What changed in this filing

/stocks — the workspaceLOADING

Item 7. Management’s Discussion and Analysis

2025-09-10 compared with 2024-09-20 · 299 added, 260 removed, 167 unchanged (77% of the section changed)

12 unchanged sentences

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.

Critics’ Choice, Collectors’ Choice, Movies Unlimited, Heartland Music, 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

encompass giants like Walmart, Amazon, Best Buy, Barnes & Noble, Wayfair, Costco, Dell, Verizon, BJ’s Wholesale Club, Rent

A Center, Kohl’s, Target, Shopify, and others.

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

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to the Company’s in stock inventory of over 340,000 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.

Blu-Rays, toys, electronics 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.

January 2025, Alliance entered into an exclusive home entertainment distribution agreement with Paramount Pictures, designating Alliance

as the sole distributor of Paramount’s physical media – including DVDs, Blu-rays, and 4K UHD titles, across the United States

This strategic partnership significantly enhances Alliance’s leadership in home entertainment distribution by providing

direct access to Paramount’s extensive library of blockbuster films and iconic TV series.

The collaboration has already yielded

positive results.

This partnership not only strengthens relationships with major retailers and collectors but also reinforces Alliance’s

commitment to delivering high-quality entertainment products to consumers.

and Business Acquisition

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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

December 17, 2024, we acquired Handmade by Robots from Bensussen Deutsch & Associates, LLC for $7.6 million.

Handmade by Robots produces

licensed vinyl figures that mimic the look of knitted or crocheted plush toys and feature characters from popular franchises such as

DC Comics, Ghostbusters, Harry Potter, Star Trek, and Stranger Things.

The acquisition was accounted for as an asset purchase, with the

purchase price allocated to inventory, tooling equipment, and a trademark associated with the product line.

Handmade by Robots acquisition enhances our portfolio by adding an exclusive collectible line that expands our reach into licensed pop

culture merchandise.

While the financial contribution of Handmade by Robots since the acquisition date has not been material to our consolidated

results for fiscal 2025, we expect this product line to provide incremental revenue growth opportunities in future periods.

February 10, 2023, Alliance completed its business combination with Adara Acquisition Corp., which was accounted for as a reverse recapitalization

with Alliance treated as the accounting acquirer.

As a result of this transaction, the Company continues to recognize non-cash fair value

remeasurement adjustments related to its outstanding warrants.

For the fiscal year ended June 30, 2025, the Company recorded a non-cash

loss of $0.9 million related to changes in the fair value of its warrants, compared to a loss of $0.04 million for the fiscal year ended

June 30, 2024.

These adjustments may create volatility in reported results;

however, they do not impact cash flows from operations.

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.

Macroeconomic conditions, including persistent inflation, continued to influence our operating environment in fiscal

Warehouse costs declined year-over-year, reflecting improved operating efficiencies, and interest expense under our credit facility

decreased due to lower borrowings.

At the same time, renewed tariff discussions on imported physical media and electronics present potential

cost increases that could pressure future gross margins.

While we did not experience material supply chain disruptions in fiscal 2025,

we continue to monitor these factors and their potential impact on our business, financial condition, and results of operations.

discussion of related risks, see Part I, Item 1A.

‘Risk Factors.

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Entertainment Holding Corporation

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

of Income Year Ended June 30, 2025, Compared to Year Ended June 30, 2024

($ in thousands)

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Transaction Costs

IC DISC Commissions

Restructuring Costs

Loss (Gain) on Disposal of Fixed Assets

(Gain) Loss on Disposal of Fixed Assets

Total Operating Expenses

Operating Income (Loss)

Operating Income

Other Expenses

Change in Fair Value of Warrants

Interest Expense, Net

Interest Expense

Total Other Expenses

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.

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.

Income Before Income Tax Expense (Benefit)

Income Tax Expense (Benefit)

Other Comprehensive income (loss)

Total Comprehensive Income

Year-over-year, total net revenues slightly decreased from $1,100 million to $1,063 million (-$37 million, -3%) for the

year ended June 30, 2025.

Like other U.S.

retailers and distributors, we continue to face macroeconomic headwinds stemming from high

interest rates, cautious consumer spending due to reduced purchasing power, and ongoing geopolitical uncertainties.

Despite these challenges,

Alliance Entertainment distinguishes itself as a value-added retail distributor with exclusive distribution rights for approximately

175 film and music studios and labels.

Our robust portfolio of exclusive content, coupled with deep inventory levels, positions us to

effectively serve both bulk B2B customers and the direct-to-consumer (DTC) market with a broad selection of products not readily available

through other distributors.

