ALLIANCE ENTERTAINMENT HOLDING CORP

Previous wording

Unfavorable conditions in the economy in the United States and abroad may negatively affect the growth of our business and have affected our results of operations. For example, macroeconomic events, including rising inflation, the U.S. Federal Reserve raising interest rates, recent bank failures, the Russia-Ukraine war and the lingering effects of the COVID-19 pandemic 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.”

Current wording

Unfavorable conditions in the economy in the United States and abroad may negatively affect the growth of our business and have affected our results of operations. For example, macroeconomic events, including 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.”

Previous wording

Net Revenue: Year-over-year, total net revenues increased from $227 million to $229 million ($2 million, 1%) for the three months ended September 30, 2024. Alliance Entertainment is a recognized leader and value-added distributor with exclusive distribution rights for approximately 150 studios and labels in the film and music industry. This extensive portfolio of unique content, combined with our deep inventory portfolio, enables us to service bulk B2B and direct-to-consumer (DTC) businesses with a vast selection of products unavailable through other distributors. Our unique DTC suite of distribution and inventory solutions for the e-commerce retail industry, including our consumer direct subsidiary DirectToU LLC, enabled approximately 34% of gross revenue for the three months ended September 30, 2024, versus 30% for the three months ended September 30, 2023.

Current wording

**Net Revenue:**Year over year, total net revenues decreased from $426 million to $394 million (-$32 million, -7.5%) for the three months ended December 31, 2024. 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 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. 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 42% of gross revenue for the three months ended December 31, 2024.

Previous wording

Cost of Revenues: Total cost of revenues, excluding depreciation and amortization, increased from $201 million to $203 million ($2 million or 1%) year over year primarily due to the direct relation of product costs to sales volume. However, Gross Margin dollars decreased year over year as product margins declined from 11.6% to 11.2%. The Gross Margin decline for the three months ended September 30, 2024, over the same period prior year, was primarily due to our desire to convert aged inventory into cash prior to the holiday season albeit at lower margins.

Current wording

**Cost of Revenues:**Total cost of revenues, excluding depreciation and amortization, decreased from $378 million to $351 million (-$27 million or -7%) year over year primarily due to the direct relation of product costs to sales volume. Gross Margin dollars decreased year over year from $47.7 million to $42.3 million resulting in a margin decline from 11.2% to 10.7% for the three months ended December 31, 2024, over the same period prior year.

Previous wording

**Operating Expenses:**Total operating expenses for the quarter decreased from $28 million to $23 million and decreased as a percentage of net revenue from 12.2% to 10.3% during the same period the prior year. Total Distribution and fulfillment expense declined from $11.7 million to $9.0 million (-$2.7 million, -23%) and decreased from 5.2% to 3.9% as a percentage of net revenue for the three months ended September 30, 2024, versus the same period prior year. 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 $7.3 million to $6.3 million (-$1.0 million, -14%) for the three months ending September 30, 2024, versus the same period of the prior year. In addition, despite low unemployment rates, the average cost per labor hour declined approximately 5%. 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. And, as we continue to identify and implement business process changes to improve overall efficiency, total selling, general and administrative costs remained flat year over year.

Current wording

**Operating Expenses:**Total operating expenses for the quarter decreased from $31.7 million to $27.5 million (-$4.2 million or -13%) anddecreased as a percentage of net revenue versus the same quarter prior year from 7.5% to 7.0%. Total Distribution and fulfillment expense declined from $15.1 million to $12.4 million (-$2.7 million, -18%) and decreased from 3.6% to 3.2% as a percentage of net revenue for the three months ended December 31, 2024, versus the same period prior year. 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 $9.4 million to $8.2 million (-$1.2 million, -13%) and, despite low unemployment rates, the average cost per labor hour declined approximately 5.5% for the three months ending December 31, 2024, versus the same period of the prior year. 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. And, as we continue to identify and implement business process changes to improve overall efficiency, total selling, general and administrative costs declined from $15.1 million to $13.8 million (-$1.3 million or -9%) year over year.

