Item 1. Business
Item
1. Business.
Alliance is a leading global wholesaler/retailer of entertainment products consisting of music, movies, gaming,
collectables, and a key player in the entertainment industry. Alliance boasts of a diverse portfolio of owned retail 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 suppliers of music labels, home video studios,
video game publishers, and collectables 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.
This
pivotal role extends to connecting these suppliers with domestic and international top-tier retail partners. Notable partners encompass
giants like Walmart, Amazon, Best Buy, Barnes & Noble, Wayfair, Costco, Dell, Verizon, Kohl’s, Target, Shopify, and others.
Employing 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.
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 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. 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.
Alliance
was founded in 1990 (previously named CD Listening Bar, Inc.). Through a series of acquisitions and organic growth, Alliance has expanded
and strengthened its global footprint and product breadth, and greatly increased its service capabilities. Since its inception, Alliance
has made ten accretive business acquisitions, including Phantom Sound and Vision, MSI Music, Infinity Resources, Alliance, ANconnect,
Mecca Electronics, Distribution Solutions, Mill Creek, COKeM, and Think3Fold. Management believes that Alliance’s ability to successfully
integrate acquisitions is underpinned by its highly efficient operating systems and experienced leadership team.
Alliance
believes the three pillars of its business; Service, Selection, and Technology create a powerful competitive advantage that will protect
the Company’s market leadership and propel its future growth into the evolving physical entertainment product segments.
The
Business Combination Agreement
On
February 10, 2023, Adara, Alliance 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 Alliance 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 Alliance. Following the consummation of the Merger on the closing of the Business Combination, Alliance changed its name from Alliance
Acquisition Corp. to Alliance Entertainment Holding Corporation.
Pursuant
to the Business Combination Agreement, Alliance issued (i) 47,500,000 shares of Class A common stock of Alliance to holders of common
stock of Legacy Alliance and (ii) 60,000,000 contingent shares of Class E common stock of Alliance 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
contingent occurrence of certain triggering events.
Alliance’s
Business
With
more than thirty years of distribution experience, Alliance serves customers of every size, providing a suite of services to resellers
and retailers worldwide. We believe that our efficient processing and essential seller tools noticeably reduce the costs associated with
administrating multiple vendor relationships and streamline the overall purchasing experience. Alliance believes that it is a single
source for all customer entertainment product needs. As a solutions-based operation, Alliance seeks to drive sales for their suppliers
with broad product selection and cost-efficient processing.
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Alliance’s
distribution business is built around three areas, where our marketplace value is created: Service, Selection and Technology.
Service
Alliance
provides efficient, Omni-Channel expansion solutions for retailers, including:
● E-Commerce
and Direct to Consumer (DTC)
Alliance
provides leading product and e-commerce distribution and inventory solutions. Alliance provides a full, enterprise-level infrastructure
and whitelists dropships orders directly to consumers on behalf of its omni customers. The entire ordering, confirmation and invoicing
process is automated. The functionality allows customers to focus on sales while Alliance performs all stocking, warehousing, and shipping
functions.
● Vendor
Managed Inventory
Alliance
is a leader in vendor managed inventory (VMI) solutions providing solutions tailored to customers to support their inventory needs. These
value-add services provide a highly technical, critical business function for our partners using traiting of locations and min/max system
of supply.
● Subsidiary
Brands — We operate under the following subsidiaries which focus on
the following product brand areas:
Alliance — was
a competitor to CD Listening Bar when CD Listening Bar acquired Alliance in 2013. Alliance primarily serviced Barnes &Noble and Best
Buy, and hundreds of independent retailers. This reverse merger by which CD Listening Bar merged into Alliance made Alliance the largest
music and video distributor in the world.
COKeM — Alliance
acquired COKeM International Ltd. in September 2020. COKeM is one of the leading and innovative distribution service companies in
the video game and accessory industries. COKeM continues to expand its capabilities, providing full-service distribution and
fulfillment for a wide array of industries and across many product categories. Alliance acquired Mecca Electronics in 2018 and,
in 2021, Mecca Electronics was merged into COKeM.
AMPED
Distribution — is a division of Alliance that consists of over 90 small music labels where AMPED is the exclusive supplier
of physical media to retailers in the United States.
Distribution
Solutions — is the largest aggregator and distributor of independent film labels in North America. Alliance acquired Distribution
Solutions in 2018 and has over 50 movie studios that are exclusively distributed to over 30,000 retail stores through Distribution Solutions.
