Algorhythm Holdings, Inc. 10-K

Item 9A. Controls and Procedures. Evaluation of Disclosure Controls and Procedures We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our Exchange Act reports is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow for timely decisions regarding required disclosure. In designing and evaluating our disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management is required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Our disclosure controls and procedures were designed to provide reasonable assurance that the controls and procedures would meet management’s objectives. As of December 31, 2024, we carried out an evaluation of the effectiveness of our disclosure controls and procedures as defined by Rule 13a-15(e) under the Exchange Act under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer. Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that, as of December 31, 2024, our disclosure controls and procedures were not effective to provide reasonable assurance that information we are required to disclose in reports that we file or submit under the Exchange Act is: (i) recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and (ii) accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure. Management’s Report on Internal Control over Financial Reporting Our management, under the supervision of our Chief Executive Officer and Chief Financial Officer, is responsible for establishing and maintaining adequate internal control over financial reporting. Internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of our consolidated financial statements for external purposes in accordance with GAAP. Internal control over financial reporting includes policies and procedures that: (a) pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of our assets; (b) provide reasonable assurance that transactions are recorded as necessary to permit preparation of our consolidated financial statements in accordance with GAAP, and that our receipts and expenditures are being made only in accordance with authorization of our management and directors; and 60 (c) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisitions, use or disposition of our assets that could have a material effect on our consolidated financial statements. Internal control over financial reporting cannot provide absolute assurance of achieving financial reporting objectives because of its inherent limitations. Internal control over financial reporting is a process that involves human diligence and compliance and is subject to lapses in judgment and breakdowns resulting from human failures. Internal control over financial reporting also can be circumvented by collusion or improper management override. Because of such limitations, there is a risk that material misstatements may not be prevented or detected on a timely basis by internal control over financial reporting. However, these inherent limitations are known features of the financial reporting process. Therefore, it is possible to design safeguards to reduce, though not eliminate, this risk. Our management used the framework set forth in the report entitled Internal Control – Integrated Framework (2013) published by the Committee of Sponsoring Organizations of the Treadway Commission, known as COSO, to evaluate the effectiveness of our internal control over financial reporting. Based on this assessment, our management concluded that our internal control over financial reporting was not effective at December 31, 2024, due to the existence of material weaknesses in our internal controls. A material weakness is a control deficiency, or a combination of control deficiencies, that results in a more than remote likelihood that a material misstatement of our annual or interim consolidated financial statements will not be prevented or detected on a timely basis. Our management, in consultation with our independent registered public accounting firm, concluded that the following material weaknesses existed in the following areas as of December 31, 2024: 1. We lacked sufficient resources in our accounting department restricting our ability to review and approve certain material journal entries which increases the likelihood that a material misstatement of interim or annual financial statements might not be prevented. 2. We lacked sufficient resources in our accounting department, which resulted in our ability to have proper segregation of duties between the preparation, review and approval certain material reconciliations related to financial reporting in a timely manner. 3. Due to our lack of sufficient resource restrictions in our accounting department, we have not established a three-way match of documents or other controls precise enough to detect a material misstatement in revenue. To remediate these material weaknesses, we intend to conduct a thorough review of the accounting department to ensure that the staff has the appropriate training and experience. We may hire one or more accounting persons to assist us with our accounting and financial reporting function. We also intend to implement more comprehensive written policies and procedures that address separation of duties and proper accounting and financial reporting. 61 Notwithstanding the existence of these material weaknesses in our internal controls, we believe that our consolidated financial statements fairly present, in all material respects, our balance sheets at December 31, 2024 and 2023, our statements of operations, stockholders’ deficit and cash flows for the year ended December 31, 2024, and our statements of operations, stockholders’ equity and cash flows the nine-month period ended December 31, 2023 in conformity with GAAP. This annual report does not include an attestation report of our independent registered public accounting firm regarding internal control over financial reporting. Our management’s report was not subject to attestation by our independent registered public accounting firm pursuant to rules of the SEC that permit us to provide only our management’s report in this annual report. Changes in Internal Control Over Financial Reporting There has been no change in our internal control over financial reporting during our most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting. Item 9B. Other Information. Rule 10b5-1 Trading Arrangements During the three-month period ended December 31, 2024, none of our officers or directors adopted or terminated a “Rule 10b5-1 trading arrangement” or “non-Rule 10b5-1 trading arrangement,” as each term is defined in Item 408(a) of Regulation S-K. Item 9C. Disclosure Regarding Foreign Jurisdictions That Prevent Inspections. Not applicable. 62 PART III Item 10. Directors, Executive Officers and Corporate Governance. The following chart sets forth certain information about each of our directors and executive officers. Name Age Positions Held Gary Atkinson 43 Chief Financial Officer, Secretary and Director Alex Andre 50 Chief Financial Officer and General Counsel Bernardo Melo 48 Chief Revenue Officer and Director Harvey Judkowitz 80 Director Joseph Kling 95 Director Mathieu Peloquin 54 Director Jay B. Foreman 63 Director Board of Directors We believe that our board of directors should be composed of individuals with sophistication and experience in many substantive areas that impact our business. We believe that experience, qualifications or skills in the following areas are most important: (i) organizational leadership and vision; (ii) strategic, financial and operational planning; (iii) AI technology and consumer electronics industry experience; (iv) corporate restructuring and performance enhancement; (v) corporate finance; and (vi) experience as a board member of other corporations. These areas are in addition to the personal qualifications described in this section. We believe that our current board members possess the professional and personal qualifications necessary for board service and have highlighted particularly noteworthy attributes for these board members below. The principal occupations and business experience of our current directors are as follows: Gary Atkinson has served as our Chief Executive Officer since May 2012 and as a member of our board of directors since August 2022. Prior to that, Mr. Atkinson served as our Interim Chief Executive Officer from November 2009 to May 2012 and as our General Counsel from January 2008 to November 2009. Mr. Atkinson is a licensed attorney in Florida and Georgia. He graduated from the University of Rochester with a bachelor’s degree in economics and received a Juris Doctorate and Masters in Business Administration from Case Western Reserve University School of Law and Weatherhead School of Management. We believe that Mr. Atkinson is qualified to serve on our board of directors because of his strong leadership, business acumen and analytical skills along with his extensive experience in the consumer electronics industry. Bernardo Melo has served as our Chief Revenue Officer since April 2022 and served as our Vice President of Global Sales and Marketing from 2008 to April 2022. He has also served as a member of our board of directors since July 2022. Prior to that, Mr. Melo held dual roles with us managing the operations, licensing and sales of the music division while concentrating on hardware sales for the Latin America and Canadian market as well as key U.S. accounts such as Walmart. 63 We believe that Mr. Melo is qualified to serve as a member of our board of directors because of his sales and marketing expertise as well as his significant experience in the consumer electronics industry. Harvey Judkowitz has served as a member of our board of directors since March 2004 and serves as the Chairman of our Audit Committee. He is licensed as a certified professional accountant in New York and Florida and has owned his own accounting firm since 1988. He also served as the Chief Executive Officer and Chairman of our board of directors of UniPro Financial Services, a diversified financial services company, up until the company was sold in September 2005. Prior to that he served as the President and Chief Operating Officer of Photovoltaic Solar Cells, Inc., a producer of photovoltaic solar cells. We believe that Mr. Judkowitz is qualified to serve as a member of our board of directors because of his organizational leadership and management skills and his accounting expertise. Joseph Kling has served as a member of our board of directors since May 2017. Mr. Kling has spent his entire career in the toy industry. Mr. Kling most recently served as an M&A consultant and served as a member of the board of directors of Russ Berrie & Co (currently known as Kids Brands, Inc.), a designer, importer, marketer and distributor of infant and juvenile consumer products, for 21 years advising on the acquisition of several toy companies. Mr. Kling also served as a member of the board of directors of Crown Crafts, a large distributor of infant, toddler, and juvenile consumer products, and Lancit Media Entertainment, a children’s, and family media production company that was formerly listed on the Nasdaq. Prior to that, he served as the Chief Executive Officer of View-Master Ideal, an iconic stereoscopic toy company that was publicly traded on the Nasdaq and which was later acquired by Tyco Toys in 1989. Notably, Mr. Kling has been involved in many major toy company acquisitions of brands such as Melissa & Doug and Brio. We believe that Mr. Kling is qualified to serve as a member of our board of directors because of his success and relationships in the toy industry, his deep understanding of consumer products, and his experience with mergers and acquisitions in the toy industry. Mathieu Peloquin has served as a member of our board of directors since December 2021. Mr. Peloquin has served as the Senior Vice-President, Marketing and Communications at Stingray Group since 2013 and oversees marketing, communication strategies, content and investor relations. Prior to joining Stingray Group, Mr. Peloquin served as the Vice President of Marketing at Transcontinental Media Inc. and Vice President of Transcontinental Media Inc.’s Digital Marketing Solutions Group from 2010 to 2013. He also held several executive positions at Reader’s Digest Magazines Canada Limited and co-founded Equinox Marketing Services. Mr. Peloquin is a certified public account, certified management accountant, and holds a Bachelor of Commerce from the School of Management of the Université du Québec à Montréal. We believe that Mr. Peloquin is qualified to serve as a member of our board of directors because of his more than 20 years of experience as an expert marketer, strategist, and inspiring leader. 64 Jay B. Foreman has served as a member of our board of directors since May 2022. Mr. Foreman has served as the Chief Executive Officer of Basic Fun!, which sells children’s toys under the Tonka™, Carebears™, K’NEX™, Lincoln Logs™, and Playhut™ brands, since he founded the company in 2009. Prior to that, he founded several toy companies, including Play-By-Play Toy’s and Novelties, a designer and distributor of stuffed toys, and more recently Play Along Toys, a leading toy company which was subsequently sold to Jakks Pacific in 2004. He currently chairs the Toy Industry trade show committee which is responsible for the world-famous NY Toy Fair, and has also served on the boards of directors of the Toy Association and Licensing Merchandisers association. We believe that Mr. Foreman is qualified to serve as a member of our board of directors because of his extensive history and experience in the toy business, including his deep knowledge of licensing, operations, sales and marketing, M&A, and capital markets. Nomination of Directors Our Nominating and Corporate Governance Committee is responsible for identifying individuals qualified to become directors. The Nominating and Corporate Governance Committee seeks to identify director candidates based on input provided by several sources, including: (i) members of our Nominating and Corporate Governance Committee, (ii) our other directors, (iii) our stockholders, (iv) our Chief Executive Officer and Chairman of our board of directors, and (v) third parties such as professional search firms. In evaluating potential candidates for director, the Nominating Committee considers the entirety of each candidate’s credentials. Qualifications for consideration as a director nominee may vary according to the particular areas of expertise being sought as a complement to the existing composition of our board of directors. However, at a minimum, candidates for director must possess: ● high personal and professional ethics and integrity; ● the ability to exercise sound judgment; ● the ability to make independent analytical inquiries; ● the willingness and ability to devote adequate time and resources to diligently perform board of directors and committee duties; and ● the appropriate and relevant business experience and acumen. In addition to these minimum qualifications, the Nominating Committee also takes into account when considering whether to nominate a potential director candidate the following factors ● whether the person possesses specific industry expertise and familiarity with general issues affecting our business; ● whether the person’s nomination and election would enable the Board to have a member that qualifies as an “audit committee financial expert” as such term is defined by the Securities and Exchange Commission (the “SEC”) in Item 401 of Regulation S-K; 65 ● whether the person would qualify as an “independent director”, as such term is defined in the Nasdaq’s stock market rules; ● the importance of continuity of the existing composition of our board of directors to provide long term stability and experienced oversight; and ● the importance of diversification among our board of directors, in terms of both the individuals involved and their various experiences and areas of expertise. Committees of the Board of Directors Audit Committee The members of our Audit Committee are Messrs. Judkowitz, Kling and Foreman. Mr. Judkowitz serves as the Chairperson of our Audit Committee. Each of Messrs. Judkowitz, Kling and Foreman is independent under the rules and regulations of the SEC and the listing standards of the Nasdaq applicable to audit committee members. Our board of directors has determined that Mr. Judkowitz qualifies as an audit committee financial expert within the meaning of SEC regulations and meets the financial sophistication requirements of the Nasdaq. Our Audit Committee has the responsibility for, among other things: (i) selecting, retaining and overseeing our independent registered public accounting firm, (ii) obtaining and reviewing a report by independent auditors that describe the accounting firm’s internal quality control, and any materials issues or relationships that may impact the auditors, (iii) reviewing and discussing with the independent auditors standards and responsibilities, strategy, scope and timing of audits, any significant risks, and results, (iv) ensuring the integrity of our financial statements, (v) reviewing and discussing with our independent auditors any other matters required to be discussed by PCAOB Auditing Standard No. 1301, (vi) reviewing, approving and overseeing any transaction between us and any related person and any other potential conflict of interest situations, (vii) overseeing our internal audit department, (viii) reviewing, approving and overseeing related party transactions, and (ix) establishing and overseeing procedures for the receipt, retention and treatment of complaints received by us regarding accounting, internal accounting controls or auditing matters and the confidential, anonymous submission by our employees of concerns regarding questionable accounting or auditing matters. The Audit Committee charter can be found online at https://ir.algoholdings.com/investor-governance. Compensation Committee The members of our Compensation Committee are Messrs. Judkowitz, Kling and Foreman. Mr. Kling serving as the Chairman of our Compensation Committee. Our Compensation Committee has the responsibility for, among other things, (i) reviewing and approving the chief executive officer’s compensation based on an evaluation in light of corporate goals and objectives, (ii) reviewing and recommending to the Board the compensation of all other executive officers, (iii) reviewing and recommending to the Board incentive compensation plans and equity plans, (iv) reviewing and discussing with management compensation information and related information to be included in this report and proxy statements, and (v) reviewing and recommending to the board of directors for approval procedures relating to say on pay votes. The Compensation Committee charter can be found online at https://ir.algoholdings.com/investor-governance. 