Algorhythm Holdings, Inc. 10-Q

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS This Quarterly Report on Form 10-Q contains forward-looking statements that involve a number of risks and uncertainties. Words such as “anticipates,” “expects,” “intends,” “goals,” “plans,” “believes,” “seeks,” “estimates,” “continues,” “may,” “will,” “would,” “should,” “could,” and variations of such words and similar expressions are intended to identify such forward-looking statements. In addition, any statements that refer to projections of our future financial performance, our anticipated growth and trends in our businesses, uncertain events or assumptions, and other characterizations of future events or circumstances are forward-looking statements. Such statements are based on management’s expectations as of the date of this filing and involve many risks and uncertainties that could cause our actual results to differ materially from those expressed or implied in our forward-looking statements. Such risks and uncertainties include those described throughout this report and our Transition Report on Form 10-KT for the nine months period ended December 31, 2023, particularly the “Risk Factors” sections of such reports. Given these risks and uncertainties, readers are cautioned not to place undue reliance on such forward-looking statements. Readers are urged to carefully review and consider the various disclosures made in this Form 10-Q and in other documents we file from time to time with the Securities and Exchange Commission (the “SEC”) that disclose risks and uncertainties that may affect our business. The forward-looking statements in this Form 10-Q are made as of the date of this filing, and we do not undertake, and expressly disclaim any duty to update such statements, whether as a result of new information, new developments or otherwise, except to the extent that disclosure may be required by law. You should read the following management’s discussion and analysis of financial condition and results of operations in conjunction with our unaudited condensed consolidated financial statements and notes thereto included in Part I, Item 1 of this Quarterly Report on Form 10-Q and with our audited financial statements and related notes thereto and Management’s Discussion and Analysis of Financial Condition and Results of Operations included in our Transition Report on Form 10-KT, filed with the SEC on April 15, 2024. In this Quarterly Report, unless the context requires otherwise, references to the “Company,” “Algorhythm,” “we,” “our company” and “us” refer to Algorhythm Holdings, Inc., a Delaware corporation, as well as our wholly owned subsidiaries; SMC Logistics, Inc., a California corporation (“SMCL”), SMC-Music, Inc., a Florida corporation (“SMCM”), SMC (HK) Limited, a Hong Kong company (“SMH”), The Singing Machine Company, Inc., a Delaware corporation (“Singing Machine”), MICS Hospitality Holdings, Inc., a Delaware corporation (“MICS Hospitality”), MICS Hospitality Management, LLC, a Delaware limited liability company (“MICS Hospitality Management”), MICS Nomad, LLC, a Delaware limited liability company (“MICS NY”) and SemiCab Holdings, LLC, a Nevada limited liability company (“SemiCab”). The objective of this Management’s Discussion and Analysis of Financial Condition and Results of Operation is to allow investors to view our company from management’s perspective, considering items that would have a material impact on future operations. Overview Algorhythm Holdings, Inc. (f/k/a The Singing machine Company, Inc.) (the “Company”) is a holding company for an AI enabled software logistics business operated through our SemiCab Holding subsidiary and a home karaoke consumer products company that designs and distributes karaoke products globally to retailers and ecommerce partners through our Singing Machine subsidiary. Our operations include our wholly owned subsidiaries, SMC Logistics, Inc., a California corporation (“SMCL”), SMC-Music, Inc., a Florida corporation (“SMCM”), SMC (HK) Limited, a Hong Kong company (“SMH”), MICS Hospitality Holdings, Inc., a Delaware corporation (“MICS Hospitality”), MICS Hospitality Management, LLC, a Delaware limited liability company (“MICS Hospitality Management”), MICS Nomad, LLC, a Delaware limited liability company (“MICS NY”) and SemiCab Holdings, LLC, a Nevada limited liability company (“SemiCab”). 