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Item 7. Management’s Discussion and Analysis

2024-09-20 compared with 2023-10-19 · 394 added, 289 removed, 33 unchanged (95% of the section changed)

Management’s Discussion and Analysis of Financial Condition and Results of Operations.

The objective for the “Management’s Discussion and Analysis of Financial Condition and Results of Operations” is to provide information the Company’s management team believes is necessary to achieve an understanding of its financial condition and the results of business operations with particular emphasis on the Company’s future and should be read in conjunction with the Company’s audited consolidated financial statements, and footnotes.

This analysis contains forward-looking statements concerning the Company’s performance expectations and estimates.

Other than statements with historical context, commentary should be considered forward- looking and carries with it risks and uncertainties.

“Statement Regarding Forward-Looking Statements” and Part I, Item 1A.

Risk Factors, of this Form 10-K for a discussion of other uncertainties, risks and assumptions associated with these statements.

Alliance is a leading global wholesaler, direct-to-consumer (“DTC”) distributor and e-commerce provider for the entertainment industry.

Alliance serves as the gateway between well-known international branded manufacturers of entertainment content, such as Universal Pictures, Warner Brothers Home Video, Walt Disney Studios, Sony Pictures, Lionsgate, Paramount, Universal Music Group, Sony Music, Warner Music Group, Microsoft, Nintendo, Take Two, Electronic Arts, Ubisoft, Square Enix, and others, and leading retailer customers in the United States and internationally, including Walmart, Amazon, Best Buy, Barnes & Noble, Wayfair, Costco, Dell, Verizon, Kohl’s, Target and Shopify, among others.

The Company distributes its physical media, entertainment products, hardware, and accessories through an established multi-channel strategy.

The Company currently sells its products that it is allowed to export to more than 100 countries around the world.

Alliance provides state-of-the art warehousing and distribution technologies, operating systems and services that seamlessly enable entertainment product transactions to better serve customers directly or through our distribution affiliates.

These technology-led platforms with access to the Company’s in stock inventory of over 375,000 SKU products, consisting of vinyl records, video games, compact discs, DVD, Blu-Rays, toys, and collectibles, combined with Alliance’s sales and distribution network, create a modern entertainment physical product marketplace that provides the discerning customer with enhanced options on efficient consumer-friendly platforms inventory.

Alliance is the retailers’ back office for in-store and e-commerce solutions.

All electronic data interchange (“EDI”) and logistics are operational and ready for existing retail channels to add new products.

Merger and Business Acquisition

Alliance has a proven history of successfully acquiring and integrating competitors and complementary businesses.

The Company will continue to evaluate opportunities to identify targets that meet strategic and economic criteria.

On July 1, 2022, Alliance purchased the assets and liabilities of Think3Fold, Inc, a collectibles distribution company.

This acquisition resulted in increased shelf space at our largest customer and expanded our product offerings.

On February 10, 2023, Alliance, Adara and Merger Sub consummated the closing of the transactions contemplated by the Business Combination Agreement.

Pursuant to the terms of the Business Combination Agreement, a business combination of Legacy Alliance and Adara was effected 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 of the Business Combination, Adara changed its name from Adara Acquisition Corp.

to Alliance Entertainment Holding Corporation.

While the legal acquirer in the Business Combination Agreement was Adara, for financial accounting and reporting purposes under U.S.

GAAP, Legacy Alliance was the accounting acquirer, and the Merger was accounted for as a “reverse recapitalization.” A reverse recapitalization (i.e., a capital transaction involving the exchange of stock by Adara for Legacy Alliance’s stock) does not result in a new basis of accounting, and the consolidated financial statements of the combined entity represent the continuation of the consolidated financial statements of Legacy Alliance in many respects.

Accordingly, the consolidated assets, liabilities, and results of operations of Legacy Alliance became the historical consolidated financial statements of the combined company, and Adara’s assets, liabilities and results of operations were consolidated with Legacy Alliance beginning on the acquisition date.

Operations prior to the Merger are presented as those of Legacy Alliance in future reports.

The net assets of Adara were recognized at historical cost (which was consistent with carrying value), with no goodwill or other intangible assets recorded.

Upon consummation of the Merger, the most significant change in Legacy Alliance’s future reported financial position and results of operations was a decrease in net Equity of $787,000 as compared to Legacy Alliance’s consolidated balance sheet.

As a result of the Merger, Alliance Entertainment became the successor to an SEC-registered company, which requires us to hire additional personnel and implement procedures and processes to address public company regulatory requirements and customary practices.

We expect to incur additional annual expenses as a public company for, among other things, directors’ and officers’ liability insurance, director fees and additional internal and external accounting, legal and administrative resources, including increased audit and legal fees.

Covid-19 and Macroeconomic Uncertainties

The residual effects of the Covid-19 pandemic will continue to directly or indirectly impact our business and the results of operations and financial impact, including expenses and employee-related costs, but are highly dependent on future developments that are uncertain at this time.

While we maintained uninterrupted operations during the pandemic, macroeconomic conditions and supply chain disruptions resulted in downstream shocks.

The most pronounced consequences were the exorbitant international shipping costs for arcades, and the incremental Marketing Development Funds in the form of customer rebates recorded during year ended June 30, 2023.

The disruptions in the transportation industry resulted in higher landed costs and a $8.2 million write down was recorded for units sold and a $7.1 million write down for gaming arcade units on-hand.

In addition, customer rebates of approximately $12.2 million were incurred to spur demand for arcades.

Finally, approximately $4.6 million of incremental storage costs was recognized to warehouse excess arcade inventory.

Any new information that emerges concerning Covid-19, including the actions taken to contain or manage, as well as the economic impact on local, regional, national customers, suppliers and markets, are uncertain and cannot be predicted at this time.

However, the management team is actively monitoring internal and external factors and assessing the potential impact on its financial performance, liquidity, operations, and workforce;

however, the full extent of the risk is uncertain.

Inflation typically affects us by increasing our cost of finished products purchased from studios and manufacturers, freight & shipping costs, and payroll.

The short-term impact of inflation on the results of the company’s operations is largely dependent on whether we can pass through incremental cost to our customers, which is subject to market conditions.

During fiscal year 2021, we began to experience inflationary pressure on freight and labor.

Disruptions in the transportation industry resulted in higher landed costs of $15.3 million, which was recorded as an inventory write down for the year ended June 30, 2023.

