ALLIANCE ENTERTAINMENT HOLDING CORP

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

December 31**, 2025**

Note 1: Organization and Summary of Significant Accounting Policies

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. Additionally, Alliance manages a diverse portfolio of owned e-commerce brands through its DirectToU LLC division, catering to various entertainment and collectible markets. Alliance also 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.

In December 31, 2025, the Company completed the acquisition of Endstate Authentic LLC (“LLC”), a digital authentication and loyalty-driven consumer brand. The transaction was accounted for as a business combination under ASC 805. Accordingly, the assets acquired and liabilities assumed have been recorded at their estimated fair values as of the acquisition date. The purchase price allocation is preliminary and subject to adjustment as the Company continues to finalize its valuation analyses. Results of operations for Endstate are included in the Company’s condensed consolidated financial statements beginning on the acquisition date. Additional information related to this acquisition is provided in Note 23 – Business Combinations.

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.

The accompanying unaudited condensed consolidated financial statements contain all adjustments (consisting only of normal recurring accruals and adjustments) which are necessary in order to state fairly the Company’s results of operations, financial position, stockholders’ equity and cash flows as of and for the periods presented. The results of operations for interim periods are not necessarily indicative of the results to be expected for the full year or any other future period. The unaudited condensed consolidated financial statements should be read in conjunction with the Company’s audited consolidated financial statements and related notes, including the Summary of Significant Accounting Policies, included in the Company’s Annual Report on Form 10-K filed September 10, 2025. June 30, 2025, balance sheet information contained herein was derived from the Company’s audited consolidated financial statements as of that date included therein.

Reclassification

Certain amounts from prior periods have been reclassified to conform to the current period presentation.

Basis for Presentation

The condensed consolidated financial statements have been prepared on the accrual basis of accounting in accordance with accounting principles generally accepted in the United States of America (U.S. GAAP). The condensed consolidated financial statements include the accounts of Alliance Entertainment Holding Corporation and its wholly owned subsidiaries. Intercompany transactions have been eliminated in consolidation.

Liquidity

On October 1, 2025, the Company entered into a $120 million senior secured asset-based revolving credit facility with Bank of America, N.A. (the “Revolving Credit Facility”). The new facility refinanced and replaced the Company’s prior three-year $120 million asset-based revolving credit facility with White Oak Commercial Finance, LLC, which was entered into on December 21, 2023, and was scheduled to mature on December 21, 2026. Based on the Company’s cash on hand, cash flows from operations, working capital, and availability under its revolving credit facility, management has concluded that the Company has sufficient liquidity to fund its operations and obligations for at least twelve months from the issuance of these condensed consolidated financial statements.

Concentration of Credit Risk

Concentration of Credit Risk consists of the following at:

Customers:

Accounting Pronouncements

Recently Issued and Adopted Accounting Pronouncements

In July 2025, the Company adopted Accounting Standards Update (“ASU”) 2024-02, Codification Improvements -Amendments to Remove References to the Concepts Statements. This ASU removes references to the FASB Concepts Statements from the Accounting Standards Codification and makes related conforming amendments. The adoption of ASU 2024-02 did not have a material impact on the Company’s condensed consolidated financial statements or related disclosures.

In July 2025, the Company adopted ASU 2024-01, Compensation - Stock Compensation (Topic 718): Scope Application of Profits Interest and Similar Awards, which clarifies how entities determine whether certain profits interest or similar awards should be accounted for as stock-based compensation under Topic 718 or under other applicable guidance. The Company does not issue profits interest or similar awards, and adoption of this ASU did not have a material impact on its condensed consolidated financial statements.

Recently Issued but Not Yet Adopted Accounting Pronouncements

In November 2024, the Financial Accounting Standards Board (“FASB”) issued ASU 2024-03, Income Statement - Reporting Comprehensive Income - Expense Disaggregation Disclosures (Subtopic 220-40), which requires additional disaggregation of certain income statement expense categories in the notes to the financial statements. The ASU is effective for annual reporting periods beginning after December 15, 2026, and interim reporting periods beginning after December 15, 2027, with early adoption permitted. The Company is currently evaluating the impact of this ASU on its condensed consolidated financial statement disclosures.

In December 2023, the FASB issued ASU 2023-09, Improvements to Income Tax Disclosures, which enhances income tax disclosure requirements, including expanded disaggregation of effective tax rate reconciliations and income taxes paid by jurisdiction. The standard is effective for fiscal years beginning after December 15, 2024, with early adoption permitted. The Company is evaluating the impact of this ASU, which is expected to primarily affect annual income tax disclosures.