Our proprietary DTC distribution and inventory solutions—anchored by our consumer-direct subsidiary,

DirectToU LLC which contributed approximately 37% of gross revenue for the year ended June 30, 2025, up from 36% in the prior

over year, vinyl record sales increased from $329 million to $340 million ($11 million, 3%) for the year ending June 30, 2025.

This growth was driven by a 3.8% increase in sales volume, partly offset

by a 0.5% reduction in the average selling price.

The modest decline in pricing was outweighed by higher unit demand, resulting in overall

revenue growth.

Robust early demand and pre-sales ahead of Record Store Day in April 2025 also supported performance.

We expect continued momentum from

collectors and music enthusiasts drawn to the physical format and limited-edition releases.

Notable vinyl releases during the twelve

months ended June 30, 2025, included Taylor Swift’s The Tortured Poets Department (including its Anniversary

Anthology vinyl edition), Sabrina Carpenter’s deluxe Short n’ Sweet , Billy Idol’s Dream Into It (his

first new album in over a decade), Lorde’s critically acclaimed Virgin , and Bruce Springsteen’s archival box set Tracks

The Lost Albums.

Our leading vinyl distribution partners for the period included Walmart, Barnes & Noble, and Amazon.

Compact Discs (CDs) sales slightly decreased from $130 million to $125 million (-$5 million, -4%) for the year ended June 30, 2025.

decline was primarily the result of a 4.5% reduction in average selling price, which more than offset a modest 0.4% increase in unit

While consumer demand showed slight improvement, pricing pressure weighed on overall revenue performance.

A key driver of the

decline in average selling price for CD sales was increased pricing pressure and a shift in consumer purchases toward lower-priced formats.

Throughout the year, interest in expanded anniversary re-issues, collector’s editions, and multi-disc box sets remained steady.

However, these premium formats represented a smaller share of total sales compared to prior years, as more consumers gravitated toward

standard, lower-priced releases.

This shift in product mix contributed to the overall decline in average selling price.

movie sales, which include DVDs, Blu-Ray, and Ultra HD, increased from $204 million to $279 million (+$75 million, +37%) for the year

ended June 30, 2025, versus the same period last year.

Unit volume rose by 14.8% year over year, and an 18.8% increase in

average selling price further amplified growth, resulting in strong overall revenue performance.

The strong growth in physical movie sales was driven by

a steady pipeline of theatrical releases and continued consumer interest in premium formats such as 4K Ultra HD and collectible SteelBooks.

The launch of a new exclusive content partnership in January 2025 further strengthened our film portfolio, introducing a slate of high-profile

titles that enhanced both our pricing power and retail visibility.

This shift toward premium content significantly contributed to the

increase in average selling price, even as overall volume declined.

We expect this trend to continue, as brick-and-mortar retailers increasingly

prioritize curated, high-value offerings to meet demand for omnichannel shopping experiences over lower-cost, mass-market inventory.

With a robust content pipeline and strengthened retail partnerships, we are well-positioned to capitalize on evolving consumer preferences

and deliver sustained growth across our physical media business.

Year-over-year,

gaming sales decreased from $338 million to $255 million (-$83 million, -25%) for the 12 months ended June 30, 2025.

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.

Unit volume declined by 61.5%, reflecting limited hardware availability

and delays in major game releases from key publishers.

However, this was partially offset by a 93.4% increase in average selling price,

driven by a stronger product mix that included more premium accessories, collector-focused items, and reduced discounting.

The June 2025

release of the Nintendo Switch 2 also contributed to elevated price points but did not fully offset the steep drop in units sold.

As a leading distributor of physical gaming products,

we are well-positioned to benefit from the upcoming wave of next-generation console releases and growing demand for high-end gaming accessories.

We continue to adapt our inventory and purchasing strategies to align with evolving industry trends and are prepared to support both

retailers and consumers as the market rebounds.

the year ended June 30, 2025, consumer products revenue, which includes Collectibles and Electronics, decreased from $43 million

to $37 million (-$6 million, -14%) versus the prior year.

Collectibles revenue totaled $22 million, down from $26 million

the prior year (-$4 million, -15%).

Unit volume increased 19.5%, but this growth was outweighed by a 30%

decline in average selling price, resulting in lower overall revenue.

Following our acquisition of Handmade by Robots, we anticipate a strong lineup of new theatrical and streaming releases that will

drive collectible and merchandise sales, boosting margins.

The collectibles market remains an integral part of the entertainment category,

driven by its mix of nostalgic, investment, and intrinsic value.

We continue to view this category as an important and profitable part

of the entertainment ecosystem.

Electronics revenue was $15 million, down slightly from $16 million in the prior year (-$1 million, -6%).

