アメリカ合衆国
証券取引委員会
ワシントン, DC 20549
フォーム
| 四半期 報告書は1934年証券取引法第13条または第15条に基づいています |
四半期の終了日
または
| 移行 1934年証券取引法第13条または15(d)に基づく報告書 |
__________________から__________________への移行期間
委員会
ファイル番号：
(定款に指定された登録者の正確な名称)
(州 または その他の管轄 の 設立または組織) |
(I.R.S. 雇用者 識別 番号) |
| (主な経営オフィスの住所) | (郵便番号 ) | (登録者の 電話番号、地域番号を含む) |
証券 法律第12(b)項に基づいて登録された：
| 各クラスのタイトル | 取引シンボル | 登録されている各取引所の名前 | ||
チェックマークで示してください。
登録者が過去12ヶ月（または登録者がその報告を提出することを要求されていたより短い期間）に、1934年の証券取引法の第13条または第15(d)条に基づいて提出する必要のあるすべての報告書を提出した（1）か、また（2）過去90日間その提出要件に従っていたかどうか。
チェックマークで、登録者が過去12ヶ月間（または登録者がそのファイルを提出する必要があった短期間）の間に、規則405に基づいて提出する必要があったすべてのインタラクティブデータファイルを電子的に提出したかどうかを示してください。
チェックマークを付けて、登録者が大規模加速報告者、加速報告者、非加速報告者、小規模報告会社または新興成長企業のいずれであるかを示してください。大規模加速報告者、加速報告者、小規模報告会社および新興成長企業の定義については、取引所法のルール120億2を参照してください。
| 大規模加速企業 | ☐ | 加速提出者 ☐ |
| ☒ | 小規模
報告会社 | |
| 新興成長企業 |
新しいまたは改訂された財務会計基準に適合するための拡張された過渡期間を使用しないことを登録者が選択した場合は、チェックマークで示してください。 ☐
書式に従い、登録者が大規模加速提出者、加速提出者、非加速提出者、より小規模な報告会社、または新興成長企業であるかどうかチェックマークで示してください。策定法12b-2の「大規模加速ファイラー」「加速ファイラー」「小規模報告会社」「新興成長企業」の定義については、参照してください。
2024年11月19日現在、 発行者の普通株式のシェアは、 $1の額面価額のシェアが発行されています。
アルゴリズムホールディングス社
目次
| ページ 番号 | ||
| 第I部 財務情報 | ||
| 項目 1. | 3 | |
| 2024年9月30日（未監査）および2023年12月31日時点の Condensed Consolidated バランスシート | 3 | |
| 2024年および2023年9月30日終了の3ヶ月および9ヶ月のための簡略化された連結損益計算書（監査されていません） | 4 | |
| 2024年および2023年9月30日終了の3ヶ月および9ヶ月のための簡略化された株主（不足）資本計算書（監査されていません） | 5 | |
| 2024年および2023年9月30日終了の9ヶ月のための簡略化された連結キャッシュフロー計算書（監査されていません） | 6 | |
| 連結財務諸表注記 (未監査) | 7 | |
| 項目 2. | 経営者の財務状態及び業績の分析と討論 | 22 |
| 項目 3。 | 市場リスクに関する定量的および定性的開示 | 28 |
| 項目 4. | 管理と手続き | 28 |
| 第II部. その他の情報 | ||
| 項目 1. | 法的手続き | 29 |
| 項目 1A. | リスク要因 | 30 |
| 項目 2. | 未登録の株式証券の販売と収益の使用 | 30 |
| 項目 3。 | 上級証券のデフォルト | 30 |
| 項目 4. | 鉱山安全開示 | 30 |
| 項目 5. | その他の情報 | 30 |
| 項目 6. | 付属書類 | 31 |
| 署名 | 32 | |
| 2 |
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
ALGORHYTHM HOLDINGS, INC. and SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
| September 30, 2024 | December 31, 2023 | |||||||
| (Unaudited) | ||||||||
| Assets | ||||||||
| Current Assets | ||||||||
| Cash | $ | $ | ||||||
| Accounts receivable, net of allowances of $ | ||||||||
| Due from Banks | ||||||||
| Accounts receivable, related party | ||||||||
| Inventory | ||||||||
| Returns asset | ||||||||
| Prepaid expenses and other current assets | ||||||||
| Total Current Assets | ||||||||
| Property and equipment, net | ||||||||
| Operating leases - right of use assets | ||||||||
| Other non-current assets | ||||||||
| Intangible assets, net | ||||||||
| Goodwill | ||||||||
| Total Assets | $ | |||||||
| Liabilities and Shareholders’ Equity | ||||||||
| Current Liabilities | ||||||||
| Accounts payable | $ | $ | ||||||
| Accrued expenses | ||||||||
| Refund due to customer | ||||||||
| Customer prepayments | ||||||||
| Reserve for sales returns | ||||||||
| Merchant cash advances payable | ||||||||
| Notes payable | ||||||||
| Current portion of notes payable to related parties | ||||||||
| Current portion of operating lease liabilities | ||||||||
| Other current liabilities | ||||||||
| Total Current Liabilities | ||||||||
| Other liabilities | ||||||||
| Notes payable to related parties, net of current portion | ||||||||
| Operating lease liabilities, net of current portion | ||||||||
| Total Liabilities | ||||||||
| Commitments and Contingencies | ||||||||
| Shareholders’ (Deficit) Equity | ||||||||
| Preferred stock, $ par value; shares authorized; shares issued and outstanding | ||||||||
| Common stock $ par value; shares authorized; issued and shares outstanding at September 30, 2024 and issued and outstanding at December 31, 2023. | ||||||||
| Additional paid-in capital | ||||||||
| Accumulated deficit | ( | ) | ( | ) | ||||
| Non-controlling interest | ( | ) | ||||||
| Total Algorhythm Holdings Shareholders’ Equity | ||||||||
| Total Liabilities and Shareholders’ Equity | $ | $ | ||||||
See notes to the condensed consolidated financial statements
| 3 |
ALGORHYTHM HOLDINGS, INC. and SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
| For the Three Months Ended | For the Nine Months Ended | |||||||||||||||
| September 30, 2024 | September 30, 2023 | September 30, 2024 | September 30, 2023 | |||||||||||||
| Net Sales | $ | $ | $ | $ | ||||||||||||
| Cost of Goods Sold | ||||||||||||||||
| Gross Profit | ||||||||||||||||
| Operating Expenses | ||||||||||||||||
| Selling expenses | ||||||||||||||||
| General and administrative expenses | ||||||||||||||||
| Net (gain) loss on early termination of operating lease | ( | ) | ||||||||||||||
| Total Operating Expenses | ||||||||||||||||
| Income (Loss) from Operations | ( | ) | ( | ) | ||||||||||||
| Other (Expenses) Income | ||||||||||||||||
| Gain on disposal of fixed assets | ||||||||||||||||
| Gain from Employee Retention Credit Program refund | ||||||||||||||||
| Interest expense | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Total Other (Expenses) Income, net | ( | ) | ( | ) | ( | ) | ||||||||||
| Income (Loss) Before Income Tax Benefit | ( | ) | ( | ) | ||||||||||||
| Income Tax Benefit (Provision) | ( | ) | ||||||||||||||
| Consolidated Net Income (Loss) | ( | ) | ( | ) | ||||||||||||
| Net (income) loss attributable to non-controlling interest | ||||||||||||||||
| Net Income (Loss) Available to Common Stockholders | $ | $ | $ | ( | ) | $ | ( | ) | ||||||||
| Income (Loss) per common share | ||||||||||||||||
| Basic and diluted | $ | $ | $ | ) | $ | ) | ||||||||||
| Weighted Average Common and Common | ||||||||||||||||
| Equivalent Shares: | ||||||||||||||||
| Basic and diluted | ||||||||||||||||
See notes to the condensed consolidated financial statements
| 4 |
ALGORHYTHM HOLDINGS, INC. and SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ (DEFICIT) EQUITY
For the Three Months Ended September 30, 2024 and 2023
(Unaudited)
| Common Stock | Additional Paid in | Non-Controlling | Accumulated | |||||||||||||||||||||
| Shares | Amount | Capital | Interest | Deficit | Total | |||||||||||||||||||
| Balance at June 30, 2024 | $ | $ | $ | $ | ( | ) | $ | ( | ) | |||||||||||||||
| Net (loss) income | - | ( | ) | |||||||||||||||||||||
| Sale of common stock, net of offering costs | ||||||||||||||||||||||||
| Stock based compensation | ||||||||||||||||||||||||
| Common stock issued for purchase of SemiCab Inc | ||||||||||||||||||||||||
| Issuance of subsidiary stock to non-controlling interest | - | |||||||||||||||||||||||
| Other | - | ( | ) | |||||||||||||||||||||
| Balance at September 30, 2024 | $ | $ | $ | ( | ) | $ | ( | ) | $ | |||||||||||||||
| Common Stock | Additional Paid in | Non-Controlling | Accumulated | |||||||||||||||||||||
| Shares | Amount | Capital | Interest | Deficit | Total | |||||||||||||||||||
| Balance at June 30, 2023 | $ | $ | $ | $ | ( | ) | $ | |||||||||||||||||
| Net income | - | |||||||||||||||||||||||
| Stock based compensation | - | |||||||||||||||||||||||
| Other | - | ( | ) | |||||||||||||||||||||
| Balance at September 30, 2023 | $ | $ | $ | $ | ( | ) | $ | |||||||||||||||||
For the Nine Months Ended September 30, 2024 and 2023
(Unaudited)
| Common Stock | Additional Paid in | Non-Controlling | Accumulated | |||||||||||||||||||||
| Shares | Amount | Capital | Interest | Deficit | Total | |||||||||||||||||||
| Balance at December 31, 2023 | $ | $ | $ | $ | ( | ) | $ | |||||||||||||||||
| Net loss | - | ( | ) | ( | ) | ( | ) | |||||||||||||||||
| Sale of common stock, net of offering costs | ||||||||||||||||||||||||
| Stock based compensation | ||||||||||||||||||||||||
| Common stock issued for purchase of SemiCab Inc | ||||||||||||||||||||||||
| Issuance of subsidiary stock to non-controlling interest | - | |||||||||||||||||||||||
| Other | - | ( | ) | |||||||||||||||||||||
| Balance at September 30, 2024 | $ | $ | $ | ( | ) | $ | ( | ) | $ | |||||||||||||||
| Balance at December 31, 2022 | $ | $ | $ | $ | ( | ) | $ | |||||||||||||||||
| Net loss | - | ( | ) | ( | ) | |||||||||||||||||||
| Sale of common stock, net of offering costs | ||||||||||||||||||||||||
| Sale of common stock warrants | ||||||||||||||||||||||||
| Stock based compensation | - | |||||||||||||||||||||||
| Balance at September 30, 2023 | $ | $ | $ | $ | ( | ) | $ | |||||||||||||||||
See notes to the condensed consolidated financial statements.
