ALLIANCE ENTERTAINMENT HOLDING CORP

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2026

Note 1: Organization and Summary of Significant Accounting Policies

Alliance Entertainment Holding Corporation (“Alliance” or the “Company”) was formed on August 9, 2010. The Company provides full-service distribution of pre-recorded music, video movies, video games and related accessories, and merchandising to retailers and other independent customers primarily in the United States. It provides product and commerce solutions to “brick-and-mortar”, e-commerce retailers, and consumer direct websites, while maintaining trading relationships with manufacturers of pre-recorded music, video movies, video games and related accessories.

On December 31, 2025, the Company completed the acquisition of Endstate Authentic LLC (“Endstate”), a digital authentication and loyalty-driven consumer brand. The transaction was accounted for as a business combination under ASC 805. Accordingly, the assets acquired and liabilities assumed have been recorded at their estimated fair values as of the acquisition date. The purchase price allocation is preliminary and subject to adjustment as the Company continues to finalize its valuation analyses. Results of operations for Endstate are included in the Company’s condensed consolidated financial statements beginning on the acquisition date. Additional information related to this acquisition is provided in Note 22 – Business Combinations.

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. The recapitalization has been retroactively reflected in all periods presented. The Company continues to recognize certain warrant and equity-related impacts from this transaction, including the outstanding contingent Class E shares and warrant liabilities, as discussed further in Notes 20 and 21.

The accompanying unaudited condensed consolidated financial statements contain all adjustments (consisting only of normal recurring accruals and adjustments) which are necessary in order to state fairly the Company’s results of operations, financial position, stockholders’ equity and cash flows as of and for the periods presented. The results of operations for interim periods are not necessarily indicative of the results to be expected for the full year or any other future period. The unaudited condensed consolidated financial statements should be read in conjunction with the Company’s audited consolidated financial statements and related notes, including the Summary of Significant Accounting Policies, included in the Company’s Annual Report on Form 10-K filed September 10, 2026. June 30, 2026, balance sheet information contained herein was derived from the Company’s audited consolidated financial statements as of that date included therein.

Reclassification

Certain amounts from prior periods have been reclassified to conform to the current period presentation.

Basis for Presentation

The condensed consolidated financial statements have been prepared on the accrual basis of accounting in accordance with accounting principles generally accepted in the United States of America (U.S. GAAP). The condensed consolidated financial statements include the accounts of Alliance Entertainment Holding Corporation and its wholly owned subsidiaries. Intercompany transactions have been eliminated in consolidation.

Liquidity

On October 1, 2025, the Company entered into a $120 million senior secured asset-based revolving credit facility with Bank of America, N.A. (the “Revolving Credit Facility”). The facility refinanced and replaced the Company’s prior three-year $120 million asset-based revolving credit facility with White Oak Commercial Finance, LLC, which was entered into on December 21, 2023, and was scheduled to mature on December 21, 2026. Based on the Company’s cash on hand, cash flows from operations, working capital, and availability under its revolving credit facility, management has concluded that the Company has sufficient liquidity to fund its operations and obligations for at least twelve months from the issuance of these condensed consolidated financial statements.

Concentration of Credit Risk

Concentration of Credit Risk consists of the following at:

Customers:

Accounting Pronouncements

Recently issued and adopted

Accounting Standards Update 2024-04, In 2024, Debt—Debt with Conversion and Other Options. In 2024, the FASB issued ASU 2024-04, Debt—Debt with Conversion and Other Options (Subtopic 470-20): Induced Conversions of Convertible Debt Instruments. This ASU clarifies the requirements for determining whether certain settlements of convertible debt instruments, including instruments with cash conversion features and instruments that are not currently convertible, should be accounted for as induced conversions. The Company adopted this ASU effective July 1, 2026. The adoption did not have a material impact on the Company’s condensed consolidated financial statements or related disclosures.

Accounting Standards Update 2025-05, In 2025, Financial Instruments—Credit Losses. In 2025, the FASB issued ASU 2025-05, Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses for Accounts Receivable and Contract Assets. This ASU introduces a practical expedient that permits entities to assume that current conditions as of the balance sheet date remain unchanged over the remaining life of current accounts receivable and contract assets arising from transactions accounted for under Topic 606 when estimating expected credit losses. The Company adopted this ASU effective July 1, 2026. The adoption did not have a material impact on the Company’s condensed consolidated financial statements or related disclosures.

Recently Issued but Not Yet Adopted Accounting Pronouncements

Accounting Standards Update 2024-03, In 2024, Income Statement—Reporting Comprehensive Income. The FASB issued ASU 2024-03, Income Statement—Reporting Comprehensive Income—Expense Disaggregation Disclosures (Subtopic 220-40): Disaggregation of Income Statement Expenses. This ASU provides guidance on the disaggregation of income statement expenses, aiming to enhance the transparency of financial reporting by requiring more detailed disclosures of expense categories, including purchases of inventory, employee compensation, depreciation and intangible asset amortization included within each relevant expense caption, a qualitative description of the amounts remaining in each relevant expense caption that are not separately disaggregated quantitatively, and disclosure of total selling expenses and, on an annual basis, the Company’s definition of selling expenses. As clarified by ASU 2025-01, Income Statement—Reporting Comprehensive Income—Expense Disaggregation Disclosures (Subtopic 220-40): Clarifying the Effective Date, this ASU is effective for annual reporting periods beginning after December 15, 2026, and interim reporting periods within annual reporting periods beginning after December 15, 2027, which for the Company is the fiscal year beginning July 1, 2027 and interim periods within the fiscal year beginning July 1, 2028, with early adoption permitted. The amendments are required to be applied prospectively, with retrospective application to any or all prior periods presented permitted. The Company is currently evaluating the impact of this ASU on its consolidated financial statements to determine the potential effect on its financial reporting and disclosures.

