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Item 9A. Controls and Procedures

2023-10-19 compared with 2023-03-30 · 1020 added, 668 removed, 511 unchanged (77% of the section changed)

Controls and Procedures.

Disclosure controls are procedures that are designed with the objective of ensuring that information required to be disclosed in our reports filed under the Exchange Act is recorded, processed, summarized, and reported within the time period specified in the SEC’s rules and forms.

Disclosure controls are also designed with the objective of ensuring that such information is accumulated and communicated to our management, including the chief executive officer and chief financial officer, as appropriate to allow timely decisions regarding required disclosure.

As required by Rules 13a-15 and 15d-15 under the Exchange Act, our Chief Executive Officer and Chief Financial Officer carried out an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures as of December 31, 2022.

Based upon their evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) were effective.

Disclosure Controls and Procedures

Our management, under the direction of and with the participation of our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act) as of June 30, 2023.

Based on the evaluation of our disclosure controls and procedures, our management concluded that, as of June 30, 2023, our disclosure controls and procedures were not effective due to the material weaknesses described below.

These material weaknesses in our internal control over financial reporting relates to the fact that Alliance did not have the necessary business processes and related internal controls formally designed and implemented to provide reasonable assurance regarding the reliability of the financial reporting and the preparation of our financial statements in accordance with U.S.

generally accepted accounting principles, as described further below.

We have added and continue to evaluate the need for additional controls over the accounting and financial reporting requirements related to certain non-routine transactions, which are still being designed and

The material weaknesses will not be considered remediated until such time as management designs and implements effective controls that operate for a sufficient period of time and has concluded, through testing, that these controls are effective.

As discussed elsewhere in this annual report, we completed the Merger on February 10, 2023.

The design of internal control over financial reporting for the post-Merger Company has required and will continue to require significant time and resources from management and other personnel to complete ongoing integration efforts.

As a result, management was unable, without incurring unreasonable effort or expense, to conduct an assessment of our internal control over financial reporting as of June 30, 2023.

Accordingly, we are excluding management’s report on internal control over financial reporting in accordance with Section 215.02 of the SEC Division of Corporation Finance’s Regulation S-K Compliance & Disclosure Interpretations.

Although management did not conduct a formal assessment of internal control over financial reporting, in connection with the audits of our consolidated financial statements for the years ended June 30, 2023, and 2022, management has identified material weaknesses in internal control over financial reporting.

As previously disclosed, the Company disclosed a material weakness as of June 30, 2022, related to the accounting for the classification of the outstanding balance of the Credit Facility, net.

During the year ended June 30, 2023, Management continued to assess the design and implementation of controls over financial reporting as the Company transitioned to becoming publicly-traded.

As a result of such assessment, additional control deficiencies were identified within the overall control environment.

Material Weaknesses in Internal Control Over Financial Reporting

A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of a company’s annual consolidated financial statements will not be prevented or detected on a timely basis.

As of June 30, 2023, the following material weaknesses existed:

Entity Level Controls

Management did not maintain appropriately designed entity-level controls impacting the (1) control environment, (2) risk assessment procedures, and (3) Board of Director’s oversight, including monitoring activities to prevent or detect material misstatements to the financial statements and assess whether the components of internal control were present and functioning.

These deficiencies were primarily attributed to an insufficient number of qualified resources to support and provide proper oversight and accountability over the performance of controls.

Control Activities

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

● Information Technology (IT) General Controls – Certain information technology general controls for security and administration of key IT systems were not designed properly or did not operate effectively.

Specifically, (i) periodic user access reviews of roles and permissions were not performed sufficiently throughout the period for certain key IT systems, and (ii) certain key IT systems were not logically restricted, resulting in improper segregation of duties for certain business processes.

● Financial Close Processes – Management did not design and maintain formal accounting policies, and effective control activities over certain routine aspects of financial reporting.

Specifically, management did not design and maintain effective controls over (i) the financial reporting process, including management review controls over areas of accounting such as revenue, inventory, accounts payable, income taxes and payroll, at an appropriate level of precision to detect a material misstatement and sufficient appropriate evidence was not maintained to support the execution and evaluation of the controls performed, (ii) the monthly financial close process, including the review of journal entries, account reconciliations, and analysis of recorded balances, and (iii) the completeness and accuracy of information used by control owners in the operation of certain controls.

● Disclosures and Internal Control Over Financial Reporting – The Company did not have the necessary business processes and related internal controls over financial reporting formally designed and implemented to address the accounting and financial reporting requirements related to certain routine and non-routine transactions.

Specifically, the controls failed to

detect required disclosures, and errors in the accounting for the classification of the outstanding balance of the revolving credit facility, net, as of June 30, 2022, as previously disclosed in the audited consolidated financial statements as of and for the year ended June 30, 2022, and as of September 30, 2022.

● Annual Impairment Analysis – Management did not design and implemented control activities that would allow the proper and timely identification, over the annual impairment analysis, of (i) triggering events and quantitative assessment approach used;

and (ii) assessing completeness and accuracy of information used in the segment and reporting unit determination.

Remediation Plan for Material Weaknesses

In response to the material weaknesses noted above, the Company’s management began to take actions to remediate the identified material weaknesses in internal control over financial reporting during the fiscal year ended June 30, 2023.

As part of management’s remediation plan, certain efforts were put into place and were underway prior to June 30, 2023.

Both new and revised controls that management started to implement in the second fiscal quarter of 2023 as part of the remediation plan require a period of seasoning to allow for a sufficient operating effectiveness testing sample.

Management plans to build on and continue such efforts going into the fiscal year ending June 30, 2024, in order to successfully remediate the identified material weaknesses.

The remediation actions include, but are not limited to, the following:

Entity Level Controls – In an effort to provide additional support, oversight and accountability over the performance of controls, the Company is evaluating enhancing its key financial reporting positions.

Management will continue to assess the composition of its resource needs, both internal and external, which may include adding additional accounting and compliance resources.

Management may also consider engaging third-party advisors when necessary to supplement its existing resources.

Information Technology General Controls – User access assessments for logical security (roles and privileges) will be performed and periodic user access reviews for key IT systems will be implemented.

All IT processes will be centrally managed and IT Management will consider transition certain hosting and administration responsibilities to third-parties.

Financial Close Process, Disclosures and Internal Control Over Financial Reporting, and Annual Impairment Analysis – Our remediation plan related to these material weaknesses include:

● Management will enhance the design of and implement controls around the rigor of the review process, and retention of sufficient appropriate evidence over revenue, inventory, accounts payable, payroll, income taxes, credit facility, journal entries, and other business processes.

● Developing monitoring controls and protocols that will allow us to timely assess the design and the operating effectiveness of controls over financial reporting and make necessary changes to the design of controls, if any.

● Engaging a professional third-party service provider to assist management with the design and implementation of internal controls.

● With the assistance from the third-party service provider, and under the supervision of the Chief Financial Officer, commencing the design and implementation of significant process transaction flows and key controls in the Company’s business processes, including revenue, inventory, income taxes, periodic impairment assessment, and IT environment.

● Adopting a process to identify and assess the Company’s disclosure controls and procedures, including the preparation and review of presentation and disclosure requirement checklists, and review of the completeness and accuracy of the underlying support of amounts contained in the financial statements.

Despite the existence of the material weaknesses, we believe the financial information presented herein is materially correct and in accordance with generally accepted accounting principles in the United States.

The elements of our remediation plan can only be accomplished over time, and we can offer no assurance that these initiatives will ultimately have the intended effects.

As management continues to evaluate and work to improve our internal control over financial reporting, management may determine it is necessary to take additional measures to address the material weakness.

material weakness will not be considered remediated unless and until such time as management designs and implements effective controls that operate for a sufficient period of time and concludes, through testing, that these controls are effective.

Until the controls have been operating for a sufficient period of time and management has concluded, through testing, that these controls are operating effectively, the material weakness described above will continue to exist.

Management will monitor the progress of the remediation plan and report regularly to the audit committee of the board of directors on the progress and results of the remediation plan, including the identification, status and resolution of internal control deficiencies.

We can provide no assurance that the measures we have taken and plan to take in the future will remediate the material weakness identified or that any additional material weakness or restatements of financial results will not arise in the future due to a failure to implement and maintain adequate internal control over financial reporting or circumvention of these controls.

In addition, even if we are successful in strengthening our controls and procedures, in the future these controls and procedures may not be adequate to prevent or identify irregularities or errors or to facilitate the fair presentation of our financial statements.

Management’s Report on Internal Controls Over Financial Reporting

As required by SEC rules and regulations implementing Section 404 of the Sarbanes-Oxley Act, our management is responsible for establishing and maintaining adequate internal control over financial reporting.

Our internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of our consolidated financial statements for external reporting purposes in accordance with GAAP.

Our internal control over financial reporting includes those policies and procedures that:

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Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree or compliance with the policies or procedures may deteriorate.

Management assessed the effectiveness of our internal control over financial reporting at December 31, 2022.

In making these assessments, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control — Integrated Framework (2013).

Based on our assessments and those criteria, management determined that we did maintain effective internal control over financial reporting as of December 31, 2022.

This Annual Report on Form 10-K does not include an attestation report of our independent registered public accounting firm due to our status as an emerging growth company under the JOBS Act.

Changes in Internal Control over Financial Reporting

There were no changes in our internal control over financial reporting during the most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Except as described above, there were no changes in our internal control over financial reporting during the most recent fiscal quarter that were identified in connection with management’s evaluation required by paragraph (d) of Rules 13d-15 and 15d-15 under the Exchange Act that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Other Information.

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Chief Financial Officer

Chairman of COKeM subsidiary and Director

Independent Director

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John received a bachelor’s degree from Washington State University majoring in Management Information Systems, and a Master of Business Administration from Carnegie Mellon University — Tepper School of Business.

Paul Eibeler .

Paul Eibeler is the chairman of COKeM International Ltd., which became a wholly owned subsidiary of Alliance in September 2020, and has been a director of Alliance since February 2023.

Since 2008, Mr.

Eibeler has led COKeM’s efforts to establish itself as the leading full-service, value-added distributor of video games and accessories.

In July 2000 Mr.

Eibeler joined Take-Two Interactive as president and director.

From 2005 to 2007, he was the chief executive officer of Take Two Interactive, a video game holding company based in New York, NY.

At Take-Two Interactive, Paul oversaw its growth from $250 million to over $1.5 billion, with titles such as Grand Theft Auto, Midnight Club, Bioshock, NBA 2K, MLB 2K, Max Payne, Carnival Games and Civilization.

Paul received a Bachelor of Arts degree from Loyola University Maryland, Paul completed a four year term on the Loyola Board, where he served as a member of the Board of Trustees.

Thomas Finke has been a director of Alliance since the closing of the Business Combination in February 2023 and was Chairman of Adara from its inception in August 2020, and CEO of Adara since June 2022, in each case, until the consummation of the Business Combination, in each case until the Business Combination.

Finke has served as a director of

Finke has served as a director of Invesco Ltd.

IVZ), a global investment management firm, since December 1, 2020.

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BBDC), a business development company that primarily makes debt investments in middle market companies, since August 2018;

Barings Global Short Duration High Yield Fund (NYSE:

Barings Global Short Duration High Yield Fund

BGH), a closed end fund that primarily invests in US and European high yield bonds, since October 2012;

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Donaldson received his Master of Business Administration degree and Juris Doctor degree from Villanova University.

He earned his undergraduate degree in Political Science from North Carolina State University.

He earned his undergraduate degree in Political

Science from North Carolina State University.

We believe Mr.

Donaldson is qualified to serve on our board of directors based on his breath and depth of experience in varied investment, financing and legal roles.

We believe Mr.

Donaldson is qualified to serve as a member of Alliance’s board of directors based on his experience as managing investment firms, his role on public and private boards of directors as well as his experience in investing in operating companies.

Director Independence

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Each member of the audit committee meets the independent director standard under the Nasdaq listing standards and under Rule 10-A-3(b)(1) of the Exchange Act.

Each member of the audit committee is financially literate and our board of directors has determined that Ms.

Wielenga qualifies as an “audit committee financial expert” as defined in applicable SEC rules.

Each member of the audit committee is financially literate, and our board of directors has determined that Mr.

Donaldson qualifies as an “audit committee financial expert” as defined in applicable SEC rules.

We have adopted an audit committee charter, which details the principal functions of the audit committee, including:

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Compensation Committee

Donaldson, Finke and Nagelson.

Serve as members of our compensation committee.

Donaldson, Finke and Nagelson serve as members of our compensation committee, and Mr.

Donaldson chairs our compensation committee.

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Nominating Committee

Finke, Donaldson and Chris Nagelson serve as members of the nominating committee.

Finke, Donaldson and Nagelson serve as members of the nominating committee, and Mr.

Finke serves as chair of the nominating committee.

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In general, in identifying and evaluating nominees for director, the board of directors will consider educational background, diversity of professional experience, knowledge of our business, integrity, professional reputation, independence, wisdom, and the ability to represent the best interests of our shareholders.

Prior to Closing our initial business combination, holders of our public shares will not have the right to recommend director candidates for nomination to our board of directors.

Section 16(a) Beneficial Ownership Reporting Compliance

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These reporting persons are also required to furnish us with copies of all Section 16(a) forms they file.

Based solely upon a review of such forms, we believe that since our inception on August 5, 2020 there have been no delinquent filers.

Based solely upon a review of such forms, we believe that since the Merger on February 10, 2023 there have been no delinquent filers.

Code of Ethics

We have adopted a Code of Ethics applicable to our directors, officers and employees, including our principal executive officer and principal financial and accounting officer.

We have filed a copy of our Code of Ethics and our audit, compensation and

nominating committee charters as exhibits to this annual report.

You will be able to review these documents by accessing our public filings at the SEC’s web site at www.sec.gov .

In addition, a copy of the Code of Ethics will be provided without charge upon request from us.

A copy of the Code of Ethics will be provided without charge upon request from us.

We intend to disclose any amendments to or waivers of certain provisions of our Code of Ethics in a Current Report on Form 8-K.

Executive Compensation.

For the year ended December 31, 2022, Alliance’s named executive officers were Bruce Ogilvie, Executive Chairman, Jeffrey Walker, Chief Executive Officer, John Kutch, Chief Finance Officer, Paul Eibeler, Board Chairman, COKeM, and Bruce Means, President Distribution Solutions.

For the fiscal year ended June 30, 2023, Alliance’s named executive officers were Bruce Ogilvie, Executive Chairman, Jeffrey Walker, Chief Executive Officer, John Kutch, Chief Finance Officer, and Bruce Means, President Distribution Solutions.

This section provides an overview of Alliance’s executive compensation programs, including a narrative description of the material factors necessary to understand the information disclosed in the summary compensation table below.

2023 and 2022 Summary Compensation Table

The following table shows information regarding the compensation of Alliance’s named executive officers for services performed during the years ended December 31, 2022 and 2021.

The following table shows information regarding the compensation of Alliance’s named executive officers for services performed during the fiscal years ended June 30, 2023 and 2022.

Name and Position

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Chief Executive Offer

John Kutch (3)

Chief Financial Officer

Paul Eibeler (4)

Board Chairman, COKeM

Ben Means (5)

President, Distribution Solutions

There were no outstanding equity awards at December 31, 2022.

(1) Included in all other compensation expenses is $18,300 for car and phone allowance in FY23 and FY22.

Also included is $16,500 in 401K and health benefits in FY23 and $16,900 in FY22

Included in all other compensation expenses is $24,000 for car and phone allowance in FY23 and $23,900 in FY22.

Also included is $13,900 in 401K and health benefits in FY23 and $14,200 in FY22

Included in all other compensation expenses is $11,400 for 401K and health benefits in FY23 and $11,700 in FY22.

Included in all other compensation expenses is $11,600 for 401K and health benefits in FY23 and $9,900 in FY22.

Included in all other compensation expenses is $14,300 for 401K and health benefits in FY23 and $12,900 in FY22.

Employment Agreements for Named Executive Officers

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Equity Incentive Plan Awards

In addition to the salaries and bonus targets set forth above, each of the two Named Executive Officers is eligible to participate in and receive awards under the 2023 Plan.

Each of the two Named Executive Officers also has the right to receive or participate in all employee benefit programs and perquisites generally established by the Company from time to time for employees similarly situated to the Named Executive Officer, subject to the general eligibility requirements and other terms of such programs and perquisites, and subject to the Company’s right to amend, terminate or take other similar action with respect to any such programs and perquisites.

In addition to the salaries and bonus targets set forth above, each of the two Named Executive Officers are eligible to participate in and receive awards under the 2023 Plan.

amend, terminate or take other similar action with respect to any such programs and perquisites.

Each also receives $2,000 per month for an automobile lease and be entitled to first class air travel where available.

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The Named Executive Officer must so execute the separation agreement within 60 days following the termination date.

None of the named the executive officers would have entitled to any payments or benefits upon termination of employment if we terminated their employment without cause or the executive terminated his employment with good reason, in either case, within 12 months following a “change of control” of our Company that (by assumption) occurred on December 31, 2022

There were no outstanding equity awards at December 31, 2022.

2023 Director Compensation

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However, we expect to implement a compensation program for our non-employee directors.

Our board of directors adopted and approved the 2023 Omnibus Equity Incentive Plan (the “2023 Plan,”), which was subsequently adopted by Alliance’s stockholders.

Our board of directors adopted and approved the 2023 Omnibus Equity and Incentive Plan, or 2023 Plan, which was subsequently adopted by Alliance’s stockholders.

The 2023 Plan became effective on February 10, 2023 and is a comprehensive incentive compensation plan under which we can grant equity-based and other incentive awards to based officers, employees and directors of, and consultants and advisers to, Alliance and its subsidiaries.

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The 2023 Plan shall continue in effect, unless sooner terminated, until the tenth (10th) anniversary of the date on which it is adopted by the Board of Directors (except as to awards outstanding on that date).

The Board of Directors in its discretion may terminate the 2023 Plan at any time with respect to any shares for which awards have not theretofore been granted;

The Board of Directors in its discretion may terminate the 2023 Plan at any time with respect to any shares for which awards have not theretofore

been granted;

provided, however, that the 2023 Plan’s termination shall not materially and adversely impair the rights of a holder, without the consent of the holder, with respect to any award previously granted.

The number of shares of common stock for which awards which are options or SARs may be granted to a participant under the 2023 Plan during any calendar year is limited to a number of shares equal to three percent (3%) of the total number of shares of common stock of the d Company outstanding on the last day of the prior calendar year.

The number of shares of common stock for which awards which are options or SARs may be granted to a participant under the 2023 Plan during any calendar year is limited to a number of shares equal to three percent (3%) of the total number of shares of common stock of the Company outstanding on the last day of the prior calendar year.

Future new hires, non-employee directors and additional non-employee consultants are eligible to participate in the 2023 Plan as well.

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In the case of ISOs granted to a ten percent shareholder, the per share exercise price under such ISO (to the extent required by the Code at the time of grant) shall be no less than 110% of the fair market value of a share on the date such ISO is granted.

ISOs may only be granted to employees of Alliance n or one of its subsidiaries.

ISOs may only be granted to employees of Alliance or one of its subsidiaries.