| 5 |
ALGORHYTHM HOLDINGS, INC. and SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
| For the Nine Months Ended | ||||||||
| September 30, 2024 | September 30, 2023 | |||||||
| Cash flows from operating activities | ||||||||
| Net loss | $ | ( | ) | $ | ( | ) | ||
| Adjustments to reconcile net loss to net cash used in operating activities: | ||||||||
| Depreciation | ||||||||
| Amortization of intangible assets | ||||||||
| Provision for estimated cost of returns | ||||||||
| Provision for inventory obsolescence | ||||||||
| Credit losses | ||||||||
| Gain on termination of operating lease | ( | ) | ||||||
| Net gain from disposal of property and equipment | ( | ) | ||||||
| Stock based compensation | ||||||||
| Amortization of right of use assets | ||||||||
| Change in net deferred tax assets | ||||||||
| Changes in operating assets and liabilities: | ||||||||
| Accounts receivable | ( | ) | ||||||
| Due from banks | ( | ) | ( | ) | ||||
| Accounts receivable - related parties | ( | ) | ||||||
| Inventories | ( | ) | ( | ) | ||||
| Prepaid expenses and other current assets | ( | ) | ||||||
| Other non-current assets | ( | ) | ||||||
| Accounts payable | ||||||||
| Accrued expenses | ( | ) | ( | ) | ||||
| Refunds due to customers | ( | ) | ||||||
| Reserve for sales returns | ( | ) | ( | ) | ||||
| Operating lease liabilities | ( | ) | ||||||
| Payment of early termination fee on operating lease termination settlement | ( | ) | ||||||
| Net cash (used in) provided by operating activities | ( | ) | ||||||
| Cash flows from investing activities | ||||||||
| Purchase of property and equipment | ( | ) | ( | ) | ||||
| Cash received from purchase of SemiCab Inc | ||||||||
| Disposal of property and equipment | ||||||||
| Net cash used in investing activities | ( | ) | ( | ) | ||||
| Cash flows from financing activities | ||||||||
| Proceeds from sale of stock, net of offering costs | ||||||||
| Payments on merchant cash advances payable | ( | ) | ||||||
| Net payment from revolving lines of credit | ( | ) | ||||||
| Other | ( | ) | ( | ) | ||||
| Net cash provided by (used in) financing activities | ( | ) | ||||||
| Net change in cash | ( | ) | ||||||
| Cash at beginning of year | ||||||||
| Cash at end of period | $ | $ | ||||||
| Supplemental disclosures of cash flow information: | ||||||||
| Cash paid for interest | $ | |||||||
| Non-Cash investing and financing cash flow information: | ||||||||
| Common stock issued for purchase of SemiCab Inc | $ | $ | ||||||
| Equipment purchased under capital lease | $ | $ | ||||||
| Right of use assets exchanged for lease liabilities | $ | $ | ||||||
See notes to the condensed consolidated financial statements
| 6 |
ALGORHYTHM HOLDINGS, INC. and SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2024 and 2023
(Unaudited)
NOTE 1 – NATURE OF BUSINESS
Algorhythm Holdings, Inc. (f/k/a The Singing machine Company, Inc.) (the “Company”) is a holding company for an AI enabled software logistics business operated through our SemiCab Holding subsidiary and a home karaoke consumer products company that designs and distributes karaoke products globally to retailers and ecommerce partners through our Singing Machine subsidiary.
Our operations include our wholly owned subsidiaries, SMC Logistics, Inc., a California corporation (“SMCL”), SMC-Music, Inc., a Florida corporation (“SMCM”), SMC (HK) Limited, a Hong Kong company (“SMH”), MICS Hospitality Holdings, Inc., a Delaware corporation (“MICS Hospitality”), MICS Hospitality Management, LLC, a Delaware limited liability company (“MICS Hospitality Management”), MICS Nomad, LLC, a Delaware limited liability company (“MICS NY”) and SemiCab Holdings, LLC, a Nevada limited liability company (“SemiCab”).
Singing Machine is primarily engaged in the development, marketing, and sale of consumer karaoke audio equipment, accessories, and musical recordings. We are a global karaoke and music entertainment company that specializes in the design and production of quality karaoke and music enabled consumer products for adults and children.
SemiCab is a cloud-based collaborative transportation platform built to achieve the scalability required to predict and optimize full-truckload transportation at enterprise-scale. To orchestrate collaboration across manufacturers, retailers, distributors, and their carriers, SemiCab uses real-time data from API-based load tendering and pre-built integrations with TMS and ELD partners. To build fully loaded round trips, SemiCab uses AI/ML techniques and advanced predictive optimization models.
NOTE 2 - RECENT DEVELOPMENTS
Name and Symbol Change
Effective September 5, 2024, our Certificate of Incorporation was amended to effect a change in the name of the Company from “The Singing Machine Company, Inc.” to “Algorhythm Holdings, Inc.” In addition, effective September 8, 2024, the Company’s ticker symbol was changed from “MICS” to “RIME.”
Change in Fiscal Year
During 2023, our Board of Directors approved a change in our fiscal year end from March 31 to December 31. Our results of operations, cash flows, and all transactions impacting shareholders’ equity presented in this Quarterly Report on Form 10-Q as of September 30, 2024 are for the three and nine month periods ended September 30, 2024 and 2023.
ATM Offering
On
June 26, 2024, the Company entered into an At-The-Market Issuance Sales Agreement (the “Sales Agreement”) with Ascendiant
Capital markets, LLC, as sales agent (the “Agent”), pursuant to which the Company could offer and sell, from time to time,
through the Agent (the “ATM Offering”), up to approximately $
| 7 |
ALGORHYTHM HOLDINGS, INC. and SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2024 and 2023
(Unaudited)
Subsequent
to September 30, 2024 and through November 18, 2024 (the last trading day prior to filing), the Company sold shares of common
stock under the ATM offering, and received net proceeds of approximately $
Asset Purchase
On June 11, 2024, the Company and its wholly owned subsidiary SemiCab Holdings, LLC, a Nevada limited liability company (“SemiCab LLC” and collectively with the Company, the “Buyer”), SemiCab, Inc., a Delaware corporation (“SemiCab” or the “Seller”), Ajesh Kapoor and Vivek Sehgal entered into an asset purchase agreement (the “Asset Purchase Agreement”) pursuant to which the Seller agreed to sell and assign to the Company, and the Company agreed to purchase and assume from the Seller, substantially all the assets, and certain specified liabilities relating to the business of the Seller. Subject to certain exceptions set forth in the Asset Purchase Agreement, the parties agreed that the Buyer will not assume the liabilities of the Seller. SemiCab is an artificial intelligence, cloud-based collaborative transportation platform built to achieve the scalability required to predict and optimize semi-tractor trailer load efficiency.
On
July 3, 2024, the parties closed on the asset purchase whereby the Company issued to the Seller (i) shares of the Company’s
common stock (ii) a twenty percent (
Pursuant to the asset acquisition agreement, the Company and Seller entered into an option agreement (the “Option Agreement”), granting the Buyer the right to acquire all of the issued and outstanding capital securities of SMCB Solutions Private Limited (“SMCB”), a wholly owned subsidiary of the Seller, in consideration for shares of common stock of the Company. The Option Agreement expired unexercised.