Accounting Standards Update 2025-03, In 2025, Business Combinations and Consolidation. The FASB issued ASU 2025-03, Business Combinations (Topic 805) and Consolidation (Topic 810): Determining the Accounting Acquirer in the Acquisition of a Variable Interest Entity. This ASU provides guidance on determining the accounting acquirer in a transaction effected primarily by exchanging equity interests in which the legal acquiree is a variable interest entity that meets the definition of a business, requiring an entity to consider the same factors that are currently required for determining the accounting acquirer in other acquisition transactions. This ASU is effective for annual reporting periods beginning after December 15, 2026, and interim reporting periods within those annual reporting periods, which for the Company is the fiscal year beginning July 1, 2027, with early adoption permitted, and is required to be applied prospectively to business combinations with an acquisition date on or after the date of initial application. The Company is currently evaluating the impact of this ASU on its consolidated financial statements to determine the potential effect on its financial reporting and disclosures.

Accounting Standards Update 2025-06, In 2025, Intangibles—Goodwill and Other—Internal-Use Software. The FASB issued ASU 2025-06, Intangibles—Goodwill and Other—Internal-Use Software (Subtopic 350-40): Targeted Improvements to the Accounting for Internal-Use Software. This ASU removes all references to software development project stages so that the guidance is neutral to the software development method used, and instead requires an entity to capitalize software costs when management has authorized and committed to funding the software project and it is probable that the project will be completed and the software will be used to perform the function intended. In evaluating that threshold, an entity is required to consider whether there is significant uncertainty associated with the development activities of the software. This ASU is effective for all entities for annual reporting periods beginning after December 15, 2027, and interim reporting periods within those annual reporting periods, which for the Company is the fiscal year beginning July 1, 2028, with early adoption permitted as of the beginning of an annual reporting period, and may be applied prospectively, using a modified transition approach, or retrospectively. The Company is currently evaluating the impact of this ASU on its consolidated financial statements to determine the potential effect on its financial reporting and disclosures.

Accounting Standards Update 2025-11, In 2025, Interim Reporting. The FASB issued ASU 2025-11, Interim Reporting (Topic 270): Narrow-Scope Improvements. This ASU clarifies that the guidance in Topic 270 applies to all entities that provide interim financial statements and notes in accordance with U.S. GAAP. It also adds a comprehensive list of required interim disclosures to Topic 270. In addition, it adds a disclosure principle, modeled after previous SEC guidance, that requires entities to disclose events and changes that occur after the end of the most recent fiscal year and have a material impact on the entity. Finally, it improves the guidance on the information included in interim financial statements and how they are formatted. This ASU does not change the fundamental nature of interim reporting, and it does not expand or reduce current interim disclosure requirements. For public business entities, this ASU is effective for interim periods within annual reporting periods beginning after December 15, 2027. For the Company, that means interim periods within the fiscal year beginning July 1, 2028. Early adoption is permitted. The amendments may be applied either prospectively or retrospectively to any or all prior periods presented. The Company is currently evaluating the impact of this ASU on its condensed consolidated financial statements to determine the potential effect on its consolidated financial reporting and disclosures.

Accounting Standards Update 2025-12, In 2025, Codification Improvements. The FASB issued ASU 2025-12, Codification Improvements. This ASU updates the FASB Accounting Standards Codification across a broad range of Topics. It addresses 33 issues arising from technical corrections, unintended application of the Codification, clarifications, and other minor improvements. This ASU is effective for annual reporting periods beginning after December 15, 2026, and interim reporting periods within those annual reporting periods. For the Company, that is the fiscal year beginning July 1, 2027. Early adoption is permitted in any interim or annual period for which financial statements have not yet been issued or made available for issuance. An entity may elect to early adopt on an issue-by-issue basis. If an entity adopts in an interim period, it must adopt as of the beginning of the annual period that includes that interim period. The Company is currently evaluating the impact of this ASU on its condensed consolidated financial statements to determine the potential effect on its consolidated financial reporting and disclosures.

Note 2: Summary of Significant Accounting Policies

There have been no material changes or updates to the Company’s significant accounting policies from those described in Note 1 to the Company’s audited consolidated financial statements included in the Annual Report on Form 10-K for the fiscal year ended June 30, 2026.

Earnings per Share

Basic Earnings Per Share (“EPS”) is computed by dividing net income available to common shareholders by the weighted average shares outstanding during the period. Diluted EPS takes into account the potential dilution that could occur if securities or other contracts to issue shares, such as stock options, warrants, and unvested restricted stock units, were exercised and converted into common shares and the impact would not be antidilutive. Diluted EPS is computed by dividing net income available to common shareholders by the weighted average shares outstanding during the period, increased by the number of additional shares that would have been outstanding if the potential shares had been issued and were dilutive. Contingently issuable shares are included in basic net income per share only when there is no circumstance under which those shares would not be issued.

The following table sets forth the computation of basic and diluted net earnings per share of Common Stock for the three months ended September 30, 2026, and 2025, respectively:

There are 60,000,000 shares of contingently issuable Common Stock that were not included in the computation of basic or diluted earnings per share since the contingencies for the issuance of these shares have not been met as of September 30, 2026, and September 30, 2025. For the three months ended September 30, 2026, there are 9,920,090 warrants outstanding that have been excluded from diluted earnings per share because they are anti-dilutive.

Note 3: Trade Receivables, Net

Trade Receivables, Net consists of the following at:

The following table provides a roll forward of the allowance for credit losses accounts for the periods ending September 30, 2026 and June 30, 2026:

Note 4: Inventory, Net

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

No inventory write-downs were recorded for the three months ended September 30, 2026, and 2025.

Note 5: Other Current and Long-Term Assets

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

Note 6: Property and Equipment, Net

Property and Equipment, Net consists of the following at:

Depreciation Expense for the three months ended September 30, 2026, and 2025 was $0.5 million and $0.4 million respectively.