Subsequently, cargo container shipping costs have returned to pre-Covid levels.

More recently, consistent with other retailers and distributors, higher interest rates and energy costs began to affect economic conditions in the United States.

Inflation risk may deter consumer spending if economic conditions worsen, and our results of operations could be adversely affected if the high inflation continues for an extended period.

We continue to monitor interest rates and believe they will have some impact on operations until they stabilize.

Combined, general business conditions and inflationary factors may impact sales, gross profits, and gross margins.

Key Performance Indicators

Management monitors and analyzes key performance indicators to evaluate financial performance, including:

To derive Net Revenue, the Company reduces total gross sales by customer returns, returns reserve, and allowances including discounts.

Cost of Revenues (excluding depreciation and amortization):

Our cost of revenues reflects the total costs incurred to market and distribute products to customers.

Changes in cost are impacted primarily by sales volume, product mix, product obsolescence, freight costs, and market development funds (“MDF”).

To analyze profitability, the Company reviews gross and net margins in dollars and as a percent of revenue by line of business and product line.

Operating Expenses:

Our Operating Expenses are the direct and indirect costs associated with the distribution and fulfillment of products and services.

objective for the “Management’s Discussion and Analysis of Financial Condition and Results of Operations” is to provide

information the Company’s management team believes is necessary to achieve an understanding of its financial condition and the

results of business operations with particular emphasis on the Company’s future and should be read in conjunction with the Company’s

audited consolidated financial statements, and footnotes.

analysis contains forward-looking statements concerning the Company’s performance expectations and estimates.

Other than statements

with historical context, commentary should be considered forward- looking and carries with it risks and uncertainties.

See “Statement

Regarding Forward-Looking Statements” and Part I, Item 1A.

Risk Factors, of this Form 10-K for a discussion of other uncertainties,

risks and assumptions associated with these statements.

is a leading global wholesaler and a key player in the entertainment industry, boasts a diverse portfolio of owned brands, including

Critics’ Choice, Collectors’ Choice, Movies Unlimited, DeepDiscount, popmarket, blowitoutahere, Fulfillment Express, importCDs

GamerCandy, WowHD, and others.

As a leading global wholesaler, direct-to-consumer (“DTC”) distributor, and e- commerce provider,

Alliance operates as the vital link between renowned international manufacturers of entertainment content, such as Universal Pictures,

Warner Brothers Home Video, Walt Disney Studios, Sony Pictures, Lionsgate, Paramount, Universal Music Group, Sony Music, Warner Music

Group, Microsoft, Nintendo, Take Two, Electronic Arts, Ubisoft, Square Enix, and others.

pivotal role extends to connecting these manufacturers with top-tier retail partners both domestically and internationally.

Notable partners

encompass giants like Walmart, Amazon, Best Buy, Barnes & Noble, Wayfair, Costco, Dell, Verizon, Kohl’s, Target, Shopify, and

an established multi-channel strategy, Alliance distributes physical media, entertainment products, hardware, and accessories across

various platforms.

Currently, the company sells its products, permitted for export, to more than 70 countries worldwide.

provides state-of-the art warehousing and distribution technologies, operating systems and services that seamlessly enable entertainment

product transactions to better serve customers directly or through our distribution affiliates.

These technology-led platforms with access

to the Company’s in stock inventory of over 325,000 SKU products, consisting of vinyl records, video games, compact discs, DVD,

Blu-Rays, toys, and collectables, combined with Alliance’s sales and distribution network, create a modern entertainment physical

product marketplace that provides the discerning customer with enhanced options on efficient consumer-friendly platforms inventory.

is the retailers’ back office for in-store and e-commerce solutions.

All electronic data interchange (“EDI”) and logistics

are operational and ready for existing retail channels to add new products.

and Business Acquisition

has a proven history of successfully acquiring and integrating competitors and complementary businesses.

The Company will continue to

evaluate opportunities to identify targets that meet strategic and economic criteria.

July 1, 2022, Alliance purchased the assets and liabilities of Think3Fold, LLC, a collectables distribution company.

This acquisition

resulted in increased shelf space for our largest customer and expanded our product offerings.

February 10, 2023, AENT Corporation (f/k/a Alliance Entertainment Holding Corporation) (“Legacy Alliance”), Adara Acquisition

(“Adara”) and Adara Merger Sub, Inc.

(“Merger Sub”) consummated the closing of the transactions contemplated

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

Pursuant to the

terms of the Business Combination Agreement, a business combination of Legacy Alliance and Adara was affected by the merger of Merger

Sub with and into Alliance (the “Merger” or the “Business Combination”), with Alliance surviving the Merger as

a wholly-owned subsidiary of Adara.

Following the Merger’s consummation on the closing of the Business Combination, Adara changed

its name from Adara Acquisition Corp.

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

the legal acquirer in the Business Combination Agreement was Adara, for financial accounting and reporting purposes under U.S.

Legacy Alliance was the accounting acquirer, and the Merger was accounted for as a “reverse recapitalization.” A reverse

recapitalization (i.e., a capital transaction involving the exchange of stock by Adara for Legacy Alliance’s stock) does not result

in a new basis of accounting, and the consolidated financial statements of the combined entity represent the continuation of the consolidated

financial statements of Legacy Alliance in many respects.

Accordingly, the consolidated assets, liabilities, and results of Legacy Alliance

operations became the company’s historical consolidated financial statements.

Adara’s assets, liabilities, and operations

results were consolidated with Legacy Alliance beginning on the acquisition date.

Operations prior to the Merger are presented as those

of Legacy Alliance in future reports.

The net assets of Adara were recognized at historical cost (which was consistent with carrying

value), with no goodwill or other intangible assets recorded.

consummation of the Merger, the most significant change in Legacy Alliance’s future reported financial position and results of

operations was a decrease in net Equity of $787,000 compared to its consolidated balance sheet.

a result of the Merger, Alliance Entertainment became the successor to an SEC-registered company, which requires us to hire additional

personnel and implement procedures and processes to address public company regulatory requirements and customary practices.

to incur additional annual expenses as a public company for, among other things, directors’ and officers’ liability insurance,

director fees and additional internal and external accounting, legal and administrative resources, including increased audit and legal

Macroeconomic

Uncertainties

conditions in the economy in the United States and abroad may negatively affect the growth of our business and have affected our results

of operations.

