Item 7. Management’s Discussion and Analysis
Item 7. Management’s Discussion and Analysis of Financial
Condition and Results of Operations.
You should read the following
discussion and analysis of our financial condition and results of our operations together with our consolidated financial statements
and the notes thereto appearing elsewhere in this report. This discussion contains forward-looking statements reflecting our current
expectations, whose actual outcomes involve risks and uncertainties. Actual results and the timing of events may differ materially from
those stated in or implied by these forward-looking statements due to a number of factors, including those discussed in the sections
entitled “Risk Factors,” “Cautionary Statement regarding Forward-Looking Statements” and elsewhere in this report.
Unless otherwise stated
or the context otherwise requires, references in this report to “RYTHM”, the “Company,” “we,” “us,”
“our,” or similar references mean RYTHM, Inc. and its subsidiaries on a consolidated basis.
Overview
RYTHM is a developer of
branded innovative solutions for the cannabis and hemp industries. The Company’s portfolio of consumer-packaged goods brands includes
RYTHM, incredibles, Dogwalkers, Beboe, &Shine, Doctor Solomon’s, Good Green and Señorita. Our Señorita brand
offers consumers hemp-derived tetrahydrocannabinol (“THC”) beverages and are sold at top retailers, online and through direct-to-retail
partnerships. The Señorita brand mirrors well-known cocktails like a margarita – in four flavors – classic Lime Jalapeño
Margarita, Mango Margarita, Paloma and Ranch Water. Known for its clean, fresh taste and commitment to high-quality, natural ingredients,
Señorita offers a low-sugar, low-calorie alternative to alcoholic beverages and is available in fifteen U.S. states and Canada
including at top retailers such as Total Wine, ABC Fine Wine & Spirits, and Binny’s. The RYTHM branded beverage comes in two
fruit-driven flavors with effect-based ingredients. Other hemp-derived products including incredibles and Beboe edible products are primarily
sold online and through direct-to-retail partnerships. In addition to the sale of hemp-derived products (“Non-licensing Revenue”),
the Company licenses its brands to be manufactured and distributed in exchange for a licensing fee (“Licensing Revenue”).
RYTHM has also historically
been a leading provider of innovative cultivation and extraction solutions for the cannabis industry. Prior to the exit of the extraction
business on March 30, 2025, the Company’s comprehensive extraction product line (“the Extraction Business”), which
included hydrocarbon, alcohol, solventless, post-processing, and lab equipment, empowered cannabis producers to maximize the quantity
and quality of extract required for premium concentrates. Additionally, prior to its sale on December 31, 2024, the Company’s proprietary
micro-environment-controlled Agrify Vertical Farming Units (“VFUs”) enabled cultivators to produce high quality products
for the cannabis industry (“the Cultivation Business”). As the discontinuation of the Extraction Business and the sale of
the Cultivation Business represented strategic shifts that had a major effect on our operations and financial results, they have been
presented in discontinued operations separate from continuing operations for the years ended December 31, 2025 and 2024 in the Company’s
consolidated statements of operations and applicable footnotes in accordance with ASC 205, Presentation of Financial Statements .
Please refer to Item 1 and the notes to the consolidated financial statements for details on recent developments and significant transactions
during the period.
Critical Accounting Policies and Significant Judgments and Estimates
Our management’s
discussion and analysis of our financial position and results of operations is based on our financial statements, which have been
prepared in accordance with accounting principles generally accepted in the United States of America, or U.S. GAAP. The preparation
of financial statements in conformity with U.S. GAAP requires us to make estimates and assumptions that affect the amounts reported
in the financial statements and accompanying notes. On an ongoing basis, we evaluate estimates, which include estimates related to
accruals, stock-based compensation expense, recoverability of goodwill, intangible assets, and other assets, and reported amounts of
revenues and expenses during the reported period. We base our estimates on historical experience and other market-specific or other
relevant assumptions that we believe to be reasonable under the circumstances. Actual results may differ materially from those
estimates or assumptions. Refer to Note 2 included elsewhere in the notes to the consolidated financial statements, for further
information.
Results of Operations
We have incurred
recurring losses to date. Our consolidated financial statements have been prepared assuming that we will continue as a going concern
and, accordingly, do not include adjustments relating to the recoverability and realization of assets and classification of
liabilities that might be necessary should we be unable to continue in operation. Refer to information provided under the heading
“Liquidity and Capital Resources” below for further details.