Note 7: Goodwill and Intangibles, Net

Goodwill reported is the result of multiple acquisitions made by Alliance Entertainment Holding Corporation over the years. The $4.97 million increase in goodwill during the fiscal year ended June 30, 2026 relates to the Endstate business combination discussed in Note 22, Business Combination (Endstate). For the periods ending September 30, 2026 and June 30, 2026, goodwill activity consisted of the following:

Intangibles, Net consists of the following at:

During the three months ended September 30, 2026, and 2025, the Company recorded amortization expenses of $1.0 million and $0.8 million, respectively.

Expected amortization over the next five years and thereafter, as of September 30, 2026, is as follows:

Note 8: Accrued Expenses

Accrued Expenses consists of the following at:

Note 9: Revolving Credit Facility

Credit Facility

On October 1, 2025, the Company entered into an asset-based revolving credit facility (the “Revolving Credit Facility”) with Bank of America, which refinanced and replaced its prior asset-based revolving credit facility with White Oak Commercial Finance, LLC. The Revolving Credit Facility provides for borrowings of up to $120.0 million, subject to a borrowing base, and matures on October 1, 2030.

Borrowings under the Revolving Credit Facility bear interest at the 30-day SOFR rate, subject to a floor of 2.00%, plus an applicable margin of 1.50% through March 31, 2026 and 1.625% thereafter. The 30-day SOFR rate as of September 30, 2026 was 3.83%. The Company also pays a commitment fee of 0.15% per annum on unused availability. Commitment fees incurred during the three months ended September 30, 2026 and September 30, 2025 were $0.01 million and $0.06 million, respectively.

Availability under the Revolving Credit Facility is based on eligible accounts receivable and inventory. As of September 30, 2026, availability was approximately $49.2 million, with outstanding borrowings of approximately $70.8 million.

The Revolving Credit Facility contains customary affirmative and negative covenants, including limitations on additional indebtedness, liens, dividends, and certain investments, and requires the maintenance of a fixed charge coverage ratio of at least 1.0 to 1.0 on a trailing twelve-month basis, as defined in the credit agreement. The facility is secured by a first-priority security interest in substantially all of the Company’s and its subsidiaries’ assets.

The Company was in compliance with all applicable covenants under the Revolving Credit Facility as of September 30, 2026.

Letters of Credit

The Revolving Credit Facility permits the issuance of letters of credit, which reduces availability under the borrowing base. As of September 30, 2026, the Company had letters of credit outstanding totaling $0.75 million.

Prior Credit Facility

The Company’s prior asset-based revolving credit facility with White Oak Commercial Finance, LLC (the “Prior Revolving Credit Facility”) provided for borrowings of up to $120 million, subject to a borrowing base, and was scheduled to mature on December 21, 2026. Borrowings under the Prior Revolving Credit Facility bore interest at the 30-day SOFR rate, subject to a floor of 2.00%, plus a margin ranging from 4.00% to 4.25%.

The Prior Revolving Credit Facility was terminated and fully repaid on October 1, 2025; therefore, as of June 30, 2026 and September 30, 2026, no amounts were outstanding and no effective interest applied.

As of September 30, 2025, outstanding borrowings under the Prior Revolving Credit Facility were approximately $58 million, with approximately $61 million in availability.

During the three months ended September 30, 2026, and 2025, the Company incurred interest expense of approximately $1.1 and $1.6 million, respectively, and amortization of deferred finance costs of $0.03 million and $0.4 million, respectively.

Note 10: Employee Benefits Company Health Plans

During the year ended June 30, 2025, the Company transitioned its health insurance coverage from a self-funded model to an Individual Coverage Health Reimbursement Arrangement (“ICHRA”), which eliminates the Company’s exposure to self-insured medical and dental claims; therefore, no similar liabilities are expected under the current plan structure. As a result, the self-insured medical plans (including both PPO and HDHP options) under the Alliance Health & Benefits Plan (“AHBP”) were terminated. Under the ICHRA model, the Company reimburses employees and executive officers for individual health insurance premiums, with contribution levels varying based on coverage tiers.

There were no changes to the Company’s dental (PPO and HMO), vision, life insurance, or short-term disability plans. The Company’s dental HMO plan remains self-insured, with exposure limited to a maximum per individual procedure based on a published fee schedule. The dental PPO plan is fully insured. The Company contributes various percentages toward premium costs across benefit offerings, based on coverage levels and Board-approved schedules. The vision, life insurance, and short- and long-term disability plans are fully insured and Company-sponsored, with premiums paid by both the employer and employees in accordance with Board-approved contribution structures.

As of September 30, 2026, and June 30, 2026, the Company had no remaining liability related to the terminated self-insured medical plans, as the previously accrued estimated run-out exposure was fully settled during the first quarter of fiscal 2026.

401(k) Plan

The Company has the Alliance Entertainment 401(k) Plan (the Plan) covering all eligible employees of the Company. All employees over the age of 18 are eligible to participate in the Plan at the beginning of the month following date of hire. The Plan has automatic deferral at the beginning of the month following the date of hire. Employees are automatically enrolled in the Plan with a 3% contribution; however, they have the option to increase/decrease their deferrals or opt out of the Plan at any time. The Company currently offers a match contribution of $0.50 of every dollar up to 4% of contribution percentage. The Company conducts a retirement plan review on an annual basis.

During the three months ended September 30, 2026, and 2025, the Company contributed $0.2 million and $0.15 million, respectively, to the Plan.

Note 11: Segment Information

Management performed an assessment of the Company’s operating segments in accordance with ASC 280-10-50-1 through 50-9. Based on this evaluation, the Company determined that it operates as a single operating segment, which is also its sole reportable segment. Segment revenue is derived from the sale of distribution of pre-recorded music, video movies, video games and related accessories, and merchandising. This conclusion is consistent with prior periods.

The Company’s Chief Executive Officer and Chairman are the Chief Operating Decision Makers (“CODM”) and review financial performance and make resource allocation decisions at the consolidated entity level. The CODM utilizes net income, prepared in accordance with U.S. GAAP, to evaluate financial performance, monitor variances against budget and forecast, and guide strategic decisions. Segment assets are reported as consolidated assets on the Company’s condensed consolidated balance sheet.