Hospitality Lease
On
August 23, 2023, MICS NY entered into an Agreement of Lease (the “Lease Agreement”) with OAC 111 Flatiron, LLC and OAC Adelphi,
LLC (the “Landlord”), pursuant to which MICS NY agreed to lease approximately
During
the six months ended June 30, 2024, the Company abandoned its plans to continue use of the leased space and exercised its early termination
provision of the Lease Agreement which was not accepted by the Landlord. Due to the abandonment of the lease, all assets related to the
lease were impaired. Assets including security deposits, rent deposits and right of use assets of approximately $
On July 26, 2024, OAC 111 Flatiron, LLC and OAC Adelphi, LLC (the “Landlord”), filed a civil action in the Supreme Court of the State of New York against MICS Nomad LLC, a subsidiary of the Company (“MICS NY”), and the Company (“the Defendants”) for alleged breach of lease, seeking monetary damages including unpaid rent, future unpaid rent, and other expenses related to the lease. The complaint 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 5 business
days of the Company’s payment of $
As
a result of the settlement, during the three months ended September 30, 2024, the Company wrote off the remaining operating lease liability
on the Lease Agreement and recognized a gain on early termination of the operating lease of approximately $
| 8 |
ALGORHYTHM HOLDINGS, INC. and SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2024 and 2023
(Unaudited)
Private Placement
On
October 22, 2024, the Company entered into a Securities Purchase Agreement (the “SPA”) with investors pursuant to which we
sold, in a private placement (the “Private Placement”), secured notes with an aggregate principal amount of $
Oxford Credit Facility
On
March 28, 2024, the Company and Oxford Commercial Finance, a Michigan banking corporation, (referred to as “Oxford”) entered
into a Loan Agreement (the “Loan Agreement”) and related Revolving Credit Note (the “Note”) for a $
Share Repurchase
On November 1, 2024, the Company entered into a Stock Repurchase Agreement (the “Repurchase Agreement”) with Regalia Ventures LLC, a Delaware limited liability company (the “Seller”), pursuant to which the Company agreed to repurchase from the Seller an aggregate of issued and outstanding shares of common stock, par value $ per share, of the Company (the “Shares”). Pursuant to the terms of the Repurchase Agreement, the Company has agreed to repurchase from the Seller, and the Seller has agreed to sell, assign and transfer to the Company, all of the Seller’s right, title and interest in and to the Shares, at a price per Share equal to the higher of: (1) the closing price of the common stock on the last trading day immediately preceding the date of the Repurchase Agreement; or (2) the highest volume weighted average price (VWAP) of the common stock during a pricing period of ten (10) consecutive trading days prior to the date of the Repurchase Agreement per share (the “Purchase Price”), and the Company shall issue to the Seller a promissory note in the principal amount equal to the Purchase Price, substantially in the form attached to the Repurchase Agreement as Exhibit A (the “Note”), and subject to terms and conditions therein.
The shares of common stock to be repurchased were originally issued to the Seller on November 21, 2023, pursuant to a certain stock purchase agreement, dated November 20, 2023.
As of the date of this filing, the repurchase of the shares has not yet closed.
NOTE 3 – LIQUIDITY, GOING CONCERN AND MANAGEMENT PLANS
As previously reported on Form 8-K filed on August 30, 2024, on August 26, 2024, the Company received a notice from The Nasdaq Stock Market LLC (“NASDAQ”) indicating that its stockholders’ equity as reported in its Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2024 did not meet the minimum of $2,500,000 in stockholders’ equity required by NASDAQ Listing Rule 5550(b)(1) (the “Equity Rule”) for continued listing, or the alternatives of market value of listed securities or net income from continuing operations. Pursuant to the Equity Rule, the Company submitted a plan to regain compliance with the Equity Rule.
On
November 13, 2024, the Company filed a Form 8-K stating that it believed it regained compliance with the Equity Rule. As disclosed herein,
the Company reported stockholders’ equity of approximately $
NASDAQ has advised the Company that it will continue to monitor the Company’s ongoing compliance with the stockholders’ equity requirement and, if at the time of its next periodic report the Company does not evidence compliance, that it may be subject to delisting.
As
of September 30, 2024, the Company had cash on hand of approximately $
The condensed 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 condensed consolidated financial statements have been prepared on a basis that assumes the Company will continue as a going concern and which contemplates the realization of assets and satisfaction of liabilities and commitments in the ordinary course of business.
Management intends to finance operations with future debt or equity financings, however, if and when such financings may occur are uncertain.
In making this assessment management performed a comprehensive analysis of the Company’s current circumstances including: its financial position, cash flow and cash usage forecasts, and obligations and debts. Although management has a recent history of successful capital raises, the analysis used to determine the Company’s ability as a going concern does not include cash sources outside the Company’s direct control that management expects to be available within the next 12 months.
| 9 |
ALGORHYTHM HOLDINGS, INC. and SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2024 and 2023
(Unaudited)
NOTE 4 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The accompanying unaudited financial statements for the three months ended September 30, 2024 and 2023 have been prepared in accordance with accounting principles generally accepted in the United States of America (“US GAAP”) applicable to interim financial information and the requirements of Form 10-Q and Article 8 of Regulation S-X of the Securities and Exchange Commission. Accordingly, they do not include all of the information and disclosures required by US GAAP for complete consolidated financial statements.
In the opinion of management, such condensed consolidated financial statements include all adjustments (consisting of normal recurring accruals) necessary for the fair presentation of the condensed consolidated financial position and the condensed consolidated results of operations. The condensed consolidated results of operations for the periods presented are not necessarily indicative of the results to be expected for the full year. The condensed consolidated balance sheet as of September 30, 2024 and condensed financial statements information for the three and nine months ended September 30, 2024 and 2023 are unaudited whereas the condensed consolidated balance sheet as of December 31, 2023 is derived from the audited consolidated balance sheet as of that date. The condensed consolidated financial statements and notes hereto should be read in conjunction with the consolidated financial statements and notes thereto included in the Company’s annual report on Form 10-KT for the transition period ended December 31, 2023. There have been no changes to our significant accounting policies as disclosed on the Company’s annual report on Form 10-KT for the transition period ended December 31, 2023.
Principles of Consolidation
The Company evaluates its business relationships with related parties to identify potential Variable Interest Entities (“VIEs”) under Accounting Standards Codification (“ASC”) 810, Consolidation. The Company will consolidate any VIE in which it has a controlling financial interest and is deemed to be the primary beneficiary. A controlling financial interest has both of the following characteristics: (1) the power to direct the activities of the VIE that most significantly impact its economic performance; and (2) the obligation to absorb losses of the VIE that could potentially 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, the Company is considered to be the primary beneficiary and therefore will consolidate that VIE into its consolidated financial statements.
As prescribed by ASC 810, if the Company holds a variable interest in a VIE but is not the entity’s primary beneficiary, it shall disclose its methodology for determining if the Company is the primary beneficiary of the VIE, e.g., significant judgments and assumptions made. 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 (explicitly or implicitly) to the VIE, when not contractually required to, the Company shall 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, shall include the nature, purpose, size, and activities of the VIE, including how the VIE is financed.
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 the Financial Accounting Standards Board (“FASB”) issued 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 the goodwill exceeds its carried value.
Intangible Assets
The Company acquired amortizable intangibles assets as part of asset purchase agreements consisting of customer relationships, trade names and proprietary technology. Such intangibles are amortized over their useful lives on a straight-line basis.
The Company reviews 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 for recoverability, the Company compares forecasts of undiscounted cash flows expected to result from the use and eventual disposition of the long-lived asset to its carrying value. An impairment loss would be recognized when estimated undiscounted future cash flows expected to result from the use of an asset are 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.
| 10 |
ALGORHYTHM HOLDINGS, INC. and SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2024 and 2023
(Unaudited)
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 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.
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.
RECENT ACCOUNTING PRONOUNCEMENTS
In November 2023, the FASB issued ASU 2023-07, Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures, 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 is currently evaluating the impact of adopting this standard on our consolidated financial statements and related disclosures.
| 11 |
ALGORHYTHM HOLDINGS, INC. and SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2024 and 2023
(Unaudited)
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 or loss from continuing operations before income tax expense or 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 our consolidated financial statements and related disclosures.
NOTE 5 – ASSET ACQUISITION
On June 11, 2024, the Company and its wholly owned subsidiary SemiCab,LLC, SemiCab, Inc., Ajesh Kapoor and Vivek Sehgal entered into the Asset Purchase Agreement pursuant to which the Seller agreed to sell and assign to the Company, and the Company agreed to purchase and assume from the Seller, substantially all the assets, and certain specified liabilities relating to the business of the Seller.
The Company decided to acquire SemiCab as part of a strategic plan to diversify its business and reduce its reliance solely on retail and consumer electronics and strategically focus on growth. The acquisition fit the Company’s strategic decision to pivot to a holding company structure.
On
July 3, 2024, the parties completed the Asset Purchase Agreement whereby the Company issued to the Seller (i) shares of the Company’s
common stock with a value of approximately $
Pursuant to the asset acquisition agreement, the Company and Seller entered into an option agreement (the “Option Agreement”), granting the Buyer the right to acquire all of the issued and outstanding capital securities of SMCB Solutions Private Limited (“SMCB”), a wholly owned subsidiary of the Seller, in consideration for shares of common stock of the Company. As of the date of this filing, the Option Agreement expired unexercised.
In
connection with the asset acquisition agreement, effective July 3, 2024, SemiCab, LLC entered into employment agreements (the “Agreements”)
with Ajesh Kapoor and Vivek Sehgal Kapoor’s agreement spans three years with an annual base salary of $
| 12 |
ALGORHYTHM HOLDINGS, INC. and SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2024 and 2023
(Unaudited)
On
July 3, 2024, the (“Acquisition Date”), the Company acquired substantially all the assets and assumed certain liabilities
of SemiCab, Inc. in exchange for the purchase price consideration of approximately $
The
trade names and developed technology intangible assets were valued using the relief-from-royalty method. The relief-from-royalty method
is one of the methods under the income approach wherein estimates of a company’s earnings attributable to the intangible asset
are based on the royalty rate the company would have paid for the use of the asset if it did not own it. Royalty payments are estimated
by applying royalty rates of
The
Company determined an estimated fair value of customer relationships using multi-period excess earnings approach utilizing a discounted
cash flow methodology. The analysis included assumptions regarding the growth rate for the development of new businesses, concluding
between
The valuations for the above intangible assets require use of unobservable inputs that are classified as Level 3 on the fair value hierarchy.
