Algorhythm Q2 2024 Earnings Call Transcript

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August 19, 2024

There are 5 speakers on the call.

Operator

Good afternoon, everyone, and welcome to the Seeing Machines 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.

Operator

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.

Operator

Please go ahead.

Speaker 1

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 Q2 2024 earnings call. I'm joined by Richard Perez, company CFO Bernardo Mello, Chief Revenue Officer and Vivek Sehgal, SEMICAB's Chief Product Officer. This past quarter was highly unusual for the Singing machine.

Speaker 1

Normally, we use the Q2 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. This past quarter, we were busy with all of these normal activities, but on top of that, we were deeply entrenched in 2 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 a legal structure to perform the acquisition, which closed as an all stock deal. After we discuss our Q2 financial results, I'm going to ask Vivek Sehgal, our Chief Product Officer at Semicap to share a brief update on this acquisition from his perspective.

Speaker 1

2nd, we spent much of the quarter deep in progress to advance our automotive initiative for our microphone business. We are very optimistic on 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 2 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.

Speaker 1

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 Q2. Go ahead, Rich.

Speaker 2

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 on insight into how our business is evolving in the near term from my perspective. Representing a decrease of approximately $185,000 representing a decrease of approximately $185,000 as compared to the 3 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 1st 6 months of the calendar year, which is historically off peak shipping season.

Speaker 2

Retail, particularly traditional brick and mortar retail sales have been challenging for almost 2 years. We have experienced this consistently across all of our major retail relationships and has challenged us 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 3 months ended June 30, 2024 decreased to approximately 300 $24,000 from approximately $529,000 representing a decrease of approximately 205,038.8 percent as compared to the 3 months ended June 30, 20 23. Gross margins for the 83 months ended June 30, 2024 were 13.3% as compared to 20.2% for the 3 months ended June 30, 2023. Approximately $260,000 of the decrease in gross profit was primarily due to increased sales and 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 the miscellaneous logistics costs related to the timing of receipt of new goods.

Speaker 2

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 Q3 as we look to clear virtually all our stagnant inventory during the current retail buying season. During the 3 months ended June 30, 2024, total operating expenses increased to approximately 6,478,000 compared to approximately $2,960,000 during the 3 months ended June 30, 2023. This represents an increase in total operating expenses of approximately $4,518 from the 3 months ended June 30, 2023. The increase in operating expenses can be somewhat misleading.

Speaker 2

Of the overall increase, 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 a decrease in logistics costs of approximately $124,000 associated with the closing of the warehouse operation and outsourcing of logistics to a third party logistics company, 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 Q2 of 2024.

Speaker 2

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 $7,000,000 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.

Speaker 2

With this, I will turn the call over to our Chief Revenue Officer, Bernardo Mello.

Speaker 3

Thanks, Richard. I appreciate. Yes, I'm here. Thanks for turning over the call. Thank you everybody for listening today.

Speaker 3

I just wanted to go through some of the highlights coming up for this 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 we 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 changes.

Speaker 3

But for us, moving forward, we are as I mentioned before in previous calls, we are looking to continue to grow our Wi Fi enabled models, our digital offerings, which have immediate back end revenue to our app and our partnership with Stingray Music. This year, we are introducing a brand new Wi Fi model, which you 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 2 different SKUs, but now we are also entering the electronic department at a higher priced point with a Wi Fi offering.

Speaker 3

This model is brand new. It's going to be directly tied in with our app. We've also included other music services as well with Apple Music, Spotify, Pandora and Amazon Prime, along with YouTube, making the item that much more attractive to consumers. Now they're able to interact with our product, with our digital product, app. And also if they have their subscription already currently, they're also able to interact with that as well.

Speaker 3

Costco is carrying it for the 2nd year. And then we're also deploying it to the rest of dotcom, whether it's target.com, Amazon, Best Buy, and then our partners in Canada with Best Buy, Walmart and others. And we're also rolling this out to Costco U. K, 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.

Speaker 3

For our traditional models, you still see them in most retailers. You still have a section in Walmart where you will find about 4 feet of space with product that's continuing through the holidays. This season, Sam's Club is also carrying some of our traditional lots of not going away, It's becoming more promotional, more aggressive price points, but that's still going to continue during this holiday season. We also are continuing our foray into the direct to consumer model. We just launched we just recently launched our TikTok store shop with 4 concentrated items in there.

Speaker 3

That has 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 in 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 .coms. You could go online now and see them.

Speaker 3

We have 3 items coming out, Elmo, Abby and Cookie Monster under that line, and we'll be looking to expand it in 2025. And then finally, one of the things I want to emphasize is moving forward, we've identified that retail shelf is always a challenge. We want to create we want to reduce the number of offerings that we're going to be doing. So come 2025, we're going to be introducing mostly strictly Wi Fi enabled models. Those have been working very well for us.

Speaker 3

We've been receiving a lot of good feedback for us from consumers on those models. And with our partnership with Stingray, we're going to be launching some new technologies that I'm sure Gary will get into in the near future. But we will be definitely aligned with that strategy moving forward. So with that being said, Gary, I'll turn it back over to you.

Speaker 1

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. So as many of you may not know, there is a rapidly growing interest in bringing karaoke microphone devices to the in car entertainment offering. So 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.

