Alliance Entertainment Holding Corp: Form 10-Q for the period ended Dec 31, 2025

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 related notes thereto for the year ended June 30, 2025, which are included in the Company’s Annual Report on Form 10-K filed with the SEC on September 10, 2025.

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 distributor of collectibles, physical media, entertainment products, hardware, and accessories across various platforms. Employing an established multi-channel strategy, Alliance operates as the vital link between renowned international manufacturers of entertainment content and top-tier retail partners both domestically and internationally. With premier suppliers such as Universal Pictures, Warner Brothers Home Video, Walt Disney Studios, Sony Pictures, Lionsgate, Universal Music Group, Sony Music, Warner Music Group, Microsoft, Nintendo, Take Two, Electronic Arts, Funko, Mattel and others, Alliance maintains in-stock inventory of over 340,000 SKU products, consisting of vinyl records, video games, compact discs, DVD, Blu-Rays, and collectibles. Combined with exclusive content from AMPED Distribution and Distribution Solutions, Alliance Entertainment serves as a valued added wholesale distributor, direct-to-consumer (“DTC”) distributor and e-commerce provider to notable partners including industry leaders like Walmart, Amazon, Best Buy, Barnes & Noble, Wayfair, Costco, Dell, Verizon, Kohl’s, Target, Shopify, and others. Currently, the company sells its products, permitted for export, to more than 70 countries worldwide.

Additionally, Alliance manages a diverse portfolio of owned e-commerce brands through its DirectToU LLC division, catering to various entertainment and collectible markets. Notable brands include DeepDiscount, PopMarket, ImportCDs, Critics’ Choice Video, Collectors’ Choice Music, Movies unlimited and WowHD.

Alliance provides state-of-the art, distribution, and technology platforms that support the efficient sale and fulfillment of physical entertainment products and collectibles across retail and e-commerce channels. These capabilities are enhanced by Handmade by Robots, which expands Alliance’s premium licensed collectibles offering, and Endstate, which contributes NFC-enabled authentication and digital product identity technology that supports product verification and authenticated resale. Together, these platforms strengthen Alliance’s position in the collectibles market by enabling secure, traceable, and scalable distribution of high-value physical products. Alliance also serves as the retailers’ back office, with EDI and logistics infrastructure fully operational to support existing and new product launches.

License Agreements

In January 2025, Alliance entered into an exclusive home entertainment distribution agreement with Paramount Pictures, designating Alliance as the sole distributor of Paramount’s physical media – including DVDs, Blu-rays, and 4K UHD titles, across the United States and Canada. This strategic partnership significantly enhances Alliance’s leadership in home entertainment distribution by providing direct access to Paramount’s extensive library of blockbuster films and iconic TV series. The collaboration has already yielded positive results. This partnership not only strengthens relationships with major retailers and collectors but also reinforces Alliance’s commitment to delivering high-quality entertainment products to consumers.

Subsequent to December 31, 2025, in January 2026, Alliance Entertainment entered into a new exclusive home entertainment license agreement with Amazon MGM Studios Distribution covering physical media distribution in the United States and Canada. Under the agreement, Alliance will serve as the exclusive distributor of Amazon MGM Studios’ physical media titles, including new releases and select catalog content, across major wholesale, e-commerce, and brick-and-mortar retail channels. Management expects the agreement to expand the Company’s physical media portfolio and support continued growth in higher-value and collectible product offerings.

Merger, Asset Purchase 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 December 31, 2025, Alliance completed its strategic acquisition of Endstate Acquisition LLC and established Endstate Authentic LLC (“Endstate”) as a wholly owned subsidiary focused on authentication and resale technology. The acquisition supports the launch of Alliance Authentic, a new premium platform designed to create authenticated, certified vinyl collectibles and a trusted global marketplace for buying, selling, and trading investment-grade physical media. Endstate’s patented NFC-enabled authentication and digital product identity technology enables real-time product verification, counterfeit prevention, and authenticated resale services, forming the technological foundation of the Alliance Authentic platform. As part of the transaction, Endstate co-founders Bennett Collen and Stephanie Howard joined Alliance’s leadership team as President and Senior Vice President of Operations, respectively. The acquisition resulted in the recognition of $5.0 million of goodwill and $3.3 million of identifiable intangible assets as of December 31, 2025, primarily related to Endstate’s proprietary technology and digital identity systems. Management believes the acquisition strengthens Alliance’s strategic position in the growing authenticated collectibles market and supports the development of new technology-enabled and recurring revenue opportunities.

