RYTHM, Inc. 10-Q

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations The information contained in this Quarterly Report is intended to update the information contained in our Annual Report on Form 10-K for the year ended December 31, 2025 filed with the Securities And Exchange Commission (the “SEC”) on March 3, 2026 (the “Form 10-K”) and presumes that readers have access to, and will have read, the “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and other information contained in the Form 10-K. The following discussion and analysis also should be read together with our financial statements and the notes to the financial statements included elsewhere in this Quarterly Report. The following discussion contains certain statements that may be deemed “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Such statements appear in a number of places in this Quarterly Report, including, without limitation, “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” These statements are not guarantees of future performance and involve risks, uncertainties and requirements that are difficult to predict or are beyond our control. Forward-looking statements speak only as of the date of this Quarterly Report. You should not put undue reliance on any forward-looking statements. We strongly encourage investors to carefully read the risk factors described in the Form 10-K in the section entitled “Risk Factors” for a description of certain risks that could, among other things, cause actual results to differ from these forward-looking statements. We assume no responsibility to update the forward-looking statements contained in this Quarterly Report. The following should also be read in conjunction with the unaudited financial statements and notes thereto that appear elsewhere in this Quarterly 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, Inc. delivers well-being to consumers through its portfolio of hemp-derived THC products and iconic licensed brands. 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 seventeen 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. Both Señorita and RYTHM hemp-derived beverages are available at Chicago’s iconic United Center, based on a partnership announced in January 2026, establishing RYTHM as the venue’s official THC sponsor. 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”), we license our 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 three months ended March 31, 2026 and 2025 in our condensed consolidated statements of operations and as of March 31, 2026 and December 31, 2025 in our condensed consolidated balance sheets and applicable footnotes in accordance with ASC 205, Presentation of Financial Statements . Please refer to Item 1 and the notes to the unaudited condensed 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 GAAP. The preparation of financial statements in conformity with 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 (prepaid licensing rights), 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 1 included elsewhere in the notes to the unaudited condensed consolidated financial statements, for further information. 32 Results of Operations We have a history of recurring net losses and have incurred losses to date, except for the three months ended March 31, 2026, during which we recognized net income primarily as a result of a non-cash income tax benefit. Our unaudited condensed 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. Results of Operations Comparison of the Three Months Ended March 31, 2026 and 2025 The following table summarizes our results of continuing operations for the three months ended March 31, 2026 and 2025: Three months ended March 31, 2026 2025 Revenue (1) $ 13,286 $ 538 Cost of goods sold 2,889 448 Gross profit 10,397 90 Selling, general and administrative (2) 14,431 3,791 Total operating expenses 14,431 3,791 Operating loss from continuing operations (4,034 ) (3,701 ) Interest (expense) income, net (3) (1,742 ) 1 Change in fair value of warrant liabilities 105 407 Other income, net — 19 Total other (expenses) income, net (1,637 ) 427 Loss from continuing operations before income taxes (5,671 ) (3,274 ) Income tax benefit 25,593 — Income (loss) from continuing operations, net of income taxes 19,922 (3,274 ) Loss from discontinued operations — (1,918 ) Gain on disposal of Extraction business — 3,566 Income from discontinued operations, net of income taxes — 1,648 Net income (loss) $ 19,922 $ (1,626 ) Net income (loss) per share attributable to Common Stockholders – basic $ 1.53 $ (0.83 ) Net income (loss) per share attributable to Common Stockholders – diluted $ 1.33 $ (0.83 ) Weighted average common shares outstanding - basic 2,149,128 1,952,022 Weighted average common shares outstanding - diluted 5,247,311 1,952,022 (1) Includes $10.0 million for the three months ended March 31, 2026, and $80 thousand for the three months ended March 31, 2025, in each case from related parties. (2) Includes $4.3 million for the three months ended March 31, 2026, and $1.4 million for the three months ended March 31, 2025, in each case from related parties. (3) Includes $1.8 million of interest expense for the three months ended March 31, 2026, and $250 thousand for the three months ended March 31, 2025, in each case from a related party. 