Algorhythm Holdings, Inc. 10-Q

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations This Management’s Discussion and Analysis of Financial Condition and Results of Operations and other parts of this report contain forward-looking statements that involve risks and uncertainties. All forward-looking statements included in this report are based on information available to us on the date hereof, and, except as required by law, we assume no obligation to update any such forward-looking statements. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of a number of factors, including those set forth herein under Item 1A. Risk Factors and elsewhere in this report. The following should be read in conjunction with our unaudited condensed consolidated financial statements and notes thereto included in Part I, Item 1 of this report and the audited consolidated financial statements and notes thereto included in our annual report on Form 10-K for the year ended December 31, 2024. Overview We are 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 our 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 our subsidiary, The Singing Machine Company, Inc. SemiCab SemiCab is a cloud-based Collaborative Transportation Platform built to achieve the scalability required to predict and optimize loads and the use of trucks. To orchestrate collaboration across manufacturers, retailers, distributors, and their carriers, SemiCab uses real-time data from API-based load tendering and pre-built integrations with TMS and ELD partners. To build fully loaded round trips, SemiCab uses AI/ML techniques and advanced predictive optimization models. Since 2020, SemiCab has enabled major retailers, brands and transportation providers to address their transportation needs. SemiCab’s Orchestrated Collaboration™ AI model has proven to increase transportation capacity, improve asset utilization, reduce empty miles, lower logistics costs, and provide visibility into the entire transportation network. Models show that the technology has the capability of reducing costs through optimization. Additionally, SemiCab’s technology has the potential to play a key role in the improved sustainability model. Based on its proven ability to improve truck utilization rates, this could result in a dramatic reduction in the carbon footprint of the industry. The optimization of existing truck utilization can add trucking capacity without adding more trucks, drivers or driven miles which addresses common problems plaguing the industry like severe driver shortage and road congestion. Trucking optimization could also reduce carbon emissions attributable to road freight. Singing Machine Through Singing Machine, we engage in the development, marketing, and sale of consumer karaoke audio equipment, accessories, and musical recordings. We are a leading global karaoke and music entertainment company that specializes in the design and production of quality karaoke and music enabled consumer products for adults and children. Our products are among the most widely available karaoke products internationally. 25 Our mission is to “create joy through music.” To deliver on this mission, we are focused on a multi-prong approach. In the short-term, we seek to improve profitability by optimizing operations and continue to expand gross margins. In the mid-to-long-term, we seek to continue to expand our business into new verticals including automotive and connected-TV devices and grow our global distribution for our consumer karaoke products. Recent Corporate Events Name and Symbol Change Effective September 5, 2024, our Certificate of Incorporation was amended to change our name from “The Singing Machine Company, Inc.” to “Algorhythm Holdings, Inc.” In addition, effective September 8, 2024, our ticker symbol was changed from “MICS” to “RIME.” Reverse Stock Split and Increase in Authorized Shares On January 13, 2025, our stockholders voted to authorize our board of directors to effect a reverse stock split of the outstanding shares of our common stock at a specific ratio within a range of 1-for-10 to a maximum of 1-for-250 and to amend our certificate of incorporation to increase the number of authorized common stock from 100,000,000 to 800,000,000 shares. On January 14, 2025, our board of directors approved a reverse stock split of 1-for-200 ratio and approved the filing of a certificate of amendment to our certificate of incorporation to effect the reverse stock split and to increase our authorized shares of common stock from 100,000,000 to 800,000,000. The reverse stock split took effect on February 10, 2025. In accordance with SEC rules and regulations, all share numbers and prices throughout this report and our consolidated financial statements reflect post-reverse stock split numbers. Acquisition of SMCB On May 2, 2025 (the “Closing Date”), we and SemiCab Holdings entered into an equity purchase agreement with SemiCab Inc. pursuant to which: (i) SemiCab Holdings purchased 9,999 shares of the issued and outstanding equity shares, Rs. 10 par value, of SMCB, representing 99.99% of the issued and outstanding equity shares of SMCB, for $1,750,000, the payment of which amount was evidenced by the issuance of a promissory note by us to SemiCab, Inc., and (ii) we purchased the 20% membership interest in SemiCab Holdings then held by SemiCab, Inc. for aggregate consideration consisting of 119,742 shares of our common stock. The promissory note provides that $1,500,000 is due and payable by us on the first anniversary of the Closing Date and the remaining $250,000 is due and payable by us on the 18-month anniversary of the Closing Date. The promissory note bears interest at six percent per annum. 