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, 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, Kohl’s, Target, Shopify, and others. 39 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 325,000 SKU products, consisting of vinyl records, video games, compact discs, DVD, Blu-Rays, toys, 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. 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 July 1, 2022, Alliance purchased the assets and liabilities of Think3Fold, LLC, a collectables distribution company. This acquisition resulted in increased shelf space for our largest customer and expanded our product offerings. On February 10, 2023, AENT Corporation (f/k/a Alliance Entertainment Holding Corporation) (“Legacy Alliance”), Adara Acquisition Corp. (“Adara”) and Adara Merger Sub, Inc. (“Merger Sub”) consummated the closing of the transactions contemplated by the Business Combination Agreement, dated as of June 22, 2022, by and among Adara, Merger Sub and Legacy Alliance. Pursuant to the terms of the Business Combination Agreement, a business combination of Legacy Alliance and Adara was affected by the merger of Merger Sub with and into Alliance (the “Merger” or the “Business Combination”), with Alliance surviving the Merger as a wholly-owned subsidiary of Adara. Following the Merger’s consummation on the closing of the Business Combination, Adara changed its name from Adara Acquisition Corp. to Alliance Entertainment Holding Corporation (the “Company”). While the legal acquirer in the Business Combination Agreement was Adara, 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 Adara 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 in many respects. Accordingly, the consolidated assets, liabilities, and results of Legacy Alliance operations became the company’s historical consolidated financial statements. Adara’s assets, liabilities, and operations results 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 Adara were recognized at historical cost (which was consistent with carrying value), with no goodwill or other intangible assets recorded. Upon consummation of the Merger, the most significant change in Legacy Alliance’s future reported financial position and results of operations was a decrease in net Equity of $787,000 compared to its consolidated balance sheet. As a result of the Merger, Alliance Entertainment became the successor to an SEC-registered company, which requires us to hire additional personnel and implement procedures and processes to address public company regulatory requirements and customary practices. We expect to incur additional annual expenses as a public company for, among other things, directors’ and officers’ liability insurance, director fees and additional internal and external accounting, legal and administrative resources, including increased audit and legal fees. Macroeconomic Uncertainties Unfavorable conditions in the economy in the United States and abroad may negatively affect the growth of our business and have affected our results of operations. For example, macroeconomic events, including inflation, interest rates, geopolitical issues, and uncertainty regarding the U.S. elections in the Fall of 2024 have led to economic uncertainty globally. The effect of macroeconomic conditions may not be fully reflected in our results of operations until future periods. If, however, economic uncertainty increases or the global economy worsens, our business, financial condition and results of operations may be harmed. For further discussion of the potential impacts of macroeconomic events on our business, financial condition, and operating results, see the section titled Part I “Item 1A. Risk Factors”. 40 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. 41 Alliance Entertainment Holding Corporation Results of Operations Year Ended June 30, 2024, Compared to Year Ended June 30, 2023 Year Ended Year Ended ($ in thousands) June 30, 2024 June 30, 2023 Net Revenues $ 1,100,483 $ 1,158,722 Cost of Revenues (excluding depreciation and amortization) 971,594 1,054,788 Operating Expenses Distribution and Fulfillment Expense 48,818 62,841 Selling, General and Administrative Expense 57,651 59,060 Depreciation and Amortization 5,880 6,629 Transaction Costs 2,086 5,014 IC DISC Commissions - 2,833 Restructuring Costs 280 306 Loss (Gain) on Disposal of Fixed Assets 33 (3 ) Total Operating Expenses 114,748 136,680 Operating Income (Loss) 14,141 (32,746 ) Other Expenses Change in Fair Value of Warrants 41 1 Interest Expense, Net 12,247 11,715 Total Other Expenses 12,288 11,716 Income (Loss) Before Income Tax Expense (Benefit) 1,853 (44,462 ) Income Tax (Benefit) (2,728 ) (9,058 ) Net Income (Loss) 4,581 (35,404 ) Other Comprehensive loss (2 ) - Total Comprehensive Income (Loss) 4,579 (35,404 ) Net Revenue: Year-over-year, total Net Revenues decreased from $1,159 million to $1,100 million (-$59 million, -5%) for the year ended June 30, 2024. Along with other retailers and distributors in the United States, we are not immune to the macroeconomic headwinds caused by high interest rates and consumer spending discretion prompted by reduced buying power and geopolitical risks. Alliance Entertainment stands out as a value-added retail distributor with exclusive distribution rights for approximately 150 studios and labels in the film and music industry. This extensive portfolio of unique content, combined with our deep inventory portfolio, enables us to cater to bulk B2B and direct-to-consumer (DTC) businesses with a vast selection of products unavailable through other distributors. Our unique DTC suite of distribution and inventory solutions for the e-commerce retail industry, including our consumer direct subsidiary