For example, macroeconomic events, including inflation, interest rates, geopolitical issues, and uncertainty regarding

elections in the Fall of 2024 have led to economic uncertainty globally.

The effect of macroeconomic conditions may not be fully

reflected in our results of operations until future periods.

If, however, economic uncertainty increases or the global economy worsens,

our business, financial condition and results of operations may be harmed.

For further discussion of the potential impacts of macroeconomic

events on our business, financial condition, and operating results, see the section titled Part I “Item 1A.

Risk Factors”.

Performance Indicators

monitors and analyzes key performance indicators to evaluate financial performance, including:

To derive Net Revenue, the Company reduces total gross sales by customer returns, returns reserve, and allowances including

of Revenues (excluding depreciation and amortization):

Our cost of revenues reflects the total costs incurred to market and distribute

products to customers.

Changes in cost are impacted primarily by sales volume, product mix, product obsolescence, freight costs, and

market development funds (“MDF”).

To analyze profitability, the Company reviews gross and net margins in dollars and as a percentage of revenue by line of business

and product line.

Our Operating Expenses are the direct and indirect costs associated with the distribution and fulfillment of products and

They include both Distribution and Fulfillment and Selling, General and Administrative (SG&A) Expenses.

The Distribution and Fulfillment Expenses are the payroll and operating expenses associated with the receipt, warehousing, and distribution of product.

Selling, General and Administrative Expenses:

The Selling, General and Administrative Expenses are payroll and operating costs for Information Technology, Sales & Marketing, and General & Administrative functions.

In addition, we include Depreciation and Amortization expenses and Transaction Costs, if applicable.

Balance Sheet Indicators:

The Company views cash, product inventory, accounts payable, and working capital as key indicators of its financial position.

Alliance Entertainment Holding Corporation

Results of Operations Year Ended June 30, 2023, Compared to Year Ended

June 30, 2022

The Distribution

and Fulfillment Expenses are the payroll and operating expenses associated with the receipt, warehousing, and distribution of product.

General and Administrative Expenses:

The Selling, General and Administrative Expenses are payroll and operating costs for Information

Technology, Sales & Marketing, and General & Administrative functions.

In addition, we include Depreciation and Amortization

expenses and Transaction Costs, if applicable.

Sheet Indicators:

The Company views cash, product inventory, accounts payable, and working capital as key indicators of its financial

Entertainment Holding Corporation

of Operations Year Ended June 30, 2024, Compared to Year Ended June 30, 2023

($ in thousands)

9 unchanged sentences

Restructuring Costs

Loss (Gain) on Disposal of Fixed Assets

Total Operating Expenses

Operating (Loss) Income

Operating Income (Loss)

Other Expenses

2 unchanged sentences

Total Other Expenses

(Loss) Income Before Income Tax (Benefit) Expense

Income Tax (Benefit) Expense

Net (Loss) Income

Year-over-year, total Net Revenues decreased from $1,417 million to $1,159 million (-$259 million or -18%) for the year ended June 30, 2023.

Along with other Retailers and Distributors in the United States, we are not immune to the macroeconomic headwinds caused by increased inflation and interest rates.

Our business to business (“B2B”) customer base, which are primarily retailers, are reacting relatively conservatively with their inventory positions due to economic uncertainty and those retailers have their own inventory supply chain challenges.

Our direct to consumer (“DTC”) channels are facing constant competition and it’s important for our merchants to keep investing while keeping a tight rein on inventories.

Our B2B wholesale customer base revenue was down almost 20% over the previous year due to their relatively rigorous inventory management.

However, as economic conditions stabilized, our B2B revenues improved to -8% year over year in Q4.

For the year ended June 30, 2023, our DTC omni-channel sales decreased 11%, our Direct2You division outperformed B2B with sales up 7% year over year.

Year-over-year, for the year ended June 30, 2023, vinyl sales decreased 2% to $324 million.

Gaming products revenue decreased 30% to $391 million;

however, the decline in demand for physical gaming products presents an opportunity as we expect to benefit from industry consolidation.

Combined, for the year ended June 30, 2023, gaming and vinyl revenue totaled $715 million and 62% of our revenue mix compared to $887 million and 63% of total revenue in the prior year.

While we captured an increase in the average selling price in Gaming, it was not enough to offset the negative impact of decreased volume.

For the year ended June 30, 2023, the average selling price of Vinyl was flat and volume was down marginally;

however, for the trailing three months, both price and volume improved year over year.

Consumer Products, including revenue from our July 1, 2022, acquisition of Think3Fold, increased from $58 million to $80 million ($22 million, 37%) versus the prior year.

We benefited from an increase in both the average selling price and volume.

As the popularity of collectibles grows, an increasing number of musicians, celebrities, sport organizations, and content providers are expanding their portfolio of merchandise as a way to connect with their audiences.

The average selling price of music Compact Disc’s (CD’s) was essentially flat, and a decrease in volume resulted in a 16% year-over-year revenue decline.

We expect this trend for CDs to continue due to the popularity and growth of on-line streaming services.

Similarly, physical movie sales declined 28% year over year as the average price increase was not enough to offset the reduction of volume.

Cost of Revenues:

Total cost of revenues, excluding depreciation and amortization, decreased from $1,235 million to $1,055 million ($180 million or 15%) year over year primarily due to the direct relation of product costs to sales volume.

Gross Margin dollars declined as a result of lower sales and a lower overall product margin of 9.0% compared to 12.9% in the prior year.

The gross margin decline of approximately 4% points for the year ended June 30, 2023, over the same period prior year, was primarily due to an inventory adjustment to address the exorbitant landed cost experienced during supply chain disruptions related to Covid and reduced supplier marketing development funds (MDF).

The Company recorded an inventory write-down of $7.1 million to reduce its gaming

arcades to their estimated net realizable value.

In addition, excessive transportation costs of $15.3 million, arcade markdowns of $12.2 million, and additional reserves for consumer products inventory of $3.7 million were recorded.

The postponement of some theatrical releases delayed MDF in the form of Price Protection.

Price Protection is the mechanism used by vendors to stimulate sales when demand slows to reduce the return of product.

Also, since gaming products are largely non-returnable, the supply chain does not have an established practice and cadence for mark downs like the movie and music industries.

As such, gaming products typically require the distributor to bear the risk of slow-moving inventory which may increase the cost of goods sold as a percentage of sales.

The change in MDF in future periods is dependent on consumer demand for gaming products and the volume and success of new movie and music releases.

