ALLIANCE ENTERTAINMENT HOLDING CORP

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2025

Note 1: Organization and Summary of Significant Accounting Policies

Alliance Entertainment Holding Corporation (“Alliance”) was formed on August 9, 2010. The Company provides full-service distribution of pre-recorded music, video movies, video games and related accessories, and merchandising to retailers and other independent customers primarily in the United States. It provides product and commerce solutions to “brick-and-mortar,” e-commerce retailers, and consumer direct websites, while maintaining trading relationships with manufacturers of pre-recorded music, video movies, video games and related accessories. The Company also provides third party logistics (3PL) products and services to customers.

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

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

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

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

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

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 20, 2024. June 30, 2024 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 preparation of the unaudited condensed consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. The estimates and assumptions made may not prove to be correct, and actual results could differ from the estimates.

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

Liquidity

On December 21, 2023, the Company secured a new three-year $120 million credit facility, replacing the Revolver (see Note 9). Additionally, the Company has implemented certain strategic initiatives to reduce expenses and focus on the sale of higher margin products. As a result of the new credit facility, combined with these initiatives and the Company’s financial performance for the three and nine months ended March 31, 2025, 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 unaudited condensed consolidated financial statements.

Concentration of Credit Risk

Concentration of Credit Risk consists of the following at:

Customers:

Accounting Pronouncements

Recently Issued but Not Yet Adopted Accounting Pronouncements

Accounting Standard Update 2024-03, In 2024, Income Statement—Reporting Comprehensive Income. The Financial Accounting Standards Board issued Accounting Standards Update (ASU) 2024-03,Income Statement—Reporting Comprehensive Income—Expense Disaggregation Disclosures (Subtopic 220-40): Disaggregation of Income Statement Expenses. This ASU provides guidance on the disaggregation of income statement expenses, aiming to enhance the transparency of financial reporting by requiring more detailed disclosures of expense categories. This 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 financial statements to determine the potential effect on its financial reporting and disclosures.

Accounting Standard Update 2024-02, In 2024, Codification Improvements—Amendments to Remove References to the Concepts Statements. The Financial Accounting Standards Board (FASB) issued ASU 2024-02, which updates accounting standards for revenue recognition (ASC 606), lease accounting (ASC 842), and impairment of long-lived assets (ASC 360). The ASU provides enhanced guidance for estimating variable consideration, accounting for contract modifications, determining lease terms, and simplifying impairment testing for long-lived assets. It also introduces increased disclosure requirements for financial instruments and derivatives. ASU 2024-02 is effective for fiscal years beginning after December 15, 2024, with early adoption permitted. The Company is currently evaluating the impact of this ASU on its financial statements.

Accounting Standard Update 2024-01 In 2024, Compensation—Stock Compensation (Topic 718): Scope Application of Profits Interest and Similar Awards. The Financial Accounting Standards Board (FASB) issued ASU 2024-01, which introduces updates to accounting standards related to the classification and measurement of financial instruments under ASC 320. The update primarily focuses on clarifying guidance for equity securities, debt instruments, and other financial assets, particularly in the areas of fair value measurement and impairment recognition. It aims to improve consistency and comparability in the reporting of financial instruments by refining the criteria for classifying securities and enhancing the methodology for recognizing and measuring impairments. ASU 2024- 01 also mandates additional disclosures to provide greater transparency around the valuation techniques and assumptions used in determining the fair value of financial instruments. The update is effective for fiscal years beginning after December 15, 2024, with early adoption permitted. The Company is currently evaluating the impact of this ASU on its financial statements and disclosures.

Accounting Standard Update 2023-09, Improvements to Income Tax Disclosures (“ASU 2023-09”). In December 2023, the FASB issued ASU 2023-09, which requires more detailed income tax disclosures. The guidance requires entities to disclose disaggregated information about their effective tax rate reconciliation as well as expanded information on income taxes paid by jurisdiction. The disclosure requirements will be applied on a prospective basis, with the option to apply them retrospectively. The standard is effective for fiscal years beginning after December 15, 2024, with early adoption permitted. We are evaluating the disclosure requirements related to the new standard.

Accounting Standard Update 2023-07, Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures (“ASU 2023-07”). In November 2023, the FASB issued ASU 2023-07, which is intended to improve reportable segment disclosure requirements, primarily through additional disclosures about significant segment expenses. The standard is effective for fiscal years beginning after December 15, 2023, and interim periods within fiscal years beginning after December 15, 2024, with early adoption permitted. The amendments should be applied retrospectively to all prior periods presented in the financial statements. We are evaluating the disclosure requirements related to the new standard.

