Algorhythm Holdings, Inc. Q2 FY2025 Earnings Call

Good morning, everyone, and welcome to Algorhythm Holdings Second Quarter 2025 Financial Results Earnings Call. My name is Jen, 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 our reports we file with the Securities and Exchange Commission, including the cautionary statements included in our current and periodic filings. I would now like to turn the call over to Gary Atkinson, company's CEO.

Thank you. Good morning, ladies and gentlemen. Thank you all for joining us for our second quarter 2025 earnings call. As mentioned, my name is Gary Atkinson, company's CEO. I am also joined this morning by Alex Andre, company's CFO, who will be providing a detailed update on the results of operations. Before we start, I'd like to focus on two key topics for today. The first is the strategic sale of the Singing Machine, our legacy consumer electronics business, and the second is the accelerated growth and outlook for SemiCab, our high-growing AI logistics platform. I'll start this morning with Singing Machine. This business has been the leader in its category for over 40 years as the number one brand for home karaoke. However, the consumer electronics market, particularly consumer karaoke, has faced persistent headwinds over the last few years. The business has experienced declining sales year-over-year, rising costs, uncertain global tariffs, inflation, and supply chain disruptions. To position our company for long-term growth, we made the strategic decision to divest the Singing Machine business. The recent sale we announced earlier this month generated $4.5 million in total consideration, which reduced our liabilities by approximately $4 million and has materially strengthened our balance sheet. More importantly, this move lowers our ongoing cash burn and allows us to dedicate capital and resources to areas with the greatest growth potential, that being our SemiCab business. This was not just a financial decision; this was a complete strategic pivot. SemiCab operates in a massive addressable market and has tremendous scaling opportunities for growth and is already transacting with some of the largest household names in the consumer product space. We do business with companies like Kellogg's Kellanova, Apollo Tyres, Asian Paints, Procter & Gamble, and Unilever, which are our customers in India, and they're eager for us to do more. Over the past several quarters, it has become clear that SemiCab deserves the resources to scale aggressively rather than coexisting alongside the Singing Machine business. This past quarter was a breakthrough quarter in our strategy to pivot into AI technology, which has the power to disrupt the legacy freight brokerage business. In May, we closed the acquisition of SemiCab India, bringing their team, their technology, and operations all under our SemiCab Holdings subsidiary. During the integration period, we prioritized funding their working capital, strengthening their vendor relationships, and starting to build out their operations, marketing, and accounting teams in India to support the anticipated growth. I believe the results now speak for themselves. During this last quarter, we announced SemiCab has secured five new contracts with some of India's largest fast-moving consumer goods companies. We also announced during the quarter that four existing clients have expanded their geographic lanes and volume by over 100% and in some cases, upwards of 200%. These expansions were with some of the companies that I mentioned earlier, like Apollo Tyres, Procter & Gamble, Asian Paints, Kellogg's Kellanova. During the quarter, we also announced a fleet expansion, where we grew our fleet from 140 to 450 trucks, clearing a runway of supply to increase our annualized revenue run rate to approximately $23 million. Over the past 12 months, our annualized revenue run rate has increased by almost 300% to now approximately $7 million in annual recurring revenue. We anticipate in the coming quarters for that growth trend to continue. In summary, SemiCab's growth trajectory is accelerating. The combination of new wins, expanded contracts, and fleet growth has created a strong flywheel effect. More volume on our platform drives network effects. This results in increased optimization opportunities to reduce empty miles, thereby unlocking significant value for our customers and driving our margin expansion. So at this point, I will turn the call over to Alex Andre, who will walk you through our second quarter results in detail.