In addition, higher freight costs negatively impacted the cost of sales due to general rate hikes and incremental fuel surcharges.

Operating Expenses:

Total Operating Expenses as a percentage of net revenue increased year-over-year from 9.9% to 11.8%.

Total Distribution and Fulfillment Expense, as a percentage of net revenue, increased from 4.5% to 5.4% for the year ended June 30, 2023, versus the same period prior year.

Fulfillment payroll was $40.4 million for the year ended June 30, 2023, and $46.5 million for the same period of the prior year.

Despite low unemployment rates, the average cost per labor hour is down 3% versus the prior year as we increased our throughput rate and reduced our use of overtime.

To address the scarcity of labor resources, we are investing in additional warehouse automation and will continue to use temporary labor forces to manage changes in demand.

We believe that for the foreseeable future, there will continue to be upward pressure on labor costs and availability;

however, our investment in warehouse automation began to show significant improvements in fiscal Q4.

The primary factor for the increased Fulfillment expenses is storage fees, which amounted to $4.6 million for the year ended June 30, 2023.

The annual storage expenses will decline as the incremental inventory occupying this space is sold.

Total Selling, Administrative, and General costs increased by $0.6 million or 1% versus the same period last year;

however, non-customer impact staffing reductions were made in Q4 to reduce costs and position the company for the future.

For the year ended June 30, 2023, vs same period prior year, Consolidated Depreciation and Amortization expense decreased from $8.3 million to $6.6 million ($1.6 million or -20%) due to fully depreciated assets and the declining balance method of intangible asset amortization.

Transaction Costs for the year ended June 30, 2023, were $5.0 million for expenses related to the Think3Fold acquisition and the merger with Adara.

These expenses were required for legal, financial advisory and other professional fees associated with the acquisition and execution of the business combination agreement.

Year over year, the IC DISC Commissions decreased from $9.9 million to $2.8 million due to reduced eligible sales and elimination of the IC DISC.

The owners of the IC-DISC forgave the commission expense for the calendar year ended December 31, 2022, which was recorded as a capital contribution by our shareholders.

Interest Expense:

For the year ended June 30, 2023, Interest Expense increased from $4.1 million to $11.7 million ($7.6 million or 189%) versus the prior year.

The primary driver for the increase was a higher average revolver balance of $156 million and an increase of 3.7% points of effective interest rate to 6.0%.

For the year ended June 30, 2023, an income tax benefit of $9.1 million was recorded compared to an expense of $9.4 million for the same period in the prior year.

Alliance reported a pretax loss of $(44.5) million and pretax net income of $38.0 million for the years ended June 30, 2023, and 2022, respectively.

The annual effective tax rate (“ETR”) for the year ended June 30, 2023, was -21%.

Provision for income taxes, effective tax rate and statutory federal income tax rate for the years ended June 30, 2023 and 2022 were as follows:

($ in thousands)

June 30, 2023

Income (Loss) Before Income Tax Expense (Benefit)

Income Tax (Benefit)

Net Income (Loss)

Other Comprehensive loss

Total Comprehensive Income (Loss)

Year-over-year, total Net Revenues decreased from $1,159 million to $1,100 million (-$59 million, -5%) for the year ended

June 30, 2024.

Income tax (benefit) expense

Effective tax rate

Statutory federal income tax rate

Non-GAAP Financial Measures:

For the year ended June 30, 2023, we had non-GAAP Adjusted EBITDA of approximately $(17.6) million compared with Adjusted EBITDA of approximately $60.0 million prior year.

Adjusted EBITDA for the year ended June 30, 2023, includes excessive transportation costs of $15.3 million, arcade markdowns of $12.2 million, incremental arcade storage fees of $4.6 million and additional reserves for consumer products inventory of $3.7 million.

We define Adjusted EBITDA as net gain or loss adjusted to exclude:

Along with other retailers and distributors in the United States, we are not immune to the macroeconomic headwinds caused

by high interest rates and consumer spending discretion prompted by reduced buying power and geopolitical risks.

Alliance Entertainment

stands out as a value-added retail distributor with exclusive distribution rights for approximately 150 studios and labels in the film

and music industry.

This extensive portfolio of unique content, combined with our deep inventory portfolio, enables us to cater to bulk

B2B and direct-to-consumer (DTC) businesses with a vast selection of products unavailable through other distributors.

Our unique DTC

suite of distribution and inventory solutions for the e-commerce retail industry, including our consumer direct subsidiary DirectToU

LLC, enabled approximately 36% of gross revenue for the 12 months ended June 30, 2024, versus 31% for the 12 months ended June 30, 2023.

music and movie products continue to show resilience.

Year over year, Vinyl record sales increased from $324 million to $329 million

($5 million, 2%) for the 12 months ended June 30, 2024.

The average selling price of Vinyl was up 6% and partially offset by decreased

volume resulting in net revenue improvement versus the prior year.

We expect music enthusiasts and collectors to extend this upward trend

because of their passion for music, their appreciation for the artwork, and a desire to enhance their physical collection.

music Compact Discs (CDs) sales increased from $128 million to $130 million ($2 million, 2%).

The average selling price of CDs increased

by 12%, however, the decline in volume, partially due to the delay of some new K-Pop releases, offset some of the gains.

Physical movie

sales, which include DVDs, Blu-Ray, and Ultra HD, increased from $190 million to $204 million ($14 million, 8%) versus the same period

The average selling price of physical film products increased 19% year over year and was partially offset by a decline in

Digital sales of our exclusive content increased approximately 135% over the same period prior year.

The consistent flow of new

theatrical releases, combined with 4K and collectable SteelBook content, continues to drive home video sales.

We expect the trend of

higher price points to continue as brick & mortar retailers cater to the consumer preference for omnichannel shopping experiences

and curated content versus inexpensive, mass market product offerings.

Alliance Entertainment’s ability to offer retailers in-store

and on-line channels a deep, extensive library of both music and movies helps provide them the products for a cohesive shopping experience

based on personal preference and engagement with their respective brands.

Year-over-year,

gaming sales decreased from $391 million to $338 million (-$53 million, -14%) for the 12 months ended June 30, 2024.

The average selling

price of gaming products more than doubled for the period versus prior year but was offset by a decrease in unit volume.

derived from a higher price point was the direct result of our success selling more hardware and retro arcades than prior periods.

suppliers continue to transition to subscription-based models, and we expect to benefit from new hardware releases during the next year.

