10-Q: RYTHM Q3 2025: Strategic Shift to Hemp Brands Amidst Losses

RYTHM Inc. reports a significant strategic pivot to hemp-derived THC products and brand licensing, marked by key acquisitions and substantial related-party debt, despite widening net losses in Q3 2025.

Summary

• RYTHM Inc. (formerly Agrify Corporation) has completed a strategic shift, exiting its Cultivation and Extraction businesses to focus on hemp-derived THC products and brand licensing.
• The company acquired the Seorita brand in December 2024, MC Brands (incredibles IP) for $5.1 million in May 2025, and VCP (RYTHM, Dogwalkers, Beboe, &Shine, Doctor Solomons, Good Green IP) for $50.0 million in August 2025.
• Revenue from continuing operations for the nine months ended September 30, 2025, was $6.623 million, a significant increase from $0 in the prior year, driven by the new business focus.
• Net loss for the nine months ended September 30, 2025, increased to $19.651 million from $17.387 million in the prior year period.
• Operating loss from continuing operations widened to $19.387 million for the nine months ended September 30, 2025, compared to $1.615 million in the prior year.
• Selling, general and administrative expenses surged by 467% to $21.534 million for the nine months ended September 30, 2025, largely due to sales and marketing for hemp-derived products.
• Cash and cash equivalents increased to $35.573 million as of September 30, 2025, from $31.170 million at December 31, 2024, primarily due to financing activities.
• Total liabilities significantly increased to $103.432 million as of September 30, 2025, from $25.933 million at December 31, 2024, mainly due to new convertible notes.
• Total stockholders' equity decreased to $11.722 million as of September 30, 2025, from $28.089 million at December 31, 2024.
• The company issued $80.0 million in secured convertible notes during the nine months ended September 30, 2025, with a 10.0% annualized interest rate, largely to related parties.
• Material weaknesses in internal control over financial reporting persist, leading to a conclusion that disclosure controls and procedures were not effective as of September 30, 2025.

Sentiment

Score: 4

Explanation: The company is undergoing a significant strategic transformation with substantial brand acquisitions and revenue growth in its new focus area. However, this comes with greatly increased operating losses, high cash burn, and a significant increase in related-party debt. The persistent material weaknesses in internal controls and the inherent risks of the cannabis industry (even for hemp-derived products) temper optimism. The reliance on related-party financing and licensing from a federally illegal industry adds a layer of uncertainty and risk.

Positives

• Successful execution of a strategic pivot to focus on the higher-growth hemp-derived THC product market, including the acquisition of several established brands like Seorita, incredibles, RYTHM, Dogwalkers, Beboe, &Shine, Doctor Solomons, and Good Green.
• Significant increase in revenue from continuing operations to $6.623 million for the nine months ended September 30, 2025, compared to no revenue in the prior year, demonstrating initial traction in the new business model.
• Secured substantial financing of $80.0 million through convertible notes, providing capital for acquisitions and operational growth.
• Regained compliance with Nasdaq's minimum bid price requirement after a 1-for-15 reverse stock split in October 2024.

Negatives

• Net loss increased to $19.651 million for the nine months ended September 30, 2025, from $17.387 million in the prior year, indicating continued unprofitability.
• Operating loss from continuing operations significantly widened to $19.387 million for the nine months ended September 30, 2025, compared to $1.615 million in the prior year, reflecting increased operational expenses relative to revenue.
• Selling, general and administrative expenses surged by 467% to $21.534 million for the nine months ended September 30, 2025, outpacing gross profit growth.
• Net cash used in operating activities increased substantially to $20.519 million for the nine months ended September 30, 2025, from $6.250 million in the prior year, indicating a higher cash burn rate.
• Total stockholders' equity decreased significantly to $11.722 million as of September 30, 2025, from $28.089 million at December 31, 2024.
• Disclosure controls and procedures were deemed not effective as of September 30, 2025, due to material weaknesses in internal control over financial reporting, raising concerns about financial reporting reliability.
• A substantial portion of the company's debt and business activities involve related parties, including Green Thumb Industries, which could present conflicts of interest or less favorable terms than arm's-length transactions.

