Good day, everyone, and welcome to the Algorhythm Holdings Third Quarter 2024 Financial Results Earnings Call. My name is Russ, and I'll 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 file with the Securities and Exchange Commission, including the cautionary statement included in our current and periodic filings. I will now turn the call over to your host, Gary Atkinson, company CEO.
Thank you, Russ. Good morning, ladies and gentlemen. My name is Gary Atkinson. I'm the CEO of the company. I would like to start off by thanking everybody for taking the time to listen in and participate in our Third Quarter 2024 Earnings Call. This past quarter has been very exciting on several important fronts. We have officially unveiled our strategic shift from a legacy consumer electronics karaoke company to a holding company model, and this has resulted in a dramatic increase in the overall prospects of the company. Today, I would like to highlight several notable milestones across our first two holdings, Singing Machine and SemiCab. As many of you know, Singing Machine is our core business. For over 40 years, Singing Machine has been and still is the dominant consumer karaoke brand and the captain of the category at retail, serving all major big-box retailers in the U.S.
for decades. This year, you will continue to see Singing Machine karaoke merchandised at all major retailers like Walmart, Costco, Sam's Club, Amazon, and many other fine retailers across the world. In addition to our traditional retail business, I'm excited to also discuss today our recent groundbreaking announcement to expand into the automotive space. For the past two years, we have been developing a fully integrated karaoke microphone solution that partners directly with automotive OEMs that allows us to build stronger relationships, leverage technology to build a moat around our business, and build a leaner, higher-margin cost structure. Just last week, we announced our first major partnership with the world's largest EV manufacturer, BYD. We are extremely proud and excited for this milestone. BYD produces globally over $3 million automobiles annually, and this figure continues to grow.
They intend to put our proprietary next-generation Singing Machine karaoke technology into every single one of the cars that they manufacture, beginning with some of their best-selling premium models in 2025. Thinking ahead for Singing Machine, we intend to leverage our brand and our technology to approach more OEM partnerships across the automotive, smart TV, and set-top box markets to implement our karaoke microphone solutions. In the future, we see this integrated microphone business being potentially larger than our retail business. On the SemiCab front, we closed on this acquisition in early July and spent much of the quarter integrating the business and closing on a number of new exciting pilot programs that we'll discuss on this call today. As a reminder to everybody, SemiCab is an early-stage, AI-driven logistics transportation company with operations in the U.S. and India.
SemiCab's technology platform was created to solve one of the oldest problems in the transportation space, and that is how to make full truckload transportation more efficient. As it exists today, approximately one out of every three trucks on the road is being driven empty. With the rise of AI and machine learning, SemiCab is solving an inefficiency that costs the industry over $900 billion a year. Since acquiring SemiCab, we first prioritized recapitalizing the business, strengthening their critical relationships, and preparing for long-term success as we turn our efforts back to growth. In early October, we made a series of announcements regarding new pilot contracts for SemiCab. The list of new relationships is impressive. In fact, to put perspective on our recent accomplishments, we have signed partnership deals in the last two months with companies that have an excess combined market cap of over $310 billion.
To give you a quick summary of some of the recent deals announced, SemiCab signed a multi-million-dollar pilot contract with the second-largest food and beverage packaged goods producer in the United States. Apollo Tyres, one of the largest tire manufacturers in Asia and Europe, awarded SemiCab a multi-million-dollar contract in India. We also saw a $10 billion consumer packaged goods manufacturer in India award SemiCab a multi-million-dollar pilot contract. We'll discuss more of these at length later, but with this brief operational overview, I would like to turn the call over to our Chief Revenue Officer, Richard Perez, to walk through the details and results of operations for the Third Quarter 2024. Go ahead, Rich.
Thank you, Gary. My name is Richard Perez, and I'm the Chief Financial Officer for Algorhythm Holdings. I appreciate everyone for taking the time out of their busy days 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 from my perspective as to how our business is evolving in the near term. 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 reflective of a reduction of sales and seasonal promotions at two of the company's top five customers, as the company chose not to aggressively pursue marketing and promotional pricing strategies as part of its focus on selling a more selective, higher-margin retail product mix going forward.