The goodwill resulting from this acquisition is tax deductible.
The following table presents the allocation of the consideration transferred to the assets acquired and liabilities assumed based on their fair values:
| Equity consideration | $ | |||
| Fair value of non-controlling interest | ||||
| Total Equity Consideration | ||||
| Debt Extinguishment | ||||
| Total Consideration | $ | |||
| Identifiable net assets acquired: | ||||
| Cash and Cash Equivalents | $ | |||
| Accounts receivable | ||||
| Prepaid expenses and other current assets | ||||
| Property and equipment, net | ||||
| Other Non-Current Operating Assets, Net | ||||
| Customer Relationships ( | ||||
| Trade Name ( | ||||
| Developed Technology ( | ||||
| Accounts payable and accrued expenses | ( | ) | ||
| Loans payable Merchant Cash Advances (MCA) | ( | ) | ||
| Note payable | ( | ) | ||
| Notes payable Related Parties | ( | ) | ||
| Net assets acquired | ( | ) | ||
| Estimated Goodwill | $ |
Pro Forma Information
The unaudited pro forma financial information below presents the effects of the Asset Purchase Agreement as though it had been completed on January 1, 2023. The pro forma adjustments are derived from the historically reported transactions of the respective companies. The pro forma results do not include anticipated combined effects or other expected benefits of the acquisition. The pro forma results for the nine months ended September 30, 2024 and 2023 reflect the combined performance of the Company and the SemiCab business for that period. The unaudited pro forma information is based on available data and certain assumptions that the Company believes are reasonable given the circumstances. However, actual results may differ materially from the assumptions used in the accompanying unaudited pro forma financial information. This selected unaudited pro forma condensed combined financial information is presented for illustrative purposes only and is not intended to represent what the actual consolidated results of operations would have been had the acquisition date occurred on January 1, 2023, nor does it attempt to forecast future consolidated results of operations.
| 13 |
ALGORHYTHM HOLDINGS, INC. and SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2024 and 2023
(Unaudited)
| Nine Months Ended | ||||||||
| September 30, 2024 | September 30, 2023 | |||||||
| Net revenue | $ | |||||||
| Operating loss from continuing operations | ( | ) | ( | ) | ||||
| Net loss | ( | ) | ( | ) | ||||
The pro forma results for
the nine months ended September 30, 2023, include a net increase in operating expenses of $
NOTE 6 – FINANCING
Oxford Credit Facility
On
March 28, 2024, the Company entered into a Loan and Security Agreement (the “Credit Agreement”) with Oxford Business Credit
“Oxford”), as Lender. The Credit Agreement established a secured asset-backed revolving credit facility which is comprised
of a maximum $
Borrowings
under the Credit Facility take the form of base rate loans at interest rates of the Wall Street Journal Prime Rate plus
The
Credit Agreement is for a -year term that expires on
The
Company is subject to a two percent (
On
October 17, 2024, the Company voluntarily terminated the Credit Agreement. Pursuant to the terms of the Credit Agreement the Company
was obligated to pay a $
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”),
as Lender, replacing the Company’s credit facilities with Crestmark and IHC that were terminated by the Company on October 13,
2022. The Credit Agreement established a secured asset-backed revolving credit facility which is comprised of a maximum $
Costs
associated with closing of the Credit Agreement of approximately $
| 14 |
ALGORHYTHM HOLDINGS, INC. and SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2024 and 2023
(Unaudited)
Borrowings
under the Credit Facility took the form of base rate loans at interest rates of the greater of either
During
the three and nine months ended September 30, 2023, the Company incurred interest expense of approximately $
On May 19, 2023, the Company executed a Waiver and First Amendment agreement which provides for a waiver of previous defaults and instituted new covenants.
On
August 30, 2023, the Company entered into a Waiver and Second Amendment (the “Revolving Loan Amendment”) to the Credit Agreement.
The Revolving Loan Amendment provides for, among other things, (i) a waiver of all known existing defaults under the Credit Agreement
as of the date of the Revolving Loan Amendment and (ii) the amendment of the definition of “Borrowing Base” to reduce from
$
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.
Merchant Cash Advance payable – Agile Capital Funding, LLC
Pursuant to the acquisition of SemiCab, the Company assumed a Merchant
Cash Advance (“MCA Financing”) payable with Agile Capital Funding, LLC (“Agile”). On
March 22, 2024, SemiCab entered into a MCA Financing agreement with Agile. The initial
amount borrowed was $
Merchant Cash Advance payable – Cedar Advance, LLC
Pursuant to the acquisition of SemiCab, the Company assumed a MCA Financing
payable with Cedar Advance, LLC (“Cedar”). On
May 8, 2024, SemiCab entered into an MCA Financing with Cedar. The initial amount borrowed was $
Loan Payable SemiCab Investor
SemiCab
maintains a loan from a SemiCab investor in the amount of $
NOTE 7 – LOANS PAYABLE – RELATED PARTIES
SemiCab
maintains several outstanding affiliate loans from Ajesh Kapoor and Vivek Sehgal, (current employees and original founders of SemiCab)
initially issued by SemiCab Holdings LLC. The notes are unsecured. There was accrued interest payable is approximately $
| 15 |
ALGORHYTHM HOLDINGS, INC. and SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2024 and 2023
(Unaudited)
The specific terms of each loan are summarized in the table below:
| Issue | Maturity | Interest | ||||||||||||
| Holder | Date | Date | Status | Rate | Principal | |||||||||
| Ajesh Kapoor | Current | % | $ | |||||||||||
| Ajesh Kapoor | Current | % | ||||||||||||
| Vivek Seghal | Default | % | ||||||||||||
| Ajesh Kapoor | Default | % | ||||||||||||
| Ajesh Kapoor | Default | % | ||||||||||||
| Amount due as of September 30, 2024 | ||||||||||||||
| Less: Current portion of notes payable to related parties | ||||||||||||||
| Notes payable to related parties, net of current portion | $ | |||||||||||||
NOTE 8 - COMMITMENTS AND CONTINGENCIES
Settlement Agreement – Efficient Capital Labs, Inc.
On
May 18, 2023 SemiCab entered into a Installment Business Loan Agreement (“IBLA”) with a principal balance of $
Payment:
Semicab shall pay to ECL the sum of $
(a)
On or before May 20, 2024, Semicab shall pay ECL $
(b)
On or before June 3, 2024, Semicab shall pay ECL $
(c)
On or before the first business day of each of the following ten (10) calendar months, starting July 1, 2024 Semicab shall pay ECL $
As
of September 30, 2024 the amount payable on the Settlement is $
Blue Yonder, Inc. Lawsuit
Pursuant
to the asset purchase agreement with SemiCab, the Company assumed a judgement against SemiCab regarding damages resulting from contract
breach for IT subscription-based services. On March 28, 2020, SemiCab 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 $
| 16 |
ALGORHYTHM HOLDINGS, INC. and SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2024 and 2023
(Unaudited)
Derivative Action
On December 21, 2023, Ault Lending, LLC, a wholly owned subsidiary of Ault Alliance, Inc. (“Ault”), one of the Company’s largest shareholders, filed a derivative shareholder action in Delaware Chancery Court against the Company, its Directors, and other Company shareholders (The Stingray Group, Inc. and Regalia Ventures) (“the Defendants”) for alleged breach of fiduciary duty in approving a recent above-market private placement equity transaction. The complaint alleges the Company, and its directors followed an inadequate process in evaluating the private placement transaction which occurred back in November 2023 and entered into the transaction with an intent to dilute Ault’s ownership stake in the Company. 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.
The Company is involved in litigation arising from other matters in the ordinary course of business. The Company is subject to claims, suits and other proceedings that could result in fines, civil penalties, or other adverse consequences. 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 a loss is reasonably possible and the loss or range of loss can be estimated, the Company discloses the reasonably possible loss. The Company evaluates developments in its legal matters that could affect the amount of liability that has been previously accrued, and the matters and related reasonably possible losses disclosed, 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.
NOTE 9 – OPERATING LEASES
At the time of this filing, the Company has operating lease agreements for offices in Florida and Hong Kong.
The
Company entered into an operating lease agreement, effective October 1, 2017, for our corporate headquarters located in Fort Lauderdale,
Florida where we lease approximately
The
Company entered into an operating lease on August 23, 2023, for approximately
Supplemental balance sheet information related to leases as of September 30, 2024 and December 31, 2023 is as follows:
| Assets: | September 30, 2024 | December 31, 2023 | ||||||
| Operating lease - right-of-use assets | $ | $ | ||||||
| Liabilities | ||||||||
| Current | ||||||||
| Current portion of operating leases | $ | $ | ||||||
| Operating lease liabilities, net of current portion | $ | $ | ||||||
Supplemental statement of operations information related to operating leases is as follows:
| Three Months Ended September 30, 2024 | Three Months Ended September 30, 2023 | Nine Months Ended September 30, 2024 | Nine Months Ended September 30, 2023 | |||||||||||||
| Operating lease expense as a component of general and administrative expenses | $ | $ | $ | $ | ||||||||||||
| 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 | $ | $ | $ | $ | ||||||||||||
| Lease term and Discount Rate | ||||||||||||||||
| Weighted average remaining lease term (years) | ||||||||||||||||
| Weighted average discount rate | % | % | ||||||||||||||
| 17 |
ALGORHYTHM HOLDINGS, INC. and SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2024 and 2023
(Unaudited)
Minimum future payments under all operating leases as of September 30, 2024, are as follows:
| Payments due by period | Amount | |||
| 2024 (remaining six months) | $ | |||
| 2025 | ||||
| Total minimum future payments | ||||
| Less: Interest | ||||
| Total operating lease liabilities | $ | |||
NOTE 10 – ISSUANCE OF COMMON STOCK
Equity Incentive Plan
On April 12, 2022, the Board of Directors approved The Singing Machine Company, Inc. 2022 Equity Incentive Plan, or the 2022 Plan. The 2022 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 collectively, the “Awards.” Awards may be granted under the 2022 Plan to the Company’s employees, officers, directors, consultants, agents, advisors and independent contractors.