DirectToU — division
consists of Alliances owned retail brands using the dba’s of ImportCDs, Deep Discount, Collectors Choice Music, Collectors Choice,
Vinyl, Blow It Out of Here, Wow, Pop Market, Collectors Choice Video, and Movies Unlimited. Most of these brands were purchased from
Infinity Resources in 2010.
Mill
Creek Entertainment — is the home entertainment industry’s leading independent studio for Blu-ray, DVD, and
digital distribution. With direct sales pipelines to all primary retail and online partners, Mill Creek Entertainment licenses, produces,
markets, and distributes a dynamic array of film and television content to over 30,000 retail stores and thousands of websites reaching
millions of customers across North America. Mill Creek Entertainment’s expansive library includes Oscar®-winning theatrical
feature films, Emmy®-winning classic and contemporary TV series, original documentary productions and pop-culture favorites that
enlighten, educate, and entertain.
NCircle
Entertainment — Founded in 2006, NCircle Entertainment is one of the largest independent distributors of quality
children and family entertainment content. NCircle is committed to providing quality children’s entertainment that builds a solid
foundation of early learning skills upon which future educational success can be built. NCircle’s award winning brands engage your
child in the learning process, using the interdisciplinary STEM approach, teaching reading readiness, science concepts, problem solving
tactics, social skills, and environmental awareness, while entertaining them with song, dance and laughter. NCircle’s library includes
many of the most loved and best-selling children’s brands including Gigantosaurus, The Cat in the Hat Knows a Lot About That!,
Llama, The Octonauts, Sonic Boom, The Snowman and many more.
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Selection:
Product
Categories — Alliance consolidates and distributes a portfolio of entertainment products with over 325,000 SKUs in stock
in core media and entertainment product areas in five primary categories:
● Gaming
Products: For the fiscal year ended June 30, 2024, gaming represented 31% of Alliance revenues
on a consolidated basis. Leading products distributed are: Nintendo, Microsoft, Arcade1Up,
and third party video game publishers. For the year ended June 30, 2023, gaming represented
approximately 34% of Alliance revenues on a consolidated basis.
● Vinyl
Records: For the fiscal year ended June 30, 2024, vinyl represented 30% of all Company revenues
on a consolidated basis. For the year ended June 30, 2023, vinyl represented approximately
28% of Alliance revenues on a consolidated basis.
● Digital
Video Discs (DVD)/Blu-Ray/UltraHD: Sales for the fiscal year ended June 30, 2024, represented
19% of Alliance’s consolidated revenue. For the year ended June 30, 2023, DVD, Blu-Ray
and UltraHD represented approximately 16% of Alliance revenues on a consolidated basis.
● Compact
Discs: CDs for the fiscal year ended June 30, 2024, represent 12% of Alliance’s consolidated
revenue. For the year ended June 30, 2023, CDs represented approximately 11% of Alliance
revenues on a consolidated basis.
● Collectables
and Consumer Products: Sales in Collectables and Consumer Products represented 4% of the
Company consolidated revenue for the fiscal year ended June 30, 2024, and approximately 7%
of Alliance revenues on a consolidated basis for the year ended June 30, 2023.
Technology:
Alliance’s
technology platforms combine customer-friendly applications and efficient operating systems with access to the Company’s global
content inventory across all current market segments. These platforms offer the Alliance marketplace stakeholders feature-rich tools
and services for all aspects of consumer engagement, transaction processing and business development.
Alliance
continues to invest in automated handling equipment in our Shepherdsville, KY warehouse resulting in reduced shipping times, streamlined
order processing, and improved warehouse efficiency. In April 2024, we implemented a new piece of automation equipment from OPEX Sure
Sort X® for the sortation of non-standard size products. Since most of these products were being manually sorted, the increased sortation
capacity reduces labor cost and minimizes the potential for product damage. In December 2022, we implemented a state-of-the art AutoStore
Automated Storage & Retrieval System (ASRS). This system significantly improved Alliance’s warehouse operations, allowing the
Company to achieve increased levels of speed, reliability, capacity, and precision, resulting in significant cost savings.
The
Company’s platforms enable stakeholders to search and purchase personalized product selections efficiently. Through a modern and
intuitive user interface, customers access Alliance’s global inventory as well as integrated marketing tools, conversational commerce,
Fintech solutions, self-service purchasing and 24/7 support. Current features of Alliance’s customer engaging technology features
include seamless connectivity across desk-top, notebook and mobile devices.