Note 2: Summary of Significant Accounting Policies

There have been no material changes or updates to the Company’s significant accounting policies from those described in Note 1 to the Company’s audited consolidated financial statements included in the Annual Report on Form 10-K for the fiscal year ended June 30, 2024.

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.

As a result of the Merger (see Note 15), the Company has retroactively adjusted the weighted average shares outstanding prior to February 10, 2023, to give effect to the Exchange Ratio used to determine the number of shares of Class A Common Stock into which they were converted.

The following table sets forth the computation of basic and diluted net earnings per share of Class A Common Stock for the three and nine months ended March 31, 2025, and 2024:

For the three and nine months ended March 31, 2025, and 2024 there are 60,000,000 shares of contingently issuable Class A 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 and 9,920,090 warrants outstanding shares have been excluded from diluted earnings per share because they are anti-dilutive. For the three and nine months ended March 31, 2025,260,000 restricted shares were excluded from diluted earnings per share because they were 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 March 31, 2025, and 2024 was $0.4 million and $0.4 million respectively, and for the nine months ended March 31, 2025, and 2024, it was $1.3 million and $1.5 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.

Intangibles, Net consists of the following at:

During the three months ended March 31, 2025, and 2024, the Company recorded amortization expenses of $0.8 million and $1.0 million, respectivelyand during the nine months ended March 31, 2025, and 2024, the Company recorded amortization expenses of $2.6 million and $3.0 million, respectively.

Expected amortization over the next five years, including the remainder of fiscal 2025 and thereafter, as of March 31, 2025, is as follows:

Note 8: Accrued Expenses

Accrued Expenses consists of the following at:

Note 9: Revolving Credit Facility

On December 21, 2023, the Company entered into a new credit facility with White Oak Commercial Finance, LLC, which will mature on December 21, 2026. The facility is a $120 million asset-based revolving credit facility (the “Revolving Credit Facility”). Borrowings under the Revolving Credit facility bear interest at the 30-day SOFR rate, subject to a floor of 2%, plus a margin ranging from 4.50% to 4.75%, depending on the Company’s utilization and consolidated fixed charge coverage ratio. The 30-day SOFR rates as of March 31, 2025, and June 30, 2024, were 4.34 and 5.29, respectively. The effective interest rates at March 31, 2025, and March 31, 2024, were 9.4% and 8.8%, respectively.

If the Company reduces or terminates the commitments under the Revolving Credit Facility before its maturity, it will incur an early termination fee of 1% if done between December 21, 2024 and August 21, 2025. Additionally, if the facility is reduced or terminated on or before June 21, 2025, the Company is required to pay a minimum interest amount of 10% of the revolver minimum based on $100 million through December 2024.

Availability under the Revolving Credit Facility is determined by the Company’s borrowing base calculation, as defined in the credit agreement relating to this facility. The Company also incurs a commitment fee of 0.25% for unused credit line with fees for the period three and nine month periods ended March 31, 2025, and March 31, 2024, of $0.07 million and $0.04 million, and $0.16 million and $0.09 million, respectively. Availability as of March 31, 2025, was approximately $52 million with an outstanding revolver balance of approximately $68 million. Availability as of June 30, 2024, was $47 million with an outstanding revolver balance of $73 million.

The maximum borrowings under the Revolving Credit Facility are determined by a formula based on eligible accounts receivable and inventory, subject to lender discretion. The facility includes standard representations and warranties, events of default, and financial reporting requirements, including maintaining a fixed charge coverage ratio of at least 1.1 to 1.0 on a trailing twelve-month basis. The facility also imposes covenants restricting the Company’s ability to incur additional indebtedness, grant liens, pay dividends, make unpermitted investments, or materially change its business operations. The facility is secured by a first-priority security interest in the Company’s and its subsidiaries’ cash, accounts receivable, and related assets.

The Company was in compliance with its covenants as of March 31, 2025. Revolving Credit Facility, net consists of the following at:

During the three and nine months ended March 31, 2025, and 2024, the Company had interest expenses of $1.5 million and $2.3 million, respectively and $5.6 million and $7.7 million, respectively. Amortization of deferred finance costs of $0.4 million and $0.4 million, respectively $1.1 million and $0.5 million, respectively.