In addition, the aggregate fair market value of the shares subject to an ISO (determined at the time of grant) which are exercisable for the first time by an employee during any calendar year may not exceed $100,000.

And Option which specifies that it is not intended to qualify as ISOs or any Option that fails to meet the requirement of an ISO at any point in time will automatically be treated as a nonqualified option (“NQSO”) under the terms of the Plan.

An Option which specifies that it is not intended to qualify as ISOs or any Option that fails to meet the requirement of an ISO at any point in time will automatically be treated as a nonqualified option (“NQSO”) under the terms of the Plan.

Restricted Share Awards.

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Unrestricted Share Awards.

An unrestricted share award is the award of common stock which are not subject to transfer restrictions.

An unrestricted share award is the award of common stock which is not subject to transfer restrictions.

Pursuant to the terms of the applicable unrestricted share award agreement, a holder may be awarded (or sold) common stock which are not subject to transfer restrictions, in consideration for past services rendered thereby to us or an affiliate or for other valid consideration.

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The vesting restrictions under any restricted share unit award shall constitute a “substantial risk of forfeiture” under Section 409A of the Code.

At the time of such award, the Plan Committee may, in its sole discretion, prescribe additional terms and conditions or restrictions.

The holder of a restricted share unit shall be entitled to receive a cash payment equal to the fair market value of a share, or one (1) share, as determined in the sole discretion of the Plan Committee and as set forth in the restricted share unit award agreement, for each restricted share unit subject to such restricted share unit award, if and to the extent the applicable vesting requirement is satisfied.

At the time of such an award, the Plan Committee may, in its sole discretion, prescribe additional terms and conditions or restrictions.

set forth in the restricted share unit award agreement, for each restricted share unit subject to such restricted share unit award, if and to the extent the applicable vesting requirement is satisfied.

Such payment shall be made no later than by the fifteenth (15th) day of the third (3rd) calendar month next following the end of the calendar year in which the restricted share unit first becomes vested.

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The vesting restrictions under any performance under award shall constitute a “substantial risk of forfeiture” under Section 409A of the Code.

At the time of such award, the Plan Committee may, in its sole discretion, prescribe additional terms and conditions or restrictions.

At the time of such an award, the Plan Committee may, in its sole discretion, prescribe additional terms and conditions or restrictions.

The holder of a performance unit shall be entitled to receive a cash payment equal to the dollar value assigned to such unit under the applicable performance unit award agreement if the holder and/or Alliance satisfy (or partially satisfy, if applicable under the applicable performance unit award agreement) the performance goals and objectives set forth in such performance unit award agreement.

If achieved, such payment shall be made no later than by the 15th day of the third calendar month next following the end of Alliance’s fiscal year to which such performance goals and objectives relate.

If achieved, such payment shall be made no later than by the 15th day of the third calendar month following the end of Alliance’s fiscal year to which such performance goals and objectives relate.

Performance Share Awards.

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The vesting restrictions under any performance under award shall constitute a “substantial risk of forfeiture” under Section 409A of the Code and, if such goals and objectives are achieved, the distribution of such common stock shall be made no later than by the 15th day of the 3rd calendar month next following the end of our fiscal year to which such goals and objectives relate.

At the time of such award, the Plan Committee may, in its sole discretion, prescribe additional terms and conditions or restrictions.

At the time of such an award, the Plan Committee may, in its sole discretion, prescribe additional terms and conditions or restrictions.

The holder of a performance share award shall have no rights as an Alliance shareholder until such time, if any, as the holder actually receives common stock pursuant to the performance share award.

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A distribution equivalent rights award may, but need not be, awarded in tandem with another award other than an Option or SAR award, whereby, if so awarded, such distribution equivalent rights award shall terminate or be forfeited by the holder, as applicable, under the same conditions as under such other award.

The distribution

equivalent rights award agreement for a distribution equivalent rights award may provide for the crediting of interest on a distribution rights award to be settled in cash at a future date (but in no event later than by the 15th day of the third calendar month next following the end of the Company’s fiscal year in which such interest was credited), at a rate set forth in the applicable distribution equivalent rights award agreement, on the amount of cash payable thereunder.

The distribution equivalent rights award agreement for a distribution equivalent rights award may provide for the crediting of interest on a distribution rights award to be settled in cash at a future date (but in no event later than by the 15th day of the third calendar month next following the end of the Company’s fiscal year in which such interest was credited), at a rate set forth in the applicable distribution equivalent rights award agreement, on the amount of cash payable thereunder.

Share Appreciation Rights.

A SAR provides the participant to whom it is granted the right to receive, upon its exercise, the excess of (A) the fair market value of the number of shares of common stock subject to the SAR on the date of exercise, over (B) the product of the number of shares of common stock subject to the SAR multiplied by the base value under the SAR, as determined by the Plan Committee or the board of directors.

The base value of a SAR shall not be less than the fair market value of a share on the date of grant.

The base value of a SAR shall not be less than the fair market value of a share on the date of the grant.

If the Plan Committee grants a share appreciation right which is intended to be a tandem SAR, additional restrictions apply.

Amendment and Termination .

The 2023 Plan shall continue in effect, unless sooner terminated pursuant to its terms, until February 10, 2033, the tenth anniversary of the date on which it was adopted by the Board of Directors (except as to awards outstanding on that date).

As of March 29, 2023, no awards have been granted under the 2023 Plan.

The 2023 Plan shall continue in effect, unless sooner terminated pursuant to its terms, until February 10, 2033, the tenth anniversary of the date on which it is adopted by the Board of Directors (except as to awards outstanding on that date).

As of June 30, 2023, a total of 463,800 awards have been granted under the 2023 Plan.

Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.

The information included in under the heading “ Equity Plans ” in Item 12 of Part III of this annual report is hereby incorporated by reference into this Item 12 of Part II of this annual report.

The information included under the heading “ Equity Plans ” in Item 12 of Part III of this annual report is hereby incorporated by reference into this Item 12 of Part II of this annual report.

The following table sets forth information regarding the beneficial ownership of our Class A common stock as of the date of this annual report, by:

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Except as described in the footnotes below and subject to applicable community property laws and similar laws, we believe that each person listed below has sole voting and investment power with respect to such shares.

The beneficial ownership percentages set forth in the table below is based on 49,167,170 shares of Class A common stock issued and outstanding as of March 29, 2023.

The beneficial ownership percentages set forth in the table below are based on 50,965,970 shares of Class A common stock issued and outstanding as of September 27, 2023 (including 463,800 shares of unvested restricted stock).

Number of Shares of

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Chris Nagelson (6)

John Kutch (7)

Directors and executive officers as a group (7 individuals)

Ogilvie Legacy Trust dated September 14, 2021 (8)

(1) Unless otherwise indicated, the business address of each of the directors and executive officers of Alliance is c/o Alliance Entertainment Holding Corporation, 8201 Peters Road, Suite 1000, Plantation, Florida 33324.

(2) Excludes Class E common stock.

15,195,975 of such shares are beneficially owned by the Bruce Ogilvie, Jr.

(3) The shares are beneficially owned by the Bruce Ogilvie, Jr.

Trust dated January 20, 1994, having Mr.

Bruce Ogilvie, Jr.

as trustee, and 8,554,025 of such shares are beneficially owned by the Ogilvie Legacy Trust dated September 14, 2021, which has Mr.

Ogilvie’s two adult children as trustees.

Ogilvie disclaims individual ownership of such shares except to his individual pecuniary interest in such trusts.

as trustee, Mr.

Ogilvie disclaims individual ownership of such shares except for his individual pecuniary interest in such trusts.

(4) Includes 637,333 shares issuable upon exercise of private warrants.

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Includes 1,837,335 shares issuable upon exercise of private warrants.

(6) Includes 5,000 shares underlying a restricted stock award which vests on October 4, 2023.

(7) Includes 12,500 shares underlying a restricted stock award which vests on October 4, 2023.

Ogilvie’s two adult children are trustees of the Ogilvie Legacy Trust dated September 14, 2021.

Ogilvie disclaims beneficial ownership of the shares held by such trust.

Certain Relationships and Related Transactions.

Adara Related Party Transactions

Initial Stockholder Shares

In August 2020, Adara issued an aggregate of 2,875,000 Initial Stockholder Shares to the Sponsor for an aggregate purchase price of $25,000 in cash, or approximately $0.009 per share.

The Initial Stockholder Shares (including the Class A common stock issuable upon exercise thereof) may not, subject to certain limited exceptions, be transferred, assigned or sold by the holder.

In connection with the Business Combination the Adara Initial Stockholders forfeited 1,375,000 of these shares.

In August 2020, the Sponsor purchased an aggregate of 2,875,000 Initial Stockholder Shares for an aggregate purchase price of $25,000 in cash, or approximately $0.009 per share.

Prior to the IPO, Sponsor transferred 50,000 Initial Stockholder Shares to the underwriter for the IPO and to affiliated of the underwriter.

In connection with the Business Combination the Adara Initial Stockholders forfeited 1,375,000 of these Initial Stockholder Shares.

At the closing of the Business Combination, each of the remaining 1,500,000 Initial Stockholder Shares converted into one share of Class A common stock.

Sponsor Service Agreement

From February 8, 2021 through May 2022, we paid an affiliate of the Sponsor, a total of $10,000 per month for office space, utilities and secretarial and administrative support.

Adara Insider Agreements and Lock-Up Agreements

In connection with the Business Combination the Adara Initial Stockholders forfeited 1,375,000 of these shares.

In addition, upon the closing of the Business Combination, the Adara Initial Stockholders and certain stockholders of Alliance will also agree, subject to certain exceptions, not to (i) sell, offer to sell, contract or agree to sell, hypothecate, pledge, grant any option to purchase or otherwise dispose of or agree to dispose of, directly or indirectly, or establish or increase a put equivalent position or liquidate or decrease a call equivalent position within the meaning of Section 16 of the Exchange Act, and the rules and regulations of the SEC promulgated thereunder, the 1,500,000 shares of Class A common stock held by them upon the closing of the Business Combination (the “Lock-up Shares”), (ii) enter into any swap or other arrangement that transfers to another, in whole or in part, any of the economic consequences of ownership of any of the Lock-up Shares, whether any such transaction is to be settled by delivery of such securities, in cash or otherwise or (iii) publicly announce any intention to effect any transaction specified in clause (i) or (ii).

The lock-up period terminates on August 11, 2023.

Registration Rights Agreement

The holders of the Initial Stockholder Shares and private warrants (and in each case holders of their underlying securities, as applicable) have registration rights to require us to register a sale of any of our securities held by them pursuant to a registration rights agreement that was signed on February 8, 2021.

This agreement provided that these holders are entitled to make up to three demands,

excluding short form registration demands, that we register such securities for sale under the Securities Act.

This agreement provided that these holders are entitled to make up to three demands, excluding short form registration demands, that we register such securities for sale under the Securities Act.

In addition, these holders were granted “piggy-back” registration rights to include their securities in other registration statements filed by us.

In connection with the closing of the Business combination, the Adara Initial Stockholders and the Legacy Alliance stockholders enter ed into the Registration Rights Agreement which amended and restated the existing registration rights agreement.

Pursuant to the Registration Rights Agreement, Alliance that, no later than 30 calendar days after the closing of the Business Combination Alliance will file with the SEC (at Alliance’s sole cost and expense) the resale registration statement, and Alliance shall use commercially reasonable efforts to have the resale registration statement declared effective as soon as practicable after the filing thereof, but no later than the earlier of (i) the 60th calendar day (or 120th calendar day if the SEC notifies Alliance that it will “review” the resale registration statement) following the closing of the Business Combination and (ii) the tenth business day after the date Alliance is notified (orally or in writing, whichever is earlier) by the SEC that the resale registration statement will not be “reviewed” or will not be subject to further review.

In connection with the closing of the Business Combination, the Adara Initial Stockholders and the Legacy Alliance stockholders entered into the Registration Rights Agreement, which amended and restated the former registration rights agreement.

Pursuant to the Registration Rights Agreement, Alliance filed a resale registration statement and it was declared effective in accordance with the terms of the registration statement.

In certain circumstances, the Adara Initial Stockholders and the Legacy Alliance stockholders may each demand up to two registrations, which may be underwritten offerings, and all of the registration rights holders will be entitled to piggyback registration rights.

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On June 22, 2022, each of Blystone & Donaldson, LLC, an affiliate of W.

Tom Donaldson III, a director of Adara prior to the Business Combination and a director of Alliance, and Thomas Finke, Chief Executive Officer and a director of Adara, prior to the Business Combination and a director of Alliance agreed to loan us up to $250,000 to fund operating expenses, including expenses related to the Business Combination pursuant to promissory notes.

The promissory notes are deemed payable upon the earlier of the closing of the Business Combination and February 11, 2023 and are non-interest bearing.

At the closing, the amounts outstanding under the promissory notes were $250,000 to Blystone & Donaldson, LLC.

And $221,598.83.

In addition, Adara had an additional payable of $53,710.49 owed to Blystone & Donaldson, LLC for advances of expenses paid on Adara’s behalf.

Tom Donaldson III, a director of Adara prior to the Business Combination and a director of Alliance, and Thomas Finke, Chief Executive Officer and a director of Adara, prior to the Business Combination and a director of Alliance, agreed to loan us up to $250,000 to fund operating expenses, including expenses related to the Business Combination pursuant to the Promissory Notes.

The Promissory Notes were deemed payable upon the earlier of the closing of the Business Combination and February 10, 2023 and were non-interest bearing.

At the closing, the amounts

outstanding under the promissory notes were $250,000 to Blystone & Donaldson, LLC and $221,598 to Mr.

In addition, Alliance had an additional payable of $53,710 owed to Blystone & Donaldson, LLC for advances of expenses paid on Alliance’s behalf.

Blystone & Donaldson, LLC and Mr.

Donaldson agreed to convert the amounts owed to them into payables and that such amounts would be payable after certain other payables assumed by Alliance in connection with the Business Combination.

Finke agreed to convert the amounts owed to them into payables and that such amounts would be payable after certain other payables assumed by Alliance in connection with the Business Combination.

Sponsor Support Agreement

On June 22, 2022, Adara, Legacy Alliance and the Adara Initial Stockholders entered into the Sponsor Support Agreement pursuant to which the Adara Initial Stockholders agreed to vote all of their Initial Stockholder Shares and shares of Class A common stock in favor of the approval and adoption of the Business Combination and related matters subject to a stockholder vote at the stockholder meeting at which the Business Combination proposal was voted upon by the Adara stockholders.

Payment to Adara’s Chief Financial Officer

Adara paid to $50,000 to Paul Porter, its Chief Financial Officer prior to the Business Combination, for acquisition related services provided by him in 2021.

Adara Indemnification Agreements

In connection with the IPO, Adara entered into agreements with its officers and directors to provide contractual indemnification in addition to the indemnification provided for in its certificate of incorporation.

Adara also purchased a policy of directors’ and officers’

liability insurance that insures its officers and directors against the cost of defense, settlement or payment of a judgment in some circumstances and insures Adara against its obligations to indemnify its officers and directors.

On June 22, 2022, Adara, Legacy Alliance and the Alliance Initial Stockholders entered into the Sponsor Support Agreement pursuant to which the Alliance Initial Stockholders agreed to vote all of their Initial Stockholder Shares and shares of Class A common stock in favor of the approval and adoption of the Business Combination and related matters subject to a stockholder vote at the stockholder meeting at which the Business Combination proposal was voted upon by the Alliance stockholders.

Alliance Indemnification Agreements

In connection with the IPO, Alliance entered into agreements with its officers and directors to provide contractual indemnification in addition to the indemnification provided for in its certificate of incorporation.

Alliance also purchased a policy of directors’ and officers’ liability insurance that insures its officers and directors against the cost of defense, settlement or payment of a judgment in some circumstances and insures Alliance against its obligations to indemnify its officers and directors.

Alliance Related Party Transactions

Captive Insurance Policies

Bruce Ogilvie, Executive Chairman and a principal stockholder of Alliance, and Jeff Walker, Chief executive Office, a director and a principal stockholder of Alliance, established two insurance companies;

Bruce Ogilvie, Executive Chairman, a director and a principal stockholder of Alliance, and Jeff Walker, Chief Executive Officer, a director and a principal stockholder of Alliance, established two insurance companies;

Guard Yourself Insurance Company, Ltd.

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The Company is not a guarantor and does not have exposure in the event of a loss.

Total captive policy expense for the years ended June 30, 2022, 2021, and 2020 was $1.6 million, $2.2 million, and $2.7 million, respectively.

Total claims filed for the years ended June 30, 2022, 2021, and 2020 was $1.2 million, $1.5 million, and $1.3 million respectively.

June 30, 2022, and 2021, receivables from the captive insurance companies were $0 million (due to non-renewal) and $1.5 million, respectively, which are included in related party receivables on the consolidated balance sheets.

Total captive policy expense for the fiscal years ended June 30, 2023 and 2022, was $0 and $1.6 million, respectively.

Total claims filed for the year ended June 30, 2022 was $1.2 million.

There were no receivables from the captive as of June 30, 2023 or 2022.

Interest-Charge Domestic International Sales Corporation (IC-DISC)

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The IC-DISC is organized to manage sales to certain qualified customers and receive commissions from the Company for this activity.

The commissions expenses were $2.8 million and $6.3 million for the six months ended December 31, 2022, and 2021 respectively.

The commissions expenses were $2.8 and $9.9 million for the year ended June 30, 2023, and 2022 respectively.

Determined under formulas and rules defined in the law and regulations of the US tax code.

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This net profit is not subject to Federal income tax.

The IC-DISC distributes the profit to its Stockholders, who are taxed on the income as a dividend.

The IC-DISC, which is managed on a calendar year, distributes the profit to its Stockholders, who are taxed on the income as a dividend.

For twelve months ended December 31, 2022, the owners of the IC-DISC elected to forgive the distribution.

The commission was not paid out but rolled into Equity of Alliance Entertainment.

The commission was not paid out but rolled into Equity of Alliance Entertainment for the period ended June 30, 2023.

GameFly Holdings, LLC

During the years ended June 30, 2022, 2021 and 2020, Alliance has made sales of new release movies, video games, and video game consoles to GameFly Holdings LLC in the amount of $7.1 million, $5.3 million, and $2.5 million, respectively.

During the years ended June 30, 2023, 2022, Alliance has made sales of new release movies, video games, and video game consoles to GameFly Holdings LLC in the amount of $16.8 million and $7.5 million, respectively.

GameFly, a customer of Alliance, is equally owned by Bruce Ogilvie and Jeff Walker, the two shareholders of Alliance.

Alliance believes the amounts that GameFly paid for New Release, movies, video games, and video game consoles are at fair market value.

GameFly does fulfillment services of fast selling new releases by providing 3PL services at market rates.

GameFly does fulfillment services of

fast selling new releases by providing 3PL services at market rates.

The agreement between Alliance and GameFly can be terminated by either party at any time.

GameFly is free to purchase from any competitor of Alliance.

On February 1, 2023, Alliance entered into a Distribution Agreement (the “Agreement”) with GameFly, 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 year ended June 30, 2023 Alliance had distribution revenue in the amount of $0.22 million.