On December 17, 2024, Alliance acquired Handmade by Robots from Bensussen Deutsch & Associates, LLC, for $7.6 million. Handmade by Robots produces licensed vinyl figures that mimic the look of knitted or crocheted plush toys. These figures feature characters from popular franchises such as DC Comics, Ghostbusters, Harry Potter, Star Trek, and Stranger Things, and have become favorites among fans and collectors. The acquisition included inventory, tooling equipment, and a trademark associated with the product line. This addition has diversified our product offerings by adding an exclusive line to our portfolio.

On February 10, 2023, Alliance completed its business combination with Adara Acquisition Corp., which was accounted for as a reverse recapitalization with Alliance treated as the accounting acquirer (the “Merger”). The recapitalization has been retroactively reflected in all periods presented. The Company continues to recognize certain warrant and equity-related impacts from this transaction, including the outstanding Class E contingent shares and warrant liabilities, as discussed further in Notes 16 and 21.

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

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 $787,000 as compared to Legacy Alliance’s consolidated balance sheet.

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.

Macroeconomic Uncertainties

The Company continued to operate amid macroeconomic uncertainty during the period ended December 31, 2025, including inflationary pressures and geopolitical instability related to ongoing global conflicts. While inflation moderated during late 2025, consumer discretionary spending remained uneven, affecting demand patterns across certain product categories. The Company also experienced cost pressures related to existing and potential tariffs on imported goods, particularly for internationally sourced physical media and collectibles. Despite these challenges, management continues to actively manage pricing, product mix, and sourcing strategies to mitigate the impact of economic and trade-related volatility. While these conditions may continue to influence future periods, the Company believes its diversified product offerings and focus on higher-value collectibles position it to navigate ongoing uncertainty. For further discussion of the potential impacts of macroeconomic events on our business, financial condition, and operating results, see the section titled Part I “Item 1A. Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended June 30, 2025, including the risk factor titled “Unstable market and economic conditions have had and may continue to have serious adverse consequences on our business, financial condition and share price.”

Key Performance Indicators

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

Net Revenue: To derive 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 revenue 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.

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 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.

Results of Operations Three Months Ended December 31, 2025, Compared to Three Months Ended

December 31, 2024

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26

Net Revenue: Year over year, total net revenues decreased from $394 million to $369 million (-$25 million, -6%) for the three months ended December 31, 2025. The decline was primarily attributable to a significant reduction in gaming product revenues, reflecting softer industry conditions, lower hardware availability, and changes in product mix during the quarter. This decrease was partially offset by growth across several core categories, including vinyl records, physical movies, and collectibles, supported by continued consumer demand for premium physical formats, exclusive content offerings, and higher-value products. Overall, revenue performance during the quarter reflects a shift in mix toward higher-priced, differentiated products, while gaming sales weighed on consolidated results. Alliance Entertainment is a recognized leader in the entertainment industry, excelling in the licensing, production, and distribution of a diverse range of entertainment products and content, including motion pictures, music, gaming hardware, retro arcades, and pop culture collectibles. With exclusive distribution rights for approximately 150 studios and labels in the film and music industry, our extensive portfolio of unique content, combined with our deep inventory, enables us to service bulk business-to-business (B2B) and direct-to-consumer (DTC) channels with a vast selection of products unavailable through other distributors. Our recent acquisition of Handmade by Robots and the Paramount licensing contract further enhance our portfolio of exclusive content. In addition, our unique DTC suite of distribution and inventory solutions for the e-commerce retail industry, including our consumer direct subsidiary DirectToU LLC, accounted for approximately 39% of gross revenue for the three months ended December 31, 2025.