26
Comparison of Years Ended December 31, 2025 and 2024
The following table summarizes our results of operations for the years
ended December 31, 2025 and 2024:
Year Ended December 31,
2025
2024
Revenue
$ 17,283
$ 18
Cost of goods sold
7,093
89
Gross profit (loss)
10,190
(71 )
Selling, general and administrative
34,055
7,182
Impairment of long-lived assets
8,471
—
Change in contingent consideration
—
(2,180 )
Total operating expenses
42,526
5,002
Operating loss from continuing operations
(32,336 )
(5,073 )
Interest expense, net
(3,203 )
(256 )
Change in fair value of warrant liabilities
299
(17,902 )
Other income, net
500
—
Total other expense, net
(2,404 )
(18,158 )
Loss from continuing operations before income taxes
(34,740 )
(23,231 )
Income tax provision
—
2
Loss from continuing operations, net of income taxes
(34,740 )
(23,229 )
Loss from discontinued operations
(2,054 )
(6,624 )
Gain on disposal of Extraction business
3,537
(11,893 )
Income (loss) from discontinued operations, net of income taxes
1,483
(18,517 )
Net loss
$ (33,257 )
$ (41,746 )
Net loss per share – basic and diluted
$ (16.68 )
$ (40.92 )
Weighted average common shares outstanding - basic and diluted
1,993,947
1,020,185
Revenues
We generate revenue from sales of hemp-derived
THC products (non-licensing) and related party Licensing Revenue.
The following table provides a breakdown of our revenue from
continuing operations for the years ended December 31, 2025 and 2024:
Year Ended December 31,
(In thousands)
2025
2024
Change
% Change
Non-licensing Revenue
9,504
18
9,486
52700 %
Licensing Revenue
7,779
—
7,779
— %
Total revenue
$ 17,283
$ 18
$ 17,265
95917 %
Revenues increased by
$17.3 million for the year ended December 31, 2025, as compared to the same period in 2024. The comparative increase in revenue was
primarily driven by the transactions with MC Brands and VCP in May and August 2025, respectively in addition to all revenue for the
year ended December 31, 2024 from the Cultivation Business and Extraction Business being presented as part of discontinued
operations. Of the revenue recognized for the year ended December 31, 2025, $8.2 million was attributable to related parties.
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Cost of Goods Sold
Cost of goods sold represents
a combination of the following: internal and outsourced labor and material costs associated with the assembly of extraction equipment,
as well as labor and parts costs associated with the sale or provision of other products and services.
The following table provides a breakdown of our
cost of goods sold from continuing operations for the years ended December 31, 2025 and 2024:
Year Ended December 31,
(In thousands)
2025
2024
Change
% Change
Non-licensing Revenue
7,093
89
7,004
7870 %
Total cost of goods sold
$ 7,093
$ 89
$ 7,004
—
Cost of goods sold
represents costs associated with the hemp-derived products sales (non-licensing). Cost of goods sold increased by $7 million for the
year ended December 31, 2025 compared to the same period in 2024. The comparative increase in cost of goods sold was primarily
driven by the hemp-derived THC edibles operations associated with the MC Brands transaction in May 2025, in addition
to all cost of goods sold for the year ended December 31, 2024 from the Cultivation Business and Extraction Business being presented
as part of discontinued operations.
Gross Profit
Year Ended December 31,
(In thousands)
2025
2024
Change
% Change
Gross profit (loss)
10,190
(71 )
10,261
(14452 )%
Gross profit totaled $10
million, or 59%, of total revenue during the year ended December 31, 2025 compared to a gross loss of $71 thousand of total revenue during
the year ended December 31, 2024. The comparative $10.3 million year-over-year increase in gross profit was primarily driven by the changes
in product lines of the business.
Selling, General and Administrative Expenses
Year Ended December 31,
(In thousands)
2025
2024
Change
% Change
Selling, general and administrative
$ 34,055
$ 7,182
$ 26,873
374 %
Selling, General and administrative
expenses (“SG&A”) consist principally of marketing costs and support services performed by Green Thumb, as well as stock-based
compensation and travel expenses associated with executive and other administrative functions. Other SG&A expenses include, but are
not limited to, professional fees for legal and accounting services and depreciation and amortization costs.