In May 2025, the FASB issued ASU 2025-03, Business Combinations (Topic 805) and Consolidation (Topic 810): Determining the Accounting Acquirer in the Acquisition of a Variable Interest Entity. The amendments are effective for fiscal years beginning after December 15, 2026, including interim periods within those fiscal years, and early adoption is permitted. The Company is evaluating the applicability of this ASU to its consolidated financial statements.

In September 2025, the FASB issued ASU 2025-06, Intangibles Goodwill and Other Internal-Use Software (Subtopic 350-40): Targeted Improvements to the Accounting for Internal-Use Software, which includes targeted improvements to the accounting and disclosure requirements for internal-use software costs. The amendments are effective for annual reporting periods beginning after December 15, 2027, including interim periods within those annual reporting periods, and early adoption is permitted. The Company is currently evaluating the impact of this ASU on its condensed consolidated financial statements.

Note 2: Summary of Significant Accounting Policies

There have been no material changes or updates to the Company’s significant accounting policies from those described in Note 1 to the Company’s audited consolidated financial statements included in the Annual Report on Form 10-K for the fiscal year ended June 30, 2025.

Earnings per Share

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

The following table sets forth the computation of basic and diluted net earnings per share of Common Stock for the three and six months ended December 31, 2025, and 2024, respectively:

There are 60,000,000 shares of contingently issuable Common Stock that were not included in the computation of basic or diluted earnings per share since the contingencies for the issuance of these shares have not been met as of December 31, 2025, and June 30, 2025. For the three and six months ended December 31, 2025, and June 30, 2025, there are 9,920,000 warrants outstanding that have been excluded from diluted earnings per share because they are anti-dilutive.

Note 3: Trade Receivables, Net

Trade Receivables, Net consists of the following at:

Note 4: Inventory, Net

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

Note 5: Other Current and Long-Term Assets

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

Note 6: Property and Equipment, Net

Property and Equipment, Net consists of the following at:

Depreciation Expense for the three months ended December 31, 2025, and 2024 was $0.4 million, and for the six months ended December 31, 2025, and 2024 was $0.9 million and $0.8 million, respectively.

Note 7: Goodwill and Intangibles, Net

Goodwill reported is the result of multiple acquisitions made by Alliance Entertainment Holding Corporation over the years. The $4,965 increase in goodwill during the six months ended December 31, 2025 relates to the Endstate business combination discussed in Note 23, Business Combination (Endstate). Goodwill consists of the following at:

Intangibles, Net consists of the following at:

During the three months ended December 31, 2025, and 2024, the Company recorded amortization expense of $0.8 millionand during the six months ended December 31, 2025, and 2024, the Company recorded amortization expenses of $1.5 million and $1.7 million, respectively.

Expected amortization over the next five years and thereafter, as of December 31, 2025, is as follows:

Note 8: Accrued Expenses

Accrued Expenses consists of the following at:

Note 9: Revolving Credit Facility

New Credit Facility

On October 1, 2025, the Company entered into an asset-based revolving credit facility (the “Revolving Credit Facility”) with Bank of America, which refinanced and replaced its prior asset-based revolving credit facility with White Oak Commercial Finance, LLC. The Revolving Credit Facility provides for borrowings of up to $120.0 million, subject to a borrowing base, and matures on October 1, 2030.

Borrowings under the Revolving Credit Facility bear interest at the 30-day SOFR rate, subject to a floor of 2.00%, plus an applicable margin of 1.50% through March 31, 2026 and 1.625% thereafter. The 30-day SOFR rate as of December 31, 2025 was 3.7%. The Company also pays a commitment fee of 0.15% per annum on unused availability. Commitment fees incurred during the quarter ended December 31, 2025 were $0.01 million. Included in interest expense for the three months ended December 31, 2025, is $1.6 million related to the accelerated amortization of unamortized deferred financing costs associated with the prior revolving credit facility that was refinanced and replaced.

Availability under the Revolving Credit Facility is based on eligible accounts receivable and inventory. As of December 31, 2025, availability was approximately $34.8 million, with outstanding borrowings of approximately $85.2 million.

The Revolving Credit Facility contains customary affirmative and negative covenants, including limitations on additional indebtedness, liens, dividends, and certain investments, and requires the maintenance of a fixed charge coverage ratio of at least 1.0 to 1.0 on a trailing twelve-month basis, as defined in the credit agreement. The facility is secured by a first-priority security interest in substantially all of the Company’s and its subsidiaries’ assets.

The Company was in compliance with all applicable covenants under the Revolving Credit Facility as of December 31, 2025.