22 Singing Machine is primarily engaged in the development, marketing, and sale of consumer karaoke audio equipment, accessories, and musical recordings. We are a global karaoke and music entertainment company that specializes in the design and production of quality karaoke and music enabled consumer products for adults and children. SemiCab is a cloud-based collaborative transportation platform built to achieve the scalability required to predict and optimize full-truckload transportation at enterprise-scale. To orchestrate collaboration across manufacturers, retailers, distributors, and their carriers, SemiCab uses real-time data from API-based load tendering and pre-built integrations with TMS and ELD partners. To build fully loaded round trips, SemiCab uses AI/ML techniques and advanced predictive optimization models. Recent Developments Name and Symbol Change Effective September 5, 2024, our Certificate of Incorporation was amended to effect a change in the name of the Company from “The Singing Machine Company, Inc.” to “Algorhythm Holdings, Inc.” In addition, effective September 8, 2024, the Company’s ticker symbol was changed from “MICS” to “RIME.” Change in Fiscal Year During 2023, our Board of Directors approved a change in our fiscal year end from March 31 to December 31. Our results of operations, cash flows, and all transactions impacting shareholders’ equity presented in this Quarterly Report on Form 10-Q as of September 30, 2024 are for the three and nine month periods ended September 30, 2024 and 2023. ATM Offering On June 26, 2024, the Company entered into an At-The-Market Issuance Sales Agreement (the “Sales Agreement”) with Ascendiant Capital markets, LLC, as sales agent (the “Agent”), pursuant to which the Company could offer and sell, from time to time, through the Agent (the “ATM Offering”), up to approximately $1,100,000 in shares of the Company’s common stock. On July 8, 2024, the Company entered into the First Amendment to the Sales Agreement (the “Amendment”) to increase the number of shares to be sold in the ATM Offering to $2,020,000. On August 9, 2024, the Company entered into the Second Amendment to the Sales Agreement (the “Amendment”) to increase the number of shares to be sold in the ATM Offering to $3,100,000. Pursuant to the agreement, the Agent was paid $30,000 in fees to cover legal and administrative expenses and will receive an amount equal to 3% of the gross proceeds from each sale of the Company’s share of common stock. For the three and nine months ended September 30, 2024, the Company sold 1,673,077 shares of common stock under the ATM offering and received net proceeds of approximately $1,489,000 after payment of legal and accounting fees, brokerage commissions, and administrative fees to the agent of approximately $189,000. Subsequent to September 30, 2024 and through November 18, 2024 (the last trading day prior to filing), the Company sold 2,162,423 shares of common stock under the ATM offering, and received net proceeds of approximately $1,372,000 after payment of brokerage commissions and administrative fees to the agent of approximately $42,000. Asset Purchase On June 11, 2024, the Company and its wholly owned subsidiary SemiCab Holdings, LLC, a Nevada limited liability company (“SemiCab LLC” and collectively with the Company, the “Buyer”), SemiCab, Inc., a Delaware corporation (“SemiCab” or the “Seller”), Ajesh Kapoor and Vivek Sehgal entered into an asset purchase agreement (the “Asset Purchase Agreement”) pursuant to which the Seller agreed to sell and assign to the Company, and the Company agreed to purchase and assume from the Seller, substantially all the assets, and certain specified liabilities relating to the business of the Seller. Subject to certain exceptions set forth in the Asset Purchase Agreement, the parties agreed that the Buyer will not assume the liabilities of the Seller. SemiCab is an artificial intelligence, cloud-based collaborative transportation platform built to achieve the scalability required to predict and optimize semi-tractor trailer load efficiency. On July 3, 2024, the parties closed on the asset purchase whereby the Company issued to the Seller (i) 641,806 shares of the Company’s common stock (ii) a twenty percent (20%) membership interest in SemiCab LLC. 23 Pursuant to the asset acquisition agreement, the Company and Seller entered into an option agreement (the “Option Agreement”), granting the Buyer the right to acquire all of the issued and outstanding capital securities of SMCB Solutions Private Limited (“SMCB”), a wholly owned subsidiary of the Seller, in consideration for 320,903 shares of common stock of the Company. The Option Agreement has not been exercised through the date of this filing. Hospitality Lease On August 23, 2023, MICS NY entered into an Agreement of Lease (the “Lease Agreement”) with OAC 111 Flatiron, LLC and OAC Adelphi, LLC (the “Landlord”), pursuant to which MICS NY agreed to lease approximately 10,000 square feet of ground floor retail space and a portion of the basement