ALLIANCE ENTERTAINMENT HOLDING CORP 10-K

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations. The objective for the “Management’s Discussion and Analysis of Financial Condition and Results of Operations” is to provide information the Company’s management team believes is necessary to achieve an understanding of its financial condition and the results of business operations with particular emphasis on the Company’s future and should be read in conjunction with the Company’s audited consolidated financial statements, and footnotes. This analysis contains forward-looking statements concerning the Company’s performance expectations and estimates. Other than statements with historical context, commentary should be considered forward- looking and carries with it risks and uncertainties. See “Statement Regarding Forward-Looking Statements” and Part I, Item 1A. Risk Factors, of this Form 10-K for a discussion of other uncertainties, risks and assumptions associated with these statements. Alliance 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, 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. This 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, BJ’s Wholesale Club, Rent A Center, Kohl’s, Target, Shopify, and others. 44 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 340,000 SKU products, consisting of vinyl records, video games, compact discs, DVD, 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. License Agreements In 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 and Canada. 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. Merger and Business Acquisition Alliance has a proven history of successfully acquiring and integrating competitors and complementary businesses. The Company will continue to evaluate opportunities to identify targets that meet strategic and economic criteria. On 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. The 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. On 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. 45 Macroeconomic Uncertainties Macroeconomic conditions, including persistent inflation, continued to influence our operating environment in fiscal 2025. 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. For further discussion of related risks, see Part I, Item 1A. ‘Risk Factors. Key Performance Indicators Management monitors and analyzes key performance indicators to evaluate financial performance, including: Net Revenue: To derive Net Revenue, the Company reduces total gross sales by customer returns, returns reserve, and allowances including discounts. Cost of Revenues (excluding depreciation and amortization): Our cost of revenues reflects the total costs incurred to market and distribute products to customers. Changes in cost are impacted primarily by sales volume, product mix, product obsolescence, freight costs, and market development funds (“MDF”). Margins: To analyze profitability, the Company reviews gross and net margins in dollars and as a percentage of revenue by line of business and product line. Operating Expenses: Our Operating Expenses are the direct and indirect costs associated with the distribution and fulfillment of products and services. They include both Distribution and Fulfillment and Selling, General and Administrative (SG&A) Expenses. The Distribution and Fulfillment Expenses are the payroll and operating expenses associated with the receipt, warehousing, and distribution of product. Selling, General and Administrative Expenses: The Selling, General and Administrative Expenses are payroll and operating costs for Information Technology, Sales & Marketing, and General & Administrative functions. In addition, we include Depreciation and Amortization expenses and Transaction Costs, if applicable. Balance Sheet Indicators: The Company views cash, product inventory, accounts payable, and working capital as key indicators of its financial position. 46 Alliance Entertainment Holding Corporation Results of Income Year Ended June 30, 2025, Compared to Year Ended June 30, 2024 Year Ended Year Ended ($ in thousands) June 30, 2025 June 30, 2024 Net Revenues $ 1,063,457 $ 1,100,483 Cost of Revenues (excluding depreciation and amortization) 930,605 971,594 Operating Expenses Distribution and Fulfillment Expense 40,375 48,818 Selling, General and Administrative Expense 55,992 57,651 Depreciation and Amortization 5,334 5,880 Transaction Costs 957 2,086 Restructuring Costs 73 280 (Gain) Loss on Disposal of Fixed Assets (15 ) 33 Total Operating Expenses 102,716 114,748 Operating Income 30,136 14,141 Other Expenses Change in Fair Value of Warrants 853 41 Interest Expense 10,575 12,247 Total Other Expenses 11,428 12,288 Income Before Income Tax Expense (Benefit) 18,708 1,853 Income Tax Expense (Benefit) 3,630 (2,728 ) Net Income 15,078 4,581 Other Comprehensive income (loss) 3 (2 ) Total Comprehensive Income 15,081 4,579 Net Revenue: 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 year. Year 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 II: The Lost Albums. Our leading vinyl distribution partners for the period included Walmart, Barnes & Noble, and Amazon. Music Compact Discs (CDs) sales slightly decreased from $130 million to $125 million (-$5 million, -4%) for the year ended June 30, 2025. The 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 volume. 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. 47 Physical 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. 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. For 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. Cost of Revenues: 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. Operating Expenses: Total Operating Expenses declined 10.3% and decreased as a percentage of revenue from 10.4% to 9.7% (.7 percentage points) year over year. Distribution and Fulfillment expenses declined in terms of absolute dollars and the percentage of revenue, and Selling General and Administrative (SG&A) expenses declined in terms of absolute dollars as well. Total 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, 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 over year. Additionally, non-payroll fulfillment costs, including storage, declined significantly, reflecting continued efforts to optimize warehouse operations and improve cost structure. 