MVP Logistics, LLC

During the six months ended December 31, 2022, and 2021 Alliance incurred costs with MVP Logistics, LLC, in the amount of $5.4 million, and $7.8 million, respectively, for freight shipping fees, transportation costs, warehouse distribution, and 3PL management services (for Arcades) at the Redlands, California and South Gates, California distribution facilities.

During the years ended June 30, 2022, and 2021, Alliance incurred costs with MVP Logistics, LLC, in the amount of $13.0 million, and $3.0 million, respectively, for freight shipping fees, transportation costs, warehouse distribution, and 3PL management services (for Arcades) at the Redlands, California and South Gates, California distribution facilities.

During the year ended June 30, 2023, and 2022 Alliance incurred costs with MVP Logistics, LLC, in the amount of $8.3 million, and $11.4 million, respectively, for freight shipping fees, transportation costs, warehouse distribution, and 3PL management services (for Arcades) at the Redlands, California and South Gates, California distribution facilities.

MVP Logistics is an independent contractor, which is 33.3% owned by Joe Rehak, the SVP of Operations of COKeM International Limited, which was acquired by Alliance in September 2020, and the remaining 66.6% by unaffiliated third parties.

Alliance believes the amounts payable

to MVP Logistics are at fair market value.

Alliance believes the amounts payable to MVP Logistics are at fair market value.

The MVP 3PL Logistics agreement for Redlands and Southgate, California is for a one-year term ending March 10, 2023, with one-year automatic renewals unless cancelled by either party.

Ogilvie Loans

(i) borrowed $7,595,520 from Ogilvie on June 6, 2023 (the “June 2023 Ogilvie Loan”) and repaid the June 6 Ogilvie Loan on June 28, 2023 (such repayment, together with the June 2023 Ogilvie Loan, the “June 2023 Ogilvie Loan Transactions”);

(ii) entered into a $17,000,000 line of credit with Ogilvie on July 3, 2023 (the “Ogilvie 2023 Line of Credit”), (iii) borrowed $10,000,000 under the Ogilvie 2023 Line of Credit on July 3, 2023 and an additional $5,000,000 under the Ogilvie 2023 Line of Credit on July 10, 2023 (collectively, such loans the “July 2023 Ogilvie Loans”) and repaid the July 2023 Ogilvie Loans on July 26, 2023 (such repayment, together with the July 2023 Ogilvie Loans, the “July 2023 Ogilvie Loan Transactions”), and (iv) borrowed $17,000,000 under the Ogilvie 2023 Line of Credit on August 10, 2023 (such loan the “August 2023 Ogilvie Loan” and collectively with the June 2023 Ogilvie Loan and the July 2023 Ogilvie Loans, the “2023 Ogilvie Loans”) and repaid $7,000,000 of the August 2023 Ogilvie Loan on August 28, 2023 (such repayment, together with the August 2023 Ogilvie Loan, the “August 2023 Ogilvie Loan Transactions” and collectively with the June 2023 Ogilvie Loan Transactions and the July 2024 Ogilvie Loan Transactions, the “2023 Ogilvie Loan Transactions”).

Alliance agreed to pay interest on the Loan at the rate of BSBY plus 3% per annum calculated daily.

The expected interest cost to be paid to Mr.

Ogilvie if BSBY remains at 5.16% and paid on June 30, 2023, would be approximately $41,000.

This amount is subject to change based upon BSBY daily rate fluctuation.

Policies and Procedures for Related Person Transactions

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Principal Accountant Fees and Services.

The firm of WithumSmith+Brown, PC, or Withum, acted as our independent registered public accounting firm until it was dismissed effective following the completion of the audit of Adara’s financial statements for the fiscal year ended December 31, 2022, which consisted only of the accounts of the pre-Business Combination special purpose acquisition company, Adara.

The following is a summary of fees paid to Withum for services rendered.

For the years ended December 31, 2022 and 2021, fees for our independent registered public accounting firm were $135,889 and $103,515, respectively, for the services Withum performed in connection with our IPO and the audit of our December 31, 2022 and 2021 financial statements.

Audit-Related Fees.

For the years ended December 31, 2022 and 2021, our independent registered public accounting firm did not render assurance and related services related to the performance of the audit or review of financial statements.

For the years ended December 31, 2022 and 2021, fees for our independent registered public accounting firm for the preparation of our corporate tax returns were $8,100 and $7,725, respectively.

All Other Fees .

For the years ended December 31, 2022 and 2021, there were no fees billed for products and services provided by our independent registered public accounting firm other than those set forth above.

For the years ended June 30, 2023, and 2022, fees for our independent registered public accounting firm were $1,157,560 and $1,044,058 respectively, for the services BDO performed in connection with SEC filings and registrations, offerings, quarterly reviews and the audit of our June 30, 2023, and 2022 financial statements.

For the years ended June 30, 2023, and 2022, fees for our tax accounting firm for the preparation of our corporate tax returns were approximately $100,000 and $108,000, respectively.

Pre-Approval Policy

Our audit committee was formed upon the consummation of our initial public offering.

As a result, the audit committee did not pre-approve all of the foregoing services, although any services rendered prior to the formation of our audit committee were approved by our board of directors.

Our audit committee was formed upon the consummation of the Merger.

As a result, the audit committee did not pre-approve all the foregoing services, although any services rendered prior to the formation of our audit committee were approved by our board of directors.

Since the formation of our audit committee, and on a going-forward basis, the audit committee has and will pre-approve all auditing services and permitted non-audit services to be performed for us by our auditors, including the fees and terms thereof (subject to the de minimis exceptions for non-audit services described in the Exchange Act which are approved by the audit committee prior to the completion of the audit).

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Incorporated by Reference

Exhibit Number

Description of Document

Schedule/Form

Business Combination Agreement, dated as of June 22, 2022, by and among Adara, Merger Sub and Alliance.

Business Combination Agreement, dated as of June 22, 2022, by and among Alliance, Merger Sub and Alliance.

June 23, 2022

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February 11, 2021

Description of the Registrant’s Securities

Form of Lock-Up Agreement (included in Exhibit 2.1).

June 23, 2022

Alliance Entertainment Holding Corporation 2022 Equity Incentive Plan.

Alliance Entertainment Holding Corporation 2023 Omnibus Equity Incentive Plan.

Form of Indemnity Agreement.

October 18, 2022

Loan and Security Agreement, dated as of February 21, 2017, by and among Alliance Entertainment

Loan and Security Agreement, dated as of February 21, 2017, by and among Alliance Entertainment Holding Corporation, Project Panther Acquisition Corporation, AEC Direct, LLC, Alliance Entertainment, LLC and Directtou, LLC, as Borrowers, Bank of

October 18, 2022

Holding Corporation, Project Panther Acquisition Corporation, AEC Direct, LLC, Alliance Entertainment, LLC and Directtou, LLC, as Borrowers, Bank of America, N.A., as Agent and Bank of America, N.A.

America, N.A., as Agent and Bank of America, N.A.

as Sole Lead Arranger and Sole Bookrunner

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February 13, 2023

Amendment Number Twelve to Loan and Security Agreement and Waiver, dated as of April 21, 2023, by and among AENT Corporation, Project Panther Acquisition Corporation, AEC Direct, LLC, Alliance Entertainment, LLC, Directtou, LLC, Mecca Electronics Industries, Inc., Mill Creek Entertainment, LLC, and COKeM International, Ltd., as Borrowers, and Bank of America, N.A., as Agent.

April 27, 2023

Amendment Number Thirteen to Loan and Security Agreement and Waiver, dated as of September 13, 2023, by and among AENT Corporation, Project Panther Acquisition Corporation, AEC Direct, LLC, Alliance Entertainment, LLC, Directtou, LLC, Mecca Electronics Industries, Inc., Mill Creek Entertainment, LLC, and COKeM International, Ltd., as Borrowers, and Bank of America, N.A., as Agent.

September 14, 2023

Code of Ethics.

3 unchanged sentences

List of Subsidiaries.

March 30, 2023

Consent of BDO USA, P.C.

Certification of Principal Executive Officer Pursuant to Securities Exchange Act Rules 13a-14(a) and 15(d)-14(a), as adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

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Form 10-K Summary.

Pursuant to the requirements of the Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, the Registrant has duly caused this annual report to be signed on its behalf by the undersigned, thereunto duly authorized, in Irvine, California, on the 30th day of March, 2023.

Alliance Entertainment Holding Corporation

5 unchanged sentences

Chief Executive Officer and Director

March 30, 2023

October 18, 2023

Jeffrey Walker

2 unchanged sentences

Executive Chairman of the Board of Directors

March 30, 2023

October 18, 2023

Bruce Ogilvie

1 unchanged sentence

Chief Financial Officer

March 30, 2023

October 18, 2023

(Principal Financial and Accounting Officer)

Tom Donaldson III

March 30, 2023

October 18, 2023

Tom Donaldson III

/s/ Thomas Finke

March 30, 2023

/s/ Paul Eibeler

March 30, 2023

October 18, 2023

/s/ Chris Nagelson

March 30, 2023

October 18, 2023

Chris Nagelson

/s/ Terilea J.

March 30, 2023

October 18, 2023

ALLIANCE ENTERTAINMENT HOLDING CORP.

(F/K/A ADARA ACQUISITION CORP.)

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

Report of Independent Registered Public Accounting Firm

Report of Independent Registered Public Accounting Firm (PCAOB ID # 243 )

Financial Statements:

Consolidated Balance Sheets as of December 31, 2022 and 2021

Consolidated Statements of Operations for the years ended December 31, 2022 and 2021

Consolidated Statements of Changes in Stockholders’ Deficit for the years ended December 31, 2022 and 2021

Consolidated Statements of Cash Flows for the years ended December 31, 2022 and 2021

Consolidated Balance Sheets as of June 30, 2023 and 2022

Consolidated Statements of Operations for the years end June 30, 2023 and 2022

Consolidated Statements of Changes in Stockholders’ Deficit for the years end June 30, 2023 and 2022

Consolidated Statements of Cash Flows for the years end June 30, 2023 and 2022

Notes to Consolidated Financial Statements

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Stockholders and the Board of Directors of

Alliance Entertainment Holding Corp.

(F/K/A Adara Acquisition Corp.)

Opinion on the financial Statements

We have audited the accompanying consolidated balance sheets of Alliance Entertainment Holding Corp.

(F/K/A Adara Acquisition Corp.) (the “Company”) as of December 31, 2022 and 2021, the related consolidated statements of operations, changes in stockholders’ deficit and cash flows for the years then ended and the related notes (collectively referred to as the “consolidated financial statements”).

In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2022 and 2021, and the results of its operations and its cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States of America.

Shareholders and Board of Directors

Alliance Entertainment Holding Corporation

Plantation, Florida

Opinion on the Consolidated Financial Statements

We have audited the accompanying consolidated balance sheets of Alliance Entertainment Holding Corporation (the “Company”) as of June 30, 2023 and 2022, the related consolidated statements of operations and comprehensive (loss) income, changes in stockholders’ equity, and cash flows for each of the years then ended, and the related notes (collectively referred to as the “consolidated financial statements”).

In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at June 30, 2023 and 2022, and the results of its operations and its cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States of America.

Going Concern Uncertainty

The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern.

As discussed in Note 1 to the consolidated financial statements, the Company has suffered losses from operations for the year ended June 30, 2023, and has a working capital deficiency that raise substantial doubt about its ability to continue as a going concern.

Management’s plans in regard to these matters are also described in Note 1.

The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.

Basis for Opinion

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We conducted our audits in accordance with the standards of the PCAOB.

Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud.

Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud.

The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting.

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We believe that our audits provide a reasonable basis for our opinion.

/s/ WithumSmith+Brown, PC

/s/ BDO USA, P.C.

We have served as the Company’s auditor since 2021.

New York, New York

March 30, 2023

PCAOB ID Number 100

Miami, Florida

October 18, 2023

ALLIANCE ENTERTAINMENT HOLDING CORP.

(F/K/A ADARA ACQUISITION CORP.)

CONSOLIDATED BALANCE SHEETS

($ in thousands) except share information

June 30, 2023

June 30, 2022

Current Assets

Prepaid expenses

Cash and Cash Equivalents

Trade Receivables, Net

Related Party Receivable

Inventory, Net

Other Current Assets

Total Current Assets

Marketable securities held in Trust Account

LIABILITIES, CLASS A COMMON STOCK SUBJECT TO POSSIBLE REDEMPTION, AND STOCKHOLDERS’ DEFICIT

Property and Equipment, Net

Operating Lease Right-Of-Use Assets

Intangibles, Net

Other Long-Term Assets

Deferred Tax Asset, Net

Liabilities and Stockholders' Equity

Current Liabilities

Accounts Payable

Accrued Expenses

Income taxes payable

Advance from related party

Current Portion of Operating Lease Obligations

Current Portion of Finance Lease Obligations

Promissory Note

Contingent Liability

Revolving Credit Facility, Net

Income Taxes Payable

Total Current Liabilities

Warrant Liabilities

Finance Lease Obligation, Non- Current

Operating Lease Obligations, Non-Current

Warrant Liability

Deferred Tax Liability

Total Liabilities

Commitments and Contingencies

Class A common stock subject to possible redemption, $ 0.0001 par value;

11,500,000 shares at $ 10.19 and $ 10.10 redemption value at December 31, 2022 and 2021, respectively

Stockholders’ Deficit

Preferred stock, $ 0.0001 par value;

1,000,000 shares authorized;

0 shares issued or outstanding as of December 31, 2022 and 2021

Class A common stock, $ 0.0001 par value;

100,000,000 shares authorized;

0 shares issued and outstanding at December 31, 2022 and 2021 (excluding 11,500,000 shares)

Class B common stock, $ 0.0001 par value;

10,000,000 shares authorized;

2,875,000 shares issued and outstanding at December 31, 2022 and 2021

Additional paid-in capital

Accumulated deficit

( 2,414,653 )

( 4,367,476 )

Total Stockholders’ Deficit

( 2,414,365 )

( 4,367,188 )

TOTAL LIABILITIES, CLASS A COMMON STOCK SUBJECT TO POSSIBLE REDEMPTION, AND STOCKHOLDERS’ DEFICIT

Commitments and Contingencies (Note 11)

Stockholders' Equity

Preferred Stock Par Value $ 0.0001 per share, authorized 1,000,000 shares, 0 shares Issued and Outstanding

Common Stock:

Par Value $ 0.0001 per share, Authorized 550,000,000 shares at June 30, 2023, and 100,000,000 at June 30, 2022;

Issued and Outstanding 49,167,170 Shares as of June 30, 2023, and 47,500,000 at June 30, 2022

Paid In Capital

Treasury Stock

Accumulated Other Comprehensive Loss

Retained Earnings

Total Stockholders' Equity

Total Liabilities and Stockholders' Equity

The accompanying notes are an integral part of the consolidated financial statements.

ALLIANCE ENTERTAINMENT HOLDING CORP.

(F/K/A ADARA ACQUISITION CORP.)

CONSOLIDATED STATEMENTS OF OPERATIONS

Years Ended December 31,

Operating and formation costs

Loss from operations

( 2,608,046 )

Other income (expense):

Interest earned on marketable securities held in Trust Account

Transaction costs incurred in connection with IPO

Change in fair value of warrants liabilities

Other income (expenses), net

Income before provision for income taxes

Provision for income taxes

Weighted average shares outstanding of Class A common stock

Basic income per share, Class A common stock

Weighted average shares outstanding of Class B common stock

Basic net income per share, Class B common stock

Weighted average shares outstanding of Class B common stock

Diluted net income per share, Class B common stock

CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE (LOSS) INCOME

($ in thousands except share and per share amounts)

June 30, 2023

June 30, 2022

Cost of Revenues (excluding depreciation and amortization)

Operating Expenses

Distribution and Fulfillment Expense

Selling, General and Administrative Expense

Depreciation and Amortization

Transaction Costs

IC DISC Commissions

Restructuring Cost

Total Operating Expenses

Operating (Loss) Income

Other Expenses

Interest Expense, Net

Change in Fair Value of Warrants

Total Other Expenses

(Loss) Income Before Income Tax (Benefit) Expense

Income Tax (Benefit) Expense

Net (Loss) Income

Other Comprehensive (Loss) Income

Foreign Currency Translation

Total Comprehensive (Loss) Income

Net (Loss) Income per Share – Basic and Diluted

Weighted Average Common Shares Outstanding – Basic and Diluted

The accompanying notes are an integral part of the consolidated financial statements.

ALLIANCE ENTERTAINMENT HOLDING CORP.

(F/K/A ADARA ACQUISITION CORP.)

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ DEFICIT

YEARS ENDED DECEMBER 31, 2022 AND 2021

Class B Common Stock

Stockholders’

Equity (Deficit)

Balance – January 1, 2021

Accretion for Class A common stock to redemption amount

( 7,606,206 )

( 7,919,418 )

Cash paid in excess of fair value of private warrants

Issuance of Representative Warrants

Balance – December 31, 2021

( 4,367,476 )

( 4,367,188 )

Accretion for Class A common stock to redemption amount

Balance – December 31, 2022

( 2,414,653 )

( 2,414,365 )

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

YEARS ENDED JUNE 30, 2023 AND 2022

Comprehensive

($ in thousands)

(Loss) Income

Balances at June 30, 2021

Currency Translation Adjustment

Balances at June 30, 2022

Capital Contribution

Conversion of Treasury Stock

Reverse Recapitalization

Fair Value of Contingent Shares

Currency Translation Adjustment

Stock-based Compensation Expense

Balances at June 30, 2023

The accompanying notes are an integral part of the consolidated financial statements.

ALLIANCE ENTERTAINMENT HOLDING CORP.

(F/K/A ADARA ACQUISITION CORP.)

CONSOLIDATED STATEMENTS OF CASH FLOWS

Years Ended December 31,

($ in thousands)

June 30, 2023

June 30, 2022

Cash Flows from Operating Activities:

Adjustments to reconcile net income to net cash used in operating activities:

Change in fair value of warrant liabilities

( 4,166,900 )

( 4,297,300 )

Transaction costs incurred in connection with IPO

Interest earned on marketable securities held in Trust Account

( 1,649,169 )

Changes in operating assets and liabilities:

Prepaid expenses

Income taxes payable

Net (Loss) Income

Adjustments to Reconcile Net (Loss) Income to

Net Cash Provided by (Used in) Operating Activities:

Inventory write-down

Depreciation of Property and Equipment

Amortization of Intangible Assets

Amortization of Deferred Financing Costs (Included in Interest)

Bad Debt Expense

Deferred Income Taxes

Stock-based Compensation Expense

Gain on Disposal of Fixed Assets

Changes in Assets and Liabilities, Net of Acquisitions

Trade Receivables

Related Party Receivable

Income Taxes Payable\Receivable

Operating Lease Right-Of-Use Assets

Operating Lease Obligations

Accounts Payable

Accrued Expenses

Net cash used in operating activities

( 1,208,635 )

Net Cash Provided by (Used in) Operating Activities

Cash Flows from Investing Activities:

Investment of cash in Trust Account

( 116,150,000 )

Cash Received for Business Acquisitions, Net of Cash Acquired

Capital Expenditures

Net Cash Used in Investing Activities

( 116,150,000 )

Cash Flows from Financing Activities:

Proceeds from sale of Units, net of underwriting discounts paid

Proceeds from sale of Private Placements Warrants

Proceeds from sale of Unit Purchase Option

Proceeds from Advances from related party

Proceeds from promissory note

Repayment of promissory note – related party

Payment of offering costs

Net cash provided by financing activities

Net Change in Cash

Cash – Beginning of year

Cash – End of year

The accompanying notes are an integral part of the consolidated financial statements.

