Fold, increased from $14 million to $19 million ($5 million increase, or 36%)~~decline versus the prior year. ~~Even though~~Potential expansion of K-Pop to the ~~mix resulted in~~vinyl format this year may improve results going forward. Music Compact Discs (CDs) increased from $34 million to $38 million ($4 million, 12%). The popularity of K-Pop helped us realize a ~~decline~~19% increase in the average selling price ~~it was more than offset by the increased volume. As the popularity~~ of collectibles grows, an increasing number of musicians, celebrities, sport organizations, and content providers are expanding their portfolio of merchandise as a way to connect with their audiences. Music Compact Disc’s (CD’s) experienced a 2% increase in average price, butCDs, however, the decline in volume offset some of the gains but resulted in a ~~17%~~ year-over-year revenue ~~decline. We expect this trend for CDs to continue due to the popularity and growth of on-line streaming services. Similarly, physical~~improvement. Physical movie sales, ~~declined 38%~~which include DVDs, Blu-Ray, and Ultra HD, decreased slightly from $71 million to $70 million (-$1 million, -1%) versus the same period last year. The average selling price of physical film products increased significantly year over year but was offset by the decline in volume. The consistent flow of new theatrical releases continues to drive home video sales, and when combined with the release of 4K content, drove the average selling price higher. Consumer products revenue decreased from $28 million to $16 million (-$12 million, or -43%) versus the prior year as the ~~average price increase of 4% was not enough to offset~~toys & collectibles industry grapples with normalizing sales volume in the ~~reduction of volume.~~post-pandemic era.

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Cost of Revenues: Total cost of revenues, excluding depreciation and amortization, decreased from ~~$280~~$424 million to ~~$200~~$378 million (-$8046 million or ~~29%~~-11%) year over year primarily due to the direct relation of product costs to sales volume. ~~Gross Margin~~However, gross margin dollars ~~declined primarily~~increased year over year as ~~a result of lower sales and a marginal decline in~~ product ~~margin~~margins improved from 4.7% to ~~12.0% compared to 12.5% in the prior year.~~11.2%. The gross margin ~~decline of 0.5% points~~increase for the three months ended ~~March~~December 31, 2023, over the same period prior year, was primarily due to ~~a decline~~less overstock inventory resulting in ~~physical product margin versus other costs of production.~~significantly less consumer incentives to stimulate demand.

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Operating Expenses:Total ~~Operating Expenses increased~~operating expenses decreased from ~~$34.2~~$38.7 million to ~~$34.7 million; however,~~$31.7 million and decreased as a percentage of net revenue ~~increased year-over-year~~over the same period of the year from ~~10.7%~~8.7% to ~~15.3%~~7.5% (1.2% points). Total Distribution and Fulfillment Expense declined ~~5% but increased~~26% and decreased from ~~4.9%~~4.6% to ~~6.6%~~3.6% (1.0% points) as a percentage of net revenue for the three months ended ~~March~~December 31, 2023, versus the same period prior year. Fulfillment payroll was ~~$9.5~~$9.4 million for the three months ended ~~March~~December 31, 2023, and ~~$11.2~~$12.6 million (-$3.2 million, -26%) for the same period of the prior year. ~~Despite low~~Low unemployment rates, combined with competition for temporary labor, increased the average cost per labor hour ~~was down 7%~~approximately 4% versus the prior ~~year as we increased our throughput rate and reduced our use of overtime.~~year. To address the scarcity of labor resources, we ~~are investing~~have invested in ~~additional~~ warehouse automation ~~in fiscal year 2023~~ and will continue to use temporary labor forces to manage changes in demand. WeSince we believe that for the foreseeable future, there will ~~continue to~~ be upward pressure on labor availability and costs, we continue to innovate our warehouse processes to reduce fulfilment costs. Total selling, administrative, and ~~availability. The primary factor for the increased Fulfillment expenses is storage fees, which amounted to $0.9~~general costs decreased by $0.4 million for the three months ended March 31, 2023. This is a temporary expense and will decline as the incremental inventory for this interim space is sold. Total Selling, Administrative, and General costs were flator 2.7% compared to the same period last ~~year. In addition,~~year due primarily due to the reduction in workforce last Spring to right size the back-office support for the three months ended March 31, 2023, vs same period prior year, consolidated Depreciation and Amortization expense decreased from $2.0 million to $1.7 million (-$0.3 million or -15%) due to fully depreciated assets and the declining balance method of intangible asset amortization. For the three months ended March 31, 2023, transaction costs of $3.3 million were expensed because the offering costs exceeded the proceeds received from the merger with Adara. These expenses were required for legal, financial advisory and other professional fees associated with the execution of the business combination agreement.business. IC DISC Commissions were $0 for the three months ended ~~March~~December 31, 2023, versus ~~$1.8~~$1.4 million for the same period of the prior year. The IC DISC has been discontinued as of December 31, 2022, and no additional expenses will be incurred.

Interest Expense:For the three months ended ~~March~~December 31, 2023, ~~Interest Expense increased~~interest expense decreased from ~~$1.0~~$3.5 million to ~~$3.2~~$3.3 million ~~($2.2~~(-$0.2 million) versus the same period of the prior year. ~~The primary driver for~~While our effective interest rate increased from 6.1% to 8.9%, the ~~increase~~impact was tempered by a ~~$5.7 million higher~~significant decline of the average revolver balance ~~of and an increase of 4.6% points of effective interest rate~~from $184 million to ~~6.9%.~~$122 million (-$62 million, -34%) year over year.

Income Tax:For the three months ended ~~March~~December 31, 2023, an income tax ~~benefit~~expense of ~~$2.9~~$3.8 million was recorded compared to ~~an expense~~a benefit of ~~$1.2~~$5.9 million for the same period in the prior year. Alliance reported a pretax ~~loss~~gain of ~~$10.6~~$12.7 million and pretax ~~net income~~loss of ~~$4.9~~$21.4 million for the three-months ended ~~March~~December 31, 2023, and 2022, respectively. The annual effective tax rate (“ETR”) for the three months ended ~~March~~December 31, 2023, was ~~27%.~~30% which includes a one-time tax implication for the distribution of Restricted Stock Units.

Non-GAAP Financial Measures:For the three months ended ~~March~~December 31, 2023, we had non-GAAP Adjusted EBITDA of approximately ~~$(2.4)~~$17.9 million compared ~~with~~to Adjusted EBITDA of approximately ~~$9.6~~-$14.5 million ~~in the~~ prior ~~year.~~year or a year-over-year improvement of $32.4 million. We define Adjusted EBITDA as net gain or loss adjusted to exclude: (i) income tax expense; (ii) other income (loss); (iii) interest expense; and (iv) depreciation and amortization expense and (v) fair value of Warrants and other ~~infrequent,~~ non- recurring expenses. Our method of calculating Adjusted EBITDA may differ from other issuers and accordingly, this measure may not be comparable to measures used by other issuers. We use Adjusted EBITDA to evaluate our own operating performance and as an integral part of our planning process. We present Adjusted EBITDA as a supplemental measure because we believe such a measure is useful to investors as a reasonable indicator of operating performance. We believe this measure is a financial metric used by many investors to compare companies. This measure is not a recognized measure of financial performance under GAAP in the United States and should not be considered as a substitute for operating earnings (losses), net earnings (loss) from continuing operations or cash flows from operating activities, as determined in accordance with GAAP. See the table below for a reconciliation, for the periods presented, of our GAAP net income (loss) to Adjusted EBITDA.