There were share base compensation awards issued under the 2022 Plan during the three and nine months ended September 30, 2024 with a weighted average grant date fair value of $ per share. There were share base compensation awards issued under the 2022 Plan during the three and nine months ended September 30, 2023. There were and shares forfeited during the three and nine months ended September 30, 2024, respectively. There were shares forfeited during the three and nine months ended September 30, 2023. As of September 30, 2024, there were shares available to be issued under the 2022 Plan.
Equity compensation under the 2022 Plan was approximately $ and $ during the three and nine months ended September 30, 2024 and was expensed as a component of general administrative expenses on the accompanying condensed consolidated statements of operations. As of September 30, 2024, there was an unrecognized expense of approximately $ remaining on options currently vesting over time with an approximate weighted average of remaining until these options are fully vested.
The vested options as of September 30, 2024, had intrinsic value.
Other Equity Compensation
During
the three and nine months ended September 30, 2024, the Company issued
NOTE 11 - WARRANTS
Common
warrants issued and outstanding as of September 30, 2024 and December 31, 2023, were
As of September 30, 2024, the Company’s warrants by expiration date were as follows:
| Number of Common Warrants | Exercise Price | Expiration Date | ||||||
| $ | ||||||||
| $ | ||||||||
| 18 |
ALGORHYTHM HOLDINGS, INC. and SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2024 and 2023
(Unaudited)
| For the three months ended September 30, 2024 | For the three months ended September 30, 2023 | For the nine months ended September 30, 2024 | For the nine months ended September 30, 2023 | |||||||||||||
| Net income (loss) available to common stockholders | $ | $ | $ | ( | ) | $ | ( | ) | ||||||||
| Weighted-average common shares outstanding | ||||||||||||||||
| Basic and diluted income (loss) per share | $ | $ | $ | ) | $ | ) | ||||||||||
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 were issued upon the exercise of outstanding in-the-money options 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.
For the three and nine months ended September 30, 2024 and 2023, options to purchase and shares of common stock, respectively and options to purchase common stock warrants for both September 30, 2024 and 2023 were excluded in the calculation of diluted net loss per share as the result would have been anti-dilutive.
NOTE 13 - INCOME TAXES
For
the three months ended September 30, 2024 and 2023 the Company did t recognize income tax provision as the Company is not forecasting
any taxable income for the current year and had a loss before income tax benefit in the previous year. The Company’s income tax
provision for the nine months ended September 30, 2023, was approximately $
The Company’s income tax expense differs from the expected tax benefit/expense based on statutory rates primarily due to full valuation allowance for all of its subsidiaries for the three and nine months ended September 30, 2024 and 2023.
NOTE 14 – 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 hardware and the Company has no other material business segments:
Revenue by product line is as follows:
| Three Months Ended | Nine Months Ended | |||||||||||||||
| Product Line | September 30, 2024 | September 30, 2023 | September 30, 2024 | September 30, 2023 | ||||||||||||
| Classic Karaoke Machines | $ | $ | $ | $ | ||||||||||||
| Licensed Products | ||||||||||||||||
| Kids Youth Electronics | ||||||||||||||||
| Microphones and Accessories | ||||||||||||||||
| Music Subscriptions | ||||||||||||||||
| Logistics Services | ||||||||||||||||
| Total Net Sales | $ | $ | $ | $ | ||||||||||||
| 19 |
ALGORHYTHM HOLDINGS, INC. and SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2024 and 2023
(Unaudited)
Sales by geographic region for the periods presented are as follows:
| Three Months Ended | Nine Months Ended | |||||||||||||||
| September 30, 2024 | September 30, 2023 | September 30, 2024 | September 30, 2023 | |||||||||||||
| North America | $ | $ | $ | $ | ||||||||||||
| Australia | ||||||||||||||||
| Europe | ||||||||||||||||
| $ | $ | $ | $ | |||||||||||||
The
Company selectively participates in a retailer’s co-op promotion incentives 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 are recorded
as a reduction to net sales. For the three months ended September 30, 2024 and 2023, co-op promotion incentives were approximately $
The
Company estimates variable consideration under its return allowance programs for goods returned from the customer whereby a revenue return
reserve is recorded based on historic return amounts, specific events as identified and management estimates. The Company’s reserve
for sales returns as of September 30, 2024 and December 31, 2023, was approximately $
A return program for defective goods is negotiated with each of the Company’s wholesale customers on a year-to-year basis. Customers are allowed to return defective goods within a specified period of time after shipment (between six and nine months). The Company does make occasional exceptions to this return policy and accordingly records a sales return reserve based on historic return amounts, specific exceptions as identified and management estimates.
The Company records a sales reserve for its return goods programs at the time of sale for estimated sales returns that may occur. The liability for defective goods is included in the reserve for sales returns on the condensed consolidated balance sheets.
NOTE 15 - CONCENTRATIONS OF CREDIT RISK AND REVENUE
The
Company derives a majority of its revenues from retailers of products in the United States. 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 September 30, 2024,
Revenues
from customers representing greater than 10% of total net sales derived from our top three customers as a percentage of net sales were
| 20 |
ALGORHYTHM HOLDINGS, INC. and SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2024 and 2023
(Unaudited)
NOTE 16 – RELATED PARTY TRANSACTIONS
Due To/From Related Parties
Stingray
Stingray
Group, Inc. (“Stingray”) is an existing shareholder with board representation. The Company has a music subscription sharing
agreement with Stingray. For the three months ended September 30, 2024, and 2023, the amounts earned from the subscription agreement
were approximately $
SMCB
The Company determined that SMCB is a VIE as the Company provides financial support to SMCB. While not contractually obligated, SMCB currently relies on our reimbursement of certain costs under a Services Agreement (“MSA”) whereby SMCB agree to provide IT software development services to support SemiCab’s US operations. 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. As a result of this relationship SMCB has been determined to be a VIE.
Pursuant to the asset acquisition agreement of SemiCab, the Company entered into an option agreement granting the right to acquire all of the issued and outstanding capital securities of SMCB, however the option agreement expired on August 31, 2024 unexercised.
The Company further determined that it is not the primary beneficiary of SMCB as 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 the accompanying condensed consolidated financials presented for this period.
As
of September 30, 2024, the Company has advanced approximately $
NOTE 17 – SUBSEQUENT EVENTS
Securities Purchase Agreement
On
October 22, 2024, the Company entered into a Securities Purchase Agreement (the “SPA”), 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 (each a “Note” and collectively, the “Notes”), and (ii) a number of shares
of common stock of the Company, par value $ equal to (i) multiplied by (ii) such purchaser’s subscription amount
divided by (iii) $
The
Company agreed to certain registration rights with respect to the Shares, as described in the SPA. The Company also granted the purchasers
a right to participate up to an amount of
Univest
Securities LLC served as the placement agent in the Offering and received
The
Offering closed on October 24, 2024. At the closing, the Company issued to the purchasers an aggregate of shares of its common
stock and Notes in the aggregate principal amount of $
At
the closing, the Company issued a Note to each purchaser equal to such purchaser’s subscription amount divided by. The Notes
were issued with an original issue discount of
The Notes also provide for redemption upon a change of control, as such term is defined under the Notes and mandatory redemption upon the receipt of net proceeds from any offering of equity or debt by the Company. The Company also has the right to prepay the Notes.
The Notes are secured by a security interest in the assets and property of the Company and its subsidiaries and guaranteed by the Company’s subsidiaries, pursuant to the terms of a Guarantee Agreement entered into among the purchasers and the Company and each of its subsidiaries.
Stock Repurchase Agreement
On November 1, 2024, the Company entered into Stock Repurchase Agreement (the “Repurchase Agreement”) with Regalia Ventures LLC, a Delaware limited liability company (the “Seller”), pursuant to which the Company agreed to repurchase from the Seller an aggregate of issued and outstanding shares of common stock, par value $ per share, of the Company (the “Shares”). The shares of common stock to be repurchased were originally issued to the Seller on November 21, 2023, pursuant to a certain stock purchase agreement, dated November 20, 2023.
As consideration for the transaction contemplated by the Repurchase Agreement (the “Stock Repurchase”), when the transaction closes, the Company has agreed to repurchase from the Seller, and the Seller has agreed to sell, assign and transfer to the Company, all of the Seller’s right, title and interest in and to the Shares, at a price per Share equal to the higher of: (1) the closing price of the common stock on the last trading day immediately preceding the date of the Repurchase Agreement; or (2) the highest volume weighted average price (VWAP) of the common stock during a pricing period of ten (10) consecutive trading days prior to the date of the Repurchase Agreement per share (the “Purchase Price”), and the Company shall issue to the Seller a promissory note in the principal amount equal to the Purchase Price.
As of the date of this filing, the repurchase of the shares has not yet closed.