DirectToU LLC, enabled approximately 36% of gross revenue for the 12 months ended June 30, 2024, versus 31% for the 12 months ended June 30, 2023. Physical music and movie products continue to show resilience. Year over year, Vinyl record sales increased from $324 million to $329 million ($5 million, 2%) for the 12 months ended June 30, 2024. The average selling price of Vinyl was up 6% and partially offset by decreased volume resulting in net revenue improvement versus the prior year. We expect music enthusiasts and collectors to extend this upward trend because of their passion for music, their appreciation for the artwork, and a desire to enhance their physical collection. Likewise, music Compact Discs (CDs) sales increased from $128 million to $130 million ($2 million, 2%). The average selling price of CDs increased by 12%, however, the decline in volume, partially due to the delay of some new K-Pop releases, offset some of the gains. Physical movie sales, which include DVDs, Blu-Ray, and Ultra HD, increased from $190 million to $204 million ($14 million, 8%) versus the same period last year. The average selling price of physical film products increased 19% year over year and was partially offset by a decline in volume. Digital sales of our exclusive content increased approximately 135% over the same period prior year. The consistent flow of new theatrical releases, combined with 4K and collectable SteelBook content, continues to drive home video sales. We expect the trend of higher price points to continue as brick & mortar retailers cater to the consumer preference for omnichannel shopping experiences and curated content versus inexpensive, mass market product offerings. Alliance Entertainment’s ability to offer retailers in-store and on-line channels a deep, extensive library of both music and movies helps provide them the products for a cohesive shopping experience based on personal preference and engagement with their respective brands. 42 Year-over-year, gaming sales decreased from $391 million to $338 million (-$53 million, -14%) for the 12 months ended June 30, 2024. The average selling price of gaming products more than doubled for the period versus prior year but was offset by a decrease in unit volume. The revenue derived from a higher price point was the direct result of our success selling more hardware and retro arcades than prior periods. Gaming suppliers continue to transition to subscription-based models, and we expect to benefit from new hardware releases during the next year. We continue to proactively monitor gaming industry trends to ensure we have the right product mix to meet market demand and maximize profitability. For the 12 months ended June 30, 2024, Consumer Products revenue decreased from $80 million to $43 million (-$37 million, -46%) versus the same period prior year. The average selling price increased by approximately 28% this year and while volume declined, margins improved significantly as we rationalized our inventory. The toys & collectables industry appears to have stabilized in the post- pandemic era and major trade shows have resumed their promotion of these unique products. The collectables market is an integral part of the entertainment market segment due to its mix of nostalgic, investment, and intrinsic value. As such, we believe there is continued profitable growth in this category. Cost of Revenues: Total cost of revenues, excluding depreciation and amortization, decreased from $1,055 million to $972 million ($83 million or 8%) year over year primarily due to the direct relation of product costs to sales volume. Gross Margin dollars increased $25 million year over year on lower sales and higher gross margins. Product margins increased from 9.0% to 11.7% (+2.7percentage points) for the 12 months ended June 30, 2024 versus June 30, 2023. The gross margin improvement was primarily driven by reduced costs compared to the previous year, as a result of inventory adjustments to manage the high landed costs caused by supply chain disruptions during the pandemic. In addition, business conditions allowed us to reduce our company sponsored marketing development funds (MDF) for arcades r elative to prior year. Since gaming products are largely non-returnable, the supply chain does not have an established practice and cadence for mark downs like the movie and music industries. As such, gaming products typically require the distributor to bear the risk of slow-moving inventory. The change in MDF in future periods is dependent on consumer demand for gaming products and the volume and success of new movie and music releases. Operating Expenses: Total Operating Expenses declined 16% and decreased as a percentage of revenue from 11.8% to 10.4% (1.4 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 5.4% to 4.4% (1.0 percentage point) for the year ended June 30, 2024, versus the same period prior year. We successfully reduced fulfillment and payroll expenses as we executed our plan to rationalize fulfillment center capacity without degradation of services. By May, we completely transitioned out of our primary Shakopee, MN warehouse and consolidated most of the product storage capacity and fulfillment operations in Shepherdsville, KY. Total Fulfillment payroll was reduced $9 million or 22% for the year ended June 30, 2024 enabling us to absorb a 2.5% increase in average labor costs while simultaneously improving warehouse efficiency by leveraging our investments in warehouse automation. In addition, we continue to monitor and optimize the use of temporary labor and overtime. Non-payroll-related fulfillment expenses were down significantly year over year and costs related to storage and freight decreased as we sold