Letters of Credit

The Revolving Credit Facility permits the issuance of letters of credit, which reduces availability under the borrowing base. As of December 31, 2025, the Company had letters of credit outstanding totaling $0.75 million.

Prior Credit Facility

The Company’s prior asset-based revolving credit facility with White Oak Commercial Finance, LLC (the “Prior Revolving Credit Facility”) provided for borrowings of up to $120.0 million, subject to a borrowing base, and was scheduled to mature on December 21, 2026. Borrowings under the Prior Revolving Credit Facility bore interest at the 30-day SOFR rate, subject to a floor of 2.00%, plus a margin ranging from 4.00% to 4.25%. As of December 31, 2024, the effective interest rate on outstanding borrowings was 9.7%.

The Prior Revolving Credit Facility was terminated and fully repaid on October 1, 2025, in connection with the Company’s entry into the new Revolving Credit Facility with Bank of America. No early termination fees were incurred. As of December 31, 2025, there were no borrowings outstanding under the Prior Revolving Credit Facility; accordingly, an effective interest rate was not applicable.

As of June 30, 2025, outstanding borrowings under the Prior Revolving Credit Facility were approximately $57.0 million, with approximately $54.0 million in availability.

During the three months ended December 31, 2025 and 2024, the Company incurred interest expense of approximately $1.7 million and $2.0 million, respectively. During the six months ended December 31, 2025 and 2024, interest expense was approximately $3.2 million and $4.0 million, respectively.

Recurring amortization of deferred financing costs was approximately $0.03 million and $0.4 million for the three months ended December 31, 2025, and 2024, respectively, and approximately $0.6 million and $0.7 million for the six months ended December 31, 2025, and 2024, respectively. In addition, interest expense for the three and six months ended December 31, 2025, includes approximately $1.6 million of accelerated amortization of deferred financing costs related to the early refinancing and termination of the prior revolving credit facility on October 1, 2025.

Note 10: Employee Benefits Company Health Plans

During the year ended June 30, 2025, the Company transitioned its health insurance coverage from a self-funded model to an Individual Coverage Health Reimbursement Arrangement (“ICHRA”), which eliminates the Company’s exposure to self-insured medical and dental claims; therefore, no similar liabilities are expected under the current plan structure. As a result, the self-insured medical plans (including both PPO and HDHP options) under the Alliance Health & Benefits Plan (“AHBP”) were terminated. Under the ICHRA model, the Company reimburses employees and executive officers for individual health insurance premiums, with contribution levels varying based on coverage tiers.

There were no changes to the Company’s dental (PPO and HMO), vision, life insurance, or short-term disability plans. The Company’s dental HMO plan remains self-insured, with exposure limited to a maximum per individual procedure based on a published fee schedule. The dental PPO plan is fully insured. The Company contributes various percentages toward premium costs across benefit offerings, based on coverage levels and Board-approved schedules. The vision, life insurance, and short- and long-term disability plans are fully insured and Company-sponsored, with premiums paid by both the employer and employees in accordance with Board-approved contribution structures.

As of December 31, 2025, and June 30, 2025, the Company had no remaining liability related to the terminated self-insured medical plans, as the previously accrued estimated run-out exposure was fully settled during the first quarter of fiscal 2026.

401(k) Plan

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

During the three and six months ended December 31, 2025, and 2024, the Company contributed $0.2 million and 0.1 million, respectively and $0.3 million and $0.3 million, respectively, to the Plan.

Note 11: Segment Information

Management performed an assessment of the Company’s operating segments in accordance with ASC 280-10-50-1 through 50-9. Based on this evaluation, the Company determined that it operates as a single operating segment, which is also its sole reportable segment. Segment revenue is derived from the sale of distribution of pre-recorded music, video movies, video games and related accessories, and merchandising. This conclusion is consistent with prior periods.

The Company’s Chief Executive Officer and Chairman are the Chief Operating Decision Makers (“CODM”) and review financial performance and make resource allocation decisions at the consolidated entity level. The CODM utilizes net income, prepared in accordance with U.S. GAAP, to evaluate financial performance, monitor variances against budget and forecast, and guide strategic decisions. Segment assets are reported as consolidated assets on the Company’s condensed consolidated balance sheet.

Significant expense categories regularly reviewed by the CODM include:

Other Segment Items:

Other segment items include expenses that are part of segment profit or loss but are not classified as significant segment expenses. These include:

The following table presents segment revenue, net income, and the significant segment expenses for the Company’s single reportable segment for the three and six months ending December 31, 2025, and 2024:

Reconciliation to Condensed Consolidated Net Income:

Note 12: Income Taxes

The effective tax rate was approximately 28% and 25.0% for the three 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 three months ended December 31, 2025 primarily resulted from state income taxes, foreign-derived intangible income (“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 three months ended December 31, 2024 primarily resulted from state income taxes and FDII.