Three Months Ended

Three Months Ended
($ in thousands)

March 31, 2023

March 31, 2022
Net Income (Loss)

$
(7,750)

$
3,714
Add back:




Interest Expense

3,207

1,004
Income Tax Expense (Benefit)

(2,864)

1,173
Depreciation and Amortization

1,679

1,958
EBITDA

$
(5,728)

$
7,849
Adjustments




IC-DISC

—

1,751
Mergers & Acquisition Fees

—

3
SPAC Merger Transaction Cost

3,348

—
Adjusted EBITDA

$
(2,380)

$
9,603
Adjusted EBITDA for the three months ended March 31, 2023, includes the following expenses:

Incremental Storage Fees Arcades

$
872

2425

Table of Contents


	Three Months Ended		Three Months Ended
($ in thousands)	December 31, 2023		December 31, 2022
Net Income (Loss)	$	8,914	$	(15,515)
Add back:
Interest Expense		3,328		3,544
Income Tax Expense (Benefit)		3,789		(5,878)
Depreciation and Amortization		1,412		1,529
EBITDA	$	17,443	$	(16,320)
Adjustments
IC-DISC		—		1,444
Stock-based Compensation Expense		58		—
SPAC Transaction Cost		—		367
Change In Fair Value of Warrants		(41)		—
Merger-related Contingent Losses (Gains)		461		—
Gain/Loss on Disposal of PPE		—		(3)
Adjusted EBITDA	$	17,921	$	(14,513)

Alliance Entertainment Holding Corporation

Results of Operations ~~Nine~~Six Months Ended ~~March~~December 31, 2023, Compared to ~~Nine~~Six Months Ended

~~March~~December 31, 2022


	Nine Months Ended		Nine Months Ended		Six Months Ended		Six Months Ended
($ in thousands except shares)	March 31, 2023		March 31, 2022
($in thousands except shares)					December 31, 2023		December 31, 2022
Net Revenues	$	911,590	$	1,152,198	$	652,341	$	683,862
Cost of Revenues (excluding depreciation and amortization)		837,897		998,304		578,384		637,495
Operating Expenses
Distribution and Fulfillment Expense		50,153		48,961		26,858		35,230
Selling, General and Administrative Expense		44,559		44,364		29,553		29,777
Depreciation and Amortization		4,845		6,330		3,054		3,166
Transaction Costs		4,355		(251)		—		1,007
IC DISC Commissions		2,833		8,014		—		2,833
(Gain) Loss on Disposal of Fixed Assets		(3)		—
Restructuring Costs						47		—
Loss on Disposal of Fixed Assets						—		(3)
Total Operating Expenses		106,742		107,418		59,512		72,010
Operating (Loss) Income		(33,049)		46,477
Operating Income (Loss)						14,445		(25,643)
Other Expenses
Interest Expense, Net		9,105		2,740		6,468		5,898
Total Other Expenses		9,105		2,740		6,468		5,898
(Loss) Income Before Income Tax (Benefit) Expense		(42,154)		43,737
Income Tax (Benefit) Expense		(11,380)		10,497
Net (Loss) Income		(30,774)		33,240
Income (Loss) Before Income Tax Expense (Benefit)						7,977		(31,541)
Income Tax Expense (Benefit)						2,525		(8,516)
Net Income (Loss)						5,452		(23,025)

Net Revenue:Year-over-year, total ~~Net Revenues~~net revenues decreased from ~~$1,152~~$684 million to ~~$912~~$652 million (-$~~240~~32 million, ~~or -21%~~-4.7%) for the ~~nine~~six months ended ~~March~~December 31, 2023. Along with other ~~Retailers~~retailers and ~~Distributors~~distributors in the United States, we are not immune to the macroeconomic headwinds caused by ~~increased inflation~~high interest rates and ~~interest rates.~~consumer discretion prompted by reduced buying power. Our ~~business to business (“B2B”)~~B2B customer base, which are primarily retailers, ~~are reacting relatively conservatively~~benefited from a long holiday season, with ~~their~~32 days between Thanksgiving and Christmas, but were challenged by earlier than usual promotional cycles and labor constraints. Alliance Entertainment stands out as a value-added retail distributor thanks to our exclusive distribution rights for approximately 160 studios and labels in the film and music industry. This extensive portfolio of unique content enables us to cater to bulk B2B and DTC businesses with a vast selection of products unavailable through other distributors. Our unique DTC suite of distribution and inventory ~~positions due to economic uncertainty and those retailers have their own inventory supply chain challenges. Our~~solutions for the e-commerce retail industry, including our consumer direct ~~to consumer (“DTC”) channels are facing constant competition and it’s important~~subsidiary DirectToU LLC, enabled approximately 40% of our gross sales revenue for ~~our merchants to keep investing while keeping a tight rein on inventories. Our B2B wholesale customer base revenue was down 22% over~~ the ~~previous year due to their relatively rigorous inventory management. For the nine~~six months ended ~~March~~December 31, 2023, ~~our DTC omni-channel sales decreased 11%, our Direct2You division outperformed B2B with sales up 8% year over year.~~

~~Year-over-year,~~versus 34% for the nine months ended March 31, 2023, gaming products revenue decreased 30% to $333 million, and vinyl sales decreased 3% to $242 million. Combined, for the nine months ended March 31, 2023, gaming and vinyl revenue totaled $575 million and 63% of our revenue mix compared to $726 million and 63% of total revenue in thesame period prior year. While we captured an increase in the average selling price in Gaming, it was not enough to offset the negative impact of decreased volume. The average selling price and volume of Vinyl were down marginally. Consumer Products, including revenue from our July 1, 2022, acquisition of Think3Fold, increased from $45 million to $65 million ($20 million, 44%) versus the prior year. We benefited from an increase in both the average selling price and volume. As the popularity of collectibles grows, an increasing number of musicians, celebrities, sport organizations, and content providers are expanding their portfolio of merchandise as a way to connect with their audiences. The average selling price of music Compact Disc’s (CD’s) was essentially flat, and a decrease in volume resulted in a 24% year-over-year revenue decline. We expect this trend for CDs to continue due to the popularity and growth of on-line streaming services. Similarly, physical movie sales declined 33% year over year as the average price increase was not enough to offset the reduction of volume.

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Year-over-year, gaming sales decreased from $278 million to $244 million (-$34 million, -12%) for the six months ended December 31, 2023. The average selling price of gaming products increased 118% and offset by a decrease in volume as we transitioned our strategy for the holiday season to higher dollar margin products. This revenue mix shift of price and volume was twofold: First, arcade sales were down approximately 50% year over year as we reduced our inventory footprint and focused on profitable sales; and second, we mixed out of lower priced value games that typically drive volume albeit with less margin. Vinyl record sales decreased from $167 million to $164 million (-$3 million, 2%) for the six months ended December 31, 2023. The average selling price of vinyl was up 4% and offset by decreased volume resulting in the revenue decline versus the prior year. Potential expansion of K-Pop to the vinyl format this year may improve results going forward. Music compact discs (CDs) increased from $66 million to $71 million ($5 million, 8%). The continued popularity of K-Pop helped us realize a 14% increase in the average selling price of CDs, however, the decline in volume offset some of the gains but resulted in a year-over-year revenue improvement. Physical movie sales, which include DVDs, Blu-Ray, and Ultra HD, increased from $114 million to $117 million ($3 million, 3%) versus the same period last year. The average selling price of physical film products significantly increased year-over-year but was offset by the decline in volume. The consistent flow of new theatrical releases continues to drive home video sales, and when combined with the release of 4K content, drove the average selling price higher. With the writers and actor work stoppage issues resolved, we expect to see a consistency in theatrical activity and content. Consumer products revenue decreased from $46 million to $26 million (-$20 million, or -43%) versus the prior year as the toys & collectibles industry grapples with normalizing sales volume in the post-pandemic era.