through surplus pandemic- related inventory. We expect the elimination of a warehouse, combined with continuous improvements efforts, to experience additional declines in fulfillment expenses in fiscal year 2025. Contributing to the decline of operating expenses was reduced Selling, Administrative, and General of $1.4 million or 2.3% for the year ended June 30, 2024, versus the same period prior year. SG&A expenses declined from $59.1 million to $57.7 million year-over- year. In addition to the reduction of overhead costs, Transaction Costs declined from $5.0 million to $2.1 million and $2.8 million of IC DISC Commissions were eliminated. SG&A costs, including business process, are being examined and analyzed to identify and capture additional cost-saving opportunities. Interest Expense: Interest Expense increased marginally from $11.7 million to $12.2 million ($0.5 million or 4.3%) for the year ended June 30, 2024, versus the prior year. Despite a significantly higher average effective interest rate this fiscal year that increased year over year from 6.0% to 9.5% (+3.5 percentage points), we successfully reduced the revolver balance $53 million or 34% from an average of $156 million for the 12 months ended June 30, 2023 to an average of $103 million for the 12 months ended June 30, 2024. Income Tax: For the year ended June 30, 2024, an income tax benefit of $2.7 million was recorded compared to tax benefit of $9.1 million for the same period in the prior year. Alliance reported a pretax income of $1.9 million and pretax net loss of $(44.5) million for the years ended June 30, 2024, and 2023, respectively. The annual effective tax rate (“ETR”) for the year ended June 30, 2024, was 147% due to an immaterial true up adjustment to deferred income taxes related to the net tax effects of temporary differences between the amount of assets and liabilities for accounting purposes and the amounts used for tax purposes. 43 Provision for income taxes, effective tax rate and statutory federal income tax rate for the years ended June 30, 2024, and 2023 were as follows: Year Ended Year Ended ($ in thousands) June 30, 2024 June 30, 2023 Income tax benefit $ (2,728 ) $ (9,058 ) Effective tax rate 147 % 21 % Statutory federal income tax rate 21 % 21 % Non-GAAP Financial Measures: For the year ended June 30, 2024, we had non-GAAP Adjusted EBITDA of $24.3 million compared with Adjusted EBITDA of $(17.6) million prior year or an improvement of $41.9 million year-over-year. Adjusted EBITDA for the year ended June 30, 2023, includes excessive transportation costs of $15.3 million, arcade markdowns of $12.2 million, incremental arcade storage fees of $4.6 million and additional reserves for consumer products inventory of $3.7 million. We define Adjusted EBITDA as net income or loss adjusted to exclude: (i) income tax expense; (ii) other income (loss); (iii) interest expense; and (iv) depreciation and amortization expense and (v) other infrequent, non- recurring expenses. Our method of calculating Adjusted EBITDA may differ from other issuers and accordingly, this measure may not be comparable to measures used by other issuers. We use Adjusted EBITDA to evaluate our own operating performance and as an integral part of our planning process. We present Adjusted EBITDA as a supplemental measure because we believe such a measure is useful to investors as a reasonable indicator of operating performance. We believe this measure is a financial metric used by many investors to compare companies. This measure is not a recognized measure of financial performance under GAAP in the United States and should not be considered as a substitute for operating earnings (losses), net earnings (loss) from continuing operations or cash flows from operating activities, as determined in accordance with GAAP. See the table below for a reconciliation, for the periods presented, of our GAAP net income (loss) to Adjusted EBITDA. Year Ended Year Ended ($ in thousands) June 30, 2024 June 30, 2023 Net Income (Loss) $ 4,581 $ (35,404 ) Add back: Interest Expense 12,247 11,715 Income Tax (Benefit) Expense (2,728 ) (9,058 ) Depreciation and Amortization 5,880 6,629 EBITDA 19,980 (26,118 ) Adjustments IC-DISC - 2,833 Transaction Costs 2,086 5,014 Restructuring Costs 280 306 Stock-based Compensation Expense 1,386 216 Change in Fair Value of Warrants 41 1 Contingent Loss 461 150 Loss (Gain) on Disposal of PPE 33 (3 ) Adjusted EBITDA $ 24,267 $ (17,601 ) Adjusted EBITDA for the year ended June 30, 2023, included the following expenses: Excessive International Transportation Costs (Units Sold) 8,241 Excessive International Transportation Costs (On Hand) 7,100 Markdown for Arcades Sold 12,156 Incremental Storage Fees Arcades 4,643 Consumer Products Inventory Reserve 3,700 Total 35,840 44 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, 2024, 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 and cash equivalents, cash provided by operating activities, and borrowings under our credit facility. As of June 30, 2024, in addition to the $1.1 million of cash, we carried a $73 million revolver balance on our $120 million credit facility under the Loan and Security Agreement with White Oak Commercial Finance, LLC. Since June 30, 2023, our available collateral decreased from $135 million to $117 million ($18 million, 13%); however, our availability increased from $2 million to $44 million, an increase of $42 million, as we converted accounts receivable and inventory to cash which was used to reduce the revolver from $133 million to $73 million ($60 million or 45%) year over year. Combined with a lower loan ceiling of $120 million versus $175 million, we have reduced debt service costs. ($in millions) June 30, 2024 June 30, 2023 Revolver Balance $ 73 $ 133 Availability 44 2 Our liquidity position has not changed significantly since the Merger, and we intend to principally rely on our borrowing capacity under the Revolving Credit Facility as well as any renewal of such facility. Although the Company does not currently intend to do so, the Company may seek to raise additional capital through the sale of equity securities. 