Alliance Entertainment (AENT) - 2023 Q1 - Quarterly Report

Financial Performance - Net Revenues decreased from $320 million to $228 million, a decline of $93 million or 29% year-over-year for the three months ended March 31, 2023[125]. - For the nine months ended March 31, 2023, net revenues decreased by 21% to $911.6 million from $1,152.2 million in the prior year[133]. - Gaming products revenue decreased by 30% to $333 million, while vinyl sales decreased by 3% to $242 million, totaling $575 million and representing 63% of revenue mix[134]. - Consumer Products revenue increased from $14 million to $19 million, a 36% increase year-over-year, attributed to the acquisition of Think3Fold[126]. - The company reported a net loss of $30.8 million compared to a net income of $33.2 million for the same period in 2022[151]. Cost and Expenses - Cost of Revenues, excluding depreciation and amortization, decreased from $280 million to $200 million, a reduction of $80 million or 29% year-over-year[127]. - Total cost of revenues, excluding depreciation and amortization, decreased by 16% to $837.9 million from $998.3 million year-over-year[135]. - Total Operating Expenses increased from $34.2 million to $34.7 million, with the percentage of net revenue rising from 10.7% to 15.3% year-over-year[128]. - Operating expenses as a percentage of net revenue increased from 9.3% to 11.7% year-over-year[136]. - Total operating expenses decreased slightly from $107.4 million to $106.7 million year-over-year[133]. Interest and Financing - Interest Expense increased from $1.0 million to $3.2 million, driven by a higher average revolver balance and an increase in the effective interest rate to 6.9%[129]. - Interest expense increased from $2.7 million to $9.1 million, primarily due to a higher average revolver balance and an increase in effective interest rate to 5.5%[137]. - The company had an outstanding revolver balance of approximately $127 million under the Credit Facility with Bank of America[169]. - The interest on borrowings accrued at a weighted average rate of 5.48% for the nine months ended March 31, 2023[169]. - A hypothetical 100 basis point increase in daily interest rates would increase the Company's interest expense by approximately $0.4 million per quarter[169]. Tax and Write-downs - The company recorded an income tax benefit of $11.4 million for the nine months ended March 31, 2023, compared to an expense of $10.5 million in the prior year[137]. - The company recognized a $7.1 million write-down for gaming arcades and $3.7 million for consumer products to their estimated net realizable value during the nine months ended March 31, 2023[157]. Liquidity and Capital - As of March 31, 2023, the company had cash and cash equivalents of $1.0 million and a borrowing capacity of $24.4 million under its revolving credit facility[142]. - The credit line with Bank of America was amended on April 21, 2023, reducing the facility from $225 million to $175 million[143]. - The company is in active discussions with lenders to renew its revolving credit facility before the current term expires on September 29, 2023[143]. - The company may seek to raise additional capital through the sale of equity securities following the current offering[147]. - The company’s liquidity position remains uncertain due to operational losses and the lack of a revised long-term revolver in place[144]. Operational Challenges - The company incurred customer rebates of approximately $12.2 million to stimulate demand for arcades during the nine months ended March 31, 2023[121]. - The company plans to invest in additional warehouse automation to address labor resource scarcity and manage changes in demand[128]. - The company recorded higher landed costs of $15.3 million due to disruptions in the transportation industry, impacting inventory write-downs for the nine months ended March 31, 2023[170]. - Inflationary pressures have begun to affect the Company's operations, particularly in freight, shipping costs, and payroll[170]. - The Company continues to monitor interest rates and inflation, which may impact sales, gross profits, and gross margins[170]. Risk Management - The Company does not currently engage in hedging transactions to manage exposure to interest rate risk[167]. - The Company believes it is not exposed to significant credit risk on cash, as primary cash is held in high-quality financial institutions[166]. - Ongoing credit evaluations and risk assessments are performed to minimize trade receivable risk[166]. - The Company’s indebtedness may make it more vulnerable to economic downturns and subject to covenants that restrict operations[168].