Cost of Revenues: Total cost of revenues, excluding depreciation and amortization, decreased from ~~$998~~$637 million to ~~$838~~$578 million ~~($160~~(-$59 million or ~~16%~~-9%) year over year primarily due to the direct relation of product costs to sales volume. ~~Gross Margin~~However, gross margin dollars ~~declined~~increased significantly year over year as ~~a result of lower sales and a lower overall~~ product ~~margin of 8% compared~~margins improved from 6.8% to ~~13% in the prior year.~~11.3%. The gross margin ~~decline of approximately 5% points~~increase for the ~~nine~~six months ended ~~March~~December 31, 2023, over the same period prior year, was primarily due to anless overstock inventory ~~adjustment~~resulting in less consumer incentives to address the exorbitant landed cost experienced during supply chain disruptions related to Covid and reduced supplier marketing development funds (MDF). The Company recorded an inventory write-down of $7.1 million to reduce its gaming arcades to their estimated net realizable value. In addition, excessive transportation costs of $15.2 million, arcade markdowns of $12.2 million, and additional reserves for consumer products inventory of $3.7 million were recorded. The postponement of some theatrical releases delayed MDF in the form of Price Protection. Price Protection is the mechanism used by vendors to stimulate sales when demand slows to reduce the return of product. Also, since gaming products are largely non-returnable, the supply chain does not have an established practice and cadence for mark downs like the movie and music industries. As such, gaming products typically require the distributor to bear the risk of slow-moving inventory which may increase the cost of goods sold as a percentage ofdrive sales. The change in MDF in future periods is dependent on consumer demand for gaming products and the volume and success of new movie and music releases. In addition, higher freight costs negatively impacted the cost of sales due to general rate hikes and incremental fuel surcharges.

Operating Expenses:Total ~~Operating Expenses~~operating expenses decreased from $72.0 million to $59.5 million and decreased as a percentage of net revenue ~~increased year-over-year~~over the same period of the year from ~~9.3%~~10.5% to ~~11.7%~~9.1%. Total ~~Distribution~~distribution and ~~Fulfillment Expense,~~fulfillment expense declined 24% and decreased from 5.2% to 4.1% as a percentage of net revenue ~~increased from 4.2% to 5.5%~~ for the ~~nine~~six months ended ~~March~~December 31, 2023, versus the same period prior year. Fulfillment payroll was ~~$31.9~~$16.9 million for the ~~nine~~six months ended ~~March~~December 31, 2023, and ~~$35.9~~$22.4 million (-$5.7 million, 25%) for the same period of the prior year. ~~Despite low~~Low unemployment rates, combined with competition for temporary labor, increased the average cost per labor hour ~~is down~~by approximately 3% versus the same period prior ~~year as we increased our throughput rate and reduced our use of overtime.~~year. To address the scarcity of labor resources, we ~~are investing~~have invested in ~~additional~~ warehouse automation ~~in fiscal year 2023~~ and will continue to use temporary labor forces to manage changes in demand. WeSince we believe that for the foreseeable future, there will ~~continue to~~ be upward pressure on labor availability and costs, we continue to innovate our warehouse processes to reduce fulfilment costs. Total selling, administrative, and ~~availability. The primary factor for the increased Fulfillment expenses is storage fees, which amounted~~general costs decreased by $2 million compared to $4.0 million for the nine months ended March 31, 2023. This is a temporary expense and will decline as the incremental inventory for this interim space is sold. Total Selling, Administrative, and General costs increased by $0.2 million versus the same period last ~~year. In addition,~~year due primarily due to the reduction in the workforce last spring to right size the back-office support for the nine months ended March 31, 2023, vs same period prior year, consolidated Depreciation and Amortization expense decreased from $6.3 million to $4.8 million ($1.5 million or -24%) due to fully depreciated assets and the declining balance method of intangible asset amortization. Transaction Costs for the nine months ended March 31, 2023, were $4.4 million for expenses related to the Think3Fold acquisition and the merger with Adara. These expenses were required for legal, financial advisory and other professional fees associated with the acquisition and execution of the business combination agreement. Year over year, thebusiness. IC DISC Commissions ~~decreased from $8.0 million to $2.8 million due to reduced eligible sales and elimination of the IC DISC. The owners of the IC-DISC forgave the commission expense~~were $0 for the ~~calendar year~~six months ended December 31, 2023, versus $2.8 million for the same period of the prior year. The IC DISC was discontinued as of December 31, 2022, ~~which was recorded as a capital contribution by our shareholders.~~and no additional expenses were incurred.

Interest Expense:For the ~~nine~~six months ended ~~March~~December 31, 2023, ~~Interest Expense~~interest expense increased from ~~$2.7~~$5.9 million to ~~$9.1~~$6.5 million ($~~6.4~~0.6 million) versus the same period of the prior year. The primary driver ~~for~~was an increase of our effective interest rate from 5.4% to 8.7% and offset by a reduction of the ~~increase was a higher~~ average revolver balance ~~of $167~~from $176 million ~~and an increase of 3.3% points of effective interest rate~~ to ~~5.5%.~~$123 million (-$53 million, -30%) for the six months ended December 31, 2023 versus the six months ended December 31, 2022.

Income Tax:For the ~~nine~~six months ended ~~March~~December 31, 2023, an income tax ~~benefit~~expense of ~~$11.4~~$2.5 million was recorded compared to ~~an expense~~a benefit of ~~$10.5~~$8.5 million for the same period in the prior year. Alliance reported a pretax ~~loss~~gain of ~~$(42.2)~~$8.0 million and pretax ~~net income~~loss of ~~$43.7~~$31.5 million for the ~~nine months~~six-months ended ~~March~~December 31, 2023, and 2022, respectively. The annual effective tax rate (“ETR”) for the ~~nine~~six months ended ~~March~~December 31, 2023, was ~~27%.~~32% which includes a one-time tax implication for the distribution of Restricted Stock Units.

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Non-GAAP Financial Measures:For the ~~nine~~six months ended ~~March~~December 31, 2023, we had non-GAAP Adjusted EBITDA of approximately ~~$(21.0)~~$19.2 million compared ~~with~~to Adjusted EBITDA of approximately ~~$60.6~~-$18.6 million ~~prior year. Adjusted EBITDA~~ for the ~~nine months ended March 31, 2023, includes excessive transportation costs~~prior year or a year-over-year improvement of ~~$15.2 million, arcade markdowns of $12.2 million, incremental arcade storage fees of $3.1 million and additional reserves for consumer products inventory of $3.7~~$37.8 million. We define Adjusted EBITDA as net gain or loss adjusted to exclude: (i) income tax expense; (ii) other income (loss); (iii) interest expense; and (iv) depreciation and amortization expense and (v) fair value of Warrants and other ~~infrequent,~~ non- recurring expenses. Our method of calculating Adjusted EBITDA may differ from other issuers and accordingly, this measure may not be comparable to measures used by other issuers. We use Adjusted EBITDA to evaluate our own operating performance and as an integral part of our planning process. We present Adjusted EBITDA as a supplemental measure because we believe such a measure is useful to investors as a reasonable indicator of operating performance. We believe this measure is a financial metric used by many investors to compare companies. This measure is not a recognized measure of financial performance under GAAP in the United States and should not be considered as a substitute for

~~Table of Contents~~

operating earnings (losses), net earnings (loss) from continuing operations or cash flows from operating activities, as determined in accordance with GAAP. See the table below for a reconciliation, for the periods presented, of our GAAP net income (loss) to Adjusted EBITDA.


