Alliance Entertainment Holding Corp: Form 10-Q for the period ended Mar 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 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 distributor of 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, Paramount, Universal Music Group, Sony Music, Warner Music Group, Microsoft, Nintendo, Take Two, Electronic Arts, Ubisoft, Square Enix, and others, Alliance maintains in-stock inventory of over 325,000 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 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, 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 and e-commerce solutions. All electronic data interchange (“EDI”) and logistics are operational and ready for existing retail channels to add new products.

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.

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 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 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.

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, 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 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 (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 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 $787,000 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

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. Alliance has navigated significant macroeconomic challenges in recent years, including inflation, the U.S. Federal Reserve interest rates, and the Russia-Ukraine war have led to economic uncertainty globally. The effect of macroeconomic conditions may not be fully reflected in our 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 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, 2024, 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 (“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.

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

March 31, 2024

($ in thousands)

26

Net Revenue: Year over year, total net revenues increased from $211 million to $213 million (+$1.8 million, +1%) for the three months ended March 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 (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 Paramount licensing contract will further enhance our portfolio of exclusive content. As a result of exclusive film and media content partnerships, the Company has already experienced a rise in sales and now contributes nearly 18% of total gross revenue. 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 35% of gross revenue for the three months ended March 31, 2025

Year over year, vinyl record sales increased from $78 million to $86 million (+$8 million, +11%) for the three months ending March 31, 2025. The average selling price of vinyl was down 7% but, combined with an increase in volume of 18.8%, resulted in an overall 10.5% increase in revenue growth compared to the same period in the previous year and combined with an increase in volume resulted in an overall 12% increase in revenue growth compared to the same period in the previous year. This growth was further supported by strong pre-sales activity leading up to Record Store Day, which continues to serve as a major catalyst for consumer interest and purchasing. We expect this upward trend to persist as music enthusiasts and collectors remain passionate about expanding their collections, appreciating the tangible experience of vinyl, and valuing the unique artwork and limited-edition offerings that events like Record Store Day promote.

Music Compact Disc (CD) sales declined from $25 million to $21 million for the three months ended March 31, 2025, representing a decrease of $4 million or 18.1% year-over-year. This drop was driven by an 8.9% reduction in the average selling price on the same number of units sold. The overall decline reflects the waning of the pandemic-era boost in physical media sales. However, the continued global popularity of K-Pop helped support the average selling price, softening the impact of the downturn.

Physical movie sales, which include DVDs, Blu-ray, and Ultra HD formats, increased from $42 million to $58 million (+$16 million, +39%) for the three months ended March 31, 2025, compared to the same period last year. The average selling price of physical film products rose 27.6% year over year, and, when combined with higher unit volume, contributed to the significant revenue growth. A major driver of this performance was the launch of new exclusive content partnerships this quarter, which expanded the availability of high-demand titles. The steady release of new theatrical films, along with the popularity of premium 4K and collectible SteelBook editions, continues to fuel home video sales. We expect the trend of higher price points to persist as brick-and-mortar retailers prioritize curated, premium content and deliver an integrated omnichannel shopping experience. Alliance Entertainment’s extensive catalog of music and movies, accessible through both in-store and online platforms, positions retailers to offer a personalized and engaging experience that builds customer loyalty and supports brand differentiation.

Consumer products revenue decreased from $9 million to $8 million (-$1 million, -8.7%) for the three months ended March 31, 2025, compared to the prior year period. The average selling price declined by 31.5%, and although volume increased by 32.3%, it was not enough to offset the pricing decline, resulting in an overall decrease in revenue. Sales were primarily impacted by changes in supply chain dynamics and purchasing strategies, along with the absence of standout or high impact releases this year. Consequently, the average selling price per unit declined. However, following our acquisition of Handmade by Robots, we anticipate a strong lineup of new theatrical and streaming releases that we anticipate will drive collectible and merchandise sales, and boost margins. The collectibles market remains an integral part of the entertainment segment, driven by its mix of nostalgic, investment, and intrinsic value. Working to align our offerings with market trends and consumer preferences will be key as we deepen our partnerships with key licensors of these franchises.