Previous wording

**Interest Expense:**For the three months ending September 30, 2024, total interest expense decreased from $3.1 million to $2.8 million (-$0.3 million or -10%) versus the same period of the prior year. The primary driver was a reduction of the average revolver balance from $124 million to $81 million (-$43 million or -35%) over the same period of the prior year, partially offset by an increase of our effective interest rate from 8.5% to 10.0%.

Current wording

**Interest Expense:**For the three months ending December 31, 2024, total interest expense decreased from $3.3 million to $2.8 million (-$0.5 million, -15%) versus the same period of the prior year. The primary driver was a reduction of the average revolver balance from $122 million to $85 million (-$37 million, -30%) over the same period of the prior year, partially offset by an increase of our effective interest rate from 8.9% to 9.6%.

Previous wording

**Non-GAAP Financial Measures:**For the three months ending September 30, 2024, we had non-GAAP Adjusted EBITDA of approximately $3.4 million compared with Adjusted EBITDA of approximately $1.3 million in the same period of the prior year. We define Adjusted EBITDA as net gain or loss adjusted to exclude: (i) income tax expense; (ii) other income (loss); (iii) interest expense; and (iv) depreciation and amortization expense and (v) other non- recurring expenses. Our method of calculating Adjusted EBITDA may differ from other issuers and accordingly, this measure may not be comparable to measures used by other issuers. We use Adjusted EBITDA to evaluate our own operating performance and as an integral part of our planning process. We present Adjusted EBITDA as a supplemental measure because we believe such a measure is useful to investors as a reasonable indicator of operating performance. We believe this measure is a financial metric used by many investors to compare companies. This measure is not a recognized measure of financial performance under GAAP in the United States and should not be considered as a substitute for operating earnings (losses), net earnings (loss) from continuing operations or cash flows from operating activities, as determined in accordance with GAAP. See the table below for a reconciliation, for the periods presented, of our GAAP net income (loss) to Adjusted EBITDA.

Current wording

**Non-GAAP Financial Measures:**For the three months ending December 31, 2024, we had non-GAAP Adjusted EBITDA of approximately $16.1 million compared with Adjusted EBITDA of approximately $18.8 million in the same period of the prior year. We define Adjusted EBITDA as net gain or loss adjusted to exclude: (i) income tax expense; (ii) other income (loss); (iii) interest expense; and (iv) depreciation and amortization expense and (v) other non- recurring expenses. Our method of calculating Adjusted EBITDA may differ from other issuers and accordingly, this measure may not be comparable to measures used by other issuers. We use Adjusted EBITDA to evaluate our own operating performance and as an integral part of our planning process. We present Adjusted EBITDA as a supplemental measure because we believe such a measure is useful to investors as a reasonable indicator of operating performance. We believe this measure is a financial metric used by many investors to compare companies. This measure is not a recognized measure of financial performance under GAAP in the United States and should not be considered as a substitute for operating earnings (losses), net earnings (loss) from continuing operations or cash flows from operating activities, as determined in accordance with GAAP. See the table below for a reconciliation, for the periods presented, of our GAAP net income (loss) to Adjusted EBITDA.

Previous wording

Year over year, vinyl record sales increased from $67.3 million to $70.5 million ($3.2 million, 4.8%) for the three months ending September 30, 2024. The average selling price of Vinyl was up 4.9% and partially offset by decreased volume resulting in the 4.8% increase in revenue growth versus the prior year. We expect music enthusiasts and collectors to extend this upward trend because of passion for music, their appreciation for the artwork, and a desire to enhance their physical collection. Likewise, Music Compact Discs (CDs) sales increased from $33.1 million to $34.4 million ($1.3 million, 4.0%). The popularity of K-Pop helped us realize a 1.1% increase in the average selling price of CDs combined with an increase in volume resulted in a net gain in revenue year-over-year. Similarly, physical movie sales, which include DVDs, Blu-Ray, and Ultra HD, increased from $46.8 million to $52.9 million ($6.1 million, 13.2%) versus the same period last year. The average selling price of physical film products increased 18.6% year over year and more than offset the decline in volume. The consistent flow of new theatrical releases, combined with 4K and collectable SteelBook content, continues to drive home video sales. We expect the trend of higher price points to continue as brick & mortar retailers cater to the consumer preference for omnichannel shopping experiences and curated content versus inexpensive, mass market product offerings. Alliance Entertainment’s ability to offer retailers in-store and on-line channels a deep, extensive library of both music and movies helps provide them with the products for a cohesive shopping experience based on personal preference and engagement with their respective brands.