Alliance’s
newer platforms also incorporate tools and services that increase revenue and profitability when compared to legacy distribution systems.
In addition to robust search, selection and purchase transaction tools and service support, the Company’s platforms currently incorporate
a Fintech platform with an extensive selection of payment options. Further, Alliance’s technology offers a multi-channel marketing
platform supporting retailer marketplace participants’ growth and business development with fully integrated product marketing
and CRM tools. Management believes the result is a more comprehensive, engaging, and cost-effective transaction process designed to make
all stakeholders more productive and competitive.
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Industry
Background
The
industries in which the Company distributes product are:
● Packaged
Goods consisting of licensed physical media and entertainment content;
● Gaming
Consoles and Accessories; and
● Licensed
Toys and Collectables.
Distributors
of physical media are navigating changes in market demand, an evolving omni-channel retail market, and supplier consolidation efforts.
While many consumers are transitioning to digital media consumption, such as streaming music and video services, there remains a growing
market driven by the collectability of physical media including Vinyl Records, specialty SteelBooks DVD’s, Box Sets of CD’s,
and Pop Culture Collectables. This shift in demand, combined with the evolving retail and supplier landscape, may prompt the consolidation
of distribution networks. This presents a unique opportunity for distributors that can cater to the evolving preferences and values of
the retailers they distribute to and suppliers they procure from.
While
overall demand for physical media has declined, niche markets for music and movie enthusiasts are growing. This trend is evidenced by
the rising popularity of K-pop in the form of CDs and vinyl records, special edition collections SteelBook DVDs, and 4K UHD Blu-ray movies,
especially among distributors with exclusive content. Nostalgia-driven purchases often appeal to collectors because of their intrinsic
value. For example, vinyl record buyers appreciate the artwork and superior warn sounding audio quality compared to streaming services.
Additionally, limited editions, box sets, and exclusive releases attract a significant market segment for similar reasons. Furthermore,
as major retail chains reduce the shelf space dedicated to physical media, distributors with direct-to-consumer channels can leverage
their capabilities and perform fulfillment service for retail dotcoms. This allows retailers to expand their product offering without
the added expense of incremental warehouse space and inventory carrying costs.
Suppliers
also benefit from this evolving landscape. By partnering with distributors who focus on mass and niche markets, suppliers can ensure
their products reach a wide and diverse set of consumers and a streamlined distribution network. Additionally, suppliers with exclusive
releases and limited editions have an opportunity to leverage their unique content with premium pricing. Collaboration with distributors
on marketing and promotional efforts can further enhance visibility and sales, creating a mutually beneficial relationship in a competitive
marketplace.
The
market for physical media is becoming increasingly competitive as companies compete for a shrinking customer base. Distributors must
differentiate themselves by offering unique products, exclusive content, and superior customer service. To be successful, we must correctly
anticipate the types of entertainment, products and play patterns which will capture consumers’ interests and imagination, and
quickly develop and introduce innovative products and engaging entertainment which can compete successfully for consumers’ limited
time, attention, and spending. Specialized distributors often have an advantage in this regard, as they can be more agile and responsive
compared to larger more diverse distributors. Additionally, partnerships with artists and content creators to secure exclusive releases
can provide a unique competitive edge. As the market evolves, distributors that can innovate and meet the demands of niche audiences
will likely thrive. Alliance has the advantage of bundling all of its different entertainment products they distribute to create unique
exclusive SKU’s that omni retailers can offer.
Market
Opportunity
The
Company has identified three primary market areas where it currently conducts business and plans to grow its business:
Content
Media
As
technology and social trends evolve, film and music market studios are overhauling their business models to take advantage of changing
consumer behavior and expanding media platforms. A large opportunity exists for Alliance to license video movies from movie studios that
want to exit from home video. With Alliance distributing these exclusive video movies for studios using the company’s technology,
process, and relationships to efficiently manage supply chain logistics in bulk to major retailers and direct to consumers. Consumers
continue to trend towards vinyl records due to the desire to own the physical product, the sound quality, and the intrinsic value of
the album artwork. Despite the rise of digital distribution models, many consumers still prefer to buy physical versions of games because
of the ability to share and display like hardcover book collections.
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Fulfillment.