Note 10: Employee Benefits Company Health Plans

During the three months ended March 31, 2025, the Company transitioned its health insurance coverage from a self-funded model to an Individual Coverage Health Reimbursement Arrangement (“ICHRA”). 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 March 31, 2025, the Company had fully accrued for the estimated run-out liability associated with the terminated self-insured medical plans on a mature claims basis, as calculated by the plan administrator. At March 31, 2025 and June 30, 2024, the accrued estimated run-out exposure for the medical and dental plans totaled approximately $332,000 and $332,000, respectively, and is included in accrued expenses on the Company’s condensed unaudited consolidated balance sheets.

401(k) Plan

The Company has the Alliance Entertainment 401(k) Plan (the Plan) covering all eligible employees of the Company. All employees over the age of 18 are eligible to participate in the Plan at the beginning of the month following the date of hire. The Plan has an 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.

Note 11: Income Taxes

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.

The 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.

Note 12: Commitments and Contingencies

Commitments

The Company enters into various agreements with suppliers for the products it distributes. The Company had no long-term purchase commitments or arrangements with its suppliers as of March 31, 2025, and June 30, 2024**.**

Litigation, Claims and Assessments

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

On March 31, 2023, a class action complaint, titled Matthew McKnight v. Alliance Entertainment Holding Corp. f/k/a Adara Acquisition Corp., Adara Sponsor LLC, Thomas Finke, Paul G. Porter, Beatriz Acevedo-Greiff, W. Tom Donaldson III, Dylan Glenn, and Frank Quintero, was filed in the Delaware Court of Chancery against our pre-Business Combination board of directors and executive officers and Adara Sponsor LLC, alleging breaches of fiduciary duties by purportedly failing to disclose certain information in connection with the Business Combination and by approving the Business Combination. On August 26, 2024, the parties executed a Stipulation of Settlement which contemplates payment by the Company of $511,000 in exchange for the dismissal of all claims against the Company and the other defendants, which is pending court approval. On or about September 19, 2024, the Court issued an order requiring certain modifications to the previously submitted Stipulation of Settlement. On January 17, 2025, the parties submitted a revised Stipulation of Settlement and related documents to the Court. On April 2, 2025, the Court issued an order preliminary approving the settlement and setting a final approval hearing for June 17, 2025. At March 31, 2025 and June 30, 2024, $511,000 is included within current liabilities on the condensed balance sheets

On June 6, 2024, Office Create Corporation filed a complaint against COKeM International Ltd. (“COKeM”) in the United States District Court for the District of Minnesota alleging contributory trademark infringement, contributory false designation of origin and unjust enrichment relating to COKeM’s alleged distribution of a specific video game, Cooking Mama: Cookstar. The plaintiff is seeking damages of no less than $20,913,200, plus interest of 9% accruing from October 3, 2022. On August 29, 2024, COKeM filed a response denying all allegations. COKeM intends to vigorously defend the lawsuit. On September 12, 2024, COKeM filed a Third-Party Complaint against Planet Entertainment LLC and Steven Grossman asserting claims for indemnification and contribution. Alliance is also investigating potential remedies against the former owners of COKem and their designees of consideration for the purchase of COKem. Office Create and COKem are scheduled for mediation on February 5, 2025. Mediation has been postponed. Plaintiff’s are filing an amended complaint impleading the former owner, chairman, CFO and SVP of Sales for COKem seeking willful trademark infringement claims and civil conspiracy. Alliance filed an amended Answer insofar as any new claims pertain to COKem directly on March 12, 2025.

On August 8, 2024, a class action complaint,Feller v. Alliance Entertainment, LLC and DirectToU, LLC, was filed under the Video Privacy Protection Act (“VPPA”). The complaint alleges that the Company violated the VPPA by disclosing users’ personally identifiable information, as well as information regarding videos they viewed on the Company’s website, to Facebook through the use of Facebook Pixel. The Company is evaluating the claims and intends to defend against the allegations vigorously. At this time, the potential outcome or range of financial impact cannot be reasonably estimated.

Ledworks, LLC and Ledworks, s.r.l. v. COKem: On June 26, 2024, Alliance received a demand letter from Ledworks’ Minnesota counsel citing claims for outstanding interest for invoices dating back to calendar year 2022. Over the last 18 months, COKem was attempting to resolve a reconciliation/return of products to Ledworks for an over-purchase made in 2022. The parties exchanged reconciliation schedules, and prior to removing all products from the Cokem’s Minnesota warehouse, the product was shipped to Ledworks for credit against the account payable. The parties are in discussion to attempt to reach agreement on one outstanding invoice (invoice amount $79 k). COKem has an outstanding Return Authorization request to return $100,000 of additional product that Ledworks has failed to authorize. Ledworks is claiming interest due under Minnesota statutory in excess of $500,000 which Alliance disputes. The parties settled the matter and a motion to dismiss with prejudice was granted by the court on February 21, 2025.