ALLIANCE ENTERTAINMENT HOLDING CORP.

(F/K/A ADARA ACQUISITION CORP.)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2022

DESCRIPTION OF ORGANIZATION AND BUSINESS OPERATIONS

Adara Acquisition Corp.

(now known as Alliance Entertainment Holding Corp.) (the “Company” or “Alliance”) was incorporated in Delaware on August 5, 2020.

The Company was formed for the purpose of effecting a merger, capital stock exchange, asset acquisition, stock purchase, reorganization or similar business combination with one or more businesses (the “Business Combination”).

The Company is not limited to a particular industry or sector for purposes of consummating a Business Combination.

The Company is an early stage and emerging growth company and, as such, the Company is subject to all the risks associated with early stage and emerging growth companies.

Payments on Financing Leases

Payments on Seller Notes

Payments on Revolving Credit Facility

( 1,092,306 )

( 1,346,442 )

Borrowings on Revolving Credit Facility

Payments on related party loans

Borrowings on related party loans

Proceeds from Financing advancements

Net Cash (Used in) Provided by Financing Activities

Net Decrease in Cash and Cash Equivalents

Net Effect of Currency Translation on Cash and Cash Equivalents

Cash, Beginning of the Period

Cash, End of the Period

Supplemental disclosure for Cash Flow Information

Cash Paid for Interest

Cash Paid for Income Taxes

Supplemental Disclosure for Non-Cash Investing and Financing Activities

Conversion of Treasury stock

Fixed Asset Financed with Debt

Capital Contribution

Business Combination:

On February 10, 2023 (the “Closing Date”), Alliance, Adara Acquisition Corp., a Delaware corporation (“Adara”), and Adara Merger Sub, Inc., a Delaware corporation (“Merger Sub”), consummated the closing of the transactions (the “Closing“) contemplated by the Business Combination Agreement, dated June 22, 2022, by and among Alliance, Adara and Merger Sub (the “Business Combination Agreement”), following their approval at a special meeting of the stockholders of Adara held on January 18, 2023 (the “Special Meeting”).

Business Prior to the Business Combination

As of December 31, 2022, the Company had not commenced any operations.

All activity for the period from August 5, 2020 (inception) through December 31, 2022 relates to the Company’s formation and the initial public offering (“Initial Public Offering”), which is described below, and subsequent to the Initial Public Offering, identifying a target company for a Business Combination.

The Company will not generate any operating revenues until after the completion of its initial Business Combination, at the earliest.

The Company generates non-operating income in the form of interest income from the marketable securities held in the Trust Account (as defined below).

On June 22, 2022, the Company, Adara Merger Sub Inc., a wholly owned subsidiary of the Company (“Merger Sub”), and Alliance Entertainment Holding Corporation (“Alliance”) entered into a Business Combination Agreement (“BCA”) related to a proposed Business Combination.

The registration statement for the Company’s Initial Public Offering was declared effective on February 8, 2021.

On February 11, 2021, the Company consummated the Initial Public Offering of 11,500,000 units (the “Units” and, with respect to the Class A common stock included in the Units sold, the “Public Shares”), which includes the full exercise by the underwriters of their over-allotment option in the amount of 1,500,000 Units, at $ 10.00 per Unit, generating gross proceeds of $ 115,000,000 which is described in Note 3.

Simultaneously with the closing of the Initial Public Offering, the Company consummated the sale of 4,120,000 warrants (the “Private Placement Warrants”) at a price of $ 1.00 per Private Placement Warrant in a private placement to Adara Sponsor LLC (the “Sponsor”), generating gross proceeds of $ 4,120,000 , which is described in Note 4.

Transaction costs amounted to $ 1,529,462 , consisting of $ 1,000,000 in cash underwriting fees, net of reimbursement, and $ 529,462 of other offering costs.

Following the closing of the Initial Public Offering on February 11, 2021, an amount of $ 116,150,000 ($ 10.10 per Unit) from the net proceeds of the sale of the Units in the Initial Public Offering and the sale of the Private Placement Warrants was placed in a trust account (the “Trust Account”), located in the United States and will be invested only in U.S.

government securities, within the meaning set forth in Section 2(a)(16) of the Investment Company Act, with a maturity of 185 days or less or in any open-ended investment company that holds itself out as a money market fund selected by the Company meeting certain conditions of Rule 2a-7 of the Investment Company Act, as determined by the Company, until the earlier of (i) the completion of a Business Combination and (ii) the distribution of the funds held in the Trust Account, as described below.

ALLIANCE ENTERTAINMENT HOLDING CORP.

(F/K/A ADARA ACQUISITION CORP.)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2022

On February 10, 2023, Alliance, Adara, and Merger Sub , consummated the closing of the transactions contemplated by the Business Combination Agreement, dated June 22, 2022, following their approval at a special meeting of the stockholders of Adara held on January 18, 2023.

Reverse recapitalization

The accompanying notes are an integral part of the consolidated financial statements.

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 July 1, 2022, the Company added Think3Fold Ltd.

to its portfolio.

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 primary warehouse facilities located in Shepherdsville, KY and Shakopee, MN.

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”), 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.

In connection with the Special Meeting and the Business Combination, holders of 11,332,830 shares of Adara Class A common stock, par value $ 0.0001 per share ( “Adara Common Stock” ), or 99.1 % of the shares with redemption rights, properly exercised their right to redeem their shares for cash at a redemption price of approximately $ 10.22 per share, for an aggregate redemption amount of $ 116,581,703 .

After giving effect to the redemption of public shares, there are currently 167,170 shares of the Company’s Class A common stock issued outstanding and there was $ 1,719,690.75 remaining balance in the trust count.

The remaining amount in the trust account was used to fund the Business Combination.

Conversion and Exchange of Equity in the Business Combination

Pursuant to the Business Combination Agreement, at the effective time of the Business Combination, Adara issued (i) 47,500,000 shares of Class A common stock of Adara (“ Company Common Stock ”) to holders of common stock of Alliance (“ Alliance Common Stock ”) and (ii) 60,000,000 shares of Class E Common stock of Adara (“ Company Class E Common Stock ”) to the Alliance Stockholders were placed in an escrow account to be released to the Alliance stockholders and converted into Company Common Stock upon the occurrence of certain Triggering Events and Merger Sub will merge with and into Alliance, with Alliance surviving the merger and becoming a wholly owned direct subsidiary of Adara.

Liquidity Capital Resources and Going Concern

As of December 31, 2022, the Company had cash of $ 17,956 not held in the Trust Account and available for working capital purposes and working capital deficit of $ 1,720,465 .

As of December 31, 2022, liquidity concerns were present.

On February 10, 2023, the Company closed its Business Combination with Alliance Entertainment Holding Corporation which historically has not presented a going concern issue.

Accordingly, as a result of the merger, the going concern has been alleviated.

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

to Alliance Entertainment Holding Corporation (the “Company”).

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.

The Merger was accounted for as a recapitalization of Legacy Alliance and the change in equity structure has been retroactively reflected in the financial statements for all periods presented.

In addition, pursuant to the Business Combination Agreement, 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.

A summary of the significant accounting policies consistently applied in the preparation of the consolidated financial statements:

Basis of Presentation

The accompanying consolidated financial statements are presented in accordance with accounting principles generally accepted in the United States of America (“GAAP”) and pursuant to the rules and regulations of the SEC.

Principles of Consolidation

The accompanying consolidated financial statements include the accounts of the Company and its wholly owned subsidiary.

All significant intercompany balances and transactions have been eliminated in consolidation.

Emerging Growth Company

The Company is an “emerging growth company,” as defined in Section 2(a) of the Securities Act, as modified by the Jumpstart Our Business Startups Act of 2012 (the “JOBS Act”), and it may take advantage of certain exemptions from various reporting requirements that are applicable to other public companies that are not emerging growth companies including, but not limited to, not being required to comply with the independent registered public accounting firm attestation requirements of Section 404 of the Sarbanes-Oxley Act, reduced disclosure obligations regarding executive compensation in its periodic reports and proxy statements, and exemptions from the requirements of holding a nonbinding advisory vote on executive compensation and stockholder approval of any golden parachute payments not previously approved.

ALLIANCE ENTERTAINMENT HOLDING CORP.

(F/K/A ADARA ACQUISITION CORP.)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2022

Further, Section 102(b)(1) of the JOBS Act exempts emerging growth companies from being required to comply with new or revised financial accounting standards until private companies (that is, those that have not had a Securities Act registration statement declared effective or do not have a class of securities registered under the Exchange Act) are required to comply with the new or revised financial accounting standards.

The JOBS Act provides that a company can elect to opt out of the extended transition period and comply with the requirements that apply to non-emerging growth companies but any such election to opt out is irrevocable.

The Company has elected not to opt out of such extended transition period which means that when a standard is issued or revised and it has different application dates for public or private companies, the Company, as an emerging growth company, can adopt the new or revised standard at the time private companies adopt the new or revised standard.

This may make comparison of the Company’s consolidated financial statement with another public company which is neither an emerging growth company nor an emerging growth company which has opted out of using the extended transition period difficult or impossible because of the potential differences in accounting standards used.

The 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.

The consolidated financial statements include the accounts of Alliance Entertainment Holding Corporation and its wholly owned subsidiaries.

Significant intercompany transactions have been eliminated in consolidation.

Liquidity and Going Concern

The accompanying consolidated financial statements have been prepared assuming the Company will continue as a going concern.

The going concern basis of presentation assumes that the Company will continue in operation one year after the date these financial statements are issued and will be able to realize its assets and discharge its liabilities and commitments in the normal course of business.

Pursuant to the requirements of the Financial Accounting Standards Board’s (the “FASB”) Accounting Standards Codification (“ASC”) Topic 205-40, Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern, management must evaluate whether there are conditions or events, considered in the aggregate, that raise substantial doubt about the Company’s ability to continue as a going concern for one year from the date these financial statements are issued.

This evaluation does not take into consideration the potential mitigating effect of management’s plans that have not been fully implemented or are not within control of the Company as of the date the financial statements are issued.

When substantial doubt about the Company’s ability to continue as a going concern exists, management evaluates whether the mitigating effect of its plans sufficiently alleviates the substantial doubt.

The mitigating effect of management’s plans, however, is only considered if both (1) it is probable that the plans will be effectively implemented within one year after the date that the financial statements are issued, and (2) it is probable that the plans, when

implemented, will mitigate the relevant conditions or events that raise substantial doubt about the Company’s ability to continue as a going concern within one year after the date that the financial statements are issued.

The Company’s principal source of liquidity is its borrowing capacity under the revolving credit facility (the “Revolver”) with Bank of America, which matures on December 31, 2023, and cash generated from operations.

The Company has suffered losses from operations for the year ended June 30, 2023, and has a working capital deficiency.

Management is in active discussions with lenders to renew the Revolver prior to its maturity.

These conditions raise substantial doubt regarding the Company’s ability to continue as a going concern for a period of at least one year from the date of issuance of these consolidated financial statements.

Management is currently evaluating cost reduction opportunities, process efficiencies, and its overall growth and diversification strategy.

If the Company is unable to get an extension of its Revolver and implement sufficient mitigation efforts, the Company may be forced to limit its business activities or be unable to continue as a going concern, which would have a material adverse effect on its results of operations and financial condition.

Revenue Recognition

The Company enters into contracts with its customers for the purchase of products in the ordinary course of business.

A contract with commercial substance exists once the Company receives and accepts a purchase order under a sales contract.

Payment terms on invoiced amounts generally range from 0 to 90 days.

Revenue from the sale and distribution of pre-recorded music, video, games, accessories, and other related products are recognized when the performance obligations under the terms of a contract with its customer are satisfied, which occurs with the transfer of control of the product.

For the majority of the Company’s products, control is transferred, and revenue is recognized when the product is shipped from the Company’s distribution center to the Company’s customers, which primarily consist of retailers.

For most of the Company’s distribution contracts, the Company is considered to be the principal to these transactions and the revenue is recognized on a gross basis, since the Company is the primary obligor for fulfilling the promise to its customers on these arrangements, has inventory risk, and has latitude in establishing prices.

Additionally, the Company ships some of its products to retailers on a consignment basis.

The Company retains ownership of its products stored at these retailers.

As the Company’s products are sold by the retailer, ownership is transferred from the Company to the retailer.

At that time, the Company invoices the retailer and recognizes revenue for these consignment transactions.

If a contract contains more than one performance obligation, the transaction price is allocated to each performance obligation based on relative standalone selling price.

Shipping and handling activities are treated as a fulfillment activity rather than a promised service, and therefore, are not considered a performance obligation.

Sales, use, value-added, and other excise taxes the Company collects concurrent with revenue producing activities are excluded from revenue.

Incidental items that are immaterial in the context of the contract are recognized as expense when incurred.

The Company applies ASC 606, Revenue from Contracts with Customers , (ASC 606) utilizing the following allowable exemptions or practical expedients:

● Portfolio approach practical expedient relative to the estimation of variable consideration.

● Shipping and handling practical expedient to account for shipping and handling activities that occur after control of the related good transfers as fulfillment activities.

● Costs of obtaining a contract practical expedient to recognize the incremental costs of obtaining a contract as an expense when incurred if the amortization period of the asset is one year or less.

● Sales taxes practical expedient to exclude sales taxes and other similar taxes from the transaction price.

● Significant financing component practical expedient

Revenue is recognized at the transaction price which the Company expects to be entitled to receive.

When determining the transaction price, the Company estimates variable consideration by applying the portfolio approach practical expedient under ASC 606.

The primary sources of variable consideration for the Company are rebate programs, incentive programs and product returns.

The rebate and incentives are recorded as a reduction to revenue at the time of the initial sale or when offered.

The Company estimates variable consideration related to products sold under its rebate and incentive programs using the expected value method, which is based on sales terms with customers, historical experience, inventory levels, volume purchases, and known changes in relevant trends in the future.

There are no material instances where variable consideration is constrained and not recorded at the initial time of sale.

Substantially all of the Company’s sales are domestic and are made to customers under agreements permitting certain limited rights of return based upon the prior months’ sales and vendor return rights.

Except for video games and vinyl sales, which are not returnable, generally it is the Company’s policy not to accept product returns that cannot be returned to the Company’s vendors.

Revenue from product sales is recognized net of estimated returns.

Sales in the pre-recorded music and video movies industry generally give certain customers the right to return products.

In addition, the Company’s suppliers generally permit the Company to return products that are in the supplier’s current product listing, except for video games and vinyl.

Based on historical returns, review of current catalog list and the change of mass merchant’s floor space and store locations carrying the Company’s products, management provides for estimated net returns at the time of sale and other specific reserves when appropriate.

This is typically done using a twelve-month average return rate by product.

The Company has determined that the nature, amount, timing, and uncertainty of revenue and cash flows are most significantly affected by the overall economic health of the consumer product industry in the United States.

Cash and Cash Equivalents

Cash equivalents include all investments with original maturities of three months or less when purchased.

The Company maintains its cash in bank deposit accounts which, at times, may exceed federally insured limits.

The Company has not experienced any losses in such accounts.

Trade Receivables, Net

The Company grants credit to customers on credit terms in the ordinary course of business.

Credit is extended based on an evaluation of a customer’s financial condition and collateral is generally not required.

Trade receivables are carried at original invoice amount less estimates made for allowances for uncollectible accounts based on a periodic review of all outstanding amounts.

Management measures all expected losses based on a forward-looking expected loss model which reflects probable losses based on historical experience, current conditions, and reasonable and supportable forecasts.

Trade receivables are written off against the allowance when they are deemed uncollectible.

Recoveries of trade receivables previously written off are recorded as a credit to the allowance for uncollectible accounts when received.

Inventory and Inventory Reserves

Inventory is stated at the lower of cost, using the weighted average cost method, or net realizable value.

Net realizable value is the estimated selling price in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation.

Excess or obsolete inventory reserves that reduce the cost basis of the assets are established when inventory is estimated to not be sellable or returnable to suppliers based on product demand and product life cycle.

Property and Equipment, Net

Property and equipment are recorded at cost less accumulated depreciation.

Depreciation and amortization are calculated using the straight-line method over the estimated useful life of the asset.

Costs of major additions and improvements are capitalized while repair and maintenance costs are charged to expense as incurred.

When items are disposed of, the cost and accumulated depreciation are eliminated from the accounts, and any gain or loss is reflected in the consolidated statements of operations.

Depreciation and Amortization

Depreciation is provided in amounts sufficient to allocate the cost of depreciable assets to operations over their estimated useful lives using the straight-line method.

The estimated useful lives are as follows:

Leasehold Improvements

Machinery and Equipment

Furniture and Fixtures

Capitalized Software

Equipment Under Capital Leases

Computer Equipment

Leasehold improvements and equipment under capitalized leases are amortized over the shorter of the useful life of the asset or the life of the lease.

Goodwill and Definite-Lived Intangible Assets, Net

Goodwill is assessed using either a qualitative assessment or quantitative approach to determine whether it is more likely than not that the fair value of the reporting unit is less than the carrying amount.

The qualitative assessment evaluates factors including macroeconomic conditions, industry-specific and company-specific considerations, legal and regulatory environments, and historical performance.

If the Company determines that it is more likely than not that the fair value of a reporting unit is less than its carrying value, a quantitative assessment is performed.

Otherwise, no further assessment is required.

The quantitative approach compares the estimated fair value of the reporting units to it carrying amount, including goodwill.

Impairment is indicated if the estimated fair value of the reporting unit is less than the carrying amount of the reporting unit, and an impairment charge is recognized for the differential.

The Company completes its annual goodwill impairment test as of June 30 each year.

For the years ended June 30, 2023 and 2022, the Company did not record any impairment.

Definite-Lived intangible assets are stated at cost, less accumulated amortization.

Amortization of customer relationships and lists is recorded using an accelerated method over the useful lives of the related assets, which range from 10 to 15 years.

Covenants not to compete, trade name and favorable leases are amortized using the straight-line method over the estimated useful lives of the related assets, which range from 5 to 15 years .

Impairment of Long-Lived Assets

Recoverability of long-lived assets, including property and equipment and certain identifiable intangible assets are evaluated whenever events or circumstances indicate that the carrying amount of an asset may not be recoverable.

Factors considered important which could trigger an impairment review include but are not limited to significant underperformance relative to historical or projected future operating results, significant changes in the manner of use of the assets or the strategy for the overall business, significant decrease in the market value of the assets and significant negative industry or economic trends.

In the event the carrying amount of the long-lived assets may not be recoverable based upon the existence of one or more of the indicators, the assets are assessed for impairment based on the estimated future undiscounted cash flows expected to result from the use of the asset and its eventual deposition.

If the carrying amount of an asset exceeds the sum of the estimated future undiscounted cash flow, an impairment loss is recorded for the excess of the asset’s carrying amount over its fair value.

There was no impairment during the years ended June 30, 2023 and 2022.

