Algorhythm Holdings, Inc. Q2 FY2024 Earnings Call

Good afternoon, everyone, and welcome to Singing Machine Second Quarter 2024 Financial Results Earnings Call. My name is Savannah, and I will be your operator. As a reminder, today's call is being recorded. We have a brief safe harbor and then we'll get started. This call contains forward-looking statements under U.S. Federal Securities Laws. These statements are subject to risks and uncertainties that could cause actual results to differ materially from historical experience or present expectations. A description of some of the risks and uncertainties can be found in the reports that we have filed with the Securities and Exchange Commission, including the cautionary statement included in our current and periodic filings. I would like to now turn the call over to Gary Atkinson, company's CEO. Please go ahead.

Thank you. Good afternoon, ladies and gentlemen. I want to start off by thanking everyone for taking the time to listen in and participate today on our second quarter 2024 earnings call. I'm joined by Richard Perez, company's CFO; Bernardo Melo, Chief Revenue Officer; and Vivek Sehgal, SemiCab’s Chief Product Officer. This past quarter was highly unusual for Singing Machine. Normally, we use the second quarter to finalize buying commitments with our retail partners, coordinate upcoming product manufacturing for the holiday season and planning to ensure retail shelves are fully stocked with Karaoke products for the holiday season. However, this past quarter, we were busy with all of these normal activities while also being deeply entrenched in two new very exciting projects that I'm pleased to discuss on today's earnings call. First, as recently announced, we closed on the acquisition of an AI-powered freight transportation software company called SemiCab which has the potential to disrupt the global logistics industry. We spent most of the quarter conducting due diligence and negotiating the legal structure to perform the acquisition, which closed as an all-stock deal. After we discuss our second quarter financial results, I'm going to ask Vivek Sehgal, our Chief Product Officer at SemiCab, to share a brief update on this acquisition from his perspective. Second, we spent much of the quarter making progress in advancing our automotive initiative for our microphone business. We are very optimistic about the potential for this business, and it is rapidly becoming a central focus for growth within the Karaoke category. Lastly, we are also finalizing our corporate rebranding and hope to share it with all of you shortly. As a company, we have successfully shifted from a single line of business to now a holding company model with the responsibility of managing, funding and growing two very different businesses. As a result, we intend to share a new vision and direction for the company to get back to growth and creating value. Before we discuss these other initiatives, I would like to ask our Chief Financial Officer, Richard Perez, to walk us through the details of our results for operations for the second quarter. Go ahead, Rich.

Thank you, Gary. I appreciate everyone for taking the time out of their busy schedules to listen in today. I'm going to walk through the specifics of our results of operations and try to add a little color and insight into how our business is evolving in the near term from my perspective. Net sales for the three months ended June 30, 2024, decreased to approximately $2,440,000 from approximately $2,625,000, representing a decrease of approximately $185,000 compared to the three months ended June 30, 2023. The 7% decrease was primarily due to lower overall sell-through results during the past holiday season, mostly with our largest customer, Walmart, which, in turn, diminished inventory restocking requirements during the first six months of the calendar year, which is historically the off-peak shipping season. Retail, particularly traditional brick-and-mortar retail sales, have been challenging for almost two years. We have experienced this consistently across all of our major retail relationships and have been challenged to be extremely focused on product mix, product placement, and leveraging shelf space to optimize every opportunity to sell efficiently at scale with these best-in-class retailers. Gross profit for the three months ended June 30, 2024, decreased to approximately $324,000 from approximately $529,000, representing a decrease of approximately $205,000, or 38.8% compared to the three months ended June 30, 2023. Gross margins for the three months ended June 30, 2024, were 13.3% compared to 20.2% for the same period in 2023. Approximately $260,000 of the decrease in gross profit was primarily due to increased sales in excess inventory, which yielded significantly lower margin than current models sold, and was offset by a decrease in expenses of approximately $57,000 associated with miscellaneous logistics costs related to the timing of the receipt of new goods. Our focus here has been to aggressively clear older, slower-moving inventory to optimize our working capital. We were very successful in converting a meaningful component of our older inventory to cash for other purposes, and that has been a focus in the early third quarter as we look to clear virtually all our stagnant inventory during the current retail buying season. During the three months ended June 30, 2024, total operating expenses increased to approximately $6,478,000 compared to approximately $2,960,000 during the same period in 2023. This represents an increase in total operating expenses of approximately $3,518,000 compared to the three months ended June 30, 2023. The increase in operating expenses can be somewhat misleading. The vast majority was due to a non-cash write-off of impaired operating lease assets of approximately $3,878,000 related to the hospitality lease we exited in New York City. Excluding this one-time event, we actually saw all other operating expenses decrease. In fact, we saw a decrease in seasonal debt reserves of approximately $156,000 and a decrease in logistics costs of approximately $124,000 associated with the closing of the warehouse operation and outsourcing logistics to a third-party logistics company, along with an acceleration of depreciation expense of approximately $130,000 recognized in the prior year on impaired fixed assets associated with the closing of the warehouse. Our focus has been and continues to be on running a very tight discretionary operating budget. The effect of these results yielded a net loss for the quarter of $6,119,000 or a loss of $0.95 per share for the second quarter of 2024. This is compared to a loss of $2,460,000 or a loss of $0.64 per share for the same period in 2023. In summary, sales were very much in line with our expectations. Our efforts to closely manage costs were very positive. We improved our balance sheet dramatically, clearing almost $7 million in short-term liabilities. We are now in our normal busy season period, and we are very focused on rebuilding liquidity as we push out our seasonal sales orders. With this, I will turn the call over to our Chief Revenue Officer, Bernardo Melo.