Jonathan Hoang To v. DirectToU, LLC, United States District Court for the Northern District of California; Case No. 3:24-cv-06447; Douglas Feller, Jeffry Haise, and Joseph Mull v. Alliance Entertainment, LLC and DirectToU, LLC, United States District Court for the Southern District of Florida, Case No. 0:24-cv-61444; and Vivek Shah v. DirectToU, LLC, JAMS Arbitration, No. 5220006749.- Jonathan Hoang To, who allegedly used the website www.deepdiscount.com; Douglas Feller and Jeffry Haise, who allegedly used the website www.ccvideo.com; Joseph Mull and Vivek Shah, who allegedly used the website www.moviesunlimited.com. The lawsuits also put at issue any other website owned or operated by Alliance Entertainment, LLC (“Alliance”) or one of its corporate affiliates, including the websites www.ccmusic.com and wowhd.co.uk. The lawsuits bring claims against DirectToU, LLC (“DirectToU”) and/or Alliance, alleging a violation of the Video Privacy Protection Act (“VPPA”) related to the alleged collection of, and alleged disclosure to Meta and other third parties, including data brokers, of alleged private information and user data regarding a user’s account information and video viewing/purchasing history from the respective Websites. Plaintiff Hoang To also alleges violations of California’s state VPPA equivalent, as well as violations of California’s Unfair Competition Law. DirectToU and Alliance dispute the allegations and will defend the lawsuits vigorously. The parties in the Hoang To matter have reached a settlement with respect to all potential class members. The settlement agreement has been submitted to the court for approval on December 15, 2024. An approved settlement would cover the class members covered by the Feller matter, rendering such litigation moot. A motion to stay the Feller matter pending court approval of the settlement in Hoang To has been filed and granted. Counsel for the Feller parties filed a motion to intervene and stay the settlement in Hoang, which motions were rejected. The parties await final settlement approval.

Balabbo v Abysse America, Inc., Target Corporation, DirectToU, LLC (Prop 65): On or about December 11, 2024, DirectToU received a tender of defense from Target Corporation citing a possible violation of California Proposition 65 for a product sold by DirectToU allegedly containing lead. The product in question was supplied to Alliance by Abysse America. Alliance/DTU have tendered defense to Abysse. Abysse has engaged counsel to respond to the Prop 65 Violation Notice. At this time, Alliance/DTU have discontinued the product, but have documentation supplied by Abysse showing that the product was properly tested and was within allowable thresholds for lead and other substances.

McConigle v Alliance/DirectToU, LLC: On December 29, 2024, McConigle filed a class action suit against Alliance in the United States District Court for the Southern District of Florida (Case 0:24-cv-62443-DSL), alleging violation of the Telephone Consumer Protection Act, 47 U.S.C. § 227 (“TCPA”). Alliance is still evaluating the factual allegations of violation against internal records regarding solicitation/advertising to the phone number at issue. Alliance intends to defend this matter vigorously and denies all allegations.

Note 13: Related Party Transactions

GameFly Holdings, LLC

On February 1, 2023, Alliance entered into a Distribution Agreement (the “Agreement”) with GameFly Holdings, Inc., a customer of Alliance that is owned by the principal stockholders of Alliance, which is effective from February 1, 2023, through March 31, 2028, at which time the Agreement continues indefinitely until either party provides the other party with six-month advance notice to terminate the Agreement. During the three and nine months ended March 31, 2025, Alliance hadno distribution revenue. During the nine months ended March 31, 2024, Alliance recorded distribution revenue of $0.22 million, which is included in the net revenues in the unaudited condensed consolidated statements of operations.

During the three-month periods ended March 31, 2025, and 2024, and the nine-months periods ended March 31, 2025, and 2024, the Company had additional sales to GameFly of $0.7 million, $2.8 million, $2.3 million, and $7.8 million, respectively.

As of March 31, 2025, and June 30, 2024, the Company had receivables from GameFly of $0.3 million and $1.8 million, respectively, recorded within other receivables, net, on the unaudited condensed consolidated balance sheets.