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.

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 a result, the tax basis of the acquired assets and assumed liabilities was stepped up generally to their respective fair values. Based on the Company’s analysis as of the acquisition date, the acquisition did not result in material acquisition-date temporary differences and, accordingly, no material deferred tax assets or liabilities were recorded in connection with the acquisition.

Note 13: Commitments and Contingencies

Commitments

The Company enters into various agreements with suppliers for the products it distributes. The Company hadno long-term purchase commitments or arrangements with its suppliers as of December 31, 2025, and June 30, 2025.

Litigation, Claims and Assessments

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

**Video Privacy Protection Act Matters.**Beginning in August 2024, several putative class actions and related proceedings were filed against the Company and its subsidiary, DirectToU, LLC (“DirectToU”), in federal courts and arbitration alleging violations of the Video Privacy Protection Act (“VPPA”) and similar state laws. The complaints generally allege that the Company disclosed certain customer information and video viewing or purchasing data to third parties through the use of website tracking technologies.

In June 2025, the parties reached a settlement resolving the VPPA-related claims, subject to court approval. The settlement provides for a cash payment of $1.577 million to the class. The Company expects a portion of the settlement payment to be covered by insurance and, accordingly, recorded an insurance receivable of $1.377 million. The Company recorded a settlement liability of $1.577 million and the related insurance receivable during the three months ended September 30, 2025, and such amounts remained recorded in the Company’s condensed consolidated financial statements as of December 31, 2025.

The court granted preliminary approval of the settlement in October 2025. Final approval of the settlement remains pending. The Company believes the recorded accrual is adequate based on currently available information.

**Office Create Litigation.**On June 6, 2024, Office Create Corporation filed a civil action against COKeM International Ltd. (“COKeM”) in the United States District Court for the District of Minnesota alleging contributory trademark infringement, false designation of origin, unfair competition, unjust enrichment, and civil conspiracy arising from the alleged distribution of the video game Cooking Mama: Cookstar. Office Create seeks monetary damages, which it asserts exceed $40 million. No damages have been awarded.

COKeM has denied the allegations. COKeM filed a third-party complaint against Planet Entertainment LLC and its principal seeking indemnification and contribution. Default has been entered against those third-party defendants. In January 2026, Office Create dismissed its claims against Plaion, Inc. and Plaion GmbH pursuant to a confidential settlement agreement. The matter remains in discovery, with trial readiness scheduled for October 2026. The Company maintains insurance coverage that may apply to this matter, subject to policy limits and shared coverage provisions. At this time, the Company cannot reasonably estimate the amount or range of any potential loss, if any, associated with this matter, and no accrual has been recorded.

**Sparkle Pop Matter.**On June 9, 2025, Sparkle Pop, LLC filed an adversary proceeding against the Company in the United States Bankruptcy Court for the District of Maryland in the matterIn re Diamond Comic Distributors, alleging theft of trade secrets and tortious interference with contractual relations. The Company has moved to dismiss the amended complaint, and that motion remains pending. The Company denies the allegations. At this time, the Company cannot reasonably estimate the amount or range of any potential loss associated with this matter, and no accrual has been recorded.

**TCPA Demand.**In November 2025, the Company received a demand letter asserting potential claims under the federal Telephone Consumer Protection Act against its subsidiary, DirectToU, LLC, relating to alleged marketing text messages. No complaint has been filed, and discussions between the parties are ongoing. At this time, the Company cannot reasonably estimate the amount or range of any potential loss associated with this matter, and no accrual has been recorded.

Other Matters

From time to time, the Company is involved in other legal and regulatory matters arising in the ordinary course of business.

In December 2024, DirectToU, LLC received a third-party tender of defense regarding a notice of alleged noncompliance with California Proposition 65 concerning a product supplied by a vendor and sold by the Company. The Company discontinued the product and tendered defense to the supplier, which has assumed responsibility for responding to the notice. The Company does not believe this matter is material.

In July 2025, the Company received a cease-and-desist letter alleging a breach of a contractual non-solicitation provision. The Company disputes the allegations, has responded to the correspondence, and has not filed any litigation. The Company does not believe this matter is material.

Note 14: Related Party Transactions

GameFly Holdings, LLC

On February 1, 2023, the Company entered into a Distribution Agreement (the “Agreement”) with GameFly Holdings, LLC (“GameFly”), a customer owned by the Company’s principal stockholders. The Agreement is effective from February 1, 2023 through March 31, 2028, and thereafter continues on an indefinite basis unless terminated by either party upon six months’ prior written notice.