underneath the ground floor retail space in the property located at 111 West 24 th Street, New York, New York (the “Premises”). During the six months ended June 30, 2024, the Company abandoned its plans to continue use of the leased space and exercised its early termination provision of the Lease Agreement which was not accepted by the Landlord. Due to the abandonment of the lease, all assets related to the lease were impaired. Assets including security deposits, rent deposits and right of use assets of approximately $3,878,000 were written off during the three months ended June 30, 2024. On July 26, 2024, OAC 111 Flatiron, LLC and OAC Adelphi, LLC (the “Landlord”), filed a civil action in the Supreme Court of the State of New York against MICS Nomad LLC, a subsidiary of the Company (“MICS NY”), and the Company (“the Defendants”) for alleged breach of lease, seeking monetary damages including unpaid rent, future unpaid rent, and other expenses related to the lease. The complaint alleges the Defendants breached the lease in various material respects. On September 25, 2024, the Company entered into a Settlement Agreement for a full release and dismissal of the complaint within 5 business days of the Company’s payment of $250,000. Pursuant to the Settlement Agreement, the Company made the first payment of $150,000 was made on September 25, 2024 and a final payment of $100,000 was due and paid on October 25, 2024. On October 29, 2024 the Landlord filed a discontinuance with prejudice. As a result of the settlement, during the three months ended September 30, 2024, the Company wrote off the remaining operating lease liability on the Lease Agreement and recognized a gain on early termination of the operating lease of approximately $3,874,000. For the nine months ended September 30, 2024 the Company recognized a loss on early termination of the operating lease of $4,000 which includes the $250,000 termination settlement expense. The net loss on early termination of the Lease Agreement was recorded as a component of operating expenses in the accompanying condensed consolidated statements of operations. Private Placement On October 22, 2024, the Company entered into a Securities Purchase Agreement (the “SPA”) with investors pursuant to which we sold, in a private placement (the “Private Placement”), secured notes with an aggregate principal amount of $2,352,941 (the “Notes”), for cash proceeds of $2,000,000, net of original issue discount of $352,941. As consideration for entering into the SPA, we issued a total of 2,299,998 shares of common stock of the Company to the investors on October 24, 2024 (See Note 17). Oxford Credit Facility On March 28, 2024, the Company and Oxford Commercial Finance, a Michigan banking corporation, (referred to as “Oxford”) entered into a Loan Agreement (the “Loan Agreement”) and related Revolving Credit Note (the “Note”) for a $2,000,000 revolving line of credit (the “Oxford Line of Credit”). On October 17, 2024, the Company terminated the Loan Agreement and the Note. As of the date of termination, the Company had no outstanding amounts owed to Oxford and paid a termination fee of $40,000. 24 Amended Bylaws On October 18, 2024, the Company amended its Amended By-laws (the “By-law Amendment”), for the purpose of reducing the quorum required to hold meetings of the stockholders of the Company (the “Quorum Requirement”). The By-law Amendment reduced the Quorum Requirement from a majority to thirty-three and one-third percent (33 1/3%) of the voting power of the shares of stock issued and outstanding and entitled to vote at the meeting. The By-law Amendment was approved by the Board of Directors of the Company on October 18, 2024. Share Repurchase On November 1, 2024, the Company entered into a Stock Repurchase Agreement (the “Repurchase Agreement”) with Regalia Ventures LLC, a Delaware limited liability company (the “Seller”), pursuant to which the Company agreed to repurchase from the Seller an aggregate of 1,098,901 issued and outstanding shares of common stock, par value $0.01 per share, of the Company (the “Shares”). Pursuant to the terms of the Repurchase Agreement, the Company has agreed to repurchase from the Seller, and the Seller has agreed to sell, assign and transfer to the Company, all of the Seller’s right, title and interest in and to the Shares, at a price per Share equal to the higher of: (1) the closing price of the common stock on the last trading day immediately preceding the date of the Repurchase Agreement; or (2) the highest volume weighted average price (VWAP) of the common stock during a pricing period of ten (10) consecutive trading days prior to the date of the Repurchase Agreement per share (the “Purchase Price”), and