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. Since the exercise price of the Warrants of $11.50 per share is significantly greater than the current market price of the Class A common stock, we do not expect the Warrants to be exercised until such time, if ever, that the market price of the Class A common stock exceeds the exercise price of the Warrants. If the price of our Class A common stock remains below the respective Warrant exercise prices per share, we believe warrant holders will be unlikely to cash exercise their Warrants, resulting in little or no cash proceeds to us. In addition, we may lower the exercise price of the Warrants in accordance with the Warrant Agreement to induce the holders to exercise such Warrants. We may effect such reduction in exercise price without the consent of such warrant holders and such reduction would decrease the maximum amount of cash proceeds we would receive upon the exercise in full of the Warrants for cash. Further, the holders of the Private Warrants and the Underwriter Warrants may exercise such Warrants on a cashless basis at any time and the holders of the Public Warrants may exercise such Warrants on a cashless basis at any time an effective registration statement is not available for the issuance of shares of Class A common stock upon such exercise. Accordingly, we would not receive any proceeds from a cashless exercise of Warrants. Cash Flow: The following table summarizes our net cash provided by or used on operating activities, investing activities and financing activities for the periods indicated and should be read in conjunction with our consolidated financial statements for the year ended June 30, 2024 and 2023. Year Ended ($ in thousands) June 30, 2024 June 30, 2023 Net Income (Loss) $ 4,581 $ (35,404 ) Net Cash (Used In) Provided By: Operating Activities 55,818 3,388 Investing Activities (162 ) (824 ) Financing Activities (55,390 ) (3,157 ) 45 For the year ended June 30, 2024, on a net income of $4.6 million, the Company’s cash provided by operating activities was $55.8 million versus $3.4 million for the year ended June 30, 2023. The primary drivers, year over year, was a $40 million increase to Net Income combined with a $49.3 million reduction of Inventory versus a $99.7 million reduction of prior year. As a result of the supply chain disruptions that occurred during the pandemic, surplus inventory accumulated and the level to support sales during fiscal year 2024 and 2023 was greatly reduced. In addition, for the 12 months ended June 30, 2024, working capital improved as Accounts Payable decreased $18.4 million and was partially offset by trade receivables that declined by $11.9 million; whereas in the prior year, Accounts Payable increased $69.0 million and trade receivables increased by $4.6 million. Cash Flows from investing activities for the 12 months ended June 30, 2024 were marginal at $0.2 million. By comparison, for the 12 months ended June 30, 2023, cashflow from investing activities was $0.8 million due to the combined net working capital structure of the acquisition transaction attributed to Cash Paid for Business Acquisition of Think3Fold that was acquired for no consideration. Net cash from financing activities was $55.4 million for the year ended June 30, 2024 versus cash used in financing activities of $3.2 million for the same period prior year. The cash from financing activities for the 12 months ended June 30, 2024 was used for debt service to reduce the principal on our revolver from $133 million to $73 million year over year. 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. 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. For the year ended June 30, 2024, 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. During the year ended June 30, 2023, the Company recognized write-downs of $7.1 million for gaming arcades and $3.7 million for consumer products to their estimated net realizable value. These write-downs were recorded in cost of revenue. The Company continues to monitor macroeconomic factors such as interest rates, inflation, and supply chain disruptions, which could materially impact future net realizable value assessments. 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, 2024, the Company performed a quantitative 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, and are amortized over their estimated useful lives, which range from 5 to 15 years. The Company reviews these assets for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. There was no impairment of goodwill or other intangible assets for the year ended June 30, 2024. 46 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 operations 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 Lattice model approach. Significant inputs into the respective models at June 30, 2024 and June 30, 2023 are as follows: June 30, 2024 February 10, 2023 Stock Price $ 3.00 $ 2.55 Exercise price per share $ 11.50 $ 11.50 Risk-free interest rate 4.41 % 4.16 % Expected term (years) 3.6 4.6 Expected volatility 36.0 % 34.6 % Expected dividend yield — — The warrants are scheduled to expire on February 10, 2028. The significant assumptions using the Lattice 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. 47 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure. None.