66 Nominating and Corporate Governance Committee The members of our Nominating and Corporate Governance Committee are Messrs. Judkowitz, Kling and Foreman. Mr. Foreman serves as the Chairman of our Nominating and Corporate Governance Committee. Our Nominating and Corporate Governance Committee has the responsibility relating to assisting the Board in, among other things, (i) identifying and screening individuals qualified to become members of our board of directors, consistent with criteria approved by our board of directors, (ii) recommending to the Board the approval of nominees for director, (ii) developing and recommending to our board of directors a set of corporate governance guidelines, and (iv) overseeing the evaluation of our board of director. The Nominating and Corporate Governance Committee charter can be found online at https://ir.algoholdings.com/investor-governance. Executive Committee The members of our Executive Committee are Messrs. Foreman, Judkowitz, Peloquin and Atkinson. Mr. Atkinson serves as the Chairman of our Executive Committee. Our Executive Committee has the responsibility for evaluating critical matters on behalf of our full board of directors. This includes but is not limited to: (i) reviewing our monthly financial and operational performance, (ii) reviewing and recommending prospective capital markets activities, including equity offerings, debt issuances, and other financings, (iii) evaluating and recommending potential business development activities such as strategic partnerships, joint ventures, mergers, acquisitions, and divestitures, and (iv) other strategic initiatives. Executive Officers Gary Atkinson has served as our Chief Executive Officer since May 2012 and as a member of our board of directors since August 2022. His background appears above under “ – Board of Directors” . Alex Andre has served as our Chief Financial Officer and General Counsel since February 2025. Mr. Andre brings us nearly 25 years of executive management, financial, legal and operational experience. He most recently served as the Chief Financial Officer of Lemnature AquaFarms Corporation, a plant-based ingredients manufacturer for the food, beverage and nutrition markets, from October 2022 to September 2023. Prior to that, Mr. Andre served as the Chief Financial Officer and General Counsel of M.H. Enterprises, Inc., the owner and franchisor of the Teriyaki Madness ® restaurant brand, from March 2021 to September 2022. Before that, he served as the Chief Financial Officer of ARC Group, Inc., a national, multi-brand, multi-unit restaurant holding company, from July 2019 to March 2021, and as its General Counsel from October 2019 to March 2021. Earlier in his career, Mr. Andre served as an accountant for KPMG LLP before serving as a corporate & securities attorney for regional and international law firms. Bernardo Melo has served as our Chief Revenue Officer since April 2022 and as a member of our board of directors since July 2022. His background appears above under “ – Board of Directors” . No Family Relationships There is no family relationship between any director and executive officer or among any directors or executive officers. Involvement in Certain Legal Proceedings None of our directors and executive officers have been involved in any of the following events during the past ten years that we consider to be material to an evaluation of their respective abilities or integrity: ● any bankruptcy petition filed by or against such person or any business of which such person was a general partner or executive officer either at the time of the bankruptcy or within two years prior to that time; ● any conviction in a criminal proceeding or being subject to a pending criminal proceeding (excluding traffic violations and other minor offenses); ● being subject to any order, judgment, or decree, not subsequently reversed, suspended, or vacated, of any court of competent jurisdiction, permanently or temporarily enjoining him from or otherwise limiting his involvement in any type of business, securities or banking activities or to be associated with any person practicing in banking or securities activities; 67 ● being found by a court of competent jurisdiction in a civil action, the SEC or the CFTC to have violated a Federal or state securities or commodities law, and the judgment has not been reversed, suspended, or vacated; ● being subject of, or a party to, any Federal or state judicial or administrative order, judgment decree, or finding, not subsequently reversed, suspended or vacated, relating to an alleged violation of any Federal or state securities or commodities law or regulation, any law or regulation respecting financial institutions or insurance companies, or any law or regulation prohibiting mail or wire fraud or fraud in connection with any business entity; or ● being subject of or party to any sanction or order, not subsequently reversed, suspended, or vacated, of any self-regulatory organization, any registered entity or any equivalent exchange, association, entity or organization that has disciplinary authority over its members or persons associated with a member. Code of Ethics We have adopted a Code of Ethics that applies to our principal executive officer, principal financial officer, principal accounting officer or controller, and persons performing similar functions. Our Code of Ethics is designed to deter wrongdoing and promote: (i) honest and ethical conduct, including the ethical handling of actual or apparent conflicts of interest between personal and professional relationships; (ii) full, fair, accurate, timely and understandable disclosure in reports and documents that we file with, or submit to, the SEC and in other public communications that we make; (iii) compliance with applicable governmental laws, rules and regulations; (iv) prompt internal reporting of violations of the code to an appropriate person or persons identified in the code; and (v) accountability for adherence to the code. Our Code of Ethics is available on our website at https://ir.algoholdings.com/investor-governance. Section 16(a) Beneficial Ownership Reporting Compliance Section 16(a) of the Exchange Act requires our officers and directors, and persons who beneficially own more than 10% of the outstanding shares of our common stock, to file reports of ownership and changes in ownership concerning their shares of our common stock with the SEC and to furnish us with copies of all Section 16(a) forms they file. We are required to disclose delinquent filings of reports by such persons. Based solely upon a review of Forms 3, Forms 4, and Forms 5 furnished to us pursuant to Rule 16a-3 under the Exchange Act, we believe that all such forms required to be filed pursuant to Section 16(a) of the Exchange Act during the year ended December 31, 2024 were timely filed by the officers, directors, and security holders required to file such forms. Insider Trading Policy and Procedures We have adopted an insider trading policy governing the purchase, sale, and/or other dispositions of our securities by us and our officers, directors and employees that are reasonably designed to promote compliance with insider trading laws, rules and regulations, and all listing standards applicable to us. Each of our executive officers, directors and employees is required to read and sign our insider trading policy. A copy of our insider trading policy is attached hereto as Exhibit 19.1. Under the policy, directors, executive officers, employees and other related persons may not: (i) buy, sell or engage in other transactions in our shares of common stock while they are aware of material non-public information; (ii) buy or sell securities of other companies while aware of material non-public information about those companies that they became aware of as a result of business dealings between us and those companies; or (iii) disclose material non-public information to any unauthorized persons outside of us. The policy restricts trading and other transactions for a limited group of our employees (including executives and directors) to defined window periods that follow our quarterly and annual earnings releases. Additionally, our executive management will also issue notices of black-out trading periods if they are aware of material transactions that they anticipate closing in the near future. 68 Item 11. Executive Compensation. Summary Compensation Table The following table provides information regarding the compensation earned by or paid to our named executive officers during our fiscal years ended December 31, 2024 and the nine-month transition period ended December 31, 2023. Name and Principal Position Year / Period Salary ($) Bonus ($) All Other Compensation (1) Total ($) Gary Atkison 2024 215,000 32,250 6,285 253,535 Chief Executive Officer 2023 165,385 -0- 4,142 169,527 Richard Perez (2) 2024 174,596 -0- -0- 174,596 Chief Financial Officer Lionel Marquis (3) 2024 134,100 10,000 8,755 152,855 Former Chief Financial Officer 2023 161,538 100,000 6,462 268,000 Bernardo Melo 2024 215,000 57,552 10,902 283,454 Chief Revenue Officer 2023 165,385 47,988 8,535 221,908 (1) Consists of 401(k) matching contributions that we made during the respective years. (2) Mr. Perez was appointed as our Chief Financial Officer on January 3, 2024 and was terminated as our Chief Financial Officer on February 13, 2025. (3) Mr. Marquis resigned as our Chief Financial Officer on December 31, 2023. Outstanding Option and Stock Awards The following table sets forth information with respect to outstanding grants of options to purchase our common stock under stock option awards issued to the named executive officers as of December 31, 2024: Name Number of Securities Underlying Unexercised Options (#) Exercisable Number of Securities Underlying Unexercised Options (#) Unexercisable Equity Incentive Plan Awards: Number of Securities Underlying Unexercised Unearned Options (#) Option Exercise Price ($) Option Expiration Date Number of Shares or Units of Stock That Have Not Vested (#) Market Value of Shares or Units of Stock That Have Not Vested ($) Equity Incentive Plan Awards: Number of Unearned Shares, Units or Other Rights That Have Not Vested (#) Equity Incentive Plan Awards: Market or Payout Value of Unearned Shares, Units or Other Rights That Have Not Vested ($) Gary Atkinson 8 - N/A 1,440 3/31/2026 N/A N/A N/A N/A 17 - N/A 2,820 5/3/2027 N/A N/A N/A N/A 67 - N/A 800 5/24/2032 N/A N/A N/A N/A 8 - N/A 1,730 8/16/2032 N/A N/A N/A N/A Lionel Marquis 3 - N/A 1,440 3/31/2026 N/A N/A N/A N/A 8 - N/A 2,820 5/3/2027 N/A N/A N/A N/A 50 - N/A 800 5/24/2032 N/A N/A N/A N/A 5 - N/A 1,730 8/16/2032 N/A N/A N/A N/A Bernardo Melo 4 - N/A 1,020 6/30/2025 N/A N/A N/A N/A 17 - N/A 1,920 8/10/2026 N/A N/A N/A N/A 33 - N/A 2,820 5/3/2027 N/A N/A N/A N/A 8 - N/A 1,320 12/25/2031 N/A N/A N/A N/A 50 - N/A 800 5/24/2032 N/A N/A N/A N/A 5 - N/A 1,730 8/16/2032 N/A N/A N/A N/A 69 Employment Agreements Effective April 22, 2022, we entered into employment agreements with Gary Atkinson to serve as our Chief Executive Officer and Bernardo Melo to serve as our Chief Revenue Officer. The agreements are for a term of three years with automatic renewals for successive one-year terms, unless either party provides notice of its intention not to extend. As compensation for their service as executives, the executives will each receive: (i) a base salary per annum of $215,000 that automatically increases to $225,000 on the first anniversary of the effective date (the “Base Salary”); (ii) eligibility to earn an annual bonus (the “Annual Bonus”); (iii) eligibility to participate in our 2022 Equity Incentive Plan, or any successor plan. In the event the employment of the executives is terminated by us without “Cause” or by the executives for “Good Reason” (as each such defined in the Employment Agreements), Messrs. Atkinson and Melo will receive severance in a lump sum payment equal to two times the sum of the executive’s base salary and annual bonus for the year in which the termination occurs. The Employment Agreements also provides for payments to the executive of certain amounts in the event of the executive’s death or disability (as defined in the Employment Agreement). Effective February 13, 2025, we entered into an employment agreement with Alex Andre to serve as our Chief Financial Officer and General Counsel. Under the terms of the agreement, we agreed to pay Mr. Andre an annual base salary of $275,000 which automatically increases to $300,000 on the six-month anniversary of the effective date. Mr. Andre is eligible to receive an annual bonus of up to 30% of his annual base salary. Mr. Andre received a non-qualified stock option to purchase 23,818 shares of our common stock and a restricted stock award for 23,818 shares of our common stock on February 13, 2025. The option has a ten-year term, subject to any earlier termination following cessation of Mr. Andre’s service with us, and an exercise price per share equal to the closing price of our common stock as reported by the Nasdaq on February 13, 2025. The restricted stock award and option shall each vest over four years as follows: (a) 25% of the shares underlying the restricted stock award and option shall vest on the first anniversary of the grant date; and (b) six and one-quarter percent (6.25%) of the shares underlying the restricted stock award and option shall vest each quarter thereafter, subject to Mr. Andre’s continued service with us through each applicable vesting date. Executive Bonus Plan On April 22, 2022, our Board of Directors approved a bonus plan for our executive officers. Under the plan, our executive officers are eligible to receive a cash bonus, stock options, and stock grants based on our earnings before interest, taxes, depreciation and amortization (“EBITDA”) for the applicable fiscal year. The value of the cash bonus and number of shares of stock underlying stock options and stock grants increases as the ratio of EBITDA to net sales increases. Director Compensation The following table sets forth all compensation earned or paid to our directors who served during all or a portion of the year ended December 31, 2024. Name Fees Earned or Paid in Cash ($) Stock Awards ($) (1) Total ($) Harvey Judkowitz 27,000 10,000 37,000 Joseph Kling 21,000 10,000 31,000 Jay Foreman 27,500 10,000 37,500 Mathieu Peloquin 25,000 10,000 35,000 Gary Atkinson -0- 10,000 10,000 Bernardo Melo -0- 10,000 10,000 James Turner (2) 3,000 10,000 13,000 Kenneth Cragun (2) 3,000 10,000 13,000 Henry Nisser (2) 3,000 -0- 3,000 (1) Represents the grant date fair value of the awards calculated in accordance with ASC Topic 718, Compensation – Stock Compensation . A summary of the assumptions made in the valuation of these awards is provided herein under Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations – Critical Accounting Policies and in our consolidated financial statements beginning on page F-1 of this report. (2) On September 5, 2024, Messrs. Turner, Cragun and Nisser resigned from our board of directors. 70 We compensate the members of our board of directors as follows: ● An annual cash payment of $15,000 for each completed full year of service or prorated for a partial year. ● An annual stock grant of stock equivalent in value to $10,000 for each completed full year of service or prorated for a partial year. The stock price at grant will be determined at the closing price on the day of the annual stockholder meeting. ● A $1,000 fee for each board meeting and annual meeting attended. Committee meetings and telephone board meetings will be compensated for with a $500 fee. ● All expenses are reimbursed for attending board, committee and annual meetings or when their presence at a location away from home is requested. 401(k) Plan Effective January 1, 2001, we adopted a voluntary 401(k) plan. All employees with at least 90 days of service are eligible to participate in our 401(k) plan. We make a matching contribution of 100% of the first three percent of salary deferral contributions, plus 50% of the next two percent of salary deferral contributions, for each payroll period. The matching contributions that we make are vested in full immediately. Policies and Practices related to the Grant of Certain Equity Awards Close in Time to the Release of Material Nonpublic Information We have a strict policy of not granting securities to our executive officers, directors and employees when material nonpublic information is known or a material transaction is anticipated to occur. The timing of equity award grants is determined with consideration to a variety of factors, including but not limited to, the achievement of pre-established performance targets, market conditions and internal milestones. We do not follow a predetermined schedule for the granting of equity awards. Instead, each grant is considered on a case-by-case basis to align with our strategic objectives and to ensure the competitiveness of our compensation packages. In determining the timing and terms of an equity award, our board of directors and compensation committee consider material nonpublic information to ensure that such grants are made in compliance with applicable laws and regulations. Procedures utilized by our board of directors and compensation committee to prevent the improper use of material nonpublic information in connection with the granting of equity awards include consultation with legal counsel and, where appropriate, the delay of the grant of applicable equity awards until the public disclosure of such material nonpublic information has been completed. We are committed to maintaining transparency in its executive compensation practices and to making equity awards in a manner that is not influenced by the timing of the disclosure of material nonpublic information for the purpose of affecting the value of executive compensation. We regularly review our policies and practices related to equity awards to ensure that they meet the evolving standards of corporate governance and continue to serve the best interests of us and our stockholders. During the year ended December 31, 2024, no securities were granted to our named executive officers within four business days prior to, or one business day following, the filing or furnishing of a periodic or current report by us that disclosed material nonpublic information. 71 Item 12. Security Ownership Of Certain Beneficial Owners And Management And Related Stockholder Matters. The following table and the notes thereto set forth, as of April 14, 2025, certain information with respect to the beneficial ownership of: (i) each of our named executive officers, (ii) each of our directors, (iii) each of our named executive officers and directors as a group, and (iv) each person or group that is known to us to be the beneficial owner of more than five percent of our common stock. This table is based upon information supplied by our officers, directors and principal stockholders and Schedules 13D and 13G filed with the SEC. Where information regarding stockholders is based on Schedules 13D and 13G, the number of shares owned is as of the date for which information was provided in such schedules. The beneficial owners and number of securities beneficially owned have been determined in accordance with Rule 13d-3 under the Exchange Act and, in accordance therewith, includes all shares of our common stock that may be acquired by such beneficial owners within 60 days of April 14, 2025 upon the exercise or conversion of any options, warrants or other convertible securities. Unless otherwise indicated and subject to community property laws where applicable, we believe that each person or entity named below has sole voting and investment power with respect to the shares of common stock indicated as beneficially owned by that person or entity, subject to the matters set forth in the footnotes to the table below, and has an address of c/o Algorhythm Holdings, Inc., 6301 NW 5 th Way, Suite 2900, Fort Lauderdale, FL 33309. Name and Address of Beneficial Owner Amount and Nature of Beneficial Ownership (1) Percentage of Class Gary Atkinson (2) 160 * Alex Andre (3) 23,818 * Bernardo Melo (2) 219 * Harvey Judkowitz (2) 103 * Joseph Kling (2) 31 * Mathieu Peloquin (2) 95 * Jay Foreman (2) 337 * All officers and directors as a group (7 persons) 693 * * Less than one percent. (1) This table has been prepared based on 2,394,829 shares of our common stock outstanding on April 14, 2025. (2) Includes for the applicable person the following outstanding stock options to purchase shares of our common stock that are underlying stock option awards issued under the 2022 Plan and other stock option awards which will be vested and exercisable within 60 days of April 14, 2025: (i) 101 shares of common stock underlying stock options held by Gary Atkinson, (ii) 118 shares of common stock underlying stock options held by Bernardo Melo, (iii) 29 shares of common stock underlying stock options held by Harvey Judkowitz, (iv) 22 shares of common stock underlying stock options held by Joseph Kling, and (v) 83 shares of common stock underlying stock options held by each of Mathieu Peloquin and Jay Foreman. (3) Includes a restricted stock award for 23,818 shares of common stock for which Mr. Andre holds the voting rights. 