Gaming product revenue declined from $43 million to $29 million, a decrease of $14 million or 32%, reflecting a broader slowdown in the gaming industry. Despite a significant increase in average selling price and margins, driven by an improved product mix and fewer discounts compared to the prior year period, overall sales were constrained by limited hardware availability from key suppliers, as existing inventory has been largely depleted. With the market eagerly awaiting the next generation of high-performance gaming consoles, we expect strong future demand for hardware, accessories, and peripherals. As a distributor of physical gaming products, we remain focused on monitoring industry trends and adjusting our product offerings to align with consumer demand and maximize profitability. However, we continue to closely watch for potential product availability issues stemming from ongoing market volatility and the trade tensions with China, which could impact manufacturing timelines, shipping costs, and overall supply chain stability.

Cost of Revenues: Total cost of revenues, excluding depreciation and amortization, increased from $183 million to $184 million (+$1 million or +0.4%) year over year primarily due to the direct relation of product costs to sales volume. Gross Margin dollars increased year over year from $28 million to $29 million for the three months ended March 31, 2025, over the same prior year period, resulting in a margin increase from 13.3% to 13.6%.

Operating Expenses: Total operating expenses for the quarter decreased from $28.7 million to $25.5 million (-$3.2 million or -11.0%) and decreased as a percentage of net revenue versus the same quarter prior year from 13.6% to 12.0%. Total Distribution and fulfillment expense declined from $11.1 million to $10.0 million (-$1.1million, -10.2%) and decreased from 5.3% to 4.7% as a percentage of net revenue for the three months ended March 31, 2025, versus the same prior year period. We continue to invest in warehouse automation to reduce the need for total warehouse labor and utilize temporary labor forces to manage changes in demand. As a result, fulfillment payroll declined from $7.4 million to $6.3 million (-$1.1 million, -15.2%) for the current quarter, and, despite low unemployment rates, the average cost per labor hour declined approximately 5.0% for the three months ended March 31, 2025, versus the prior year period. In May of 2024, we consolidated operations by closing our Shakopee, MN warehouse, which also helped reduce operating costs and improve efficiency by centralizing operations and reducing redundancy. We continue to identify and implement business-process changes aimed at improving overall efficiency and supporting long-term scalability, total selling, general, and administrative costs increased slightly from $13.9 million to $14.2 million, a rise of $0.2 million or 1.7% year over year. This modest increase reflects strategic investments in infrastructure, personnel, and technology to enhance operational effectiveness. Depreciation and Amortization decreased from $1.4 million to $1.3 million (-$0.1 million, or -10.0%) for the quarter ended March 31, 2025, over the prior year period.

Interest Expense: For the three months ended March 31, 2025, total interest expense decreased from $3.1 million to $2.4 million (-$0.6 million, -20.2%) versus the prior year period. The primary driver was a reduction of the average revolver balance from $94 million to $68 million (-$26 million, -27%) over the prior year period, partially offset by an increase of our effective interest rate from 10.0% to 8.9%.

Income Tax: For the three months ended March 31, 2025, an income tax expense of $0.9 million was recorded compared to a benefit of $0.5 million for the prior year period. Alliance reported a pretax income of $2.8 million for the three months ended March 31, 2025, versus a loss of $3.9 million for the three months ended March 31, 2024. The effective tax rate was 35% and 43% for the three months ended March 31, 2025, and 2024, respectively. The difference between the Company’s effective tax rate for the three months ended March 31, 2025, and the federal statutory rate primarily resulted from state income taxes, foreign derived intangible income, and a discrete item for the impact of fair value adjustments related to the Company’s warrant liability. The difference between the Company’s effective tax rate for the three months ended March 31, 2024, and the federal statutory rate primarily resulted from state income taxes, foreign derived intangible income, and a discrete item for goodwill related to the Think3Fold acquisition.