Year over year, vinyl record sales increased from $109 million to $112 million for the three months ended December 31, 2025, representing an increase of $3 million, or 3%, compared to the prior-year period. The increase in revenue was primarily driven by a 2.9% increase in unit sales volume, reflecting continued consumer demand for vinyl records, with a modest contribution from a 0.1% increase in average selling prices. The growth in sales volume was supported by strong new release activity, continued interest in collectible and limited-edition offerings, and sustained demand for vinyl as a preferred physical music format among both established and emerging artists. While pricing remained relatively stable during the period, increased unit demand more than offset the minimal change in average selling price, resulting in overall revenue growth.

Music Compact Disc (CD) sales increased from $39 million to $41 million for the three months ended December 31, 2025, representing an increase of $2 million, or 5%, compared to the prior-year period. The increase in revenue was driven primarily by a 7% increase in unit sales volume, partially offset by a 1% decline in average selling price. The growth in unit volume reflects heightened demand for select new releases during the period, including Taylor Swift’s album released in October 2025, as well as continued demand for K-Pop titles and collectible CD editions. While the broader market continues to shift toward streaming and digital formats, strong performance from major artist releases and fan-driven purchases supported increased CD sales during the quarter.

Physical movie sales, encompassing DVD, Blu-ray, and Ultra HD formats, increased from $86 million to $114 million for the three months ended December 31, 2025, representing an increase of $28 million, or 33%, compared with the same period in the prior year. The increase was driven by a 4% increase in average selling price, together with higher unit shipments, resulting in significant year-over-year revenue growth. Performance during the current quarter benefited from a consistent flow of theatrical releases and sustained consumer demand for premium formats, including 4K Ultra HD and collectible SteelBook editions. In addition, the launch of a new exclusive content partnership with Paramount earlier in the year expanded the Company’s film portfolio and contributed to improved pricing and increased retail visibility for select titles. A favorable mix shift toward premium, higher-margin products supported the increase in average selling price and partially offset softness in lower-priced catalog titles.

For the quarter ended December 31, 2025, collectibles revenue rose from $6 million to $8 million (+$2 million, +31%) compared with the prior-year period. Although unit sales volume declined by 17%, a 56% increase in average selling price more than offset the decrease and drove overall revenue growth. The increase reflects a favorable shift toward higher-value collectibles, supported by expanded sourcing activity and new vendor additions during the second half of 2025, which contributed incremental revenue primarily in the quarter. Growth was further supported by the transition of Handmade by Robots from a distributed brand in 2024 to an owned brand in 2025, as well as improved profitability from certain legacy brands following inventory rationalization in the prior year.

For the quarter ended December 31, 2025, electronics revenue remained flat at $6 million compared to the prior-year period. Unit sales volume declined by 9%; however, this decrease was offset by a 5.1% increase in average selling price, resulting in relatively stable revenue year-over-year. The higher average selling price reflected changes in product mix and competitive pricing dynamics, while the decline in unit volume indicates softer demand compared with the prior-year period. Electronics sales primarily consist of audio playback devices and accessories, including turntables, headphones, speakers, and related accessories, which are generally sold as complementary products alongside physical music and movie media.

Gaming product revenue declined from $140 million to $80 million for the three months ended December 31, 2025, representing a decrease of $60 million, or 43%, compared to the prior-year period. The decline reflected a broader slowdown in the gaming industry, with unit sales volume decreasing 23% year over year and average selling price declining 25%. These decreases were driven in part by a pause in arcade hardware purchases following a reassessment of vendor partnerships, limited availability of certain hardware products, and delays in major game releases during the period. While overall sales declined during the quarter, industry interest in next-generation, high-performance consoles remains evident. As a distributor of physical gaming products, the Company continues to adjust its product mix and distribution strategies to align with evolving consumer demand and to manage profitability, while monitoring potential supply chain and cost pressures related to market volatility and ongoing trade tensions with China.

Cost of Revenues: Total cost of revenues, excluding depreciation and amortization, decreased from $351 million to $322 million for the year-over-year period, representing a decline of $29 million, or 8.5%, primarily reflecting the direct relationship between product costs and lower sales volume. Gross margin dollars increased by $5 million, driven by improved margins. For the quarter ended December 31, 2025, gross margin expanded from 11% to 13%, an increase of 2 percentage points, compared with the same period in the prior year. The improvement was supported by higher average selling prices and the launch of a new exclusive content partnership earlier in the year. Additional factors contributing to margin expansion included enhanced inventory management and modest improvements in distribution fees, which together strengthened overall profitability.