SG&A expenses increased by $27 million, or 374%, for the year ended
December 31, 2025, compared to the same period in 2024. The comparative change is primarily attributable to marketing and consulting costs
to support the growth of the hemp-derived THC products sales (non-licensing) in addition to the presentation of SG&A expense from
the Cultivation Business and Extraction Business for the year ended December 31, 2024 as part of discontinued operations. Of the SG&A
expense incurred for the year ended December 31, 2025, $10.6 million was attributable to related parties.
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Other Expense, Net
Year Ended December 31,
(In thousands)
2025
2024
Change
% Change
Interest expense, net
$ (3,203 )
$ (256 )
$ (2,947 )
1151 %
Change in fair value of warrant liabilities
299
(17,902 )
18,201
(102 )%
Other income, net
500
—
500
— %
Total other expense, net
$ (2,404 )
$ (18,158 )
$ 15,754
(87 )%
Interest expense, net
Interest expense, net was approximately $3.2 million for the year ended
December 31, 2025 compared to interest expense, net of approximately $0.3 million for the same period in 2024. The change is attributable
mainly to the increase of $72.0 million principal under the Convertible Notes. Included interest expense, net for the year ended December
31, 2025 is $4.1 million incurred from a related party. The year ended December 31, 2025 includes $1.2 million of interest income earned
on cash deposits with no comparable amount earned in the year ended December 31, 2024.
Change in fair value of warrant liability
Change in fair value of the warrant liability decreased by $18.2 million,
or 102%, for the year ended December 31, 2025, compared to the same period in 2024. The increase is related to the fair value remeasurement
of warrants.
Other income, net
Other income, net increased by $0.5 million,
for the year ended December 31, 2025, compared to the same period in 2024. The comparative change is primarily attributable to the employee
retention credit refunds received for the year ended December 31, 2025.
Income Tax Provision
Year Ended December 31,
(In thousands)
2025
2024
Change
% Change
Income tax provision
$ —
$ 2
$ (2 )
(100 )%
Effective tax rate
0.00 %
(0.01 )%
Change in loss on provision
for income taxes decreased by $2 thousand for the year ended December 31, 2025, compared to the same period in 2024.
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Liquidity and Capital Resources
As of December 31, 2025,
our principal sources of liquidity are cash and cash equivalents totaling $32.2 million. Our current working capital needs are to support
revenue growth and manage inventory to meet demand forecasts and support operational growth. Our long-term financial needs primarily include
working capital requirements. There are many factors that may negatively impact our available sources of funds in the future, including
the ability to generate cash from operations, raise debt capital and raise cash from the issuance of our securities. The amount of cash
generated from operations is dependent upon factors such as the successful execution of our business strategy and general economic conditions.
We may opportunistically
raise debt capital, subject to market and other conditions. Additionally, as part of our growth strategies, we may also raise debt capital
for strategic alternatives and general corporate purposes. If additional financing is required from outside sources, we may not be able
to raise such capital on terms acceptable to us or at all. If we are unable to raise additional capital when desired, our business, operating
results and financial condition may be adversely affected.
The Company is required to
evaluate whether there are conditions or events, considered in aggregate, that raise substantial doubt about the Company’s ability
to continue as a going concern within one year after the date that the financial statements are issued. Substantial doubt exists when
conditions and events, considered in aggregate, indicate that it is probable that a company will be unable to meet its obligations as
they become due within one year after the date that the consolidated financial statements are issued.
We have a history of recurring
net losses and negative cash flow in operating activities. However, we believe our positive working capital as of December 31, 2025 inclusive
of $32.2 million of cash and cash equivalents, anticipated contractual Licensing Revenue and ability to address our Convertible Notes
will be sufficient to meet our cash requirements through at least the 12-month period following the date that these consolidated financial
statements were issued.
Contractual debt maturities
of $80 million exist through February 2027, with $72 million of the Convertible Notes held by Green Thumb, a related party. The election
of these notes to be payable in cash upon maturity could raise substantial doubt about the Company’s ability to continue as a going
concern. However, while these contractual maturities require management attention, management believes it is probable that the obligations
will be addressed through extension or conversion consistent with historical practice. As such, our financial statements have been
prepared on a going concern basis.