The
global e-commerce fulfillment services market is expected to experience substantial growth due to the proliferation of the e-commerce
industry, particularly in emerging markets, leading to an unprecedented rise in online buyers. This growth is anticipated to be driven
by established brands in North America, such as Amazon, Walmart, Best Buy, and Target. In addition, retailers and manufacturers are increasingly
focusing on their core competencies to sustain intense competition, leading them to outsource fulfillment activities to third-party vendors.
Our Competitive
Strengths
Alliance
is one of the largest physical media and entertainment product distributors in the world and a leader in fulfillment and e-commerce distribution
solutions. Its existing product and service offering has positioned the Company to capitalize on shifts towards e-commerce and Omni-Channel
strategies, especially as retailers and manufacturers greatly increase their reliance on their direct-to-consumer fulfillment and distribution
partners.
We
believe that our key strengths position us to deliver on our strategy to grow profitably, optimize our core physical media and entertainment
product distributors’ fulfillment and e-commerce distribution solutions, and expand and invest in higher-margin advanced technology
solutions and high-value services.
The
Company believes the following strengths are key to its ability to grow and maintain its position as a market leader:
● Proven
Management Experience and Equity Rollover. With over 30 years of operations and experience,
Alliance management has extensive knowledge and is rolling over all their equity in the Business
Combination in preparation to lead the Company towards future growth.
● Significant
barriers to entry and market leadership. Alliance is a leader in fulfillment and e-commerce
distribution with over 325,000 SKUs in stock. The Company’s market leadership is further
protected by a three-pronged moat of services, selection, and technology. The Company’s
platforms create efficiencies, which benefit its partners in the physical media and entertainment
marketplace. As a result, both suppliers and retailer customers rely on the Company’s
platforms to fuel transaction volume.
● Organic
Growth Opportunities. Alliance will seek to grow revenue and expand margins through the
expansion of partnerships with vendors and customers and investment in existing facilities.
● Proven
track record of building scale through significant acquisitions. Since its inception,
Alliance has successfully acquired and integrated ten businesses that have greatly expanded
the vendors and customers we are supporting. This M&A activity has built scale and added
capabilities to the Company’s platforms. Further, Alliance has demonstrated an ability
to integrate those companies into its existing platforms to fundamentally improve the acquired
businesses. Alliance management believes significant consolidation opportunities remain to
drive future growth by acquiring complementary businesses and competitors.
● Modern
technology distribution platform and interface. The Company’s technology platform
increases transaction efficiency, provides great mobile accessibility, and incorporates modern
marketing and Fintech tools.
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Strategy
for Future Growth
Alliance
will continue to capitalize on its services, selection, and scalable distribution network technology to propel its future growth both
organically and through acquisitions. With a public listing, we have access to additional capital to finance future growth.
Our
strategy will include:
● Execute
Acquisition Strategy. Alliance has a proven track record of successfully acquiring and
integrating competitors and complementary businesses. With additional capital, Alliance will
be able to execute its acquisition strategy more effectively.
● Increase
Market Share. Expanding its existing product and service offerings and executing its
acquisition strategy will drive Alliance’s efforts toward increasing market share.
The Company has historically built scale and added capabilities through acquisitions. It
has demonstrated an ability to execute accretive and synergistic acquisitions as well as
integrate and fundamentally improve the acquired businesses. Alliance expects to continue
pursuing strategic opportunities that strengthen its platforms, expand the breadth and depth
of its content, and enhance its distribution infrastructure. Alliance will continue to actively
monitor and evaluate these and future opportunities in its acquisition pipeline in both the
near and mid-term.
● Enhance
Direct to Consumer (DTC) Relationships and Capabilities. Alliance’s DTC services
are in greater demand as consumer preferences shift and stress retailers’ e-commerce
and DTC capabilities. Enhancing DTC relationships will grow existing revenue lines and improving
capabilities will generate a more attractive overall service offering.
● Expand
into New Consumer Products. Leveraging existing relationships, Alliance can expand into
new consumer product segments, growing its product offering and providing more to its existing
customer base while attracting new customers in the process.
● Continuing
Technological Advancement. Alliance will further invest in automating facilities and
upgrading proprietary software.
Suppliers
Alliance
distributes and markets over 400,000 products worldwide from more than 600 of the industry’s premier physical media entertainment
products suppliers. The Company maintains approximately 325,000 SKUs of unique items in its inventory.
