8-K: Algorhythm Secures $1.09M in Pre-Paid Purchase Financing

Algorhythm Holdings, Inc. entered into its third secured pre-paid purchase agreement with Streeterville Capital, LLC for $1.09 million, continuing its equity financing strategy.

Summary

• Algorhythm Holdings, Inc. (the "Company") entered into Secured Pre-Paid Purchase #3 with Streeterville Capital, LLC on December 19, 2025.
• This is the third pre-paid purchase under a securities purchase agreement dated August 21, 2025, which allows for up to $20,000,000 in aggregate purchases.
• The Third Pre-Paid Purchase is for a principal amount of $1,090,000.
• It includes an original issue discount (OID) of $90,000, resulting in a net purchase price of $1,000,000.
• The purchase accrues interest at 9% per annum, compounded daily, with a three-year maturity date from December 19, 2025.
• The Company paid Univest Securities, LLC, its placement agent, an 8% cash fee of the aggregate gross proceeds received from the Third Pre-Paid Purchase.
• The securities were offered and sold in a private placement transaction, exempt from registration requirements under Section 4(a)(2) of the Securities Act.
• The Investor (Streeterville Capital, LLC) has the right, but not the obligation, to purchase common shares by applying portions of the outstanding balance.
• The Purchase Share Purchase Price is calculated as 90% multiplied by the lowest daily Volume Weighted Average Price (VWAP) during the ten trading days preceding the applicable measurement date.
• An ownership limitation prevents the Investor from beneficially owning more than 9.99% of the Company's outstanding common shares.
• The Pre-Paid Purchase is secured by a Guaranty, Pledge Agreement, Security Agreement, and IP Security Agreement, as defined in the Purchase Agreement.

Sentiment

Score: 4

Explanation: While the company secured needed capital, the terms involve significant dilution potential, high financing costs (OID, agent fees), and a secured obligation, which are generally unfavorable for existing shareholders. The ongoing reliance on such financing suggests potential cash flow challenges or a growth-at-any-cost strategy.

Positives

• Secured $1,000,000 in immediate funding (net of OID) for the Company's operations.
• The financing is part of a larger $20,000,000 facility, indicating ongoing access to capital.
• The interest rate of 9% per annum is fixed.
• The Company retains the right to prepay the outstanding balance with a 110% premium, provided no Event of Default has occurred.

Negatives

• The financing includes a significant original issue discount of $90,000 on a $1,090,000 principal, effectively reducing the immediate cash received to $1,000,000.
• An 8% cash fee was paid to the placement agent, further reducing net proceeds.
• The financing is secured by various company assets, including intellectual property, which could be a concern in case of default.
• The conversion terms (Purchase Share Purchase Price at 90% of lowest daily VWAP) are potentially dilutive to existing shareholders, especially if the stock price declines.
• A 110% prepayment penalty applies if the Company chooses to prepay.
• A default interest rate of 18% per annum (or maximum legal rate) applies upon an Event of Default, along with a 7.5% increase in the outstanding balance.

Risks

• Dilution Risk: The Investor can convert the outstanding balance into common shares at a price based on 90% of the lowest daily VWAP, which could lead to significant dilution for existing shareholders, especially if the stock price is volatile or declines.
• Default Risk: Numerous events of default are defined, including failure to pay, insolvency, failure to maintain share reserve, failure to deliver purchase shares, and breaches of other agreements. An Event of Default can lead to immediate acceleration of the entire outstanding balance, a 7.5% increase in the balance, and an 18% default interest rate.
• Security Interest Risk: The financing is secured by the Company's assets, including intellectual property, which could be at risk if the Company defaults on its obligations.
• Market Price Volatility: The conversion mechanism is tied to the VWAP, making the number of shares issued dependent on the Company's stock performance, which could exacerbate dilution during periods of low stock prices.
• Financing Costs: The original issue discount and placement agent fees represent significant costs associated with this financing.
• Ownership Limitation: The 9.99% ownership limitation for the Investor might restrict the speed or size of conversions, potentially forcing the Company to pay cash if shares cannot be issued.

Future Outlook

The Company continues to utilize its existing securities purchase agreement with Streeterville Capital, LLC to secure financing, indicating an ongoing strategy of raising capital through pre-paid equity purchases. This agreement provides a framework for future capital injections up to an aggregate of $20,000,000.

Management Comments

• "The Company has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized. By: /s/ Alex Andre Name: Alex Andre Title: Chief Financial Officer and General Counsel."
• "IN WITNESS WHEREOF, Company has caused this Pre-Paid Purchase to be duly executed as of the Effective Date. COMPANY: Algorhythm Holdings, Inc. By: /s/ Gary Atkinson Gary Atkinson, CEO."

Industry Context

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Stakeholder Impact

• Shareholders: Potential for significant dilution due to the conversion terms (90% of lowest daily VWAP) and the ongoing nature of the pre-paid purchases. The secured nature of the debt also increases risk for equity holders.
• Creditors: Streeterville Capital, LLC, as a secured creditor, has a priority claim on the Company's assets, including intellectual property, in the event of default.
• Company Operations: The capital infusion provides immediate liquidity, which can support ongoing operations or strategic initiatives.

Next Steps

• The Company will continue to issue and sell shares of its common stock to Streeterville Capital, LLC in one or more pre-paid purchases under the existing Securities Purchase Agreement, up to the aggregate limit of $20,000,000.
• Investor may, at its sole discretion, submit Purchase Notices to require the Company to issue and sell Purchase Shares.
• The Company must ensure Purchase Shares are issued free trading, either via an effective Registration Statement or an applicable exemption (e.g., Rule 144).

Key Dates

Recommendation

The capital raise provides necessary funding, but the terms of the pre-paid purchase, including the original issue discount, placement agent fees, and the potentially dilutive conversion mechanism tied to the lowest VWAP, introduce significant risks for existing shareholders. The secured nature of the financing further elevates risk. While the company has access to capital, the cost and potential dilution warrant a cautious 'hold' stance until there is clearer evidence of how this capital will translate into sustainable growth and improved financial health without excessive shareholder value erosion.

Keywords

Algorhythm Holdings, Streeterville Capital, Secured Pre-Paid Purchase, Equity Financing, Private Placement, Convertible Debt, Dilution, 8-K Filing, RIME, Nasdaq Capital Market, Securities Purchase Agreement, Original Issue Discount, Corporate Finance