	Six Months Ended		Six Months Ended
($in thousands)	December 31, 2023		December 31, 2022
Net Income (Loss)	$	5,452	$	(23,025)
Add back:
Interest Expense		6,468		5,898
Income Tax Expense (Benefit)		2,525		(8,516)
Depreciation and Amortization		3,054		3,166
EBITDA	$	17,499	$	(22,477)
Adjustments
IC-DISC		—		2,833
Stock-based Compensation Expense		1,386		—
SPAC Transaction Cost		—		1,007
Restructuring Cost		47		—
Change In Fair Value of Warrants		(165)		—
Merger-related Contingent Losses (Gains)		461		—
Gain/Loss on Disposal of PPE		—		(3)
Adjusted EBITDA	$	19,228	$	(18,640)

Nine Months Ended

Nine Months Ended
($ in thousands)

March 31, 2023

March 31, 2022
Net Income (Loss)

$
(30,774)

$
33,240
Add back:




Interest Expense

9,105

2,740
Income Tax Expense (Benefit)

(11,380)

10,497
Depreciation and Amortization

4,845

6,330
EBITDA

(28,204)

52,807
Adjustments




IC-DISC

2,833

8,014
SPAC Merger Transaction Cost

3,348

—
Mergers & Acquisition Fees

1,007

(251)
Gain on Disposal of PPE

(3)

—
Adjusted EBITDA

$
(21,019)

$
60,570

Adjusted EBITDA for the nine months ended March 31, 2023, includes the following expenses:





Excessive International Transportation Costs (Units Sold)

$
8,241

Excessive International Transportation Costs (On Hand)

7,100

Markdown for Arcades Sold

12,156

Incremental Storage Fees Arcades

3,950

Consumer Products Inventory Reserve

3,700

Total

$
35,147

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LIQUIDITY AND CAPITAL RESOURCES

Liquidity: On December 21, 2023, Alliance Entertainment Holding Corporation entered into a Revolving Credit Facility, which is a three-year $120 million senior secured asset based credit facility with White Oak Commercial Finance, LLC. The Revolving Credit Facility replaces the Company’s revolver with Bank of America (the “Prior Credit Facility”). The Prior Credit Facility was scheduled to expire on December 31, 2023.

The Company has implemented certain strategic initiatives to reduce expenses and focus on the sale of higher margin products. As a result of ~~March~~the new credit facility, combined with these initiatives and the Company’s financial performance for the three and six months ended December 31, 2023, ~~we had~~the Company has concluded that it has sufficient cash to fund its operations and obligations (from its cash ~~equivalents~~on hand, operations, working capital and ~~borrowing capacity under~~availability on the ~~revolving~~ credit ~~facility~~facility) for at least twelve months from the issuance of ~~$1.0 million and of $24.4 million, respectively.~~ these consolidated financial statements.

Our primary sources of liquidity are ~~existing~~ cash and cash equivalents, cash provided by operating activities, and borrowings under our credit ~~facilities. On September 29, 2020, the credit line with Bank~~facility. As of America was extended for three years and increased from $125 million to $175 million. On June 30, 2022, the credit line with Bank of America was amended for the current period which ends September 29, 2023, and increased from $175 million to $225 million. On April 21, 2023, in connection with the Amendment No. 12 as defined below, the Credit Facility with Bank of America was reduced from $225 million to $175 million.

March 31

June 30,
($in millions)

2023

2022
Revolver Balance

$
127

$
136
Availability

24

48

Our principal source of liquidity is our borrowing capacity under the revolving credit facility with Bank of America and cash generated from operations. Management is in active discussions with lenders to renew the revolver and expect to have it in place prior to the expiration of the current term which expires on September 29, 2023. Since we do not have a revised long-term revolver in place, along with the Company’s losses from operations, there is a substantial doubt as to the Company’s ability to continue as a going concern for one year from the issuance of the March 31, 2023 financial statements. The unaudited condensed consolidated financial statements included herein have been prepared assuming that we will continue as a going concern and do not include mitigation efforts that might result from the outcome of this uncertainty. Management is currently evaluating cost reduction opportunities, process efficiencies, and its overall growth and diversification strategy. If we are unable to get an extension of our revolver and implement our mitigation efforts, we may need to alter our operations including ceasing some functions.

~~Table of Contents~~

As disclosed in Note 9 to the Company’s condensed consolidated financial statements, during the third quarter ended March 31, 2023, the Company failed to meet the Fixed Charge Coverage Ratio covenant requirement. On April 21, 2023, certain subsidiaries of the Company, as Borrowers thereunder (the “Borrowers”), entered into an Amendment Number Twelve and Waiver (“Amendment No. 12”) to the Credit Facility. Amendment No. 12 provides for the waiver by Bank of America and the Required Lenders (as defined in the Credit Facility) of certain specified events of default under the Credit Facility, including the failure by the Borrowers to meet the Fixed Charge Coverage Ratio covenant requirement for the twelve trailing months ended November 30, 2022, December 31, 2023, January 31, 2023 and February 28, 2023 and certain other non-financial covenant breaches, and modifies the Credit Facility to, among other things, (i) suspend the Fixed Charge Coverage Ratio covenant requirement until the first calendar month end for which the Borrowers are in compliance with such requirement (the “Fixed Charge Coverage Compliance Date”), and (ii) add an additional covenant requiring the Borrowers to maintain specified minimum levels of EBITDA, which requirement will remain in effect until the Fixed Charge Coverage Compliance Date.

~~On April 21, 2023, certain subsidiaries of the Company, as Borrowers thereunder (the "Borrowers"), entered into an Amendment Number Twelve and Waiver ("Amendment No. 12")~~addition to the ~~Credit Facility.~~

~~Amendment No. 12 provides for~~$1.8 million of cash, we carried a $101 million revolver balance on our $120 million credit facility under the ~~waiver by Bank of America~~Loan and Security Agreement with White Oak Commercial Finance, LLC. Since June 30, 2023, our available collateral increased from $135 million to $194 million ($59 million, 44%) due to seasonally higher sales revenue and the ~~Required Lenders (as defined~~subsequent increase in the ~~Credit Facility)~~accounts receivable balance. The revolver balance decreased from $133 million to $101million (-$32 million, -24%) and our debt service expense exposure is significantly reduced. In addition, with a loan ceiling of ~~certain specified events~~$120 million versus $175 million we minimize financing fees. As of ~~default under the Credit Facility, including the failure by the Borrowers to meet the Fixed Charge Coverage Ratio covenant requirement for the twelve trailing months ended November 30, 2022,~~ December 31, 2023 January 31, 2023 and February 28, 2023 and certain other non- financial covenant breaches, and modifies the Credit Facility to, among other things, (i) suspend the Fixed Charge Coverage Ratio covenant requirement until the first calendar month end for which the Borrowers are in complianceour availability was $19 million with ~~such requirement (the "Fixed Charge Coverage Compliance Date"), and (ii) add~~ an additional ~~covenant requiring~~$74 million of suppressed availability, which is the ~~Borrowers to maintain specified minimum levels~~excess of ~~EBITDA, which requirement will remain in effect until~~ the ~~Fixed Charge Coverage Compliance Date. Pursuant to Amendment No. 12, the Borrowers agreed to pay to Agent a waiver fee in the~~available collateral amount ~~of $179,882.64.~~over our $120 million facility ceiling.


	December 31,		June 30,
($in millions)	2023		2023
Revolving Credit Facility		120		135
Less: Revolver Balance		101		133
Availability	$	19	$	2

Our liquidity position has not changed significantly since the Merger, and we intend to principally rely on our borrowing capacity under the Revolving Credit Facility as well as any renewal of such facility. Since the exercise price of the Warrants of $11.50 per share is significantly greater than the current market price of the Class A common stock, we do not expect the Warrants to be exercised until such time, if ever, that the market price of the Class A common stock exceeds the exercise price of the Warrants.