Use of Estimates

The preparation of the consolidated financial statements in conformity with GAAP requires the Company’s management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting periods.

Making estimates requires management to exercise significant judgment.

It is at least reasonably possible that the estimate of the effect of a condition, situation or set of circumstances that existed at the date of the consolidated financial statements, which management considered in formulating its estimate, could change in the near term due to one or more future confirming events.

The warrants liabilities are the Company’s most significant estimate.

Accordingly, the actual results could differ significantly from those estimates.

Offering Costs

Offering costs consist of legal, accounting, underwriting fees and other costs incurred through the consolidated balance sheet date that are directly related to the Initial Public Offering.

Offering costs associated with the Class A common stock issued were initially charged to temporary equity and then accreted to common stock subject to redemption upon the completion of the Initial Public Offering.

Offering costs amounting to $ 1,442,918 were charged to stockholders’ deficit upon the completion of the Initial Public Offering, and $ 86,544 of the offering costs was related to the warrant liabilities and charged to the consolidated statements of operations.

Class A Common Stock Subject to Possible Redemption

The Company accounts for its Class A common stock subject to possible redemption in accordance with the guidance in Accounting Standards Codification (“ASC”) Topic 480, “Distinguishing Liabilities from Equity”.

Shares of Class A common stock subject to mandatory redemption are classified as a liability instrument and are measured at fair value.

Conditionally redeemable common stock (including common stock that features redemption rights that are either within the control of the holder or subject to redemption upon the occurrence of uncertain events not solely within the Company’s control) is classified as temporary equity.

At all other times, common stock is classified as stockholders’ equity.

The Company’s Class A common stock features certain redemption rights that are considered to be outside of the Company’s control and subject to occurrence of uncertain future events.

Accordingly, at December 31, 2022 and 2021, Class A common stock subject to possible redemption is presented as temporary equity, outside of the stockholders’ deficit section of the Company’s consolidated balance sheets.

The Company recognizes changes in redemption value immediately as they occur and adjusts the carrying value of redeemable common stock to equal the redemption value at the end of each reporting period.

ALLIANCE ENTERTAINMENT HOLDING CORP.

(F/K/A ADARA ACQUISITION CORP.)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2022

At December 31, 2022 and 2021, the Class A common stock reflected in the consolidated balance sheets is reconciled in the following table:

Gross proceeds

Proceeds allocated to Public Warrants

( 5,290,000 )

Class A common stock issuance at cost

( 1,479,418 )

Accretion of carrying value to redemption value

Class A common stock subject to possible redemption, December 31, 2021

Accretion of carrying value to redemption value

Class A common stock subject to possible redemption, December 31, 2022

Warrant Liabilities

The Company accounts for the Warrants in accordance with the guidance contained in ASC 815-40-15-7D and 7F under which the Warrants do not meet the criteria for equity treatment and must be recorded as liabilities.

Accordingly, the Company classifies the Warrants as liabilities at their fair value and adjust the Warrants to fair value at each reporting period.

This liability is subject to re-measurement at each consolidated balance sheet date until exercised, and any change in fair value is recognized in the consolidated statements of operations.

The Private Warrants, Public Warrants, and the Representative Warrants for periods where no observable traded price was available are valued using a lattice model, specifically a binomial lattice.

For periods subsequent to the detachment of the Public Warrants from the Units, the Public Warrant quoted market price was used as the fair value for the Public and the Private Warrants as of each relevant date.

The Representative Warrants used the binomial lattice model as of each relevant date.

The Company accounts for income taxes under ASC 740, “Income Taxes.” ASC 740, requires the recognition of deferred tax assets and liabilities for both the expected impact of differences between the consolidated financial statements and tax basis of assets and liabilities and for the expected future tax benefit to be derived from tax loss and tax credit carry forwards.

ASC 740 additionally requires a valuation allowance to be established when it is more likely than not that all or a portion of deferred tax assets will not be realized.

As of December 31, 2022 and 2021, the Company’s deferred tax asset had a full valuation allowance recorded against it.

ASC 740- 270-25-2 requires that an annual effective tax rate be determined and such annual effective rate applied to year to date income in interim periods under ASC 740-270-30-5.

The Company’s effective tax rate was 8.24% and 0.00 % for the years ended December 31, 2022 and 2021, respectively.

The effective tax rate differs from the statutory tax rate of 21 % for the years ended December 31, 2022 and 2021, due to changes in fair value in warrant liability and the valuation allowance on the deferred tax assets.

ASC 740 also clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s consolidated financial statements and prescribes a recognition threshold and measurement process for consolidated financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return.

For those benefits to be recognized, a tax position must be more likely than not to be sustained upon examination by taxing authorities.

ASC 740 also provides guidance on derecognition, classification, interest and penalties, accounting in interim period, disclosure and transition.

The Company recognizes accrued interest and penalties related to unrecognized tax benefits as income tax expense.

There were no unrecognized tax benefits and no amounts accrued for interest and penalties as of December 31, 2022 and 2021.

The Company is currently not aware of any issues under review that could result in significant payments, accruals or material deviation from its position.

ALLIANCE ENTERTAINMENT HOLDING CORP.

(F/K/A ADARA ACQUISITION CORP.)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2022

The Company has identified the United States as its only “major” tax jurisdiction.

The Company has been subject to income taxation by major taxing authorities since inception.

These examinations may include questioning the timing and amount of deductions, the nexus of income among various tax jurisdictions and compliance with federal and state tax laws.

The Company’s management does not expect that the total amount of unrecognized tax benefits will materially change over the next twelve months.

Net Income per Common Share

The Company complies with accounting and disclosure requirements of Financial Accounting Standards Board (“FASB”) ASC Topic 260, “Earnings Per Share”.

Income and losses are shared pro rata between the two classes of shares.

Net income (loss) per common share is computed by dividing net income (loss) by the weighted average number of common stock outstanding for the period.

Accretion associated with the redeemable shares of Class A common stock is excluded from earnings per share as the redemption value approximates fair value.

The calculation of diluted income (loss) per common share does not consider the effect of the warrants issued in connection with the (i) Initial Public Offering, and (ii) the private placement since the exercise of the warrants is contingent upon the occurrence of future events.

The warrants are exercisable to purchase 9,870,000 shares of Class A common stock in the aggregate.

As of December 31, 2022 and 2021, the Company did not have any other dilutive securities or other contracts that could, potentially, be exercised or converted into common stock and then share in the earnings of the Company.

As a result, diluted net income (loss) per share of common stock is the same as basic net income (loss) per common share for the periods presented.

The following tables reflect the calculation of basic and diluted net income (loss) per common share (in dollars, except per share amounts):

Years Ended December 31,

Basic net income per common share

Allocation of net income, as adjusted

Basic weighted average shares outstanding

Basic net income per common share

Years Ended December 31,

Diluted net income per common share

Allocation of net income, as adjusted

Basic weighted average shares outstanding

Basic net income per common share

Concentration of Credit Risk

The Company has significant cash balances at financial institutions which throughout the year regularly exceed the federally insured limit of $250,000.

Any loss incurred or a lack of access to such funds could have a significant adverse impact on the Company's financial condition, results of operations, and cash flows.

ALLIANCE ENTERTAINMENT HOLDING CORP.

(F/K/A ADARA ACQUISITION CORP.)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2022

The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and revenues and expenses during the reporting period.

Actual results could differ from those estimates.

Significant estimates inherent in the preparation of the accompanying consolidated financial statements include management’s estimates of sales returns, warrants fair value, rebates, inventory valuation, 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.

Fair Value of Financial Instruments

The fair value of the Company’s assets and liabilities, which qualify as financial instruments under ASC Topic 820, “Fair Value Measurement,” approximates the carrying amounts represented in the accompanying consolidated balance sheets, primarily due to their short-term nature, except for the warrant liabilities (see Note 10).

Recent Accounting Standards

In August 2020, the FASB issued Accounting Standards Update (“ASU”) 2020-06, “Debt - Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging - Contracts in Entity’s Own Equity (Subtopic 815-40)” (“ASU 2020-06”), to simplify accounting for certain financial instruments.

ASU 2020-06 eliminates the current models that require separation of beneficial conversion and cash conversion features from convertible instruments and simplifies the derivative scope exception guidance pertaining to equity classification of contracts in an entity’s own equity.

The new standard also introduces additional disclosures for convertible debt and freestanding instruments that are indexed to and settled in an entity’s own equity.

ASU 2020-06 amends the diluted earnings per share guidance, including the requirement to use the if-converted method for all convertible instruments.

As a smaller reporting company, ASU 2020-06 is effective January 1, 2024 for fiscal years beginning after December 15, 2023 and should be applied on a full or modified retrospective basis, with early adoption permitted beginning on January 1, 2021.

The Company is currently assessing the impact, if any, that ASU 2020-06 would have on its financial position, results of operations or cash flows.

The Company has not adopted this guidance as of December 31, 2022.

Management does not believe that any recently issued, but not yet effective, accounting standards, if currently adopted, would have a material effect on the Company’s consolidated financial statements.

Derivative Financial Instruments

The Company evaluates its financial instruments to determine if such instruments are derivatives or contain features that qualify as embedded derivatives in accordance with ASC Topic 815, “Derivatives and Hedging”.

For derivative financial instruments that are accounted for as liabilities, the derivative instrument is initially recorded at its fair value on the grant date and is then re-valued at each reporting date, with changes in the fair value reported in the consolidated statements of operations.

The classification of derivative instruments, including whether such instruments should be recorded as liabilities or as equity, is evaluated at the end of each reporting period.

Derivative liabilities are classified in the consolidated balance sheet as current or non-current based on whether or not net-cash settlement or conversion of the instrument could be required within 12 months of the consolidated balance sheet date.

INITIAL PUBLIC OFFERING

Pursuant to the Initial Public Offering, the Company sold 11,500,000 Units, inclusive of 1,500,000 Units sold to the underwriters on February 11, 2021 upon the underwriters’ election to fully exercise their over-allotment option, at a price of $ 10.00 per Unit.

Each Unit consists of one share of Class A common stock and one -half of one redeemable warrant (“Public Warrant”).

Each whole Public Warrant entitles the holder to purchase one share of Class A common stock at a price of $ 11.50 per share, subject to adjustment.

ALLIANCE ENTERTAINMENT HOLDING CORP.

(F/K/A ADARA ACQUISITION CORP.)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2022

PRIVATE PLACEMENT

Simultaneously with the closing of the Initial Public Offering, the Sponsor purchased an aggregate of 4,120,000 Placement Warrants at a price of $ 1.00 per Placement Warrant, for an aggregate purchase price of $ 4,120,000 from the Company in a private placement.

Each Placement Warrant will be exercisable to purchase one share of Class A common stock at a price of $ 11.50 per share, subject to adjustment (see Note 10).

The proceeds from the sale of the Placement Warrants were added to the net proceeds from the Initial Public Offering held in the Trust Account.

If the Company does not complete a Business Combination within the Combination Period, the proceeds from the sale of the Placement Warrants held in the Trust Account will be used to fund the redemption of the Public Shares (subject to the requirements of applicable law) and the Placement Warrants will expire worthless.

RELATED PARTY TRANSACTIONS

Founder Shares

In August 2020, the Sponsor purchased 2,875,000 shares (the “Founder Shares”) of the Company’s Class B common stock for an aggregate price of $ 25,000 .

The Founder Shares included an aggregate of up to 375,000 shares subject to forfeiture to the extent that the underwriters’ over-allotment was not exercised in full or in part, so that the number of Founder Shares will equal, on an as-converted basis, approximately 20 % of the Company’s issued and outstanding shares of common stock after the Initial Public Offering.

As a result of the underwriters’ election to fully exercise their over-allotment option, no Founder Shares are currently subject to forfeiture.

The Sponsor has agreed, subject to limited exceptions, not to transfer, assign or sell any of the Founder Shares until the earlier to occur of:

(A) one year after the completion of a Business Combination and (B) subsequent to a Business Combination, (x) if the last sale price of the Class A common stock equals or exceeds $ 12.00 per share (as adjusted for stock splits, stock capitalizations, reorganizations, recapitalizations and the like) for any 20 trading days within any 30 -trading day period commencing at least 150 days after a Business Combination, or (y) the date on which the Company completes a liquidation, merger, capital stock exchange or other similar transaction that results in all of the Public Stockholders having the right to exchange their shares of common stock for cash, securities or other property.

Advances from Related Party

As of December 31, 2022, Blystone & Donaldson, LLC advanced the Company $ 30,582 .

Promissory Note — Related Party

On August 5, 2020, the Sponsor issued an unsecured promissory note to the Company, which was amended and restated on November 18, 2020 (the “Promissory Note”), pursuant to which the Company may borrow up to an aggregate principal amount of $ 600,000 .

The Promissory Note was non-interest bearing and payable on the earlier of (i) March 31, 2021 or (ii) the consummation of the Initial Public Offering.

As of December 31, 2021, there was no amounts outstanding under the Promissory Note.

No future borrowings are permitted.

On June 22, 2022, Blystone & Donaldson, LLC issued an unsecured promissory note to the Company, pursuant to which the Company may borrow up to an aggregate principal amount of $ 250,000 .

The Promissory Note was non-interest bearing and payable on the earlier of (i) closing of the Merger as described in the BCA or (ii) February 11, 2023.

As December 31, 2022, $ 250,000 was outstanding under the Promissory Note.

On June 22, 2022, Thomas Finke, LLC issued an unsecured promissory note to the Company, pursuant to which the Company may borrow up to an aggregate principal amount of $ 250,000 .

The Promissory Note was non-interest bearing and payable on the earlier of (i) closing of the Merger as described in the Business Combination Agreement (“BCA”) dated as of June 22, 2022 by and among Thomas Finke, the Company, and Adara Merger Sub Inc.

and Alliance Entertainment Holding Corporation as defined therein or (ii) February 11, 2023.

As December 31, 2022, $ 221,599 was outstanding under the Promissory Note.

ALLIANCE ENTERTAINMENT HOLDING CORP.

(F/K/A ADARA ACQUISITION CORP.)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2022

Related Party Loans

In order to finance transaction costs in connection with a Business Combination, the Sponsor or an affiliate of the Sponsor, or certain of the Company’s officers and directors may, but are not obligated to, loan the Company funds as may be required (“Working Capital Loans”).

If the Company completes a Business Combination, the Company would repay the Working Capital Loans out of the proceeds of the Trust Account released to the Company.

Otherwise, the Working Capital Loans would be repaid only out of funds held outside the Trust Account.

In the event that a Business Combination does not close, the Company may use a portion of proceeds held outside the Trust Account to repay the Working Capital Loans, but no proceeds held in the Trust Account would be used to repay the Working Capital Loans.

Except for the foregoing, the terms of such Working Capital Loans, if any, have not been determined and no written agreements exist with respect to such loans.

The Working Capital Loans would either be repaid upon consummation of a Business Combination, without interest, or, at the lender’s discretion, up to $ 1,500,000 of such Working Capital Loans may be convertible into warrants of the post-Business Combination entity at a price of $ 1.00 per warrant.

The warrants would be identical to the Placement Warrants.

As of December 31, 2022 and 2021, there were no amounts outstanding under the Working Capital Loans.

Administrative Support Agreements

The Company entered into an agreement, commencing on February 11, 2021, through the earlier of the Company’s consummation of a Business Combination and its liquidation, to pay Adara Sponsor LLC, a total of $ 10,000 per month for office space and administrative support services.

The agreement was terminated with Adara Sponsor LLC, when they moved out of the office space on June 2022.

For the years ended December 31, 2022 and 2021, the Company incurred and paid $ 50,000 and $ 105,000 in fees for these services, respectively.

The Company complies with ASC 820, Fair Value Measurements and Disclosures, which defines fair value, establishes a framework for measuring fair value in accordance with U.S.

generally accepted accounting principles and expands disclosure requirements about fair value measurements.

Under ASC 820, there are three categories for the classification and measurement of assets and liabilities carried at fair value:

Valuation based on quoted market prices in active markets for identical assets or liabilities.

Since valuations are based on quoted prices that are readily and regularly available in an active market, valuation of these products does not entail a significant degree of judgment.

Examples include publicly traded equity securities and publicly traded mutual funds that are actively traded on a major exchange or over-the-counter market.

Valuation based on quoted market prices of investments that are not actively traded or for which certain significant inputs are not observable, either directly or indirectly.

Examples include municipal bonds, where fair value is estimated using recently executed transactions, bid asked prices and pricing models that factor in, where applicable, interest rates, bond spreads and volatility.

Valuation based on inputs that are unobservable and reflect management’s best estimate of what market participants would use as fair value.

Examples include limited partnerships and private equity investments.

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 June 30, 2023, and 2022, based on the short-term nature and maturity of these instruments.

The estimated fair values of 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 June 30, 2023 and 2022 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 estimated fair value of the tangible and intangible assets acquired, and the liabilities assumed in connection with the acquisition of Think3Fold were measured using Level 2 and Level 3 inputs.

The estimated fair value of warrants, contingent shares and restricted stock awards is determined based on various valuation methodologies, including the Black-Scholes option pricing model and other appropriate valuation techniques.

These methodologies consider factors such as the exercise price, expected volatility, expected term, and risk-free interest rate.

Management evaluates all of the Company’s financial instruments, including warrants issued to purchase its Class A Common Stock, to determine if such instruments are derivatives or contain features that qualify as embedded derivatives, pursuant to ASC 480 and ASC 815-15.

The classification of derivative instruments, including whether such instruments should be recorded as liabilities or as equity, is assessed at issuance of the financial instrument and re-assessed at the end of each reporting period.

As a result of the Merger, the Company initially had 5,750,000 Public Warrants, 4,120,000 Private Placement Warrants, and 50,000 Representative Warrants issued that are exercisable to purchase shares of Class A Common Stock.

The Public Warrants qualify for the derivative scope exception under ASC 815 and are therefore presented as a component of Stockholders’ Equity on the consolidated balance sheets without subsequent fair value re-measurement.

The Private Placement Warrants and Representative Warrants are recognized as derivative liabilities in accordance with ASC 815-40.

Accordingly, the Company recognizes the Private Placement Warrants and Representative Warrants as liabilities at fair value

in the consolidated balance sheets with the warrant liabilities subject to re-measurement at each balance sheet date until exercised, and any change in fair value recognized in the consolidated statements of operations.

The Company re-computes 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.

Refer to Note 17, Warrants and Note 18, Fair Value for additional details of the Warrants and related valuation.

Earnings per Share

Basic Earnings Per Share 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 loss 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 Common Stock into which they were converted.

The following table sets forth the computation of basic and diluted net earnings (loss) per share of Common Stock for the years ended June 30, 2023, and 2022 respectively:

June 30, 2023

June 30, 2022

Net (loss) Income (in thousands)

Basic and diluted shares

Weighted-average Class A Common Stock outstanding (basic)

Weighted-average Class A Common Stock outstanding (diluted)

(Loss) Income per share for Class A Common Stock

— Basic and Diluted

There are 60,000,000 shares of contingently issuable Common Stock that were not included in the computation of basic earnings (loss) per share since the contingencies for the issuance of these shares have not been met as of June 30, 2023.

There are also 9,920,000 warrants outstanding and 260,000 restricted shares that have been excluded from diluted earnings per share because they are anti-dilutive.

