ALLIANCE ENTERTAINMENT HOLDING CORP

● · Shepherdsville, Kentucky (Additional Storage Facility) — We have vacated our previous cold storage building and moved to a new facility that charges $11.00 per pallet with a $14,000 monthly minimum, which equates to 1,273 pallets. This facility can accommodate up to 3,000 skids. There is no time limit set for this agreement

We also maintain marketing and sales offices in six cities throughout the United States and believe our facilities are adequate and suitable for our current business needs and expect to continue to reduce reliance on fixed office space in the future.

• We may experience significant fluctuations in our operating results and growth rate.
• Our international operations expose us to a number of risks.
• Our business will suffer if we are not successful in developing and expanding our partner brands across our consumer base.
• Risks Related to Shifts in Consumer Demand
• Consumer interests change rapidly, and acceptance of products and entertainment offerings are influenced by outside factors.
• An inability to develop, introduce and ship planned products, product lines and new brands in a timely and cost-effective manner may damage our business.
• Risks Related to Our Supply Chain and Sales Channels
• Disruptions or inefficiencies in our supply chain or logistics network could adversely affect our ability to fulfill customer demand and may increase our costs.
• If we are unable to adapt our business to the continued shift to e-commerce, our business may be harmed.
• The concentration of our retail customer base and continued shift to ecommerce sales means that economic difficulties or changes in the purchasing or promotional policies or patterns of our major customers could have a significant impact on us.
• Our business, including our costs and supply chain, is subject to risks associated with sourcing, manufacturing, warehousing, distribution and logistics, and the loss of any of our key suppliers or service providers could negatively impact our business.
• We face significant inventory risk.
• If our third-party suppliers’ labels, studios, and publishers do not comply with applicable laws and regulations, our reputation, business, financial condition, results of operations and prospects could be harmed.
• Shipping is a critical part of our business and any changes in our shipping arrangements or any interruptions in shipping could adversely affect our operating results.
• We are subject to credit risk and may be subject to substantial write-offs if one or more of our significant customers default on their payment obligations to us.
• We are subject to risks related to online payment methods, including third-party payment processing-related risks.
• We rely on third-party suppliers, labels, studios, publishers, suppliers, retail and ecommerce partners and other vendors, and they may not continue to produce products or provide services that are consistent with our standards or applicable regulatory requirements, which could harm our brand, cause consumer dissatisfaction, and require us to find alternative suppliers of our products or services.
• Risks Related to Our Debt
• Alliance’s existing and any future indebtedness could adversely affect its ability to operate its business.
• Covenants and events of default under Alliance’s Credit Agreement could limit our ability to undertake certain types of transactions and adversely affect our liquidity.
• Government efforts to combat inflation, along with other interest rate pressures arising from an inflationary economic environment, could lead to us to incur even higher interest rates and financing costs.
• Our indebtedness may limit our availability of cash, cause us to divert cash to fund debt service payments or make it more difficult to take certain other actions.
• If we were unable to obtain or service our other external financing, or if the restrictions imposed by such financing were too burdensome, our business would be harmed.
• Risks Related to our Management
• Our success is dependent on the efforts and dedication of our officers and other employees.
• If we fail to develop diverse top talent, we may be unable to compete, and our business may be harmed.
• Alliance has engaged in transactions with related parties, and such transactions present possible conflicts of interest that could have an adverse effect on our business and results of operations.
• A default under the personal loan between our Executive Chairman and our Chief Executive Officer could result in a substantial change in the ownership of our common stock.
• Risks Related to Our Technology and Intellectual Property
• Our business may be harmed if we are unable to protect our critical intellectual property rights.
• Failure to successfully operate our information systems and implement new technology effectively could disrupt our business or reduce our sales or profitability.
• If our electronic data is compromised, our business could be significantly harmed.
• Risks Related to Matters Outside our Control That May Impact Our Business
• Risks Related to International Trade Policies and Tariffs
• Adverse economic conditions in the markets in which we and our employees, consumers, customers, suppliers, and manufacturers operate could negatively impact our ability to produce and ship our products, and lower our revenues, margins and profitability.
• Changes in U.S., global or regional economic conditions could harm our business and financial performance.
• Our quarterly and annual operating results may fluctuate due to seasonality in our business and union strikes impacting the availability of content.
• Risks Related to Taxes and Government Related Matters
• We face additional tax liabilities and collection obligations. Changes in, or differing interpretations of, income tax laws and rules, and changes in our geographic operating results, may impact our effective tax rate.
• We are subject to various government regulations, violations of which could subject us to sanctions or otherwise harm our business. In addition, we could be the subject of future product liability suits or merchandise recalls, which could harm our business.
• Risks Related to Litigation
• We may face increased costs in achieving our sustainability goals and any failure to achieve our goals could result in reputational damage.
• Our entertainment business involves risks of liability claims for media content, which could adversely affect our business, results of operations and financial condition.
• We are involved in litigation, arbitration or regulatory matters where the outcome is uncertain, and which could entail significant expense.
• Risks Related to Accounting Matters
• Prior to the Business Combination, Adara had accounted for its outstanding Warrants as a warrant liability and following the Business Combination, Alliance is now required to determine the value warrant liability for the Private Warrants quarterly, which could have a material impact on Alliance’s financial position and operating results.
• Because Alliance qualifies as a “smaller reporting company” within the meaning of the Securities Act of 1933, as amended, it is eligible for, and relies on, certain scaled disclosure and reporting accommodations. This could make Alliance’s securities less attractive to investors and may make it more difficult to compare Alliance’s performance to the performance of other public companies.
• Risks Related to Our Securities
• The warrant agreement designates the courts of the State of New York or the United States District Court for the Southern District of New York as the sole and exclusive forum for certain types of actions and proceedings that may be initiated by holders of the Warrants, which could limit the ability of warrant holders to obtain a favorable judicial forum for disputes with Alliance.
• Alliance may redeem unexpired Warrants prior to their exercise at a time that is disadvantageous to a Warrant holder, thereby making the Warrants worthless.
• If Warrant holders exercise Public Warrants on a “cashless basis,” they will receive fewer shares of Alliance common stock from such exercise than if you were to exercise such warrants for cash.
• The receipt of cash proceeds from the exercise of our Warrants is dependent upon the market price exceeding the $11.50 exercise price and the Warrants being exercised for cash.
• Concentration of ownership among Alliance’s executive officers, directors and their affiliates may prevent new investors from influencing significant corporate decisions.
• An active trading market may not develop for our securities, and you may not be able to sell your Class A common stock at or above the price per share for which you purchased it.
• We might not be able to maintain the listing of our Class A common stock on the Nasdaq Capital Market.
• If securities or industry analysts do not publish or cease publishing research or reports about Alliance, its business, or its market, or if they change their recommendations regarding Alliance’s securities adversely, the price and trading volume of Alliance’s securities could decline.
• Because we have no current plans to pay cash dividends on Alliance’s common stock for the foreseeable future, you may not receive any return on investment unless you sell Alliance’s common stock for a price greater than that which you paid for it.
• Anti-takeover provisions in the Certificate of Incorporation and under Delaware law could make an acquisition of Alliance, which may be beneficial to its stockholders, more difficult and may prevent attempts by its stockholders to replace or remove Alliance’s then current management.
• A possible “short squeeze” due to a sudden increase in demand of our Class A common stock that largely exceeds supply may lead to price volatility in our Class A common stock.
• We may issue additional shares of Class A common stock or preferred shares under the 2023 Plan, which would dilute the interest of our stockholders.