26 On the Closing Date, we and SemiCab Holdings entered into an amended and restated employment agreement with each of Ajesh Kapoor and Vivek Sehgal pursuant to which Mr. Kapoor agreed to serve as the Chief Executive Officer and Chief Technology Officer of SemiCab Holdings and Mr. Sehgal agreed to serve as the Chief Product Officer of SemiCab Holdings. Pursuant to the terms of the employment agreements, SemiCab Holdings granted Messrs. Kapoor and Sehgal a membership interest in SemiCab Holdings with three quarters of each such grant subject to certain forfeiture rights tied to continued employment with SemiCab Holdings. Additionally, Mr. Kapoor was granted the right to serve as a member of our board of directors and the right to appoint an additional member of our board of directors upon the occurrence of certain specified events. Also on the Closing Date, we, SemiCab Holdings, Ajesh Kapoor and Vivek Sehgal entered into an amended and restated limited liability company agreement for SemiCab Holdings which sets forth the terms and conditions governing the operation and management of SemiCab Holdings. Strategy Our SemiCab and Singing Machine businesses are each in very different stages of development. Accordingly, our plans for growing each of them are very different. SemiCab is an early-stage business that is not yet contributing a material amount of revenue to us. We intend to invest in our SemiCab business to develop and grow it into a significant revenue producer for us. This will involve investments in the continued research and development of its technology, the hiring of additional qualified employees, marketing and advertising initiatives, and back-office support. While SemiCab is a nascent business, it has already acquired several multinational consumer products companies as customers. We believe that as existing customers experience the benefits of our SemiCab logistics and distribution solutions, they will begin to increase their use of SemiCab. We also believe that SemiCab’s proven ability to improve truck utilization rates and improve trucking capacity without adding more trucks, drivers or driven miles will be of substantial interest to additional companies that can benefit from SemiCab. We acquired the United States component of our SemiCab business on July 3, 2024 and acquired the India component of our SemiCab business on May 2, 2025. We may make additional investments in companies operating in the AI distribution and logistics space that we believe are complementary to our SemiCab business. Our investments could involve an acquisition of the assets or equity of complementary companies or businesses, or could involve a strategic partnership or joint venture with complementary companies or businesses. We believe that additional investments could provide us with new AI logistics and distribution technologies, services and resources that we can implement across our entire SemiCab business, or could help us to more quickly expand our SemiCab footprint into other parts of the world. We are actively evaluating additional opportunities to expand our SemiCab business through investments in complementary AI logistics and distribution businesses and companies. In contrast to our SemiCab business, our Singing Machine business has been successfully operating worldwide for decades. Our karaoke products are well-known and established with retailers and consumers in the countries in which we sell them. Our plan for Singing Machine is to continue to focus on customer retention through loyalty programs for the online and brick-and-mortar retailers offering our products and compelling offer promotions, discounts, and special deals to attract customers and increase conversions. We also intend to reduce costs through overhead trimming and the use of new selling and marketing methodologies, leverage data analytics to better understand new trends in consumer preferences for our products, explore new product features and product offerings, and support our new and existing products with fun and exciting digital marketing and advertising initiatives. We may also explore entering new markets that may offer more profitable avenues for our products. 27 Financial Results We generated net sales of $1,993,000 for the three-month period ended March 31, 2025, compared to $2,426,000 for the three-month period ended March 31, 2024. The decrease in net sales was due primarily to the loss of retail shelf space at two major customers. Gross profit decreased $2,000 to $500,000, or 25.1% of net sales, for the three-month period ended March 31, 2025, compared to $502,000, or 20.7% of net sales, for the three-month period ended March 31, 2024. The decrease was due primarily to the decrease of $433,000 for net sales, partially offset by a corresponding decrease of $431,000 for cost of goods sold associated with less products being manufactured for sale. Our operating expenses increased $521,000 to $3,310,000 for the three-month period ended March 31, 2025, from $2,789,000 for the three-month period ended March 31, 2024, primarily due to an increase in general and administrative expenses incurred for the growth and development of our SemiCab business. As a result, we incurred a loss from operations