Significant expense categories regularly reviewed by the CODM include:

Other Segment Items:

Other segment items include expenses that are part of segment profit or loss but are not classified as significant segment expenses. These include:

The following table presents segment revenue, net income, and the significant segment expenses for the Company’s single reportable segment for the three months ending September 30, 2026, and 2025:

Reconciliation to Condensed Consolidated Net Income:

Note 12: Income Taxes

The Company’s effective income tax rates were 26% and 28% for the three months ended September 30, 2026 and 2025, respectively.

In accordance with ASC 740-270, Interim Reporting, the Company calculates its interim income tax provision by applying an estimated annual effective tax rate to year-to-date ordinary income before income taxes. The estimated annual effective tax rate is based on projected annual pretax income, expected permanent differences, state income taxes, and other relevant tax considerations. The tax effects of significant unusual or infrequently occurring items, as well as certain other discrete tax events, are recognized in the interim period in which they occur and are excluded from the estimated annual effective tax rate.

The difference between the Company’s effective income tax rate of 26% for the three months ended September 30, 2026, and the U.S. federal statutory income tax rate of 21% was primarily attributable to state income taxes, partially offset by the tax benefits associated with foreign-derived deduction eligible income under Section 250 of the Internal Revenue Code and nontaxable gains resulting from changes in the fair value of the Company’s warrant liabilities.

Note 13: Commitments and Contingencies

Commitments

The Company enters into various agreements with suppliers for the products it distributes. The Company hadno long-term purchase commitments or arrangements with its suppliers as of September 30, 2026, and June 30, 2026.

Litigation, Claims and Assessments

We are exposed to claims and litigations of varying degrees arising in the ordinary course of business and use various methods to resolve these matters. When a loss is probable, we record an accrual based on the reasonably estimable loss or range of loss. When no point of loss is more likely than another, we record the lowest amount in the estimated range of loss and, if material, disclose the estimated range of loss. We do not record liabilities for reasonably possible loss contingencies but do disclose a range of reasonably possible losses if they are material and we are able to estimate such a range. If we cannot provide a range of reasonably possible losses, we explain the factors that prevent us from determining such a range. Historically, adjustments to our estimates have not been material. We believe the recorded reserves in our consolidated financial statements are adequate in light of the probable and estimable liabilities. We do not believe that any of these identified claims or litigation will be material to our results of operations, cash flows, or financial condition.

On June 6, 2024, Office Create Corporation (“Office Create”) filed a complaint against COKeM International Ltd. (“COKeM”) in the United States District Court for the District of Minnesota alleging contributory trademark infringement, contributory false designation of origin and unjust enrichment relating to COKeM’s alleged distribution of the video game Cooking Mama: Cookstar. Office Create originally sought damages of no less than $20,913,200, plus interest of 9% accruing from October 3, 2022. On August 29, 2024, COKeM filed a response denying all allegations, and on September 12, 2024 filed a third-party complaint against Planet Entertainment LLC and Steven Grossman asserting claims for indemnification and contribution. Office Create later filed an amended complaint impleading the former owner, chairman, chief financial officer and senior vice president of sales of COKeM and asserting claims for willful trademark infringement and civil conspiracy, increasing the damages sought to an amount in excess of $35 million. COKeM filed an amended answer as to the new claims pertaining to it directly on March 12, 2025, denies the allegations, and intends to continue to defend the lawsuit vigorously.

The parties then completed fact discovery, including depositions of a co-defendant corporate designee and of current and former COKeM personnel taken between September 2025 and February 2026, and each party designated a damages expert. On January 6, 2026, Office Create stipulated to the dismissal of its claims against the Plaion defendants pursuant to a confidential settlement, and the court dismissed those defendants from the litigation the same day. Fact discovery has concluded.

The parties have engaged in settlement discussions that have not resulted in an agreement, and their respective positions as to value remain materially divergent. During the period from April 17, 2026 through June 30, 2026 the matter remained in the expert-motion phase: COKeM denies liability and continues to defend the matter. The Company maintains liability insurance applicable to this claim. Because the proceedings remain at an expert and pre-trial stage and the parties’ valuations of the claim differ materially, the Company is unable to estimate the amount or range of reasonably possible loss, and no liability has been recorded for this matter as of June 30, 2026. An unfavorable outcome could exceed available insurance and could be material to the Company’s consolidated financial position, results of operations and cash flows.

Jonathan Hoang To v. DirectToU, LLC, United States District Court for the Northern District of California, Case No. 3:24-cv-06447; Douglas Feller, Jeffry Haise, and Joseph Mull v. Alliance Entertainment, LLC and DirectToU, LLC, United States District Court for the Southern District of Florida, Case No. 0:24-cv-61444; and Vivek Shah v. DirectToU, LLC, JAMS Arbitration, No. 5220006749. — On or about September 12, 2024, these actions were brought against DirectToU, LLC (“DirectToU”) and/or Alliance Entertainment, LLC (“Alliance”) alleging violations of the Video Privacy Protection Act (“VPPA”) related to the alleged collection of, and alleged disclosure to Meta and other third parties including data brokers of, private information and user data regarding a user’s account information and video viewing and purchasing history from websites operated by the Company. DirectToU and Alliance disputed the allegations. The Feller action was dismissed and those plaintiffs were added to the Hoang To matter.

The parties agreed to resolve the claims on a class-wide basis for $1.58 million. The court granted preliminary approval of the settlement on September 22, 2025 and entered final approval on May 5, 2026. The settlement was funded during the fiscal year ended June 30, 2026, and the matter was fully resolved as of that date. No further obligation or contingency exists in respect of these claims.

The Company recorded a contingent liability of $1.58 million for the settlement and a related insurance recovery receivable from CNA of $1.38 million as of June 30, 2025. Both amounts were settled during the fiscal year ended June 30, 2026, and no balances relating to this matter remain recorded on the condensed consolidated balance sheet as of September 30, 2026.