Ogilvie Loans

On July 3, 2023, the Company entered into a $17 million line of credit (the “Ogilvie Loan”) with Bruce Ogilvie, a principal stockholder. Initial borrowings amounted to $10 million on that date, followed by an additional $5 million on July 10, 2023. These sums were repaid on July 26, 2023. Subsequently, on August 10, 2023, the Company accessed the Ogilvie Loan for the full $17 million, repaying $7 million on August 28, 2023. Further transactions occurred on September 14, 2023, with a borrowing of $7 million, repaid on September 28, 2023. On October 10, 2023, an additional $7 million was borrowed and repaid on October 18, 2023. As of March 31, 2025, and June 30, 2024, the outstanding balance on the Ogilvie Loan was $10 million.

The Ogilvie Loan is subordinated to the Company’s revolving credit facility, meaning that in the event of liquidation or default, repayment of the Ogilvie Loan is subordinate to amounts outstanding under the Company’s debt arrangements.

The Ogilvie Loan matures on December 22, 2026, and bears interest at the rate of the 30-day SOFR plus 5.5% (4.34% and 5.29% at March 31, 2025 and June 30, 2024, respectively). Interest expenses for the three and nine months ended March 31, 2025, and 2024 were $0.2 million and $0.3 million, respectively and $0.8 million and $0.8 million, respectively. The interest rate at March 31, 2025, was 9.81%.

MVP Logistics, LLC

MVP Logistics is an independent contractor, which, before August 31, 2023, was partially owned by Joe Rehak, the SVP of Operations of COKeM International Limited, which Alliance acquired in September 2020. Subsequent to August 31, 2023, Mr. Rehak no longer has an equity stake in MVP Logistics and retired from COKeM in January 2024. Alliance believes the amounts payable to MVP Logistics are at fair market value.

During the three and nine months ended March 31, 2025 and 2024, Alliance incurred costs with MVP Logistics LLC, in the amount of $0 and $0, respectively and $0 and $1.0 million, respectively, recorded as cost of revenues in the unaudited condensed consolidated statements of operations, for freight shipping fees, transportation costs, warehouse distribution, and MVP 3PL services (for Arcades) at the Santa Fe Springs, and South Gates, California distribution facilities.

B&D Capital Partners, LLC

During the fiscal year ended June 30, 2024, the Company entered into a financial advisory agreement with B&D Capital Partners, LLC (“BDCP”). W. Tom Donaldson III, a director of the company, is a managing partner and a principal equity holder of Blystone & Donaldson, the parent company of BDPC. The agreement, dated July 28, 2023, engaged BDCP as a non-exclusive financial advisor to assist the Company in issuing privately held debt securities and related transactions. BDCP is owned by Blystone & Donaldson, LLC, and Mr. Donaldson, an independent director of the Company, is a principal of BDCP.

Under the terms of the agreement, BDCP provided financial advisory services, including the review of confidential information, identification and engagement of potential transaction parties, and assistance with investor presentations.

During the three and nine months ended March 31, 2025, the Company did not incur any related party fees with BDCP. For the fiscal year ended June 30, 2024, the Company paid BDCP approximately $1.8 million, which included an advisory fee equal to 1.5% of the gross proceeds from transactions involving White Oak Commercial Finance, LLC.

Note 14: Leases

Components of lease expense were as follows for the three and nine months ended March 31, 2025, and 2024:

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

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

($ in thousands)

Note 15: Merger

As disclosed in Note 1, on February 10, 2023, the Company completed the Merger with Adara and a Merger Sub, resulting in the Company becoming a publicly traded company. While Adara was the legal acquirer in the Merger, for financial accounting and reporting purposes under U.S. GAAP, Legacy 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. 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.

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

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

Up to 60 million additional shares of Class A common stock may be issued to the Legacy Alliance shareholders at no cost and upon automatic conversion of the 60 million shares of Class E common stock based on future performance of the Company’s stock price and warrants that can be exercised to purchase shares of Class A common stock at $11.50 per share (See Note 17). The 60 million shares of Class E common stock are held in an escrow account as additional consideration contingent on triggering events occurring within 10 years after the Merger. Upon reaching the following triggering events, the Class E shares will be released from the escrow account to the three major shareholders, and converted to Class A shares on a 1:1 basis:

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.

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 canceled, 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 March 31, 2025,463,800 shares were awarded under the 2023 Plan.

Note 16: 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:

($ in thousands)

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).