Although the Company does not currently intend to do so, ~~following this offering,~~ the Company may seek to raise additional capital through the sale of equity securities.

The receipt of cash proceeds from the exercise of our Warrants is dependent upon the market price exceeding the $11.50 exercise price and the Warrants being exercised for cash. The $11.50 exercise price per share of the Warrants is considerably higher than the ~~$3.00~~$1.35 closing sale price of the Class A common stock on ~~May 16,~~February 5, 2023. If the price of our Class A ~~Common Stock~~common stock remains below the respective Warrant exercise prices per share, we believe warrant holders will be unlikely to cash exercise their Warrants, resulting in little or no cash proceeds to us.

In addition, we may lower the exercise price of the Warrants in accordance with the Warrant Agreement to induce the holders to exercise such ~~warrants.~~Warrants. We may effect such reduction in exercise price without the consent of such warrant holders and such reduction would decrease the maximum amount of cash proceeds we would receive upon the exercise in full of the Warrants for cash. Further, the holders of the Private Warrants and the Underwriter Warrants may exercise such Warrants on a cashless basis at any time and the holders of the Public Warrants may exercise such Warrants on a cashless basis at any time aan effective registration statement is not ~~effective and a prospectus is not currently~~ available for the issuance of shares of Class A common stock upon such exercise. Accordingly, we would not receive any proceeds from a cashless exercise of ~~Warrants.~~Warrants

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Table of Contents

Cash Flow: The following table summarizes ~~our~~ net cash provided by or used onin operating activities, investing activities and financing activities for the periods indicated and should be read in conjunction with our consolidated financial statements for the ~~nine~~six months ended ~~March~~December 31, 2023 and 2022.


	Nine Months Ended				Six Months Ended
($ in thousands)	March 31, 2023		March 31, 2022		December 31, 2023		December 31, 2022
Net Income (Loss)	$	(30,774)	$	33,240	$	5,452	$	(23,025)
Net Cash (Used In) Provided By:
Net Cash Provided By (Used In):
Operating Activities		8,314		(83,643)		26,106		(40,660)
Investing Activities		1		—		(131)		1
Financing Activities		(8,750)		81,097		(24,185)		40,564

For the ~~nine~~six months ended ~~March~~December 31, 2023, on a net ~~loss~~income of ~~$(30.8)~~$5.5 million, the Company’s cash ~~provided by~~from operating activities was ~~$8.3~~$26.1 million versus ~~$(83.6)~~($40.7) million used in operations for the ~~nine~~six months ended ~~March~~December 31, 2022. The primary drivers ~~year over year,~~of the $66.4 million improvement, compared to the same six-month period in 2022, was a ~~$64.0~~$28.8 million improvement in net income combined with a $60.7 million decline in ~~Net Income combined with~~accounts payable versus a ~~$91.6~~$25.7 million ~~reduction in Inventory vs. an increase~~ of ~~$108.1 million~~cash from operations compared to the prior year. ~~Less~~The relatively large change in payables was directly attributed to an intentional objective to reduce inventory ~~was required to support sales~~on-hand at December 31, 2022. The change in inventory decreased $32.8 million for the ~~nine~~six months ended ~~March~~December 31, 2023, ~~due to~~versus a decrease of $68.5 million for same six month period prior year; however, the ~~relatively high~~central element was an ending inventory ~~position on June 30, 2022 because~~ of ~~the supply chain disruptions that occurred~~$114 million at December 31, 2023 versus $175 million (-$61 million, -35%) in the prior ~~year. As a result, Accounts Payable decreased approximately $73.0 million vs. a decrease of $10.4 million prior~~ year because of liabilities related to the Think3Fold acquisition and less pre-paid purchases which were required to support the gaming inventory prior year. In addition, Other Assets decreased by $5.6 million primarily due to the merger related transactions costs that were classified as prepaids and subsequently expensed.period.

The cashflow from investing activities was $0 for the six months ended December 31, 2023. For the same prior year period, the change was marginal due to the combined net working capital structure of the acquisition transaction attributed to ~~Cash Paid~~cash paid for ~~Business Acquisition~~business acquisition of Think3Fold that was acquired for no consideration.

Net cash used in financing activities was ~~$8.8~~$24.2 million for the ~~nine~~six months ended ~~March~~December 31, 2023, versus cash provided of ~~$81.1~~$40.6 million for the same period prior year. The primary reason for the decline was reduced borrowing necessary to maintain desired inventory ~~levels. For~~levels as noted above. In addition, our debt service exposure declined as the ~~nine months ended March~~revolver balance declined from $177 million on December 31, ~~2023, our revolver increased~~2022, to ~~prepay for arcade gaming products and other inventory.~~$97 million (-$80 million or -45%) on December 31, 2023.

Critical Accounting Policies and Estimates

The consolidated financial statements and disclosures have been prepared in accordance with generally accepted accounting principles (GAAP) which requires that management apply accounting policies, estimates, and assumptions that impact the results of operations and the reported amounts of assets and liabilities in the financial statements. Management uses estimates and judgments based on historical experience and other variables believed to be reasonable at the time. Actual results may differ from these estimates under a separate set of assumptions or conditions. Note 21 of the Notes to the ~~Unaudited~~ Consolidated Financial Statements includes a summary of the significant accounting policies and methods used by the Company in the preparation of its consolidated financial statements. Management believes that of the Company’s significant accounting policies and estimates, the following involve a higher degree of judgment or complexity:

Inventory and Returns Reserve: Product inventory is recorded at the lower of cost or net realizable value.

The valuation of inventory requires significant judgment and estimates, including evaluating the need for any adjustments to net realizable value related to excess or obsolete inventory to ensure that the inventory is reported at the lower of cost or net realizable value. For all product categories, the Company records any adjustments to net realizable value, if appropriate, based on historical sales, current inventory levels, anticipated customer demand, and general market conditions.

For the ~~nine months~~year ended ~~March 31,~~June 30, 2023, the Company performed a net realizable value analysis to determine if a reserve or write- down was necessary for excess or obsolete inventory. The two most critical assumptions in the analysis were the estimated monthly sales and the average sales price. In the analysis of the average sales price, we considered our master pricing list or alternative approximations of net realizable value including: (a) Estimates based on fluctuations of market price or cost of manufacturing similar items, (b) Invoices for new purchases made after the year-end from the original supplier of the inventory item, if sales prices are not available (replacement cost), and/or (c) Advertised prices on product brochures, also considering possible discounts, costs to complete and sell, and salability. ~~Management completed an analysis of the net realizable value of inventory and recognized a $7.1 million~~

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write-down for gaming arcades and $3.7 million for consumer products to their estimated net realizable value, which was recorded in cost of revenue during the nine months ended March 31, 2023. Prolonged macroeconomic instability in the United States including interest rates, inflation, or supply chain disruption could materially impact our assumptions for net realizable value.

Goodwill and Definite-Lived Intangible Assets, Net: The Company tests its goodwill for impairment only upon the occurrence of an event or circumstances that may indicate the fair value of the entity is less than it’s carrying amount. ~~The~~For the six months ended December 31, 2023, and year ended June 30, 2023, the Company ~~will test~~tested goodwill for impairment at the entity ~~level.~~level, since there is one Reporting Unit. As part of the analysis, we performed a discounted cash flow based on the Company’s three-year projections and determined that the fair value of equity is higher than the carrying value of equity. As such, the Company’s analysis concluded that there was no impairment to goodwill.

As of December 31, 2023, the fair value of the Company’s reporting unit exceeded its carrying value by approximately 11.8%. Either a reduction in the long-term growth rate by more than 80 basis points or an increase in the discount rate by 60 basis points would result in the carrying value of the Company’s reporting unit exceeding its fair value, resulting in an impairment loss of the Company’s goodwill. Given the inherent uncertainties on the macroeconomic conditions and interest rates in general, actual results may differ from management’s current estimates and could have an adverse impact on one or more of the assumptions used in our quantitative model related to impairment assessment, resulting in potential impairment charges in subsequent periods.