Sales were also negatively impacted by general inflation concerns and lower overall demand for audio and in-home electronic entertainment, resulting in lower forecasts by the company's retail customers. 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. During the three months ended September 30, 2024, total operating expenses decreased to approximately $1,073,000 compared to approximately $3,628,000 during the three months ended September 30, 2023. This represents a decrease in total operating expenses of approximately $2,555,000 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 mentioned previously. These decreases in operating expenses were offset by increases in stock-based consulting expenses of approximately $446,000 and increased third-party logistics costs of approximately $213,000, which was primarily 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 $815,000 related to the asset acquisition agreement of SemiCab.
Other expenses consisted of interest expense of approximately $283,000 for the three months ended September 30, 2024, as compared to the 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. In closing, the total net effect of these developments in sales and related expenses was that the company recognized a positive net income for the Third Quarter of $1.2 million compared to net income of $100,000 in the same period of the prior year. In conclusion, we're excited about the momentum building in our business and look forward to updating you on our future progress. Thanks again for your time today. We appreciate your interest in Algorhythm Holdings. And now I'll return the call back to you, Gary.
Perfect. Thank you, Richard. I would like to make sure that we keep some time here for Q&A, but before turning it over, I wanted to wrap up my prepared portion of the call by reiterating our view on the growth prospects for both of our current businesses. For Singing Machine, we see the BYD relationship as very exciting, but hopefully only the beginning of an entirely new product vertical for us. We see tremendous blue sky to integrate our microphones with many major automotive brands. In addition, the television market is also equally eager to integrate with our next-generation karaoke microphone. Many leading TV manufacturers that we have spoken to see the future of smart TVs as becoming a technology and entertainment hub driven by shared communal social experiences.
Karaoke has always been a strong example of this experience, where all you need is a screen, speakers, and a microphone combined with the best-in-class karaoke content through our partner, Stingray, to fully recreate the karaoke experience at home. Singing Machine intends to become more asset-light, focus on higher-margin opportunities, and look to scale back from unprofitable retail business. Similarly, we view SemiCab as on the cusp of disrupting a multi-trillion-dollar ground transportation industry. We are starting with optimizing full truckload shipping first in the U.S. and in India. As mentioned above, the demand is there, as evidenced by signing a number of pilot contracts with very large Fortune 500 global household brands. We have articulated that as we execute in the current geographies, our partners will continue to look to expand and replicate these opportunities in many more markets. The potential here is enormous.
We are extremely focused on taking the time and the effort to ensure that these pilot contracts are successful, organically unlocking the full potential of this AI-driven technology. I want to thank everybody for your continued support. I look forward to providing additional updates soon, and at this point, I'd like to now turn the call over to the moderator to conduct our Q&A session.
If you would like to ask a question, please press star one on your telephone keypad now. You will be placed into the queue in the order received. Please be prepared to ask your question when prompted. Once again, if you would like to ask a question, please press star one on your phone now. And our first question comes from Theodore O'Neill from Litchfield Hills Research. Please go ahead, Theodore.
Thanks very much. And thanks for taking my call. Gary, forgive me if the question's naive due to the story, but can you add more color to the SemiCab pilot contracts? Specifically, what's the commonality between a tire company and a consumer goods company? And also, what is it going to take for the pilots to go into commercial phase?
Perfect. Yeah, Theodore, great question. Thanks for joining and asking, so I'll start with the commonality. I mean, the nice thing about the SemiCab platform is they operate in essentially the full truckload ground transportation space, so any shippers, any, let's say, consumer goods companies, anybody that needs to ship full truckload goods from point A to point B can use the SemiCab platform as a means to move freight, so the only commonality required is that it has to be a dry van. They're not doing refrigerated storage, so no food products. But basically, any sort of consumer product goods are perfect candidates to move their freight with SemiCab.
And then in terms of just adding a little bit of color around the pilot contracts, I think the way to answer that is when you're dealing with these sort of enterprise-scale Fortune 500-type companies, they're not going to just turn over multiple percentage points of their freight business to a newcomer overnight. I think the key that we're seeing and hearing is that there's a lot of demand for the SemiCab products. There's a lot of buy-in from the corporate offices in terms of the sort of sustainability and efficiency and optimization that SemiCab can bring. But obviously, they want to start relatively small. And when I say relatively small, we're talking still multi-million-dollar annual commitments, but small overall for companies that are doing upwards of $1 billion a year in annual freight spend.