72 2022 Equity Incentive Plan On April 12, 2022, our board of directors approved The Singing Machine Company, Inc. 2022 Equity Incentive Plan. The plan provides for the issuance of equity incentive awards, such as stock options, stock appreciation rights, stock awards, restricted stock, stock units, performance awards and other stock or cash-based awards, to our employees, officers, directors, consultants, agents, advisors, and independent contractors. The maximum number of shares of common stock that was initially available for issuance under the plan was 1,167 shares of common stock. On the first day of each of our fiscal years thereafter, this number is increased by the lesser of: (i) five percent of the number of shares of our common stock that were outstanding on the last day of our immediately preceding fiscal year, calculated on a fully diluted, (ii) 167 shares, and (iii) such lesser number as our board of directors may determine. Any shares of common stock underlying awards that lapse, terminate, expire prior to exercise, are canceled or are forfeited are added to the number of shares of commons stock available for issuance under the plan. As of December 31, 2024, there were 1,500 shares of common stock authorized for issuance under the plan. Of this amount, awards representing 1,183 shares of common stock had been granted under the plan and 317 shares remained available for issuance under the plan. The following table summarizes our equity compensation plan information as of December 31, 2024. Plan Category Number of securities to be issued upon exercise of outstanding options, warrants and rights (a) Weighted- average exercise price of outstanding options, warrants and rights (b) Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a)) (c) Equity compensation plans approved by security holders: 352 $ 1,228 318 Equity compensation plans not approved by security holders: N/A N/A N/A Total 352 $ 1,228 318 73 Item 13. Certain Relationships and Related Transactions, and Director Independence. A transaction may be a related person transaction if any of our directors, executive officers, owners of more than five percent of our common stock, or their immediate family were involved in a transaction in which we were or are to be a participant, and the amount involved exceeds the lesser of $120,000 or one percent of the average of our total assets at the end of our last two completed fiscal years. We engaged in the following related persons transactions since the beginning of our last fiscal year or any currently proposed transaction. Regalia Ventures Stock Transactions On November 20, 2023, we entered into a stock purchase agreement with Regalia Ventures pursuant to which we sold 5,495 shares of our common stock to Stingray Group at a purchase price of $182 per share. Net proceeds from the transaction were approximately $950,000, net of transaction fees of approximately $50,000 . On November 1, 2024, we entered into a stock repurchase agreement with Regalia Ventures pursuant to which we agreed to repurchase the 5,495 shares for $472,527. On February 18, 2025, the date of the closing of the transaction, we issued a promissory note to Stingray Group in the amount of $472,527. On February 27, 2025, we paid off the note in full. Regalia Ventures is owned and controlled by Jay B. Foreman, who serves as a member of our board of directors. Stingray Group Stock Transactions On November 20, 2023, we entered into a stock purchase agreement with Stingray Group pursuant to which we sold 5,495 shares of our common stock to Stingray Group at a purchase price of $182 per share. Net proceeds from the transaction were approximately $950,000, net of transaction fees of approximately $50,000 . On December 3, 2024, we entered into a stock repurchase agreement with Stingray Group pursuant to which we agreed to repurchase the 5,495 shares for $285,714. We agreed to issue a promissory note to Stingray Group in the principal amount of the purchase price of the shares at the closing of the transaction. On February 18, 2025, the date of the closing of the transaction, we issued a promissory note to Stingray Group in the amount of $285,714. On April 3, 2025, we paid off the note in full. Mathieu Peloquin is the Senior Vice-President, Marketing and Communications of Stingray Group and serves as a member of our board of directors. Stingray Holdings Music Subscription Agreement We have a music subscription sharing agreement with Stingray Group. For the year ended December 31, 2024 and the nine-month transition period ended December 31, 2023, we received music subscription revenue of 780,000 and $602,000, respectively. As of December 31, 2024 and 2023, we had $212,000 and $269,000, respectively, due from Stingray Group for music subscription reimbursement. Mathieu Peloquin is the Senior Vice-President, Marketing and Communications of Stingray Group and serves as a member of our board of directors. SMCB VIE Analysis We determined that SMCB, which is a subsidiary of SemiCab, Inc., is a VIE as we provide financial support to SMCB. While not contractually obligated, SMCB currently relies on our reimbursement of certain costs under a intercompany services agreement (“MSA”) whereby SMCB agrees to provide IT software development services to SemiCab, Inc. US operations. In exchange, under the MSA, we grant intellectual property rights to SMCB to use the software platform in India. Compensation for services is invoiced and paid on a monthly or quarterly basis as agreed by both parties, with rates subject to periodic review and revision. The agreement is for a term of two years ending on April 1, 2025 and automatically renews for additional 12-month periods unless prior notice is given by the terminating party. The agreement automatically renewed for an additional 12-month period on April 1, 2025. As a result of this relationship and the financial support provided by us under the loan agreement described below, SMCB has been determined to be a VIE. We further determined that we are not the primary beneficiary of SMCB because we do not have the power to direct or control SMCB’s significant activities related to its business. Accordingly, we have not consolidated SMCB’s results of operations and financial position in our consolidated financial statements. Pursuant to the terms of the asset purchase agreement that we entered into on June 11, 2024, we entered into an option agreement that granted SemiCab Holdings the right to acquire all of the issued and outstanding equity securities of SMCB for 1,605 shares of our common stock. We did not exercise this right and the option agreement expired on August 31, 2024. Loan Agreement We are a party to a loan agreement with SMCB dated March 22, 2024. Under the loan agreement, we agreed to loan up to $2,500,000 to SMCB. The loans are anticipated to be made in tranches. Disbursements of any tranches are fully at our discretion. Each tranche has a repayment period of five years. The loans can be repaid at any time prior to the five- year maturity date without penalty. Interest on the loans accrues at a rate of six percent per year and is payable quarterly. As of December 31, 2024, we had made aggregate advances to SMCB in the amount of $1,777,000. During the year ended December 31, 2024, SMCB charged $637,000 for services to us that were performed under the MSA, which charges offset amounts due under the loan with SMCB. As a result, as of December 31, 2024, a total of $1,140,000 of loans were outstanding under the loan agreement, and a total of $1,360,000 remained available for future borrowings under the loan agreement as of December 31, 2024. As of December 31, 2024, SMCB had not made any interest payments due under the loan agreement. As a result, the loans were in default as of December 31, 2024. We performed the credit risk assessment of the collectability of the notes receivable from SMCB at December 31, 2024 pursuant to ASC 326-20. Due to uncertainties associated with the loans, we accrued a reserve in the amount of $439,000 as of December 31, 2024. 74 Review, Approval or Ratification of Transactions With Related Persons We believe that the terms of all of our transactions with related parties are commercially reasonable and no less favorable to us than we could have obtained from an unaffiliated third party. Our audit committee is charged with the responsibility to review, approve and oversee any transaction between us and any related parties and to develop policies and procedures for the audit committee’s approval of related-party transactions. While we do not maintain a formal written policy with respect to related-party transactions, our audit committee and board of directors routinely review potential transactions that we have identified as related parties prior to the consummation of the transaction to ensure that the transaction is commercially reasonable and reflects market terms. Each transaction is reviewed to determine that a related party transaction is entered into by us with the related party pursuant to normal competitive negotiation and on terms no more favorable than with an unrelated third party. We also generally require, unless prohibited by law, that all related parties recuse themselves from negotiating and voting on behalf of us in connection with proposed transactions to which they would be a party. Item 14. Principal Accountant Fees and Services. Fees and Services Marcum LLP served as our independent registered public accounting firm for the year ended December 31, 2024 and for part of our nine-month transition period ended December 31, 2023. EisnerAmper LLP served as our independent registered public accounting firm for part of our nine-month transition period ended December 31, 2023. We paid audit fees of $ 404,000 to Marcum LLP for services performed for the year ended December 31, 2024, and $215,000 for services performed for our nine-month transition period ended December 31, 2023. We paid audit fees of $31,000 to EisnerAmper LLP for services performed for our nine- month transition period ended December 31, 2023. Audit Fees consist of fees billed for professional services rendered by our independent registered public accounting firm for the audit of our annual consolidated financial statements, the review of our interim consolidated financial statements included in our quarterly reports, the review of our registration statements and services that are normally provided by our principal accountant in connection with statutory and regulatory filings or engagements. 75 Policy on Audit Committee Pre-Approval of Audit and Permissible Non-Audit Services of Independent Auditors Our Audit Committee’s policy is to pre-approve all audit and permissible non-audit services provided by the independent registered public accounting firm. These services may include audit services, audit-related services, tax services and other services. Pre-approval is generally provided for up to one year and any pre-approval is detailed as to the particular service or category of services and is generally subject to a specific budget. Our auditors and management are required to periodically report to the Audit Committee regarding the extent of services provided by the auditors in accordance with this pre-approval and the fees for the services performed to date. The Audit Committee may also pre-approve particular services on a case-by-case basis. PART IV Item 15. Exhibits, Financial Statement Schedules. Financial Statements The following consolidated financial statements and reports of our independent registered public accounting firms are filed as part of this report and incorporated by reference in Item 8. Financial Statements and Supplementary Data of this report: ● Report of Independent Registered Public Accounting Firm. ● Consolidated Balance Sheets at December 31, 2024 and 2023. ● Consolidated Statements of Operations for the Year Ended December 31, 2024 and the Nine-Month Period Ended December 31, 2023. ● Consolidated Statements of Stockholders’ Deficit for the Year Ended December 31, 2024 and the Nine-Month Period Ended December 31, 2023. ● Consolidated Statements of Cash Flows for the Year Ended December 31, 2024 and the Nine-Month Period Ended December 31, 2023. ● Notes to Consolidated Financial Statements. 76 Financial Statement Schedules All financial statement schedules have been omitted because the required information is either not applicable or has been presented in the consolidated financial statements. Exhibits The documents set forth below are filed as exhibits to this report. Where so indicated, exhibits that were previously filed with the SEC are incorporated by reference herein. Exhibit No. Description 1.1 Underwriting Agreement, dated May 23, 2022, by and between Algorhythm Holdings and Aegis Capital Corp. (incorporated by reference to Algorhythm Holdings’ Current Report on Form 8-K filed with the SEC on May 27, 2022) 1.2 At-The-Market Issuance Sales Agreement, dated February 15, 2023, by and between Algorhythm Holdings and Aegis Capital Corp. (incorporated by reference to Algorhythm Holdings’ Current Report on Form 8-K filed with the SEC on February 17, 2023). 2.1 Asset Purchase Agreement dated June 11, 2024, between Algorhythm Holdings, SemiCab, Inc. and SemiCab Holdings, LLC (incorporated by reference to Exhibit 2.1 in Algorhythm Holdings’ Current Report on Form 8-K filed with the SEC on June 12, 2024). 2.2 Amendment No. 1 to Asset Purchase Agreement dated July 1, 2024, among Algorhythm Holdings, SemiCab, Inc. and SemiCab Holdings LLC (incorporated by reference to Exhibit 2.2 in Algorhythm Holdings’ Current Report on Form 8-K filed with the SEC on July 5, 2024). 3.1 Certificate of Incorporation of Algorhythm Holdings filed with the Delaware Secretary of State on February 15, 1994 and amendments through April 14, 1999 (incorporated by reference to Exhibit 3.1 in Algorhythm Holdings’ registration statement on Form SB-2 filed with the SEC on March 7, 2000). 3.2 Certificate of Amendment to Certificate of Incorporation filed with the Delaware Secretary of State on September 29, 2000 (incorporated by reference to Exhibit 3.1 in Algorhythm Holdings’ Quarterly Report on Form 10-QSB for the period ended September 30, 1999 filed with the SEC on November 14, 2000). 3.3 Corrected Certificate of Amendment to Certificate of Incorporation filed with the Delaware Secretary of State on March 27, 2001 (incorporated by reference to Exhibit 3.13 in Algorhythm Holdings’ registration statement on Form SB-2 filed with the SEC on April 11, 2001). 77 3.4 Corrected Certificate of Amendment to Certificate of Incorporation filed with the Delaware Secretary of State on April 4, 2001 (incorporated by referenced to Exhibit 3.12 in Algorhythm Holdings’ registration statement on Form SB-2 filed with the SEC on April 11, 2001) . 3.5 Certificate of Correction to Corrected Certificate of Amendment to Certificate of Incorporation filed with the Delaware Secretary of State on April 20, 2001 (incorporated by reference to Algorhythm Holdings’ Transition Report on Form 10-KT filed with the SEC on July 14, 2022). 3.6 Certificate of Amendment to the Certificate of Incorporation filed with the Delaware Secretary of State on January 27, 2006 (incorporated by reference to Algorhythm Holdings’ Transition Report on Form 10-KT filed with the SEC on July 14, 2022). 3.7 Certificate for Renewal and Revival of Charter filed with Delaware Secretary of State on September 25, 2012 (incorporated by reference to Algorhythm Holdings’ Transition Report on Form 10-KT filed with the SEC on July 14, 2022). 3.8 Certificate of Amendment of Certificate of Incorporation filed with the Delaware Secretary of State on May 19, 2022 (incorporated by reference to Algorhythm Holdings’ Current Report on Form 8-K filed with the SEC on May 25, 2022). 3.9 Amended By-Laws of Algorhythm Holdings (incorporated by reference to Exhibit 3.14 in Algorhythm Holdings’ Transition Report on Form 10-KTSB for the year ended March 31, 2001 filed with the SEC on June 29, 2001). 3.10 Certificate of Amendment of Certificate of Incorporation dated August 27, 2024 (incorporated by reference to Exhibit 3.1 in Algorhythm Holdings’ Current Report on Form 8-K filed with the SEC on September 6, 2024). 3.11 Amendment No. 1 to Amended By-laws, effective October 18, 2024 (incorporated by reference to Exhibit 3.1 in Algorhythm Holdings’ Current Report on Form 8-K filed with the SEC on October 21, 2024). 3.12 Certificate of Amendment to the Certificate of Incorporation filed with the Delaware Secretary of State on January 14, 2025 (incorporated by reference to Exhibit 3.1 in Algorhythm Holdings’ Current Report on Form 8-K filed with the SEC on January 17, 2025). 4.1 Description of Registrant’s Securities (incorporated by reference to Algorhythm Holdings’ Transition Report on Form 10-KT filed with the SEC on July 14, 2022). 10.1 Lease for Lakeside Plaza executive offices dated July 31, 2011 by and between Algorhythm Holdings and Lakeside IV, LLC (incorporated by reference to Algorhythm Holdings’ Current Report on Form 10-KT filed with the SEC on June 29, 2011). 78 10.2 Lease for Ontario, CA warehouse dated January 31, 2013 by and among Algorhythm Holdings, Majestic-CCCIV Partners and NM Majestic Holdings, LLC (incorporated by reference to Algorhythm Holdings’ Current Report on Form 10-KT filed with the SEC on June 28, 2013). 10.3 First Amendment to Standard Industrial Lease dated June 15, 2020 by and among Algorhythm Holdings, Majestic-CCCIV Partners and NM Majestic Holdings, LLC (incorporated by reference to Algorhythm Holdings’ Transition Report on Form 10-KT filed with the SEC on August 13, 2020). 10.4+ The Singing Machine 2022 Equity Incentive Plan (incorporated by reference to Algorhythm Holdings’ Current Report on Form 8-K filed with the SEC on April 18, 2022) 10.5+ Employment Agreement by and between Algorhythm Holdings and Gary Atkinson (incorporated by reference to Algorhythm Holdings’ Current Report on Form 8-K filed with the SEC on April 22, 2022). 10.6+ Employment Agreement by and between Algorhythm Holdings and Bernardo Melo (incorporated by reference to Algorhythm Holdings’ Current Report on Form 8-K filed with the SEC on April 22, 2022). 10.7 Form of Indemnification Agreement to be entered into with the Registrant and each of its officers and directors (incorporated by reference to Algorhythm Holdings’ Current Report on Form 8-K filed with the SEC on May 27, 2022). 10.8+ Amended and Restated Employment Agreement by and between Algorhythm Holdings and Lionel Marquis (incorporated by reference to Algorhythm Holdings’ Current Report on Form 8-K filed with the SEC on January 6, 2023). 10.9 Agreement of Lease by and between MICS Nomad, LLC and OAC 111 Flatiron, LLC and OAC Adelphi, LLC, dated August 1, 2023 (incorporated by reference to Exhibit 10.1 in Algorhythm Holdings’ Current Report on Form 8-K filed with the SEC on August 24, 2023). 10.10 Form of Stock Purchase Agreement dated November 20, 2023 (incorporated by reference to Exhibit 10.1 in Algorhythm Holdings’ Current Report on Form 8-K filed with the SEC on November 22, 2023). 10.11 Loan Agreement by and between Algorhythm Holdings and Oxford Commercial Finance dated March 28, 2024 (incorporated by reference to Exhibit 10.1 in the Company’s Current Report on Form 8-K filed with the SEC on April 3, 2024). 10.12 Revolving Credit Note dated March 28, 2024 (incorporated by reference to Exhibit 10.2 in the Company’s Current Report on Form 8-K filed with the SEC on April 3, 2024). 79 10.13 Security Agreement by and between Algorhythm Holdings and Oxford Commercial Finance dated March 28, 2024 (incorporated by reference to Exhibit 10.3 in the Company’s Current Report on Form 8-K filed with the SEC on April 3, 2024). 10.14 Operating Agreement between Algorhythm Holdings, SemiCab Holdings, LLC and SemiCab, Inc. (incorporated by reference to Exhibit 10.1 in Algorhythm Holdings’ Current Report on Form 8-K filed with the SEC on June 12, 2024). 10.15 At-The-Market Issuance Sales Agreement by and between Algorhythm Holdings and Ascendiant Capital Markets, LLC, dated June 26, 2024 (incorporated by reference to Exhibit 1.1 in Algorhythm Holdings’ Current Report on Form 8-K filed with the SEC on June 27, 2024). 10.16 Amendment to At-The-Market Issuance Sales Agreement by and between Algorhythm Holdings and Ascendiant Capital Markets, LLC, dated July 8, 2024 (incorporated by reference to Exhibit 10.1 in Algorhythm Holdings’ Current Report on Form 8-K filed with the SEC on July 9, 2024). 10.17 Form of Securities Purchase Agreement (incorporated by reference to Exhibit 10.1 in the Company’s Form 8-K filed with the SEC on October 24, 2024). 10.18 Form of Original Issue Discount Senior Secured Note (incorporated by reference to Exhibit 10.2 in the Company’s Form 8-K filed with the SEC on October 24, 2024). 10.19 Form of Guarantee (incorporated by reference to Exhibit 10.3 in the Company’s Form 8-K filed with the SEC on October 24, 2024) 10.20 Stock Repurchase Agreement dated November 1, 2024 (incorporated by reference to Exhibit 10.1 in the Company’s Form 8-K filed with the SEC on November 7, 2024) 10.21 Form of Series A Warrant dated December 4, 2024 (incorporated by reference to Exhibit 4.1 in Algorhythm Holdings’ Current Report on Form 8-K filed with the SEC on December 6, 2024). 10.22 Form of Series B Warrant dated December 4, 2024 (incorporated by reference to Exhibit 4.2 in Algorhythm Holdings’ Current Report on Form 8-K filed with the SEC on December 6, 2024). 10.23 Form of Pre-Funded Warrant dated December 4, 2024 (incorporated by reference to Exhibit 4.3 in Algorhythm Holdings’ Current Report on Form 8-K filed with the SEC on December 6, 2024). 10.24 Form of Securities Purchase Agreement dated December 4, 2024 (incorporated by reference to Exhibit 10.1 in Algorhythm Holdings’ Current Report on Form 8-K filed with the SEC on December 6, 2024). 80 10.25 Placement Agency Agreement dated December 4, 2024 (incorporated by reference to Exhibit 10.2 in Algorhythm Holdings’ Current Report on Form 8-K filed with the SEC on December 6, 2024). 10.26 Stock Repurchase Agreement dated December 3, 2024 (incorporated by reference to Exhibit 10.3 in Algorhythm Holdings’ Current Report on Form 8-K filed with the SEC on December 6, 2024). 10.27 Form of Securities Purchase Agreement dated December 17, 2024 (incorporated by reference to Exhibit 10.1 in Algorhythm Holdings’ Current Report on Form 8-K filed with the SEC on December 18, 2024). 10.28 Placement Agency Agreement dated December 17, 2024 (incorporated by reference to Exhibit 10.2 in Algorhythm Holdings’ Current Report on Form 8-K filed with the SEC on December 18, 2024). 10.29+ Employment Agreement, dated February 12, 2025, between Algorhythm Holdings, Inc. and Alex Andre (incorporated by reference to Exhibit 10.1 in Algorhythm Holdings’ Current Report on Form 8-K filed with the SEC on February 18, 2025). 10.30 Stock Option, dated February 13, 2025, issued by Algorhythm Holdings, Inc. to Alex Andre (incorporated by reference to Exhibit 10.2 in Algorhythm Holdings’ Current Report on Form 8-K filed with the SEC on February 18, 2025). 10.31 Restricted Stock Award, dated February 13, 2025, issued by Algorhythm Holdings, Inc. to Alex Andre (incorporated by reference to Exhibit 10.3 in Algorhythm Holdings’ Current Report on Form 8-K filed with the SEC on February 18, 2025). 19.1* Algorhythm Holdings Insider Trading Policy 21.1 List of subsidiaries of Algorhythm Holdings (incorporated by reference to Exhibit 21 in the Company’s Registration Statement on Form S-1 filed with the SEC on November 12, 2024). 23.1* Consent of Marcum LLP 31.1* Certification of Gary Atkinson, Chief Executive Officer, pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934, as amended. 31.2* Certification of Alex Andre, Chief Financial Officer, pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934, as amended. 32.1** Certifying Statement of the Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act. 81 32.2** Certifying Statement of the Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act. 97 Algorhythm Holdings Clawback Policy (incorporated by reference to Exhibit 97 in Algorhythm Holdings’ Transition Report on Form 10-KT filed with the SEC on April 15, 2024). 101.INS Inline XBRL Instance Document. The instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document. 101.SCH Inline XBRL Taxonomy Extension Schema Document. 101.CAL Inline XBRL Taxonomy Extension Calculation Linkbase Document. 101.DEF Inline XBRL Taxonomy Extension Definition Linkbase Document. 101.LAB Inline XBRL Taxonomy Extension Label Linkbase Document. 101.PRE Inline XBRL Taxonomy Extension Presentation Linkbase Document. 