Non-GAAP Financial Measures: For the three months ended March 31, 2025, we had non-GAAP Adjusted EBITDA of approximately $4.9 million compared with Adjusted EBITDA of approximately $2.9 million in the prior year period, or a year-over-year improvement of $2.0 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)

Alliance Entertainment Holding Corporation

Results of Operations Nine Months Ended March 31, 2025, Compared to Nine Months Ended

March 31, 2024

($ in thousands)

29

Net Revenue: Year over year, total net revenues decreased from $864 million to $836 million (-$28 million, -3.2%) for the nine months ended March 31, 2025. Alliance Entertainment remains a recognized leader in the entertainment industry, with strengths in licensing, production, and distribution across a wide range of categories, including motion pictures, music, gaming hardware, retro arcades, and pop culture collectibles. Our exclusive content partnerships have contributed to increased sales, with this category now accounting for approximately 13% of total gross revenue. With exclusive distribution rights for nearly 200 studios and labels across the film and music industries, our expansive portfolio and deep inventory allow us to efficiently serve both bulk B2B customers and direct-to-consumer (DTC) channels with a broad assortment of products not available through other distributors. Our recent acquisition of Handmade by Robots, along with the Paramount licensing agreement, further strengthens our library of exclusive and in-demand content. Additionally, our comprehensive DTC suite of distribution and inventory solutions, anchored by our consumer-direct subsidiary, DirectToU LLC, contributed approximately 38% of gross sales revenue for the nine-month period ended March 31, 2025.

Year over year, vinyl record sales increased from $242 million to $266 million ($24 million, 10%) for the nine months ending March 31, 2025. The average selling price of vinyl rose 1.7%, and when combined with a 7.9% increase in volume, resulted in an overall 9.8% growth in revenue compared to the prior year. This performance was further supported by strong early demand and pre-sales in anticipation of Record Store Day in April 2025, which has become a major driver of limited-edition releases and consumer engagement. We expect music enthusiasts and collectors to continue fueling this upward trend through their passion for music, appreciation of album artwork, and desire to build and personalize their physical collections. Notable releases in the nine months ended March 31, 2025 included Taylor Swift’s The Tortured Poets Department, Oasis’s 30th anniversary reissue of Definitely Maybe, Chappell Roan’s The Rise and Fall of a Midwest Princess and Sabrina Carpenter’s Short n’ Sweet.

Music Compact Discs (CDs) sales decreased from $97 million to $94 million (-$2.5 million, -2.6%) for the nine months ended March 31, 2025. The average selling price declined modestly by 2.5% year over year, while unit volume increased slightly by 0.9%, helping to soften the impact of the price decrease. One of the key drivers behind this surge in unit sales was the continued strength of K-pop in the U.S. market. Despite a global decline of 19% in K-pop physical album sales in 2024, the genre remained a dominant force in the U.S., with seven K-pop albums ranking among the top 10 best-selling CDs. Albums from groups such as Stray Kids and Enhypen helped fuel this demand, driven by highly collectible physical editions and a deeply engaged fanbase. As a result, K-pop played a crucial role in mitigating the overall revenue decline and sustaining consumer interest in the CD format during this period.

Physical movie sales, which include DVDs, Blu-Ray, and Ultra HD, increased from $159 million to $197 million (+$39 million, +25%) for the nine months ended March 31, 2025, versus the same period last year. The average selling price of physical film products increased 20.2% year over year, while a modest decrease in volume of 5.3% still contributed to a healthy revenue increase versus the same period last year. The consistent flow of new theatrical releases, combined with 4K and collectible SteelBook content, continues to drive home video sales. Additionally, the launch of a new exclusive content partnership in January 2025 significantly enhanced our film portfolio, bringing in a wave of high-profile titles that elevated both our pricing power and retail placement. We expect the trend of higher price points to continue as brick-and-mortar retailers cater to consumer preferences for omnichannel shopping experiences and curated content over inexpensive, mass-market offerings. We believe that ensuring our offerings align with market trends and consumer preferences is essential as we deepen our partnerships with key licensors of these franchises. At the same time, we remain vigilant about potential impacts from tariffs and related supply chain pressures, which could influence product availability and pricing structures. We are actively working to mitigate these risks through diversified sourcing strategies and close coordination with our partners.