Sparkle Pop, LLC v. Alliance Entertainment Holding Corporation and Alliance Entertainment. LLC (U.S. Bankruptcy Court for MD-In Re Diamond Comic Distributors): On June 9, 2025, Sparkle Pop sued the Alliance entities in the United States Bankruptcy Court for the District of Maryland (In re Diamond Comic Distributors) alleging theft of trade secrets and tortious interference with contracts arising out of Alliance’s successful bid for, and subsequent termination of, the asset purchase agreement in the Diamond Comic Distributors bankruptcy. Alliance moved to dismiss the original complaint on July 10, 2025. On July 24, 2025, Sparkle Pop filed an amended complaint asserting the same claims plus an additional claim for breach of a non-disclosure agreement, and on August 7, 2025 Alliance moved to dismiss the amended complaint on the grounds that Sparkle Pop lacks standing, having been neither a party to, an intended third-party beneficiary of, nor an assignee of rights under the non-disclosure agreement, and that it failed to state a claim. Briefing was completed on September 17, 2025, and on November 10, 2025 the court heard oral argument and denied Alliance’s motion to dismiss. The adversary proceeding was stayed until February 16, 2026 to permit the appointed Chapter 7 trustee to become familiar with the litigation, after which the parties advance to discovery.

Other Matters

From time to time, the Company is involved in other legal and regulatory matters arising in the ordinary course of business.

In December 2024, DirectToU, LLC, a subsidiary of the Company, received a third-party tender of defense related to alleged noncompliance with California Proposition 65 involving a product supplied by a third-party vendor and sold by the Company. The Company discontinued sales of the product and tendered the defense to the supplier, which has assumed responsibility for responding to the matter. Based on currently available information, the Company does not expect the resolution of this matter to have a material adverse effect on its consolidated financial statements.

In July 2025, the Company received correspondence alleging a violation of a contractual non-solicitation provision. The Company disputes the allegations and has responded accordingly. Based on currently available information, the Company does not expect the resolution of this matter to have a material adverse effect on its consolidated financial statements.

Tariffs and Trade Policy:

As previously disclosed in the Company’s Annual Report on Form 10-K for the fiscal year ended June 30, 2026, the Company estimates that it may be entitled to refunds of approximately $0.2 million in tariffs previously paid under the International Emergency Economic Powers Act (IEEPA), following the U.S. Supreme Court’s February 20, 2026 ruling that IEEPA does not authorize the imposition of tariffs.

As of September 30, 2026, there have been no material changes to the Company’s estimated refund amount or its assessment of the recognition of a related receivable. Accordingly, the Company has not recognized a receivable in the accompanying condensed consolidated financial statements.

The impact of currently effective tariffs on the Company’s results of operations for the three months ended September 30, 2026, was not material.

Note 14: Related Party Transactions

GameFly Holdings, LLC

On February 1, 2023, the Company entered into a Distribution Agreement (the “Agreement”) with GameFly Holdings, LLC (“GameFly”), a customer which is owned by the Company’s principal stockholders. The Agreement is effective from February 1, 2023 through March 31, 2028, and thereafter continues on an indefinite basis unless terminated by either party upon six months’ prior written notice.

During the three-month periods ended September 30, 2026, and 2025, and the Company had additional sales to GameFly of $0.5 million, and $0.9 million, respectively.

As of September 30, 2026, and June 30, 2026, the Company had receivables, net, from GameFly of approximately $0.3 million and $0.2 million, respectively, which were included in other receivables, net, on the condensed consolidated balance sheets.

For the three months ended September 30, 2026 and 2025, the Company recognized revenue for consulting services provided to GameFly of $0.08 million in each period.

For the three months ended September 30, 2026 and 2025, the Company incurred consulting expense of $0.02 million in each period for services received from GameFly.

Ogilvie Loans

On July 3, 2023, the Company entered into a $17.0 million line of credit with Bruce Ogilvie, a principal stockholder (the “Ogilvie Loan”). The Company made and repaid various short-term borrowings under the Ogilvie Loan through October 2023. The Ogilvie Loan would have matured on December 22, 2026, and bore interest at a rate equal to 30-day SOFR plus 5.0%.

In connection with the Company’s entry into an asset-based revolving credit facility with Bank of America on October 1, 2025, the Company repaid the outstanding balance of $10.0 million under the Ogilvie Loan in full. As a result, there were no amounts outstanding under the Ogilvie Loan as of June 30, 2026 and September 30, 2026.

Interest expenses related to the Ogilvie Loan for the three months ended September 30, 2026, and 2025 were $0 and $0.2 million, respectively.

B&D Capital Partners, LLC

B&D Capital Partners, LLC (“BDCP”) is a financial advisory firm whose parent company is majority owned by W. Tom Donaldson III, a member of the Company’s board of directors. During the fiscal year ended June 30, 2024, the Company paid BDCP approximately $1.8 million in advisory fees in connection with the Company’s former credit facility with White Oak Commercial Finance, LLC, which were capitalized as deferred financing costs.

The White Oak credit facility was repaid in full and terminated on October 1, 2025. In connection with the termination, the Company recognized $0.6 million of expense related to the write-off of remaining unamortized deferred financing costs during the three months ended December 31, 2025. No related-party fees were incurred with BDCP during the three months ended September 30, 2026. There were no amounts payable to BDCP as of September 30, 2026 or June 30, 2026.

Note 15: Leases

The Company leases offices, warehouses, computer equipment, and vehicles. Certain leases include options to renew, which may extend the lease term from 1 to 13 years. The decision to exercise renewal options is at the Company’s sole discretion and is included in the lease term when it is reasonably certain that the option will be exercised.

Leasehold improvements and assets are depreciated over the shorter of their useful life or the lease term unless the lease includes a purchase option or title transfer that is reasonably certain to occur.

Our lease agreements do not include material residual value guarantees or restrictive covenants. Lease payments generally include fixed payments, with some leases requiring variable payments. These variable payments typically cover the Company’s proportionate share of property taxes, insurance, and common area maintenance and are recognized as incurred rather than being included in the lease liability.