Advertising Costs

Advertising costs, which consist primarily of mailers, catalogs, online marketing and other promotions, are expensed in the period in which the advertisement or promotion occurs.

Additionally, the Company maintains cooperative advertising agreements with certain vendors to include their logos and product descriptions prominently in the catalogs and calendars.

The fee revenues charged to the vendors for the cooperative advertising arrangements are recorded as a reduction of advertising expense and any excess fees are recorded as a reduction of cost of goods sold.

Advertising costs, which are included as selling, general and administrative expenses, were $ 7.9 million and $ 6.5 million for the years ended June 30, 2023 and 2022, respectively.

Deferred Financing Costs

Deferred financing costs relating to the Company’s revolving credit facility are deferred and amortized ratably over the life of the debt using the straight-line method.

Deferred financing costs are included as an addition to interest expense on the consolidated statements of operations and comprehensive income and are included in Revolving Credit Facility, Net on the Consolidated Balance Sheets.

Shipping and Handling

The Company accounts for shipping and handling activities as fulfillment activities.

As such, the Company does not evaluate shipping and handling as promised services to its customers.

Shipping and handling costs are included in cost of revenues in the accompanying consolidated statements of operations and comprehensive income.

Foreign Currency Translation and Transactions

The financial position and results of operations of the Company’s foreign subsidiary is measured using the local currency as the functional currency.

Assets and liabilities of this subsidiary are translated into United States dollars at the exchange rate in effect at each period end.

Income statement accounts are translated at the average rate of exchange prevailing during the period.

Foreign currency translation (loss) income totaled ($ 11 ) and $ 7,000 for the years ended June 30, 2023, and 2022, respectively.

The Company does not typically hedge its foreign exchange rate position.

Realized gains or losses from foreign currency transactions are included in operations as incurred.

Business Combinations — Valuation of Acquired Assets and Liabilities Assumed

The Company allocates the purchase price for each business combination, or acquired business, based upon (i) the fair value of the consideration paid and (ii) the fair value of net assets acquired, and liabilities assumed.

The determination of the fair value of net assets acquired and liabilities assumed requires estimates and judgements of future cash flow expectations for the acquired business and the allocation of those cash flows to identifiable tangible and intangible assets.

Fair values are calculated by applying estimates related to Internal Rate of Return (IRR) and Weighted Average Cost of Capital (WACC) assumptions as well as incorporating expected cash flows into industry standard valuation techniques.

Goodwill is the amount by which the purchase price consideration exceeds the fair value of tangible and intangible assets acquired, less assumed liabilities.

Intangible assets, such as customer relations and trade names, when identified, are separately recognized and amortized over their estimated useful lives, if considered definite lived.

Acquisition costs are expensed as incurred and are included in the consolidated statements of operations and comprehensive income.

The Company is a lessee in multiple noncancelable operating and financing leases.

If the contract provides the Company with the right to substantially all the economic benefits and the right to direct the use of the identified asset, it is generally considered to be or contain a lease.

Right-of-Use (ROU) assets and lease liabilities are recognized at the lease commencement date based on the present value of the future lease payments over the expected lease term.

The ROU asset is also adjusted for any lease prepayments made, lease incentives received, and initial direct costs incurred.

The lease liability is initially and subsequently recognized based on the present value of its future lease payments.

Variable payments are included in the future lease payments when those variable payments depend on an index or a rate.

Increases (decreases) to variable lease payments due to subsequent changes in an index or rate are recorded as variable lease expense (income) in the future period in which they are incurred.

The discount rate used is the implicit rate in the lease contract, if it is readily determinable, or the Company’s incremental borrowing rate.

The Company uses the incremental borrowing rate based on the information available at the commencement date for all leases.

The Company’s incremental borrowing rate for a lease is the rate of interest it would have to pay on a collateralized basis to borrow an amount equal to the lease payments under similar terms and in a similar economic environment.

The ROU asset for operating leases is subsequently measured throughout the lease term at the amount of the remeasured lease liability (i.e., present value of the remaining lease payments), plus unamortized initial direct costs, plus (minus) any prepaid (accrued) lease payments, less the unamortized balance of lease incentives received, and any impairment recognized.

Operating leases with fluctuating lease payments:

For operating leases with lease payments that fluctuate over the lease term, the total lease costs are recognized on a straight-line basis over the lease term.

The ROU asset for finance leases is amortized on a straight-line basis over the lease term.

For all underlying classes of assets, the Company has elected to not recognize ROU assets and lease liabilities for short-term leases that have a lease term of 12 months or less at lease commencement and do not include an option to purchase the underlying asset that the Company is reasonably certain to exercise.

Leases containing termination clauses in which either party may terminate the lease without cause and the notice period is less than 12 months are generally deemed short-term leases with lease costs included in short-term lease expense.

The Company recognizes short-term lease cost on a straight-line basis over the lease term.

Variable Interest Entity

The Company evaluates its ownership, contractual, and other interests in entities to determine if it has any variable interest in a variable interest entity (VIE).

These evaluations are complex, involve judgment, and the use of estimates and assumptions based on available historical information, among other factors.

If the Company determines that an entity in which it holds a contractual, or ownership, interest is a VIE and that the Company is the primary beneficiary, the Company consolidates such entity in its consolidated financial statements.

The primary beneficiary of a VIE is the party that meets both of the following criteria:

(i) has the power to make decisions that most significantly affect the economic performance of the VIE;

and (ii) has the obligation to absorb losses or the right to receive benefits that in either case could potentially be significant to the VIE.

Management performs ongoing reassessments of whether changes in the facts and circumstances regarding the Company’s involvement with a VIE will cause the consolidation conclusion to change.

Changes in consolidation status are applied prospectively.

The Company evaluated its transactions with a related party included in Note 12 and concluded that the arrangements do not result in variable interests and do not require consolidation of any of the related party entities.

Concentrations

June 30, 2023

June 30, 2022

June 30, 2023

June 30, 2022

June 30, 2023

June 30, 2022

June 30, 2023

June 30, 2022

* Less than 10%

Operating segments are defined as components of an enterprise where discrete financial information is available and evaluated regularly by the chief operating decision maker or decision-making group, in deciding how to allocate resources and in assessing performance.

The Company’s chief operating decision makers manage the business, allocate resources, and assess performance on a consolidated basis.

Accordingly, the Company has one operating and reportable segment.

Accounting Pronouncements

Recently Issued Accounting Pronouncements

In August 2020, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2020-06, Debt—Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging— Contracts in Entity’s Own Equity (Subtopic 815-40) to improve, simplify, and enhance the financial reporting requirements for convertible instruments and contracts in an entity’s own equity.

ASU 2020-06 is effective for public business entities that meet the definition of an SEC filer, excluding entities eligible to be smaller reporting companies as defined by the SEC, for fiscal years beginning after December 15, 2021, including interim periods within those fiscal years.

For all other entities, the amendments are effective for fiscal years beginning after December 15, 2023, including interim periods within those fiscal years.

The Company adopted this ASU using the modified retrospective method on July 1, 2022.

The adoption did not result in any cumulative adjustment to the opening balance of retained earnings.

Recently Issued but Not Yet Adopted Accounting Pronouncements

In October 2021, The FASB issued ASU No.

2021-08, Accounting for contract Assets and Contract Liabilities from contracts with customers (Topic 805) (“ASU 2021-08”).

ASU 2021-08 requires an acquirer in a business combination to recognize and measure contract assets and contract liabilities (deferred revenue) from acquired contracts using the revenue recognition guidance in Topic 606.

At the acquisition date, the acquirer applies the revenue model as if it had originated the acquired contracts.

ASU 2021-08 is effective for annual periods beginning after December 15, 2022, including interim periods within those fiscal years.

Adoption of ASU 2021-08 should be applied prospectively.

Early adoption is also permitted, including adoption in an interim period.

If early adopted, the amendments are applied retrospectively to all business combinations for which the acquisition date occurred during the fiscal year of adoption.

The Company is currently evaluating the impact of ASU 2021-08 on its consolidated financial statements.

Trade Receivables, Net

Trade Receivables, Net consists of the following at:

($ in thousands)

June 30, 2023

June 30, 2022

Trade Receivables

Allowance for Credit Losses

Sales Returns Reserve, Net

Customer Rebate and Discount Reserve

Total Allowances

Trade Receivables, Net

Trade Receivables, Net as of July 1, 2021 were $ 111.3 million.

Inventory, Net

The Company completed an evaluation of the net realizable value of our inventory during the twelve months ended June 30, 2023.

As a result of this evaluation, the Company recorded a $ 10.8 million inventory write down to reflect it at its net realizable value, which is recorded in cost of revenue in the consolidated financial statements.

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

($ in thousands)

June 30, 2023

June 30, 2022

Inventory, Net

Other Current and Long-Term Assets

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

($ in thousands)

June 30, 2023

June 30, 2022

Other Assets - Current

Prepaid Intellectual Property

Prepaid Insurance

Prepaid Acquisitions

Prepaid Freight

Prepaid Manufacturing Components

Prepaid Maintenance

Prepaid Shipping Supplies

Total Other Assets - Current

Other Long-Term Assets

Income tax receivable

Total Other Long-Term Assets

Property and Equipment, Net

Property and Equipment, Net consists of the following at:

($ in thousands)

June 30, 2023

June 30, 2022

Property and Equipment

Leasehold Improvements

Machinery and Equipment

Furniture and Fixtures

Capitalized Software

Equipment Under Capital Leases

Computer Equipment

Construction in Progress

Accumulated Depreciation and Amortization

Total Property and Equipment, Net

Depreciation Expense for the year ended June 30, 2023, and 2022 was $ 2.2 million and $ 3.1 million respectively.

Goodwill and Intangibles, Net

($ in thousands)

Goodwill, as of June 30, 2022

Additions from business acquisition

Goodwill, as of June 30, 2023

Intangibles, Net consists of the following at:

($in thousands)

June 30, 2023

June 30, 2022

Customer Relationships

Trade Name - Alliance

Covenant Not to Compete

Mecca Customer Relationships

Customer List

Accumulated Amortization

Intangibles, Net

During the year ended June 30, 2023, and 2022, the Company recorded amortization expense of $ 4.4 million and $ 5.2 million, respectively.

Expected amortization over the next five years and thereafter, as of June 30, 2023, is as follows:

($ in thousands)

Intangible Assets

Year Ended June 30

Total Expected Amortization

Accrued Expenses

Accrued Expenses consists of the following at:

($ in thousands)

June 30, 2023

June 30, 2022

Marketing Funds Accruals

Payroll and Payroll Tax Accruals

Accruals for Other Expenses

Total Accrued Expenses

Revolving Credit Facility

The Company has a Revolving Credit Facility with Bank of America (the “Credit Facility”).

The Credit Facility was increased from $ 175 million to $ 225 million on June 30, 2022, but was reduced to $ 175 million on June 30, 2023, in connection with Amendment No.

12, as defined below.

The Credit Facility carries a variable annual interest rate equal to the higher of the Prime rate, Federal Funds rate plus .5 % or Bank of America Libor rate plus 2 %, up to January 1, 2022, and SOFR plus a spread of 2.11 % thereafter.

The Company executed an amendment to its Credit Facility on January 24, 2022, (retroactive to January 1, 2022), to transition the interest rate benchmark from Libor to a Secured Overnight Financing Rate (SOFR).

The effective interest rate on the revolver using SOFR for the year ended June 30, 2023, was 6.00 % (SOFR plus a spread of 2.11 %).

The effective interest rate for the year ended June 30, 2022, was 3.61 %.

All assets (with certain capitalized lease exceptions) and interest in the assets of the Company are pledged as collateral under the Credit Facility.

The Credit Facility, which had its original maturity on September 29, 2023, was extended for 93-days in connection with Amendment No.

13, as defined below.

Management is in active discussions with lenders to renew the Credit Facility.

The Credit Facility contains certain financial covenants with which the Company is required to comply.

Failure to comply with the financial covenants contained in the Credit Facility could result in an event of default.

An event of default, if not cured or waived,

would permit acceleration of any outstanding indebtedness under the Credit Facility.

The Company obtained a waiver for non-compliance with one non-financial covenant related to its delivery of the monthly financial statements and compliance certificates for the periods pertaining to June 30, 2022, July 31, 2022, and August 31, 2022.

These non-compliances resulted in events of default under the Revolving Credit Facility and accordingly, the Credit Facility was classified as a current liability as of June 30, 2022.

On April 21, 2023, certain subsidiaries of the Company, as Borrowers thereunder (the “Borrowers”), entered into an Amendment Number Twelve and Waiver (“Amendment No.

12”) to the Credit Facility.

Amendment No.

12 provides for the waiver by Bank of America and the Required Lenders (as defined in the Credit Facility) of certain specified events of default under the Credit Facility, including the failure by the Borrowers to meet the Fixed Charge Coverage Ratio covenant requirement for the twelve trailing months ended November 30, 2022, December 31, 2022, January 31, 2023 and February 28, 2023 and certain other non-financial covenant breaches, and modifies the Credit Facility to, among other things, (i) suspend the Fixed Charge Coverage Ratio covenant requirement until the first calendar month end for which the Borrowers are in compliance with such requirement (the “Fixed Charge Coverage Compliance Date”), and (ii) add an additional covenant requiring the Borrowers to maintain specified minimum levels of EBITDA, which requirement will remain in effect until the Fixed Charge Coverage Compliance Date.

Pursuant to Amendment No.

12, the Borrowers agreed to pay a waiver fee in the amount of approximately $ 180,000 .

On September 13, 2023, the Borrowers entered into Amendment Number Thirteen and Waiver (“Amendment No.

13”) to the Credit Facility.

Amendment No.

13 provides for the waiver by Bank of America and the Required Lenders (as defined in the Credit Facility) of certain specified events of default under the Credit Facility, as of June 30, 2023 and thereafter, including a favored Equipment Lease Guaranty with Fifth Third Bank and short-term loans known as Ogilvie Loan Transactions ranging from $ 7.6 million to $ 17.0 million during the months of June, July and August, 2023 (Note 12).

The parties acknowledge these are breaches of the covenants of the Credit Facility;

however, the Borrowers have requested, and the Required Lenders have agreed, to waive the Specified Events of Default and amend the Credit Facility Agreement to extend the Revolver Termination Date for a period of 93 days to December 31, 2023.

Availability under the Credit Facility is limited by the Company’s borrowing base calculation, as defined in the Credit Agreement.

In addition, there is a commitment fee of 0.25 % for unused credit line with fees for the twelve months ended June 30, 2023, and 2022 of $ 147,000 and $ 141,000 , respectively.

Availability at June 30, 2023, was approximately $ 2 million with an outstanding revolver balance of $ 133 million.

Availability at June 30, 2022, was $ 48 million with an outstanding revolver balance of $ 136 million.

Revolving Credit Facility, net consists of the following at:

($ in thousands)

June 30, 2023

June 30, 2022

Outstanding Balance

Deferred Finance Costs

Revolving Credit Facility, Net

Employee Benefits

Company Health Plans

The Company sponsors the Alliance Health & Benefits Plan (AHBP) consisting of the following plans:

self-insured medical (PPO and HDHP), dental (PPO and HMO), vision, life Insurance, and short & long-term disability.

The medical insurance is self-insured to a maximum company exposure of $ 225,000 per individual occurrence, at which time a stop loss policy covers the balance of covered claims.

The Company contributes various percentages to different levels of premium coverage.

As of June 30, 2023, the Company fully accrued for estimated run out exposure on a mature claim basis, as provided and calculated by our plan administrator.

The Dental insurance HMO is self-insured to a maximum per individual procedure based on a published schedule which measures exposure.

The PPO policy is fully insured.

The Company contributes various percentages to different levels of premium coverage.

As of June 30, 2023, the Company was fully accrued for estimated run out exposure on a mature claim basis, as provided and calculated by the plan administrator.

The vision plan, life insurance plan, and short and long-term disability plans are fully insured, sponsored by the Company and premiums are paid by the employer and employee based on various Board approved schedules.

At June 30, 2023 and June 30, 2022, the accrued estimated run out exposure totaled approximately $ 218,000 and $ 218,000 , respectively, for the medical and dental insurance plans.

Accrued estimated runout exposure is included in accrued expenses on the consolidated balance sheets.

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 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 $ .50 of every dollar up to 4 % of contribution percentage.

The Company conducts a retirement plan review on an annual basis.

The Company accounts for income taxes under an asset and liability approach that requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been recognized in the Company’s consolidated financial statements or tax returns as well as tax credits carry forward.

In estimating future tax consequences, the Company generally considers all expected future events other than enactments of changes in the tax laws or rates.

Valuation allowances are established as necessary to reduce deferred tax assets to an amount more likely than not to be realized.

The Company's policy on income statement classification of interest and penalties related to income tax obligations is to include such items as part of total interest expense and other expense, respectively.

As of June 30, 2023, and 2022, the Company did not have any material uncertain tax positions and thus has not recognized any interest or penalties in these consolidated financial statements.

The Federal income tax return remains open for examination by the U.S.

tax authorities for all years subsequent to 2019.

In addition, due to the Florida tax examination, tax years 2008-2016 also remains open.

Domestic income (loss) before income taxes and details of the income tax expense (benefit) are as follows:

Year Ended June 30

($ in thousands)

Income Tax (Benefit) Expense:

Total Current

Total Deferred

Income Tax (Benefit) Expense

The items accounting for the difference between income taxes computed at the U.S.

federal statutory income tax rate and the income tax expense (benefit) at the effective tax rate for each of the years are as follows:

Year Ended June 30

($ in thousands)

Federal Income Tax Provision at Statutory Rate

State Taxes, Net of Federal Benefits

Meals and Entertainment

Foreign Derived Intangible Income

Immaterial income tax out-of-period adjustment

Income Tax (Benefit) Expense

Deferred income taxes reflect the net tax effects of temporary differences between the amount of assets and liabilities for accounting purposes and the amounts used for tax purposes.

The components of deferred taxes consist of the following (amounts in thousands):

($in thousands)

June 30, 2023

June 30, 2022

Deferred Tax Assets:

Other Deferred Tax Assets (ICDISC)

Net Operating Losses

Section 248 Organization Costs

Accruals Not Currently Deductible

Lease Liability

Total Deferred Tax Assets

Deferred Tax Liabilities:

Accruals Not Currently Deductible

Property and Equipment

Operating Lease Assets

Goodwill/Intangibles

Total Deferred Tax Liabilities

Net Deferred Tax Asset (Liability)

As of June 30, 2023, 2022 and 2021, the Company had recorded no unrecognized tax benefits and, therefore, no accrued interest or penalties for unrecognized tax positions.

In addition, the Company is under examination by the Florida tax authorities.

These proceedings may lead to adjustments or proposed adjustments to their taxes or provisions for uncertain tax provisions.

The Company believes that it would prevail under such examination and, accordingly, has not recorded a provision for uncertain tax positions.

The Company evaluates deferred tax assets each period for recoverability.

The Company records a valuation allowance for assets that do not meet the threshold of “more likely than not” to be realized in the future.

To make that determination, the Company evaluates the likelihood of realization based on the weight of all positive and negative evidence available.

As of June 30, 2023 and 2022, The Company has not recorded a valuation allowance.