For
the fiscal year that ended June 30, 2024, five suppliers made up approximately 58% of product receipt value, and 17 suppliers made up
80% of product receipt value. By comparison, for the fiscal year that ended June 30, 2023, five suppliers made up approximately 49% of
the product receipt value, and 23 suppliers made up 80% of the product receipt value. One supplier comprised of approximately 21% of
Alliance’s total product receipt value for the year ended June 30, 2024, versus 15% in 2023.
Alliance
has written supply agreements with many of its suppliers. These agreements usually provide for nonexclusive distribution rights and often
include territorial restrictions that limit the countries and, in some cases, certain channels in which it may distribute the products.
Some of Alliance’s agreements with suppliers may contain limitations of liability with respect to our suppliers’ obligations
and warranties. Historically, warranty expenses have not been material.
The
agreements also are generally short-term, subject to annual renewal, and in some cases contain provisions permitting termination by either
party without cause upon relatively short notice. Certain supply agreements either require (at our option) or allow for the repurchase
of inventory upon termination of the agreement. In cases in which suppliers are not obligated to accept inventory returns upon termination,
some suppliers will nevertheless elect to repurchase the inventory while other suppliers will assist with either liquidation or resale
of the inventory.
Customers
Alliance
conducts business with most of the leading retailers of entertainment products and services around the world. Alliance serves a customer
base that is divided into categories including retailers, direct marketers, Internet-based resellers, independent dealers, product category
specialists and other distributors. Management believes that many of its customers are heavily dependent on Alliance as a partner with
the necessary systems, capital, inventory availability, and distribution and facilities in place to provide fulfillment and other services.
Alliance tries to reduce our exposure to the impact of business fluctuations by maintaining a balance in the customer categories we serve.
Alliance has over 4,000 customers shipping to over 35,000 storefronts and distributes to over 2,500 independent music and video retailers.
6
In
most cases Alliance conducts business with our customers under our general terms and conditions, without minimum purchase requirements.
It also has resale contracts with some of its reseller customers that are terminable at will after a reasonable notice period and have
no minimum purchase requirements. Alliance typically ships products on the same day it receives and accepts customers’ purchase
orders. Unless otherwise requested, substantially all of Alliance’s products are delivered by common freight carriers. Backlog
is usually not material to its business because orders are generally filled shortly after acceptance.
Alliance
has specific agreements in place with certain suppliers and resellers in which it provides supply chain management services such as order
management, technical support, call center services, forward and reverse logistics management, and procurement management services. These
agreements generally may be terminated by either party without cause following reasonable notice. None of the Company’s customer
contracts exceed a one-year term, with most contracts having auto-renewal clauses.
For
the year ended June 30, 2024, Alliance’s top five customers represented approximately 47% of its consolidated revenue. Alliance’s
top customer represented 18% of its consolidated net sales. By comparison, for the fiscal year ended June 30, 2023, the top five customers
generated approximately 50% of consolidated revenue with one customer representing almost 23%.
Our Business is
Affected by Seasonality
Alliance
experiences some seasonal fluctuation in demand in our business due to changes in consumer behavior and schedules of new releases. In
addition, the Company typically experiences an increase in demand in the October-to-December period, driven primarily by pre-holiday
stocking levels in the retail channel for its North American business.
How We Manage Our
Inventory
Alliance
strives to maintain enough product inventories to achieve optimum order fill rates. Alliance’s business, like that of other distributors,
is subject to the risk that our inventory’s value will be adversely impacted by suppliers’ price reductions or by technological
changes affecting the usefulness or desirability of the products comprising the inventory. It is the policy of many suppliers to offer
distributors limited protection from the loss in inventory value due to technological change or a supplier’s price reductions.
When protection is offered, the distributor may be restricted to a designated period of time in which products may be returned for credit
or exchanged for other products or during which price protection credits may be claimed. Alliance continually takes various actions,
including monitoring inventory levels and controlling the timing of purchases, to maximize its protection under supplier programs and
reduce inventory risk. However, no assurance can be given that current protective terms and conditions will continue or that they will
adequately protect Alliance against declines in inventory value, or that they will not be revised in such a manner as to adversely impact
Alliance’s ability to obtain price protection. Alliance is subject to the risk that inventory values may decline, and supplier
agreements may not adequately cover the decline in values. Alliance manages these risks through pricing and continual monitoring of existing
inventory levels relative to customer demand, reflecting its forecasts of future demand and market conditions. On an ongoing basis, Alliance
reduces inventory values for excess and obsolescence to assist in the liquidation of impacted inventories. Music CD’s and Video
Movies are 100% returnable back to Alliance’s suppliers. Products that have exclusive distributions for AMPED and Distribution
Solutions are not owned by Alliance and are treated as consignments for ownership and title.
