Business context and reporting period
Alliance Entertainment Holding Corporation distributes physical entertainment products and provides wholesale, e-commerce, direct-to-consumer fulfillment and related services. Its inventory includes more than 425,000 SKUs, including games, vinyl, DVDs/Blu-rays, CDs, toys and collectibles.
This Form 10-K is for the year ended December 31, 2022 and was filed March 30, 2023. The reporting scope requires care: the audited financial statements included in this filing are for Adara, the pre-combination SPAC, which had no operating business. Alliance’s operating results are separately discussed for the six months ended December 31, 2022 and 2021. The business combination closed on February 10, 2023, after the reporting date.
Financial performance and liquidity
Alliance operating business
| Metric | Six months ended Dec. 31, 2022 | Six months ended Dec. 31, 2021 |
|---|---|---|
| Revenue | $684 million | $832 million |
| Net income (loss) | $(23.0) million | $29.5 million |
| Adjusted EBITDA | $(21.5) million | $44.7 million |
Revenue decreased approximately 18% year over year, while net income and Adjusted EBITDA shifted to losses. The filing does not provide clear comparable six-month gross-margin figures in the supplied text.
For the fiscal years ended June 30, 2022 and 2021, Alliance reported revenue of $1.417 billion and $1.324 billion, net income of $28.5 million and $34.2 million, and Adjusted EBITDA of $60.0 million and $68.5 million, respectively.
At December 31, 2022, Alliance had a $225 million asset-based revolving credit facility, with $176.7 million outstanding and $48.3 million available. The stated interest rate was 6.41% at period-end; the six-month weighted-average rate was 6.90%. The facility matures September 29, 2023 and is secured by substantially all company assets. Alliance reported failure to meet its fixed-charge coverage covenant and was negotiating a waiver. It also cited substantial doubt about its ability to continue as a going concern absent sufficient operating cash flow, other liquidity or an extension of the facility.
Audited financial statements in this filing: pre-combination Adara
Adara reported 2022 net income of $2.9 million, compared with $3.2 million in 2021. The 2022 result included $4.2 million of non-cash warrant fair-value gains and $1.6 million of trust-account interest, offset by $2.6 million of operating and formation costs and $0.3 million of income-tax expense. These are SPAC results, not Alliance’s operating-business earnings.
At December 31, 2022, Adara had $17,956 of cash outside its trust account and $117.8 million of trust-account securities; current liabilities were $2.4 million. It used $1.2 million of cash in operating activities during 2022. Following redemptions at the February 2023 combination, approximately $1.7 million remained in the trust account and was used to fund the transaction.
Material changes, outlook and risks
- Alliance’s first-half fiscal 2023 results weakened substantially versus the prior comparable six-month period, with lower revenue and losses in place of profits.
- Gaming and vinyl were approximately 41% and 24% of Alliance’s six-month revenue, respectively; DVDs/Blu-rays were approximately 17%, CDs 10%, and consumer products and collectibles 7%.
- Customer and supplier concentration are notable: the top customer accounted for approximately 19% of six-month net sales, and the top five suppliers represented approximately 48% of product expenditures. The filing also reports top-five customers at approximately 47% of fiscal 2022 revenue.
- Management’s stated priorities include growing direct-to-consumer fulfillment, expanding products and services, investing in warehouse automation and technology, and pursuing acquisitions. The filing provides no quantified forward revenue, profit or cash-flow guidance.
- Principal risks include the debt covenant breach and near-term facility maturity, liquidity and going-concern uncertainty, inflation and higher interest expense, supply-chain and inventory exposure, seasonality, competition from digital and streaming formats, and reliance on major customers, suppliers and shipping providers.
- The filing identifies a material weakness in Alliance’s financial reporting controls related to accounting for credit-facility classification and covenant consequences. It also says the September 2022 interim statements materially misstated the facility’s classification and were restated. Management described remediation efforts as ongoing.
- The business combination issued 47.5 million Class A shares to Legacy Alliance holders and placed 60 million contingent Class E shares in escrow, releasable upon specified triggering events. The transaction’s high public-share redemption rate left little trust cash for the combined company.
- Alliance disclosed related-party transactions, including sales to GameFly, which is owned by its two principal stockholders, and logistics services purchased from an entity partly owned by a COKeM executive. Management states these arrangements were at market rates.
- Legal matters are described as arising in the ordinary course; management said it did not expect their resolution to have a material adverse effect, while noting outcomes are uncertain.
Important facts for investors to verify
- Confirm the latest lender waiver, covenant compliance, borrowing-base availability, facility extension or refinancing, and cash-flow outlook.
- Review Alliance’s subsequent-period operating results and cash flows, including the drivers of the first-half revenue and profitability decline.
- Distinguish Alliance operating results from the audited Adara SPAC financial statements presented in this filing.
- Track remediation of the material weakness and the company’s disclosures about restated interim financial statements and debt classification.
- Assess customer and supplier concentration, inventory valuation exposure, and the terms and oversight of related-party arrangements.