We continue to proactively monitor gaming industry trends to ensure we have the right product mix to meet market demand and maximize

profitability.

the 12 months ended June 30, 2024, Consumer Products revenue decreased from $80 million to $43 million (-$37 million, -46%) versus the

same period prior year.

The average selling price increased by approximately 28% this year and while volume declined, margins improved

significantly as we rationalized our inventory.

The toys & collectables industry appears to have stabilized in the post- pandemic

era and major trade shows have resumed their promotion of these unique products.

The collectables market is an integral part of the entertainment

market segment due to its mix of nostalgic, investment, and intrinsic value.

As such, we believe there is continued profitable growth

in this category.

Total cost of revenues, excluding depreciation and amortization, decreased from $1,055 million to $972 million ($83

million or 8%) year over year primarily due to the direct relation of product costs to sales volume.

Gross Margin dollars increased $25

million year over year on lower sales and higher gross margins.

Product margins increased from 9.0% to 11.7% (+2.7percentage points)

for the 12 months ended June 30, 2024 versus June 30, 2023.

The gross margin improvement was primarily driven by reduced costs compared

to the previous year, as a result of inventory adjustments to manage the high landed costs caused by supply chain disruptions during

the pandemic.

In addition, business conditions allowed us to reduce our company sponsored marketing development funds (MDF) for arcades

r elative to prior year.

Since gaming products are largely non-returnable,

the supply chain does not have an established practice and cadence for mark downs like the movie and music industries.

As such, gaming

products typically require the distributor to bear the risk of slow-moving inventory.

The change in MDF in future periods is dependent

on consumer demand for gaming products and the volume and success of new movie and music releases.

Total Operating Expenses declined 16% and decreased as a percentage of revenue from 11.8% to 10.4% (1.4 percentage points)

year over year.

Distribution and Fulfillment expenses declined in terms of absolute dollars and the percentage of revenue and Selling

General and Administrative (SG&A) expenses declined in terms of absolute dollars as well.

Distribution and Fulfillment Expense, as a percentage of net revenue, decreased from 5.4% to 4.4% (1.0 percentage point) for the year

ended June 30, 2024, versus the same period prior year.

We successfully reduced fulfillment and payroll expenses as we executed our plan

to rationalize fulfillment center capacity without degradation of services.

By May, we completely transitioned out of our primary Shakopee,

MN warehouse and consolidated most of the product storage capacity and fulfillment operations in Shepherdsville, KY.

Total Fulfillment

payroll was reduced $9 million or 22% for the year ended June 30, 2024 enabling us to absorb a 2.5% increase in average labor costs while

simultaneously improving warehouse efficiency by leveraging our investments in warehouse automation.

In addition, we continue to monitor

and optimize the use of temporary labor and overtime.

Non-payroll-related fulfillment expenses were down significantly year over year

and costs related to storage and freight decreased as we sold through surplus pandemic- related inventory.

We expect the elimination

of a warehouse, combined with continuous improvements efforts, to experience additional declines in fulfillment expenses in fiscal year

to the decline of operating expenses was reduced Selling, Administrative, and General of $1.4 million or 2.3% for the year ended June

30, 2024, versus the same period prior year.

SG&A expenses declined from $59.1 million to $57.7 million year-over- year.

to the reduction of overhead costs, Transaction Costs declined from $5.0 million to $2.1 million and $2.8 million of IC DISC Commissions

were eliminated.

SG&A costs, including business process, are being examined and analyzed to identify and capture additional cost-saving

opportunities.

Interest Expense increased marginally from $11.7 million to $12.2 million ($0.5 million or 4.3%) for the year ended June

30, 2024, versus the prior year.

Despite a significantly higher average effective interest rate this fiscal year that increased year

over year from 6.0% to 9.5% (+3.5 percentage points), we successfully reduced the revolver balance $53 million or 34% from an average

of $156 million for the 12 months ended June 30, 2023 to an average of $103 million for the 12 months ended June 30, 2024.

For the year ended June 30, 2024, an income tax benefit of $2.7 million was recorded compared to tax benefit of $9.1

million for the same period in the prior year.

Alliance reported a pretax income of $1.9 million and pretax net loss of $(44.5)

million for the years ended June 30, 2024, and 2023, respectively.

The annual effective tax rate (“ETR”) for the year

ended June 30, 2024, was 147% due to an immaterial true up adjustment to deferred income taxes related to the net tax effects of

temporary differences between the amount of assets and liabilities for accounting purposes and the amounts used for tax

for income taxes, effective tax rate and statutory federal income tax rate for the years ended June 30, 2024, and 2023 were as follows:

in thousands)

federal income tax rate

Financial Measures:

For the year ended June 30, 2024, we had non-GAAP Adjusted EBITDA of $24.3 million compared with Adjusted EBITDA

of $(17.6) million prior year or an improvement of $41.9 million year-over-year.

Adjusted EBITDA for the year ended June 30, 2023, includes

excessive transportation costs of $15.3 million, arcade markdowns of $12.2 million, incremental arcade storage fees of $4.6 million and

additional reserves for consumer products inventory of $3.7 million.

We define Adjusted EBITDA as net income or loss adjusted to exclude:

(i) income tax expense;

1 unchanged sentence

(iii) interest expense;

and (iv) depreciation and amortization expense and (v) other infrequent, non- recurring expenses.

Our method of calculating Adjusted EBITDA may differ from other issuers and accordingly, this measure may not be comparable to measures used by other issuers.

We use Adjusted EBITDA to evaluate our own operating performance and as an integral part of our planning process.

We present Adjusted EBITDA as a supplemental measure because we believe such a measure is useful to investors as a reasonable indicator of operating performance.

and (iv) depreciation and amortization expense and (v) other

infrequent, non- recurring expenses.

Our method of calculating Adjusted EBITDA may differ from other issuers and accordingly, this measure

may not be comparable to measures used by other issuers.

We use Adjusted EBITDA to evaluate our own operating performance and as an integral

part of our planning process.

We present Adjusted EBITDA as a supplemental measure because we believe such a measure is useful to investors

as a reasonable indicator of operating performance.

We believe this measure is a financial metric used by many investors to compare companies.

This measure is not a recognized

measure of financial performance under GAAP in the United States and should not be considered as a substitute for operating earnings (losses), net earnings (loss) from continuing operations or cash flows from operating activities, as determined in accordance with GAAP.