The plan is to start small, basically take on the loads that are being tendered, and just making sure that we're delivering a high quality of service, that we're picking up on time, we're delivering the goods on time, and that the pricing that we're promising is true for the customers. And what we're hearing is that if we're able to do those things, if we're able to execute on our promises, that more and more geographic areas will open up, more lanes, and more volume will open up, which will, of course, increase the size of the revenue. So that's sort of where we are now. I mean, it's obviously a good problem to have. It's an exciting opportunity for SemiCab and for the company. And so we're just looking forward to executing on that. Hopefully, I answered all your questions.
Oh, no, I've got more. And then, how do you, yes, you answered the ones I had just posed. And then, how does it interface with the actual trucking companies?
So SemiCab works with thousands of trucking companies. These could be anywhere from little mom-and-pop carriers that have maybe one or two trucks all the way up to mid-size fleet operators that have hundreds of trucks available. So SemiCab has long-term contractual relationships with these carriers, and they're basically directing the flow of those trucks into the different customer warehouses. And so they'll pick up goods. So these carriers are coming in under the sort of the name of SemiCab, and SemiCab is directing those trucks where to pick up, where to drop off, where to go to next. So it's basically kind of like, think of it as like a virtual shipper. We have access to the assets, the trucks, the equipment without having all of the overhead and the risk of drivers and maintenance and repairs on the vehicles, if that makes sense.
Okay, and under the new holding company model, where are you seeing opportunity for potential acquisitions?
I think right now we just want to make sure that we're executing on the opportunities that we have in front of us for now. We don't have any immediate plans for acquisitions at the moment. I would say that once we're able to execute on the opportunities we have and we're successful, then I would say there's certainly opportunities to look at additional acquisitions down the road, particularly anything that might complement or supplement SemiCab in the logistics and transportation space.
Okay. Thanks very much.
Okay. Thanks, Theodore.
Our next question comes from Ed Woo from Ascendiant Capital. Please go ahead, Ed.
Yeah. Congratulations on all the progress you're making. In terms of you talked about global opportunities for SemiCab, have you given a timeline for when you may expand outside of the U.S. and Indian market?
I think the key there is that we've made it clear to our customer base that we are willing to enter new geographies with their support. If we're able to execute and make these multinational enterprise-level customers happy in the U.S. and in India, if they came to us and said to us, "Hey, we'd like now to replicate this in Europe or replicate this in Australia," we'd certainly be willing to look at it and make the investments into entering new territories. I would say right now we want to focus on the demand that we have right in front of us. Certainly, we're more than willing to go where the customers want us to go, but we don't want to try to grow too quickly.
I think we want to execute with what's in front of us and then grow from there.
That sounds good. Well, thank you for answering my questions, and I wish you good luck. Thank you.
Okay. Thanks, Ed.
And our next question comes from Brian Tantalo, an investor. Please go ahead, Brian.
Thank you. Gary, congratulations on several transformative announcements. Sounds like you and the team are busy.
Thanks, Brian.
A couple of quick questions. Yeah. A couple of quick questions. The BYD announcement obviously is significant. I'm wondering kind of two things, if you could, one, articulate the details of that agreement, and two, could we expect any additional announcements in the EV space or in the auto sector in general?
Yeah. No, great question, so I think the way we're thinking about BYD, it's sort of a unique, the way that contract had to be structured, it was unique. And the reason for that is BYD is a very, very vertically integrated company, so I was actually surprised to learn that internally, they manufacture every single component in their cars with the exception of the tires and the glass.
And so from the very outset, they were adamant to say, "We want your microphone technology, but as a company, we have to manufacture every single part that goes into those cars." So what we worked out with them is essentially sort of a technology licensing model where BYD will pay us a fixed multi-dollar royalty on every single microphone that they produce and they put in their cars, which actually is quite good for us because we don't have to worry about the manufacturing process. BYD Electronics, which is sort of an internal division of BYD, will manufacture the microphones, and then they'll sell them internally to BYD Automotive. But for us, it's nice because we're just collecting a fixed royalty on every mic, which is essentially 100% margin for us. So it's a nice model.