104 Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101) * Filed herewith ** Furnished herewith + Compensatory plan or arrangement Item 16. Form 10-K Summary. None. 82 SIGNATURES In accordance with the requirements of Section 13 and 15(d) of the Securities Exchange Act of 1934, Algorhythm Holdings, Inc. has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. ALGORHYTHM HOLDINGS, INC. Date: April 15, 2025 By: /s/ Gary Atkinson Gary Atkinson Chief Executive Officer (Principal Executive Officer) Date: April 15, 2025 By: /s/ Alex Andre Alex Andre Chief Financial Officer & General Counsel (Principal Financial and Accounting Officer) In accordance with the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of Algorhythm Holdings, Inc. and in the capacities and on the dates indicated. Signature Title Date /s/ Gary Atkinson Chief Executive Officer and Director April 15, 2025 Gary Atkinson (Principal Executive Officer) /s/ Alex Andre Chief Financial Officer and General Counsel April 15, 2025 Alex Andre (Principal Financial Officer) /s/ Harvey Judkowitz Director April 15, 2025 Harvey Judkowitz /s/ Joseph Kling Director April 15, 2025 Joseph Kling /s/ Jay Foreman Director April 15, 2025 Jay Foreman /s/ Mathieu Peloquin Director April 15, 2025 Mathieu Peloquin /s/ Bernardo Melo Director April 15, 2025 Bernardo Melo 83 Algorhythm Holdings, Inc. Index to Financial Statements Page Report of Independent Registered Public Accounting Firm (PCAOB ID: 688 ) F-2 Consolidated Balance Sheets at December 31, 2024 and 2023 F-3 Consolidated Statements of Operations for the Year Ended December 31, 2024 and the Nine-Month Period Ended December 31, 2023 F-4 Consolidated Statements of Stockholders’ Deficit for the Year Ended December 31, 2024 and the Nine-Month Period Ended December 31, 2023 F-5 Consolidated Statements of Cash Flows for the Year Ended December 31, 2024 and the Nine-Month Period Ended December 31, 2023 F-6 Notes to Consolidated Financial Statements F-7 F- 1 Report of Independent Registered Public Accounting Firm To the Shareholders and Board of Directors of Algorhythm Holdings, Inc. Opinion on the Financial Statements We have audited the accompanying consolidated balance sheets of Algorhythm Holdings, Inc. (the “Company”) as of December 31, 2024 and 2023, the related consolidated statements of operations, shareholders’ (deficit) equity, and cash flows for the year ended December 31, 2024 and the nine month transition period from April 1, 2023 through December 31, 2023, and the related notes (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2024 and 2023, and the results of its operations and its cash flows for the year ended December 31, 2024 and the nine month transition period from April 1, 2023 through December 31, 2023, in conformity with accounting principles generally accepted in the United States of America . Explanatory Paragraph – Going Concern The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As more fully described in Note 2, the Company has incurred significant losses and needs to raise additional funds to meet its obligations and sustain its operations. These conditions raise substantial doubt about the Company’s ability to continue as a going concern. Management’s plans in regard to these matters are also described in Note 2. The financial statements do not include any adjustments that might result from the outcome of this uncertainty. Basis for Opinion These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audit s we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion. Critical Audit Matters The critical audit matters communicated below are matters arising from the current period audit of the financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate. Reserve for Sales Returns: As discussed in Note 3 to the consolidated financial statements, the Company estimates the sales value of goods to be returned from our allowance programs for goods returned from the customer for various reasons, whereby a reserve for sales returns is recorded based on historic return amounts, specific events as identified and management estimates. We identified management’s estimate for sales returns as a critical audit matter due to the fact that there was significant judgment required by management with respect to measurement uncertainty, as the calculation of estimated sales returns includes assumptions such as historical product returns and margins experience used to predict future returns. This in turn led to a high degree of auditor judgment, subjectivity and effort in applying the procedures related to those assumptions. Addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the financial statements. We obtained an understanding and evaluated the design of controls over the Company’s estimates for variable consideration. Our procedures also included, among others, (1) evaluating the estimated sales return reserve based on historical sales returns experience; (2) evaluating the Company’s ability to accurately estimate the sales return reserve by comparing historically recorded reserves to the actual amount that was ultimately claimed by the retailers; and (3) evaluating the impact of returns and notification from customers regarding returns subsequent to year-end on the estimated sales returns reserve. /s/ Marcum LLP Marcum LLP We have served as the Company’s auditor since 2023. Philadelphia, Pennsylvania April 15, 2025 F- 2 Algorhythm Holdings, Inc. and Subsidiaries CONSOLIDATED BALANCE SHEETS December 31, 2024 December 31, 2023 Assets Current Assets Cash $ 7,550,000 $ 6,703,000 Accounts receivable, net of allowances of $ 274,000 and $ 174,000 , respectively 4,373,000 7,308,000 Accounts receivable, related party 212,000 269,000 Accounts receivable 212,000 269,000 Note receivable - related party 701,000 - Note receivable 701,000 Inventory 2,186,000 6,871,000 Returns asset 1,621,000 1,919,000 Prepaid expenses and other current assets 120,000 136,000 Total Current Assets 16,763,000 23,206,000 Property and equipment, net 284,000 404,000 Operating leases - right of use assets 95,000 3,926,000 Other non-current assets 29,000 179,000 Intangible assets, net 345,000 - Goodwill 786,000 - Total Assets $ 18,302,000 $ 27,715,000 Liabilities and Shareholders’ Equity Current Liabilities Accounts payable $ 3,808,000 $ 7,616,000 Accrued expenses 4,224,000 2,614,000 Refund due to customer 38,000 1,743,000 Customer prepayments - 687,000 Reserve for sales returns 3,355,000 3,390,000 Warrant liability 16,603,000 - Current portion of notes payable to related parties 265,000 - Notes payable 265,000 - Other current liabilities 145,000 159,000 Total Current Liabilities 28,438,000 16,209,000 Notes payable to related parties, net of current portion 385,000 - Operating lease liabilities, net of current portion - 3,925,000 Other liabilities - 3,000 Total Liabilities 28,823,000 20,137,000 Commitments and Contingencies - Shareholders’ (Deficit) Equity Preferred stock, $ 1.00 par value; 1,000,000 shares authorized; no shares issued and outstanding - - Common stock $ 0.01 par value; 100,000,000 shares authorized; 470,825 and 32,090 shares issued and outstanding at December 31, 2024 and 2023. 5,000 - Additional paid-in capital 39,682,000 33,493,000 Accumulated deficit ( 49,172,000 ) ( 25,915,000 ) Non-controlling interest ( 1,036,000 ) - Total Algorhythm Holdings Shareholders’ (Deficit) Equity ( 10,521,000 ) 7,578,000 Total Liabilities and Shareholders’ (Deficit) Equity $ 18,302,000 $ 27,715,000 See notes to the consolidated financial statements F- 3 Algorhythm Holdings, Inc. and Subsidiaries CONSOLIDATED STATEMENTS OF OPERATIONS Year Ended Nine Months Ended December 31, 2024 December 31, 2023 Net Sales $ 23,494,000 $ 29,198,000 Cost of Goods Sold 18,713,000 23,008,000 Gross Profit 4,781,000 6,190,000 Operating Expenses Selling expenses 2,874,000 3,717,000 General and administrative expenses 12,240,000 8,616,000 Impairment of goodwill 3,592,000 - Total Operating Expenses 18,706,000 12,333,000 Loss from Operations ( 13,925,000 ) ( 6,143,000 ) Other (Expense) Income Change in fair value of warrant liability 334,000 - Loss on issuance of warrants ( 8,889,000 ) - Interest expense ( 1,887,000 ) ( 299,000 ) Other income - 44,000 Total Other Expense ( 10,442,000 ) ( 255,000 ) Loss Before Income Tax Benefit ( 24,367,000 ) ( 6,398,000 ) Income Tax Provision - - Net Loss ( 24,367,000 ) ( 6,398,000 ) Net Loss Attributable to Non-controlling Interest 1,110,000 - Net Loss Available to Common Stockholders $ ( 23,257,000 ) $ ( 6,398,000 ) Loss per common share Basic and diluted $ ( 353.87 ) $ ( 263.04 ) Weighted Average Common and Common Equivalent Shares: Basic and diluted 65,722 24,323 See notes to the consolidated financial statements F- 4 Algorhythm Holdings, Inc. and Subsidiaries STATEMENTS OF SHAREHOLDERS’ (DEFICIT) EQUITY For the Year Ended December 31, 2024 and Nine Months Ended December 31, 2023 Shares Amount Capital Interest Deficit Total Common Stock Additional Paid in Non-Controlling Accumulated Shares Amount Capital Interest Deficit Total Balance at March 31, 2023 15,837 $ - $ 29,848,000 $ - $ ( 19,517,000 ) $ 10,331,000 Net loss - - - - ( 6,398,000 ) ( 6,398,000 ) Sale of common stock, net of offering costs 16,253 - 3,529,000 - - 3,529,000 Stock based compensation - - 110,000 - - 110,000 Other - - 6,000 - - 6,000 Balance at December 31, 2023 32,090 $ - $ 33,493,000 $ - $ ( 25,915,000 ) $ 7,578,000 Balance 32,090 $ - $ 33,493,000 $ - $ ( 25,915,000 ) $ 7,578,000 Net loss - - - ( 1,110,000 ) ( 23,257,000 ) ( 24,367,000 ) Sale of common stock and pre-funded warrants, net of offering cost 418,927 4,000 4,881,000 - - 4,885,000 Stock based compensation 5,099 - 630,000 - - 630,000 Common stock issued for purchase of SemiCab Inc 3,209 - 494,000 - - 494,000 Subsidiary interests issued for purchase of SemiCab Inc - - - 74,000 - 74,000 Repurchase of common shares - related parties - - ( 758,000 ) - - ( 758,000 ) Issuance of common stock with debt 11,500 1,000 942,000 - - 943,000 Balance at December 31, 2024 470,825 $ 5,000 $ 39,682,000 $ ( 1,036,000 ) $ ( 49,172,000 ) $ ( 10,521,000 ) Balance 470,825 $ 5,000 $ 39,682,000 $ ( 1,036,000 ) $ ( 49,172,000 ) $ ( 10,521,000 ) See notes to the consolidated financial statements F- 5 Algorhythm Holdings, Inc. and Subsidiaries CONSOLIDATED STATEMENTS OF CASH FLOWS Year Ended Nine Months Ended December 31, 2024 December 31, 2023 Cash flows from operating activities Net loss $ ( 24,367,000 ) $ ( 6,398,000 ) Adjustments to reconcile net loss to net cash (used in), provided by operating activities: Depreciation 192,000 287,000 Amortization of intangible assets 30,000 - Impairment of goodwill from purchase of SemiCab Inc 3,592,000 - Impairment on note receivable - SCMB 439,000 - Reduction in SMCB loan in exchange for services 637,000 - Provision for estimated cost of returns 299,000 ( 1,364,000 ) Change in fair value of warrant liability ( 334,000 ) - Loss on issuance of warrants 8,889,000 - Amortization of debt discount and issuance costs 1,520,000 - Provision for inventory obsolescence 918,000 1,798,000 Reserve for sales returns ( 35,000 ) 2,490,000 Credit losses 14,000 8,000 Non-cash effect on termination of operating lease ( 280,000 ) - Net gain from disposal of property and equipment - ( 44,000 ) Stock based compensation 630,000 110,000 Amortization of right of use assets 236,000 510,000 Changes in operating assets and liabilities: Accounts receivable 3,114,000 ( 5,241,000 ) Accounts receivable - related parties 57,000 ( 30,000 ) Inventories 3,767,000 415,000 Prepaid expenses and other current assets 29,000 215,000 Other non-current assets - 76,000 Accounts payable ( 4,540,000 ) 5,847,000 Accrued expenses ( 1,076,000 ) 348,000 Prepaids from customers - 103,000 Refunds due to customers ( 2,392,000 ) 1,743,000 Operating lease liabilities 105,000 ( 462,000 ) Net cash (used in) provided by operating activities ( 8,556,000 ) 411,000 Cash flows from investing activities Purchase of property and equipment ( 70,000 ) ( 68,000 ) Pre Acquistion advances to SemiCab ( 415,000 ) - Cash received from purchase of SemiCab Inc 17,000 - Disposal of property and equipment - 54,000 Advances to SMCB ( 1,777,000 ) - Net cash used in investing activities ( 2,245,000 ) ( 14,000 ) Cash flows from financing activities Proceeds from sale of common stock and warrants, net of offering costs 12,932,000 3,529,000 Payments on merchant cash advances payable ( 631,000 ) - Proceeds from issuance of senior secured notes, net of discounts 2,000,000 - Payment of senior secured notes ( 2,353,000 ) - Payment of debt issuance costs ( 225,000 ) - Other ( 75,000 ) ( 118,000 ) Net cash provided by financing activities 11,648,000 3,411,000 Net change in cash 847,000 3,808,000 Cash at beginning of year 6,703,000 2,895,000 Cash at end of period $ 7,550,000 $ 6,703,000 Supplemental disclosures of cash flow information: Cash paid for interest $ 591,000 44,000 Non-Cash investing and financing cash flow information: Common stock and subsidiary interests issued for purchase of SemiCab Inc $ 568,000 $ - Right of use assets exchanged for lease liabilities $ 136,000 $ 3,874,000 Issuance of common stock with debt $ 943,000 $ - Repurchase of common shares - related parties $ 758,000 $ - Effect of extinguishment of advances to SemiCab Inc. $ 415,000 $ - See notes to the consolidated financial statements F- 6 ALGORHYTHM HOLDINGS, INC AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2024 and 2023 Note 1 – Nature of Business Algorhythm Holdings, Inc. (f/k/a The Singing Machine Company, Inc.) (the “Company”) is an artificial intelligence (“AI”) technology and consumer electronics holding company with two primary business units – SemiCab and Singing Machine. SemiCab is an AI-enabled software logistics business operated through the Company’s subsidiary, SemiCab Holdings, LLC. Singing Machine is a home karaoke consumer products business that designs and distributes karaoke products globally to retailers and ecommerce partners through the Company’s subsidiary, The Singing Machine Company, Inc. The Company’s operations include its 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”), and MICS Nomad, LLC, a Delaware limited liability company (“MICS NY”), and its 80 %-owned subsidiary, SemiCab Holdings, LLC, a Nevada limited liability company (“SemiCab Holdings”). During 2023, the Company’s board of directors approved a change in the Company’s fiscal year end from March 31 to December 31. Effective September 5, 2024, the Company’s Certificate of Incorporation was amended to change the name of the Company from “The Singing Machine Company, Inc.” to “Algorhythm Holdings, Inc.” On January 13, 2025, the Company’s stockholders voted to authorize the Company’s board of directors to effect a reverse stock split of the Company’s outstanding shares of common stock at a specific ratio within a range of 1-for-10 to a maximum of 1-for-250 and to amend the Company’s certificate of incorporation to increase the number of authorized common stock from 100,000,000 to 800,000,000 shares. On January 14, 2025, the Company’s board of directors approved a reverse stock split of 1-for-200 ratio and approved the filing of a certificate of amendment to the Company’s certificate of incorporation to effect the reverse stock split and to increase the Company’s authorized shares of common stock from 100,000,000 to 800,000,000. The reverse stock split took effect on Monday February 10, 2025. All current and prior year balances have been adjusted to reflect the reverse stock split. Note 2 – Liquidity, Going Concern and Management Plans As of December 31, 2024, the Company’s cash balance was $ 7,550,000 . This will not be sufficient to fund its planned operations for at least one year after the date the consolidated financial statements are issued. The Company has a recent history of recurring operating losses and decreases in working capital. These factors create substantial doubt about the Company’s ability to continue as a going concern for at least one year after the date that the Company’s audited consolidated financial statements are issued. The consolidated financial statements do not include any adjustments that might be necessary if the Company is unable to continue as a going concern. Accordingly, the consolidated financial statements have been prepared under the assumption that the Company will continue as a going concern and that the realization of assets and satisfaction of liabilities and commitments will continue in the ordinary course of business. The Company plans to finance operations by obtaining additional capital through external sources of financing. It may attempt to obtain additional capital through the sale of equity securities or the issuance of debt securities. The Company has not made arrangements to obtain additional capital and can provide no assurance that additional financing will be available in an amount or on terms acceptable to the Company, if at all. In making this assessment, management performed a comprehensive analysis of the Company’s current circumstances including its financial position, cash flow and outflow forecasts, and obligations and debts. Although management has a recent history of successful capital raises, the analysis used to determine the Company’s ability to continue as a going concern does not include cash resources outside the Company’s direct control that management expects to be available within the next 12 months. F- 7 ALGORHYTHM HOLDINGS, INC AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2024 and 2023 Note 3 – Summary of Significant Accounting Policies Basis of Presentation The accompanying consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States of America (“GAAP”). Principles of Consolidation The accompanying consolidated financial statements include the accounts of the Company, its wholly-owned subsidiaries SMCL, SMCM, SMH, Singing Machine”, MICS Hospitality, MICS, MICS Hospitality Management, MICS NY, and its eighty percent ( 80 %)-owned subsidiary, SemiCab Holdings. All intercompany accounts and transactions have been eliminated in consolidation for all periods presented. The Company evaluates its business relationships with related parties to identify potential Variable Interest Entities (“VIEs”) under the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 810, Consolidation . The Company will consolidate any VIE in which it is deemed to be the primary beneficiary of the VIE. The Company will be deemed to be the primary beneficiary of the VIE if the Company has a controlling financial interest in the VIE. A controlling financial interest has the following characteristics: (i) the power to direct the activities of the VIE that most significantly impact its economic performance; and (ii) the obligation to absorb losses of the VIE that could be significant to the VIE or the right to receive benefits from the VIE that could be significant to the VIE. If both characteristics are met and, then the Company will consolidate that VIE into its consolidated financial statements. F- 8 ALGORHYTHM HOLDINGS, INC AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2024 and 2023 As prescribed by ASC 810, if the Company holds a variable interest in an entity that is a VIE, but the Company is not the entity’s primary beneficiary, then the Company must disclose the methodology (e.g., significant judgments and assumptions made) that it used to determine that it is not the primary beneficiary of the VIE. Additional information required includes information about the types of involvement considered significant, and those considered in the determination of whether the reporting entity is the primary beneficiary. Furthermore, if the Company provides or intends to provide financial or other support, whether explicitly or implicitly, to the VIE when not contractually required to, the Company must disclose the type and amount of the support along with the primary reasons for providing the support. Both qualitative and quantitative information about the Company’s involvement with the VIE must be disclosed, including the nature, purpose, size, and activities of the VIE and how the VIE is financed. The Company determined that SMCB Solutions Private Limited, an Indian Company (“SMCB”), is a VIE because the Company provides financial support to SMCB in the form of a loan agreement to fund SMCB’s operations. The Company further determined that it is not the primary beneficiary of SMCB because the Company does not have the power to direct or control SMCB’s significant activities related to its business. Accordingly, the Company has not consolidated SMCB’s results of operations and financial position in its consolidated financial statements. Reclassification of Prior Periods Presentation Certain prior period amounts have been reclassified for consistency with the current year presentation. These reclassifications had no effect on the reported results of operations. Use of Estimates The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions. These estimates and assumptions affect the reported amounts of assets, liabilities, revenues and expenses. Actual results could differ materially from these estimates. Estimates are assessed each period and updated to reflect current information. Significant estimates include allowance for credit losses, provision for excess and obsolete inventory, reserve for sales returns, co-op promotion incentives, accruals relating to litigation, goodwill, share-based compensation expense and warrant liability. Segment Reporting Pursuant to Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 280, Segment Reporting (“ASC 280”), the Company’s Chief Executive Officer serves as the Company’s Chief Operating Decision Maker (“CODM”) for the purposes of ASC 280. The CODM concluded that the Company operates