33 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 three months ended March 31, 2026 and 2025: Three months ended March 31, (In thousands) 2026 2025 Change % Change Non-licensing Revenue $ 3,311 $ 538 $ 2,773 515 % Licensing Revenue $ 9,975 $ — $ 9,975 — % Total revenue $ 13,286 $ 538 $ 12,748 2370 % Revenue increased by $12.7 million for the three months ended March 31, 2026, as compared to the same period in 2025. The comparative increase in revenue was primarily driven by the commencement of Licensing Revenue in May and August 2025 as well as the $2.8 million increase in Non-Licensing Revenue. Of the revenue recognized for the three months ended March 31, 2026, $10.0 million was attributable to related parties, as compared to $80 thousand for the three months ended March 31, 2025. Cost of Goods Sold Cost of goods sold represents costs associated with the hemp-derived THC product sales (Non-licensing Revenue). The following table presents our cost of goods sold from continuing operations for the three months ended March 31, 2026 and 2025, all of which relates to non-licensing revenue: Three months ended March 31, (In thousands) 2026 2025 Change % Change Cost of goods sold $ 2,889 $ 448 $ 2,441 545 % Cost of goods sold increased by $2.4 million for the three months ended March 31, 2026 compared to the same period in 2025. The comparative increase in cost of goods sold is driven by the increased sales of hemp-derived THC products. Gross Profit Three months ended March 31, (In thousands) 2026 2025 Change % Change Gross profit $ 10,397 $ 90 $ 10,307 11452 % Gross profit totaled $10.4 million, or 78% of total revenue during the three months ended March 31, 2026, compared to a gross profit of $90 thousand, or 17% of total revenue during the three months ended March 31, 2025. The comparative $10.3 million increase in gross profit was primarily driven by the commencement of Licensing Revenue in August 2025. Selling, General and Administrative Three months ended March 31, (In thousands) 2026 2025 Change % Change Selling, general and administrative $ 14,431 $ 3,791 $ 10,640 281 % Selling, general and administrative (“SG&A”) expenses consist principally of marketing costs and support services performed by Vision Management Services, LLC, a subsidiary of Green Thumb Industries Inc, a related party (“Green Thumb”), pursuant to two shared services agreements, 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 amortization costs. SG&A expense increased by $10.6 million, or 281%, for the three months ended March 31, 2026, compared to the same period in 2025. The comparative change is primarily attributable to marketing and consulting costs to support the growth of the hemp-derived THC products sales in addition to the presentation of SG&A expense from the Cultivation Business and Extraction Business for the three months ended March 31, 2025 as part of discontinued operations. 34 Other (Expenses) Income, Net Three months ended March 31, (In thousands) 2026 2025 Change % Change Interest (expense) income, net $ (1,742 ) $ 1 $ (1,743 ) (174300 )% Change in fair value of warrant liabilities 105 407 (302 ) (74 )% Other income, net — 19 (19 ) (100 )% Total other (expenses) income, net $ (1,637 ) $ 427 $ (2,064 ) (483 )% Interest expense, net was $1.7 million for the three months ended March 31, 2026, compared to interest income, net of $1 thousand for the three months ended March 31, 2025. The change is attributable mainly to the increase of $80.0 million new borrowings under the Convertible Notes (as that term is defined under “—Indebtedness” below). Included in interest expense, net for the three months ended March 31, 2026 is $1.8 million of interest expense incurred with a related party and $0.3 million of interest income. The fair value gain on warrant liabilities decreased by $302 thousand, or 74%, for the three months ended March 31, 2026, compared to the same period in 2025. The decrease reflects a smaller reduction in the fair value of warrant liabilities during the current period compared to the prior year period. Other income, net was nil for the three months ended March 31, 2026, compared to $19 thousand for the same period in 2025. Income Tax Benefit Income tax benefit was $25.6 million for the three months ended March 31, 2026, compared to nil for the three months ended March 31, 2025. The increase was attributable to a $25.6 million non-cash income tax benefit resulting from the release of the Company’s valuation allowance against its deferred tax assets. The valuation allowance was released following the execution of an amendment to the