Current wording

Physical movie sales, which include DVDs, Blu-Ray, and Ultra HD, increased from $117 million to $139 million ($22 million, 19%) versus the same period last year. The average selling price of physical film products increased 17% year over year and partially offset by a decline in volume contributed to a healthy increase versus the same period last year. The consistent flow of new theatrical releases, combined with 4K and collectable SteelBook content, continues to drive home video sales. We expect the trend of higher price points to continue as brick & mortar retailers cater to the consumer preference for omnichannel shopping experiences and curated content versus inexpensive, mass market product offerings. Alliance Entertainment’s ability to offer retailers in-store and on-line channels a deep, extensive library of both music and movies helps provide them with the products for a cohesive shopping experience based on personal preference and engagement with their respective brands.

Previous wording

**Income Tax:**For the three months ended September 30, 2024, an income tax benefit of $1.2 million was recorded compared to a benefit of $1.3 million for the same period in the prior year. Alliance reported a pretax loss of $0.8 million and $4.7 million for the three-months ended September 30, 2024, and 2023, respectively. The annual effective tax rate for the three months ended September 30, 2024, was 152%. The difference between the Company’s effective tax rate and the 21% federal statutory rate primarily resulted from state income taxes, Foreign derived intangible income, and one discrete item from a one-time adjustment for out of measurement period adjustment to the deferred tax liability for software costs.

Current wording

Income Tax: For the six months ended December 31, 2024, an income tax expense of $1.2 million was recorded compared to a expense of $2.5 million for the same period in the prior year. Alliance reported a pretax gain of $8.7 million and pretax gain of $8.0 million for the six-months ended December 31, 2024, and 2023, respectively. The annual effective tax rate (“ETR”) for the six months ended December 31, 2024, was 14% versus 32% prior year. The difference between the Company’s effective tax rate for the six months ended December 31, 2024, and the federal statutory rate primarily resulted from state income taxes, foreign derived intangible income, and a discrete item from an out-of-measurement period adjustment to the deferred tax liability related to software costs.

Previous wording

Our primary sources of liquidity are cash on-hand, cash provided by operating activities, and borrowings under our credit facility. As of September 30, 2024, in addition to the $4.3 million of cash, we carried a $88 million revolver balance on our $120 million credit facility (the “Revolving Credit Facility”) under the Loan and Security Agreement with White Oak Commercial Finance, LLC. Since June 30, 2024, our available collateral increased from $117 million to $142 million ($25 million, 21%). Our availability decreased from $44 million to $32 million, a decrease of $12 million, as we build our inventory for the 2024 holiday season. Year over year, we have converted accounts receivable and inventory to cash which was used to reduce the revolver balance from $126 million on September 30, 2023, to $88 million (-$38 million or -28%) on September 30, 2024. Furthermore, combined with a lower loan ceiling of $120 million versus $175 million, we have reduced debt service costs.

Current wording

Our primary sources of liquidity are cash on-hand, cash provided by operating activities, and borrowings under our credit facility. As of December 31, 2024, in addition to the $2.5 million of cash, we carried a $70 million revolver balance on our $120 million credit facility (the “Revolving Credit Facility”) under the Loan and Security Agreement with White Oak Commercial Finance, LLC. Year over year, we have converted accounts receivable and inventory to cash which was used to reduce the revolver balance from $101 million on December 31, 2023, to $70 million (-$31 million or -31%) on December 31, 2024. As a result, our availability increased from $19 million on December 31, 2023 to $50 million on December 31, 2024 ($31 million, 163%).