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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This Quarterly Report on Form 10-Q contains forward-looking statements that involve a number of risks and uncertainties. Words such as “anticipates,” “expects,” “intends,” “goals,” “plans,” “believes,” “seeks,” “estimates,” “continues,” “may,” “will,” “would,” “should,” “could,” and variations of such words and similar expressions are intended to identify such forward-looking statements. In addition, any statements that refer to projections of our future financial performance, our anticipated growth and trends in our businesses, uncertain events or assumptions, and other characterizations of future events or circumstances are forward-looking statements. Such statements are based on management’s expectations as of the date of this filing and involve many risks and uncertainties that could cause our actual results to differ materially from those expressed or implied in our forward-looking statements. Such risks and uncertainties include those described throughout this report and our Transition Report on Form 10-KT for the nine months period ended December 31, 2023, particularly the “Risk Factors” sections of such reports. Given these risks and uncertainties, readers are cautioned not to place undue reliance on such forward-looking statements. Readers are urged to carefully review and consider the various disclosures made in this Form 10-Q and in other documents we file from time to time with the Securities and Exchange Commission (the “SEC”) that disclose risks and uncertainties that may affect our business. The forward-looking statements in this Form 10-Q are made as of the date of this filing, and we do not undertake, and expressly disclaim any duty to update such statements, whether as a result of new information, new developments or otherwise, except to the extent that disclosure may be required by law.
You should read the following management’s discussion and analysis of financial condition and results of operations in conjunction with our unaudited condensed consolidated financial statements and notes thereto included in Part I, Item 1 of this Quarterly Report on Form 10-Q and with our audited financial statements and related notes thereto and Management’s Discussion and Analysis of Financial Condition and Results of Operations included in our Transition Report on Form 10-KT, filed with the SEC on April 15, 2024.
In this Quarterly Report, unless the context requires otherwise, references to the “Company,” “Algorhythm,” “we,” “our company” and “us” refer to Algorhythm Holdings, Inc., a Delaware corporation, as well as our wholly owned subsidiaries; SMC Logistics, Inc., a California corporation (“SMCL”), SMC-Music, Inc., a Florida corporation (“SMCM”), SMC (HK) Limited, a Hong Kong company (“SMH”), The Singing Machine Company, Inc., a Delaware corporation (“Singing Machine”), MICS Hospitality Holdings, Inc., a Delaware corporation (“MICS Hospitality”), MICS Hospitality Management, LLC, a Delaware limited liability company (“MICS Hospitality Management”), MICS Nomad, LLC, a Delaware limited liability company (“MICS NY”) and SemiCab Holdings, LLC, a Nevada limited liability company (“SemiCab”).
The objective of this Management’s Discussion and Analysis of Financial Condition and Results of Operation is to allow investors to view our company from management’s perspective, considering items that would have a material impact on future operations.
Overview
Algorhythm Holdings, Inc. (f/k/a The Singing machine Company, Inc.) (the “Company”) is a holding company for an AI enabled software logistics business operated through our SemiCab Holding subsidiary and a home karaoke consumer products company that designs and distributes karaoke products globally to retailers and ecommerce partners through our Singing Machine subsidiary.
Our operations include our wholly owned subsidiaries, SMC Logistics, Inc., a California corporation (“SMCL”), SMC-Music, Inc., a Florida corporation (“SMCM”), SMC (HK) Limited, a Hong Kong company (“SMH”), MICS Hospitality Holdings, Inc., a Delaware corporation (“MICS Hospitality”), MICS Hospitality Management, LLC, a Delaware limited liability company (“MICS Hospitality Management”), MICS Nomad, LLC, a Delaware limited liability company (“MICS NY”) and SemiCab Holdings, LLC, a Nevada limited liability company (“SemiCab”).
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Singing Machine is primarily engaged in the development, marketing, and sale of consumer karaoke audio equipment, accessories, and musical recordings. We are a global karaoke and music entertainment company that specializes in the design and production of quality karaoke and music enabled consumer products for adults and children.
SemiCab is a cloud-based collaborative transportation platform built to achieve the scalability required to predict and optimize full-truckload transportation at enterprise-scale. To orchestrate collaboration across manufacturers, retailers, distributors, and their carriers, SemiCab uses real-time data from API-based load tendering and pre-built integrations with TMS and ELD partners. To build fully loaded round trips, SemiCab uses AI/ML techniques and advanced predictive optimization models.
Recent Developments
Name and Symbol Change
Effective September 5, 2024, our Certificate of Incorporation was amended to effect a change in the name of the Company from “The Singing Machine Company, Inc.” to “Algorhythm Holdings, Inc.” In addition, effective September 8, 2024, the Company’s ticker symbol was changed from “MICS” to “RIME.”
Change in Fiscal Year
During 2023, our Board of Directors approved a change in our fiscal year end from March 31 to December 31. Our results of operations, cash flows, and all transactions impacting shareholders’ equity presented in this Quarterly Report on Form 10-Q as of September 30, 2024 are for the three and nine month periods ended September 30, 2024 and 2023.
ATM Offering
On June 26, 2024, the Company entered into an At-The-Market Issuance Sales Agreement (the “Sales Agreement”) with Ascendiant Capital markets, LLC, as sales agent (the “Agent”), pursuant to which the Company could offer and sell, from time to time, through the Agent (the “ATM Offering”), up to approximately $1,100,000 in shares of the Company’s common stock. On July 8, 2024, the Company entered into the First Amendment to the Sales Agreement (the “Amendment”) to increase the number of shares to be sold in the ATM Offering to $2,020,000. On August 9, 2024, the Company entered into the Second Amendment to the Sales Agreement (the “Amendment”) to increase the number of shares to be sold in the ATM Offering to $3,100,000. Pursuant to the agreement, the Agent was paid $30,000 in fees to cover legal and administrative expenses and will receive an amount equal to 3% of the gross proceeds from each sale of the Company’s share of common stock. For the three and nine months ended September 30, 2024, the Company sold 1,673,077 shares of common stock under the ATM offering and received net proceeds of approximately $1,489,000 after payment of legal and accounting fees, brokerage commissions, and administrative fees to the agent of approximately $189,000.
Subsequent to September 30, 2024 and through November 18, 2024 (the last trading day prior to filing), the Company sold 2,162,423 shares of common stock under the ATM offering, and received net proceeds of approximately $1,372,000 after payment of brokerage commissions and administrative fees to the agent of approximately $42,000.
Asset Purchase
On June 11, 2024, the Company and its wholly owned subsidiary SemiCab Holdings, LLC, a Nevada limited liability company (“SemiCab LLC” and collectively with the Company, the “Buyer”), SemiCab, Inc., a Delaware corporation (“SemiCab” or the “Seller”), Ajesh Kapoor and Vivek Sehgal entered into an asset purchase agreement (the “Asset Purchase Agreement”) pursuant to which the Seller agreed to sell and assign to the Company, and the Company agreed to purchase and assume from the Seller, substantially all the assets, and certain specified liabilities relating to the business of the Seller. Subject to certain exceptions set forth in the Asset Purchase Agreement, the parties agreed that the Buyer will not assume the liabilities of the Seller. SemiCab is an artificial intelligence, cloud-based collaborative transportation platform built to achieve the scalability required to predict and optimize semi-tractor trailer load efficiency.
On July 3, 2024, the parties closed on the asset purchase whereby the Company issued to the Seller (i) 641,806 shares of the Company’s common stock (ii) a twenty percent (20%) membership interest in SemiCab LLC.
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Pursuant to the asset acquisition agreement, the Company and Seller entered into an option agreement (the “Option Agreement”), granting the Buyer the right to acquire all of the issued and outstanding capital securities of SMCB Solutions Private Limited (“SMCB”), a wholly owned subsidiary of the Seller, in consideration for 320,903 shares of common stock of the Company. The Option Agreement has not been exercised through the date of this filing.
Hospitality Lease
On August 23, 2023, MICS NY entered into an Agreement of Lease (the “Lease Agreement”) with OAC 111 Flatiron, LLC and OAC Adelphi, LLC (the “Landlord”), pursuant to which MICS NY agreed to lease approximately 10,000 square feet of ground floor retail space and a portion of the basement underneath the ground floor retail space in the property located at 111 West 24th Street, New York, New York (the “Premises”).
During the six months ended June 30, 2024, the Company abandoned its plans to continue use of the leased space and exercised its early termination provision of the Lease Agreement which was not accepted by the Landlord. Due to the abandonment of the lease, all assets related to the lease were impaired. Assets including security deposits, rent deposits and right of use assets of approximately $3,878,000 were written off during the three months ended June 30, 2024.
On July 26, 2024, OAC 111 Flatiron, LLC and OAC Adelphi, LLC (the “Landlord”), filed a civil action in the Supreme Court of the State of New York against MICS Nomad LLC, a subsidiary of the Company (“MICS NY”), and the Company (“the Defendants”) for alleged breach of lease, seeking monetary damages including unpaid rent, future unpaid rent, and other expenses related to the lease. The complaint alleges the Defendants breached the lease in various material respects.
On September 25, 2024, the Company entered into a Settlement Agreement for a full release and dismissal of the complaint within 5 business days of the Company’s payment of $250,000. Pursuant to the Settlement Agreement, the Company made the first payment of $150,000 was made on September 25, 2024 and a final payment of $100,000 was due and paid on October 25, 2024. On October 29, 2024 the Landlord filed a discontinuance with prejudice.
As a result of the settlement, during the three months ended September 30, 2024, the Company wrote off the remaining operating lease liability on the Lease Agreement and recognized a gain on early termination of the operating lease of approximately $3,874,000. For the nine months ended September 30, 2024 the Company recognized a loss on early termination of the operating lease of $4,000 which includes the $250,000 termination settlement expense. The net loss on early termination of the Lease Agreement was recorded as a component of operating expenses in the accompanying condensed consolidated statements of operations.