The Company did not recognize any distribution revenue under the Agreement during the three or six months ended December 31, 2025 or 2024. During the three months ended December 31, 2025 and 2024, the Company recognized sales to GameFly of approximately $0.7 million and $0.8 million, respectively. During the six months ended December 31, 2025 and 2024, sales to GameFly totaled approximately $1.6 million for each respective period. Sales to GameFly were conducted on terms consistent with those offered to third-party customers.

As of December 31, 2025 and June 30, 2025, the Company had receivables, net, from GameFly of approximately $0.2 million and $0.2 million, respectively, which are included in other receivables, net, on the condensed consolidated balance sheets.

Ogilvie Loans

On July 3, 2023, the Company entered into a $17.0 million line of credit with Bruce Ogilvie, a principal stockholder (the “Ogilvie Loan”). The Company made and repaid various short-term borrowings under the Ogilvie Loan through October 2023. The Ogilvie Loan would have matured on December 22, 2026, and bore interest at a rate equal to 30-day SOFR plus 5.0%.

In connection with the Company’s entry into an asset-based revolving credit facility with Bank of America on October 1, 2025, the Company repaid the outstanding balance of $10.0 million under the Ogilvie Loan in full. As a result, there wereno amounts outstanding under the Ogilvie Loan as of December 31, 2025.

Interest expense related to the Ogilvie Loan waszero for the three months ended December 31, 2025, as no borrowings were outstanding during that period. Interest expense related to the Ogilvie Loan for the three months ended December 31, 2024 was approximately $0.26 million. Interest expense for the six months ended December 31, 2025 and 2024 was approximately $0.24 million and $0.53 million, respectively.

B&D Capital Partners, LLC

B&D Capital Partners, LLC (“BDCP”) is a financial advisory firm whose parent company is majority owned by W. Tom Donaldson III, a member of the Company’s board of directors. During the fiscal year ended June 30, 2024, the Company paid BDCP approximately $1.8 million in advisory fees in connection with the Company’s former credit facility with White Oak Commercial Finance, LLC, which were capitalized as deferred financing costs.

The White Oak credit facility was repaid in full and terminated on October 1, 2025. During the three and six months ended December 31, 2025, the Company did not incur any related-party fees with BDCP; however, upon termination of the facility, the Company expensed $1.6 million of the remaining unamortized deferred financing costs associated with that facility. No amounts were payable to BDCP as of December 31, 2025.

Note 15: Leases

The Company leases offices, warehouses, computer equipment, and vehicles. Certain leases include options to renew, which may extend the lease term from 1 to 13 years. The decision to exercise renewal options is at the Company’s sole discretion and is included in the lease term when it is reasonably certain that the option will be exercised.

Leasehold improvements and assets are depreciated over the shorter of their useful life or the lease term unless the lease includes a purchase option or title transfer that is reasonably certain to occur.

Our lease agreements do not include material residual value guarantees or restrictive covenants. Lease payments generally include fixed payments, with some leases requiring variable payments. These variable payments typically cover the Company’s proportionate share of property taxes, insurance, and common area maintenance and are recognized as incurred rather than being included in the lease liability.

On the condensed consolidated balance sheet, operating leases are reflected in “Operating Lease Right-of-Use Assets, Net,” “Current Portion of Operating Lease Obligations,” and “Operating Lease Obligations, Non-Current.” Finance leases are included under “Property & Equipment, Net,” “Current Portion of Finance Lease Obligations,” and “Finance Lease Obligations, Non-Current.

The extended lease term will result in continued amortization of the ROU asset over the remaining lease period, with the associated lease liabilities being remeasured in accordance with ASC 842,Leases. The Company will continue to amortize the ROU asset in line with the revised lease terms and conditions, reflecting the financial impact of the extension in future periods.

Components of lease expense were as follows for the three and six months ending December 31, 2025, and 2024:

Maturities of operating and finance lease liabilities as of December 31, 2025 are as follows:

Finance ROU leases are recorded in Property and Equipment, net on the condensed consolidated balance sheets.

Note 16: Merger

As disclosed in Note 1, on February 10, 2023, the Company completed the Merger with Alliance and a Merger Sub, resulting in the Company becoming a publicly traded company. While Adara was the legal acquirer in the Merger, for financial accounting and reporting purposes under U.S. GAAP, Legacy 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 Alliance 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. Accordingly, the consolidated assets, liabilities, and results of operations of Legacy Alliance became the historical consolidated financial statements of the combined company, and Alliance’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 Alliance were recognized at historical cost (which was consistent with carrying value), with no goodwill or other intangible assets recorded.