When a triggering event occurs, the Company has an option to first perform a qualitative assessment to determine whether it is more likely than not (i.e., 50% likely) that the fair value of the entity is less than ~~it’s~~its carrying amount. If the Company elects to use the qualitative option, it must decide whether it is more than 50% likely that the fair value of the entity is less than its carrying amount. If so, the one-step impairment test is required. However, if management concludes that fair value exceeds the carrying amount, further testing is unnecessary. Goodwill impairment is calculated as the amount by which the carrying amount of the entity including goodwill exceeds its fair value.

Intangible assets are stated at cost, less accumulated amortization. Amortization of customer relationships and lists is recorded using an accelerated method over the useful lives of the related assets, which range from 10 to 15 years. Covenants not to compete, trade name and favorable leases are amortized using the straight-line method over the estimated useful lives of the related assets, which range from 5 to 15 years.

Impairment of Long-Lived Assets: Recoverability of long-lived assets, including property and equipment, goodwill and certain identifiable intangible assets are evaluated whenever events or circumstances indicate that the carrying amount of an asset may not be recoverable. Factors considered important which could trigger an impairment review include but are not limited to significant underperformance relative to historical or projected future operating results, significant changes in the manner of use of the assets or the strategy for the overall business, significant decrease in the market value of the assets and significant negative industry or economic trends. In the event the carrying amount of the long-lived assets may not be recoverable based upon the existence of one or more of the indicators, the assets are assessed for impairment based on the estimated future undiscounted cash flows expected to result from the use of the asset and its eventual deposition. If the carrying amount of an asset exceeds the sum of the estimated future undiscounted cash flow, an impairment loss is recorded for the excess of the asset’s carrying amount over its fair value. There was no impairment during the ~~nine months~~three-month period ended ~~March~~December 31, ~~2023 or 2022.~~

2023.

Business Combinations — Valuation of Acquired Assets and Liabilities Assumed: The Company allocates the purchase price for each business combination, or acquired business, based upon (i) the fair value of the consideration paid and (ii) the fair value of net assets acquired, and liabilities assumed. The determination of the fair value of net assets acquired and liabilities assumed requires estimates and judgements of future cash flow expectations for the acquired business and the allocation of those cash flows to identifiable tangible and intangible assets. Fair values are calculated by applying estimates related to Internal Rate of Return (IRR) and Weighted Average Cost of Capital (WACC) assumptions as well as incorporating expected cash flows into industry standard valuation techniques. Goodwill is the amount by which the purchase price consideration exceeds the fair value of tangible and intangible assets acquired, less assumed liabilities. Intangible assets, such as customer relations and trade names, when identified, are separately recognized and amortized over their estimated useful lives, if considered definite lived. Acquisition costs are expensed as incurred and are included in the consolidated statements of operations and comprehensive income.

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Warrant Liability – The Company’s warrant liability is remeasured at fair value ~~through~~as of the reporting period balance sheet ~~date and trued up accordingly to represent the liability's fair value. Warrants are scheduled to expire on February 10, 2028.~~date. The fair value of the Private Warrant was measured using the Lattice model approach. Significant inputs into the respective models at December 31, 2023 and February 10, 2023 (the initial recognition) ~~and March 31, 2023~~ are as follows:

March 31,

Valuation Assumptions

2023

Stock Price

$
3.30

Strike Price

$
11.50

Volatility (annual)

28.6
%
Risk-free rate

3.58
%
Estimated time to expiration (years)

4.8


	December 31,			February 10,
	2023			2023
Stock Price	$	0.93		$	3.30
Exercise price per share	$	11.50		$	11.50
Risk-free interest rate		4.61	%		3.58	%
Expected term (years)		4.1			4.8
Expected volatility		48.6	%		28.6	%
Expected dividend yield		—			—

30The Warrants are scheduled to expire on February 10, 2028.

~~Table~~The significant assumptions using the Lattice model approach for valuation of ~~Contents~~the Private Placement Warrants and Representative Warrants were determined in the following manner:

●

Risk-free interest rate: the risk-free interest rate is based on the U.S. Treasury rate with a term matching the time to expiration.

●

Expected term: the expected term is estimated to be equivalent to the remaining contractual term.

●

Expected volatility: expected stock volatility is based on daily observations of the Company’s historical stock value and implied by market price of the Public Warrants, adjusted by guideline public company volatility.

●

Item 3. Quantitative and Qualitative Disclosures About Market Risk

~~Market risk represents the risk of loss that may impact our financial position due to adverse changes in financial market prices and interest rates. Our market risk exposure is primarily~~We are a ~~result of exposure due to potential changes in inflation or interest rates. We do not hold financial instruments for trading purposes.~~

Concentration of Credit Risk: Financial instruments which potentially subject the Company to concentrations of credit risk consist of cash, cash equivalents, and trade receivables. The Company believes it is not exposed to any significant credit risk on cashsmaller reporting company as the Company’s primary cash is bank deposit accounts with high quality financial institutions and, although at times may exceed federally insured limits, is swept to our outstanding loan balance daily. The Company has not experienced any losses in these accounts. To minimize trade receivable risk, credit evaluation of customers is routinely conducted, and ongoing risk assessments performed. In addition, reserves for potential losses for uncollectible accounts are monitored and results are within management’s expectations.

~~Interest Rate Risk:~~ Our interest rate risk is primarily related to our outstanding bank revolver. On March 31, 2023, we had our outstanding revolver balance subject to our Credit Facility with Bank of America and therefore exposed to market interest rate risk associated with the interest terms under that facility. We do not currently engage in hedging transactions to manage our exposure to interest rate risk.

~~Interest rates are subject to the influence of economic conditions generally, both domestic and foreign, and also to the monetary and fiscal policies~~defined by Rule 12b-2 of the ~~United States~~Exchange Act and ~~its agencies, particularly the Federal Reserve. The nature and timing of any changes in such policies or general economic conditions and the effect they may have on the Company~~ are ~~unpredictable. The Company’s indebtedness may also have other important impacts on the Company, including that the Company will be~~not required to ~~utilize cash flow to service~~provide the debt, indebtedness may make the Company more vulnerable to economic downturns, and the Company’s indebtedness subjects the Company to covenants, which may place restrictions on its operations and activities, including its ability to pay dividends and take certain other actions.

~~As of March 31, 2023, the Company had approximately $127 million revolver balance~~information required under the Credit Facility with Bank of America. Interest on such borrowings accrued at a weighted average rate of 5.48% for the nine months ended March 31, 2023. Based on the average outstanding balance for the period, a hypothetical 100 basis point overall increase in the daily interest rates that we pay would increase the Company’s interest expense by approximately $0.4 million per quarter.

~~Inflation Risk:~~ Inflation typically affects us by increasing our cost of finished products purchased from studios and manufacturers, freight & shipping costs, and payroll. The short-term impact of inflation on the results of the company’s operations is largely dependent on whether we can pass through incremental cost to our customers, which is subject to market conditions. During fiscal year 2021, we began to experience inflationary pressure on freight and labor. Disruptions in the transportation industry resulted in higher landed costs of $15.3 million, which was recorded as an inventory write down for the nine months ended March 31, 2023. Subsequently, cargo container shipping costs have returned to pre-covid levels. More recently, consistent with other retailers and distributors, higher interest rates and energy costs began to affect economic conditions in the United States. Inflation risk may deter consumer spending if economic conditions worsen, and our results of operations could be adversely affected if the high inflation continues for an extended period. We continue to monitor interest rates and believe they will have some impact on operations until they stabilize. Combined, general business conditions and inflationary factors may impact sales, gross profits, and gross margins; however, we do not expect inflation to have a material impact on our ability to execute our long-term strategy.this item.