Private Placement
On October 22, 2024, the Company entered into a Securities Purchase Agreement (the “SPA”) with investors pursuant to which we sold, in a private placement (the “Private Placement”), secured notes with an aggregate principal amount of $2,352,941 (the “Notes”), for cash proceeds of $2,000,000, net of original issue discount of $352,941. As consideration for entering into the SPA, we issued a total of 2,299,998 shares of common stock of the Company to the investors on October 24, 2024 (See Note 17).
Oxford Credit Facility
On March 28, 2024, the Company and Oxford Commercial Finance, a Michigan banking corporation, (referred to as “Oxford”) entered into a Loan Agreement (the “Loan Agreement”) and related Revolving Credit Note (the “Note”) for a $2,000,000 revolving line of credit (the “Oxford Line of Credit”). On October 17, 2024, the Company terminated the Loan Agreement and the Note. As of the date of termination, the Company had no outstanding amounts owed to Oxford and paid a termination fee of $40,000.
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Amended Bylaws
On October 18, 2024, the Company amended its Amended By-laws (the “By-law Amendment”), for the purpose of reducing the quorum required to hold meetings of the stockholders of the Company (the “Quorum Requirement”). The By-law Amendment reduced the Quorum Requirement from a majority to thirty-three and one-third percent (33 1/3%) of the voting power of the shares of stock issued and outstanding and entitled to vote at the meeting. The By-law Amendment was approved by the Board of Directors of the Company on October 18, 2024.
Share Repurchase
On November 1, 2024, the Company entered into a Stock Repurchase Agreement (the “Repurchase Agreement”) with Regalia Ventures LLC, a Delaware limited liability company (the “Seller”), pursuant to which the Company agreed to repurchase from the Seller an aggregate of 1,098,901 issued and outstanding shares of common stock, par value $0.01 per share, of the Company (the “Shares”). Pursuant to the terms of the Repurchase Agreement, the Company has agreed to repurchase from the Seller, and the Seller has agreed to sell, assign and transfer to the Company, all of the Seller’s right, title and interest in and to the Shares, at a price per Share equal to the higher of: (1) the closing price of the common stock on the last trading day immediately preceding the date of the Repurchase Agreement; or (2) the highest volume weighted average price (VWAP) of the common stock during a pricing period of ten (10) consecutive trading days prior to the date of the Repurchase Agreement per share (the “Purchase Price”), and the Company shall issue to the Seller a promissory note in the principal amount equal to the Purchase Price, substantially in the form attached to the Repurchase Agreement as Exhibit A (the “Note”), and subject to terms and conditions therein.
The shares of common stock to be repurchased were originally issued to the Seller on November 21, 2023, pursuant to a certain stock purchase agreement, dated November 20, 2023.
As of the date of this filing, the repurchase of the shares has not yet closed.
Results of Operations
The following table sets forth, for the periods indicated, certain items related to our consolidated statements of operations as a percentage of net sales as follows:
| For the Three Months Ended | For the Nine Months Ended | |||||||||||||||
| September 30, 2024 | September 30, 2023 | September 30, 2024 | September 30, 2023 | |||||||||||||
| Net Sales | 100.0 | % | 100.0 | % | 100.0 | % | 100.0 | % | ||||||||
| Cost of Goods Sold | 77.6 | % | 76.6 | % | 79.3 | % | 75.6 | % | ||||||||
| Operating Expenses | 10.5 | % | 22.8 | % | 67.1 | % | 44.8 | % | ||||||||
| Income (Loss) from Operations | 11.8 | % | 0.6 | % | -46.4 | % | -20.4 | % | ||||||||
| Other (Expenses) Income, Net | -2.7 | % | -0.1 | % | -2.1 | % | 2.9 | % | ||||||||
| Income (Loss) Before Income Tax Provision | 9.1 | % | 0.5 | % | -48.5 | % | -17.5 | % | ||||||||
| Income Tax Provision | 0.0 | % | 0.0 | % | 0.0 | % | -6.8 | % | ||||||||
| Net Income (Loss) | 9.1 | % | 0.5 | % | -48.5 | % | -24.3 | % | ||||||||
Three Months Ended September 30, 2024 Compared to the Three Months Ended September 30, 2023
Net Sales
Net sales for the three months ended September 30, 2024, decreased to approximately $10,622,000 from approximately $15,931,000 representing a decrease of approximately $5,309,000 as compared to the three months ended September 30, 2023. The decrease was primarily due to lower overall sell-through results during the prior year holiday season, mostly with our largest customer, Walmart, which in turn reduced their forecast for the upcoming holiday season resulting in decreased stock purchases.
Gross Profit
Gross profit for the three months ended September 30, 2024 decreased to approximately $2,375,000 from approximately $3,734,000 representing a decrease of approximately $1,359,000 as compared to the three months ended September 30, 2023. The decrease in gross profit was primarily due to the decrease in net sales as described above.
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Operating Expenses
During the three months ended September 30, 2024, total operating expenses decreased to approximately $1,118,000, compared to approximately $3,628,000 during the three months ended September 30, 2023. This represents a decrease in total operating expenses of approximately $2,510,000 from the three months ended September 30, 2023. The Company wrote off the remaining operating lease liability on the hospitality Lease Agreement due to a termination Settlement Agreement and recognized a gain on early termination of the operating lease of approximately $3,874,000 as the related right of use asset had already been written off as impaired in the previous quarter. Selling expenses decreased by approximately $516,000 of variable and discretionary selling expenses commensurate with the decrease in net sales as described above. These decreases in operating expenses were offset by increases in stock-based consulting expenses of approximately $426,000 and increased third-party logistics costs of approximately $213,000 associated with the closing of the Company’s logistics warehouse in the prior year. In addition, there was an increase in operating expenses of approximately $816,000 related to the asset acquisition agreement of SemiCab.
Other Expenses (Income)
Other expenses consisted of interest expense of approximately $283,000 for the three months ended September 30, 2024, as compared to interest expense of approximately $53,000 for the three months ended September 30, 2023. The increase in interest expense of approximately $230,000 was primarily due to interest incurred on debt from the recently acquired asset purchase of SemiCab. There was a gain on the disposal of warehouse equipment of approximately $44,000 associated with the closing of the logistics facility in California during the three months ended September 30, 2023.
Income Taxes
For the three months ended September 30, 2024 and 2023 the Company did not recognize any income tax provision. The Company is not recognizing any tax provision for the three months ended September 30, 2024 as the Company is not forecasting any taxable income for the current year and had a loss before income tax benefit in the previous year. The Company’s income tax expense differs for the expected tax benefit based on statutory rates primarily due history of losses and forecasts that suggest the Company will not be able to utilize any deferred tax assets in the future.
Nine Months Ended September 30, 2024 Compared to the Nine Months Ended September 30, 2023
Net Sales
Net sales for the nine months ended September 30, 2024, decreased to approximately $15,488,000 from approximately $21,939,000 representing a decrease of approximately $6,451,000 as compared to the nine months ended September 30, 2023. The decrease was primarily due to lower overall sell-through results during the prior year holiday season, mostly with our largest customer, Walmart, which in turn reduced their forecast for the upcoming holiday season resulting in decreased stock purchases.
Gross Profit
Gross profit for the nine months ended September 30, 2024 decreased to approximately $3,201,000 from approximately $5,357,000 representing a decrease of approximately $2,156,000 as compared to the nine months ended September 30, 2023. The decrease in gross profit was primarily due to the decrease in net sales as described above. Gross margins for the nine months ended September 30, 2024 were 20.7%, as compared to 24.4% for the nine months ended September 30, 2023. The primary reason for the decrease in gross profit margin was due to a product mix of excess inventory that was sold at margins significantly lower than current active products.
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Operating Expenses
During the nine months ended September 30, 2024, total operating expenses increased to approximately $10,386,000 compared to approximately $9,829,000 during the nine months ended September 30, 2023. This represents an increase in total operating expenses of approximately $557,000 for the nine months ended September 30, 2023. The increase in total operating expenses was primarily due to an increase in stock-based consulting expenses of approximately $426,000 and an increase in operating expenses of approximately $816,000 related to the asset acquisition agreement of SemiCab. These increases were offset by a decrease in variable and discretionary selling expenses of approximately $596,000 commensurate with the decrease in net sales as described above.
Other (Expenses) Income, net
Other expenses, net increased to approximately $328,000 for the nine months ended September 30, 2024 as compared to other income, net of approximately $626,000.
There was interest expense of approximately $328,000 for the nine months ended September 30, 2024 as compared to interest expense of approximately $122,000. The increase in interest expense of approximately $206,000 was primarily due to interest incurred on debt from the recently acquired asset purchase of SemiCab. During the nine months ended September 30, 2023, there was a refund of approximately $704,000 from the Employee Retention Credit program and a gain on the disposal of warehouse equipment of approximately $44,000 associated with the closing of the logistics facility in California.
Income Taxes
For the nine months ended September 30, 2024, the Company did not recognize any income tax provision as the Company is not forecasting any taxable income for the current year. The Company’s income tax provision for the nine months ended September 30, 2023, was approximately $1,502,000 as the Company recognized a full valuation allowance on all of its deferred tax assets based on the recent history of losses and forecasts that suggested the Company would not be able to utilize the deferred tax assets in the future. The Company’s income tax expense differs for the expected tax benefit/expense based on statutory rates primarily due to full valuation allowance for all of its subsidiaries for the nine months ended September 30, 2023.
Liquidity and Capital Resources
The Company incurred a net loss of approximately $7,247,000 for the nine-month period ended September 30, 2024, and has a history of recurring losses.