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

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

Up to 60 million additional Class E shares may be issued to the Legacy Alliance shareholders at no cost based on future performance of the company’s stock price, and 9.9 million warrants (Class A) that can be exercised for common shares at $11.50 per share (See Note 21). The 60 million Class E shares are set aside in an escrow account as additional consideration contingent on triggering events occurring within 10 years after the Merger. Upon reaching the following triggering events, the Class E shares will be released from the escrow account to the three major shareholders, and converted to Class A shares on a 1:1 basis:

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

During the fiscal year ended June 30, 2023, the Company incurred total transaction costs of approximately $5.0 million, including legal, financial advisory and other professional fees related to the Merger, which was recorded as an expense as the transaction costs exceeded the proceeds received in the Merger.

In connection with the Merger, the Company’s 2023 Omnibus Equity Incentive Plan (the “2023 Plan”) became effective. The 2023 Plan is a comprehensive incentive compensation plan under which the Company can grant equity-based and other incentives awards to based officers, employees, and directors of, and consultants and advisers to, Alliance and its subsidiaries. The Company has reserved a total of 600,000 shares of Class A common stock for issuance as or under awards to be made under the 2023 Plan. To the extent that an award lapses, expires, is cancelled, is terminated unexercised or ceases to be exercisable for any reason, or the rights of its holder terminate, any common stock subject to such award shall again be available for the grant of a new award. The 2023 Plan shall continue in effect, unless sooner terminated, until the tenth anniversary of the date on which it is adopted by the Board of Directors (except as to awards outstanding on that date), and the Board of Directors in its discretion may terminate it at any time with respect to any shares for which awards have not theretofore been granted, provided certain conditions are met, in accordance with the 2023 Plan. The price at which a share may be purchased upon exercise of a share option shall be determined by the Plan Committee; provided, however, that such option price (i) shall not be less than the fair market value of a share on the date such share option is granted, and (ii) shall be subject to adjustment as provided in the 2023 Plan. On November 7, 2024, the Company’s stockholders approved an amendment to the 2023 Plan to increase the number of shares of Class A common stock for issuance as or under awards to be made under the 2023 Plan to 1,000,000 shares. As of December 31, 2025,622,550 shares were awarded under the 2023 Plan.

Note 17: Asset Purchase

On December 17, 2024, the Company completed an asset purchase from Bensussen Deutsch & Associates, LLC, “an unrelated third party” for a total cash consideration to the seller of $7,551,000. The asset purchase included inventory, tooling equipment, and a trademark.

The allocation of the purchase price was as follows:

The acquired intangible asset represents a trademark associated with the Company’s recently acquired product line, Handmade by Robots. The trademark is determined to have an indefinite useful life and will not be amortized. Instead, it will be tested for impairment annually or more frequently if events or changes in circumstances indicate that the asset may be impaired, in accordance with ASC 350 (Intangibles – Goodwill and Other).

For the three and six months ended December 31, 2025, and 2024, there was no impairment recorded.

Inventory was recorded at its estimated fair value on the acquisition date and is expected to be sold within 18 months. Acquisition-related costs of $103 thousand, consisting of capitalized legal and shipping fees, included in the value of the intangible asset in accordance with ASC 805 -50-30-1. As a result, the total allocated purchase price, including capitalized costs, is $7.7 million.

Note 18: Reclassification of Private Warrants to Public Warrants

Reclassification from Liability to Equity

During the six months ended December 31, 2024, certain shareholders of the Company sold private warrants to third parties who were not deemed “permitted transferees” under the terms of the Warrant Agreement. In accordance with the Warrant Agreement, upon such a sale, the private warrants became subject to the same redemption provisions as the Company’s public warrants.

As a result of this change in terms, the affected warrants, which had previously been accounted for as a liability, were reclassified to equity. Accordingly, the Company reclassified approximately 769,000 warrants with a carrying value of $0.5 million from warrant liabilities to paid-in capital during fiscal 2025. This reclassification had no impact on the Company’s condensed consolidated statements of operations or cash flows. Prior period balances were not restated (See Note 21).

Note 19: Stock-Based Compensation:

As part of the Merger on February 10, 2023,600,000 shares were authorized for a one-time employee stock plan. The compensation committee approved 463,800 shares of restricted stock awards to employees on June 15, 2023. The shares fully vest on October 4, 2023. The company does not have an annual stock-based compensation plan.