Operating Expenses: Total operating expenses for the quarter increased from $28 million to $30 million, or 9% year over year, rising as a percentage of net revenue from 7% to 8%. The increase was primarily driven by higher selling, general, and administrative expenses, which grew from $14 million to $16 million, reflecting strategic investments in infrastructure, technology, and personnel to support the Company’s exclusive content partnerships and future growth initiatives. Distribution and fulfillment expenses decreased slightly from $12.4 million to $12.1 million, or 2.4%, though these costs increased modestly as a percentage of net revenue to 3.3%. The Company continues to invest in warehouse automation to support a more permanent labor structure and reduce reliance on temporary staff, while maintaining flexibility to manage demand fluctuations. Fulfillment payroll remained flat at $8 million but rose as a percentage of net revenue from 2.1% to 2.2%, reflecting lower net revenue and a 4% increase in average labor costs per hour. The May 2024 consolidation of the Shakopee, Minnesota warehouse continued to deliver cost savings and operational efficiencies through increased centralization. Depreciation and amortization expense remained consistent at $1 million compared with the prior-year period.

Interest Expense: For the three months ended December 31, 2025, total interest expense increased from $2.8 million to $3.5 million, driven primarily by the full expensing of remaining deferred financing costs from the Company’s former White Oak credit facility, including $1.8 million in advisory fees previously paid to B&D Capital Partners, LLC (“BDCP”), a firm partially owned by board member W. Tom Donaldson III. Excluding this non-recurring charge of $1.6 million, interest expense declined year over year due to a lower effective rate from Bank of America, which fell from 9.3% to 7.5%, more than offsetting the modest increase in the average revolver balance from $85 million to $87 million.

Income Tax: For the three months ended December 31, 2025, an income tax expense of $3.6 million was recorded compared to $2.4 million for the prior year period. Alliance reported a pretax income of $13.0 million for the three months ended December 31, 2025, versus income of $9.4 million for the three months ended December 31, 2024. The effective tax rate was 28% and 25% for the three months ended December 31, 2025, and 2024, respectively. The difference between the Company’s effective tax rate for the three months ended December 31, 2025, and the federal statutory rate primarily resulted from state income taxes, Foreign Derived Intangible Income, fair value adjustments related to the Company’s warrant liability, and prior taxes related to parent’s pre-acquisition period. The difference between the Company’s effective tax rate for the three months ended December 31, 2024, and the federal statutory rate primarily resulted from state income taxes, and Foreign Derived Intangible Income. The Company completed the acquisition of Endstate Authentic LLC on December 31, 2025. For U.S. federal and state income tax purposes, the transaction is treated as a taxable purchase of assets because Endstate Authentic LLC is a disregarded entity. As such, the tax basis of all acquired assets and assumed liabilities was stepped up to an amount equal to their fair values determined under ASC 805. Accordingly, the acquisition did not give rise to any temporary differences, and no deferred tax assets or liabilities were recognized on the acquisition date.

Non-GAAP Financial Measures: For the three months ended December 31, 2025, we had non-GAAP Adjusted EBITDA of approximately $18.5 million compared with Adjusted EBITDA of approximately $16.1 million in the prior year period, or a year-over-year improvement of $2.4 million. We define Adjusted EBITDA as net gain or loss adjusted to exclude: (i) income tax expense; (ii) other income (loss); (iii) interest expense; (iv) depreciation and amortization expense; and (v) other non- recurring expenses. Our method of calculating Adjusted EBITDA may differ from other companies and accordingly, this measure may not be comparable to measures used by other companies. 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.

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28

Results of Operations Six Months Ended December 31, 2025, Compared to Six Months Ended

December 31, 2024

($ in thousands)

Net Revenue: Year over year, total net revenues remained the same at $623 million for the six months ended December 31, 2025. Alliance Entertainment is a recognized leader in the entertainment industry, excelling in the licensing, production, and distribution of a diverse range of entertainment products and content, including motion pictures, music, gaming hardware, retro arcades, and pop culture collectibles. With exclusive distribution rights for approximately 150 studios and labels in the film and music industry, our extensive portfolio of unique content, combined with our deep inventory, enables us to service bulk business-to-business and direct-to-consumer channels with a vast selection of products unavailable through other distributors. Our recent acquisition of Handmade by Robots and the Paramount licensing contract further enhance our portfolio of exclusive content. In addition, our unique DTC suite of distribution and inventory solutions for the e-commerce retail industry, including our consumer direct subsidiary DirectToU LLC, accounted for approximately 37% of gross revenue for the six months ended December 31, 2025.