Speaker 1

And I'll remind everyone, Singing Machine was the 1st company to bring karaoke microphones to the car. This was through our successful carpool karaoke collaboration that we launched back in 2017. And as further proof of the market demand for karaoke microphones in the car, earlier this month Tesla just announced that they are introducing karaoke microphones to all of their Tesla models in the North American market. And I think as most people see, as 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 mics into the car, embedded directly into the in vehicle infotainment system, which is where they're currently now accessing Stingray's karaoke content services.

Speaker 1

So we see the connected microphone as a quickly growing segment. It's nice because 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. Secondly, 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. So for karaoke, this means the opportunity to take advantage of the big screen TV and the sound systems that most people have in their homes and converting them into a fully featured karaoke experience. Integral to this entire experience is the karaoke microphone.

Speaker 1

So moving forward, we see our business model shifting rapidly more towards integrated microphone devices as opposed to being so 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 very asset light, very 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. So at this point of the call, I would like to introduce Vivek Segal, Semicab's Chief Product Officer.

Speaker 1

Vivek is one of the 2 key visionaries along with a jesh Kapoor, its Founder and President, who together were instrumental in identifying the opportunity in creating the core technology that has become semiCAD's artificial intelligence driven platform. At this time, I'd like to turn the call over to Vivek.

Speaker 4

Thank you, Gary. I appreciate the opportunity to speak with everyone today. I want to take a minute and share why we started semi cab. The transportation industry is very fragmented and pretty slow on adopting technology to solve its efficiency challenges. On average, 1 in every 3 miles run is empty.

Speaker 4

That creates unnecessary costs and carbon emissions that the whole industry has to bear. At Semicab, we are tackling this inefficiency heads 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 adjacent I had for pursuing the transaction that led to our joining the Singing Machine team in early July. For Ajay and myself, we have worked together for many years developing critical software for some of the largest players in the logistics space.

Speaker 4

In 2018, we launched semi cab 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 efforts to building the technology and getting early versions of our solutions into live pilot environments where we could test our models and gain critical empirical data as well. Our models were very encouraging and client adoption began to ramp up in the U. S. After COVID.

Speaker 4

During one of the industry events that we were attending in India, we were unexpectedly presented an opportunity to help launch the National Digital Trade 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 $1,500,000,000 worth in shipping spend annually into one common network of data. Sam was involved from day 1 and now we are an exclusive partner for this organization. We launched a pilot in India that went extremely well beginning in the Q2 of 2023 and we quickly realized that the scale of this opportunity was huge.

Speaker 4

We knew that there was almost no easy way for us to financially support our financial growth expanding into India. As a U. S.-based startup, Ajay and I explored many possible avenues. We talked to the VCs. We saw the SPAC market implode and the process for a reverse merger seems very expensive, time consuming and uncertain.

Speaker 4

The opportunity to seamlessly join a NASDAQ listed company and gain access to the efficient capital as we execute our business model just made tremendous sense. Today,

Speaker 1

we are

Speaker 4

100% focused on moving forward. We see excellent growth opportunities in both the U. S. And the India markets. Our clients are eager to see us expand our relationships and we anticipate strong growth.

Speaker 4

We are also being asked to expand our service model into additional geographies, including the Middle East, North Africa, East Asia. Our growth opportunities are exciting and we believe semi cab has the great potential to grow for many years. Both Jaysh 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 growth. Gary, back to you.

Speaker 1

Perfect. Thank you, Vivek. I appreciate the updates on that. So in closing, I just wanted to address I think what is most likely the most common question that I get from investors since we announced the semi cap acquisition back in July. And the number one question I've been receiving is why would a karaoke company buy an AI software company?

Speaker 1

And I've heard it time and time again, people say, well, there's no synergies there. And so my response is relatively simple. I see my job is to create shareholder value. And as the CEO, I need to be creative, I need to uncover value and I need to look for ways to grow the business. And I think for a lot of our long time shareholders for the last few years, I think you've all seen, we've seen that the legacy karaoke business has watched its retail presence come under a significant amount of pressure.

Speaker 1

And I don't see these challenges going away anytime in the short term. 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 into the smart TV category, which requires a lot more innovative technology and fortunately has much deeper moats around both of those businesses. But with that being said, Bemacab has presented a very compelling opportunity to potentially disrupt almost $1,000,000,000,000 global freight industry. And I'll touch on something Vivek said earlier.

Speaker 1

Today, traditional freight transportation and in particular, digital freight brokers, they operate in a broken industry that is highly siloed and very inefficient, where on average one out of every 3 miles that a truck is on the road, it's empty. And this massive inefficiency leads to annually over $900,000,000,000 in wasted freight expenses, over $140,000,000,000 empty miles that a truck is on the road, leading to increased road congestion and unnecessary CO2 emissions. SemiCAD has the technology to solve that inefficiency in the market and they've shown us that they have successfully attained 90% efficiency, which is to say they have shown that they can reduce the number of empty miles from 1 out of every 3 miles empty to only 1 out of every 10 miles empty. So as we embark to change the company's narrative and to tell this story to a broader audience, we see semi cab as having an opportunity to create much higher floor value for our company very quickly and at levels that are meaningfully higher than where we are today. As such, we felt compelled to add semi cap into our corporate portfolio and we will continue to openly evaluate opportunities to grow the business moving forward.

Speaker 1

I do understand and realize that this is not the standard approach, particularly in the small cap investment space. I believe that with the general headwinds that are facing small companies today, taking a bold, innovative approach in the face of adversity should hopefully give us a better chance to unlock value for everyone. So I thank everybody for your time today. We look forward to providing updates soon on the progress of both business segments. I want to thank everybody for your time and interest today.

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