But I will say that for other OEMs that we talk to, they're not going to be as interested in manufacturing their own microphones. They're more looking to buy sort of an off-the-shelf existing microphone that will work for them. So that model will look a lot more like our traditional model, which is we'll contract manufacture that. And in fact, BYD will be the manufacturer for our microphones for all OEM partnerships, and then we'll sell those microphones at wholesale pricing to the other OEMs that we work with. So there'll be two different models in which we can sell those microphones.
Excellent. Thank you.
And then I think, oh, sorry. And then you had a second part, right? Whether we expect to have more of these automotive. So I probably can't say what partners we're currently in talks with. I will say there has been a tremendous amount of demand for karaoke in the car. One thing I could say that might be helpful to look at is if you look at the Stingray Group, which is our content partner, they've been very successful in signing new contracts with large automotive OEMs. So they've signed, and this is public, so we can talk about it, but they've signed content deals with Ford, which was fairly recently announced. They've signed deals with Audi. They've signed deals with, for instance, Tesla. They power all of the karaoke content and all of the Teslas around the world.
So where there are situations where Stingray already has their content in the car, those are good opportunities for us to try to partner with those car brands and get our microphone technology in because in case people on this call may be not familiar, Stingray is one of our largest investors. They're a key strategic partner of ours, and we have in our microphone a pretty tight integration between the hardware and Stingray's karaoke app software. So there's a lot of value add to working with Singing Machine if you're already working with Stingray on the music side.
That's very helpful. Thank you for that.
Of course.
Our next question comes from Dave Brown, an investor. Please go ahead, Dave.
Yeah. Hi. Thanks for taking my question. I just wanted to quickly ask on the Singing Machine side, in terms of kind of a product roadmap or strategy, can you talk maybe a little bit about anything that you're developing, new products that might help both on revenue growth and margin expansion? Thanks.
Sure. So like I mentioned in my earlier prepared comments, the future, in my opinion, of Singing Machine is to develop products that are higher margin, which means products that I think provide a better experience and have more features to the consumers. So we're looking now at exploring more of a premium, higher price point karaoke product offering that I think at a minimum has to support Wi-Fi streaming where consumers have access to over 100,000 of our karaoke songs in the cloud, but that also offer other apps that people might subscribe to. So for instance, we launched this year a new karaoke product with Costco and with Sam's Club, and that has natively built into it Spotify, Apple Music, Pandora.
So if you're already customers of those services, we're willing and happy to make those services available on our karaoke products so that people can take advantage of what they're already paying for. And so far, we found that to be a very popular new feature that we've added this year. So I think what we're looking to do is maybe shy away from the lower margin promotional sort of product that is at the lower price points and really try to focus on areas where we can create the most value, which I think is higher price point, Wi-Fi products that can support some new software features like gaming that we have coming out, I think, for next year, and that can take advantage of some of the new things that we've been developing.
For instance, with BYD, we've created a lot of new features and technology that hasn't yet made its way into the consumer product side, and that's what we're going to focus on for 2025 and beyond. And then, of course, that's just the consumer product side. And we intend to also continue to scale these automotive opportunities, smart TV opportunities, and even set-top box integrations where we can essentially almost, the way I almost think about it is at some point in the future, there will be a world where all you need is a microphone. That microphone will connect to almost any TV or your Apple TV or your Roku or whatever you've got at home, and you won't need to go buy an external karaoke device.
It'll just be a microphone that will connect to your existing sound system at home, and from that, you'll be able to create your own karaoke experience. So that's kind of the longer-term vision for where I see it going.
Thanks. That's helpful.
At this time, there are no further questions. I'll turn the call back over to Gary for closing remarks.
Okay. All right, well, everybody. I thank you all for your time today. These were great questions. We appreciate the interest and the support from all of our shareholders, and we look forward to continuing to update all of you in the coming quarter. It's a big quarter for our holiday season, and we look forward to our next update, so thanks, everybody. Enjoy the rest of your day. Take care.
This does conclude today's third quarter earnings call. Thank you for your participation. You may now disconnect.