Thank you, Gary. Hello, everyone. The quarterly report that we filed yesterday presents information for the three and six months ended June 30, 2025, and 2024. We had an exciting quarter with the acquisition of SemiCab India. SemiCab is included in our financial results of May 2, 2025, which was the acquisition date and contributed to our financial results for the months of May and June. As Gary mentioned, we sold Singing Machine on August 1. Accordingly, our third quarter results will include Singing Machine for just the month of July. Thereafter, our future financial results will only reflect our SemiCab business. We expect to reflect the sales of Singing Machine as discontinued operations for our third quarter. Moving on to our third quarter results. Sales for the three months ended June 30, 2025, increased to $2.7 million from $2.4 million for the corresponding period last year, primarily due to the addition of SemiCab India on May 2. Our Singing Machine business accounted for $1.5 million of our sales, while our SemiCab business accounted for the remaining $1.2 million. Sales of our Singing Machine business were negatively impacted by increased inflation and the tariffs that were implemented on April 2, as all of our Singing Machine products are manufactured in China. Our Singing Machine business is also seasonal, with most sales being generated in the second half of the calendar year. On the SemiCab side of our business, our revenue run rate has tripled to more than $7 million since January 2025. We expect SemiCab to generate between $2 million and $2.5 million of revenue during our third quarter. We also expect revenue generated from SemiCab to increase substantially over the next 12 months, with SemiCab's revenue run rate projected to rise to between $15 million and $20 million over the next 12 months. Gross profit for the three months ended June 30, 2025, increased to $954,000 from $324,000 for the same period last year, with gross margin increasing to 35% from 13%. The increase was due primarily to one-time adjustments made to inventory reserves and co-ops associated with our Singing Machine business. We expect gross profit to decrease to closer to breakeven in the near term to reflect SemiCab's current margins, as SemiCab incurs freight handling and servicing costs in its business that are included in the cost of goods sold. Selling expenses for the three months ended June 30, 2025, decreased to $234,000 from $547,000 in the prior year period due to decreases in online marketing and social media advertising campaigns associated with decreases in sales of Singing Machine's karaoke products. We expect selling expenses to decrease substantially over the next 12 months due to the sale of our Singing Machine business, as virtually all of our selling expenses were incurred by Singing Machine. SemiCab does not currently incur selling expenses. General and administrative expenses for the month ended June 30, 2025, decreased to $1.5 million from $2.1 million for the same period last year. The decrease is due primarily to reductions in general and administrative expenses incurred by our Singing Machine business, combined with increases in the same expenses incurred in the growth and development of our SemiCab business. We expect G&A expenses to decrease over the next 12 months due to the sale of Singing Machine. However, we expect the reductions achieved to be partially offset by an increase in expenses that we anticipate to incur as we continue to invest in the growth and development of our SemiCab business. Finally, the net loss for the three months ended June 30 decreased to $809,000 from $6.2 million for the comparable period last year. The decrease was due primarily to $3.9 million for operating lease impairment expenses that we incurred in 2024 in connection with the termination of a lease that we no longer needed for our business and lower general and administrative expenses. Net loss is expected to decrease during the next 12 months, primarily due to the sale of our Singing Machine business, which accounted for a significant portion of our losses. The reduction in net loss is expected to be partially offset by increases in net loss resulting from our continued investment in the growth and development of SemiCab. That concludes my overview of the second quarter financial results, Gary.

Thank you, Alex. I just want to say that I am extremely proud of the work that we have completed during the second quarter. Today, we shared how the strategic sale of Singing Machine and the acceleration of SemiCab are two sides of the same coin. The Singing Machine sale strengthens our balance sheet, reduces our cash burn on a go-forward basis, and frees up capital for high-growth opportunities. Our focus is now on SemiCab, fully resourced to capture market share in a fast-growing untapped sector. We are extremely confident in our path forward with SemiCab, positioned for continued contract wins, geographic expansions, fleet expansion, and revenue growth. We look forward to updating everyone on our progress over the coming few months and appreciate your continued interest and support. And with that, we have reserved some time for some Q&A. So I would like to, at this point, open it up to any questions.

Our first question comes from Theodore O'Neill with Litchfield Hills Research.

Congratulations on the margin and expense reductions. I was wondering if you could give us sort of how to think about profit margins and the operating expense going forward into the fourth quarter when you have your first clean quarter.

Sure. That's a good question. Yes, we can certainly give a little guidance. Maybe, Alex, you can talk about some of the anticipation with total operating expenses. I can address the margin. So as we move ahead, obviously, now with the sale of Singing Machine coming off of the books, we anticipate total operating expenses to come down. We are expecting the margin to be in line with what the SemiCab business is generating. Their margins to start will not be sort of indicative of what the Singing Machine margins used to be. We used to see with Singing Machine margins well north of 25% to 30%. The SemiCab business, obviously, from a margin perspective, is smaller. So we would anticipate anywhere, I would say, from 5% to 10% margins, but we expect the growth to far outweigh the growth opportunities that Singing Machine had. So what we would lose in, let's say, margin percentages, we anticipate to make up for in dollars and growth, if that makes sense. And Alex, if you want to maybe touch on the operating expense side.