Item 4. Controls and Procedures

~~Evaluation~~Our management, under the direction of ~~Disclosure Controls~~ and ~~Procedures~~

~~Our management,~~ with the participation of our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act) as of ~~March~~December 31, 2023. Based on the evaluation of our disclosure controls and procedures, our management concluded that, as of ~~March~~December 31, 2023, our disclosure controls and procedures were not effective due to the material ~~weakness~~weaknesses described below. ~~This~~These material ~~weakness~~weaknesses in our internal control over financial reporting ~~relates~~relate to the fact that ~~Alliance~~the Company did not have the necessary business processes and related internal controls formally designed and implemented to ~~address,~~provide reasonable assurance regarding the reliability of the financial reporting and the preparation of our financial statements in accordance with U.S. generally accepted accounting principles, as described further below. ~~We have~~The Company has added and ~~continue~~continues to evaluate the need for additional controls over the accounting and financial reporting requirements related to certain non-routine transactions, which are still being designed and implemented. The material ~~weakness~~weaknesses will not be considered remediated until such time as management designs and

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implements effective controls that operate for a sufficient period of time and has concluded, through testing, that these controls are effective.

Material Weaknesses in Internal Control Over Financial Reporting

A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of a company’s annual ~~or interim~~ consolidated financial statements will not be prevented or detected on a timely basis. As of December 31, 2023, the following material weaknesses existed:

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Entity Level Controls

~~Material Weakness~~

~~As previously disclosed, in connection with our consolidated~~Management did not maintain appropriately designed entity-level controls impacting the (1) control environment, (2) risk assessment procedures, and (3) monitoring activities to prevent or detect material misstatements to the financial statements asand assess whether the components of ~~and for the year ended June 30, 2022, and our unaudited condensed consolidated financial statements for the six months ended December 31, 2022, we identified a material weakness in our~~ internal control were present and functioning. These deficiencies were primarily attributed to an insufficient number of qualified resources to support and provide proper oversight and accountability over ~~financial reporting related to~~ the ~~accounting for the classification~~performance of ~~the outstanding balance of the revolving credit facility, net, due to the fact that Alliance~~controls.

Control Activities

Management did not have ~~the necessary business processes~~adequate selection and related internal controls formally designed and implemented to address the accounting and financial reporting requirements related to certain routine and non-routine transactions. Specifically, the controls failed to detect errorsdevelopment of effective control activities resulting in the ~~accounting for the classification of the outstanding balance of the revolving credit facility, net, as of June 30, 2022, and September 30, 2022.~~

~~Our management previously concluded that this~~following material weakness in our internal control over financial reporting was due to the fact that at the time we initially identified the material weakness, Alliance was a private company with limited resources and did not have the necessary business processes and related internal controls formally designed and implemented to address the accounting and financial reporting requirements related to certain routine and non-routine transactions, such as the accounting implications resulting from covenant violations and maturity of the revolving credit facility, net. Our design and implementation of controls to evaluate and monitor the accounting for these routine and non-routine transactions were still not adequate as of March 31, 2023 due to the reasons described above.weaknesses:

●

Information Technology (IT) General Controls – Certain information technology general controls for security and administration of key IT systems were not designed properly or did not operate effectively. Specifically, (i) periodic user access reviews of roles and permissions were not performed sufficiently throughout the period for certain key IT systems, and (ii) certain key IT systems were not logically restricted, resulting in improper segregation of duties for certain business processes.

●

Financial Close Processes – Management did not design and maintain formal accounting policies, and effective control activities over certain routine aspects of financial reporting. Specifically, management did not design and maintain effective controls over (i) the financial reporting process, including management review controls over areas of accounting such as revenue, inventory, accounts payable, income taxes and payroll, at an appropriate level of precision to detect a material misstatement and sufficient appropriate evidence was not maintained to support the execution and evaluation of the controls performed, (ii) the monthly financial close process, including the review of journal entries, account reconciliations, and analysis of recorded balances, and (iii) the completeness and accuracy of information used by control owners in the operation of certain controls.

●

Disclosures and Internal Control Over Financial Reporting – The Company did not have the necessary business processes and related internal controls over financial reporting formally designed and implemented to address the accounting and financial reporting requirements related to certain routine and non-routine transactions. Specifically, the controls failed to detect required disclosures, and errors in the accounting for the classification of the outstanding balance of the revolving credit facility, net, as of June 30, 2022, as previously disclosed in the audited consolidated financial statements as of and for the periods ended June 30, 2022, December 31, 2022 and June 30, 2023.

●

Annual Impairment Analysis – Management did not design and implemented control activities that would allow the proper and timely identification, over the annual impairment analysis, of (i) triggering events and quantitative assessment approach used; and (ii) assessing completeness and accuracy of information used in the segment and reporting unit determination.

Remediation Plan ~~for Material Weakness~~

In response to the material weaknesses noted above, the Company’s management began to take actions to remediate the identified material weaknesses in internal control over financial ~~reporting.~~reporting during the fiscal year ended June 30, 2023. As part of management’s remediation plan, certain efforts were put into place and were underway prior to December 31, ~~2022. All~~2023. Both new and revised controls that management started to implement in the second fiscal quarter of 2023 as part of the remediation plan require a period of seasoning to allow for a sufficient operating effectiveness testing sample. Management plans to build on and continue such efforts going into the ~~next~~ fiscal year ending June 30, 2024, in order to successfully remediate the identified material weaknesses. The remediation actions include, but are not limited to, the following:

Entity Level Controls – In an effort to provide additional support, oversight and accountability over the performance of controls, the Company is evaluating enhancing its key financial reporting positions. Management will continue to assess the composition of its resource needs, both internal and external, which may include adding additional accounting and compliance resources. Management may also consider engaging third-party advisors when necessary to supplement its existing resources.

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Information Technology General Controls – User access assessments for logical security (roles and privileges) will be performed and periodic user access reviews for key IT systems will be implemented. All IT processes will be centrally managed and IT Management will consider transition certain hosting and administration responsibilities to third-parties.

Financial Close Process Disclosures and Internal Control Over Financial Reporting, and Annual Impairment Analysis – Our remediation plan related to ~~this~~these material ~~weakness includes:~~weaknesses include:

●

~~Engaged~~Management will enhance the design of and implement controls around the rigor of the review process, and retention of sufficient appropriate evidence over revenue, inventory, accounts payable, payroll, income taxes, credit facility, journal entries, and other business processes.

●

Developing monitoring controls and protocols that will allow us to timely assess the design and the operating effectiveness of controls over financial reporting and make necessary changes to the design of controls, if any.

●

Engaging a professional third-party service provider to assist management with the design and implementation of internal controls.

●

With the assistance from the third-party service provider, and under the supervision of the Chief Financial Officer, ~~commenced~~commencing the design and implementation of significant process transaction flows and key controls in the Company’s business processes, including revenue, inventory, income taxes, and IT environment. ~~As discussed above, all new processes and controls were in the seasoning period as of December 31, 2022.~~

●

~~Adopted~~Adopting a process to identify and assess the Company’s disclosure controls and procedures, including the preparation and review of presentation and disclosure requirement ~~checklists.~~checklists, and review of the completeness and accuracy of the underlying support of amounts contained in the financial statements.

Despite the existence of the material ~~weakness,~~weaknesses, we believe the financial information presented herein is materially correct and in accordance with generally accepted accounting principles in the United States.