the Company shall issue to the Seller a promissory note in the principal amount equal to the Purchase Price, substantially in the form attached to the Repurchase Agreement as Exhibit A (the “Note”), and subject to terms and conditions therein. The shares of common stock to be repurchased were originally issued to the Seller on November 21, 2023, pursuant to a certain stock purchase agreement, dated November 20, 2023. As of the date of this filing, the repurchase of the shares has not yet closed. Results of Operations The following table sets forth, for the periods indicated, certain items related to our consolidated statements of operations as a percentage of net sales as follows: For the Three Months Ended For the Nine Months Ended September 30, 2024 September 30, 2023 September 30, 2024 September 30, 2023 Net Sales 100.0 % 100.0 % 100.0 % 100.0 % Cost of Goods Sold 77.6 % 76.6 % 79.3 % 75.6 % Operating Expenses 10.5 % 22.8 % 67.1 % 44.8 % Income (Loss) from Operations 11.8 % 0.6 % - 46.4 % -20.4 % Other (Expenses) Income, Net - 2.7 % -0.1 % -2.1 % 2.9 % Income (Loss) Before Income Tax Provision 9.1 % 0.5 % -48.5 % -17.5 % Income Tax Provision 0.0 % 0.0 % 0.0 % -6.8 % Net Income (Loss) 9.1 % 0.5 % -48.5 % -24.3 % Three Months Ended September 30, 2024 Compared to the Three Months Ended September 30, 2023 Net Sales Net sales for the three months ended September 30, 2024, decreased to approximately $10,622,000 from approximately $15,931,000 representing a decrease of approximately $5,309,000 as compared to the three months ended September 30, 2023. The decrease was primarily due to lower overall sell-through results during the prior year holiday season, mostly with our largest customer, Walmart, which in turn reduced their forecast for the upcoming holiday season resulting in decreased stock purchases. Gross Profit Gross profit for the three months ended September 30, 2024 decreased to approximately $2,375,000 from approximately $3,734,000 representing a decrease of approximately $1,359,000 as compared to the three months ended September 30, 2023. The decrease in gross profit was primarily due to the decrease in net sales as described above. 25 Operating Expenses During the three months ended September 30, 2024, total operating expenses decreased to approximately $1,118,000, compared to approximately $3,628,000 during the three months ended September 30, 2023. This represents a decrease in total operating expenses of approximately $2,510,000 from the three months ended September 30, 2023. The Company wrote off the remaining operating lease liability on the hospitality Lease Agreement due to a termination Settlement Agreement and recognized a gain on early termination of the operating lease of approximately $3,874,000 as the related right of use asset had already been written off as impaired in the previous quarter. Selling expenses decreased by approximately $516,000 of variable and discretionary selling expenses commensurate with the decrease in net sales as described above. These decreases in operating expenses were offset by increases in stock-based consulting expenses of approximately $426,000 and increased third-party logistics costs of approximately $213,000 associated with the closing of the Company’s logistics warehouse in the prior year. In addition, there was an increase in operating expenses of approximately $816,000 related to the asset acquisition agreement of SemiCab. Other Expenses (Income) Other expenses consisted of interest expense of approximately $283,000 for the three months ended September 30, 2024, as compared to interest expense of approximately $53,000 for the three months ended September 30, 2023. The increase in interest expense of approximately $230,000 was primarily due to interest incurred on debt from the recently acquired asset purchase of SemiCab. There was a gain on the disposal of warehouse equipment of approximately $44,000 associated with the closing of the logistics facility in California during the three months ended September 30, 2023. Income Taxes For the three months ended September 30, 2024 and 2023 the Company did not recognize any income tax provision. The Company is not recognizing any tax provision for the three months ended September 30, 2024 as the Company is not forecasting any taxable income for the current year and had a loss before income tax benefit in the previous year. The Company’s income tax expense differs for the expected tax benefit based on statutory rates primarily due history of losses and forecasts that suggest the Company will not be able to utilize any deferred tax assets in the future. Nine Months Ended September 30, 2024 Compared to the Nine Months Ended September 30, 2023 Net Sales