Inventory
levels may vary from period to period, due, in part, to differences in actual demand from that forecasted when orders were placed, the
addition of new suppliers or new product lines with current suppliers, expansion into new product areas and strategic purchases of inventory.
In addition, payment terms with inventory suppliers may vary from time to time and could result in fewer inventories being financed by
suppliers and a greater amount of inventory being financed by our own capital. Our payment patterns can be influenced by incentives,
such as early pay discounts offered by suppliers.
Sales and Marketing
Alliance’s
product management and marketing groups help create demand for Alliance’s suppliers’ products and services, enable the launch
of new products, and facilitate customer contact. Our marketing programs are tailored to meet specific supplier and customer needs. These
needs are met through a wide offering of services by our in-house marketing organization, including advertising, market research, online
marketing, retail programs, sales promotions, training, and solutions marketing. In addition, Alliance creates and utilizes specialized
channel marketing communities to deliver focused resources and business building support to solution providers.
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For
its Direct-to-Consumer division, the Company deploys performance marketing strategies through digital and offline channels to drive additional
traffic and transactions from high-intent prospective customers. To increase the efficiency of its performance marketing initiatives,
the Company utilizes a Customer Relationship management platform, which provides further opportunities to personalize marketing campaigns
and target advertising to specific market segments. Alliance complements its brand and performance marketing with nurture initiatives
through email and outbound communications to ensure the Company retains high-value customers, increases brand loyalty, and drives recurring
transactions.
The
Company’s marketing strategy includes brand performance, and viral marketing. Brand marketing, which may also include the Company’s
presence on social media platforms, increases awareness among potential customers, helping them understand the benefits of using Alliance’s
platforms. In addition to brand, and performance marketing, Alliance engages in traditional public relations and communications activities,
such as trade show participation, to strengthen its brand and enable it to be less reliant on performance marketing, reducing the Company’s
customer acquisition costs. The Company’s communications team works across press and policy channels to share timely and important
news about the Company. They also oversee the execution of a consumer, product, corporate, and policy communications plan that supports
Alliance’s brand strategy.
Competition
Alliance
faces competition from a variety of competitors, including some of our own suppliers that sell directly to certain segments of the market,
wholesale distributors, retailers, and internet-based businesses. We are a leading company in the sale and marketing of physical media
entertainment products, including vinyl, gaming, DVDs, CD’s and consumer products and toys offerings, and operate in the competitive
e-commerce business environment. We compete with several smaller physical media companies in our product categories, as well as with
many larger e-commerce companies in the United States and internationally. In addition, we compete with entertainment companies that
digitally download and stream their products. Competition is based primarily on meeting consumer product preferences and on the quality
and play value of our physical media products and experiences. To a lesser extent, competition is also based on product pricing.
Many
of the major entertainment and gaming companies are part of large, diversified companies with a variety of other operations. Some of
these competitors have substantially greater marketing and financial resources than we do and may be able to compete aggressively on
pricing in order to increase entertainment revenues and streaming placement. In addition, the resources of the major entertainment producers
may give them an advantage in acquiring other businesses or assets, including media content, that we might also be interested in acquiring.
The competition we face may cause us to lose market share, achieve lower prices for our products or pay more for third party content,
any of which could harm our business.
The
changing trends in consumer preferences with respect to entertainment and barriers to entry as well as the emergence of new technologies
and different mediums for viewing content, such as the growing number of streaming platform options, continually creates new opportunities
for existing competitors and start-ups to develop products and offerings that compete with our entertainment and e-commerce offerings.
In the future, the Company may face increased competition through the emergence of new competitors or business models. Some of Alliance’s
competitors may have access to significant financial resources, greater name recognition and well-established client bases in their target
customer segments, differentiated business models, technology and other capabilities, or a differentiated geographic coverage, which
may make it more difficult for Alliance to attract new customers.