Consumer products revenue decreased from $35 million to $27 million (-$8 million, -23%) for the nine months ended March 31, 2025 versus the prior year period. This drop was primarily driven by shifts in supply chain dynamics and evolving purchasing strategies from key retail partners, which led to more conservative ordering patterns and tighter inventory controls. Additionally, the absence of major, high-impact releases during the period limited consumer excitement and demand across key product categories. As a result, while the average selling price per unit declined due to increased promotional activity and a less premium product mix, unit volume rose modestly. This slight uptick in volume was not enough to offset the overall revenue decline, but it reflects ongoing consumer interest in the category despite a more challenging market environment. Following our acquisition of Handmade by Robots, we anticipate a strong lineup of new theatrical and streaming releases that will drive collectible and merchandise sales, boosting margins. The collectibles market remains an integral part of the entertainment segment, driven by its mix of nostalgic, investment, and intrinsic value. We believe that ensuring our offerings align with market trends and consumer preferences is essential as we deepen our partnerships with key licensors of these franchises. At the same time, we remain vigilant about potential impacts from tariffs and related supply chain pressures, which could influence product availability and pricing structures. We are actively working to mitigate these risks through diversified sourcing strategies and close coordination with our partners.

Gaming product revenue decreased from $287 million to $226 million (-$61 million, -21%) for the nine months ended March 31, 2025, compared to the prior year period, reflecting a broader downturn across the gaming industry. While this category has historically been a strong performer, this period’s results were impacted by several interrelated factors. Most notably, a lack of hardware availability from key suppliers constrained our ability to meet consumer demand, as inventories of popular consoles and gaming devices were depleted. In addition, major gaming publishers shifted their release timelines, resulting in fewer blockbuster game launches during the period. Despite the overall revenue decline, our average selling price and margins improved meaningfully over the prior year period, driven by an improved product mix favoring premium accessories and collector-focused offerings, along with fewer discounts compared to the prior year period. These gains helped partially offset lower volumes. The gaming market is now in a transitional phase, with consumers and retailers anticipating the next generation of high-performance gaming consoles. As a leading distributor of physical gaming products, we are positioning ourselves to capitalize on the expected resurgence in demand for hardware, peripherals, and accessories once these new platforms are introduced. We continue to closely monitor industry developments and are aligning our inventory and purchasing strategies to ensure we are well-equipped to support both our retail partners and gaming consumers in the upcoming cycle. With the anticipated release of next-generation gaming consoles, and increased demand for premium accessories and collector editions, we expect a renewed surge in consumer interest and are preparing accordingly to meet that demand.

Cost of Revenues: Total cost of revenues, excluding depreciation and amortization, decreased from $762 million to $739 million (-$23 million, -3%) year over year primarily due to the direct relation of product costs to sales volume. Gross margin dollars decreased year over year from $102 million to $97 million resulting in a slight margin decline from 11.8% to 11.6% for the nine months ended March 31, 2025, over the same prior year period.

Operating Expenses: Total operating expenses decreased from $88.4 million to $76.4 million (-$11.9 million, -13.5%) and decreased as a percentage of net revenue over the prior year period from 10.2% to 9.1%. Total distribution and fulfillment expense declined from $38 million to $31.4 million and decreased from 4.4% to 3.8% as a percentage of net revenue for the nine months ended March 31, 2025, versus the prior year period. We continue to invest in warehouse automation to reduce the need for total warehouse labor and utilize temporary labor forces to manage changes in demand. As a result, fulfillment payroll declined from $24.1 million to $20.7 million (-$3.2 million, -14%) and, despite low unemployment rates during the period, the average cost per labor hour declined 5.1% for the nine months ended March 31, 2025. In May 2024, we streamlined our operations by closing the Shakopee, MN warehouse, a move that helped lower operating costs and enhance efficiency by centralizing our logistics and eliminating operational redundancies. We continue to identify and implement business process changes to improve overall efficiency, and total selling, general and administrative costs declined from $43.7 million to $41.1 million (-$2.6 million, -5.9%) year over year.