On September 30, 2024, we had cash on hand of approximately $621,000 as compared to approximately $6,703,000 on December 31, 2023. The decrease in cash on hand of approximately $6,082,000 from December 31, 2023, was primarily due to approximately $7,069,000 used in operations. We advanced approximately $776,000 to SMCB for prepaid services under a service agreement (See Note 5). There was a decrease in refunds due to customers of approximately $1,968,000 which included payment of approximately $768,000 to one major customer for refunds due for overstock returned by the customer in the prior year. There was a seasonal increase in reserves for sales returns of approximately $1,180,000. These uses of cash were offset by proceeds of approximately $1,489,000 for the sale of its common stock and a decrease in trade and related party accounts receivable of approximately $3,158,000. As of September 30, 2024, we had deficit working capital of approximately $2,082,000.
On September 30, 2023, we had cash on hand of approximately $3,213,000 as compared to $2,795,000 as of December 31, 2022. The increase in cash on hand of approximately $418,000 was primarily due to approximately $760,000 provided by operating activities primarily due to peak seasonal increases of accounts payable of approximately $10,442,000 primarily due to factory vendors offset by seasonal increases in accounts receivable of approximately $3,982,000, inventories or approximately $3,424,000 accrued expenses related to seasonal accruals for estimated returned goods and co-op incentive program expenses, approximately $1,132,000. Net cash used investing activities for the purchase of molds and tooling was approximately $163,000. Net cash used in financing activities was approximately $234,000. While the Company received proceeds from the exercise of common stock warrants and issuance of common stock (net of offering costs) of approximately $1,640,000, this increase in financing activities was offset by repayment of revolving credit lines of credit and other debt of approximately $1,874,000 during the nine months ended September 30, 2023.
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As previously reported on Form 8-K filed on August 30, 2024, on August 26, 2024, the Company received a notice from The Nasdaq Stock Market LLC (“NASDAQ”) indicating that its stockholders’ equity as reported in its Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2024 did not meet the minimum of $2,500,000 in stockholders’ equity required by NASDAQ Listing Rule 5550(b)(1) (the “Equity Rule”) for continued listing, or the alternatives of market value of listed securities or net income from continuing operations. Pursuant to the Equity Rule, the Company submitted a plan to regain compliance with the Equity Rule.
On November 13, 2024, the Company filed a Form 8-K stating that it believed it regained compliance with the Equity Rule. As disclosed herein, the Company reported stockholders’ equity of approximately $2.7 million.
NASDAQ has advised the Company that it will continue to monitor the Company’s ongoing compliance with the stockholders’ equity requirement and, if at the time of its next periodic report the Company does not evidence compliance, that it may be subject to delisting.
Based on cash flow projections from operating and financing activities and the existing balance of cash, management is of the opinion that the Company has insufficient funds to sustain operations for at least one year after the date of this report, and it may not be able to meet its payment obligations from operations and related commitments, if the Company is not able to obtain outside financing to allow the Company to continue as a going concern. Based on these factors, the Company has substantial doubt that it will continue as a going concern for the twelve months following the issuance date of the financial statements included elsewhere in this report.
The Company’s plan to alleviate the going concern issue is to increase revenue while controlling operating costs and expenses and obtaining funds from outside sources of financing to generate positive financing cash flows. While management is optimistic about its ability to raise funds to fund operations for at least one year after the date of this report, there can be no assurance that any such measures will be successful.
The Company’s ability to raise additional funds will depend, in part, on the success of our product development activities, and other events or conditions that may affect the share value or prospects, as well as factors related to financial, economic and market conditions, many of which are beyond our control. There can be no assurances that sufficient funds will be available to us when required or on acceptable terms, if at all. Accordingly, management has concluded that these plans do not alleviate substantial doubt about the Company’s ability to continue as a going concern. Our failure to achieve or maintain profitability could negatively impact the value of our common stock.
Critical Accounting Estimates
Our interim financial statements were prepared in accordance with United States generally accepted accounting principles, which require management to make subjective decisions, assessments and estimates about the effect of matters that are inherently uncertain. As the number of variables and assumptions affecting the judgement increases such judgements become even more subjective. While management believes that its assumptions are reasonable and appropriate, actual results may be materially different than estimated. The critical accounting estimates and assumptions have not materially changed from those identified in our Transition Report for the period ended December 31, 2023.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not required for small reporting companies.
ITEM 4. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
We have established disclosure controls and procedures designed to ensure that information required to be disclosed in the reports that we file or submit under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in SEC rules and forms and is accumulated and communicated to management, including the principal executive officer and principal financial officer, to allow timely decisions regarding required disclosure.
Our principal executive officer and principal financial officer, with the assistance of other members of our management, have evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of the end of the period covered by this quarterly report. Based upon this evaluation, our principal executive officer and principal financial officer concluded that our disclosure controls and procedures are not effective to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the Commission’s rules and forms and is accumulated and communicated to our management, including its principal executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required disclosure.
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Changes in Internal Controls over Financial Reporting
During our transition period ended December 31, 2023, our Chief Executive Officer and Chief Financial Officer concluded that our internal control over financial reporting was not effective due to the material weaknesses described below.
| 1. | We lack 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. Management evaluated our current process of review and approval of certain material journal entries and concluded this deficiency represented a material weakness. |
| 2. | We lack sufficient resources in our accounting department, which restricts our ability to review certain material reconciliations related to financial reporting in a timely manner. Due to our size and nature, segregation of all conflicting duties may not always be possible and may not be economically feasible. Management evaluated the impact of our failure to have proper segregation between the preparation, review and approval of account reconciliations and concluded that this control deficiency represented a material weakness. |
| 3. | Due to resource restrictions, we have not established a three-way match of documents or other controls precise enough to detect a material misstatement in revenue. Management evaluated our current process of determining the occurrence of revenue and concluded this deficiency represented a material weakness. |
Planned Remediation
We continue to work on improving and simplifying our internal processes and implement enhanced controls to address the material weaknesses in our internal control over financial reporting discussed above and to remedy the ineffectiveness of our disclosure controls and procedures. We are addressing our accounting resource requirements to help remediate the segregation of duties and plan to implement a concise “three-way” document matching procedure. These material weaknesses will not be considered as remediated until the applicable remediated controls are operating for a sufficient period and management has concluded, through testing, that these controls are operating effectively.
Despite the material weaknesses identified above, we believe that the consolidated financial statements included in the period covered by this report on Form 10-Q fairly present, in all material aspects, our financial conditions, results of operations and cash flows for the periods presented in conformity with U.S. generally accepted accounting principles.
During the fiscal quarter ended September 30, 2024, there were no additional changes in our internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) of the Exchange Act) that have materially affected or are reasonably likely to materially affect our internal control over financial reporting.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On July 26, 2024, OAC 111 Flatiron, LLC and OAC Adelphi, LLC, filed a civil action in the Supreme Court of the State of New York against MICS Nomad LLC, a subsidiary of the Company (“MICS NY”), and the Company (“the Defendants”) for alleged breach of lease, seeking monetary damages including unpaid rent, future unpaid rent, and other expenses related to the lease. The complaint alleges the Defendants breached the lease in various material respects.
On September 25, 2024, the Company entered into a Settlement Agreement for a full release and dismissal of the complaint within 5 business days of the Company’s payment of $250,000. Pursuant to the Settlement Agreement, the Company made the first payment of $150,000 was made on September 25, 2024 and a final payment of $100,000 was due and paid on October 25, 2024. On October 29, 2024 the Landlord filed a discontinuance with prejudice.
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Blue Yonder, Inc. Lawsuit
Pursuant to the asset purchase agreement with SemiCab, the Company assumed a judgement against SemiCab regarding damages resulting from contract breach for IT subscription-based services. On March 28, 2020, SemiCab 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 (“Lawsuit”). 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 condensed consolidated balance sheets.
Derivative Action
On December 21, 2023, Ault Lending, LLC, a wholly owned subsidiary of Ault Alliance, Inc. (“Ault”), one of the Company’s largest shareholders, filed a derivative shareholder action in Delaware Chancery Court against the Company, its Directors, and other Company shareholders (The Stingray Group, Inc. and Regalia Ventures) (“the Defendants”) for alleged breach of fiduciary duty in approving a recent above-market private placement equity transaction. The complaint alleges the Company, and its directors followed an inadequate process in evaluating the private placement transaction which occurred back in November 2023 and entered into the transaction with an intent to dilute Ault’s ownership stake in the Company. 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.
There were no other material changes during the quarter ended September 30, 2024, to our disclosure in Part I, Item 3, “Legal Proceedings” of our Form 10-KT for the period ended December 31, 2023. There are no other relevant matters to disclose under this Item for this period. See Note 8 to our consolidated financial statements entitled “Commitments and Contingencies” which is incorporated in this item by reference.
ITEM 1A. RISK FACTORS
Not required for small reporting companies.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
ITEM 5. OTHER INFORMATION
Rule 10b5-1 Trading Arrangement
During
the three months ended September 30, 2024, no director or officer of the Company
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ITEM 6. EXHIBITS
| * | Filed herewith. |
| ** | Furnished herewith. |
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SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| ALGORHYTHM HOLDINGS, INC. | ||
| Date: November 19, 2024 | By: | /s/ Gary Atkinson |
| Gary Atkinson | ||
| Chief Executive Officer | ||
| (Principal Executive Officer) | ||
| /s/ Richard Perez | ||
| Richard Perez | ||
| Chief Financial Officer | ||
| (Principal Financial and Accounting Officer) | ||
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