two reportable segments. One segment consists of its SemiCab business and the other segment consists of its Singing Machine business. The CODM manages the Company’s operations and business separately for each operating segment and uses net loss to allocate resources, making operating decisions and evaluating financial performance. The CODM also uses net loss, along with non-financial inputs and qualitative information, to evaluate the Company’s performance, establish compensation, monitor budget versus actual results, and decide the level of investment in various operating activities and other capital allocation activities. See Note 15 – Segment Information and Revenue Disaggregation – Segment Information . F- 9 ALGORHYTHM HOLDINGS, INC AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2024 and 2023 Accounts Receivable and Allowances for Expected Credit Losses The Company recognizes credit losses in accordance with Accounting Standards Update 2016-13, Financial Instruments – Credit Losses (Topic 326) . The Company recognizes an allowance for credit losses at the time a receivable is recorded based on its estimate of expected credit losses and adjusts this estimate over the life of the receivable as needed. The Company evaluates specific identified risks and the aggregation and risk characteristics of a receivable pool and develops loss rates that reflect historical collections, current forecasts of future economic conditions over the time horizon the Company is exposed to credit risk, and payment terms or conditions that may materially affect future forecasts. As needed, amounts are written-off when determined to be uncollectible. Inventory Inventory is comprised primarily of electronic karaoke equipment, microphones, and accessories, and are stated at the lower of cost or net realizable value, as determined using the first in, first out method. The Company reduces inventory on hand to its net realizable value on an item-by-item basis when it is apparent that the expected realizable value of an inventory item falls below its original cost. A charge to cost of sales results when the estimated net realizable value of specific inventory items declines below cost. In addition, the Company reports an estimated amount for the net realizable value of expected future inventory returns (returns asset) related to the Company’s defective allowance, overstock, and warranty policies. Substantially all of the Company’s inventory consists of finished goods. Property and Equipment, Net Property and equipment are stated at cost, less accumulated depreciation. Expenditures for repairs and maintenance are charged to expense as incurred. Depreciation is provided for in amounts sufficient to relate the cost of depreciable assets to their estimated useful lives using straight-line methods. Leases The Company determines if an arrangement contains a lease at the inception of a contract. Right-of-use assets represent the Company’s right to use an underlying asset for the lease term and lease liabilities represent the Company’s obligation to make lease payments arising from the lease. Right-of-use assets and lease liabilities are recognized at the commencement date. The liability is equal to the present value of the remaining minimum lease payments. The asset is based on the liability, subject to certain adjustments. Operating leases result in straight-line expense (similar to operating leases under the prior accounting standard) while finance leases result in a front-loaded expense pattern (similar to capital leases under the prior accounting standard). As the interest rate implicit in the Company’s operating leases is not readily determinable, the Company utilizes its incremental borrowing rate to discount the lease payments. The Company utilizes the implicit rate for its finance leases. Business Combinations The Company accounts for business combinations using the acquisition method of accounting in accordance with ASC Topic 805, Business Combinations. The Company allocates the purchase price of an acquired business to the tangible and intangible assets acquired and liabilities assumed based upon their estimated fair values on the acquisition date. Any excess of the purchase price over the fair value of the net assets acquired is recorded as goodwill. The purchase price allocation process requires management to make significant estimates and assumptions at the acquisition date with respect to intangible assets. The allocation of the consideration transferred in certain cases may be subject to revision based on the final determination of fair values during the measurement period, which may be up to one year from the acquisition date. Direct transaction costs associated with the business combination are expensed as incurred. The Company includes the results of operations of the business that it has acquired in its consolidated results prospectively from the date of acquisition. Goodwill The Company evaluates its goodwill for impairment in accordance with FASB Accounting Standards Update (“ASU”) 350, Intangibles – Goodwill and Other . Goodwill is recorded when the purchase price paid for an acquisition exceeds the estimated fair value of the net identified tangible and intangible assets acquired. The Company tests the recorded amount of goodwill for impairment on an annual basis on December 31 or more frequently if there are indicators that the carrying amount of goodwill exceeds its carried value. F- 10 ALGORHYTHM HOLDINGS, INC AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2024 and 2023 Long Lived and Intangible Assets The Company reviews long-lived assets and intangible assets for impairment in accordance with ASC Topic 360, Property, Plant and Equipment (“ASC 360”). The Company reviews long-lived assets and intangible assets for impairment whenever events or changes in business circumstances indicate that the carrying amount of the assets might not be recoverable. Factors that the Company considers in deciding when to perform an impairment review include significant underperformance of the business in relation to expectations, significant negative industry or economic trends, and significant changes or planned changes in the use of the assets. If an impairment review is performed to evaluate a long-lived asset or intangible asset for recoverability, the Company compares forecasts of undiscounted cash flows expected to result from the use and eventual disposition of the asset to its carrying value. An impairment loss is recognized when the estimated undiscounted future cash flows expected to result from the use of the asset is less than its carrying amount. The impairment loss would be based on the excess of the carrying value of the impaired asset over its fair value, determined based on discounted cash flows. The Company had no impairment loss related to long-lived assets or intangible assets for the year ended December 31, 2024 or the nine months ended December 31, 2023. Fair Value Measurements In accordance with ASC 820, Fair Value Measurements and Disclosures , fair value is defined as the exit price, or the amount that would be received for the sale of an asset or paid to transfer a liability in an orderly transaction between market participants as of the measurement date. The guidance also establishes a hierarchy for inputs used in measuring fair value that maximizes the use of observable inputs and minimizes the use of unobservable inputs by requiring that the most observable inputs be used when available. Observable inputs include those that market participants would use in valuing the asset or liability and are developed based on market data obtained from sources independent of the Company. Unobservable inputs are inputs that reflect the Company’s assumptions about the factors that market participants would use in valuing the asset or liability. The guidance establishes three levels of inputs that may be used to measure fair value: ● Level 1: Quoted market prices in active markets for identical assets or liabilities. ● Level 2: Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or model-derived valuations. All significant inputs used in the Company’s valuations are observable or can be derived principally from or corroborated with observable market data for substantially the full term of the assets or liabilities. Level 2 inputs also include quoted prices that were adjusted for security-specific restrictions which are compared to output from internally developed models such as a discounted cash flow model. ● Level 3: Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. The carrying amounts of financial instruments carried at cost, including cash, accounts receivables and accounts receivable – related party, trade payables advances and notes payables and notes payable – related party approximate their fair value due to the short-term maturities of such instruments. F- 11 ALGORHYTHM HOLDINGS, INC AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2024 and 2023 The categorization of a financial instrument within the valuation hierarchy is based upon the lowest level of input that is significant to the fair value measurement. Warrants The Company accounts for warrants as either equity-classified or liability-classified instruments based on an assessment of the warrant’s specific terms and applicable authoritative guidance in FASB ASC 480, Distinguishing Liabilities from Equity (“ASC 480”) and ASC 815, Derivatives and Hedging (“ASC 815”). The assessment considers whether the warrants are freestanding financial instruments pursuant to ASC 480, meet the definition of a liability pursuant to ASC 480, and whether the warrants meet all of the requirements for equity classification under ASC 815, including whether the warrants are indexed to the Company’s own ordinary shares and whether the warrant holders could potentially require “net cash settlement” in a circumstance outside of the Company’s control, among other conditions for equity classification. Finally, the Company determines if the warrants meet the definition of a derivative based on their contractual terms. This assessment, which requires the use of professional judgment, is conducted at the time of warrant issuance, as of each subsequent quarterly period end date while the warrants are outstanding and at interim dates if circumstances warrant such analysis. For issued or modified warrants that meet all of the criteria for equity classification, the warrants are required to be recorded as a component of additional paid-in capital at the time of issuance. For issued or modified warrants that do not meet all the criteria for equity classification, the warrants are required to be recorded at their initial fair value on the date of issuance, and at each balance sheet date thereafter. Changes in the estimated fair value of the liability classified warrants are recognized as a non-cash gain or loss on the consolidated statements of operations. The Company also evaluates if changes in contractual terms or other considerations would result in the reclassification of outstanding warrants from liabilities to stockholders’ equity (or vice versa). Revenue Recognition The Company recognizes revenue in accordance with ASC 606, Revenue from Contracts with Customers . All revenue is generated from contracts with customers. The Company recognizes revenue when the control of the goods sold is transferred to the customer, in an amount, referred to as the transaction price, that reflects the consideration to which the Company expected to be entitled in exchange for those goods. The Company determines revenue recognition utilizing the following five steps: (i) identification of the contract with a customer; (ii) identification of the performance obligations in the contract (promised goods or services that are distinct); (iii) determination of the transaction price; (iv) allocation of the transaction price to the performance obligations; and (v) recognition of revenue when, or as, the Company transfers control of the product or service for each performance obligation. F- 12 ALGORHYTHM HOLDINGS, INC AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2024 and 2023 The Company’s performance obligations are established when a customer submits a purchase order notification and the Company accepts the order. The Company identifies performance obligations as the delivery of the requested product or service in appropriate quantities and to the location specified in the customer’s contract and/or purchase order. Revenue from sales of products is recognized at a point in time when the Company transfers control to the customer, typically at the time when the product is delivered or shipped, at which time, title passes to the customer and there are no further performance obligations with regard to the product. The Company selectively participates in retailers’ co-op promotion incentives to maximize sales of the Company’s products on the retail floor and to assist in developing consumer awareness of new product launches by providing marketing fund allowances to its customers. As these co-op promotion initiatives are not a distinct good or service and the Company cannot reasonably estimate the fair value of the benefit it receives from these arrangements, the cost of these allowances at the time they are offered to the customers is recorded as a reduction to net sales. Co-op promotion incentives were $ 2,059,000 during the year ended December 31, 2024 and $ 2,648,000 during the nine months ended December 31, 2023. The Company’s contracts with customers consist of one performance obligation, which is the sale of its products. The Company’s contracts have no financing elements. Payment terms are generally less than 120 days and have no further contract asset or liability obligations once control of goods is transferred to the customer. Revenue is recorded in the amount of consideration the Company expects to receive for the sale of these goods. Costs incurred in fulfilling contracts with customers include administrative costs associated with the procurement of goods are included in general and administrative expenses, in-bound freight costs are included in the cost of goods sold and accrued sales representative commissions are included in selling expenses in the accompanying consolidated statements of operations as the Company’s underlying customer agreements are less than one year. Reserve for Sales Returns and Returns Asset While the Company has no overstock return privileges in its vendor agreements with its customers, it does accept defective returns, warranty exchanges and overstock from seasonal customers. The Company estimates the sales value of goods to be returned from its allowance programs for goods returned from the customer for various reasons, whereby a reserve for sales returns is recorded based on historic return amounts, specific events as identified and management estimates. The Company’s reserve for sales returns was $ 3,355,000 and $ 3,390,000 as of December 31, 2024 and 2023, respectively. The Company estimates the net realizable value of these expected future sales returns. The net realizable value of these estimated returns is classified as return assets as part of current assets on the Company’s consolidated financial statements. The Company’s return assets were $ 1,621,000 and $ 1,919,000 as of December 31, 2024 and 2023, respectively. F- 13 ALGORHYTHM HOLDINGS, INC AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2024 and 2023 Shipping and Handling Costs Shipping and handling activities are performed before the customer obtains control of the goods sold to them and are considered activities to fulfill the Company’s promise to transfer the goods. Shipping and handling expenses were $ 592,000 and $ 561,000 for the year ended December 31, 2024 and the nine months ended December 31, 2023, respectively. These expenses are classified as a component of selling expenses in the Company’s consolidated statements of operations. Share-Based Compensation The Company has granted stock options, warrants, restricted stock awards and restricted stock units to employees, non-employee consultants and non-employee members of its board of directors. The Company also has an equity incentive plan that provides for the issuance of equity incentive awards, such as stock options, warrants, stock appreciation rights, stock awards, restricted stock, stock units, performance awards and other stock or cash-based awards to the Company’s employees, officers, directors, consultants, agents, advisors and independent contractors. The Company measures the compensation cost associated with all share-based payments based on grant date fair values. The fair value of each stock option and stock purchase right is estimated on the date of grant using an option pricing model that meets certain requirements. The Company generally uses the Black-Scholes option pricing model to estimate the fair value of its stock options and stock purchase rights. The determination of the fair value of share-based payment awards utilizing the Black-Scholes model is affected by the Company’s stock price and several assumptions, including expected volatility, expected term, risk-free interest rate and expected dividends. For grants of stock options, the Company uses a blend of historical and implied volatility for traded options on its stock to estimate the expected volatility assumption required in the Black-Scholes model. The Company’s use of blended volatility estimates in computing the expected volatility assumption for stock options is based on its belief that while the implied volatility is representative of expected future volatility, the historical volatility over the expected term of the award is also an indicator of expected future volatility. The Company utilizes a blended volatility estimate that consists of implied volatility and historical volatility in order to estimate the expected volatility assumption of the Black-Scholes model. The expected term of stock options granted is estimated using historical experience. The risk-free interest rate assumption is based on observed interest rates appropriate for the expected terms of the Company’s stock options and stock purchase rights. The dividend yield assumption is based on the Company’s history and expectation of no dividend payouts. The Company estimates forfeitures at the time of grant and revises these estimates, if necessary, in subsequent periods if actual forfeitures differ from those estimates. The Company estimates its forfeiture rate assumption for all types of share-based compensation awards based on historical forfeiture rates related to each category of award. F- 14 ALGORHYTHM HOLDINGS, INC AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2024 and 2023 Compensation costs associated with grants of restricted stock awards and restricted stock units are measured at fair value, which has historically been the closing price of the Company’s common stock on the date of grant. The Company recognizes share-based compensation expense over the requisite service period of each individual award, which generally equals the vesting period, using the straight-line method for awards that contain only service conditions. For awards that contain performance conditions, the Company recognizes the share-based compensation expense on a straight-line basis for each vesting tranche, when achievement of that tranche is considered probable. The Company evaluates the assumptions used to value stock awards on the grant date. If there are any modifications or cancellations of the underlying unvested securities, the Company may be required to accelerate, increase or cancel any remaining unearned share-based compensation expense. Income Taxes The Company follows the provisions of FASB ASC 740, Accounting for Income Taxes (“ASC 740”). Under the asset and liability method of ASC 740, deferred tax assets and liabilities are recognized for the future tax consequences attributed to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax base. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. Under ASC 740, the effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. If it is more likely than not that some portion of a deferred tax asset will not be realized, a valuation allowance is recognized. The Company recognizes a liability for uncertain tax positions. An uncertain tax position is defined as a position in a previously filed tax return or a position expected to be taken in a future tax return that is not based on clear and unambiguous tax law and that is reflected in measuring current or deferred income tax assets and liabilities for interim or annual periods. The Company may recognize the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position. The Company measures the tax benefits recognized based on the largest benefit that has a greater than 50% likelihood of being realized upon ultimate resolution. As of December 31, 2024 and 2023, there were no uncertain tax positions that resulted in any adjustment to the Company’s provision for income taxes. The Company recognizes interest and penalties related to unrecognized tax benefits in its provision for income taxes. The Company currently has no liabilities recorded for accrued interest or penalties related to uncertain tax provisions. Net Loss Per Common Share Net loss available to common stockholders is computed by dividing the net loss attributable to common stockholders by the weighted-average number of shares that were outstanding during the period. Diluted net loss available to common stockholders reflects the potential dilution that could occur if securities or other contracts to acquire common stock were exercised or converted into common stock. Potentially dilutive securities are excluded from the diluted net loss available to common stockholders computation in loss periods as their effect would be anti-dilutive. F- 15 ALGORHYTHM HOLDINGS, INC AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2024 and 2023 Recent Accounting Pronouncements In November 2023, the FASB issued Accounting Standards Update (“ASU ”) 2023- 07, Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures (“ASU 2023-07”), that requires disclosure of significant segment expenses that are regularly reviewed by the chief operating decision maker and included within each reported measure of segment profit or loss. The standard also requires disclosure of the composition of other segment items included in the measure of segment profit or loss that are not separately disclosed. All disclosure requirements under ASU 2023-07 are also required for public entities with a single reportable segment. The ASU is effective for the Company’s Annual Report on Form 10-K for the year ended December 31, 2024, and subsequent interim periods, with early adoption permitted. The Company adopted ASU 2023-07 effective December 31, 2024 with additional disclosures detailed in the subsequent notes. In December 2023, the FASB issued ASU 2023-09, Income Taxes (Topic 740): Improvements to Income Tax Disclosures . ASU 2023-09 is intended to enhance the usefulness of income tax disclosures by requiring entities to disclose specific rate reconciliations, amount of income taxes separate by federal and individual tax jurisdictions, and the amount of income (loss) from continuing operations before income tax expense (benefit) disaggregated between federal, state and foreign. ASU 2023-09 is effective for the Company for its fiscal year beginning January 1, 2025, with early adoption permitted. The Company is currently evaluating the impact of adopting this standard on its consolidated financial statements and related disclosures. In November 2024, the FASB issued ASU 2024-03, Income Statement – Reporting Comprehensive Income—Expense Disaggregation Disclosures (Subtopic 220-40) . This ASU requires disclosure on an annual and interim basis, in the notes to the financial statements, of disaggregated information about specific categories underlying certain income statement expense line items. The guidance is effective for annual periods beginning after December 15, 2026, and interim periods with annual reporting periods beginning after December 15, 2027, on a retrospective basis. The Company is currently evaluating the impact of this standard on its consolidated financial statements and related disclosures. In November 2024, the FASB issued ASU 2024-04, Debt – Debt with Conversion and Other Options (Subtopic 470-20) . This ASU clarifies the requirements for determining whether certain settlements of convertible debt instruments should be accounted for as an induced conversion. ASU 2024-04 is effective for annual periods beginning after December 15, 2025, and interim reporting periods within those annual reporting periods. Early adoption is permitted for all entities that have adopted the amendments in Update 2020-06. Adoption can be on a prospective or retrospective basis. The Company is currently evaluating the impact of this standard on its consolidated financial statements and related disclosures. The Company reviewed all other significant newly-issued accounting pronouncements and concluded that they either are not applicable to the Company’s operations or that no material effect is expected on its consolidated financial statements as a result of future adoption. Note 4 – Business Combination On June 11, 2024, the Company, its wholly-owned subsidiary, SemiCab Holdings, SemiCab, Inc., Ajesh Kapoor and Vivek Sehgal entered into an asset purchase agreement pursuant to which the Company agreed to purchase substantially all of the assets, and assume certain specified liabilities, of SemiCab, Inc. On July 3, 2024 (the “Acquisition Date”), the parties completed the acquisition and, on that date, the Company issued 3,209 shares of the Company’s common stock and a 20 % membership interest in SemiCab Holdings to SemiCab, Inc. The Company acquired SemiCab, Inc.’s business to diversify the Company’s business. F- 16 ALGORHYTHM HOLDINGS, INC AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2024 and 2023 Pursuant to the terms of the asset purchase agreement that the Company entered into on June 11, 2024, the Company entered into an option agreement that granted SemiCab Holdings the right to acquire all of the issued and outstanding equity securities of SMCB, which is a subsidiary of SemiCab, Inc., for 1,605 shares of the Company’s common stock. The Company did not exercise this right and the option agreement expired unexercised on August 31, 2024. In connection with the asset purchase agreement, effective July 3, 2024, SemiCab Holdings entered into employment agreements with Ajesh Kapoor and Vivek Sehgal. Mr. Kapoor’s agreement is for a term of three years with an annual base salary of $ 140,000 for 2024, $ 240,000 for 2025, and $ 300,000 for 2026. Mr. Sehgal’s agreement is for a term of three years with an annual base salary of $ 105,000 for 2024, $ 210,000 for 2025, and $ 240,000 for 2026. Both executives’ salaries are subject to annual review by the board of managers of SemiCab Holdings. The value of the consideration paid by the Company to SemiCab, Inc. for the SemiCab business was $ 983,000 . The 3,209 shares issued to SemiCab, Inc. were valued at $ 494,000 on the Acquisition Date based on the trading price of the Company’s common stock on the Acquisition Date discounted for a lack of marketability. The Company recognized a non-controlling interest at fair value as of the Acquisition Date in the amount of $ 74,000 , representing the value of the 20 % membership interest in SemiCab Holdings that was issued to SemiCab, Inc. in the transaction. The 20 % membership interest was valued at the Acquisition Date based on the fair value of the implied value of SemiCab Holdings based on the value of the Company’s common stock issued on the Acquisition Date. The Company recorded a measurement period adjustment during the fourth quarter of 2024 that reduced the value of finite lived intangible assets acquired in the transaction by $ 1,050,000 . This had the effect of increasing goodwill by $ 1,050,000 . F- 17 ALGORHYTHM HOLDINGS, INC AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2024 and 2023 The following table presents the allocation of the consideration transferred to the assets acquired and liabilities assumed based on their fair values: Schedule of Consideration Transferred to the Assets Acquired and Liabilities Assumed Consideration: Equity consideration $ 494,000 Fair value of non-controlling interest 74,000 Total equity consideration 568,000 Effective extinguishment of advances to SemiCab, Inc. 415,000 Total consideration $ 983,000 Identifiable net assets acquired: Cash $ 17,000 Accounts receivable 193,000 Prepaid expenses and other current assets 13,000 Property and equipment, net 3,000 Other non-current assets 14,000 Customer relationships (nine 9 year estimated useful life) 25,000 Trade name (nine 9 year estimated useful life) 25,000 Developed technology (six 6 year estimated useful life) 325,000 Accounts payable and accrued expenses ( 2,679,000 ) Merchant cash advances payable ( 631,000 ) Notes payable to related parties ( 650,000 ) Other current liabilities ( 50,000 ) Net assets acquired ( 3,395,000 ) Goodwill $ 4,378,000 Note 5 – Property and Equipment, Intangible Assets and Goodwill A summary of the Company’s property and equipment at December 31, 2024 and 2023 is as follows: Schedule of Property and Equipment Useful December 31, December 31, Life 2024 2023 Computer and office equipment 5 - 7 years $ 412,000 $ 404,000 Furniture and fixtures 7 years 107,000 107,000 Molds and tooling 3 - 5 years 2,297,000 2,228,000 Property and equipment gross 2,816,000 2,739,000 Less: Accumulated depreciation 2,532,000 2,335,000 Property and equipment net $ 284,000 $ 404,000 Depreciation expense was $ 192,000 and $ 287,000 for the year ended December 2024 and nine months ended December 31, 2023, respectively. F- 18 ALGORHYTHM HOLDINGS, INC AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2024 and 2023 A summary of the Company’s intangible assets at December 31, 2024 and 2023 is as follows: Schedule of Intangible Assets Useful December 31, Life 2024 Customer relationships 9 years $ 25,000 Trade name 9 years 25,000 Developed technology 6 years 325,000 Intangible assets gross 375,000 Less: Accumulated amortization 30,000 Intangible assets net $ 345,000 Amortization expense was $ 30,000 for the year ended December 31, 2024. The Company did not have any intangible assets or goodwill at December 31, 2023. The Company tested the recorded amount of goodwill for impairment on December 31, 2024 to see if the carrying amount of goodwill exceeded its carried value. The Company calculated a market-based valuation utilizing inputs classified as level 3 on the fair value hierarchy by multiplying one by projected 2025 revenue for the SemiCab business. The Company determined that, as a result of the SemiCab generating less revenue than anticipated, an impairment charge of $ 3,592,000 should be recorded as of December 31, 2024. The following table presents the changes in the value of the goodwill recognized in connection with the acquisition of SemiCab business: Schedule of Changes in Goodwill Balance at January 1, 2024 $ - 0 - Goodwill from acquisition of SemiCab, Inc. on July 3, 2024 4 ,378,000 Impairment of goodwill ( 3,592,000 ) Balance at December 31, 2024 $ 786,000 Note 6 – Notes Payable to Related Parties SemiCab Holdings assumed several unsecured loans from Ajesh Kapoor and Vivek Sehgal in the acquisition of SemiCab, Inc.’s business. The Company had accrued interest payable of $ 6,000 as of December 31, 2024 that was included as a component of accrued expenses on the Company’s consolidated balance sheets. The Company incurred interest expense on these loans of $ 36,000 for the year ended December 31, 2024. The terms of each loan are summarized in the table below: Schedule of Notes Payable to Related Parties Loan Issue Maturity Interest Note Holder Date Date Status Rate Principal Ajesh Kapoor 7/10/2021 7/10/2026 Current 9 % $ 150,000 Ajesh Kapoor 8/27/2021 8/26/2026 Current 9 % 235,000 Vivek Sehgal 4/17/2023 10/13/2023 Default 10 % 50,000 Ajesh Kapoor 5/5/2023 5/4/2024 Default 10 % 50,000 Ajesh Kapoor 5/17/2023 5/16/2024 Default 10 % 165,000 Balance as of December 31, 2024 $ 650,000 Balance $ 650,000 Less: current portion of notes payable to related parties 265,000 Notes payable to related parties, net of current portion $ 385,000 Subsequent to December 31, 2024, the Company entered into waivers and amendments with each of the note holders who are parties to the loans described above that were in default at December 31, 2024 pursuant to which the maturity dates of the loans were extended to February 1, 2026. As a result of the execution of the waivers and amendments, the Company cured the defaults that had existed at December 31, 2024 due to non-payment on the original maturity dates of the notes. F- 19 ALGORHYTHM HOLDINGS, INC AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2024 and 2023 Note 7 – Credit Facilities and Other Financing Arrangements Fifth Third Bank Asset-Backed Revolving Credit Facility On October 14, 2022, the Company entered into a loan and security agreement with Fifth Third Financial Corporation. The credit agreement established a secured asset-backed revolving credit facility that was comprised of a maximum $ 15,000,000 revolving credit facility. Availability under the credit facility was determined monthly by a borrowing base comprised of a percentage of eligible accounts receivable and eligible inventory of the Company. The Company’s obligations under the credit agreement are secured by a continuing security interest in all property of each loan party, subject to certain excluded collateral. Costs associated with the closing of the credit agreement of $ 254,000 were deferred and amortized over life of the loan. During the nine months ended December 31, 2023, the Company incurred amortization expense of $ 215,000 associated with the amortization of deferred financing costs from the credit agreement. Borrowings under the credit facility took the form of base rate loans at interest rates of the greater of either: (a) the Prime Rate plus 0.50%, or (b) the Secured Overnight Financing Rate 30-day term rate plus 3%, subject to a minimum of 0.050% in either case. The Company incurred interest expense of 43,000 for the nine months ended December 31, 2023. On May 19, 2023, the Company executed a Waiver and First Amendment agreement which provided for a waiver of previous defaults and instituted new covenants. On November 17, 2023, the Company voluntarily terminated the credit agreement as the Company could not comply with the debt coverage financial covenant effective September 30, 2023. There was no balance outstanding on the credit agreement as of the termination date. Oxford Credit Facility On March 28, 2024, the Company entered into a loan agreement and related revolving credit note with Oxford Commercial Finance (“Oxford”). The agreement was for a two-year term and established a secured asset-backed revolving credit facility that was comprised of a maximum $ 2,000,000 revolving credit facility. Availability under the credit facility was determined monthly by a borrowing base comprised of a percentage of eligible accounts receivable of the borrowers. The Company’s obligations under the credit agreement were secured by a continuing security interest in all property of each Loan Party, subject to certain excluded collateral. On October 17, 2024, the Company terminated the loan agreement and note and paid Oxford a termination fee of $ 40,000 . As of the date of termination, the Company had no outstanding amounts owed to Oxford. During the year ended December 31, 2024, the Company incurred interest expense of $ 77,000 for financing costs associated with the credit agreement. F- 20 ALGORHYTHM HOLDINGS, INC AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2024 and 2023 Agile Capital Merchant Cash Advance In connection with the acquisition of SemiCab, Inc.’s business, the Company assumed a merchant cash advance that was payable to Agile Capital Funding, LLC that had been incurred under a financing agreement that SemiCab, Inc. had entered into on March 22, 2024. The initial amount borrowed was $ 315,000 , with net proceeds to SemiCab, Inc. in the amount of $ 300,000 . Repayment terms consisted of weekly payments in the amount of $ 16,200 for 28 weeks for a total repayment of $ 453,600 . The effective interest rate for the borrowings is 15 % per year. The Company incurred $ 105,400 of interest expense under this financing agreement during the year ended December 31, 2024. As of December 31, 2024, the merchant cash advance had been repaid in full. Cedar Advance Merchant Cash Advance In connection with the acquisition of SemiCab, Inc.’s business, the Company assumed a merchant cash advance that was payable to Cedar Advance, LLC that had been incurred under a financing agreement that SemiCab, Inc. had entered into on May 8, 2024. The initial amount borrowed was $ 215,000 , with net proceeds to SemiCab, Inc. in the amount of $ 204,300 . Repayment terms consisted of weekly payments in the amount of $ 11,100 for 28 weeks for a total repayment of $ 312,000 . The effective interest rate for the borrowings is 18 % per year. The Company incurred $88,800 of interest expense under this financing agreement during the year ended December 31, 2024. As of December 31, 2024, the merchant cash advance had been repaid in full. Note 8 – Commitments and Contingencies The Company is subject to claims, suits and other proceedings from time to time in the ordinary course of business that could result in fines, civil penalties, or other adverse consequences. In accordance with the provisions of ASC Topic 450, Contingencies, the Company records a liability when it believes that it is probable that a loss has been incurred and the amount can be reasonably estimated. If the Company determines that it is probable that a loss has been incurred and the loss or range of loss can be estimated, the Company discloses the estimated amount of the loss. The Company evaluates developments in its legal matters that could affect the amount of liability that has been previously accrued and makes adjustments as appropriate. Significant judgment is required to determine both likelihood of there being and the estimated amount of a loss related to such matters. Efficient Capital Labs Settlement Agreement On May 18, 2023, SemiCab, Inc. entered into an installment business loan agreement with Efficient Capital Labs, Inc. (“ECL”) pursuant to which SemiCab, Inc. borrowed the principal amount of $ 1,000,000 . Repayments were originally scheduled to begin in June 2023 in equal installments of $ 91,667 for 13 months with an effective interest rate of 17.97 %. The loan had a maturity date of May 17, 2024 . On May 18, 2024, SemiCab, Inc. defaulted on the loan for non-payment. F- 21 ALGORHYTHM HOLDINGS, INC AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2024 and 2023 On May 18, 2024, SemiCab, Inc. entered into a settlement agreement with ECL pursuant to which SemiCab, Inc. agreed to pay ECL $ 946,666 as follows: (i) $ 25,000 on or before May 20, 2024; (ii) $ 75,000 on or before June 3, 2024; and (iii) $ 84,666 on or before the first business day of each of the following 10 calendar months starting on July 1, 2024. In connection with the acquisition of the SemiCab, Inc.’s business, the Company assumed this settlement liability. As of December 31, 2024, the remaining unpaid balance of the settlement was $ 325,000 and was included as a component of accrued expenses on the Company’s consolidated balance sheets. The Company was in compliance with the terms of the settlement at December 31, 2024. Derivative Litigation On December 21, 2023, Ault Lending, LLC (“Ault Lending”), a wholly-owned subsidiary of Ault Alliance, Inc., a former shareholder of the Company, filed a derivative shareholder action in Delaware Chancery Court against the Company, its board of directors, Stingray Group, LLC (“Stingray Group”) and Regalia Ventures, LLC (“Regalia Ventures”) for alleged breach of fiduciary duty in approving a recent above-market private placement equity transaction. The complaint alleges that the Company and its board of directors followed an inadequate process in evaluating the private placement transaction that the Company completed in November 2023 and that the Company and its board of directors entered into the transaction with an intent to dilute Ault’s ownership stake in the Company. Ault Lending is seeking the following relief from the Court: (i) declarations that the defendant directors breached their fiduciary duties; and that Stingray Group and Regalia Ventures aided and abetted those breaches; (ii) rescission of the Company’s sale of shares to Stingray Group and Regalia Ventures ; and (iii) damages and attorney’s fees. The Company filed a motion to dismiss the complaint. Based on the Company’s assessment of the facts underlying the claims, the uncertainty of the litigation and the preliminary stage of the case, the Company cannot reasonably estimate the potential loss or range of loss that may result from this action. OAC Flatiron & OAC Adelphi Litigation 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 year ended December 31, 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 year ended December 31, 2024. F- 22 ALGORHYTHM HOLDINGS, INC AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2024 and 2023 On July 26, 2024, the Landlord filed a civil action in the Supreme Court of the State of New York against 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 alleged 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 five business days of the Company’s payment of $ 250,000 . Pursuant to the settlement agreement, the Company made the first payment of $ 150,000 on September 25, 2024 and a final payment of $ 100,000 on October 25, 2024. The remaining lease liability was written off upon settlement, resulting in a loss upon termination of the lease of $ 4,000 , net of the write off of the related lease asset discussed above. On October 29, 2024, the Landlord filed a discontinuance with prejudice. Blue Yonder Liability Pursuant to the asset purchase agreement with SemiCab, Inc., the Company assumed a judgement against SemiCab, Inc. regarding damages resulting from contract breach for IT subscription-based services. On March 28, 2020, SemiCab, Inc. entered into a service contract and agreement with Blue Yonder, Inc. (“Blue Yonder”) for certain IT subscription-based services. The original term of the agreement was for three years, at a price of $ 100,000 per year, for a total of $ 300,000 . On June 21, 2023, Blue Yonder filed a lawsuit claiming damages in the amount of $ 275,000 with the Maricopa County Superior Court in Arizona. The suit was found in favor of Blue Yonder in the amount of $ 509,119 , subject to two separate milestone payments that would otherwise deem the entire balance due satisfied if either milestone payment is made by the Company. The first milestone payment for $ 175,000 and was due on July 1, 2024 and was not made. In the event this payment is made, the remaining settlement shall be deemed satisfied. If this payment is not made, the Company shall owe a total of $ 