This decline was driven by a 5.3% decrease in unit volume combined

with a 4.1% decrease in average selling price.

The softer pricing reflects ongoing competitive pressures and product mix shifts, while

the modest volume decline indicates more stable demand compared to the prior year.

Total cost of revenues, excluding depreciation and amortization, decreased from $972 million to $931 million ($41 million

or 4%) year over year primarily due to the direct relation of product costs to sales volume.

gross margin dollars increased $4 million

year over year on lower sales and higher gross margins.

Gross margins increased from 11.7% to 12.5% (+.8 percentage points) for the year ended June 30, 2025, versus June 30, 2024.

The improvement in the gross margin was primarily driven by higher average selling

prices and the successful launch of a new exclusive content partnership.

Additionally, enhanced inventory management and increased vendor

rebate activity contributed to stronger profitability and overall margin expansion.

Total Operating Expenses declined 10.3% and decreased as a percentage of revenue from 10.4% to 9.7% (.7 percentage points)

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Distribution and Fulfillment Expense, as a percentage of net revenue, decreased from 4.4% to 3.8% (.6 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

ended June 30, 2025, versus the prior year.

This improvement was driven by reductions in both fulfillment and payroll expenses,

as we implemented a strategic plan to streamline operations without compromising service levels.

In May 2024, we closed our Shakopee,

MN warehouse and consolidated fulfillment operations in Shepherdsville, KY, enhancing efficiency, eliminating redundancies, and lowering

operating costs for the twelve-month period.

We also continue to invest in warehouse automation to reduce reliance on permanent labor,

while leveraging temporary labor to manage fluctuations in demand.

As a result, total fulfillment payroll expenses declined by $5 million,

or 17%, for the year ended June 30, 2025.

Despite historically low unemployment rates, the average cost per labor hour fell by 4.6% year

Additionally, non-payroll fulfillment costs, including storage, declined significantly, reflecting continued efforts to optimize

warehouse operations and improve cost structure.

key contributor to the decline in operating expenses was a $1.7 million, or 2.9%, reduction in Selling, General, and Administrative (SG&A)

expenses for the year ended June 30, 2025, compared to the prior year.

SG&A costs decreased from $57.7 million to $56 million,

while remaining relatively steady as a percentage of net revenue at 5.3%, compared to 5.2% in the prior year.

In addition to lower overhead,

Transaction Costs fell from $2.1 million to $1.0 million.

We continually review SG&A expenses, including business processes, to identify

opportunities for further cost reductions and operational efficiency.

Interest expense decreased from $12.2 million to $10.6 million ($1.6 million or 13.1%) for the year ended June 30, 2025,

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

The decrease was driven by both a lower average effective interest rate, which declined from 9.5% to 9.2%, and

a reduction in the average revolver balance, which fell by $25.5 million (25%) from $103 million to $77.5 million for the year ended

June 30, 2025.

For the year ended June 30, 2025, an income tax provision of $3.6 million was recorded compared to tax benefit of $2.7 million

for the prior year.

Alliance reported a pretax income of $18.7 million and $1.9 million for the years

ended June 30, 2025, and 2024, respectively.

The annual effective tax rate for the year ended June 30, 2025, was

19% 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 purposes.

for income taxes, effective tax rate and statutory federal income tax rate for the years ended June 30, 2025, and 2024 were as follows:

($ in thousands)

federal income tax rate

June 30, 2025

June 30, 2024

Income tax provision (benefit)

Effective tax rate

Statutory federal income tax rate

Financial Measures:

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of $24.3 million prior year or an improvement of $12.2 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:

We define Adjusted EBITDA as net income or loss adjusted

(i) income tax expense;

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(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.

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

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.

($ in thousands)

Income (Loss)

Tax (Benefit) Expense

and Amortization

Restructuring

Compensation Expense

in Fair Value of Warrants

(Gain) on Disposal of PPE

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

June 30, 2025

June 30, 2024

Interest Expense

Income Tax Expense (Benefit)

Depreciation and Amortization

Transaction Costs

Restructuring Costs

Stock-based Compensation Expense

Change in Fair Value of Warrants

Contingent Loss

(Gain) Loss on Disposal of PPE

Adjusted EBITDA

AND CAPITAL RESOURCES

9 unchanged sentences

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

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

credit facility.

1 unchanged sentence

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.

Since June 30, 2024, our availability

increased from $44 million to $54 million, an increase of $10 million, as we converted accounts receivable and inventory to cash which

was used to reduce the revolver from $73 million to $57 million ($16 million or 22%) year over year.

($in millions)

June 30, 2025

June 30, 2024

Revolver Balance

Company currently intends to continue relying primarily on its borrowing capacity under the Current Credit Facility, as well as any

renewal or replacement of such facility, to fund working capital and other operational requirements.