Thanks, Richard. I appreciate it. Thanks for turning over the call. Thank you, everybody, for listening today. I just wanted to go through some of the highlights coming up with the holiday season. As Richard has mentioned, there has been some redefining of shelf space at retail. Some of our major partners are looking to consolidate some of the shelf space. Fortunately for us, we are still players with each of those retailers. But towards the end of my conversation, I'll highlight some of the changes that we're making internally to capitalize on some of the retail shifts. For us, moving forward, we are looking to continue to grow our Wi-Fi enabled models and our digital offerings, which have immediate back-end revenue through our app and our partnership with Stingray Music. This year, we are introducing a brand-new Wi-Fi model, which we will find at Sam's Club. They partnered with us in the electronic department. Normally, we were in the toy department. We're still in the toy department with two different SKUs, but now we are also entering the electronic department at a higher price point with a Wi-Fi offering. This model is brand new. It's going to be directly tied in with our app. We've also included other music services such as Apple Music, Spotify, Pandora, Amazon Prime, and YouTube, making the item much more attractive to consumers. Now they're able to interact with our product via our digital product app, and also if they already have their subscriptions, they're able to interact with that as well. Costco is carrying it for the second year and we're also deploying it to the rest of our partners, whether it's target.com, Amazon, Best Buy, and our partners in Canada with Best Buy, Walmart, and others. We're also rolling this out to Costco UK, Costco Australia. So our offering for the Wi-Fi model is definitely expanding, and we're looking for that to be the future going forward. For our traditional model, we still see them in most retailers. You will still find about four feet of space with product continuing through the holidays in Walmart. Sam's Club is also carrying some of our traditional products, which are becoming more promotional at more aggressive price points, but that's still going to continue during this holiday season. We are also continuing our foray into the direct-to-consumer model. We recently launched our TikTok shop with four concentrated items that have gone very well so far. We're starting to allocate some of our marketing dollars more towards the TikTok shop and also with the meta platforms, resulting in higher sales in those platforms and also online on our own singingmachine.com. We also successfully launched our Sesame Street Karaoke Plus line. That's going to be launching with Amazon and all the dot com. You can go online now and see them. We have three items coming out, Elmo, Abby, and Cookie Monster under that line, and we'll be looking to expand it in 2025. Finally, I want to emphasize that moving forward, we've identified that retail shelf space is always a challenge. We want to reduce the number of offerings that we're going to be doing. So come 2025, we're going to be introducing primarily Wi-Fi enabled models. Those have been working very well for us, and we've been receiving a lot of good feedback from consumers on those models. With our partnership with Stingray, we're going to be launching some new technologies that I'm sure Gary will discuss in the near future. So with that being said, Gary, I'll turn it back over to you.

Perfect. Thanks, Bernardo. That's actually a perfect segue into the next part of the call, where I want to focus on some of the new emerging automotive and connected TV opportunities that we have within Singing Machine. As many of you may not know, there is a rapidly growing interest in bringing Karaoke microphone devices to the in-car entertainment offering. We had previously debuted this technology at the Consumer Electronics Show earlier this year, and we did see tremendous interest from many major OEM automotive brands for this type of a microphone integration. I would like to remind everyone that Singing Machine was the first company to bring Karaoke microphones to the car through our successful Karaoke collaboration that we launched back in 2017. To further prove the market demand for Karaoke microphones in the car, earlier this month, Tesla announced that they are introducing Karaoke microphones to all of their Tesla models in the North American market. As most people see, when Tesla moves, the industry tends to follow, and through our strategic relationship with the Stingray Group, we are now at the forefront of partnering with many major automotive brands that are seeking to bring Karaoke microphones into the car, embedded directly into the in-vehicle infotainment system, which is where they are currently accessing Stingray's Karaoke content services. We see the connected microphone as a quickly growing segment since it doesn’t cannibalize our existing retail business, and it takes advantage of the growing demand to provide different forms of entertainment within the car. For the TV market, OEMs have been actively seeking to grow their TV app services offerings and to aggregate and unify multiple devices throughout the house into one single touch point. For Karaoke, this means the opportunity to utilize the big screen TV and sound systems that most people have in their homes and convert them into a fully featured Karaoke experience. Integral to this entire experience is the Karaoke microphone. Moving forward, we see our business model shifting rapidly more towards integrated microphone devices as opposed to being heavily reliant on standalone Karaoke systems. We're excited about this shift because we believe we can transform our legacy business into a more technology-driven predictable year-round business. This new model is asset-light, human capital-light, but yields much higher margins. This should enable us to drive costs down throughout our legacy Karaoke business while boosting growth and bottom-line profitability. At this point of the call, I would like to introduce Vivek Sehgal, SemiCab’s Chief Product Officer. Vivek is one of the two key visionaries, along with Ajesh Kapoor, its Founder and President, who were instrumental in identifying the opportunity in creating a core technology that has become SemiCab’s artificial intelligence-driven platform. At this time, I'd like to turn the call over to Vivek.