225,000 by October 1, 2024. In the event this payment is made, the remaining settlement shall be deemed satisfied. If neither payment is made, Blue Yonder shall be entitled to execute the full $ 509,119 beginning January 1, 2025. As of the date of this filing, none of the scheduled payments have been made. A liability of $ 509,119 has been recorded as a component of accrued expenses on the accompanying consolidated balance sheets. On February 11, 2025, Blue Yonder filed a civil action in the Superior Court of the State of Arizona against the Company for breach of contract and to enforce a stipulated judgment entered against SemiCab, Inc. in connection with the liabilities related to Blue Yonder that the Company assumed when it acquired SemiCab, Inc.’s business. Blue Yonder alleges that, because the Company assumed these liabilities, Blue Yonder can enforce the judgment against the Company. The judgement was in the amount of $ 509,119 . The Company have retained counsel to represent them in this matter. F- 23 ALGORHYTHM HOLDINGS, INC AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2024 and 2023 Note 9 – Operating Leases The Company is a party to various operating leases with rent ranging from $ 4,900 to $ 10,000 per month. All of the leases have remaining terms of less than one year. Lease expense for the Company’s operating leases is recognized on a straight-line basis over the lease terms. The following table presents supplemental information about the Company’s operating leases and future minimum annual lease payments under its operating leases as of December 31, 2024. Supplemental balance sheet information related to leases as of December 31, 2024 and 2023 is as follows: Schedule of Supplemental Information Related To Leases December 31, 2024 December 31, 2023 Assets: Operating lease - right-of-use assets $ 95,000 $ 3,926,000 Liabilities Current Current portion of operating leases $ 92,000 $ 84,000 Operating lease liabilities, net of current portion $ - $ 3,925,000 Supplemental statement of operations information related to operating leases is as follows: Schedule of Operating Lease Term and Discount Rate Twelve Months Ended Nine Months Ended December 31, 2024 December 31, 2023 Operating lease expense as a component of general and administrative expenses $ 489,000 $ 717,000 Supplemental cash flow information related to operating leases is as follows: Cash paid for amounts included in the measurement of lease liabilities: Operating cash flow paid for operating leases $ 181,000 $ 656,000 Lease term and Discount Rate Weighted average remaining lease term (years) 0.6 15.0 Weighted average discount rate 9.0 % 12.0 % The following table summarizes information regarding lease maturities and balance due as follows: Schedule of Operating Lease Lease Maturities and Balance Due Payments due by period Amount 2025 $ 94,000 Less: Interest 2,000 Total operating lease liabilities Total operating lease liabilities $ 92,000 F- 24 ALGORHYTHM HOLDINGS, INC AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2024 and 2023 Note 10 – Stock Compensation Expense Equity Incentive Plan On April 12, 2022, the Company’s board of directors approved The Singing Machine Company, Inc. 2022 Equity Incentive Plan. The equity plan provides for the issuance of equity incentive awards, such as stock options, stock appreciation rights, stock awards, restricted stock, stock units, performance awards and other stock or cash-based awards to the Company’s employees, officers, directors, consultants, agents, advisors and independent contractors. The maximum number of shares of common stock initially available for issuance under the plan was 1,167 shares of common stock and thereafter, beginning in 2023, an annual increase would occur as of the first day of the Company’s applicable fiscal equal to the lesser of: (i) five percent of the outstanding shares of common stock calculated on a fully diluted basis as of the end of the Company’s immediately preceding fiscal year; (ii) 167 shares; and (iii) a lesser amount as determined by the Company’s board of directors. The shares of common stock subject to stock awards granted under the equity plan that lapse, terminate, expire prior to exercise, are canceled, or are forfeited, become available for issuance again under the equity plan. Shares subject to a stock award under the equity plan do not become available for issuance or delivery again under the equity plan if such shares are: (i) shares tendered by a participant or retained by the Company as full or partial payment to the Company for the exercise or purchase price of an award; or (ii) shares used to satisfy tax withholding obligations in connection with an award. The Company’s board of directors may amend, suspend or terminate the plan or a portion of it at any time; provided, however, that to the extent required by applicable law, regulation or stock exchange rule, stockholder approval will be required for any amendment to the plan. The plan is scheduled to terminate automatically in 10 years following the earlier of: (i) the date the Company’s board of directors adopted the plan; and (ii) the date the stockholders approved the plan. As of December 31, 2024, there were 1,500 shares of common stock authorized for issuance under the plan. Of this amount, awards representing 1,183 shares of common stock had been granted under the plan and 317 shares remained available for issuance under the plan. The Company did not issue any share-based compensation during the year ended December 31, 2024 or the nine months ended December 31, 2023. There were 33 and 238 shares forfeited during the year ended December 31, 2024 and the nine months ended December 31, 2023, respectively. There were 351 and 384 shares of common stock underlying share-based awards that were outstanding at December 31, 2024 and 2023, respectively. Employee share-based compensation expense for the year ended December 31, 2024 and the nine months ended December 31, 2023 includes the estimated fair value of share-based awards granted, amortized on a straight-line basis over the requisite service period for the entire portion of the award. For the year ended December 31, 2024 and the nine months ended December 31, 2023, the Company recognized share-based compensation expense of $ 69,000 and $ 110,000 , respectively. As of December 31, 2024, there was an unrecognized expense of $ 33,000 remaining on stock options currently vesting over time with approximate weighted average of six months remaining until these options are fully vested. The vested options as of December 31, 2024, had no intrinsic value. F- 25 ALGORHYTHM HOLDINGS, INC AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2024 and 2023 Other Equity Compensation During the year ended December 31, 2024, the Company issued 3,873 shares of its common stock to three vendors as payment for consulting services rendered and issued 472 shares of common stock to Vivek Sehgal as bonus compensation earned under his employment agreement with SemiCab Holdings. The Company recognized compensation expense of $ 478,000 during the year ended December 31, 2024 in connection with these share issuances, all of which was recorded in general and administrative expenses in the Company statement of operations. Note 11 – Net Loss Per Share The computations of basic and dilutive loss per share of commons stock outstanding for the year ended December 31, 2024 and the nine months ended December 31, 2023 are as follows: Schedule of Basic and Diluted Loss Per Share Year Ended December 31, 2024 Nine Months Ended December 31, 2023 Net loss available to common shareholders $ ( 23,257,000 ) $ ( 6,398,000 ) Basic and fully diluted weighted average shares of common stock outstanding 65,722 24,323 Basic and fully diluted net loss per share of common stock $ ( 353.87 ) $ ( 263.04 ) The computation of the fully diluted weighted average number of shares of common stock outstanding for the year ended December 31, 2024 and the nine months ended December 31, 2023 is as follows: Schedule of Diluted Weighted Average Number of Shares Year Ended December 31, 2024 Nine Months Ended December 31, 2023 Basic weighted average common shares outstanding 65,722 24,323 Effect of dilutive stock options - - Diluted weighted average of common shares outstanding 65,722 24,323 Basic net loss per share is based on the weighted average number of shares of common stock outstanding during the period. Diluted net loss per share reflects the potential dilution assuming shares of common stock underlying in-the-money options and warrants have been issued upon the exercise of the options and warrants and the proceeds thereof were used to purchase shares of the Company’s common stock at the average market price during the period using the treasury stock method. F- 26 ALGORHYTHM HOLDINGS, INC AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2024 and 2023 For the year ended December 31, 2024, 536 shares of common stock underlying stock options and 563,335 shares of common stock underlying warrants were excluded from the calculation of diluted net loss per share as the result would have been anti-dilutive. For the nine months ended December 31, 2023, 569 shares of common stock underlying stock options and 4,511 shares of common stock underlying warrants were excluded from the calculation of diluted net loss per share as the result would have been anti-dilutive. Note 12 – Securities Transactions 2023 Private Placement On November 20, 2023, the Company entered into an agreement to sell $ 2,000,000 of common stock through a private placement of common stock with Stingray Group and Jay Foreman, both of which were existing shareholders with representation on the Company’s board of directors. The shares of common stock were sold at $ 182 per share of common stock. A total of 10,990 shares of common stock were issued to them by the Company. Net proceeds from the transaction were approximately $ 1,900,000 , net of transaction fees of approximately $ 100,000 . During the six-month period after the closing date, the investors had the right to make a written request for registration under the Securities Act of all or any portion of the shares purchased. Neither of them exercised this right. 2023 ATM Offering On February 15, 2023, the Company entered into an at-the-market issuance sales agreement with Aegis Capital Corp as sales agent pursuant to which the Company could offer and sell, from time to time, through the sales agent, up to $ 1,800,000 in shares of the Company’s common stock. For the nine months ended December 31, 2023, the Company received net proceeds of $ 1,654,000 from the sale of its common stock in this offering after payment of $ 146,000 for brokerage commissions and administrative fees to the agent. The at-the-market issuance sales agreement was terminated on May 12, 2023. Regalia Ventures Stock Repurchase Transaction On November 1, 2024, the Company entered into a stock repurchase agreement with Regalia Ventures pursuant to which the Company agreed to repurchase the 5,495 shares from Regalia Ventures at a price per share equal to the higher of: (i) the closing price of the common stock on the last trading day immediately preceding the date of the repurchase agreement; or (ii) the highest volume weighted average price (VWAP) of the common stock during a pricing period of 10 consecutive trading days prior to the date of the repurchase agreement. The shares of common stock to be repurchased were originally issued to Regalia Ventures on November 21, 2023, pursuant to a certain stock purchase agreement dated November 20, 2023. The Company recorded an accrued liability in the amount of the repurchase price, which was $ 472,527 , as of December 31, 2024 as there were no further conditions that needed to be satisfied prior to the closing date other than the issuance of the promissory note and the delivery of the shares. On February 18, 2025, the date of the closing of the transaction, the Company issued a promissory note to Regalia Ventures in the amount of $ 472,527 , which was the principal amount of the purchase price. The note was due and payable on demand and accrued interest at the rate of 10% per year. On February 27, 2025, the Company paid off the note in full. Regalia Ventures is owned and controlled by Jay B. Foreman, who serves as a member of the Company’s board of directors. Stingray Group Stock Repurchase Transaction On December 3, 2024, the Company entered into a stock repurchase agreement with Stingray Group pursuant to which the Company agreed to repurchase the 5,495 shares from Stingray Group at a price per share equal to the higher of: (i) the closing price of the common stock on the last trading day immediately preceding the date of the repurchase agreement; or (ii) the highest VWAP of the common stock during a pricing period of 10 consecutive trading days prior to the date of the repurchase agreement. The shares of common stock to be repurchased were originally issued to the Stingray Group on November 21, 2023, pursuant to a certain stock purchase agreement dated November 20, 2023. The Company recorded an accrued liability in the amount of the repurchase price, which was $ 285,714 , as of December 31, 2024 as there were no further conditions that needed to be satisfied prior to the closing date other than the issuance of the promissory note and the delivery of the shares. On February 18, 2025, the date of the closing of the transaction, the Company issued a promissory note to Stingray Group in the amount of $ 285,714 , which was the principal amount of the purchase price. The note was due and payable on demand and accrued interest at the rate of 10% per year. On April 3, 2025, the Company paid off the note in full. Mathieu Peloquin is the Senior Vice-President, Marketing and Communications of Stingray Group and serves as a member of the Company’s board of directors. F- 27 ALGORHYTHM HOLDINGS, INC AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2024 and 2023 October 2024 Private Placement On October 22, 2024, the Company entered into a securities purchase agreement pursuant to which the Company agreed to issue and sell to each purchaser: (i) an original issue discount senior secured note with a principal amount equal to such purchaser’s subscription amount divided by 0.85, and (ii) a number of shares of the Company’s common stock equal to (x) 11,500, multiplied by (y) such purchaser’s subscription amount, and divided by (z) $2,000,000. No interest would accrue on the notes unless and until an event of default occurred, upon which interest would accrue at a rate of 14% per year. The notes had a maturity date of January 22, 2025. The Offering closed on October 24, 2024. At closing, the Company issued an aggregate of 11,500 shares of its common stock and notes in the aggregate principal amount of $ 2,352,941 to the purchasers for total proceeds of $ 2,000,000 net of original issue discount of $ 352,941 . The Company recorded amortization of original issue discount in the amount of $ 352,941 during the year ended December 31, 2024, which was recorded in interest expense in other expense in the Company’s statement of operations. The 11,500 shares of common stock were valued at $ 943,000 on the date of issuance and were recorded as a debt issuance cost, fully amortized to interest expense during the year ended December 31, 2024. The Company repaid the notes in full during the 2024 year. Univest Securities served as the placement agent in the offering and received seven percent of the gross proceeds received by the Company and reimbursement of the legal fees of its counsel. December 2024 Public Offering On December 4, 2024, the Company entered into a securities purchase agreement in connection with a public offering of an aggregate of 21,000 shares of its common stock, pre-funded warrants to purchase up to 258,412 shares of common stock, Series A warrants to purchase up to 279,412 shares of common stock, and Series B warrants to purchase up to 279,412 shares of common stock. Each share of common stock, or a pre-funded warrant in lieu thereof, was sold together with the accompanying warrants to purchase one share of common stock. The public offering price for each share of common stock and one accompanying Series A warrant and Series B warrants was $ 34.00 . The public offering price of each pre-funded warrant and one accompanying Series A warrant and Series B warrant was $ 32.00 . The exercise price of each pre-funded warrant is $ 2.00 per share. Each Series A warrant is exercisable for one share of common stock and has an initial exercise price equal to $ 34.00 . Each Series B warrant is exercisable for one share of common stock and has an initial exercise price equal to $ 68.00 . The Series A and B warrants have a term of five and two and one-half years, respectively, from the date the issuance of the warrants was approved by shareholders. The Company received aggregate gross proceeds upon the closing of the offering of approximately $ 9,000,000 , before deducting placement agents’ fees and other offering expenses. F- 28 ALGORHYTHM HOLDINGS, INC AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2024 and 2023 The pre-funded warrants are immediately exercisable upon issuance and may be exercised at any time until all pre-funded warrants are exercised in full. The Series A and B warrants will be exercisable only upon receipt of such shareholder approval as may be required by the applicable rules and regulations of the Nasdaq to permit the exercise of the Series A and B warrants, after which the Series A warrants will be exercisable for a period of five years and the Series B warrants will be exercisable for two and one-half years. The pre-funded warrants and Series A and B warrants contain standard adjustments to the exercise price, including for stock splits, stock dividends and pro rata distributions and contain customary terms regarding the treatment of such pre-funded warrants or the Series A and B warrants in the event of a fundamental transaction, which include but are not limited to a merger or consolidation involving the Company, a sale of all or substantially all of the assets of the Company or a business combination resulting in any person acquiring more than 50% of the outstanding shares of common stock of the Company. Additionally, the pre-funded warrants, Series A warrants, and Series B warrants include restrictions on exercise in the event the purchaser’s beneficial ownership of the Company’s common stock would exceed 4.99% of the number of shares of common stock outstanding immediately after giving effect to the exercise. The Series A and B warrants include an exercise price adjustment feature upon shareholder approval, whereby the exercise price will adjust to the greater of the lowest daily volume weighted average price during the reset period or the floor price ($ 6.844 per share), with a proportional increase in the number of warrant shares. The Series A and B warrants can be settled by a cash exercise or by cashless exercise, and the Series B warrants specifically can be settled by way of an alternative cashless exercise after shareholder approval is obtained, in which the Series B warrant holders can receive the same number of shares of common stock that would be issuable under a cash exercise. Upon meeting certain stock price requirements, the Company has the right to redeem any outstanding Series A and Series B warrants for $ 2.00 per share, provided the holders do not elect to exercise prior to redemption. The Company assessed the pre-funded warrants under ASC 480 and ASC 815 and determined that the pre-funded warrants met the requirements to be classified in stockholders’ equity. The Company assessed the Series A and B warrants under ASC 480 and ASC 815 and determined that the Series A and B warrants will be classified as liabilities as they do not meet the requirements to be considered indexed to the Company’s own stock, due to (a) the adjustment to the exercise price tied to shareholder approval, and (b) the potential change in the settlement amount of the Series B warrants upon an alternative cashless exercise election. Additionally, the Company concluded at issuance that it would not have sufficient authorized and available shares of common stock to settle the Series A and B warrants. See Note 13 – Derivative Liability . At inception, the estimated fair value of the Series A warrants was $ 5,900,000 and the Series B warrants was $ 11,000,000 , for a total estimated fair value of $ 16,900,000 . The total fair value exceeded the proceeds received in the offering by $ 8,000,000 , which the Company recorded as a loss upon issuance of warrants. The Company also expensed approximately $ 900,000 of issuance costs incurred in the offering, resulting in a total loss on issuance of $ 8,889,000 . The estimated fair values of the Series A and B warrants have been recorded as a derivative liability at issuance and at December 31, 2024. In the Company’s consolidated statement of operations for the year ended December 31, 2024, the Company recognized a gain of $ 334,000 for the change in the fair value measurement of the warrant liability. F- 29 ALGORHYTHM HOLDINGS, INC AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2024 and 2023 During December 2024, the 258,412 pre-funded warrants were exercised in full, resulting in the Company receiving $ 500,000 in cash proceeds. On January 14, 2025, the Company’s stockholders approved the issuance of the Series A and B warrants that had been issued by the Company in the public offering of securities that the Company had completed on December 6, 2024, at which time all of the Series A and B warrants