Year over year, vinyl record sales increased from $179 million to $188 million (+$9 million, +5%) for the six months ending December 31, 2025. The increase in revenue was driven by a 5% increase in unit sales volume, partially offset by a 0.3% decrease in average selling price. The modest decline in pricing was more than offset by higher unit demand, resulting in overall revenue growth. The increase in vinyl record revenue reflects continued consumer demand for physical music formats, particularly among collectors and enthusiasts seeking premium and limited-edition releases. Higher sales volume during the period was supported by strong new release activity, expanded retail distribution, and the ongoing popularity of vinyl as a preferred format among both established and emerging artists.

Music Compact Disc sales increased from $73 million to $75 million for the six months ended December 31, 2025, representing an increase of $2 million or 2% year-over-year. The increase was driven by a 5% increase in unit volume partially offset by a 3% drop in average selling price. Higher unit demand more than offset the decline in pricing, resulting in overall revenue growth for the period. Sales were supported in part by the release of The Life of a Showgirl, the twelfth studio album by Taylor Swift, which was released on October 3, 2025 and generated notable physical sales activity during the 6 months ended December 31, 2025. Continued consumer interest in select physical releases and collectible CD editions also contributed to the increase in CD revenue, even as broader industry trends favor streaming and digital formats.

Physical movie sales, encompassing DVD, Blu-ray, and Ultra HD formats, increased from $139 million to $198 million for the six months ended December 31, 2025, representing an increase of $59 million, or 43%, compared with the same period in the prior year, and accounted for approximately 32% of total net sales during the period. The increase in revenue was driven by a 3% increase in average selling price, together with a 38% increase in unit shipments, resulting in significant year-over-year growth. Performance during the period benefited from a consistent flow of theatrical releases and sustained consumer demand for premium formats, including 4K Ultra HD and collectible SteelBook editions. In addition, the launch of a new exclusive content partnership with Paramount earlier in the year expanded the Company’s film portfolio and contributed to improved pricing and increased retail visibility for select titles. A favorable shift in sales mix toward premium, higher-margin content supported the increase in average selling price and partially offset softness in lower-priced catalog titles.

For the six months ended December 31, 2025, collectibles revenue rose from $11 million to $14 million (+$3 million, +31%) compared with the prior-year period. Although unit volume declined 23%, a 71% increase in average selling price more than offset lower volumes and drove revenue growth. Results were supported by the addition of over 20 new collectibles vendors that began contributing sales in the second half of 2025, generating more than $0.5 million in incremental revenue. Existing vendors also delivered higher sales driven by new product lines, and Handmade by Robots’ transition from a distributed brand in 2024 to an owned brand in 2025 contributed meaningfully to year-over-year performance.

For the six months ended December 31, 2025, electronics revenue declined from $8 million to $7 million (-$1 million, -9%) compared to the prior-year period. Unit sales volume increased 4%, but this was more than offset by a 13% decline in average selling price, resulting in an overall reduction in revenue. The decline in average selling price primarily reflected changes in product mix and competitive pricing dynamics. Electronics sales primarily consist of audio playback devices and related accessories, including turntables, headphones, speakers, and other ancillary products that complement physical music and movie media.

Gaming product revenue declined from $197 million to $126 million (-$71 million, -36%), for the six months ended December 31, 2025. The decline in revenue was driven by a 34% decrease in average selling price, together with a 3% decrease in unit sales volume year over year. The reduction in average selling price reflected a pause in arcade hardware purchases, which typically carry higher price points, following a reassessment of vendor partnerships, as well as limited availability of certain hardware products and delays in major game releases during the period. While unit volume declined modestly, consumer interest in physical gaming products remained evident. As a distributor of physical gaming products, the Company continues to adjust its product mix and sourcing strategies to align with evolving consumer demand and to manage profitability, while monitoring potential supply chain risks related to market volatility and ongoing trade tensions with China.