Net sales for the nine months ended September 30, 2024, decreased to approximately $15,488,000 from approximately $21,939,000 representing a decrease of approximately $6,451,000 as compared to the nine months ended September 30, 2023. The decrease was primarily due to lower overall sell-through results during the prior year holiday season, mostly with our largest customer, Walmart, which in turn reduced their forecast for the upcoming holiday season resulting in decreased stock purchases. Gross Profit Gross profit for the nine months ended September 30, 2024 decreased to approximately $3,201,000 from approximately $5,357,000 representing a decrease of approximately $2,156,000 as compared to the nine months ended September 30, 2023. The decrease in gross profit was primarily due to the decrease in net sales as described above. Gross margins for the nine months ended September 30, 2024 were 20.7%, as compared to 24.4% for the nine months ended September 30, 2023. The primary reason for the decrease in gross profit margin was due to a product mix of excess inventory that was sold at margins significantly lower than current active products. 26 Operating Expenses During the nine months ended September 30, 2024, total operating expenses increased to approximately $10,386,000 compared to approximately $9,829,000 during the nine months ended September 30, 2023. This represents an increase in total operating expenses of approximately $557,000 for the nine months ended September 30, 2023. The increase in total operating expenses was primarily due to an increase in stock-based consulting expenses of approximately $426,000 and an increase in operating expenses of approximately $816,000 related to the asset acquisition agreement of SemiCab. These increases were offset by a decrease in variable and discretionary selling expenses of approximately $596,000 commensurate with the decrease in net sales as described above. Other (Expenses) Income, net Other expenses, net increased to approximately $328,000 for the nine months ended September 30, 2024 as compared to other income, net of approximately $626,000. There was interest expense of approximately $328,000 for the nine months ended September 30, 2024 as compared to interest expense of approximately $122,000. The increase in interest expense of approximately $206,000 was primarily due to interest incurred on debt from the recently acquired asset purchase of SemiCab. During the nine months ended September 30, 2023, there was a refund of approximately $704,000 from the Employee Retention Credit program and a gain on the disposal of warehouse equipment of approximately $44,000 associated with the closing of the logistics facility in California. Income Taxes For the nine months ended September 30, 2024, the Company did not recognize any income tax provision as the Company is not forecasting any taxable income for the current year. The Company’s income tax provision for the nine months ended September 30, 2023, was approximately $1,502,000 as the Company recognized a full valuation allowance on all of its deferred tax assets based on the recent history of losses and forecasts that suggested the Company would not be able to utilize the deferred tax assets in the future. The Company’s income tax expense differs for the expected tax benefit/expense based on statutory rates primarily due to full valuation allowance for all of its subsidiaries for the nine months ended September 30, 2023. Liquidity and Capital Resources The Company incurred a net loss of approximately $7,247,000 for the nine-month period ended September 30, 2024, and has a history of recurring losses. On September 30, 2024, we had cash on hand of approximately $621,000 as compared to approximately $6,703,000 on December 31, 2023. The decrease in cash on hand of approximately $6,082,000 from December 31, 2023, was primarily due to approximately $7,069,000 used in operations. We advanced approximately $776,000 to SMCB for prepaid services under a service agreement (See Note 5). There was a decrease in refunds due to customers of approximately $1,968,000 which included payment of approximately $768,000 to one major customer for refunds due for overstock returned by the customer in the prior year. There was a seasonal increase in reserves for sales returns of approximately $1,180,000. These uses of cash were offset by proceeds of approximately $1,489,000 for the sale of its common stock and a decrease in trade and related party accounts receivable of approximately $3,158,000. As of September 30, 2024, we had deficit working capital of approximately $2,082,000. On September 30, 2023, we had cash on hand of approximately $3,213,000 as compared to $2,795,000 as of December 