of $2,810,000 for the three-month period ended March 31, 2025 compared to $2,287,000 for the three-month period ended March 31, 2024. We generated net losses available to common stockholders of $9,191,000, or $4.66 per share of common stock, for the three-month period ended March 31, 2025, compared to $2,367,000, or $73.76 per share of common stock, for the three-month period ended March 31, 2024. We had total assets of $10,461,000 and $18,302,000 at March 31, 2025 and December 31, 2024, respectively. Net cash used by operating activities was $3,108,000 for the three-month period ended March 31, 2025 compared to $2,557,000 for the three-month period ended March 31, 2024. The most significant contributor to the increase in our net loss available to common stockholders was a one-time, non-cash charge of $6,468,000 for the change in fair value of warrants that we issued in connection with the public offering of securities that we completed on December 6, 2024. In that offering, we sold Series A warrants and Series B warrants that had certain features and were subject to certain contingencies that resulted in us having to record a warrant liability of $16,603,000 on our balance sheet at December 31, 2024. All of the contingencies that the Series A warrants were subject to were satisfied in January 2025, and all of the Class B warrants were exercised in full during January and February 2025. We re-measured the warrant liability for the Class A and B warrants on their respective measurement dates and adjusted the liability to fair value which resulted in us recording the non-cash charge of $6,468,000 for the change in fair value of warrants. The warrant liability was reclassified as equity on our condensed consolidated balance sheet for our fiscal quarter ended March 31, 2025. As a result, we did not have any warrant liability on our condensed consolidated balance sheet at March 31, 2025 and will not incur any further non-cash charges for the change in fair value of warrants. 28 Outlook We expect net sales of our Singing Machine karaoke products to decrease over the next 12 months due to the negative impact on our business from recently implemented tariffs on our products manufactured in China. However, we expect revenue generated from our SemiCab business to increase over the next 12 months as we generate more business from our growing customer base in the United States and India. As a result, total net sales are expected to increase over the next 12 months. We expect gross profit to remain at similar levels over the next 12 months as costs of goods sold decrease commensurate with the decrease in net sales of our karaoke products. We expect operating expenses to remain flat, if not decrease, over the next 12 months as we implement initiatives designed to reduce general and administrative expenses, particularly those related to marketing and advertising initiatives. The reductions achieved may be partially offset by legal and accounting expenses that we incur as we engage in additional capital-raising activities as needed to fund our business and expenses that we incur to fund the growth and development of our SemiCab business. Net loss available to common stockholders is expected to decrease substantially during the next 12 months primarily due to the fact that we do not expect to incur any additional non-cash charges for the change in fair value of warrants, and due to the decreases in general and administrative expenses that we intend to generate. Notwithstanding the foregoing, in the event we complete additional acquisitions of controlling or non-controlling financial interests in other complementary businesses or companies through mergers, acquisitions, joint ventures or other strategic initiatives, such as the acquisition of the United States component of our SemiCab business on July 3, 2024 and the acquisition of the India component of our SemiCab business on May 2, 2025, our financial results will include and reflect the financial results of the target entities. Accordingly, the completion of any such transactions in the future may have a substantial beneficial or negative impact on our business, financial condition and results of operations. Comparison of the Three-Month Periods Ended March 31, 2025 and 2024 Net Sales Net sales consist primarily of sales of our Singing Machine karaoke products and sales of our SemiCab logistics and distribution solutions. Net sales decreased $433,000 to $1,993,000 for the three-month period ended March 31, 2025, compared to $2,426,000 for the three-month period ended March 31, 2024. The decrease in net sales was due primarily to the loss of retail shelf space at two major customers. We expect net sales of our Singing Machine karaoke products to decrease over the next 12 months due to the negative impact on our business from recently implemented tariffs on our products manufactured in China. However, we expect revenue generated from our SemiCab business to increase over the next 12 months as we generate more business from our growing customer base in the United States and India. Cost of Goods Sold Cost of goods sold consists primarily of costs for raw materials and the manufacturing of our Singing Machine karaoke products. We incurred only a minimal amount of costs in connection with our SemiCab business. Cost of goods sold decreased $431,000 to $1,493,000 for the three-month period ended March 31, 2025, compared to $1,924,000 for the three-month period ended March 31, 2024. Our decrease in net sales of our karaoke products resulted in a corresponding decrease in products manufactured, resulting in lower manufacturing costs. We expect costs of goods sold to decrease over the next 12 months commensurate with the decrease in net sales of our karaoke products due to the negative impact on our business of recently implemented tariffs on our products manufactured in China. 