The
market for physical media is becoming increasingly competitive as companies compete for a shrinking customer base. Distributors must
differentiate themselves by offering unique products, exclusive content, and superior customer service. The ability to quickly adapt
to market trends and consumer preferences is crucial. Specialized distributors often have an advantage in this regard, as they can be
more agile and responsive compared to larger more diverse distributors. Additionally, partnerships with artists and content creators
to secure exclusive releases can provide a unique competitive edge. As the market evolves, distributors that can innovate and meet the
demands of niche audiences will likely thrive.
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Intellectual Property
Alliance’s
intellectual property is an important component of its business. The Company relies on a combination of domain names, trademarks, copyright,
know-how and trade secrets, as well as contractual provisions and restrictions, to protect its intellectual property. As of June 30,
2024, Alliance has no active patents or patent applications, but intends to pursue patent protection to the extent it believes it would
be beneficial and cost effective.
As
of June 30, 2024, the Company owned 22 U.S. registered or pending trademarks and one registered or pending trademark in another jurisdiction.
Alliance also owns 128 domain names including www.deepdiscount.com, www.aent.com, www.cokem.com, www.importcds.com, www.ds.aent.com,
and www.AMPEDdistribution.com.
The
Company relies on trade secrets and confidential information to develop and maintain its competitive advantage. Alliance seeks to protect
its trade secrets and confidential information through a variety of methods, including confidentiality agreements with employees, third
parties, and others who may have access to the Company’s proprietary information. Alliance also requires key employees to sign
invention assignment agreements with respect to inventions arising from their employment and restrict unauthorized access to the Company’s
proprietary technology.
Notwithstanding
the Company’s efforts to protect its intellectual property, there can be no assurance the measures taken will be effective or that
its intellectual property will provide any competitive advantage. Alliance can provide no assurance that any patents will be issued from
its pending applications or any future applications or that any issued patents will adequately protect its proprietary technology. The
Company’s intellectual property rights may be invalidated, circumvented, or challenged. Furthermore, the laws of certain countries
do not protect intellectual property and proprietary rights to the same extent as the laws of the United States and, as a result, Alliance
may be unable to protect its intellectual property and other proprietary rights in certain jurisdictions. In addition, while the Company
has confidence in the measures it takes to protect and preserve its trade secrets, it cannot guarantee these measures will not be circumvented,
or that all applicable parties have executed confidentiality or invention assignment agreements. In addition, such agreements can be
breached, and may not have adequate remedies should any such breach occur. Accordingly, Alliance’s trade secrets may otherwise
become known or be independently discovered by competitors.
Human Capital Resources
As
of June 30, 2024, Alliance had approximately 657 employees on its payroll and approximately 226 workers hired through staffing agencies
throughout the U.S. and internationally. As of June 30, 2023, Alliance had approximately 761 employees on its payroll and approximately
266 workers hired through staffing agencies throughout the U.S. and internationally. Staffing agencies are used to flex labor capacity
to ensure the labor supply and demand are in balance. None of Alliance’s employees are subject to a collective bargaining agreement
and Alliance believes it has a good relationship with its employees and staffing agencies.
Employees
& Demographics. With respect to global demographics on June 30, 2024, approximately 50% of the Company’s payroll employees
are female and 50% are male.
Talent
& Turnover. With a focus on talent acquisition, the leadership team seeks out the most qualified candidates for open roles
and endeavors to keep them at Alliance. Alliance has a robust program for seeking out those candidates, which ranges from sourcing through
talent applications, reviewing direct applicants and using internal referrals to fill roles. Additionally, Alliance strives to promote
internally when possible. Alliance’s program resulted in an annualized turnover rate of about 14% for the fiscal year ended June
30, 2024.
Compensation
Practice & Pay Equality. As Alliance evolves and expands operations, Human Resources, in partnership with the leadership
team, will continue to evaluate the existing workforce to ensure that best practices are maintained across the entire team without risk
of inequality. Pay structures for hourly employees are reviewed annually and for all other employees, compensation is benchmarked according
to the position when a vacancy becomes available. This ensures best practices in a competitive market and, as part of that review, compensation
will be realigned where appropriate for existing employees and new hires.
Regulatory Compliance
The
Company’s overall business approach and strategy includes rigorous attention to regulatory compliance, as its operations are subject
to regulations in the following principal areas, across a wide variety of jurisdictions. Alliance’s business is subject to a wide
array of laws, regulations, and standards in each domestic and foreign jurisdiction where we operate. Alliance has a buying office in
the UK and operates under the name Fulfillment Express. Fulfillment Express sources music from the UK music suppliers that is then transferred
(exported from the United Kingdom) to Kentucky where that music product is prepared to sell in the US market. Fulfillment Express makes
no sales of any kind, for it is a buying office.