The Company will reevaluate this determination quarterly and record a tax expense if and when future evidence requires a valuation allowance.

As of June 30, 2023, the Company had federal net operating loss carryforwards ("NOLs") of $ 46.4 million and state NOLs of $ 40.1 million.

Of these carryforwards, approximately $ 40.4 million will expire, if not utilized, in various years through 2043.

The remaining carryforwards have no expiration.

The Internal Revenue Code of 1986, as amended, imposes restrictions on the utilization of net operating losses and certain credits in the event of an “ownership change” of a corporation.

Accordingly, a company’s ability to use net operating losses and certain credits may be limited as prescribed under.

The federal and state net operating loss and credit carryforwards may be subject to significant limitations under Sections 382 and 383 of the Internal Revenue Code (Code) and similar provisions of state law.

These Code sections limit the federal net operating loss and credit carryforwards that may be used in any year in the event of an “ownership change.” A Section 382 “ownership change” generally occurs if one or more shareholders or groups of shareholders, who own at least 5% of the Company’s stock, increase their ownership by more than 50 percentage points over their lowest ownership percentage within a rolling three year period.

The Company may experience one or more Section 382 “ownership changes”.

If so, the Company may lose some or all of the tax benefits of its NOLs and tax credits.

Commitments and Contingencies

Risks and Uncertainties

Management continues to evaluate the impact of the COVID-19 pandemic and has concluded that while it is reasonably possible that the virus could have a negative effect on the Company’s financial position, results of its operations and/or search for a target company, the specific impact is not readily determinable as of the date of these consolidated financial statements.

The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.

In February 2022, the Russian Federation and Belarus commenced a military action with the country of Ukraine.

As a result of this action, various nations, including the United States, have instituted economic sanctions against the Russian Federation and Belarus.

Further, the impact of this action and related sanctions on the world economy is not determinable as of the date of these consolidated financial statements.

The specific impact on the Company’s financial condition, results of operations, and cash flows is also not determinable as of the date of these consolidated financial statements.

Inflation Reduction Act of 2022

On August 16, 2022, the Inflation Reduction Act of 2022 (the “IR Act”) was signed into federal law.

The IR Act provides for, among other things, a new U.S.

federal 1% excise tax on certain repurchases of stock by publicly traded U.S.

domestic corporations and certain U.S.

domestic subsidiaries of publicly traded foreign corporations occurring on or after January 1, 2023.

The excise tax is imposed on the repurchasing corporation itself, not its shareholders from which shares are repurchased.

The amount of the excise tax is generally 1% of the fair market value of the shares repurchased at the time of the repurchase.

However, for purposes of calculating the excise tax, repurchasing corporations are permitted to net the fair market value of certain new stock issuances against the fair market value of stock repurchases during the same taxable year.

In addition, certain exceptions apply to the excise tax.

Department of the Treasury (the “Treasury”) has been given authority to provide regulations and other guidance to carry out and prevent the abuse or avoidance of the excise tax.

ALLIANCE ENTERTAINMENT HOLDING CORP.

(F/K/A ADARA ACQUISITION CORP.)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2022

Any redemption or other repurchase that occurs after December 31, 2022, in connection with a Business Combination, extension vote or otherwise, may be subject to the excise tax.

Whether and to what extent the Company would be subject to the excise tax in connection with a Business Combination, extension vote or otherwise would depend on a number of factors, including (i) the fair market value of the redemptions and repurchases in connection with the Business Combination, extension or otherwise, (ii) the structure of a Business Combination, (iii) the nature and amount of any “PIPE” or other equity issuances in connection with a Business Combination (or otherwise issued not in connection with a Business Combination but issued within the same taxable year of a Business Combination) and (iv) the content of regulations and other guidance from the Treasury.

In addition, because the excise tax would be payable by the Company and not by the redeeming holder, the mechanics of any required payment of the excise tax have not been determined.

The foregoing could cause a reduction in the cash available on hand to complete a Business Combination and in the Company’s ability to complete a Business Combination.

The Company is permitted to use interest earned on the proceeds placed in the trust account to pay taxes, which could include any excise tax due under the IR Act on any redemptions or stock buybacks by Adara.

Registration Rights

Pursuant to a registration rights agreement entered into on February 8, 2021, the holders of the Founder Shares, Placement Warrants and warrants that may be issued upon conversion of Working Capital Loans (and any Class A common stock issuable upon the exercise of the Placement Warrants and warrants that may be issued upon conversion of Working Capital Loans and upon conversion of the Founder Shares) are entitled to registration rights pursuant to a registration rights agreement requiring the Company to register such securities for resale (in the case of the Founder Shares, only after conversion to the Company’s Class A common stock).

The holders of the majority of these securities are entitled to make up to three demands, excluding short form demands, that the Company register such securities.

In addition, the holders have certain “piggy-back” registration rights with respect to registration statements filed subsequent to the completion of a Business Combination and rights to require the Company to register for resale such securities pursuant to Rule 415 under the Securities Act.

The registration rights agreement does not contain liquidated damages or other cash settlement provisions resulting from delays in registering securities.

The Company will bear the expenses incurred in connection with the filing of any such registration statements.

Business Combination Agreement

On February 10, 2023, Alliance, Adara, and Merger Sub, consummated the closing of the transactions contemplated by the Business Combination Agreement, dated June 22, 2022, by and among Alliance, Adara and Merger Sub, following their approval at a special meeting of the stockholders of Adara held on January 18, 2023.

On June 22, 2022, the Company, Merger Sub and Alliance entered into the Business Combination Agreement, pursuant to which the Company and Alliance will consummate the Business Combination.

The Business Combination Agreement contains customary representations and warranties, covenants, closing conditions, termination fee provisions and other terms relating to the Merger and the other transactions contemplated thereby.

Pursuant to the BCA, Merger Sub will merge with and into Alliance, with Alliance being the surviving entity (the “Merger”).

The Merger is to become effective by the filing of a certificate of merger with the Secretary of State of the State of Delaware, in accordance with the relevant provisions of the Delaware General Corporation Law and mutually agreed by the parties and will be effective immediately upon such filing or upon such later time as may be agreed by the parties and specified in such certificate of merger (such time, “Effective Time”).

The parties will hold the closing immediately prior to such filing of a certificate of merger, on the closing date.

The Effective Time shall occur as promptly as practicable but in no event later than three business days after the satisfaction or, if permissible, waiver of the conditions to the completion of the Business Combination set forth in the BCA (other than those conditions that by their nature are to be satisfied at closing, provided that the occurrence of the closing shall remain subject to the satisfaction or, if permissible, waiver at the closing).

ALLIANCE ENTERTAINMENT HOLDING CORP.

(F/K/A ADARA ACQUISITION CORP.)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2022

At the Effective Time, by virtue of the Merger and without any action on the part of Adara, Merger Sub, Alliance or the holders of any of Alliance’s securities:

Each share of Alliance common stock issued and outstanding immediately prior to the Effective Time will be cancelled and automatically converted into the right to receive the number of shares of the Company surviving the Business Combination (the “Combined Company Common Stock”) equal to the Exchange Ratio and

No certificates or scrip or shares representing fractional shares of Combined Company Common Stock shall be issued upon the exchange of Alliance common stock and such fractional share interests will not entitle the owner thereof to vote or to have any rights of a stockholder of Adara or a holder of shares of Combined Company Common Stock.

In lieu of any fractional share of Combined Company Common Stock to which each holder of Alliance common stock would otherwise be entitled, the fractional share shall be rounded up or down to the nearest whole share of Combined Company Common Stock, with a fraction of 0.5 rounded up.

No cash settlements shall be made with respect to fractional shares eliminated by rounding.

At the closing, the Company will also issue to the Alliance stockholders shares of a to be formed Class E Common Stock (the ”Contingent Consideration Shares”) which shall be placed into an escrow account pursuant to the Contingent Consideration Shares Agreement and shall not be released from escrow over a ten-year period unless and until they are earned as a result of the occurrence of the applicable triggering event as follows:

20,000,000 Contingent Consideration Shares will be earned upon the occurrence of triggering event I prior to the five-year anniversary of the closing;

20,000,000 Contingent Consideration Shares will be earned upon the occurrence of triggering event II prior to the seven-year anniversary of the closing;

and 20,000,000 Contingent Consideration Shares will be earned upon the occurrence of triggering event III prior to the ten-year anniversary of the closing.

Upon the occurrence of a triggering event, the Contingent Consideration Shares released from the escrow shall automatically convert into an equal number of shares of Combined Company Common Stock.

Pursuant to a letter agreement dated March 17, 2022, as amended, ThinkEquity, an Adara Initial Stockholder, will receive a financial advisory fee for serving as Adara’s financial advisor in connection with the Business Combination in an amount equal to 3.5 % of the net funds held in the Trust Account after giving effect to redemptions by Adara Public Stockholders, which shall be due and payable in immediately available funds on the closing date.

STOCKHOLDERS’ DEFICIT

Preferred Stock — The Company is authorized to issue 1,000,000 shares of preferred stock with a par value of $ 0.0001 per share with such designations, voting and other rights and preferences as may be determined from time to time by the Company’s board of directors.

At December 31, 2022 and 2021, there were no shares of preferred stock issued or outstanding.

Class A Common Stock — The Company is authorized to issue 100,000,000 shares of Class A common stock with a par value of $ 0.0001 per share.

Holders of Class A common stock are entitled to one vote for each share.

At December 31, 2022 and 2021, there were 11,500,000 of Class A common stock issued and outstanding subject to possible redemption which are presented as temporary equity.

Class B Common Stock — The Company is authorized to issue 10,000,000 shares of Class B common stock with a par value of $ 0.0001 per share.

Holders of Class B common stock are entitled to one vote for each share.

At December 31, 2022 and 2021, there were 2,875,000 shares of Class B common stock issued and outstanding.

Holders of Class A common stock and holders of Class B common stock will vote together as a single class on all matters submitted to a vote of the Company’s stockholders except as otherwise required by law.

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 June 30, 2023, and June 30, 2022.

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 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.)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2022

The shares of Class B common stock will automatically convert into Class A common stock at the time of a Business Combination on a one-for-one basis, subject to adjustment.

In the case that additional shares of Class A common stock, or equity-linked securities, are issued or deemed issued in excess of the amounts offered in this prospectus and related to the closing of a Business Combination, the ratio at which shares of Class B common stock shall convert into shares of Class A common stock will be adjusted (unless the holders of a majority of the outstanding shares of Class B common stock agree to waive such adjustment with respect to any such issuance or deemed issuance) so that the number of shares of Class A common stock issuable upon conversion of all shares of Class B common stock will equal, in the aggregate, on an as-converted basis, 20 % of the sum of the total number of all shares of common stock outstanding upon completion of the Initial Public Offering plus all shares of Class A common stock and equity-linked securities issued or deemed issued in connection with a Business Combination (excluding any shares or equity-linked securities issued, or to be issued, to any seller in a Business Combination, any private placement-equivalent warrants and their underlying securities issued to the Sponsor or its affiliates upon conversion of loans made to the Company).

The Company cannot determine at this time whether a majority of the holders of its Class B common stock at the time of any future issuance would agree to waive such adjustment to the conversion ratio.

WARRANT LIABILITIES

Warrants — At December 31, 2022 and 2021, there were 5,750,000 Public Warrants, 4,120,000 Private Placement Warrants and 50,000 Representatives Warrants issued and outstanding.

The Public Warrants may only be exercised for a whole number of shares.

No fractional warrants will be issued upon separation of the Units and only whole warrants will trade.

The Public Warrants will become exercisable on the later of (a) 30 days after the completion of a Business Combination and (b) 12 months from the closing of the Initial Public Offering.

The Public Warrants will expire five years after the completion of a Business Combination or earlier upon redemption or liquidation.

f/k/a Alliance Acquisition Corp., Alliance 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 the Sponsor, alleging breaches of fiduciary duties by purportedly failing to disclose certain information in connection with the Business Combination and by approving the Business Combination.

We intend to vigorously defend the lawsuit.

There can be no assurance, however, that we will be successful.

The Company has accrued $ 150,000 as of June 30, 2023, based on the expected loss.

Related Party Transactions

Interest-Charge Domestic International Sales Corporation (“IC-DISC”)

The Company had an affiliate, My Worldwide Market Place, Inc.

which was an IC-DISC and was established February 12, 2013.

The IC-DISC was owned by the same shareholders of the Company, pre-Merger.

Effective December 31, 2022, the IC-DISC was discontinued and there will be no future accruals or commissions paid out.

The IC-DISC was organized to manage sales to certain qualified customers and receive commissions from the Company for this activity.

The commissions expenses were $ 2.8 million and $ 9.9 million for the twelve months ended June 30, 2023, and 2022, respectively.

The commission was determined under formulas and rules defined in the law and regulations of the US tax code, and under these regulations, the commission was deductible by the Company and results in a specified profit to the IC-DISC.

This net profit was not subject to federal income tax.

The IC-DISC distributed the profit to its stockholders, who were taxed on the income as a dividend.

In December 2022, the owners of the IC-DISC elected to forgive the commissions earned for the twelve months ended December 31, 2022.

The forgiveness of $ 6.6 million was recorded as a deemed capital contribution by the Company Stockholders.

Captive Insurance Policies

Bruce Ogilvie, Executive Chairman and a principal stockholder of Alliance, and Jeff Walker, Chief Executive Officer, a director, and a principal stockholder of Alliance, established two insurance companies:

Airlie Protection Ins.

and Protection for You Ins.

These insurance companies insured the general assets, liabilities, and claims of Alliance through March 30, 2022, and were not renewed for future periods.

Premium payments were allowed based on the Loan Agreement dated February 21, 2017.

The Company was not a guarantor and did not have exposure in the event of a loss.

Total captive policy expenses for the year ended June 30, 2023, and 2022, were $ 0.0 million and $ 1.6 million, respectively.

Other Related Party Transactions

During the year ended June 30, 2023, two promissory notes of approximately $ 0.25 million were outstanding between Adara and two of its then shareholders to provide cash to pay operating costs.

The notes do not accrue interest and were payable no earlier than when the Merger closes or February 10, 2023.

On June 30, 2023, approximately $ 0.50 million was outstanding under the Promissory Note.

During the twelve-month periods ended June 30, 2023, and 2022, the Company had sales to a related party company owned by the Company’s shareholders of $ 16.8 million, and $ 7.5 million, respectively.

During the same periods, the Company had costs incurred with another related party company in the amount of $ 8.3 million and $ 11.4 million, respectively.

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 year Alliance had distribution revenue in the amount of $ 0.22 million.

As described in Note 8, the Company borrowed approximately $ 7.6 million from Bruce Ogilvie on June 6, 2023, and repaid it in full on June 28, 2023.

On July 3, 2023, the Company entered into a $ 17 million line of credit with Bruce Ogilvie (the “Ogilvie 2023 Line of Credit”), whereas it borrowed $ 10 million on that date, and $ 5 million on July 10, 2023.

These borrowings were paid in full on July 26, 2023.

On August 10, 2023, the Company borrowed $ 17 million.

As of September 27, 2023, the amount outstanding under the Ogilvie 2023 Line of Credit amounts to $ 10 million.

The Company leases offices and warehouses, computer equipment and vehicles.

Certain operating leases may contain one or more options to renew.

The renewal terms can extend the lease term from one to 13 years .

The exercise of lease renewal options is at the Company’s sole discretion.

Renewal option periods are included in the measurement of the ROU asset and lease liability when the exercise is reasonably certain to occur.

The depreciable lives of assets and leasehold improvements are limited by the expected lease term, unless there is a transfer of title or purchase option reasonably certain of exercise.

The Company’s lease agreements do not contain any material residual value guarantees or material restrictive covenants.

Payments due under the lease contracts include fixed payments plus, may include variable payments.

The Company’s office space leases require it to make variable payments for the Company’s proportionate share of the building’s property taxes, insurance, and common area maintenance.

These variable lease payments are not included in lease payments used to determine the lease liability and are recognized as variable costs when incurred.

Fixed payments may contain predetermined fixed rent escalations.

Operating leases are included in the following asset and liability accounts on the Company’s Balance Sheet:

Operating Lease Right-of-Use Assets, Current Portion of Operating Lease Obligations, and Noncurrent Operating Lease Obligations.

ROU assets and liabilities arising from finance leases are included in the following asset and liability accounts on the Company’s Consolidated Balance Sheet:

Property & Equipment - Net, Current Portion of Finance Lease Obligation, and Noncurrent Finance Lease Obligations.

Components of lease expense were as follows for the twelve months ended June 30, 2023, and 2022:

Lease Cost ($ in thousands)

Finance Lease Cost:

Amortization of Right of Use Assets

Interest on lease liabilities

Operating Lease Cost

Short - Term Lease Cost

Variable Lease Cost

Total Lease Cost

Other Information ($ in thousands)

Cash paid for amounts included in the measurement of lease liabilities:

Operating cash flows from finance leases

Operating cash flows from operating leases

Financing cash flows from finance leases

Right of use assets obtained in exchange for new finance lease liabilities

Right of use assets obtained in exchange for new operating lease liabilities

Net Right of use asset remeasurement

Weighted average remaining lease term - finance leases (in Years)

Weighted average remaining lease term - operating leases (in Years)

Weighted average discount rate - finance leases

Weighted average discount rate - operating leases

Maturities of operating and finance lease liabilities as of June 30, 2023 are as follows:

($ in thousands)

Operating Leases

Finance Leases

Total Lease Payments

Less Imputed Interest

Business Acquisition

On July 1, 2022, Alliance purchased 100 % of the stock of Think3Fold, a collectibles distribution company for contingent consideration with a fair value of zero at the acquisition date.

The transaction expanded and diversified the Company’s portfolio of products and enabled scale and fixed cost leverage.

The results of operations of the acquired entity are included in the Consolidated Financial Statements from July 1, 2022, through June 30, 2023.

The Company recognized $ 694,000 of acquisition-related costs that were expensed in year ended June 30, 2023.

These costs are included in the consolidated statements of operations and comprehensive income within transaction costs.

Think3Fold revenue and earnings included in the Company’s consolidated statements of operations for the periods July 1, 2022, through June 30, 2023, are as follows:

($ in thousands)

June 30, 2023

The company has not presented pro forma financial information for the acquisition of Think3Fold in accordance with ASC 805, as historical financial information was not available in a reliable format and because the omission of such information is considered immaterial to the consolidated financial statements as a whole.

As part of the Think3Fold acquisition, a contingent consideration, or earn-out, arrangement was established.

The contingent consideration is contingent upon the achievement of certain predefined performance milestones from July 1, 2022, to June 30, 2025.

The fair value of the contingent consideration was zero at the acquisition date and as of June 30, 2023.

Any subsequent changes in the fair value of the contingent consideration will be accounted for as an adjustment to the statement of operations and comprehensive (loss) income.

The Think3Fold acquisition was treated for accounting purposes as a purchase of Think3Fold using the acquisition method of accounting in accordance with ASC 805, Business Combination.

Under the acquisition method of accounting, the aggregate consideration was allocated to the acquired assets and assumed liabilities, in each case, based on their respective fair value as of the closing date, with the excess of the consideration transferred over the fair value of the net assets acquired (or net liabilities assumed) being allocated to intangible assets and goodwill.