Previous wording

Our liquidity position has improved significantly since the Merger. The company’s liquidity ratio (current assets divided by current liability) increased to 1.34 from 0.87 last year. This improvement reflects a stronger ability to meet short-term obligations, providing us with more financial flexibility and stability. We intend to principally rely on our borrowing capacity under the Revolving Credit Facility as well as any renewal or replacement of such facility. The receipt of cash proceeds from the exercise of our Warrants is dependent upon the market price exceeding the $11.50 exercise price and the Warrants being exercised for cash. Since the exercise price of the Warrants of $11.50 per share is significantly greater than the current market price of the Class A common stock $4.87 as of November 8, 2024 we do not expect the Warrants to be exercised until such time, if ever, that the market price of the Class A common stock exceeds the exercise price of the Warrants. Although the Company does not currently intend to do so, following this offering, the Company may seek to raise additional capital through the sale of equity securities.

Current wording

We intend to principally rely on our borrowing capacity under the Revolving Credit Facility as well as any renewal or replacement of such facility. The receipt of cash proceeds from the exercise of our Warrants is dependent upon the market price exceeding the $11.50 exercise price and the Warrants being exercised for cash. Since the exercise price of the Warrants of $11.50 per share is significantly greater than the current market price of the Class A common stock $5.29 as of February 10, 2025 we do not expect the Warrants to be exercised until such time, if ever, that the market price of the Class A common stock exceeds the exercise price of the Warrants. Although the Company does not currently intend to do so, following this offering, the Company may seek to raise additional capital through the sale of equity securities.

Previous wording

**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 three months ended September 30, 2024, and 2023.

Current wording

**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 six months ended December 31, 2024, and 2023.

Previous wording

For the three months ended September 30, 2024, on net income of $0.4 million, the Company’s cash used in operating activities was $11.6 million versus $2.7 million used in operations for the three months ended September 30, 2023. Compared to the same three-month period last year, there was a $4 million improvement in net income combined with a $41 million increase in inventory versus a decrease of $13 million increase in inventory for the same three-month period prior year. The key driver was approximately $21 million less inventory on-hand to support sales for the three months ended September 30, 2024, due to the relatively high inventory position on September 30, 2023, because of the supply chain disruptions that occurred in the prior year. The $41 million decrease in inventory for the three months ending September 30, 2024, was offset of $43 million increase to accounts payable and a $10 million increase in trade receivables.

Current wording

For the six months ended December 31, 2024, on net income of $7.5 million, the Company’s cash provided by operating activities was $13.6 million versus $26.1 million provided by operations for the six months ended December 31, 2023. Compared to the same six-month period last year, there was a $2 million improvement in net income combined with approximately a $2 million decrease in inventory versus a decrease of $33 million decline in inventory for the same six-month period prior year. The key driver was carrying $97 million of inventory at June 30, 2024 versus $147 million at June 30, 2023 (-$50 million, -34%) due to the relatively high inventory position because of the supply chain disruptions that occurred in the prior year. By December 31, 2024 our inventory valuation was approximately $96 million versus $114 million December 31, 2023 (-$18 million, -16%).

Previous wording

Net cash provided by financing activities was $14.7 million for the three months ending September 30, 2024, versus cash provided of $3.1 million for the same period prior year. The primary reason was an increase in borrowing necessary to obtain desired inventory levels which increased from $97 million on June 30, 2024, to $138 million ($41 million or 42%) at September 30, 2024. However, year over year, financing requirements were reduced because the value of inventory declined from $159 million on September 30, 2023, to $138 million on September 30, 2024 (-$20 million or -13%). In addition, our debt service exposure declined year over year as the revolver balance declined from $126 million to $85 million (-$41 million or -33%) from September 30, 2023, to 2024, respectively.

Current wording

Net cash used in financing activities was $4.7 million for the six months ending December 31, 2024, versus cash used of $24.2 million for the same period prior year. The primary reason was a decrease in borrowing necessary to obtain desired inventory levels which were significantly higher on June 30, 2023 versus June 30, 2024. As a result of the improved inventory position, we reduced the debt service which improved year over year as the revolver balance declined from $101 million to $70 million (-$31 million, -31%) from December 31, 2023, to 2024, respectively.

Previous wording

No changes were made to the critical accounting estimates discussed in the 2024 Annual Report during the three months ending September 30, 2024.

Current wording

No changes were made to the critical accounting estimates discussed in the 2024 Annual Report during the six months ending December 31, 2024.