In September 2024, the Company’s Board approved, subject to stockholder approval, an amendment to the 2023 Plan to increase the number of shares authorized for issuance thereunder by 400,000 shares of Class A common stock, bringing the total reserved under the 2023 Plan to 1,000,000 shares of Class A common stock. On November 7, 2024, the Company’s stockholders approved the amendment to the 2023 Plan.

During the three months ended December 31, 2025, the Company granted restricted stock awards to certain employees pursuant to employment offer letters executed in December 2025. Although the employment offer letters reference a December 31 grant date, the Company determined that, for accounting purposes under ASC 718, the grant date was January 1, 2026, as this was the date on which all requisite terms of the awards were finalized, requisite approvals were obtained, and the employees commenced service. Accordingly, the fair value of these awards was measured as of January 1, 2026, and stock-based compensation expense is recognized over the requisite service period beginning on that date.

In connection with awards granted, the Company recognized $0.1 million and $0 in stock-based compensation expense during the three- and six-month periods ending December 31, 2025, and December 31, 2024, respectively.

Note 20: Impact of Warrant Liabilities on Earnings Per Share (EPS)

Certain outstanding warrants issued by the Company are classified as liabilities in accordance with ASC 815-40,Derivatives and Hedging – Contracts in Entity’s Own Equity, due to specific terms that require them to be remeasured at fair value at each reporting date. Changes in fair value are recognized as a non-cash gain or loss in the condensed consolidated statements of operations, which resulted in fluctuations in the Company’s reported net income and earnings per share (EPS).

During the three and six months ending December 31, 2025, and 2024 the Company recorded a loss of $0.9 million, and $2.5 million, respectively and $2.3 million and $2.6 million, respectively related to the fair value measurement of warrant liabilities, primarily due to changes in the market price of our common stock and the volatility assumptions used in the valuation model. Reported EPS was negatively impacted by $0.02 for the three months ended December 31, 2025 and by $0.05 for the three months ended December 31, 2024. For the six months ended December 31, 2025 and 2024, reported EPS was negatively impacted by $0.05 per share in each period.

The fair value of the warrant liabilities at December 31, 2025, and June 30, 2025, was $3.0 million and $0.6 million, respectively, and is recorded under warrant liabilities on the condensed consolidated balance sheets.

Investors should note that the remeasurement of warrant liabilities is a non-operational, non-cash item. Future changes in fair value will continue to be recorded in earnings until the warrants are either exercised, transferred to public warrants or expire. Additional details on the fair value assumptions and measurement techniques are provided in Note 22 – Fair Value.

Note 21: Warrants

At December 31, 2025, and June 30, 2025, there were 6,519,083 Public Warrants,3,357,667 Private Placement Warrants, and 43,340 Representatives Warrants issued and outstanding, each exercisable to purchase one share of Class A common stock at an exercise price of $11.50 (the “Warrants”).

The Company will not be obligated to deliver any shares of Class A common stock pursuant to the exercise of a warrant. It will have no obligation to settle such warrant exercise unless a registration statement under the Securities Act covering the issuance of the shares of Class A common stock underlying the Warrants is then effective. A prospectus relating thereto is current, subject to the Company satisfying its obligations with respect to registration. Additionally, no warrant will be exercisable, and the Company will not be obligated to issue shares of Class A common stock upon exercise of a warrant unless Class A common stock issuable upon such warrant exercise has been registered, qualified, or deemed to be exempt under the securities laws of the state of residence of the registered holder of the Warrants.

The Company filed with the SEC on April 11, 2023, its registration statement covering the shares of Class A common stock issuable upon exercise of the Warrants, to cause such registration statement to become effective and to maintain a current prospectus relating to those shares of Class A common stock until the warrants expire or are redeemed, as specified in the warrant agreement. The registration, as amended, became effective June 29, 2023.

Public Warrants:

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

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

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

Private Placement Warrants:

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

Representative Warrants

The Company issued Representative Warrants, for minimal consideration to ThinkEquity, a division of Fordham Financial Management, Inc. (and/or its designees), in a private placement simultaneously with the closing of Alliance’s initial public offering, which are also classified as liabilities on the condensed consolidated balance sheet. The Representative Warrants are identical to the Private Warrants except that so long as the Representative Warrants are held by ThinkEquity (and/or its designees) or its permitted transferees, the Representative Warrants (i) will not be redeemable by the Company, (ii) may be exercised by the holders on a cashless basis, (iii) are entitled to registration rights and (iv) are not exercisable more than five years from the effective date of the Merger.

Note 22: Fair Value

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

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

As of December 31, 2025 and June 30, 2025, the Company has classified the Private Placement Warrants and the Representative Warrants as Level 3 fair value measurements. Management evaluates a variety of inputs and then estimates fair value based on those inputs. As discussed below, the Company utilized the Black Scholes Model in valuing the Private Placement Warrants and Representative Warrants.