On the condensed consolidated balance sheets, operating leases are reflected in “Operating Lease Right-of-Use Assets, Net,” “Current Portion of Operating Lease Obligations,” and “Operating Lease Obligations, Non-Current.” Finance leases are included under “Property & Equipment, Net,” “Current Portion of Finance Lease Obligations,” and “Finance Lease Obligations, Non-Current”.

The extended lease term will result in continued amortization of the ROU asset over the remaining lease period, with the associated lease liabilities being remeasured in accordance with ASC 842,Leases. The Company will continue to amortize the ROU asset in line with the revised lease terms and conditions, reflecting the financial impact of the extension in future periods.

Components of lease expense were as follows for the three months ending September 30, 2026, and 2025:

Maturities of operating and finance lease liabilities as of September 30, 2026 are as follows:

Finance ROU leases are recorded in Property and Equipment, net on the condensed consolidated balance sheets and is as follows:

Note 16: Merger

As disclosed in Note 1, on February 10, 2023, the Company completed the Merger with Alliance and a Merger Sub, resulting in the Company becoming a publicly traded company. While Adara was the legal acquirer in the Merger, for financial accounting and reporting purposes under U.S. GAAP, Legacy Alliance was the accounting acquirer, and the Merger was accounted for as a “reverse recapitalization.” A reverse recapitalization (i.e., a capital transaction involving the exchange of stock by Alliance for Legacy Alliance’s stock) does not result in a new basis of accounting, and the consolidated financial statements of the combined entity represent the continuation of the consolidated financial statements of Legacy Alliance. Accordingly, the consolidated assets, liabilities, and results of operations of Legacy Alliance became the historical consolidated financial statements of the combined company, and Alliance’s assets, liabilities and results of operations were consolidated with Legacy Alliance beginning on the acquisition date. Operations prior to the Merger are presented as those of Legacy Alliance in future reports. The net assets of Alliance were recognized at historical cost (which was consistent with carrying value), with no goodwill or other intangible assets recorded.

At the closing of the Merger, each of the then issued and outstanding shares of Alliance common stock were cancelled and automatically converted into the right to receive the number of shares of Alliance common stock equal to the exchange ratio (determined in accordance with the Business Combination Agreement). The Company’s 900 shares of previously outstanding common stock were exchanged for 47,500,000 shares of Class A Common Stock. In addition, the treasury stock was cancelled. This change in equity structure has been retroactively reflected in the financial statements for all periods presented.

The following table summarizes the shares of Class A outstanding following consummation of the Merger:

Up to 60 million additional Class E shares may be issued to the Legacy Alliance shareholders at no cost based on future performance of the company’s stock price, and 9.9 million warrants (Class A) that can be exercised for common shares at $11.50 per share (See Note 20). The 60 million Class E shares are set aside in an escrow account as additional consideration contingent on triggering events occurring within 10 years after the Merger. Upon reaching the following triggering events, the Class E shares will be released from the escrow account to the three major shareholders, and converted to Class A shares on a 1:1 basis:

Each share of Class A and Class E common stock has one vote, and the common shares collectively will possess all voting power and will have the exclusive right to vote for the election of directors and on all other matters properly submitted to a vote of the stockholders. Since the Class E shares are subject to vesting conditions and meet the contingent exercise and settlement provisions to be considered indexed to the Company’s stock, they are accounted for as equity instruments, and are reflected as a reduction of retained earnings, at their fair value on the date of the Merger.

During the fiscal year ended June 30, 2023, the Company incurred total transaction costs of approximately $5.0 million, including legal, financial advisory and other professional fees related to the Merger, which was recorded as an expense as the transaction costs exceeded the proceeds received in the Merger.

In connection with the Merger, the Company’s 2023 Omnibus Equity Incentive Plan (the “2023 Plan”) became effective. The 2023 Plan is a comprehensive incentive compensation plan under which the Company can grant equity-based and other incentives awards to based officers, employees, and directors of, and consultants and advisers to, Alliance and its subsidiaries. The Company has reserved a total of 600,000 shares of Class A common stock for issuance as or under awards to be made under the 2023 Plan. To the extent that an award lapses, expires, is cancelled, is terminated unexercised or ceases to be exercisable for any reason, or the rights of its holder terminate, any common stock subject to such award shall again be available for the grant of a new award. The 2023 Plan shall continue in effect, unless sooner terminated, until the tenth anniversary of the date on which it is adopted by the Board of Directors (except as to awards outstanding on that date), and the Board of Directors in its discretion may terminate it at any time with respect to any shares for which awards have not theretofore been granted, provided certain conditions are met, in accordance with the 2023 Plan. The price at which a share may be purchased upon exercise of a share option shall be determined by the Plan Committee; provided, however, that such option price (i) shall not be less than the fair market value of a share on the date such share option is granted, and (ii) shall be subject to adjustment as provided in the 2023 Plan. On November 7, 2024, the Company’s stockholders approved an amendment to the 2023 Plan to increase the number of shares of Class A common stock for issuance as or under awards to be made under the 2023 Plan to 1,000,000 shares. As of September 30, 2026,785,400 shares were awarded under the 2023 Plan.

Note 17: Reclassification of Private Warrants to Public Warrants

Under the terms of the Company’s Warrant Agreement, private placement warrants transferred to holders other than permitted transferees become subject to the same terms and redemption provisions as the Company’s public warrants. Upon such transfers, the Company reassesses the classification of the affected warrants in accordance with ASC 815-40, Contracts in Entity’s Own Equity. Warrants that meet the criteria for equity classification are reclassified from warrant liabilities to additional paid-in capital at their fair value as of the date of transfer, following recognition of any changes in fair value through that date in the condensed consolidated statements of operations.

During the three months ended September 30, 2026, certain holders transferred private placement warrants to third parties who were not permitted transferees under the Warrant Agreement. As a result, the Company reclassified approximately 304,666 warrants, with an aggregate fair value of $0.06 million, from warrant liabilities to additional paid-in capital. The reclassification is reflected in the accompanying condensed consolidated statement of changes in stockholders’ equity and did not result in any cash flows or gain or loss separate from the fair value adjustments recognized before reclassification.