29 Operating Expenses Operating expenses consist of selling expenses and general and administrative expenses. Selling Expenses Selling expenses consist primarily of marketing and advertising expenses that we incur in connection with advertising campaigns and online advertising initiatives that we engage in to generate sales of our Singing Machine karaoke products. We did not incur any selling expenses in connection with our SemiCab business. Selling expenses increased $134,000 to $764,000 for the three-month period ended March 31, 2025, from $630,000 for the three-month period ended March 31, 2024. The increase was due primarily to an increase in online marketing and social media advertising campaigns. We expect selling expenses to decrease over the next 12 months as we engage in fewer, but more focused, marketing and advertising initiatives and as we navigate the negative impact of recently implemented tariffs on sales of our karaoke products. General and Administrative Expenses General and administrative expenses consist primarily of payroll expenses, legal and accounting expenses, warehouse expenses and rent expense associated with our Singing Machine business, and general and administrative expenses incurred in the development and growth of our SemiCab business. General and administrative expenses increased $387,000 to $2,546,000 for the three-month period ended March 31, 2025, compared to $2,159,000 for the three-month period ended March 31, 2024. The increase was due primarily to increases of $480,000 for general and administrative expenses incurred in the development and growth of our SemiCab business. We expect general and administrative expenses to decrease over the next 12 months as we implement actions designed to reduce general and administrative expenses. The reductions achieved may be partially offset by an increase in expenses that we incur to fund the growth and development of our SemiCab business. Other Expenses Other expenses consists primarily of a non-cash loss that we incurred for the change in fair value of the warrants in connection with the public offering of securities that we completed on December 6, 2024. We incurred only a minimal amount of other expenses in connection with our SemiCab business. Other expenses increased $6,456,000 to $6,468,000 for the three-month period ended March 31, 2025, compared to $28,000 for the three-month period ended March 31, 2024. The increase was due primarily to an increase of $6,468,000 for the change in fair value of warrants. Net Loss Attributable to Non-Controlling Interest Net loss attributable to non-controlling interest consists of the loss allocated to SemiCab, Inc., which owns 20% of the outstanding membership interests of SemiCab Holdings. SemiCab Holdings owns our SemiCab business. We acquired our SemiCab business from SemiCab, Inc. on July 3, 2024, and, as part of the transaction, granted SemiCab, Inc. a 20% membership interest in SemiCab Holdings. The net loss attributable to non-controlling interest of $103,000 represents the amount of loss incurred by SemiCab that was allocated to SemiCab, Inc. through its 20% membership interest in SemiCab Holdings for the three-month period ended March 31, 2025. We expect net loss attributable to non-controlling interest to increase over the next 12 months as we continue to invest in the development and growth of SemiCab’s business. 30 Liquidity And Capital Resources Since our inception, we have funded our operations primarily through cash generated by our operations, private sales of equity securities and the use of short- and long-term debt. As of March 31, 2025, our cash balance was $3,296,000. Net cash used by operating activities was $3,108,000 during the three-month period ended March 31, 2025, compared to $2,557,000 during the three-month period ended March 31, 2024. The increase of $551,000 was due primarily to an increase of $6,927,000 for net loss and a decrease of $1,197,000 for accounts receivable. This was partially offset by increases of $6,468,000 for loss on change in fair value of warrants that we incurred in connection with the public offering of securities that we completed on December 6, 2024 and $892,000 for refunds due to customers. Net cash used by investing activities was $673,000 during the three-month period ended March 31, 2025. We did not have any cash flows from investing activities during the three-month period ended March 31, 2024. The increase of $673,000 was due primarily to increases of $672,000 for advances to SMCB under our loan agreement with them. Net cash used by financing activities was $473,000 for the three-month period ended March 31, 2025, compared to $21,000 for the three-month period ended March 31, 2024. The increase of $452,000 was due primarily to an increase of $473,000 for repayments of promissory notes to related parties. To date, our capital needs have been met through cash generated by our operations, sales of our equity securities and the use of short- and long-term debt to fund our operations. We have used these sources of