The purchase price allocation for this business acquisition was completed in the fourth quarter of the fiscal year ended June 30, 2023 and the following assets and liabilities are recognized based on the purchase price allocation and the fair value measurements.

During the twelve-month period ended June 30, 2023, the Company recorded a measurement period adjustment to reduce the fair value of the inventory acquired by $ 5.2 million, which resulted in a corresponding increase in goodwill.

Allocation of purchase price consideration ($ in thousands)

Cash Acquired

Trade Receivables

Customer Relationship Intangibles

Accounts Payable

Total identifiable net assets (liabilities)

Total Consideration

Goodwill resulting from the Think3Fold acquisition is not deductible for tax purposes.

This non-deductibility arises from the intrinsic nature of the transaction and applicable tax regulations.

The recognized goodwill associated with the Think3Fold acquisition primarily comprises expected synergies, since the acquisition is expected to generate synergies in various aspects, including operational efficiencies and revenue growth.

These synergies are a significant component of recognized goodwill, as they are anticipated to enhance the overall value of the combined entity.

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 Alliance 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:

Alliance Public Shares

Alliance Sponsor Shares

Legacy Alliance Shares

Total Shares of Common Stock Outstanding after 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 17).

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:

● If the stock price increases to $ 20 per share within 5 years , 20 million Class E shares will be released.

● If the stock price increases to $ 30 per share within 7 years , 20 million Class E shares will be released.

● If the stock price increases to $ 50 per share within 10 years , 20 million Class E shares will be released.

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.

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 offering 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 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.

As of June 30, 2023, 463,800 shares were awarded under the 2023 Plan.

Stock-Based Compensation:

As part of the merger with Adara on February 10, 2023, 600,000 shares were authorized for a one-time employee stock 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 vest on October 4, 2023.The company does not have an annual stock-based compensation plan.

Number of RSAs

Outstanding as of February 10, 2023

Granted on June 15, 2023

Outstanding June 30, 2023

In connection with awards granted, the Company recognized $ 216,000 in stock-based compensation during the year ended June 30, 2023.

As a result of the Merger, at June 30, 2023, there were 5,750,000 Public Warrants, 4,120,000 Private Placement Warrants and 50,000 Representatives Warrants issued and outstanding, each exercisable for one share of Class A Common Stock with 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 and 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 and a prospectus relating thereto is current, subject to the Company satisfying its obligations with respect to registration.

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 has agreed that as soon as practicable, but in no event later than 15 business days after the closing of a Business Combination, it will use its best efforts to file with the SEC a 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.

If a registration statement covering the shares of Class A common stock issuable upon exercise of the warrants is not effective by the 60 th business day after the closing of a Business Combination, warrant holders may, until such time as there is an effective registration statement and during any period when the Company will have failed to maintain an effective registration statement, exercise warrants on a “cashless basis” in accordance with Section 3(a)(9) of the Securities Act or another exemption.

Notwithstanding the foregoing, if a registration statement covering the Class A common stock issuable upon exercise of the warrants is not effective within a specified period following the consummation of a Business Combination, warrant holders may, until such time as there is an effective registration statement and during any period when the Company shall have failed to maintain an effective registration statement, exercise warrants on a cashless basis pursuant to the exemption provided by Section 3(a)(9) of the Securities Act, provided that such exemption is available.

If that exemption, or another exemption, is not available, holders will not be able to exercise their warrants on a cashless basis.

Once the warrants become exercisable, the Company may redeem for cash the outstanding Public Warrants:

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:

● in whole and not in part.

● at a price of $ 0.01 per Public Warrant.

ALLIANCE ENTERTAINMENT HOLDING CORP.

(F/K/A ADARA ACQUISITION CORP.)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2022

● upon not less than 30 days ’ prior written notice of redemption given after the warrants become exercisable to each warrant holder;

● if, and only if, the reported last sale price of the Class A common stock equals or exceeds $ 18.00 per share (as adjusted for stock splits, stock dividends, reorganizations, recapitalizations and the like) for any 20 trading days within a 30 -trading day period commencing once the warrants become exercisable and ending three business days before the Company sends the notice of redemption to the warrant holders.

If and when the warrants become redeemable by the Company, the Company may exercise its redemption right even if it is unable to register or qualify the underlying securities for sale under all applicable state securities laws.

● upon not less than 30 days ’ prior written notice of redemption after the warrants become exercisable to each warrant holder;

● if, and only if, the reported last sale price of the Class A common stock equals or exceeds $ 18.00 per share (as adjusted for stock splits, stock dividends, reorganizations, recapitalizations, and the like) for any 20 trading days within a 30 -trading day period commencing once the Public Warrants become exercisable and ending three business days before the Company sends the notice of redemption to the warrant holders.

If and when the Public Warrants become redeemable by the Company, the Company may exercise its redemption right.

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 warrants may be adjusted in certain circumstances including in the event of a stock dividend, or recapitalization, reorganization, merger or consolidation.

However, except as described below, the 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 warrants.

If the Company is unable to complete a Business Combination within the Combination Period and the Company liquidates the funds held in the Trust Account, holders of warrants will not receive any of such funds with respect to their warrants, nor will they receive any distribution from the Company’s assets held outside of the Trust Account with the respect to such warrants.

Accordingly, the warrants may expire worthless.

In addition, if (x) the Company issues additional shares of Class A common stock or equity-linked securities for capital raising purposes in connection with the closing of its initial Business Combination at an issue price or effective issue price of less than $ 9.20 per share of Class A common stock (with such issue price or effective issue price to be determined in good faith by the Company’s board of directors and, in the case of any such issuance to the Sponsor or its affiliates, without taking into account any Founder Shares held by the Sponsor or such affiliates, as applicable, prior to such issuance) (the “Newly Issued Price”), (y) the aggregate gross proceeds from such issuances represent more than 60 % of the total equity proceeds, and interest thereon, available for the funding of the Company’s initial Business Combination on the date of the consummation of such initial Business Combination (net of redemptions), and (z) the volume weighted average trading price of the Company’s common stock during the 20 trading day period starting on the trading day prior to the day on which the Company consummates its initial Business Combination (such price, the “Market Value”) is below $ 9.20 per share, the exercise price of the warrants will be adjusted (to the nearest cent) to be equal to 115 % of the greater of the Market Value and the Newly Issued Price and the $ 18.00 per share redemption trigger price described above will be adjusted (to the nearest cent) to be equal to 180 % of the greater of the Market Value and the Newly Issued Price.

The Placement Warrants were identical to the Public Warrants underlying the Units sold in the Initial Public Offering, except that the Placement Warrants and the Class A common stock issuable upon the exercise of the Placement Warrants will not be transferable, assignable or saleable until 30 days after the completion of a Business Combination, subject to certain limited exceptions.

Additionally, the Placement Warrants will be exercisable on a cashless basis and be non-redeemable, except as described above, so long as they are held by the initial purchasers or their permitted transferees.

If the Placement Warrants are held by someone other than the initial purchasers or their permitted transferees, the Placement Warrants will be redeemable by the Company and exercisable by such holders on the same basis as the Public Warrants.

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 50,000 warrants (the “Representative Warrants”), for minimal consideration, to ThinkEquity (“ThinkEquity”), a division of Fordham Financial Management, Inc.

(and/or its designees), in a private placement simultaneously with the closing of Initial Public Offering.

The Company accounted for the Representative Warrants as an expense of the Initial Public Offering, with a corresponding credit to stockholders’ equity.

The Representative Warrants are identical to the Public Warrants except that each Representative Warrant entitles the holder thereof to purchase one share of Class A common stock at a price of $ 11.50 per share, subject to adjustment, and so long as the Representative Warrants are held by ThinkEquity (and/or its designees) or its permitted transferees, (i) will not be redeemable by the Company, (ii) may not (including the Class A common stock issuable upon exercise of these warrants),

ALLIANCE ENTERTAINMENT HOLDING CORP.

(F/K/A ADARA ACQUISITION CORP.)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2022

subject to certain limited exceptions, be transferred, assigned or sold by the holders until 30 days after the completion of a Business Combination, (iii) may be exercised by the holders on a cashless basis, (iv) will be entitled to registration rights and (v) for so long as they are held by ThinkEquity (and/or its designees), will not be exercisable more than five years from the effective date of the Initial Public Offering in accordance with FINRA Rule 5110(f)(2)(G)(i).

The Representative Warrants and the underlying Class A common stock have been deemed compensation by FINRA and are therefore subject to a lock-up for a period of 180 days immediately following the date of the effectiveness of Initial Public Offering pursuant to FINRA Rule 5110(g)(1).

The Company’s net deferred tax assets are as follows:

Years Ended December

Deferred tax assets

Net operating loss carryforward

Start-up/organization expenses

Total deferred tax assets

Valuation allowance

Deferred tax assets, net of allowance

The income tax provision for the years ended December 31, 2022 and 2021 consisted of the following:

Years Ended December

Change in valuation allowance

Income tax provision

As of December 31, 2022 and 2021, the Company did no t have any U.S.

federal and state net operating loss carryovers available to offset future taxable income.

In assessing the realization of the deferred tax assets, management considers whether it is more likely than not that some portion of all of the deferred tax assets will not be realized.

The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which temporary differences representing net future deductible amounts become deductible.

Management considers the scheduled reversal of deferred tax liabilities, projected future taxable income and tax planning strategies in making this assessment.

After consideration of all of the information available, management believes that significant uncertainty exists with respect to future realization of the deferred tax assets and has therefore established a full valuation allowance.

For the year ended December 31, 2022 and 2021, the change in the valuation allowance was $ 464,933 and $ 221,150 , respectively.

ALLIANCE ENTERTAINMENT HOLDING CORP.

(F/K/A ADARA ACQUISITION CORP.)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2022

A reconciliation of the federal income tax rate to the Company’s effective tax rate is as follows:

Years Ended December

Statutory federal income tax rate

State taxes, net of federal tax benefit

Deferred tax liability change in rate

Change in fair value of warrant liabilities

Change in valuation allowance

Income tax provision

The Company files income tax returns in the U.S.

federal jurisdiction in various state and local jurisdictions and is subject to examination by the various taxing authorities.

FAIR VALUE MEASUREMENTS

The fair value of the Company’s financial assets and liabilities reflects management’s estimate of amounts that the Company would have received in connection with the sale of the assets or paid in connection with the transfer of the liabilities in an orderly transaction between market participants at the measurement date.

In connection with measuring the fair value of its assets and liabilities, the Company seeks to maximize the use of observable inputs (market data obtained from independent sources) and to minimize the use of unobservable inputs (internal assumptions about how market participants would price assets and liabilities).

The following fair value hierarchy is used to classify assets and liabilities based on the observable inputs and unobservable inputs used in order to value the assets and liabilities:

Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities and

Quoted prices in markets that are not active or financial instruments for which significant inputs to models are observable (including but not limited to quoted prices for similar securities, interest rates, foreign exchange rates, volatility and credit risk), either directly or indirectly;

Prices or valuations that require significant unobservable inputs (including the Management’s assumptions in determining fair value measurement).

At December 31, 2022, marketable securities held in the Trust Account were comprised of $ 117,809,450 in money market funds which are invested primarily in U.S.

Treasury Securities.

At December 31, 2021, marketable securities held in the Trust Account were comprised of $ 116,160,281 in money market funds which are invested primarily in U.S.

Treasury Securities.

ALLIANCE ENTERTAINMENT HOLDING CORP.

(F/K/A ADARA ACQUISITION CORP.)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2022

The following table presents information about the Company’s assets and liabilities that are measured at fair value on a recurring basis at December 31, 2022 and 2021 and indicates the fair value hierarchy of the valuation inputs the Company utilized to determine such fair value.

Marketable Securities held in Trust Account – U.S.

Treasury Securities Money Market Fund

Warrant Liabilities – Public Warrants

Warrant Liabilities – Private Placement Warrants

Warrant Liabilities – Representative Warrants

The Warrants were accounted for as liabilities in accordance with ASC 815-40 and are presented within warrant liabilities on the Company’s accompanying December 31, 2022 and 2021 consolidated balance sheets.

The warrant liabilities are measured at fair value at inception and on a recurring basis, with changes in fair value presented within change in fair value of warrant liabilities in the consolidated statements of operations.

The Company utilizes a lattice model, specifically a binomial lattice model, to value the Representative Warrants at each reporting period, with changes in fair value recognized in the consolidated statement of operations.

The estimated fair value of the representative warrant liabilities are determined using Level 3 inputs.

Inherent in a binomial options pricing model are assumptions related to expected share-price volatility, expected life, risk-free interest rate and dividend yield.

The Company estimates the volatility of its shares of common stock based on historical volatility that matches the expected remaining life of the 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.

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.

These levels are:

Level 1 – Quoted prices are available in active markets for identical assets or liabilities at the reporting date.

Generally, this includes debt and equity securities that are traded in an active market.

Level 2 – Observable inputs other than Level 1 prices such as quote prices for similar assets or liabilities;

quoted prices in markets that are not active;

or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.

Generally, this includes debt and equity securities that are not traded in an active market.

Level 3 – Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.

Level 3 assets and liabilities include financial instruments whose value is determined using pricing models, discounted cash flow methodologies, or other valuation techniques, as well as instruments for which the determination of fair value requires significant management judgment or estimation.

As of June 30, 2023, 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 Lattice Model in valuing the Private Placement Warrants and Representative Warrants.

The fair value of cash and cash equivalents, other assets, line of credit, accounts payable and accrued expenses approximate their carrying value due to the short-term maturities of these items.

The fair value of the company’s line of credit, which is considered a Level 2 fair value measurement, approximates it carrying value because it has a variable interest rate.

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:

Exercise price per share

Risk-free interest rate

Expected term (years)

Expected volatility

Expected dividend yield

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

(i) Risk-free interest rate:

the risk-free interest rate is based on the U.S.

Treasury zero-coupon yield curve on the grant date for a maturity similar to the expected remaining life of the warrants.

The expected life of the warrants is assumed to be equivalent to their remaining contractual term.

The dividend rate is based on the historical rate, which the Company anticipates to remain at zero.

The Public Warrants were initially valued using a lattice model, specifically a binomial lattice model.

As of December 31, 2022 and 2021, the Public Warrants were valued using the instrument’s publicly listed trading price as of the consolidated balance sheet date, which is considered to be a Level 1 measurement due to the use of an observable market quote in an active market.

As of December 31, 2022 and 2021, the fair value of the Private Warrants was the equivalent to that of the Public Warrants as they had substantially the same terms;

however, they are not actively traded, as such are listed as a Level 2 in the fair value hierarchy table above.

The key inputs into the binomial lattice model for the Warrants were as follows:

Treasury rate with a term matching the time to expiration.

(ii) Expected term:

the expected term is estimated to be equivalent to the remaining contractual term.

(iii) Expected volatility:

expected stock volatility is based on daily observations of the Company’s historical stock value and implied by market price of the Public Warrants, adjusted by guideline public company volatility.

(iv) Expected dividend yield:

expected dividend yield is based on the Company’s anticipated dividend payments.

As the Company has never issued dividends, the expected dividend yield is 0 % and this assumption will be continued in future calculations unless the Company changes its dividend policy.

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)

As of June 30, 2023

Private Placement and Representative Warrants

The table below presents the change in number and fair value of the Private and Representative Warrants since the Merger on February 10, 2023:

(in thousands, except the number of shares)

Private Warrants

Representative Warrants

February 10, 2023

(Initial Measurement)

Representative

Market price of public stock

Term (in years)

Risk-free rate

Dividend yield

Exercise price

Effective expiration date

One-touch hurdle

ALLIANCE ENTERTAINMENT HOLDING CORP.

(F/K/A ADARA ACQUISITION CORP.)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2022

The following tables presents the changes in the fair value of Level 3 warrant liabilities:

Private Placement

Representative

Warrant Liabilities

Fair value as of January 1, 2021

Initial measurement on February 11, 2021

Change in valuation inputs or other assumptions

( 1,587,300 )

( 1,437,500 )

( 3,012,300 )

Transfer to Level 1

( 3,852,500 )

Transfer to Level 2

( 2,197,800 )

Fair value as of December 31, 2021

Representative

Warrant Liabilities

Fair value as of January 1, 2022

Change in fair value

Fair value as of December 31, 2022

Transfers to/from Levels 1, 2 and 3 are recognized at the end of the reporting period in which a change in valuation technique or methodology occurs.

The estimated fair value of the Public Warrants transferred from a Level 3 measurement to a Level 1 during the year ended December 31, 2021 was $ 3,852,500 .

The estimated fair value of the Private Placement Warrants transferred from a Level 3 measurement to a Level 2 measurement during the year ended December 31, 2021 was $ 2,197,800 .

There were no transfers from Level 3 to Level 1 or Level 2 during the year ended December 31, 2022.

Change in value

June 30, 2023

Subsequent Events

The Company evaluated subsequent events and transactions that occurred after the consolidated balance sheets date up to the date that the consolidated financial statements were issued.

Based upon this review, the Company did not identify any subsequent events that would have required adjustment or disclosure in the consolidated financial statements, other than what is disclosed below.

On February 10, 2023, the Company completed its Business Combination with Alliance Entertainment Holding Corp, which is described in Note 6 above.

On July 5, 2023, the Company sold an aggregate of 1,335,000 shares of the Company’s Class A Common Stock at a public offering price to the public of $ 3.00 per share (the “Offering”), pursuant to an Underwriting Agreement, dated as of June 29, 2023 (the “Underwriting Agreement”), by and between the Company and ThinkEquity, as representative of the underwriters of the Offering (the “Underwriters”).

In addition, pursuant to the Underwriting Agreement, the Company granted ThinkEquity a 45-day option to purchase up to 200,250 additional shares of Class A Common Stock to cover over-allotments in connection with the Offering.

The Class A Common Stock was offered and sold to the public pursuant to the Company’s registration statement on Form S-1, initially filed by the Company with the SEC under the Securities Act of 1933, as amended (the “Securities Act”), on April 12, 2023, as amended, which became effective on July 4, 2023.

The Company received gross proceeds of $ 4,005,000 , before deducting underwriting discounts and commissions of 7.5 % of the gross proceeds and estimated Offering expenses.

As described in Note 8, on September 13, 2023, certain subsidiaries of Alliance Entertainment Holding Corporation, a Delaware corporation (the “Company” or “Alliance”), as Borrowers thereunder (the “Borrowers”), entered into an Amendment Number Thirteen and Waiver (“Amendment No.

13”) to the Loan and Security Agreement (the “Credit Facility”) with Bank of America, N.A.

(the “Agent”), as agent for the Lenders thereunder.

Pursuant to Amendment No.

13, (i) the termination date of the Credit Facility was extended to December 31, 2023, (ii) the definitions of Subordinated Debt and Permitted Contingent Obligations were amended, (iii) the Borrowers are not permitted to create, incur, guarantee or offer to exit any new debt or liens, other than certain specified liens, or to make or declare any distribution, other than certain permitted distributions, (iv) loans and advances that were previously permitted, as well as previously permitted acquisitions, will be considered restricted investments and may not be made, (v) the Borrowers may not make any loans or advances of money to any persons, and (vi) the lenders waived certain events of default, including certain breaches of negative covenants.

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 9A. Controls and Procedures