48 A 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: 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. 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. Income Tax: 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 $1.9 million for the years ended June 30, 2025, and 2024, respectively. The annual effective tax rate for the year ended June 30, 2025, was 19% due to an immaterial true up adjustment to deferred income taxes related to the net tax effects of temporary differences between the amount of assets and liabilities for accounting purposes and the amounts used for tax purposes. Provision for income taxes, effective tax rate and statutory federal income tax rate for the years ended June 30, 2025, and 2024 were as follows: Year Ended Year Ended ($ in thousands) June 30, 2025 June 30, 2024 Income tax provision (benefit) $ 3,630 $ (2,728 ) Effective tax rate 19 % 147 % Statutory federal income tax rate 21 % 21 % Non-GAAP Financial Measures: For the year ended June 30, 2025, we had non-GAAP Adjusted EBITDA of $36.5 million compared with Adjusted EBITDA of $24.3 million prior year or an improvement of $12.2 million year-over-year. We define Adjusted EBITDA as net income or loss adjusted to exclude: (i) income tax expense; (ii) other income (loss); (iii) interest expense; and (iv) depreciation and amortization expense and (v) other infrequent, non- recurring expenses. Our method of calculating Adjusted EBITDA may differ from other issuers and accordingly, this measure may not be comparable to measures used by other issuers. We use Adjusted EBITDA to evaluate our own operating performance and as an integral part of our planning process. We present Adjusted EBITDA as a supplemental measure because we believe such a measure is useful to investors as a reasonable indicator of operating performance. We believe this measure is a financial metric used by many investors to compare companies. This measure is not a recognized measure of financial performance under GAAP in the United States and should not be considered as a substitute for operating earnings (losses), net earnings (loss) from continuing operations or cash flows from operating activities, as determined in accordance with GAAP. See the table below for a reconciliation, for the periods presented, of our GAAP net income (loss) to Adjusted EBITDA. Year Ended Year Ended ($ in thousands) June 30, 2025 June 30, 2024 Net Income $ 15,078 $ 4,581 Add back: Interest Expense 10,575 12,247 Income Tax Expense (Benefit) 3,630 (2,728 ) Depreciation and Amortization 5,334 5,880 EBITDA 34,617 19,980 Adjustments Transaction Costs 957 2,086 Restructuring Costs 73 280 Stock-based Compensation Expense 58 1,386 Change in Fair Value of Warrants 853 41 Contingent Loss - 461 (Gain) Loss on Disposal of PPE (15 ) 33 Adjusted EBITDA $ 36,543 $ 24,267 49 LIQUIDITY AND CAPITAL RESOURCES Liquidity: On December 21, 2023, Alliance Entertainment Holding Corporation entered into a Revolving Credit Facility, which is a three-year $120 million senior secured asset-based credit facility with White Oak Commercial Finance, LLC. The Revolving Credit Facility replaced the Company’s revolver with Bank of America (the “Prior Credit Facility”). The Prior Credit Facility was scheduled to expire on December 31, 2023. The Company has implemented certain strategic initiatives to reduce expenses and focus on the sale of higher margin products. As a result of the new credit facility, combined with these initiatives and the Company’s financial performance for the year ended June 30, 2025, the Company has concluded that it has sufficient cash to fund its operations and obligations (from its cash on hand, operations, working capital and availability on the credit facility) for at least twelve months from the issuance of these consolidated financial statements. Our primary sources of liquidity are existing cash provided by operating activities and borrowings under our credit facility. As of June 30, 2025, in addition to the $1.2 million of cash, we carried a $57 million revolver balance on our $120 million credit facility under the Loan and Security Agreement with White Oak Commercial Finance, LLC. 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 $ 57 $ 73 Availability 54 44 The 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 $3.77 as of June 30, 2025, the Company does not currently expect Warrants to be exercised unless and until the market price exceeds the exercise price. Although the Company does not currently have any definitive plans to do so, it may seek to raise additional capital through the issuance of equity securities in the future, depending on market conditions, strategic opportunities and liquidity needs. In addition, we may lower the exercise price of the Warrants in accordance with the Warrant Agreement to induce the holders to exercise such Warrants. We may effect such reduction in exercise price without the consent of such warrant holders and such reduction would decrease the maximum amount of cash proceeds we would receive upon the exercise in full of the Warrants for cash. Further, the holders of the Private Warrants and the Underwriter Warrants may exercise such Warrants on a cashless basis at any time and the holders of the Public Warrants may exercise such Warrants on a cashless basis at any time an effective registration statement is not available for the issuance of shares of Class A common stock upon such exercise. Accordingly, we would not receive any proceeds from a cashless exercise of Warrants. Cash Flow: The following table summarizes our net cash provided by or used on operating activities, investing activities and financing activities for the periods indicated and should be read in conjunction with our consolidated financial statements for the year ended June 30, 2025 and 2024. Year Ended ($ in thousands) June 30, 2025 June 30, 2024 Net Income $ 15,078 $ 4,581 Net Cash (Used In) Provided By: Operating Activities 26,809 55,773 Investing Activities (8,134 ) (117 ) Financing Activities 18,571 (55,390 ) 50 For 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. Cash 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 periods. This one-time event temporarily inflated investing cash outflows and does not reflect ongoing acquisition activity. For the year ended June 30, 2025, net cash used in financing activities totaled $19 million, compared to $55 million in the prior year. The 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. Critical Accounting Policies and Estimates The consolidated financial statements and disclosures have been prepared in accordance with generally accepted accounting principles (GAAP), which require that management apply accounting policies, estimates, and assumptions that impact the results of operations and the reported amounts of assets and liabilities in the financial statements. Management uses estimates and judgments based on historical experience and other variables believed to be reasonable at the time. Actual results may differ from these estimates under a separate set of assumptions or conditions. Note 1 of the Notes to the Consolidated Financial Statements includes a summary of the significant accounting policies and methods used by the Company in the preparation of its consolidated financial statements. 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 significant accounting policies and estimates, the following involve a higher degree of judgment or complexity: Inventory and Returns Reserve: Product inventory is recorded at the lower of cost or net realizable value. The valuation of inventory requires significant judgment and estimates, including evaluating the need for any adjustments to net realizable value related to excess or obsolete inventory to ensure that the inventory is reported at the lower of cost or net realizable value. For all product categories, the Company records any adjustments to net realizable value, if appropriate, based on historical sales, current inventory levels, anticipated customer demand, and general market conditions. 51 For the year ended June 30, 2025, the Company continued to perform a net realizable value analysis to determine if a reserve or write-down was necessary for excess or obsolete inventory. The key assumptions in this analysis included estimated monthly sales and the average sales price of inventory items. The analysis considered factors such as fluctuations in market prices, recent purchase invoices, and advertised prices, adjusted for potential discounts and costs to complete and sell. The 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, 2025, the Company performed a qualitative assessment of goodwill at the entity level, which is considered a single reporting unit. Based on this analysis, the Company determined that the fair value of the reporting unit exceeded its carrying value, and no impairment was recognized. 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. Given the inherent uncertainties in the macroeconomic environment, including interest rates and economic conditions, actual results could differ from management’s estimates, which could lead to future impairment charges. Business Combinations — Valuation of Acquired Assets and Liabilities Assumed: The Company allocates the purchase price for each business combination, or acquired business, based upon (i) the fair value of the consideration paid and (ii) the fair value of net assets acquired, and liabilities assumed. The determination of the fair value of net assets acquired and liabilities assumed requires estimates and judgements of future cash flow expectations for the acquired business and the allocation of those cash flows to identifiable tangible and intangible assets. Fair values are calculated by applying estimates related to Internal Rate of Return (IRR) and Weighted Average Cost of Capital (WACC) assumptions as well as incorporating expected cash flows into industry standard valuation techniques. Goodwill is the amount by which the purchase price consideration exceeds the fair value of tangible and intangible assets acquired, less assumed liabilities. Intangible assets, such as customer relations and trade names, when identified, are separately recognized and amortized over their estimated useful lives, if considered definite lived. Acquisition costs are expensed as incurred and are included in the consolidated statements of income and comprehensive income. Warrant Liability – The Company’s warrant liability is remeasured at fair value as of the reporting period balance sheet date. The fair value of the Private Warrant was measured using the 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 Stock Price $ 3.77 $ 3.00 Exercise price per share $ 11.50 $ 11.50 Risk-free interest rate 3.63 % 4.41 % Expected term (years) 2.62 3.6 Expected volatility 47.1 % 36.0 % Expected dividend yield - — The warrants are scheduled to expire on February 10, 2028. 52 The significant assumptions using the Black Scholes model approach for valuation of the Private Placement Warrants and Representative Warrants were determined in the following manner: ● Risk-free interest rate: the risk-free interest rate is based on the U.S. Treasury rate with a term matching the time to expiration. ● Expected term: the expected term is estimated to be equivalent to the remaining contractual term. ● Expected volatility: expected stock volatility is based on daily observations of the Company’s historical stock value and implied by market price of the Public Warrants, adjusted by guideline public company volatility. ● Expected dividend yield: expected dividend yield is based on the Company’s anticipated dividend payments. As the Company has never issued dividends, the expected dividend yield is 0% and this assumption will be continued in future calculations unless the Company changes its dividend policy. Item 7A. Quantitative and Qualitative Disclosures about Market Risk. Not applicable. Item 8. Financial Statements and Supplementary Data. This information appears following Item 15 of this annual report and is included herein by reference. Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure. None.