became exercisable. This approval triggered the adjustment to the exercise price. In connection with this approval, the holders of the Series B Warrants exercised their warrants in full under the alternative cashless exercise provision, resulting in the issuance of 1,910,975 shares of common stock and no additional proceeds received by the Company. Registered Direct Offering On December 18, 2024, the Company sold 120,337 shares of its common stock to accredited investors in a registered direct offering at a purchase price of $ 16.62 per share. The Company engaged Univest Securities to serve as its exclusive placement agent in connection with the offering. The Company agreed to pay Univest Securities a cash fee equal to eight percent of the aggregate gross proceeds received in the offering. It also agreed to reimburse Univest Securities for various expenses incurred in connection with the offering. The Company received net proceeds of $ 1,665,000 from the offering after deducting placement agent fees and other offering expenses of $ 335,000 . Note 13 – Derivative Liability During the year ended December 31, 2024, the Company had derivative warrant liabilities that were measured at fair value on a recurring basis. These fair value measurements were estimated using a Monte Carlo simulation model, with the key inputs described below. Each of these fair value measurements was considered to be a Level 3 measurement by the Company as they used significant unobservable inputs, including the probability and expected date of stockholder approval. The key inputs for each of these warrant liabilities were as follows: Schedule of Derivative Warrant Liabilities Warrant Liability – Series A Warrants Issuance Date December 31, 2024 Stock price on valuation date $ 18.00 $ 18.00 Exercise price $ 34.00 $ 34.00 Number of warrants 279,412 279,412 Remaining term (years) 5.00 4.93 Annual equity volatility 113.0 % 114.0 % Annual volume volatility 377.0 % 379.0 % Risk-free interest rate 3.95 % 4.29 % Expected stockholder approval date January 14, 2025 January 14, 2025 Expected stockholder approval probability 50 % 50 % F- 30 ALGORHYTHM HOLDINGS, INC AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2024 and 2023 Warrant Liability – Series B Warrants Issuance Date December 31, 2024 Stock price on valuation date $ 18.00 $ 18.00 Exercise price $ 68.00 $ 68.00 Number of warrants 279,412 279,412 Remaining term (years) 2.50 2.43 Annual equity volatility 126.0 % 120.0 % Annual volume volatility 409.0 % 416.0 % Risk-free interest rate 4.00 % 4.17 % Expected stockholder approval date January 14, 2025 January 14, 2025 Expected stockholder approval probability 50 % 50 % The following table details the Company’s financial instruments that are required to be remeasured at fair value on a recurring basis and their fair value hierarchy as of December 31, 2024: Schedule of fair value on a recurring basis December 31, 2024 Level 1 Level 2 Level 3 Liabilities Warrant liabilities $ — $ — $ 16,603,000 Total liabilities $ — $ — $ 16,603,000 The following table provides a roll-forward of the fair value of the derivative liabilities described above: Schedule of fair value of the Derivative Liabilities Series A Warrants Series B Warrants Total Warrant Liabilities Balance at December 31, 2023 $ — $ — $ — Issuances 5,901,000 11,036,000 16,937,000 Exercises — — — Loss (gain) on change in fair value ( 445,000 ) 111,000 ( 334,000 ) Balance at December 31, 2024 $ 5,456,000 $ 11,147,000 $ 16,603,000 F- 31 ALGORHYTHM HOLDINGS, INC AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2024 and 2023 The following table provides a roll-forward of the number of shares of common stock underlying warrants issued during the year ended December 31, 2024 and the nine months ended December 31, 2023: Schedule of Shares of Common Stock Underlying Warrants Pre-Funded Warrants Series A Warrants Series B Warrants Other Warrants Total Balance at March 31, 2023 — — — 4,511 4,511 Issuances — — — — — Exercises — — — — — Balance at December 31, 2023 — — — 4,511 4,511 Issuances 258,412 279,412 279,412 — 817,236 Exercises ( 258,412 ) — — — ( 258,412 ) Balance at December 31, 2024 — 279,412 279,412 4,511 563,335 The Company did not issue any warrants during the nine month transition period ended December 31, 2023 and did not have any warrants outstanding as of December 31, 2023. Note 14 – Income Taxes The Company’s loss before income taxes for the year ended December 31, 2024 and the nine months ended December 31, 2023 is as follows: Schedule of Loss Before Income Taxes 2024 2023 United States $ ( 24,414,000 ) $ ( 6,173,000 ) Foreign 47,000 ( 225,000 ) Total $ ( 24,367,000 ) $ ( 6,398,000 ) The Company did not have any provision for income taxes for the year ended December 31, 2024 or the nine months ended December 31, 2023. F- 32 ALGORHYTHM HOLDINGS, INC AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2024 and 2023 The Company’s net deferred tax assets as of December 31, 2024 and 2023 are as follows: Schedule of Deferred Tax Assets and Liabilities December 31, 2024 December 31, 2023 NOL Federal Carryforward $ 4,085,000 $ 1,291,000 State NOL Carryforward 1,426,000 469,000 Inventory differences 355,000 1,173,000 Impairment of GoodWIll - Semi Cab 674,000 - Stock option compensation expense (SFAS 123R) 179,000 159,000 Intangibles - Semi Cab 253,000 - ROU Liability 14,000 1,022,000 Section 163(j) 694,000 151,000 Allowance for doubtful accounts 40,000 45,000 Reserve for estimated returns 476,000 384,000 Accrued vacation 20,000 8,000 Deferred Tax Assets Gross $ 8,216,000 $ 4,702,000 Less: valuation allowance ( 8,039,000 ) ( 3,600,000 ) Net deferred tax asset $ 176,000 $ 1,103,000 Depreciable and amortizable assets ( 39,000 ) ( 67,000 ) ROU Asset ( 14,000 ) ( 1,000,000 ) Warrant Liability ( 92,000 ) - Prepaid expenses ( 32,000 ) ( 35,000 ) Net deferred tax liability $ ( 176,000 ) $ ( 1,103,000 ) Net Deferred Tax Assets and Liabilities $ - $ - The Company recognizes federal, state and foreign current tax liabilities or assets based on its estimate of taxes payable to or refundable by tax authorities in the current fiscal year. The Company also recognizes federal, state and foreign deferred tax liabilities or assets based on the Company’s estimate of future tax effects attributable to temporary differences and carryforwards. The Company records a valuation allowance to reduce any deferred tax assets by the amount of any tax benefits that, based on available evidence and judgment, are not expected to be realized. The Company performed an analysis in accordance with the provisions of ASC 740, which requires an assessment of both positive and negative evidence when determining whether it is more likely than not that deferred tax assets are recoverable. The analysis performed to assess the realizability of the deferred tax assets included an evaluation of the pattern and timing of the reversals of temporary differences and the length of carryback and carryforward periods available under the applicable federal, state and foreign laws; and the amount and timing of future taxable income. The Company evaluated the realizability of its deferred tax assets as of December 31, 2024 and 2023 in accordance with accounting principles generally accepted in the United States of America and concluded that a valuation allowance against all of the Company’s deferred tax assets was necessary based upon the Company’s conclusions regarding, among other considerations, the Company’s recent history of losses and projected losses for fiscal year 2024 and in the future. F- 33 ALGORHYTHM HOLDINGS, INC AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2024 and 2023 The actual tax provision differs from the “expected” tax for the year ended December 31, 2024 and the nine months ended December 31, 2023 (computed by applying the U.S. Federal Corporate tax rate of 21% to income before taxes) as follows: Schedule of Tax Provision December 31, 2024 December 31, 2023 Expected tax expense (benefit) $ ( 5,117,000 ) $ ( 1,344,000 ) State income taxes, net of Federal income tax effect ( 1,574,000 ) ( 326,000 ) Permanent differences ( 441,000 ) 104,000 Permanent difference loss on issuance of warrants 2,441,000 - Tax rate differential on foreign earnings 13,000 59,000 Change in valuation allowance 4,428,000 1,495,000 Other 250,000 11,000 Actual tax (benefit) provision $ - $ - At December 31, 2024 and 2023, the Company had federal tax net operating loss carryforwards in the amount of $ 19,452,000 and $ 6,149,000 , respectively, that begin to expire in the year 2025. The net operating loss carryforward is subject to an IRS Section 382 limitation that limited the amount available to use beginning in fiscal 2020 to $ 150,000 per year. In addition, the Company had state tax net operating loss carryforwards during those periods of $ 23,100,000 and $ 2,453,000 , respectively that began to expire in 2024. These tax net operating loss carryforwards may be subject to further adjustment based on future changes in ownership. At December 31, 2024, the Company evaluated the realizability of its deferred tax assets in accordance with GAAP and concluded that a valuation allowance of $ 8,039,000 against deferred tax assets is necessary. The change in valuation allowance increased $ 4,439,000 to $ 8,039,000 as of December 31, 2024 from $ 3,600,000 as of December 31, 2023. The recognition of the remaining net deferred tax asset and corresponding tax benefit is based upon the Company’s conclusions regarding, among other considerations, the Company’s current and anticipated customers, contracts and product introductions, and recent operating results. Note 15 – Segment Information and Revenue Disaggregation Segment Information As previously detailed in Note 3 – Summary of Significant Accounting Policies – Segment Reporting , pursuant to ASC 280, the Company’s Chief Executive Officer serves as the Company’s Chief Operating Decision Maker (“CODM”) for the purposes of ASC 280. The CODM concluded that the Company operates two reportable segments. One segment consists of its Singing Machine business and the other segment consists of its SemiCab business. The CODM manages the Company’s operations and business separately for each operating segment and uses net sales and net loss to allocate resources, making operating decisions and evaluating financial performance. The CODM also uses net sales and net loss, along with non-financial inputs and qualitative information, to evaluate the Company’s performance, establish compensation, monitor budget versus actual results, and decide the level of investment in various operating activities and other capital allocation activities. F- 34 ALGORHYTHM HOLDINGS, INC AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2024 and 2023 The following table details the revenues, significant expenses and other segment items regularly provided to the CODM: Schedule of Details the Revenue, Significant expenses and Other Segment Year Ended December 31, 2024 Nine Months Ended December 31, 2023 Singing Machine SemiCab Total Singing Machine SemiCab Total Revenues $ 23,197,000 $ 297,000 $ 23,494,000 $ 29,198,000 $ - $ 29,198,000 Less: Adjusted cost of revenues 18,222,000 491,000 18,713,000 23,008,000 - 23,008,000 Adjusted sales and marketing 2,874,000 - 2,874,000 3,717,000 - 3,717,000 Adjusted general and administrative (1) 9,935,000 1,014,000 10,949,000 8,219,000 - 8,219,000 Adjusted depreciation and amortization 191,000 31,000 222,000 287,000 - 287,000 Share based compensation 578,000 52,000 630,000 110,000 - 110,000 Impairment of goodwill - 3,592,000 3,592,000 - - - Impairment of note receivable - 439,000 439,000 - - - Change in fair value of warrant liability ( 334,000 ) - ( 334,000 ) - - - Gain on disposal of fixed assets - - - ( 44,000 ) - ( 44,000 ) Loss on issuance of warrants 8,889,000 - 8,889,000 - - - Interest expense 1,660,000 227,000 1,887,000 299,000 - 299,000 Segment net loss $ ( 18,818,000 ) $ ( 5,549,000 ) $ ( 24,367,000 ) $ ( 6,398,000 ) $ - $ ( 6,398,000 ) Total segment assets $ 16,301,000 $ 1,215,000 $ 17,516,000 (1) Excludes depreciation and amortization, share-based compensation, impairment of goodwill and impairment of a note receivable. The following reconciles total segment assets to consolidated total assets as of December 31, 2024: Schedule of Reconcilation of Segment Assets to Consolidated December 31, 2024 Total segment assets $ 17,516,000 Goodwill 786,000 Total assets $ 18,302,000 The Company only had one reportable segment for the nine months ended December 31, 2023, which consisted of its Singing Machine business. As the Company only had one reportable segment, the measure of segment assets at December 31, 2023 is reported on the balance sheet as total consolidated assets. Revenue Disaggregation The Company disaggregates revenues by product line and major geographic region as most of its revenue is generated by the sales of karaoke products. Revenue by product line is as follows: Schedule of Revenue by Product Line Product Line Year Ended December 31, 2024 Nine Months Ended December 31, 2023 Classic Karaoke Machines $ 16,516,000 $ 24,189,000 Licensed Products 486,000 549,000 Kids Youth Electronics 959,000 565,000 Microphones and Accessories 4,411,000 3,283,000 Music Subscriptions 825,000 612,000 Logistics Services 297,000 - Total Net Sales $ 23,494,000 $ 29,198,000 F- 35 ALGORHYTHM HOLDINGS, INC AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2024 and 2023 Revenue by geographic region is as follows: Schedule of Revenue by Geographical Region Year Ended December 31, 2024 Nine Months Ended December 31, 2023 North America $ 22,191,000 28,763,000 Australia 1,075,000 205,000 Europe and United Kingdom 184,000 226,000 All Others 44,000 4,000 Total Net Sales $ 23,494,000 29,198,000 The geographic area of sales is based primarily on where the product was delivered. The Company’s accounts receivable balance, net of an allowance of $ 139,182 , was$ 7,305,920 as of December 31, 2022. Notes 16 – Concentrations, Risks and Uncertainties Bank Liquidity and Financial Stability At times, the Company maintains cash in United States bank accounts that are more than the Federal Deposit Insurance Corporation insured amounts. The Company maintains cash balances in foreign financial institutions. The Company regularly monitors the financial stability of this financial institution and believes that it is not exposed to any significant credit risk in cash and cash equivalents. However, in March and April 2023, certain U.S. government banking regulators took steps to intervene in the operations of certain financial institutions due to liquidity concerns, which caused general heightened uncertainties in financial markets. While these events have not had a material direct impact on the Company’s operations, if further liquidity and financial stability concerns arise with respect to banks and financial institutions, either nationally or in specific regions, the Company’s ability to access cash or enter into new financing arrangements may be threatened, which could have a material adverse effect on its business, financial condition and results of operations. U.S. Trade Policies U.S. government administration and members of the U.S. Congress have recently implemented significant changes in U.S. trade policy and taken certain actions that are impacting the Company’s business, including imposing tariffs on certain goods imported into the United States. Some of these changes have triggered retaliatory actions by affected countries and may result in “trade wars” and increased costs for goods imported into the United States. All of the Company’s products are manufactured and imported from China and the Company sells its products in Canada and other countries. The implementation of tariffs has resulted in an increase in the cost of the Company’s products. If the Company is unable to mitigate these increased costs through price increases, it may experience lower sales which would negatively impact its revenue, gross profit margin and results of operations. Revenue Concentration The Company derives a majority of its revenues from sales of its products in North America by retailers. The Company’s allowance for credit losses is based upon management’s estimates and historical experience and reflects the fact that accounts receivable is concentrated with several large customers. At December 31, 2024, 68 % of accounts receivable were due from three customers in North America that each individually owed more than 10% of the Company’s total accounts receivable. On December 31, 2023, 82 % of accounts receivable were due from four customers in North America that each individually owed more than 10% of the Company’s total accounts receivable. Revenue derived from the Company’s top five customers and top three customers collectively as a percentage of total net sales was 79 % and 81 % of our revenue, respectively, for the year ended December 31, 2024 and the nine months ended December 31, 2023, respectively. Revenues from customers representing greater than 10% of total net sales were derived from top four customers for the year ended December 31, 2024 as percentage of the net sales were 26 %, 22 %, 16 % and 12%, respectively. Revenues from customers representing greater than 10% of total net sales were derived from top three customers for the nine months ended December 31, 2023 as percentage of the net sales were 48 %, 21 % and 12 %. The loss of any of these customers could have an adverse impact on the Company. F- 36 ALGORHYTHM HOLDINGS, INC AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2024 and 2023 Note 17 – Related Party Transactions Stingray Group Subscription Payments The Company has a music subscription sharing agreement with Stingray Group. For the year ended December 31, 2024 and the nine months ended 2023, the Company received music subscription revenue of $ 780,000 and $ 612,000 , respectively, from Stingray Group. As of December 31, 2024 and 2023, the Company had $ 212,000 and $ 269,000 , respectively, due from Stingray Group for music subscription reimbursement. SMCB VIE Analysis The Company determined that SMCB, which is a subsidiary of SemiCab, Inc., is a VIE as the Company provides financial support to SMCB. While not contractually obligated, SMCB currently relies on the Company’s reimbursement of certain costs under an intercompany services agreement (“MSA”) whereby SMCB agrees to provide IT software development services to SemiCab, Inc. In exchange, under the MSA, the Company grants intellectual property rights to SMCB to use the software platform in India. Compensation for services is invoiced and paid on a monthly or quarterly basis as agreed by both parties, with rates subject to periodic review and revision. The agreement is for a term of two years ending on April 1, 2025 and automatically renews for additional 12-month periods unless prior notice is given by the terminating party. The agreement automatically renewed for an additional 12-month period on April 1, 2025. As a result of this relationship and the financial support provided by the Company to SMCB under the loan agreement described below to fund SMCB’s operations, SMCB has been determined to be a VIE. The Company further determined that it is not the primary beneficiary of SMCB because the Company does not have the power to direct or control SMCB’s significant activities related to its business. Accordingly, the Company has not consolidated SMCB’s results of operations and financial position in its consolidated financial statements. Pursuant to the terms of the asset purchase agreement that the Company entered into on June 11, 2024, the Company entered into an option agreement that granted SemiCab Holdings the right to acquire all of the issued and outstanding equity securities of SMCB for 1,605 shares of the Company’s common stock. The Company did not exercise this right and the option agreement expired on August 31, 2024. Loan Agreement The Company is a party to a loan agreement with SMCB dated March 22, 2024. Under the loan agreement, the Company agreed to loan up to $ 2,500,000 to SMCB. The loans are anticipated to be made in tranches. Disbursements of any tranches are fully at the discretion of the Company. Each tranche has a repayment period of five years. The loans can be repaid at any time prior to the five-year maturity date without penalty. Interest on the loans accrues at a rate of six percent per year and is payable quarterly. As of December 31, 2024, the Company had made aggregate advances to SMCB in the amount of $ 1,777,000 . During the year ended December 31, 2024, SMCB charged $ 637,000 for services to the Company that were performed under the MSA, which charges offset amounts due under the loan with SMCB. As a result, as of December 31, 2024, a total of $ 1,140,000 of loans were outstanding under the loan agreement, and a total of $ 1,360,000 remained available for future borrowings under the loan agreement as of December 31, 2024. As of December 31, 2024, SMCB had not made any interest payments due under the loan agreement. As a result, the loans were in default as of December 31, 2024. The Company performed the credit risk assessment of the collectability of the notes receivable from SMCB at December 31, 2024 pursuant to ASC 326-20. Due to uncertainties associated with the loans, the Company accrued a reserve in the amount of $ 439,000 as of December 31, 2024. The reserve was included within general and administrative expenses in the Company’s statement of operations. Subsequent to December 31, 2024, the Company made additional advances to SMCB in the aggregate amount of $ 500,000 under the loan agreement. F- 37