Thank you, Gary. I appreciate the opportunity to speak with everyone today. I want to take a minute and share why we started SemiCab. The transportation industry is very fragmented and slow in adopting technology to solve efficiency challenges. On average, one in every three miles run is empty, creating unnecessary costs and carbon emissions that the whole industry has to bear. At SemiCab, we are tackling this inefficiency head-on. We are an award-winning technology company and we are solving freight at scale using dynamic AI technology that optimizes transportation on demand and in real time. Next, I want to share a little on the rationale Ajesh and I had for pursuing the transaction that led to our joining the Singing Machine team in early July. For Ajesh and myself, we have worked together for many years, developing critical software for some of the largest players in the logistics space. In 2018, we launched SemiCab to address the inefficiencies that we saw going unaddressed for many years in the logistics industry in general. From 2018 to late 2021, we devoted most of our resources to building the technology and getting early versions of our solutions into live pilot environments, where we could test our models and gain crucial empirical data as well. Our models were very encouraging, and client adoption began to ramp up in the U.S. after COVID. During one of the industry events we attended in India, we were unexpectedly presented with an opportunity to help launch the National Digital Freight Exchange in India. This was, in my mind, a once-in-a-lifetime opportunity; roughly 35 out of the Fortune 1,000 global industry leaders came together, pooling almost $1.5 billion worth in shipping spend annually into one common network of data. SemiCab was involved from day one and we are now an exclusive partner for this organization. We launched a pilot in India that went extremely well, beginning in the second quarter of 2023. We quickly realized that the scale of this opportunity was immense. However, we knew that there was almost no easy way for us to financially support our growth expanding into India. As a U.S. based startup, Ajesh and I explored many possible avenues. We talked to VCs, but we saw that the SPAC market improved, and the process for the reverse merger is very expensive, time-consuming, and uncertain. The opportunity to seamlessly join a NASDAQ-listed company and gain access to efficient capital as we execute our business model just made tremendous sense. Today, we are 100% focused on moving forward. We see excellent growth opportunities in both the U.S. and India markets. Our clients are eager to see us expand our relationships, and we anticipate strong growth. We are also being asked to expand our service model into additional geographies, including the Middle East, North Africa, and East Asia. Our growth opportunities are exciting and we believe SemiCab has great potential to grow for many years. Both Ajesh and I are pleased to be a part of the Singing Machine team as it rebrands and expands its business model. We look forward to sharing periodic updates as we focus on driving growth within this part of the company's future.

Perfect. Thank you, Vivek. I appreciate the updates on that. So in closing, I just wanted to address what is likely the most common question I get from investors since we announced the SemiCab acquisition back in July. The number one question I've been receiving is, why would a Karaoke company buy an AI software company? I’ve heard it time and time again; people say, well, there's no synergies there. My response is relatively simple. I see my job as creating shareholder value. As a CEO, I need to be creative, uncover value, and look for ways to grow the business. For many of our long-time shareholders over the last few years, I think you've seen that our legacy Karaoke business has faced significant pressure in its retail presence. I don’t see these challenges going away anytime soon. As a result, we are actively reinventing ourselves and our core business. We’re pivoting into new markets that integrate Karaoke into the automotive space and the smart TV category, which require much more innovative technology and, fortunately, have much deeper moats around both of those businesses. However, SemiCab has presented a very compelling opportunity to potentially disrupt an almost $1 trillion global freight industry. I'll touch on something Vivek said earlier. Today, traditional freight transportation, particularly digital freight brokers, operate in a broken industry that is highly siloed and very inefficient, where on average, one out of every three miles that a truck is on the road is empty. This massive inefficiency leads to over $900 billion in wasted freight expenses annually, with over 140 billion empty miles driven by trucks leading to increased road congestion and unnecessary CO2 emissions. SemiCab has the technology to solve that inefficiency in the market. They have shown us they can successfully attain 90% efficiency, which means they can reduce the number of empty miles from one out of every three to only one out of every ten miles. As we embark on changing the company's narrative and telling this story to a broader audience, we see SemiCab as having the opportunity to create much higher floor value for our company quickly and at levels that are meaningfully higher than where we are today. Therefore, we felt compelled to add SemiCab to our corporate portfolio, and we will continue to evaluate opportunities to grow the business moving forward. I understand that this is not a standard approach, particularly in the small-cap investment space. However, I believe that with the headwinds that are facing small companies today, taking a bold innovative approach in the face of adversity should give us a better chance to unlock value for everyone. Thank you for your time today. We look forward to providing updates soon on the progress of both business segments. Thank you all for your time and interest today. That concludes my prepared statements. I'll turn it back over to the moderator.

Thank you, Gary. We will now conduct the question-and-answer session. If you would like to ask a question, please signal by pressing *1 on your telephone keypad.