Interest Expense: For the nine months ended March 31, 2025, total interest expense decreased from $9.5 million to $8.1 million (-$1.4 million, -14.9%) versus the prior year period. The primary driver was a large reduction of the average revolver balance from $114 million to $79 million (-$35 million, -31%) and partial offset by an increase of our effective interest rate from 8.8% to 9.4% for the nine months ended March 31, 2025, versus the nine months ended March 31, 2024.

Income Tax: For the nine months ended March 31, 2025, an income tax expense of $2.1 million was recorded compared to an expense of $2.0 million for the prior year period. Alliance reported a pretax gain of $11.4 million and pretax gain of $4.1 million for the nine months ended March 31, 2025, and 2024, respectively. The annual effective tax rate was 19% and 50% for the nine months ended March 31, 2025, and 2024, respectively. The difference between the Company’s effective tax rate for the nine months ended March 31, 2025, and the federal statutory rate primarily resulted from state income taxes, foreign derived intangible income, and discrete item for the impact of fair value adjustment related to the Company’s warrant liability, and from an out-of-measurement period adjustment to the deferred tax liability related to software costs. The difference between the Company’s effective tax rate for the nine months ended March 31, 2024, and the federal statutory rate primarily resulted from state income taxes, foreign derived intangible income, and a discrete item for goodwill related to the Think3Fold acquisition.

Non-GAAP Financial Measures: For the nine months ended March 31, 2025, we had non-GAAP Adjusted EBITDA of approximately $24.4 million compared to Adjusted EBITDA of approximately $22.2 million for the prior year period, or a year-over-year improvement of $2.2 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) fair value of Warrants and 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)

LIQUIDITY AND CAPITAL RESOURCES

Liquidity: On December 21, 2023, Alliance Entertainment Holding Corporation entered into a Loan and Security Agreement, providing for a three-year $120 million senior secured asset-based credit facility, with White Oak Commercial Finance, LLC (the “Current Credit Facility”). The Current Credit Facility replaced the Company’s revolver with Bank of America.

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, 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.

Our primary sources of liquidity are cash on-hand, cash provided by operating activities, and borrowings under our credit facility. As of March 31, 2025, in addition to the $2 million of cash, we carried a $65 million revolver balance on our $120 million Current Credit Facility. Year over year, we have converted accounts receivable and inventory to cash which was used to reduce the Current Credit Facility balance from $73 million on March 31, 2024, to $68 million (-$2 million or -3%) on March 31, 2025. As a result, our availability increased from $47 million on March 31, 2024, to $52 million on March 31, 2025 (+$5 million, +11%).

($in millions)

As of March 31, 2025, the Company intends to continue relying primarily on its borrowing capacity under the Current 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 $2.40 as of May 12, 2025, 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 consolidated financial statements for the nine months ended March 31, 2025, and 2024.

($ in thousands)

For the nine months ended March 31, 2025, on net income of $9.3 million, the Company’s cash provided by operating activities was $16.1 million compared to $46.1 million for the nine months ended March 31, 2024. The year-over-year comparison reflects a $7.2 million improvement in net income combined with a $5.0 million decrease in inventory, versus a $39.0 million decrease the prior-year period. A key driver of the year-over-year reduction in inventory levels was the elevated inventory position we carried in prior periods as a result of earlier supply chain disruptions. As of March 31, 2025, inventory was approximately $93 million compared to $108 million at March 31, 2024 (a decrease of $15 million, or 14%), which was primarily driven by improved inventory management and tighter control over purchasing and replenishment processes.

The cash flow used in investing activities was $7.6 million for the nine months ended March 31, 2025, and $0.1 million for the same period prior year. The use of funds in investing activities was primarily driven by the acquisition of Handmade by Robots.

Net cash used in financing activities totaled $7.6 million, an improvement over the $45.2 million used in the prior year, driven by reduced borrowings on revolving credit facilities due to tighter cash management controls in the current nine month period.