See the table below for a reconciliation, for the periods presented, of our GAAP net income (loss) to Adjusted EBITDA.

This measure is not a recognized measure of financial performance under GAAP in the United States and should not be considered as a substitute

for operating earnings (losses), net earnings (loss) from continuing operations or cash flows from operating activities, as determined

in accordance with GAAP.

See the table below for a reconciliation, for the periods presented, of our GAAP net income (loss) to Adjusted

in thousands)

June 30, 2023

June 30, 2022

Net (Loss) Income

Interest Expense

Income Tax (Benefit) Expense

Depreciation and Amortization

SPAC Merger Transaction Cost

Restructuring Cost

Stock-based Compensation Expense

Change in Fair Value of Warrants

Contingent Loss

Income (Loss)

Tax (Benefit) Expense

and Amortization

Restructuring

Compensation Expense

in Fair Value of Warrants

(Gain) on Disposal of PPE

Adjusted EBITDA

Adjusted EBITDA for the year ended June 30, 2023, includes the following expenses:

Excessive International Transportation Costs (Units Sold)

Excessive International Transportation Costs (On Hand)

Markdown for Arcades Sold

Incremental Storage Fees Arcades

Consumer Products Inventory Reserve

LIQUIDITY AND CAPITAL RESOURCES

As of June 30, 2023 we had cash and cash equivalents and borrowing capacity under the revolving credit facility of $0.9 million and of $1.7 million, respectively.

Our primary sources of liquidity are existing cash and cash equivalents, cash provided by operating activities, and borrowings under our credit facilities.

On September 29, 2020, the credit line with Bank of America was extended for three years and increased from $125 million to $175 million.

On June 30, 2022, the credit line with Bank of America was amended for the current period which ends September 29, 2023, and increased from $175 million to $225 million.

On April 21, 2023, in connection with the Amendment No.

12 as defined below, the Credit Facility with Bank of America was reduced from $225 million to $175 million.

($in millions)

Revolver Balance

Our principal source of liquidity is our borrowing capacity under the revolving credit facility with Bank of America and cash generated from operations.

The revolving credit facility, which was scheduled to expire 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 revolver and expect to have it in place prior to the expiration of the revised term which expires on December 31, 2023.

Since we do not have a revised long-term revolver in place, along with the Company’s losses from operations, there is a substantial doubt as to the Company’s ability to continue as a going concern for one year from the issuance of the June 30, 2023 financial statements.

The consolidated financial statements included herein have been prepared assuming that we will continue as a going concern and do not include mitigation efforts that might result from the outcome of this uncertainty.

Management is currently evaluating cost reduction

opportunities, process efficiencies, and its overall growth and diversification strategy.

If we are unable to get an extension of our revolver and implement our mitigation efforts, we may need to alter our operations including ceasing some functions.

As disclosed in Note 8 to the Company’s consolidated financial statements, during the year ended June 30, 2023, the Company failed to meet the Fixed Charge Coverage Ratio covenant requirement.

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, 2023, 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.

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, 2023, 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 to Agent a waiver fee in the amount of $179,883.

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.

Our liquidity position has not changed significantly since the Merger, and we intend to principally rely on our borrowing capacity under the Credit Facility as well as any renewal of such facility.

Since the exercise price of the Warrants of $11.50 per share is significantly greater than the current market price of the Class A common stock, we do not expect the Warrants to be exercised until such time, if ever, that the market price of the Class A common stock exceeds the exercise price of the Warrants.

Although the Company does not currently intend to do so, following this offering, the Company may seek to raise additional capital through the sale of equity securities.

The receipt of cash proceeds from the exercise of our Warrants is dependent upon the market price exceeding the $11.50 exercise price and the Warrants being exercised for cash.

The $11.50 exercise price per share of the Warrants is considerably higher than the $1.32 closing sale price of the Class A common stock on October 17, 2023.

If the price of our Class A Common Stock remains below the respective Warrant exercise prices per share, we believe warrant holders will be unlikely to cash exercise their Warrants, resulting in little or no cash proceeds to us.

In addition, we may lower the exercise price of the Warrants in accordance with the Warrant Agreement to induce the holders to exercise such warrants.

We may effect such reduction in exercise price without the consent of such warrant holders and such reduction would decrease the maximum amount of cash proceeds we would receive upon the exercise in full of the Warrants for cash.

Further, the holders of the Private Warrants and the Underwriter Warrants may exercise such Warrants on a cashless basis at any time and the holders of the Public Warrants may exercise such Warrants on a cashless basis at any time a registration statement is not effective and a 10-K is not currently available for the issuance of shares of Class A common stock upon such exercise.

EBITDA for the year ended June 30, 2023, included the following expenses:

International Transportation Costs (Units Sold)

International Transportation Costs (On Hand)

for Arcades Sold

Storage Fees Arcades

Products Inventory Reserve

AND CAPITAL RESOURCES

On December 21, 2023, Alliance Entertainment Holding Corporation entered into a Revolving Credit Facility, which is a three-year

$120 million senior secured asset-based credit facility with White Oak Commercial Finance, LLC.

The Revolving Credit Facility replaced

the Company’s revolver with Bank of America (the “Prior Credit Facility”).

The Prior Credit Facility was scheduled

to expire on December 31, 2023.

Company has implemented certain strategic initiatives to reduce expenses and focus on the sale of higher margin products.

of the new credit facility, combined with these initiatives and the Company’s financial performance for the year ended June 30,

2024, the Company has concluded that it has sufficient cash to fund its operations and obligations (from its cash on hand, operations,

working capital and availability on the credit facility) for at least twelve months from the issuance of these consolidated financial

primary sources of liquidity are existing cash and cash equivalents, cash provided by operating activities, and borrowings under our

credit facility.

As of June 30, 2024, in addition to the $1.1 million of cash, we carried a $73 million revolver balance on our $120

million credit facility under the Loan and Security Agreement with White Oak Commercial Finance, LLC.

Since June 30, 2023, our available

collateral decreased from $135 million to $117 million ($18 million, 13%);

however, our availability increased from $2 million to $44

million, an increase of $42 million, as we converted accounts receivable and inventory to cash which was used to reduce the revolver

from $133 million to $73 million ($60 million or 45%) year over year.

Combined with a lower loan ceiling of $120 million versus $175

million, we have reduced debt service costs.

liquidity position has not changed significantly since the Merger, and we intend to principally rely on our borrowing capacity under

the Revolving Credit Facility as well as any renewal of such facility.