Cost of Revenues: Total cost of revenues, excluding depreciation and amortization, decreased from $555 million to $538 million (-$17 million, -3%) year-over-year, driven by improved cost discipline, a more favorable product mix, and the impact of our exclusive content partnership, which supported higher-value physical media sales. For the six months ended December 31, 2025, gross margin increased from 10.9% to 13.5%, an expansion of 2.6 percentage points compared with the prior-year period. This improvement was primarily attributable to higher average selling prices and the successful ramp-up of the exclusive content partnership, modest improvements in distribution fees, which together strengthened overall profitability.

Operating Expenses: Total operating expenses for the six months ended December 31, 2025, increased from $51 million to $57 million (+$6 million, +12%), rising as a percentage of net revenue from 8% to 9% compared with the same period of the prior year. This increase was primarily driven by higher selling, general, and administrative expenses, which rose from $27 million to $32 million (+$5 million, +18%) due to strategic investments in infrastructure, technology, and personnel, including additions to support our new exclusive content partnership. These investments are intended to strengthen operational effectiveness and position the business for sustainable growth. Distribution and fulfillment expenses increased modestly from $21 million to $22 million (+$1 million, +3%), remaining largely consistent as a percentage of net revenue at 3.5% compared with 3.4% in the prior-year period. The Company continues to invest in warehouse automation initiatives to support a more permanent labor structure while maintaining flexibility to manage fluctuations in demand. As a result, fulfillment payroll decreased slightly from $14.5 million to $14.3 million (-$0.2 million, -1.3%) and remained consistent as a percentage of net revenue at 2.3%, despite an approximate 3% increase in average hourly labor costs driven by market conditions. The May 2024 consolidation of the Shakopee, Minnesota warehouse continues to generate cost savings and operational efficiencies through centralized operations. We continue to identify and implement business-process improvements to enhance operational efficiency and support long-term scalability. Depreciation and amortization remained consistent at $3 million for the six months ended December 31, 2025, compared with the prior-year period.

Interest Expense: For the six months ended December 31, 2025, total interest expense increased slightly from $5.7 million to $5.8 million (+$0.1 million, +2.4%) compared with the prior-year period, primarily due to the full expensing of remaining deferred financing costs from the Company’s former White Oak credit facility, including $1.8 million in advisory fees previously paid to B&D Capital Partners, LLC, a firm partially owned by board member W. Tom Donaldson III. This non-recurring amortization totaled $1.6 million. Excluding this item, interest expense for the six months ended December 31, 2025, declined compared with the prior-year period, primarily due to a lower effective interest rate from Bank of America , which decreased from 9.6% to 8.0%, a decline of 1.6 percentage points, or 16.9% year over year. This reduction, combined with a modest decline in the average revolver balance to $81 million from $83 million, contributed to the overall decrease in interest expense excluding the non-recurring amortization.

Income Tax: For the six months ended December 31, 2025, an income tax expense of $5.4 million was recorded compared to $1.2 million for the prior year period. Alliance reported a pretax income of $19.7 million for the six months ended December 31, 2025, versus $8.7 million for the six months ended December 31, 2024. The effective tax rate was approximately 28% and 14.0% for the six months ended December 31, 2025, and 2024, respectively. The difference between the Company’s effective tax rate and the U.S. federal statutory rate for the six months ended December 31, 2025, primarily resulted from state income taxes, FDII, fair value adjustments related to the Company’s warrant liability, and tax items attributable to periods prior to the Company’s acquisition by its parent. The difference between the Company’s effective tax rate and the U.S. federal statutory rate for the six months ended December 31, 2024 primarily resulted from state income taxes, FDII, and a discrete item related to an out-of-measurement period adjustment to the deferred tax liability related to software costs.

Non-GAAP Financial Measures: For the six months ended December 31, 2025, we had non-GAAP Adjusted EBITDA of approximately $30.7 million compared with Adjusted EBITDA of approximately $19.5 million in the prior year period, or a year-over-year improvement of $11.2 million. We define Adjusted EBITDA as net gain or loss adjusted to exclude: (i) income tax expense; (ii) other income (loss); (iii) interest expense; (iv) depreciation and amortization expense; and (v) other non- recurring expenses. Our method of calculating Adjusted EBITDA may differ from other companies and accordingly, this measure may not be comparable to measures used by other companies. 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.