Critical Accounting Policies and Estimates

Our 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 2024 Annual Report during the nine months ended March 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.

Our management, under the direction of and 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 31, 2025. Based on the evaluation of our disclosure controls and procedures, our management concluded that, as of March 31, 2025, our disclosure controls and procedures were not effective due to the material weaknesses described below. These material weaknesses in our internal control over financial reporting relate to the fact that the Company did not have the necessary business processes and related internal controls fully implemented to 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. The Company has added and continues to evaluate the need for additional controls over the accounting and financial reporting requirements related to certain non-routine transactions, which has been implemented within the reporting period but has yet to be effective for most of the fiscal year ended June 30, 2025. The material weaknesses will be considered remediated when such time as management designs and 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 consolidated financial statements will not be prevented or detected on a timely basis. As of March 31, 2025, the following material weaknesses existed:

Entity Level Controls

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 and assess whether the components of 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 the performance of controls.

Control Activities

Management did not have adequate selection and development of effective control activities resulting in the following material 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.

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• 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 Weaknesses

As of March 31, 2025, the Company has implemented controls that we are confident will remediate the identified material weaknesses. While certain controls were fully operational only for a portion of the prior fiscal year ended June 30, 2024, some control implementations are still ongoing, with significant remediation efforts expected to be finalized by the end of the fiscal year ending June 30, 2025. These efforts focused on enhancing financial oversight, improving the accuracy and compliance of financial operations, and strengthening our internal controls over financial reporting (ICFR). The Company continues to monitor the effectiveness of these controls to ensure sustained compliance.

Key remediation actions included:

• Entity-Level Controls: We enhanced support, oversight, and accountability for key financial reporting positions. Management continues to assess and address resource needs, including the potential addition of accounting and compliance personnel and engagement of third-party advisors, as necessary.
• Information Technology General Controls: We implemented user access assessments and periodic reviews for key IT systems to ensure appropriate logical security. IT processes are now centrally managed, and we are evaluating the transition of certain hosting and administrative responsibilities to third-party providers.
• Financial Close Process and Internal Controls over Financial Reporting (ICFR): We enhanced controls over revenue, inventory, accounts payable, payroll, income taxes, journal entries, and other business processes. This included developing monitoring controls to timely assess and adjust our ICFR as needed. Additionally, we engaged a third-party service provider to assist in designing and implementing significant process transaction flows and key controls across various business processes.

Despite these material weaknesses, we believe that the financial information presented in this report is materially correct and in accordance with U.S. GAAP. We are committed to ongoing monitoring and will continue reporting progress to the audit committee. However, the full remediation of these material weaknesses requires that the newly implemented controls operate effectively over time, and we cannot guarantee that additional weaknesses will not be identified in the future.

Changes in Internal Control over Financial Reporting

For the nine months ended March 31, 2025, 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.

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, 2024, filed with the SEC on September 20, 2024. Any of these factors could result in a significant or material adverse effect on our results of operations or financial condition. Our business is subject to risks associated with the current developments in international trade, including tariffs, which could increase our costs and negatively impact margins and sales. 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 International Trade Policies and Tariffs

We are subject to risks arising from changes in international trade policies, including the imposition of new or increased tariffs on imported goods. These risks are particularly relevant to our gaming and collectibles categories, where a significant portion of our inventory is sourced from foreign suppliers. Tariffs on such goods have increased in recent years, and proposed tariffs as high as 145%—if enacted—could severely limit our ability to source products at commercially viable cost levels, potentially resulting in reduced availability of inventory and lost sales.

Even more moderate tariff increases, in the range of 25% to 50%, could materially increase our cost of goods sold. While we may be able to offset some of these increases through price adjustments, there is no guarantee that market conditions will support such increases without negatively affecting consumer demand. In some cases, higher retail prices could increase revenues, but these effects are uncertain and highly dependent on our ability to maintain price elasticity and competitive positioning in the marketplace.

If we are unable to pass through increased costs or if supply chain disruptions prevent us from sourcing key products, our business, financial condition, results of operations, and cash flows could be materially and adversely affected.