Risks

• Licensing revenue from state-licensed cannabis operators is subject to changes in state regulations, U.S. federal cannabis enforcement policy, or licensee non-compliance, as cannabis activities remain illegal under U.S. Federal law.
• Licensees in the cannabis industry face unique financial challenges that could negatively impact RYTHM's ability to generate Licensing Revenue.
• Lack of operational or financial control over licensees means their conduct could harm RYTHM's business and brand image.
• The company's ability to compete depends on protecting its intellectual property (trademarks, patents), which may be challenged or infringed upon, diverting resources and potentially affecting competitive advantage.
• Material weaknesses in internal control over financial reporting could adversely affect the company's ability to record, process, summarize, and report financial information accurately.
• Ongoing legal proceedings, including the Bud & Marys, Bowdoin Construction Corp., McCutchan, Inc. litigations, and a former sales VP lawsuit, could result in significant monetary damages or adverse financial outcomes.
• Utilization of Net Operating Loss (NOL) carryforwards is subject to limitations under Section 382 of the Internal Revenue Code due to historical ownership changes, potentially reducing future tax benefits.
• The company is potentially subject to claims related to various non-income taxes from different tax authorities.

Future Outlook

The company plans for continued expansion of its Seorita brand into premier on-premises destinations and actively seeks alternative/additional co-manufacturing facilities to minimize transportation costs and mitigate production disruption risks. It also anticipates recognizing monthly license fees from GTI Core for the acquired brands, effective November 1, 2025. Management is committed to strengthening internal controls to remediate identified material weaknesses.

Management Comments

• "RYTHM delivers well-being to consumers through its portfolio of hemp-derived THC products and iconic licensed brands."
• "The Company is committed to ensuring that the carrying amounts of its assets are appropriately assessed and adjusted for any impairment, reflecting a true and fair view of its financial position."
• "Management, including the Interim Chief Executive Officer and Chief Financial Officer, has reaffirmed the importance of a strong control environment and an organization-wide focus on internal control and accountability."

Industry Context

RYTHM's strategic pivot positions it squarely in the rapidly evolving hemp-derived THC beverage and consumer packaged goods market, a segment experiencing significant growth as consumers seek alternatives to traditional alcoholic beverages. The acquisitions of established brands like Seorita and incredibles, along with licensing agreements for other well-known cannabis brands from Green Thumb Industries, leverage existing brand equity to gain market share. This move aligns with a broader industry trend of diversification and brand consolidation, particularly as companies navigate the complex and evolving regulatory landscape between state-legal cannabis and federally legal hemp-derived products. The reliance on related-party licensing from Green Thumb, a major player in the state-legal cannabis market, provides a unique competitive advantage but also exposes RYTHM to the inherent risks of the federally illegal cannabis industry.

Comparison to Industry Standards

• NA

Corporate Governance

Legal Proceedings

• Bud & Marys Litigation: Bud & Marys Cultivation, Inc. is suing RYTHM for alleged unfair/deceptive trade practices, breach of contract, and conversion. RYTHM has counterclaimed for breach of contract, unjust enrichment, and enforcement of guarantees. RYTHM has reserved $14.4 million for this contingent loss and funded $1.5 million into escrow for settlement.
• Bowdoin Construction Corp. Litigation: Bowdoin is suing RYTHM, Bud & Marys, and related parties for breach of a construction contract due to nonpayment of approximately $7.0 million. Two subcontractors have filed separate suits for $1.498 million and $93 thousand, consolidated with the Bowdoin suit. RYTHM has denied liability and funded $1.5 million into escrow for settlement.
• McCutchan, Inc. Litigation: McCutchan is suing RYTHM, Valiant Group LLC, and related parties for no less than $3 million, alleging breach of contract, misrepresentations, and unjust enrichment related to a construction project. RYTHM is pursuing Valiant in separate litigation for $1.4 million. RYTHM has funded $1.5 million into escrow for settlement.
• Former Sales Vice President Litigation: A former sales VP is suing RYTHM for back wages, commission, and equity under Massachusetts labor laws. Litigation is in discovery, with a trial anticipated in Q1 2026. Management estimates an aggregate net loss exposure of approximately $887 thousand and has recorded an accrual for this amount.