($ in thousands)

31

LIQUIDITY AND CAPITAL RESOURCES

Liquidity: On October 1, 2025, Alliance Entertainment Holding Corporation entered into a new Loan and Security Agreement providing for a $120 million senior secured revolving credit facility with Bank of America, N.A. (the “Revolving Credit Facility”), which replaced the Company’s prior asset-based credit facility with White Oak Commercial Finance, LLC (the “Prior Credit Facility”). The Revolving Credit Facility enhances the Company’s liquidity profile and provides increased financial flexibility to support working capital needs and ongoing operations. In addition, the Company continues to implement strategic initiatives focused on cost control and the sale of higher-value products. Based on the availability under the Revolving Credit Facility, cash on hand, cash generated from operations, and working capital, management believes the Company has sufficient liquidity to fund its operations and meet its obligations for at least twelve months from the issuance of these consolidated financial statements.

Our primary sources of liquidity are cash on-hand, cash provided by operating activities, and borrowings under our new credit facility. As of December 31, 2025, in addition to the $1.4 million cash, we carried an $85 million revolver balance on the Revolving Credit Facility. Year over year, working capital levels increased, resulting in higher borrowings under the Company’s revolving credit facility. As of December 31, 2025, the Company carried an $85 million revolver balance, compared with a $70 million balance under the prior credit facility as of December 31, 2024, representing an increase of $15 million, or 22%. As a result, our availability under the Prior Credit Facility decreased from $50 million on December 31, 2024, to $35 million on December 31, 2025 ($15 million, 30%).

Under the Revolving Credit Facility, the Company may request the issuance of letters of credit, which reduce availability under the borrowing base and increase outstanding borrowings. As of December 31, 2025, the Company had a $750,000 letter of credit outstanding, which reduced availability under the Revolving Credit Facility and increased borrowings outstanding by a corresponding amount. The letter of credit is collateralized under the terms of the credit agreement and does not represent restricted cash held by the Company.

($in millions)

As of December 31, 2025, the Company intends to continue relying primarily on its borrowing capacity under the Revolving Credit Facility, as well as any renewal or replacement of such facility, to fund working capital and other operational requirements. The availability of additional cash proceeds from the potential exercise of outstanding Warrants is contingent upon the market price of the Company’s Class A common stock exceeding the Warrant exercise price of $11.50 per share. Given that the market price of the Class A common stock was $7.58 as of January 23, 2026, the Company does not currently expect Warrants to be exercised unless and until the market price exceeds the exercise price. Although the Company does not currently have any definitive plans to do so, it may seek to raise additional capital through the issuance of equity securities in the future, depending on market conditions, strategic opportunities, and liquidity needs.

Cash Flow: The following table summarizes our net cash provided by or used on operating activities, investing activities and financing activities for the periods indicated and should be read in conjunction with our condensed consolidated financial statements for the six months ended December 31, 2025, and 2024.

($ in thousands)

32

For the six months ended December 31, 2025, on net income of $14.3 million, the Company used $13.8 million of cash from operating activities, compared to $13.6 million of cash generated in the prior-year period. The year-over-year change was primarily driven by working capital dynamics, including the timing of collections, inventory purchases, and vendor payments. Accounts payable increased by $32.7 million, compared to a $57.1 million increase in the prior year, reflecting more normalized purchasing activity and improved cash management practices following the prior year’s heavy build-up of inventory and supplier payments. Inventory increased by $15.0 million, versus a $1.8 million increase in the prior-year period, largely due to the timing of inbound product shipments and inventory replenishment ahead of the holiday selling season. The more moderate inventory growth reflects improved forecasting, tighter purchasing controls, and a more balanced inventory position aligned with current demand levels.

Cash used in investing activities was $1.8 million for the six months ended December 31, 2025, compared to $7.5 million used during the same period in the prior year. Cash used during the current period primarily reflects capital expenditures related to facility improvements and warehouse automation, partially offset by minor cash inflows from asset disposals, as well as cash paid in connection with the Endstate acquisition completed on December 31, 2025. Cash used in the prior-year period primarily related to the Handmade by Robots acquisition, which contributed to the higher investing cash outflows in that period.