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The elements of our remediation plan can only be accomplished over time, and we can offer no assurance that these initiatives will ultimately have the intended effects. As management continues to evaluate and work to improve our internal control over financial reporting, management may determine it is necessary to take additional measures to address the material weakness. The material weakness will not be considered remediated unless and until such time as management designs and implements effective controls that operate for a sufficient period of time and concludes, through testing, that these controls are effective. Until the controls have been operating for a sufficient period of time and management has concluded, through testing, that these controls are operating effectively, the material weakness described above will continue to exist. Management will monitor the progress of the remediation plan and report regularly to the audit committee of the board of directors on the progress and results of the remediation plan, including the identification, status and resolution of internal control deficiencies. We can provide no assurance that the measures we have taken and plan to take in the future will remediate the material weakness identified or that any additional material weakness or restatements of financial results will not arise in the future due to a failure to implement and maintain adequate internal control over financial reporting or circumvention of these controls. In addition, even if we are successful in strengthening our controls and procedures, in the future these controls and procedures may not be adequate to prevent or identify irregularities or errors or to facilitate the fair presentation of our financial statements.

Changes in Internal Control over Financial Reporting

For the three months ended December 31, 2023, except as described above, there were no changes in our internal control over financial reporting during the most recent fiscal quarter that were identified in connection with management’s evaluation required by paragraph (d) of Rules 13d-15 and 15d-15 under the Exchange Act that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

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PART II - OTHER INFORMATION

Item 1. Legal Proceedings

Alliance is currently involved in, and may in the future be involved in, legal proceedings, claims, and government investigations in the ordinary course of business. These include proceedings, claims, and investigations relating to, among other things, regulatory matters, commercial matters, intellectual property, competition, tax, employment, pricing, discrimination, consumer rights, personal injury, and property rights.

Depending on the nature of the proceeding, claim, or investigation, the Company may be subject to monetary damage awards, fines, penalties, or injunctive orders. Furthermore, the outcome of these matters could materially adversely affect Alliance’s business, results of operations, and financial condition. The outcomes of legal proceedings, claims, and government investigations are inherently unpredictable and subject to significant judgment to determine the likelihood and amount of loss related to such matters.

~~In particular, on~~On March 31, 2023, a class action complaint, titled Matthew McKnight v. Alliance Entertainment Holding Corp. f/k/a Adara Acquisition Corp., Adara Sponsor LLC, Thomas Finke, Paul G. Porter, Beatriz Acevedo-Greiff, W. Tom Donaldson III, Dylan Glenn, and Frank Quintero, was filed in the Delaware Court of Chancery against our pre-Business Combination board of directors and executive officers and ~~the~~Adara Sponsor LLC, alleging breaches of fiduciary duties by purportedly failing to disclose certain information in connection with the Business Combination and by approving the Business Combination. We intend to vigorously defend the lawsuit. There can be no assurance, however, that we will be successful. At this time, we are unable to estimate potential losses, if any, related to the lawsuit. The Company has accrued $511,000 and $150,000 as of December 31, 2023, and June 30, 2023, respectively, based on the expected loss.

Item 1A. Risk Factors

Factors that could cause our actual results to differ materially from those in this Quarterly Report are any of the risks described in our Annual Report on Form ~~S-4,~~10-K for the year ended June 30, 2023, filed with the SEC on ~~November 30, 2022.~~October 19, 2023. Any of these factors could result in a significant or material adverse effect on our results of operations or financial condition. Additional risk factors not presently known to us or that we currently deem immaterial may also impair our business or results of operations.

~~Risk Factor Summary~~

The following is a summary of the principal risks that could materially adversely affect our business, reputation, financial condition and/or operating results. You should read this summary together with the more detailed description of each risk contained below.

●If Alliance fails to respond to or capitalize on the rapid technological development in the music, video, gaming, and entertainment industry, including changes in entertainment delivery formats, its business could be harmed.

●~~If Alliance does not successfully optimize and operate its fulfillment network, its business could be harmed.~~

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●~~The markets in which Alliance participates are competitive, and if Alliance does not compete effectively, its operating results could be harmed.~~

●~~Alliance may not realize the anticipated benefits of acquisitions or investments in its acquisitions or joint ventures, or those benefits may be delayed or reduced in their realization.~~

●~~Alliance’s expansion into new products, services, technologies, and geographic regions subjects it to additional business, legal, financial, and competitive risks.~~

●~~Alliance’s international operations expose it to a number of risks.~~

●~~Alliance’s business will suffer if it is not successful in developing and expanding its partner brands across its consumer base.~~

●~~Consumer interests change rapidly, and acceptance of products and entertainment offerings are influenced by outside factors.~~

●~~An inability to develop, introduce and ship planned products, product lines and new brands in a timely and cost-effective manner may damage Alliance’s business.~~

●~~If Alliance is unable to navigate through global supply chain challenges, its business may be harmed.~~

●~~If Alliance is unable to adapt its business to the continued shift to ecommerce, its business may be harmed.~~

●The concentration of Alliance’s retail customer base and continued shift to ecommerce sales means that economic difficulties or changes in the purchasing or promotional policies or patterns of its major customers could have a significant impact on it.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.

~~None~~None.

Item 3. Defaults Upon Senior Securities

~~None~~None.

Item 4. Mine Safety Disclosures

Not ~~applicable~~applicable.

Item 5. Other Information

~~None~~During the three months ended December 31, 2023, the company has yet to formally adopt an insider trading policy. Moreover, no officers or directors have initiated or concluded any contracts, instructions, or written plans pertaining to the purchase or sale of the Company’s securities with the intention of meeting the affirmative defense conditions outlined in Rule 10b5-1(c) or engaged in any non-Rule 10b5-1 trading arrangements. The Company is in the process of implementing these regulations and their implications on trading practices and compliance protocols.

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Item 6. Exhibits

The following exhibits are filed as part of, or incorporated by reference into, this Quarterly Report on Form 10-Q.


No.		Description of Exhibit
10.1		GameFly Distribution Agreement
31.1*		Certification of Principal Executive Officer ~~Pursuant~~and Principal Financial Officer pursuant to Securities Exchange Act ~~Rules~~Rule 13a-14(a), as adopted ~~Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002~~
31.2*		~~Certification of Principal Financial Officer Pursuant to Securities Exchange Act Rules 13a-14(a), as adopted Pursuant~~pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1**		Certification of Principal Executive Officer ~~Pursuant~~and Principal Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted ~~Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002~~
32.2**		~~Certification of Principal Financial Officer Pursuant to 18 U.S.C. Section 1350, as adopted Pursuant~~pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
101.INS*		Inline XBRL Instance Document
101.SCH*		Inline XBRL Taxonomy Extension Schema Document
101.CAL*		Inline XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF*		Inline XBRL Taxonomy Extension Definition Linkbase Document
101.LAB*		Inline XBRL Taxonomy Extension Labels Linkbase Document
101.PRE*		Inline XBRL Taxonomy Extension Presentation Linkbase Document
104*		Cover Page Interactive Data File (Embedded within the Inline XBRL document and included in Exhibit)

*	Filed herewith.

**	Furnished herewith.

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SIGNATURES

In accordance with the requirements of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.


	ALLIANCE ENTERTAINMENT HOLDING ~~CORP.~~CORPORATION

Date: ~~May 22, 2023~~February 8, 2024	By:	/s/ Jeffrey Walker
	Name:	Jeffrey Walker
	Title:	Chief Executive Officer
		~~(Principal Executive Officer)~~

~~Date: May 22, 2023~~	~~By:~~	~~/s/John Kutch~~
	~~Name:~~	~~John Kutch~~
	~~Title:~~	and Chief Financial Officer
		(Principal Executive, Financial and Accounting Officer)

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