Related Party Transactions

• RYTHM's Chairman and Interim CEO, Ben Kovler, also serves as Green Thumb Industries' Chairman and CEO. RYTHM's CFO is a Green Thumb employee.
• Two of RYTHM's seven directors are affiliated with Green Thumb.
• Acquisition of MC Brands LLC (incredibles brand IP) from VCP IP Holdings, LLC, an indirectly wholly-owned subsidiary of Green Thumb, for $5.1 million cash on May 20, 2025.
• Acquisition of VCP (RYTHM, Dogwalkers, Beboe, &Shine, Doctor Solomons, Good Green brand IP) from VCP23, LLC, an indirectly wholly-owned subsidiary of Green Thumb, for $50.0 million cash on August 27, 2025.
• License agreement with GTI Core, LLC (an indirect wholly-owned subsidiary of Green Thumb) for the acquired brands, effective November 1, 2025, with monthly license fees.
• Issued secured convertible notes totaling $82.0 million to RSLGH, LLC (a subsidiary of Green Thumb) and other third-party accredited investors, with a 10.0% annualized interest rate.
• The November 2024 Note holder (RSLGH) elected to convert $10 million principal and $175 thousand interest into pre-funded warrants subsequent to September 30, 2025.
• Entered into an Amended and Restated Shared Services Agreement with Vision Management Services, LLC (an indirect wholly-owned subsidiary of Green Thumb) for administrative, supply chain, operations, sales/marketing, and technical services. Service fees are 125% of costs for non-dedicated personnel and 100% for dedicated personnel/third-party costs, payable in cash or pre-funded warrants.
• Net activity with Green Thumb Industries for the nine months ended September 30, 2025, totaled $8.8 million, consisting of $7.0 million for support services (including $6.5 million in salary charges), $2.2 million in interest charges, and $383 thousand non-licensing chargeback expense, offset by $80 thousand equipment/beverage sales and $745 thousand Licensing Revenue.
• Net related party payable to Green Thumb Industries was $86.4 million as of September 30, 2025, including $4.1 million service charge payable, $82.0 million convertible notes payable, $521 thousand accrued interest payable, and $40 thousand non-licensing chargeback payable, offset by $182 thousand receivable from Licensing Revenue.

Stakeholder Impact

• Shareholders: Experience dilution risk from warrant conversions and potential future equity raises. The significant net losses and internal control weaknesses could negatively impact share price and long-term value. The strategic shift offers potential for future growth but carries substantial execution and regulatory risks.
• Employees: Workforce reduction of nine employees on April 1, 2025, due to the discontinuation of the Extraction Business. Ongoing legal proceedings, such as the former sales VP lawsuit, highlight potential employment-related liabilities.
• Customers: The strategic focus on hemp-derived THC products aims to deliver well-being through a portfolio of brands, potentially expanding product availability and choice. However, supply chain disruptions or quality issues could impact customer satisfaction.
• Suppliers: Co-manufacturing arrangements are critical for product supply, and the company is actively seeking additional facilities. Any disruptions or changes in terms could affect product availability.
• Creditors: Holders of the secured convertible notes, particularly related parties like Green Thumb Industries, have significant exposure. The company's ability to service its substantial debt, including interest payments in pre-funded warrants, is crucial for creditor confidence.

Next Steps

• Continue expansion of Seorita brand into premier on-premises destinations.
• Actively seek alternative and/or additional co-manufacturing facilities.
• Remediate material weaknesses in internal control over financial reporting by expanding accounting personnel, enhancing monitoring, formalizing documentation, engaging third-party advisors, and reinforcing segregation of duties.
• GTI Core to begin monthly license fee payments for acquired brands, effective November 1, 2025.
• Ongoing litigation processes for Bud & Marys, Bowdoin Construction Corp., McCutchan, Inc., and a former sales VP lawsuit.

Key Dates

Recommendation

RYTHM Inc. is in a transitional phase, having made a decisive strategic pivot towards the hemp-derived THC market through significant brand acquisitions and divestitures of its legacy businesses. While the company has demonstrated initial revenue growth in its new segment and secured substantial financing, the financial results for Q3 2025 show widening net and operating losses, coupled with a high cash burn from operations. The reliance on related-party debt and licensing agreements, along with the inherent regulatory risks of the cannabis industry (even for hemp-derived products), introduces considerable uncertainty. Furthermore, the acknowledged material weaknesses in internal control over financial reporting are a serious concern for financial reliability. Given the significant strategic changes, the early stage of the new business model, and the mixture of high potential with substantial risks and operational challenges, a 'hold' recommendation is appropriate. Investors should monitor the company's progress in remediating internal control weaknesses, improving profitability, and navigating the complex regulatory environment before considering a stronger position.

Keywords

Hemp-derived THC, Brand licensing, Cannabis industry, SEC filing, Quarterly report, RYTHM Inc., Agrify Corporation, Seorita, incredibles, Green Thumb Industries, Convertible notes, Financial performance, Internal controls, Legal proceedings, Strategic shift