The estimated fair value of cash, trade receivables, accounts payable, accrued expenses and other current liabilities are based on Level 1 inputs as the fair values approximate carrying amounts as of December 31, 2025, and June 30, 2025, based on the short-term nature and maturity of these instruments.

The estimated fair values of subordinated shareholder debt and the credit facility is based on Level 2 inputs, which consist of interest rates that are currently available to the Company for issuance of debt with similar terms and remaining maturities. As of December 31, 2025, and June 30, 2025 the estimated fair value of the Company’s short and long-term debt approximates it carrying value due to market interest rates charged on such debt or their short-term maturities.

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

The Company utilized the following assumptions to estimate fair value of the Private Warrants and Representative Warrants as of:

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

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

The table below presents the change in the number and fair value of the Private and Representative Warrants for the period ended December 31, 2025, and December 31, 2024 (in thousands, except the number of shares)

Note 23: Business Combinations - Endstate

On December 31, 2025, Alliance Entertainment Holding Corporation (the “Company”), through a wholly owned subsidiary, completed the acquisition of substantially all of the assets of Endstate (the “Acquisition”). The Acquisition was accounted for as a business combination under ASC 805,Business Combinations.

The Acquisition was completed to enhance the Company’s technology capabilities and expand its digital and direct-to-consumer product offerings. Because the Acquisition closed on December 31, 2025, the results of Endstate’s operations were not included in the Company’s condensed consolidated results of operations for the period ended December 31, 2025.

Purchase Consideration

The total consideration transferred in connection with the Acquisition was**$7.9 million**, which consisted of the following (in thousands):

Certain payments to the founders, including guaranteed payments and sign-on bonuses that were not contingent on continued employment, were determined to represent consideration transferred in exchange for the acquired business and were included in purchase consideration. Payments contingent on continued employment were excluded from purchase consideration and will be recognized as compensation expense over the requisite service period.

Preliminary Purchase Price Allocation

The allocation of the purchase consideration is preliminary and subject to adjustment during the measurement period as the Company finalizes its valuation of acquired assets and assumed liabilities. The preliminary allocation of the consideration transferred is as follows (in thousands):

Identifiable intangible assets are being amortized on a straight-line basis over an estimated useful life often years.

Goodwill represents the excess of the consideration transferred over the estimated fair value of the identifiable net assets acquired and reflects expected synergies, future technology enhancements, and the assembled workforce. Goodwill is deductible through amortization over 15 years for income tax purposes.

Contingent Consideration

The Acquisition includes contingent consideration arrangements consisting of earnout payments based on future financial performance during the 2026 through 2028 periods.

The contingent consideration was recorded at an estimated fair value of $5.5 million as of the acquisition date and is included in accrued liabilities on the accompanying condensed consolidated balance sheets. The fair value was determined using a probability-weighted discounted cash flow model and includes significant unobservable inputs. Accordingly, the contingent consideration liability is classified asLevel 3 within the fair value hierarchy.

Contingent consideration is remeasured at each reporting date, with changes in fair value recognized in earnings.

Acquisition-Related Costs

Transaction costs incurred in connection with the Acquisition were expensed as incurred and included in transaction costs.

Note 24: Subsequent Events

The Company evaluated subsequent events occurring through February 12, 2026, the date these condensed consolidated financial statements were issued (or available to be issued). Based on this evaluation, the Company identified the following non-recognized subsequent event that requires disclosure.

Home Entertainment License Agreement

On January 1, 2026, The Company, entered into an exclusive Home Entertainment License Agreement (the “AmazonMGM Agreement”) with Amazon MGM Studios Distribution (“Amazon MGM”). The AmazonMGM Agreement grants the Company exclusive rights to distribute certain Amazon MGM physical media titles, including DVD, Blu-ray, and UHD formats, in the United States and Canada.

Under the terms of the AmazonMGM Agreement, the Company will manufacture, distribute, and fulfill physical media products for Amazon MGM titles, while Amazon MGM retains responsibility for its digital media distribution. The AmazonMGM Agreement covers both newly released and catalog film and television titles.

The AmazonMGM Agreement is effective January 1, 2026. The AmazonMGM Agreement has an initial term of five years beginning January 1, 2026, unless earlier terminated in accordance with its terms. The Company evaluated this event under ASC 855, Subsequent Events, and determined that the AmazonMGM Agreement represents a non-recognized subsequent event. Accordingly, no adjustments were made to the Company’s consolidated financial statements as of and for the period ended.