Company’s license agreement with GTI Core on March 31, 2026, which transitioned licensing fees to a fixed annual structure and reduced uncertainty in projected future taxable income. Based on this change and sustained projected profitability, management concluded that sufficient positive evidence exists to support the realizability of its deferred tax assets. Non-GAAP Measures “EBITDA” and “Adjusted EBITDA” are non-GAAP measures and do not have standardized definitions under GAAP. The following information provides reconciliations of the supplemental non-GAAP financial measures, presented herein to the most directly comparable financial measures calculated and presented in accordance with GAAP. The Company has provided the non-GAAP financial measures, which are not calculated or presented in accordance with GAAP, as supplemental information and in addition to the financial measures that are calculated and presented in accordance with GAAP. These supplemental non-GAAP financial measures are presented because management has evaluated the financial results both including and excluding the adjusted items and believes that the supplemental non-GAAP financial measures presented provide additional perspective and insights when analyzing the core operating performance of the business. These supplemental non-GAAP financial measures should not be considered superior to, as a substitute for or as an alternative to, and should be considered in conjunction with, the GAAP financial measures presented. EBITDA is calculated as Income (loss) from continuing operations before: net interest (expense) income, provision for income taxes, and depreciation and amortization. Adjusted EBITDA is calculated as EBITDA before stock-based compensation and change in fair value of warrant liabilities. The following table presents a reconciliation of Income (loss) from continuing operations (GAAP) to non-GAAP Adjusted EBITDA, for the periods presented: Three months ended March 31, 2026 2025 (unaudited) (unaudited) Income (loss) from continuing operations, net of income taxes $ 19,922 $ (3,274 ) Interest expense (income), net 1,742 (1 ) Income tax benefit (25,593 ) - Depreciation and amortization 3,443 336 Earnings before interest, taxes, depreciation and amortization (EBITDA) (non-GAAP measure) (486 ) (2,939 ) Stock-based compensation expense 570 589 Change in fair value of warrant liabilities (105 ) (407 ) Adjusted EBITDA (non-GAAP measure) $ (21 ) $ (2,757 ) 35 Liquidity and Capital Resources As of March 31, 2026, our principal sources of liquidity are cash and cash equivalents totaling $33.3 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. We are required to evaluate whether there are conditions or events, considered in aggregate, that raise substantial doubt about our 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 condensed consolidated financial statements are issued. We have a history of recurring net losses and negative cash flow in operating activities. However, for the three months ended March 31, 2026, the Company generated positive cash flow from operating activities and reported net income which was mainly impacted by a non-cash income tax benefit. We believe our $33.3 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 condensed consolidated financial statements were issued. Convertible Notes maturities of $80.0 million exist through February 2027, with $72.0 million held by a subsidiary of Green Thumb, a related party. If the holders of these notes elect to be paid in cash upon maturity could raise substantial doubt about the our 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 May 22, 2025, we 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 and rank senior to all of our indebtedness except for 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. On August 25, 2025, we 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 and rank senior to all of our indebtedness except for the May 2025 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. 36 The May 2025 Notes and August 2025 Notes (together referred to as “the Convertible Notes”) impose certain customary affirmative and negative covenants upon us, including covenants relating to ranking and reservation of shares. If an event of default under one or more of the Convertible 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. We were in compliance with these covenants as of March 31, 2026. 