Indebtedness
Convertible Notes
On November 5, 2024, the Company issued a secured convertible note
(the “November 2024 Note”) to RSLGH, LLC (“RSLGH”), a subsidiary of Green Thumb, a related party. The November
2024 Note is a secured obligation of the Company and ranks senior to all indebtedness of the Company except for the May 2025 Notes and
the August 2025 Notes (both as defined below), which rank on parity with the November 2024 Note. The November 2024 Note matured on November
5, 2025 and accrued interest at a 10.0% annualized rate. The principal amount of the November 2024 Note was converted into pre-funded
warrant on the maturity date. The November 2024 Note provided for advances of up to $20 million in the aggregate, of which $10 million
was advanced upon issuance. The November 2024 Note was amended on May 8, 2025 to issue pre-funded warrants in lieu of cash interest, with
18,614 pre-funded warrants issued on May 8, 2025 and an additional 11,373 pre-funded warrants issued on September 1, 2025, which were
issued in lieu of the cash interest that would otherwise be payable under the November 2024 Note. The number of pre-funded warrants is
equal to the cash interest amount otherwise payable on the November 2024 Note divided by the closing share price on May 8, 2025, the effective
date of the amendment. No changes were made to the conversion price of the principal amount of the November 2024 Note. On May 22, 2025,
the Company and RSLGH entered into a second amendment to the November 2024 Note, which amended the terms to, among other things, permit
RSLGH to elect, subject to any required approvals under Nasdaq listing rules, to receive pre-funded warrants in lieu of shares of Common
Stock upon conversion of the November 2024 Note at a conversion price equal to the existing conversion price of $3.158 less the $0.001
exercise price of each pre-funded warrant. On November 3, 2025, the holder of the November 2024 Note elected to convert the outstanding
principal and interest, into pre-funded warrants. The outstanding principal and accrued interest amounts of $10 million and $175 thousand
respectively, resulted in the issuance of 3,167,564 and 55,433 pre-funded warrants, respectively.
On May 22, 2025, the Company
issued secured convertible notes with an aggregate original principal amount of $30.0 million (collectively the “May 2025 Notes”)
to RSLGH and to certain other third-party accredited investors. The May 2025 Notes are secured obligations of the Company and rank senior
to all indebtedness of the Company except for the the August 2025 Notes, which ranks on parity with the May 2025 Notes. The May 2025 Notes
will mature on November 22, 2026 and accrue interest at a 10.0% annualized rate, with interest to be paid on the first calendar day of
each September and March while the May 2025 Notes are outstanding, in pre-funded warrants, beginning September 1, 2025. The principal
amount of the May 2025 Notes will be payable on the maturity date. The May 2025 Notes may be converted into Common Stock or, at the election
of the holder, into pre-funded warrants, with a beneficial ownership limitation for RSLGH of 49.99% and a beneficial ownership limitation
for other holders of 4.99%, in each case subject to applicable Nasdaq listing rules. If a holder elects to convert the May 2025 Notes
into Common Stock, the conversion price per share will be $23.53, equal to the most recent closing price of the Common Stock on the Nasdaq
Capital Market at the time the May 2025 Notes were issued, subject to customary adjustments for certain corporate events. If a holder
elects to convert the May 2025 Notes into pre-funded warrants, and for interest payments payable in the form of pre-funded warrants, the
conversion price per pre-funded warrant will be equal to the $23.53 conversion price less than $0.001 exercise price of the warrant. The
conversion of the May 2025 Notes into Common Stock and/or pre-funded warrants is subject to certain customary conditions and, to the extent
necessary, the receipt of stockholder approval under Nasdaq listing rules.
30
On August 25, 2025, the Company
issued secured convertible notes with an aggregate original principal amount of $50.0 million (collectively the “August 2025 Notes”)
to RSLGH and to certain other third-party accredited investors. The August 2025 Notes are secured obligations of the Company and rank
senior to all indebtedness of the Company except for the May 2025 and November 2024 Notes, which rank on parity with the August 2025 Notes.