Although the Company does not currently intend to do so, the Company

may seek to raise additional capital through the sale of equity securities.

receipt of cash proceeds from the exercise of our Warrants is dependent upon the market price exceeding the $11.50 exercise price and

the Warrants being exercised for cash.

Since the exercise price of the Warrants of $11.50 per share is significantly greater than the

current market price of the Class A common stock, we do not expect the Warrants to be exercised until such time, if ever, that the market

price of the Class A common stock exceeds the exercise price of the Warrants.

If the price of our Class A common stock remains below

the respective Warrant exercise prices per share, we believe warrant holders will be unlikely to cash exercise their Warrants, resulting

in little or no cash proceeds to us.

addition, we may lower the exercise price of the Warrants in accordance with the Warrant Agreement to induce the holders to exercise

such Warrants.

We may effect such reduction in exercise price without the consent of such warrant holders and such reduction would decrease

the maximum amount of cash proceeds we would receive upon the exercise in full of the Warrants for cash.

Further, the holders of the

Private Warrants and the Underwriter Warrants may exercise such Warrants on a cashless basis at any time and the holders of the Public

Warrants may exercise such Warrants on a cashless basis at any time an effective registration statement is not available for the issuance

of shares of Class A common stock upon such exercise.

Accordingly, we would not receive any proceeds from a cashless exercise of Warrants.

The following table summarizes our net cash provided by or used on operating activities, investing activities and financing activities for the periods indicated and should be read in conjunction with our consolidated financial statements for the year ended June 30, 2023 and 2022.

The following table summarizes our net cash provided by or used on operating activities, investing activities and financing

activities for the periods indicated and should be read in conjunction with our consolidated financial statements for the year ended

June 30, 2024 and 2023.

in thousands)

June 30, 2023

June 30, 2022

Net Income (Loss)

Net Cash (Used In) Provided By:

Operating Activities

Investing Activities

Financing Activities

For the year ended June 30, 2023, on a net loss of $(35.4) million, the Company’s cash provided by operating activities was $3.4 million versus $(83.6) million used in operations for the year ended June 30, 2022.

The primary drivers, year over year, was a $64.0 million decline in Net Income combined with a $99.7 million reduction in Inventory vs.

an increase of $108 million prior year.

Less inventory was required to support sales for the year ended June 30, 2023, due to the relatively high inventory position on June 30, 2022, because of the supply chain disruptions that occurred in the prior year.

As a result, Accounts Payable increased approximately $69 million vs.

an increase of $16 million prior year because of liabilities related to the Think3Fold acquisition and less pre-paid purchases which were required to support the gaming inventory prior year.

In addition, Deferred Income Taxes increased by $8.2 million due to fiscal year 2023 losses.

Other Assets decreased by $5.0 million primarily due to the merger-related transactions costs that were classified as prepaids and subsequently expensed.

The cashflow from investing activities was marginal due to the combined net working capital structure of the acquisition transaction attributed to Cash Paid for Business Acquisition of Think3Fold that was acquired for no consideration.

Net cash used in financing activities was $3.2 million for the year ended June 30, 2023, versus cash provided of $81.0 million for the same period prior year.

The primary reason for the decline was reduced borrowing, necessary to maintain lower, desired inventory levels.

Critical Accounting Policies and Estimates

The consolidated financial statements and disclosures have been prepared in accordance with generally accepted accounting principles (GAAP) which requires that management apply accounting policies, estimates, and assumptions that impact the results of operations and the reported amounts of assets and liabilities in the financial statements.

Management uses estimates and judgments based on historical experience and other variables believed to be reasonable at the time.

Actual results may differ from these estimates under a separate set of assumptions or conditions.

Note 1 of the Notes to the Consolidated Financial Statements includes a summary of the significant accounting policies and methods used by the Company in the preparation of its consolidated financial statements.

Management believes that of the Company’s significant accounting policies and estimates, the following involve a higher degree of judgment or complexity:

Inventory and Returns Reserve:

Income (Loss)

Cash (Used In) Provided By:

the year ended June 30, 2024, on a net income of $4.6 million, the Company’s cash provided by operating activities was $55.8

million versus $3.4 million for the year ended June 30, 2023.

The primary drivers, year over year, was a $40 million increase to Net

Income combined with a $49.3 million reduction of Inventory versus a $99.7 million reduction of prior year.

As a result of the

supply chain disruptions that occurred during the pandemic, surplus inventory accumulated and the level to support sales during

fiscal year 2024 and 2023 was greatly reduced.

In addition, for the 12 months ended June 30, 2024, working capital improved as

Accounts Payable decreased $18.4 million and was partially offset by trade receivables that declined by $11.9 million;

the prior year, Accounts Payable increased $69.0 million and trade receivables increased by $4.6 million.

Flows from investing activities for the 12 months ended June 30, 2024 were marginal at $0.2 million.

By comparison, for the 12 months

ended June 30, 2023, cashflow from investing activities was $0.8 million due to the combined net working capital structure of the acquisition

transaction attributed to Cash Paid for Business Acquisition of Think3Fold that was acquired for no consideration.

cash from financing activities was $55.4 million for the year ended June 30, 2024 versus cash used in financing activities of $3.2 million

for the same period prior year.

The cash from financing activities for the 12 months ended June 30, 2024 was used for debt service to

reduce the principal on our revolver from $133 million to $73 million year over year.

Accounting Policies and Estimates

consolidated financial statements and disclosures have been prepared in accordance with generally accepted accounting principles (GAAP),

which require that management apply accounting policies, estimates, and assumptions that impact the results of operations and the reported

amounts of assets and liabilities in the financial statements.

Management uses estimates and judgments based on historical experience

and other variables believed to be reasonable at the time.

Actual results may differ from these estimates under a separate set of assumptions

or conditions.

Note 1 of the Notes to the Consolidated Financial Statements includes a summary of the significant accounting policies

and methods used by the Company in the preparation of its consolidated financial statements.

Management believes that of the Company’s

significant accounting policies and estimates, the following involve a higher degree of judgment or complexity:

and Returns Reserve:

Product inventory is recorded at the lower of cost or net realizable value.

The valuation of inventory requires significant judgment and estimates, including evaluating the need for any adjustments to net realizable value related to excess or obsolete inventory to ensure that the inventory is reported at the lower of cost or net realizable value.