31, 2022. The increase in cash on hand of approximately $418,000 was primarily due to approximately $760,000 provided by operating activities primarily due to peak seasonal increases of accounts payable of approximately $10,442,000 primarily due to factory vendors offset by seasonal increases in accounts receivable of approximately $3,982,000, inventories or approximately $3,424,000 accrued expenses related to seasonal accruals for estimated returned goods and co-op incentive program expenses, approximately $1,132,000. Net cash used investing activities for the purchase of molds and tooling was approximately $163,000. Net cash used in financing activities was approximately $234,000. While the Company received proceeds from the exercise of common stock warrants and issuance of common stock (net of offering costs) of approximately $1,640,000, this increase in financing activities was offset by repayment of revolving credit lines of credit and other debt of approximately $1,874,000 during the nine months ended September 30, 2023. 27 As previously reported on Form 8-K filed on August 30, 2024, on August 26, 2024, the Company received a notice from The Nasdaq Stock Market LLC (“NASDAQ”) indicating that its stockholders’ equity as reported in its Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2024 did not meet the minimum of $2,500,000 in stockholders’ equity required by NASDAQ Listing Rule 5550(b)(1) (the “Equity Rule”) for continued listing, or the alternatives of market value of listed securities or net income from continuing operations. Pursuant to the Equity Rule, the Company submitted a plan to regain compliance with the Equity Rule. On November 13, 2024, the Company filed a Form 8-K stating that it believed it regained compliance with the Equity Rule. As disclosed herein, the Company reported stockholders’ equity of approximately $2.7 million. NASDAQ has advised the Company that it will continue to monitor the Company’s ongoing compliance with the stockholders’ equity requirement and, if at the time of its next periodic report the Company does not evidence compliance, that it may be subject to delisting. Based on cash flow projections from operating and financing activities and the existing balance of cash, management is of the opinion that the Company has insufficient funds to sustain operations for at least one year after the date of this report, and it may not be able to meet its payment obligations from operations and related commitments, if the Company is not able to obtain outside financing to allow the Company to continue as a going concern. Based on these factors, the Company has substantial doubt that it will continue as a going concern for the twelve months following the issuance date of the financial statements included elsewhere in this report. The Company’s plan to alleviate the going concern issue is to increase revenue while controlling operating costs and expenses and obtaining funds from outside sources of financing to generate positive financing cash flows. While management is optimistic about its ability to raise funds to fund operations for at least one year after the date of this report, there can be no assurance that any such measures will be successful. The Company’s ability to raise additional funds will depend, in part, on the success of our product development activities, and other events or conditions that may affect the share value or prospects, as well as factors related to financial, economic and market conditions, many of which are beyond our control. There can be no assurances that sufficient funds will be available to us when required or on acceptable terms, if at all. Accordingly, management has concluded that these plans do not alleviate substantial doubt about the Company’s ability to continue as a going concern. Our failure to achieve or maintain profitability could negatively impact the value of our common stock. Critical Accounting Estimates Our interim financial statements were prepared in accordance with United States generally accepted accounting principles, which require management to make subjective decisions, assessments and estimates about the effect of matters that are inherently uncertain. As the number of variables and assumptions affecting the judgement increases such judgements become even more subjective. While management believes that its assumptions are reasonable and appropriate, actual results may be materially different than estimated. The critical accounting estimates and assumptions have not materially changed from those identified in our Transition Report for the period ended December 31, 2023. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Not required for small reporting companies.