capital to pay virtually all of the costs and expenses that we have incurred to date. These costs and expenses have been comprised primarily of the professional fees, employee compensation expenses, and general and administrative expenses discussed above. We intend to continue to rely upon each of these sources to fund our operations and expansion efforts, including additional acquisitions of controlling or non-controlling financial interests in other complementary businesses and companies during the next 12 months . We can provide no assurance that these sources of capital will be adequate to fund our operations and expansion efforts during the next 12 months. If these sources of capital are not adequate, we will need to obtain additional capital through alternative sources of financing. We may attempt to obtain additional capital through the sale of equity securities or the issuance of short- and long-term debt. If we raise additional funds by issuing shares of our common stock, our stockholders will experience dilution. If we raise additional funds by issuing securities exercisable or convertible into shares of our common stock, our stockholders will experience dilution in the event the securities are exercised or converted, as the case may be, into shares of our common stock. Debt financing may involve agreements containing covenants limiting or restricting our ability to take specific actions, such as incurring additional debt, issuing equity securities, making capital expenditures for certain purposes or above a certain amount, or declaring dividends. In addition, any equity securities or debt that we issue may have rights, preferences and privileges senior to those of the shares of common stock held by our stockholders. 31 We have 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 us, if at all. Our ability to obtain additional capital will be subject to a number of factors, including market conditions and our operating performance. These factors may make the timing, amount, terms and conditions of any proposed future financing transactions unattractive to us. If we cannot raise additional capital when needed, or if such capital cannot be obtained on acceptable terms, we may not be able to pay our costs and expenses as they are incurred, take advantage of future acquisition opportunities, respond to competitive pressures or unanticipated events, or otherwise execute upon our business plan. This may adversely affect our business, financial condition and results of operations and, in the extreme case, cause us to discontinue our operations. Nasdaq Compliance On August 26, 2024, we received a letter from the Nasdaq indicating that we were not in compliance with Nasdaq Listing Rule 5550(a)(2) because the closing bid price per share for our common stock had closed below $1.00 for more than 30 consecutive business days. We were given until February 24, 2025, to regain compliance with the rule. On December 30, 2024, we received notice from the Nasdaq indicating that the bid price for our common stock had closed below $0.10 per share for the 13-consecutive trading day period ended December 27, 2024 and, accordingly, we would be subject to the provisions contemplated under Nasdaq Listing Rule 5810(c)(3)(A)(iii) and its securities would be subject to delisting from Nasdaq unless we timely request a hearing before the Nasdaq Hearings Panel. On March 25, 2025, we received a letter from the Nasdaq stating that we had regained compliance with the minimum bid price requirement of $1.00 per share for continued listing on the Nasdaq, as set forth in Nasdaq Listing Rule 5550(a)(2). We will be subject to a mandatory panel monitor for a period of one year from March 25, 2025. If, within that one-year monitoring period, the Nasdaq Listing Qualifications staff finds that we are again out of compliance with the minimum bid price requirement, notwithstanding Nasdaq Listing Rule 5810(c)(2), then the staff will issue a delist determination letter and we will have an opportunity to request a new hearing with the initial Nasdaq hearing panel or a newly convened hearing panel if the initial panel is unavailable. Off-Balance Sheet Arrangements As of March 31, 2025, we did not have any relationships with unconsolidated entities or financial partners, such as entities often referred to as structured finance or special purpose entities, that had been established for the purpose of facilitating off-balance sheet arrangements or for other contractually narrow or limited purposes. As such, we are not materially exposed to any financing, liquidity, market or credit risk that could arise if we had engaged in such relationships. 32 Critical Accounting Estimates Our interim financial statements were prepared in accordance with United States generally accepted accounting principles, which require management to make subjective decisions, assessments and estimates about the effect of matters that are inherently uncertain. As the number of variables and assumptions increases, such judgements become even more subjective. While management believes that its assumptions are reasonable and appropriate, actual results may be materially different than estimated. Our critical accounting estimates and assumptions have not materially changed from those identified in our Annual Report on Form 10-K for the year ended December 31, 2024. Item 3. Quantitative and Qualitative Disclosures About Market Risk Not required for small reporting companies.