Net cash provided by financing activities was $15.8 million for the six months ended December 31, 2025, compared with net cash used of $4.7 million in the prior-year period. Financing activity during the current period primarily reflected borrowings under the Company’s revolving credit facility to support working capital requirements, resulting in net borrowings of approximately $27.9 million, compared with net repayments of $3.3 million in the prior-year period offset by repayment of the $10 million outstanding under loans from Bruce Ogilvie, Executive Chairman of the Board and a principal stockholder of the Company. The increase in net borrowings reflects higher working capital needs during the current period, partially offset by improved liquidity following the Company’s transition to its new revolving credit facility with Bank of America.

Critical Accounting Policies and Estimates

Our condensed consolidated financial statements have been prepared in accordance with U.S. GAAP. Our discussion and analysis of the financial condition and results of operations are based on these financial statements. The preparation of these financial statements requires the application of accounting policies in addition to certain estimates and judgments by our management. Our estimates and judgments are based on currently available information, historical results, and other assumptions we believe are reasonable. The actual results could differ materially from these estimates.

No changes were made to the critical accounting estimates discussed in the 2025 Annual Report during the six months ended December 31, 2025.

We are a small reporting company as defined by Rule 12b-2 of the Exchange Act and are not required to provide the information required under this item.

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 of 1934) as of December 31, 2025. Based on that evaluation, management concluded that our disclosure controls and procedures were effective as of that date.

Changes in Internal Control over Financial Reporting

There were no changes in the Company’s internal control over financial reporting during the quarter ended December 31, 2025, that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

As previously disclosed in the Company’s Annual Report on Form 10-K for the fiscal year ended June 30, 2025, management concluded that the material weaknesses previously identified in prior periods were fully remediated as of June 30, 2025. The Company continues to monitor and enhance its internal control environment to support reliable financial reporting.

In addition to the risks described below, 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 10-K for the year ending June 30, 2025, filed with the SEC on September 10, 2024. 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.

Risks Related to the Acquisition and Integration of Endstate

On December 31, 2025, we completed the acquisition of Endstate Authentic LLC (“Endstate”). The acquisition introduces operational, financial, and strategic risks that could adversely affect our business if we are unable to successfully integrate or operate the acquired business. Endstate operates a digital authentication and loyalty-driven consumer brand that differs from our traditional wholesale and distribution operations. Successfully integrating Endstate requires, among other things, aligning technology platforms, operational processes, personnel, and corporate culture. We may experience challenges integrating Endstate’s systems and technology, retaining key employees, maintaining relationships with customers and partners, or achieving anticipated growth and synergies. If the integration of Endstate is delayed or unsuccessful, or if Endstate’s business does not perform as expected, our results of operations, cash flows, and financial condition could be materially adversely affected.

The Endstate acquisition includes contingent consideration and other payment obligations that may adversely affect our liquidity and results of operations.

As part of the Endstate acquisition, we assumed obligations that include contingent consideration arrangements, deferred consideration, and acquired royalty obligations. The contingent consideration is based on Endstate’s future financial performance and is subject to remeasurement at fair value each reporting period, with changes recognized in earnings. At December 31, 2025, we accrued $5,500,000 under earnout. Actual amounts payable under these arrangements could exceed the currently estimated amounts and may require significant cash resources. In addition, changes in the estimated fair value of contingent consideration could negatively impact earnings and result in earnings volatility in future periods. These obligations could adversely affect our liquidity, financial flexibility, and results of operations.

Our goodwill and intangible assets recorded in connection with the Endstate acquisition may become impaired.

In connection with the Endstate acquisition, we recorded additional goodwill and finite-lived intangible assets, including technology, trademarks, and customer relationships. The purchase price allocation for the acquisition is preliminary and subject to adjustment as valuation analyses are finalized. Goodwill and intangible assets are subject to impairment testing, which requires significant judgment and estimates regarding future cash flows, growth rates, and market conditions. If Endstate’s operating performance, consumer adoption, or market conditions do not meet our expectations, we may be required to record impairment charges in future periods. Any such impairment could be material and would adversely affect our results of operations and financial condition.