During the fiscal year ended June 30, 2025, the Company similarly reclassified approximately 769,000 private placement warrants, with an aggregate fair value of $0.5 million, from warrant liabilities to additional paid-in capital following transfers to non-permitted transferees. These reclassifications were recognized in the periods in which the transfers occurred and did not result in any cash flows or gain or loss separate from the fair value adjustments recognized before reclassification.

As of September 30, 2026, approximately 3,096,341 private placement and representative warrants remained outstanding and classified as warrant liabilities in the accompanying condensed consolidated balance sheet. (See Note 20).

Note 18: Stock-Based Compensation

As part of the Merger on February 10, 2023,600,000 shares were authorized for a one-time employee stock plan. The compensation committee approved 463,800 shares of restricted stock awards to employees on June 15, 2023. The shares fully vest on October 4, 2023. The Company does not have an annual stock-based compensation plan.

In September 2024, the Company’s Board approved, subject to stockholder approval, an amendment to the 2023 Plan to increase the number of shares authorized for issuance thereunder by 400,000 shares of Class A common stock, bringing the total reserved under the 2023 Plan to 1,000,000 shares of Class A common stock. On November 7, 2024, the Company’s stockholders approved the amendment to the 2023 Plan.

During the three months ended September 30, 2026, the Company granted restricted stock awards to certain employees pursuant to employment offer letters executed in December 2025. Although the employment offer letters reference a December 31 grant date, the Company determined that, for accounting purposes under ASC 718, the grant date was January 1, 2026, as this was the date on which all requisite terms of the awards were finalized, requisite approvals were obtained, and the employees commenced service. Accordingly, the fair value of these awards was measured as of January 1, 2026, and stock-based compensation expense is recognized over the requisite service period beginning on that date. During the three months ended September 30, 2026, no shares of restricted stock vested under the 2023 Plan.

In connection with awards granted, the Company recognized $0.15 million and $0.03 million in stock-based compensation expense during the three months ended September 30, 2026, and September 30, 2025.

Note 19: Impact of Warrant Liabilities on Earnings Per Share (EPS)

Certain outstanding warrants issued by the Company are classified as liabilities in accordance with ASC 815-40,Derivatives and Hedging – Contracts in Entity’s Own Equity, due to specific terms that require them to be remeasured at fair value at each reporting date. Changes in fair value are recognized as a non-cash gain or loss in the condensed consolidated statements of operations, which resulted in fluctuations in the Company’s reported net income and earnings per share (EPS).

For the three months ended September 30, 2026 and 2025, changes in the fair value of warrant liabilities improved reported EPS by $0.02 and reduced reported EPS by $0.03 per share, respectively. These changes were primarily driven by movements in the market price of our common stock and changes in the volatility assumptions used in the valuation model. For the three months ended September 30, 2026 and 2025, the Company recorded (i) gains of $0.9 million and (ii) losses of $1.5 million, respectively, related to the fair value measurement of warrant liabilities.

Investors should note that the remeasurement of warrant liabilities is a non-operational, non-cash item. Future changes in fair value will continue to be recorded in earnings until the warrants are either exercised, transferred to public warrants or expire. Additional details on the fair value assumptions and measurement techniques are provided in Note 21-Fair Value.

Note 20: Warrants

As a result of the Merger, at September 30, 2026, and June 30, 2026, there were 6,823,749 and 6,519,083 Public Warrants respectively,3,053,001 and 3,357,667 Private Placement Warrants respectively, and 43,340 Representatives Warrants issued and outstanding, each exercisable for one share of Class A common stock at an exercise price of $11.50 (the “Warrants”). (See Note 17: Reclassification of Private Warrants to Public Warrants)

The Company will not be obligated to deliver any shares of Class A common stock pursuant to the exercise of a warrant. It will have no obligation to settle such warrant exercise unless a registration statement under the Securities Act covering the issuance of the shares of Class A common stock underlying the Warrants is then effective. A prospectus relating thereto is current, subject to the Company satisfying its obligations with respect to registration. Additionally, no warrant will be exercisable, and the Company will not be obligated to issue shares of Class A common stock upon exercise of a warrant unless Class A common stock issuable upon such warrant exercise has been registered, qualified, or deemed to be exempt under the securities laws of the state of residence of the registered holder of the Warrants.

The Company filed with the SEC on April 11, 2023, its registration statement covering the shares of Class A common stock issuable upon exercise of the Warrants, to cause such registration statement to become effective and to maintain a current prospectus relating to those shares of Class A common stock until the warrants expire or are redeemed, as specified in the warrant agreement. The registration, as amended, became effective June 29, 2023.

Public Warrants:

The Public Warrants qualify for the derivative scope exception under ASC 815 and are therefore classified as equity on the condensed consolidated balance sheets. They may only be exercised for a whole number of shares. The Public Warrants are currently exercisable at $11.50 per share and will expire five years after the completion of the Merger or earlier upon redemption or liquidation. The Company may redeem for cash the outstanding Public Warrants:

Even if it is unable to register or qualify the underlying securities for sale under all applicable state securities laws.

If the Company calls the Public Warrants for redemption, management will have the option to require all holders that wish to exercise the Public Warrants to do so on a “cashless basis,” as described in the warrant agreement. The exercise price and number of shares of Class A common stock issuable upon exercise of the Public Warrants may be adjusted in certain circumstances including in the event of a stock dividend, or recapitalization, reorganization, merger, or consolidation. However, the Public Warrants will not be adjusted for issuances of Class A common stock at a price below its exercise price. Additionally, in no event will the Company be required to net cash settle the Public Warrants.