Yes, the operating expense side will be, as Gary indicated, much lower because of the sale of Singing Machine. We expect operating expenses to increase gradually over time, but that's associated with the growth in the SemiCab business. So, I mean, it's an intentional decision by us to invest heavily into it. And that's also the reason why we expect revenue to increase so quickly. But overall, we will experience a major reduction at the outset because Singing Machine accounted for a significant portion of our operating expenses.

And sort of a follow-up, it may be too soon to tell, but given what's going on with tariffs here in this country, and I've only seen stories about potential mass layoffs of people in India. Can you give a viewpoint on the tariffs and the impact in India? And if that will have some impact on your business in the SemiCab business?

Yes. The advantage of tariffs is that, for example, Singing Machine was directly affected by them, particularly with the increased tariffs on products manufactured in China. This had a direct impact on Singing Machine's business. Fortunately, SemiCab does not share that level of exposure since we are not importing physical products from other countries. However, if there is a decrease in the overall movement of goods in and out of India, it could affect freight logistics across the country. On the positive side, we are working with some of the largest Fortune 500 and Fortune 100 multinational companies, ensuring there will still be substantial demand for their products in India. We don't expect this to affect our business because our contribution to transportation for these large companies is minimal compared to the overall volume they handle. In fact, we anticipate receiving even more of their demand as our platform continues to excel. Our early indicators in India suggest we are now optimizing truck utilization by over 85%, which is a significant jump from the industry average of around 66%. In summary, the platform is functioning effectively, the optimizations are substantial, and we are helping our customers save money, which is leading to more business from them. Overall, I do not expect tariffs to impact us significantly.

And our next question will come from Eric Nickerson with Third Century Partners.

Say is, have you guys rehired Brendan Hopkins as your IR guy?

Yes, that's a good point. We are currently collaborating with Brendan again to enhance engagement and since we've sold our Singing Machine, we believe it's crucial to have a dedicated individual available to answer shareholder questions moving forward, serving as an additional resource and channel for communication.

Okay. In your recent filings, you indicated that you will need to raise additional funds to support the growth of SemiCab. Can I assume that this will involve equity sales again, or is there another strategy in place?

Yes. I mean, obviously, there are two options with raising capital, right? There's debt and there's equity. We have taken on a little bit of debt in the recent quarter, not a lot. I think as we did bring in some cash from the sale of Singing Machine, but I mean, you're certainly right, over the next coming few quarters, we're definitely going to need to continue to bring in working capital to fund the growth of SemiCab. And I would imagine equity is going to be a piece of that. Now the nice thing that I want to point out is that it's not without now the Singing Machine business, the needs of SemiCab are much smaller. The overall working capital need is much lighter than what we had to do in the past to support Singing Machine.

Okay. And when we talked about before, you said most of the capital needs for SemiCab are to finance receivables since you're having to pay out money quicker and the truckers tend to pay later. That sounds like something that you could either get bank financing for or maybe even a factoring relationship. Do you consider along those lines?

Yes, we have. In fact, we are in the process of putting essentially sort of a factoring facility in place in India to help just balance out that cash to cash timing that's been challenging us in the past. So that will be one way of solving the working capital needs of the India business.

Okay. Well, that sounds good. I can tell you, this is just as one little guy out here in the peanut gallery and stock market land, if you want to raise your credibility, probably the fastest way to do it is to sell some new shares at a price at or above current market, the company has been able to do. So I wish you luck in that and hope you can do it. Yes. I guess that's all I have. I'll go back in the queue.

And our next question will come from Brian Tantalo.

So obviously, with the spin-off or sale of Singing Machine, there's a lot of benefits, I guess, specifically from the negative cash burn, which is great. You've kind of addressed some of my initial questions on how that's going to directly impact the company from a financial perspective, which is obviously significant. Could you also talk a little bit about the focus on SemiCab and its current customers and the growth, meaning, will we likely see kind of deeper penetration into the current customer base or an expansion of new customers? How should we look at it, as far as the opportunity going forward?