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 $59 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 $7,610 thousand.

Note 17: Warrants

As a result of the Merger, at March 31, 2025, and June 30, 2024 there were 5,750,000 Public Warrants,4,120,000 Private Placement Warrants, and 50,090 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 condensed consolidated balance sheets. They may only be exercised for a whole number of shares. The Public Warrants are currently exercisable at $11.5 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:

The Company’s redemption right exists even if the Company 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 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 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 18: 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 March 31, 2025, and June 2024, 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 March 31, 2025, and June 30, 2024, based on the short-term nature and maturity of these instruments.

The estimated fair values of subordinated shareholder debt and the credit facility are 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 March 31, 2025, and June 30, 2024, the estimated fair value of the Company’s short and long-term debt approximates its 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 the fair value of the Private Warrants and Representative Warrants as of March 31, 2025 and June 30, 2024.

The significant assumptions using the Lattice model approach for valuation of the 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 (in thousands):

The table below presents the change in number and fair value of the Private and Representative Warrants since June 30, 2024: (in thousands, except the number of shares)

Note 19: Reclassification of Private Warrants to Public Warrants

Reclassification from Liability to Equity

During the nine months ended March 31, 2025, certain shareholders of the company sold private warrants to third parties who were not deemed “permitted transferees” under the terms of the Warrant Agreement. As stipulated in the Warrant Agreement, upon such a sale, the private warrants became subject to the same redemption provisions applicable to public warrants. This change in terms impacted the accounting treatment of the private warrants as follows:

As a result of this reclassification, the private warrants, which were previously accounted for as a liability, were reclassified to equity.

Under U.S. GAAP, private warrants are generally classified as liabilities due to certain settlement provisions, including redemption features and variations in transferability. However, upon their reclassification to public warrants, these instruments became subject to the terms applicable to public warrants, which meet the criteria for equity classification.

The reclassification resulted in the following accounting impacts:

Derecognition of Liability: The liability associated with the private warrants was derecognized at its fair value as of December 31, 2024, the reclassification date, totaling $0.4 million. The corresponding amount was recognized within additional paid-in capital in the equity section of the condensed consolidated balance sheets. There was no impact to the condensed consolidated statements of income.

This reclassification has had no impact on the Company’s previously reported cash flows or operations but resulted in a shift from liabilities to equity on the balance sheet. Future changes in the value of the public warrants will no longer affect the consolidated statements of income after December 31, 2024, as they are no longer subject to mark-to-market adjustments.

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 unaudited condensed consolidated statements of operations, which resulted in fluctuations in the Company’s reported net income (loss) and earnings per share (EPS).

During the three and nine months ended March 31, 2025, and 2024 the Company recorded a gain of $1.7 million, and a loss of $0.1 million, respectively and a loss of $0.9 million and a gain of $.04 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.

The fair value of the warrant liabilities at March 31, 2025, and June 30, 2024, was $0.7 million and $0.2 million, respectively, and is recorded under warrant liabilities on the unaudited 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 or expire. Additional details on the fair value assumptions and measurement techniques are provided in Note 18 – Fair Value.

Note 21: Stock-Based Compensation

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

In connection with awards granted, the Company recognized $0.0 and $0.0 and $0 and $1.4 million in stock-based compensation expense during the three and nine months ended March 31, 2025, and March 31, 2024.

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, for a total amount reserved under the 2023 Plan of 1,000,000 shares of Class A common stock. On November 7, 2024, the Company’s stockholder approved the amendment to the 2023 Plan.

Note 22 –Issuance of Common Stock

During the nine months ended March 31, 2024, the Company sold 1,335,000 shares of its Class A common stock at a price of $3.00 per share, generating gross proceeds of approximately $4.0 million. After deducting underwriting discounts, offering expenses, and representative warrants, net proceeds were approximately $1.3 million. No shares were issued during the nine months ended March 31, 2025.

Note 23 –Subsequent Events

Subsequent to March 31, 2025, the Company terminated its proposed acquisition of Diamond Comics, which had been proceeding under Chapter 11 of the U.S. Bankruptcy Code. As of March 31, 2025, approximately $3.9 million of transaction-related costs were included in prepaid assets on the Company’s unaudited condensed balance sheet. The termination of the acquisition will not result in the completion of the planned transaction. The Company is currently evaluating the recoverability of the deferred costs related to the acquisition and will adjust the carrying value of these assets in a future period if it determines that any portion is not recoverable.