Private Placement Warrants:

The Private Placement Warrants are identical to the Public Warrants underlying the Units sold in the Initial Public Offering but are classified as liabilities on the condensed consolidated balance sheet as they are not considered indexed to the company’s own stock. Additionally, the Private Placement Warrants are exercisable on a cashless basis and are non-redeemable, so long as they are held by the initial purchasers or their permitted transferees. If the Private Placement Warrants are held by someone other than the initial purchasers or their permitted transferees, the Private Placement Warrants will be redeemable by the Company and exercisable by such holders on the same basis as the Public Warrants as described above.

Representative Warrants

The Company issued Representative Warrants, for minimal consideration to ThinkEquity, a division of Fordham Financial Management, Inc. (and/or its designees), in a private placement simultaneously with the closing of Alliance’s initial public offering, which are also classified as liabilities on the condensed consolidated balance sheet. The Representative Warrants are identical to the Private Warrants except that so long as the Representative Warrants are held by ThinkEquity (and/or its designees) or its permitted transferees, the Representative Warrants (i) will not be redeemable by the Company, (ii) may be exercised by the holders on a cashless basis, (iii) are entitled to registration rights and (iv) are not exercisable more than five years from the effective date of the Merger.

Note 21: Fair Value

The Company complies with the provisions of ASC 820,Fair Value Measurements, for its financial and non-financial assets and liabilities. ASC 820 defines fair value, establishes a framework for measuring fair value and expands disclosure for each major asset and liability category measured at fair value on either a recurring or nonrecurring basis.

The Company accounts for certain assets and liabilities at fair value. The hierarchy below lists three levels of fair value based on the extent to which inputs used in measuring fair value are observable in the market. The company categorizes each of its fair value measurements in one of these three levels based on the lowest level input that is significant to the fair value measurement in its entirety.

As of September 30, 2026 and June 30, 2026, the Company has classified the Private Placement Warrants and the Representative Warrants as Level 3 fair value measurements. Management evaluates a variety of inputs and then estimates fair value based on those inputs. As discussed below, the Company utilized the Black Scholes Model in valuing the Private Placement Warrants and Representative Warrants.

The estimated fair value of cash, trade receivables, accounts payable, accrued expenses and other current liabilities are based on Level 1 inputs as the fair values approximate carrying amounts as of September 30, 2026, and June 30, 2026, based on the short-term nature and maturity of these instruments.

The estimated fair values of subordinated shareholder debt and the credit facility is based on Level 2 inputs, which consist of interest rates that are currently available to the Company for issuance of debt with similar terms and remaining maturities. As of September 30, 2026, and June 30, 2026 the estimated fair value of the Company’s short and long-term debt approximates it carrying value due to market interest rates charged on such debt or their short-term maturities.

The Company recomputes the fair value of the Private and the Representative Warrants at the issuance date and the end of each quarterly reporting period. Such value computation includes subjective input assumptions that are consistently applied each period. If the Company were to alter its assumptions or the numbers input based on such assumptions, the resulting fair value could be materially different.

The Company utilized the following assumptions to estimate fair value of the Private Warrants and Representative Warrants as of:

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

The table below presents the balances of assets and liabilities measured at fair value on a recurring basis by level within the hierarchy as follows (in thousands)

The table below presents the change in the number and fair value of the Private and Representative Warrants for the period ended September 30, 2026, and September 30, 2025 (in thousands, except the number of shares)

Note 22: Business Combinations - Endstate

On December 31, 2025, Alliance Entertainment Holding Corporation (the “Company”), through a wholly owned subsidiary, completed the acquisition of substantially all of the assets of Endstate (the “Acquisition”). The Acquisition was accounted for as a business combination under ASC 805,Business Combinations.

The Acquisition was completed to enhance the Company’s technology capabilities and expand its digital and direct-to-consumer product offerings. The results of operations of the acquired business were included in the Company’s condensed consolidated financial statements at September 30, 2026, since the acquisition date was not material.

Purchase Consideration

The total consideration transferred in connection with the Acquisition was $7.9 million, which consisted of the following (in thousands):

Certain payments to the founders, including guaranteed payments and sign-on bonuses that were not contingent on continued employment, were determined to represent consideration transferred in exchange for the acquired business and were included in purchase consideration. Payments contingent on continued employment were excluded from purchase consideration and will be recognized as compensation expense over the requisite service period.

Preliminary Purchase Price Allocation

The allocation of the purchase consideration is preliminary and subject to adjustment during the measurement period as the Company finalizes its valuation of acquired assets and assumed liabilities. The preliminary allocation of the consideration transferred is as follows (in thousands):

Identifiable intangible assets are being amortized on a straight-line basis over an estimated useful life often years.

Goodwill represents the excess of the consideration transferred over the estimated fair value of the identifiable net assets acquired and reflects expected synergies, future technology enhancements, and the assembled workforce. Goodwill is deductible through amortization over 15 years for income tax purposes.

Contingent Consideration

The Acquisition includes contingent consideration arrangements consisting of earnout payments based on future financial performance during the 2026 through 2028 periods.

The contingent consideration was recorded at an estimated fair value of $5.5 million as of the acquisition date and is included in Non-Current Contingent Liability on the accompanying condensed consolidated balance sheets. Management determined the fair value using a probability-weighted discounted cash flow model and significant unobservable inputs. Accordingly, the contingent consideration liability is classified as Level 3 within the fair value hierarchy.

Contingent consideration is remeasured at each reporting date, with changes in fair value recognized in earnings.

Acquisition-Related Costs

Transaction costs incurred in connection with the Acquisition were expensed as incurred and included in transaction costs.

Note 23: Subsequent Events

The Company evaluated subsequent events through November 12, 2026, the date the condensed consolidated financial statements were issued.

In November 2026, the Company entered into a Simple Agreement for Future Equity (“SAFE”) to make a minority investment of $0.5 million in ArtPics Inc. (“ArtPics”), a privately held company. In connection with the investment, the Company also renewed its existing commercial agreement with ArtPics.

The investment was funded through borrowings under the Company’s revolving credit facility.

The Company is evaluating the accounting treatment of the investment, which will be reflected in the quarter ending December 31, 2026, as applicable.