Yes. No, that's a great question. So just touching on the first part now with the sale of Singing Machine, obviously, like you said, there are a lot of additional advantages. But the main thing that I think of is the focus, right? So prior to August 1, there was a capital allocation problem. We had to sort of take the limited dollars that we had and decide whether to put it into Singing Machine or put it into SemiCab. Now we don't have that problem anymore. Now we know exactly where our focus is, we know to allocate capital, and it's into the fast-growing AI trucking logistics platform. Now in terms of just customers and penetration. Look, I mean, we've seen now in these first contracts with our customers. They're all very, very, very excited. There's a buzz in India. There's word of mouth that's going on. We've been picking up additional customers that are outside of the NDFE, which is the National Digital Freight Exchange. So our customers are talking, and we're kind of getting free marketing and business development from word of mouth. So we are seeing some new customer wins that are coming in outside of the NDFE and with our existing customer base, which I would consider sort of like our Big 4, which are Asian Paints, Apollo Tyres, Procter & Gamble, and Kelloggs'. They're all looking to expand pretty aggressively. We haven't really given all the details of those expansions; I would expect that we will be able to announce them fairly soon. But there are material increases to overall volume lanes and traffic that they're expecting to be giving us. So again, I have to be a little vague, unfortunately, just because we haven't publicly announced those yet. But yes, we're seeing solid growth coming.

Okay. So it sounds like there's a ton of runway with the current customers and other customers in India, which will keep you busy. At the same time, are you looking to expand outside of India?

Yes, the challenge we're facing is that while there's significant demand to grow this business in India, we are somewhat limited by our access to trucks. Increasing our working capital will allow us to expand our fleet and ensure we have a reliable pool of carriers available to deploy trucks when needed. As for expanding outside of India, that is certainly a possibility. Working with large multinational companies makes it easier for us to enter new markets when they see successful outcomes. Even minor improvements in their transportation costs can lead to opportunities in other countries like Australia, the Middle East, Europe, and potentially in the U.S., which has not been discussed yet. The advantage of our business model is that it is not confined to India; it is applicable on a global scale.

And we'll hear next from Brendan Hopkins with RIME.

Gary, thanks for bringing me back on board. I just want to introduce myself to everybody. I've worked with Gary in the past. We've had a great relationship. One of the things I saw with the company recently is an inability for investors to actually get a hold of people at the company and more color on developments, somewhat limited access to management. I just want to let everyone know I'm always available to add additional color to any press releases, which we're going to try and be very transparent as we stage the growth. And I'm always available to give more color or if you want to set up a call with management, off-line call management. Now one of the things I'm getting in my initial feedback is what distinguishes SemiCab from a digital freight broker?

Great. Thank you, Brendan. Definitely excited to have you come back on board. That's a great question, and I'll be honest, that's probably the number one question that I know I get from potential investors and shareholders that are new to the SemiCab story. So, yes, let me spend just a quick minute. I know we're kind of getting close to time, but it's a very important point. So I want to be very clear, SemiCab is not just a digital freight broker. So when I think of a digital freight broker, I think of basically a huge load board that only tries to pair supply to trucks with demand with loads, and that's all they do. They're not built from the ground up to solve this pervasive problem in the transportation industry, which is this concept of deadhead miles and empty miles. So again, just to restate what the mission of SemiCab is, approximately 33% of all miles that trucks drive are being driven empty. That's not just U.S.; it's not just India; that's global. So you're talking about a 66% utilization of a truck on average. And SemiCab is a software platform built specifically to address that problem. Our technology enables better utilization of trucks, better routing of where trucks are going to be able to increase that truck utilization from industry average of 66%. We've seen it with our platform, upwards of 90%. I think, in India, we're probably averaging around 85% utilization on trucks. The consequence of that is we're saving money; there's less wasted miles, less fuel being burned, less labor, less depreciation, and usage of the actual trucks itself, and it's working. It's working; we're seeing it work. So it's an important distinction. We are not just a digital freight broker. We're solving a real-world problem that is costing companies hundreds of millions of dollars annually. So I appreciate the opportunity to kind of clarify that.

Great. That's it for me.

Okay. Thanks, Brendan. And I think that's it for time. I appreciate everybody taking the time. I love all the great questions. We look forward to updating everybody with progress over the coming few months and quarters. And obviously, as Brendan has just introduced himself, his email and phone number are now on the bottom of press releases. So I encourage everybody that has questions to feel free to reach out to Brendan. We look forward to continuing the dialogue. Thank you, everybody. With that, we will conclude today's call.

Thank you. This does conclude today's second quarter 2025 earnings call. Thank you all for your participation. You may now disconnect.