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The
regulatory environment in each market is often complex, evolving and can be subject to significant change. Some relevant laws and regulations
are inconsistent, ambiguous and could be interpreted by regulators and courts in ways that could adversely affect the Company’s
business, results of operations, and financial condition. Moreover, certain laws and regulations have not historically been applied to
an innovative hospitality provider such as Alliance, which often makes their application to its business uncertain. For additional information
regarding the laws and regulations that affect the Company’s business, see “Item 1A. Risk Factors.”
Privacy
and Data Protection Regulation
In
processing purchase transactions and information about customers, the Company receives and stores a large volume of personally identifiable
data. The collection, storage, processing, transfer, use, disclosure and protection of this information are increasingly subject to legislation
and regulations in numerous jurisdictions around the world, such as the European Union’s General Data Protection Regulation (“GDPR”)
and variations and implementations of that regulation in the member states of the European Union, as well as privacy and data protection
laws and regulations in various U.S. states and other jurisdictions, such as the California Consumer Privacy Act (as amended by the California
Privacy Rights Act), the Canadian Personal Information Protection and Electronic Documents Act (“PIPEDA”), and the UK General
Data Protection Regulation and the UK Data Protection Act.
Alliance
incorporates a variety of technical and organizational security measures and other procedures and protocols to protect data within the
Company’s platforms and business services, including personally identifiable data pertaining to guests and employees. Alliance
is engaged in an ongoing process of evaluating and considering additional steps to maintain compliance with the California Consumer Privacy
Act, GDPR, PIPEDA, the UK General Data Protection Regulation, and the UK Data Protection Act.
Employment
Laws
The
Company is also subject to laws governing its relationship with employees, including laws governing wages and hours, benefits, immigration
and workplace safety and health.
Other
Regulation
Alliance’s
business is subject to various other laws and regulations involving matters such as income tax and other taxes, consumer protection,
online messaging, advertising, and marketing, the U.S. Foreign Corrupt Practices Act and other laws governing bribery and other corrupt
business activities, and regulations aimed at preventing money laundering or prohibiting business activities with specified countries
or persons. As the Company expands into additional markets, it will be subject to additional laws and regulations.
Periodic
Reporting and Financial Information
Our
Class A common stock and warrants are registered under the Exchange Act, and as a smaller reporting company, we have specific reporting
obligations. We file annual, quarterly, and current reports with the SEC, which include audited financial statements prepared by our
independent registered public accountants. These reports and other important information are available on our website at www.aent.com
under the Investor Relations section, free of charge, as soon as they are filed with the SEC. Please note that information on our website
is not incorporated by reference into this report.
We
are an “emerging growth company,” as defined in Section 2(a) of the Securities Act, as modified by the JOBS Act.
As such, we are eligible to 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
auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act, reduced disclosure obligations regarding executive compensation
in our periodic reports and proxy statements, and exemptions from the requirements of holding a non-binding advisory vote on executive
compensation and shareholder approval of any golden parachute payments not previously approved. If some investors find our securities
less attractive as a result, there may be a less active trading market for our securities and the prices of our securities may be more
volatile.
In
addition, Section 107 of the JOBS Act also provides that an “emerging growth company” can take advantage of the extended
transition period provided in Section 7(a)(2)(B) of the Securities Act for complying with new or revised accounting standards.
In other words, an “emerging growth company” can delay the adoption of certain accounting standards until those standards
would otherwise apply to private companies. We intend to take advantage of the benefits of this extended transition period.
We
will remain an emerging growth company until the earlier of (1) the last day of the fiscal year (a) of 2026, (b) in
which we have total annual gross revenue of at least $1.235 billion, or (c) in which we are deemed to be a large accelerated filer,
which means the market value of our shares of Class A common stock that are held by non-affiliates exceeds $700 million as of the
prior June 30 th , and (2) the date on which we have issued more than $1.0 billion in non-convertible debt during
the prior three-year period. References herein to “emerging growth company” will have the meaning associated with it in the
JOBS Act.
Additionally,
we currently qualify as a “smaller reporting company” under SEC regulations. This status allows us to benefit from certain
reduced disclosure obligations, such as the option to provide only two years of audited financial statements. We will continue to be
classified as a smaller reporting company until the last day of the fiscal
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