The availability of additional

cash proceeds from the potential exercise of outstanding Warrants is contingent upon the market price of the Company’s Class A

common stock exceeding the Warrant exercise price of $11.50 per share.

Given that the market price of the Class A common stock was

$3.77 as of June 30, 2025, the Company does not currently expect Warrants to be exercised unless and until the market price exceeds

the exercise price.

Although the Company does not currently have any definitive plans to do so, it may seek to raise additional

capital through the issuance of equity securities in the future, depending on market conditions, strategic opportunities and

liquidity needs.

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

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($ in thousands)

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.

June 30, 2025

June 30, 2024

Net Cash (Used In) Provided By:

Operating Activities

Investing Activities

Financing Activities

the year ended June 30, 2025, the Company generated $26.8 million in cash from operating activities on net income of $15.1 million, compared

to $55.8 million in the prior year.

The year-over-year change was primarily driven by a $10 million increase in net income and a $22

million increase in accounts payable, compared to an $18 million decrease in accounts payable in the prior year, reflecting the impact

of improved cash management practices.

Inventory increased by $5 million as of June 30, 2025, whereas in the prior year it had decreased

by $49 million.

The significant reduction in the prior year reflected efforts to draw down surplus inventory that had accumulated during

the pandemic due to supply chain disruptions.

That inventory had supported sales throughout fiscal 2024, contributing to the large swing.

Additionally, working capital declined modestly by $3 million year over year—from $48 million to $45 million.

Changes in the inventory

and sales mix during fiscal 2025 led to higher payable balances to vendors offering extended payment terms.

Flows used in investing activities for the 12 months ended June 30, 2025 were at $8 million.

By comparison, for the 12 months ended June

30, 2024, cashflow used in investing activities was $0.1 million.

In fiscal year 2025, Alliance Entertainment reported a significant increase

in cash used for business acquisitions, totaling approximately $7.6 million.

This outflow was related to a planned acquisition that ultimately

did not materialize.

Although the transaction was not completed, the funds had already been disbursed as part of the acquisition process.

The company is currently in the process of recovering these funds, and the reimbursement is expected to be reflected in future reporting

This one-time event temporarily inflated investing cash outflows and does not reflect ongoing acquisition activity.

the year ended June 30, 2025, net cash used in financing activities totaled $19 million, compared to $55 million in the prior year.

current year’s financing activity primarily reflects net repayments on the revolving credit facility of $15.7 million, resulting

from $986.1 million in payments and $970.4 million in borrowings.

In contrast, the prior year saw heavier net repayments of $60.3 million.

Additionally, there were no proceeds from shareholder loans in fiscal 2025, while the prior year included $46 million in inflows and

$36 million in repayments.

Other financing activities in the current year include $2.8 million in payments on financing leases, consistent

with the prior year, which saw $3.0 million.

Overall, the lower cash used in financing activities in fiscal 2025 reflects more moderate

debt activity and the absence of shareholder-related financing transactions.

Accounting Policies and Estimates

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

Significant estimates inherent in

the preparation of the consolidated financial statements include management’s estimates related to the sales returns reserve, customer

rebates and discount reserves, inventory valuation, goodwill and intangible asset impairment, and the fair value of warrants.

On an ongoing

basis, management evaluates its estimates compared to historical experience and trends, which form the basis for making judgments about

the carrying value of assets and liabilities.

Management believes that of the Company’s

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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

For the year ended June 30, 2025, the Company performed a qualitative assessment of goodwill at the entity level, which

is considered a single reporting unit.

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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.

Intangible assets are carried at cost, less accumulated amortization, if applicable.

Definite-lived intangible assets

are amortized over their estimated useful lives, which range from 5 to 15 years.

Indefinite-lived intangible assets, including certain

trade names, are not amortized but are tested for impairment annually, or more frequently if events or changes in circumstances indicate

that their carrying amount may not be recoverable.

Goodwill is also tested for impairment at least annually, or more frequently if triggering

events occur.

There was no impairment of goodwill or other intangible assets for the year ended June 30, 2025.

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lives, if considered definite lived.

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

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

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

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

Significant inputs into the respective models

at June 30, 2025, and June 30, 2024, are as follows:

June 30, 2025

June 30, 2024

Exercise price per share

Risk-free interest rate

Expected term (years)

Expected volatility

Expected 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

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

were determined in the following manner:

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

Treasury rate with a term

matching the time to expiration.

Treasury rate with a term matching the time to expiration.

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

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 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

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.

Quantitative and Qualitative Disclosures about Market Risk.

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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