The August 2025 Notes will mature on February 25, 2027 and accrue interest at a 10.0% annualized rate, with interest to be paid on the
first calendar day of each September and March, while the August 2025 Notes are outstanding beginning March 1, 2026. The principal amount
of the August 2025 Notes will be payable on the maturity date. The August 2025 Notes may be converted into Common Stock or, at the election
of the holder, into pre-funded warrants, with a beneficial ownership limitation for RSLGH of 49.99% and a beneficial ownership limitation
for other holders of 4.99%, in each case subject to applicable Nasdaq listing rules. If a holder elects to convert the August 2025 Notes
into Common Stock, the conversion price per share will be $29.475, equal to the Minimum Price as such term is defined under Nasdaq Listing
Rule 5635 at the time the August 2025 Notes were issued, subject to customary adjustments for certain corporate events. If a holder elects
to convert the August 2025 Notes into pre-funded warrants, and for interest payments elected to be paid in the form of pre-funded warrants,
the conversion price per pre-funded warrant will be equal to the $29.475 conversion price less than $0.001 exercise price of the warrant.
The conversion of the August 2025 Notes into Common Stock and/or pre-funded warrants is subject to certain customary conditions and, to
the extent necessary, the receipt of stockholder approval under Nasdaq listing rules.
The May 2025 Notes and August
2025 Notes (together referred to as “the Notes”) impose certain customary affirmative and negative covenants upon the Company,
including covenants relating to ranking and reservation of shares. If an event of default under one or more of the Notes occurs and is
not waived, the holder can elect to accelerate all or a portion of the then-outstanding principal amount of the applicable Note, plus
accrued and unpaid interest, including default interest, which accrues at a rate per annum equal to 14% from the date of a default or
event of default. The Company was in compliance with these covenants as of December 31, 2025.
Summary Statement of Cash Flows
The following table presents the major components of net cash
flows from and used in operating, investing, and financing activities for the years ended December 31, 2025 and 2024:
(In thousands)
December 31,
2025
December 31,
2024
Net cash (used in) provided by:
Operating activities
$ (23,537 )
$ (11,583 )
Investing activities
(55,075 )
(54 )
Financing activities
79,660
42,373
Net increase in cash and cash equivalents
$ 1,048
$ 30,736
Cash Flows from Operating Activities
For the year ended December 31, 2025, our operating cash flows
included a net loss of $33.2 million, $6.2 million of depreciation and amortization, $2.2 million of stock based compensation expense,
non-cash interest expense of $2.8 million offset by an increase of $7.0 million related party accounts receivable, $3.5 million related
to a loss on exit of the Extraction Business, and $3.5 million reduction of inventory. Net cash was increased by changes in operating
assets and liabilities of $7.1 million.
For the year ended December 31, 2024, our operating cash flows included
a net loss of $41.7 million, a $17.9 million change in the fair value of warrant liabilities, $11.9 million related to loss on disposal
of the Cultivation Business, $1.4 million of depreciation and amortization, $1.2 million of stock based compensation expense, offset by
a decrease of $5.9 million related to gain on settlement of contingent liability, $2.2 million decrease related to accrued acquisition
liabilities due to issuance of held-back-shares, change in provision for credit losses of $0.3 million, change in provision for inventory
of $0.7 million, and a gain on early termination of lease of $0.1 million. Net cash was increased by changes in operating assets and liabilities
of $7.0 million.
Cash Flows from Investing Activities
For the year ended
December 31, 2025, net cash used in investing activities was $55.1 million, which primarily resulted from the related party
transactions with MC Brands and VCP.
For the year ended December
31, 2024, net cash used in investing activities was approximately $0.1 million, which included cash inflows of $0.3 million from the proceeds
from repayment of loan receivable, and cash outflows of $0.4 million related to issuance of loans receivable.
Cash Flows from Financing Activities
For the year ended December
31, 2025, net cash provided by financing activities was $79.7 million, which resulted from proceeds from May and August 2025 Notes.
For the year ended December
31, 2024, net cash provided by financing activities was $42.4 million. Net cash provided by financing activities was primarily driven
by proceeds from the issuance Common Stock in connection with private placement of $25.8 million, proceeds from the issuance of related
party notes of $14.5 million, proceeds from the issuance of Common Stock pursuant to a registered offering with the U.S. Securities and
Exchange Commission and pre-funded warrants offering of $2.1 million, proceeds from the issuance of Common Stock through stock subscription
of $0.3 million, offset by payments on insurance financing loans of $0.4 million.
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Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
Not applicable.