For all product categories, the Company records any adjustments to net realizable value, if appropriate, based on historical sales, current inventory levels, anticipated customer demand, and general market conditions.

For the year ended June 30, 2023, the Company performed a net realizable value analysis to determine if a reserve or write- down was necessary for excess or obsolete inventory.

The two most critical assumptions in the analysis were the estimated monthly sales and the average sales price.

In the analysis of the average sales price, we considered our master pricing list or alternative approximations of net realizable value including:

(a) Estimates based on fluctuations of market price or cost of manufacturing similar items, (b) Invoices for new purchases made after the year-end from the original supplier of the inventory item, if sales prices are not available (replacement cost), and/or (c) Advertised prices on product brochures, also considering possible discounts, costs to complete and sell, and salability.

Management completed an analysis of the net realizable value of inventory and recognized a $7.1 million write-down for gaming arcades and $3.7 million for consumer products to their estimated net realizable value, which was recorded in

cost of revenue during the year ended June 30, 2023.

Prolonged macroeconomic instability in the United States including interest rates, inflation, or supply chain disruption could materially impact our assumptions for net realizable value.

Goodwill and Definite-Lived Intangible Assets, Net:

The Company tests its goodwill for impairment on an annual basis, or upon the occurrence of an event or circumstances that may indicate the fair value of the entity is less than it’s carrying amount.

For the year ended June 30, 2023, the Company tested goodwill for impairment at the entity level, since there is one Reporting Unit.

As part of the analysis, we performed a discounted cash flow based on the Company’s three-year projections and determined that the fair value of equity is higher than the carrying value of equity.

As such, the Company’s analysis concluded that there was no impairment to goodwill.

When a triggering event occurs, the Company has an option to first perform a qualitative assessment to determine whether it is more likely than not (i.e., 50% likely) that the fair value of the entity is less than it’s carrying amount.

If the Company elects to use the qualitative option, it must decide whether it is more than 50% likely that the fair value of the entity is less than its carrying amount.

If so, the one-step impairment test is required.

However, if management concludes that fair value exceeds the carrying amount, further testing is unnecessary.

Goodwill impairment is calculated as the amount by which the carrying amount of the entity including goodwill exceeds its fair value.

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, goodwill 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 year ended June 30, 2023, or 2022.

As of the date of the annual goodwill impairment test, the fair value of the Company’s reporting unit exceeded its carrying value by less than 10%.

Either a reduction in the long-term growth rate by more than 25 basis points or an increase in the discount rate by 65 basis points would result in the carrying value of the Company’s reporting unit exceeding its fair value, resulting in an impairment loss of the Company’s goodwill, which amounts to $89,116 as of June 30, 2023.

Given the inherent uncertainties on the macroeconomic conditions and interest rates in general, actual results may differ from management’s current estimates and could have an adverse impact on one or more of the assumptions used in our quantitative model related to impairment assessment, resulting in potential impairment charges in subsequent periods.

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.

Warrant Liability – The Company’s warrant liability is remeasured at fair value as of the reporting period balance sheet date.

The fair value of the Private Warrant was measured using the Lattice model approach.

Significant inputs into the respective models at June 30, 2023 and February 10, 2023 (the initial recognition) are as follows:

Exercise price per share

Risk-free interest rate

Expected term (years)

Expected volatility

Expected dividend yield

The warrants are scheduled to expire on February 10, 2028.

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

● Risk-free interest rate:

The valuation of inventory requires

significant judgment and estimates, including evaluating the need for any adjustments to net realizable value related to excess or obsolete

inventory to ensure that the inventory is reported at the lower of cost or net realizable value.

For all product categories, the Company

records any adjustments to net realizable value, if appropriate, based on historical sales, current inventory levels, anticipated customer

demand, and general market conditions.

the year ended June 30, 2024, the Company continued to perform a net realizable value analysis to determine if a reserve or write-down

was necessary for excess or obsolete inventory.

The key assumptions in this analysis included estimated monthly sales and the average

sales price of inventory items.

The analysis considered factors such as fluctuations in market prices, recent purchase invoices, and

advertised prices, adjusted for potential discounts and costs to complete, and sell.

the year ended June 30, 2023, the Company recognized write-downs of $7.1 million for gaming arcades and $3.7 million for consumer products

to their estimated net realizable value.

These write-downs were recorded in cost of revenue.

The Company continues to monitor macroeconomic

factors such as interest rates, inflation, and supply chain disruptions, which could materially impact future net realizable value assessments.

Company tests its goodwill for impairment when events or circumstances indicate that the fair value of the entity may be less than its

carrying amount.

For the year ended June 30, 2024, the Company performed a quantitative assessment of goodwill at the entity level, which

is considered a single reporting unit.

Based on this analysis, the Company determined that the fair value of the reporting unit exceeded

its carrying value, and no impairment was recognized.

assets are carried at cost, less accumulated amortization, and are amortized over their estimated useful lives, which range from 5 to

The Company reviews these assets for impairment whenever events or changes in circumstances indicate that the carrying amount

may not be recoverable.

There was no impairment of goodwill or other intangible assets for the year ended June 30, 2024.

the inherent uncertainties in the macroeconomic environment, including interest rates and economic conditions, actual results could differ

from management’s estimates, which could lead to future impairment charges.

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

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.

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.

Liability – The Company’s warrant liability is remeasured at fair value as of the reporting period balance sheet date.

fair value of the Private Warrant was measured using the Lattice model approach.

Significant inputs into the respective models at June

30, 2024 and June 30, 2023 are as follows:

price per share

interest rate

dividend yield

warrants are scheduled to expire on February 10, 2028.

significant assumptions using the Lattice model approach for valuation of the Private Placement Warrants and Representative Warrants

were determined in the following manner:

interest rate:

the risk-free interest rate is based on the U.S.

Treasury rate with a term matching the time to expiration.

● Expected term:

Treasury rate with a term

matching the time to expiration.

the expected term is estimated to be equivalent to the remaining contractual term.

● 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.

● 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.

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.

dividend yield:

expected dividend yield is based on the Company’s anticipated dividend

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

Quantitative and Qualitative Disclosures about Market Risk.

Not applicable.

Financial Statements and Supplementary Data.

This information appears following Item 15 of this annual report and is included herein by reference.

information appears following Item 15 of this annual report and is included herein by reference.

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.

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 7. Management’s Discussion and Analysis