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 three months ended March 31, 2026 and 2025: Three months ended March 31, (In thousands) 2026 2025 Net cash provided by (used in): Operating activities $ 1,043 $ (6,720 ) Investing activities — — Financing activities — (1 ) Net increase (decrease) in cash and cash equivalents $ 1,043 $ (6,721 ) The following discussion explains the major components contributing to the net cash flows from operating, investing, and financing activities for the three months ended March 31, 2026 and 2025, as summarized in the table above. Each section below provides details on the key drivers of the cash inflows and outflows for the respective periods. Cash Flow from Operating Activities For the three months ended March 31, 2026, our operating cash flows included a net income of $19.9 million, which included $3.4 million related to depreciation and amortization, $25.6 million non-cash deferred income tax benefit, $750 thousand non-cash interest expenses, $570 thousand of stock-based compensation expense, and $105 thousand gain related to the change in fair value of warrant liabilities. Net cash was increased by changes in operating assets and liabilities of $1.9 million. For the three months ended March 31, 2025, our operating cash flows included a net loss of $1.6 million, which included $336 thousand related to depreciation and amortization, $589 thousand of stock-based compensation expense, $407 thousand gain related to the change in fair value of warrant liabilities, and $3.6 million gain on disposal of the Extraction Business. Net cash was decreased by changes in operating assets and liabilities of $2.3 million. Cash Flow from Investing Activities For the three months ended March 31, 2026 and 2025, there were no cash flows from investing activities. Cash Flow from Financing Activities For the three months ended March 31, 2026, there were no cash flows from financing activities. For the three months ended March 31, 2025, net cash provided by financing activities was due to immaterial repayments of notes payable. Off-Balance Sheet Arrangements During the periods presented, we did not have, nor do we currently have, any relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or special purpose entities, which would have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes. We are therefore not exposed to the financing, liquidity, market, or credit risk that could arise if we had engaged in those types of relationships. Critical Accounting Policies and Estimates Part I, Item, 2, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” discusses our unaudited condensed consolidated financial statements, which have been prepared in accordance with GAAP. The preparation of these unaudited condensed consolidated financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the unaudited condensed consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results may differ from these estimates under different assumptions or conditions. 37 These estimates are based on our knowledge and understanding of current conditions and actions that we may take in the future. Changes in these estimates will occur as a result of the passage of time and the occurrence of future events. Subsequent changes in these estimates may have a significant impact on our financial condition and results of operations and are recorded in the period in which they become known. We have identified the following estimates that, in our opinion, are subjective in nature, require the exercise of judgment and involve complex analysis: the fair value of derivative assets and liabilities, net realizable value of inventory, goodwill impairment assessment, intangible assets and revenue recognition. The significant accounting policies and estimates that have been adopted and followed in the preparation of our condensed consolidated financial statements are detailed in Note 1 - Overview, Basis of Presentation and Significant Accounting Policies included in the Form 10-K and Note 1 - Overview, Basis of Presentation and Significant Accounting Policies to our unaudited condensed consolidated financial statements in Part I, Item 1 of this Quarterly Report. Other than the addition of the accounting policies related to business combinations and asset acquisitions described in Note 1 – Overview, Basis of Presentation and Significant Accounting Policies, there have been no changes in these policies and estimates that had a significant impact on the financial condition and results of operations for the periods covered in this Quarterly Report. Recently Issued Accounting Pronouncements Adopted For more information on recently issued accounting pronouncements are included within Note 1 - Overview, Basis of Presentation and Significant Accounting Policies, included elsewhere in the notes to unaudited condensed consolidated financial statements covered under Part I, Item 1 of this Quarterly Report. New Accounting Pronouncements Not Yet Adopted For more information on new accounting pronouncements not yet adopted are included within Note 1 - Overview, Basis of Presentation and Significant Accounting Policies, included elsewhere in the notes to unaudited condensed consolidated financial statements covered under Part I, Item 1 in this Quarterly Report. Item 3. Quantitative and Qualitative Disclosures About Market Risk As a “smaller reporting company” as defined by 17 C.F.R. § 229.10, the Company is not required to provide information required by this Item.