8-K: RYTHM Recasts Financials, Exits Legacy Businesses

RYTHM, Inc. retrospectively reclassified its Extraction and Cultivation businesses as discontinued operations, shifting focus to its hemp-derived beverage brand, Señorita.

Summary

• RYTHM, Inc. (formerly Agrify Corporation) retrospectively reclassified its legacy Extraction Business as discontinued operations for the fiscal years ended December 31, 2024, and 2023, following its discontinuation on March 30, 2025.
• The Cultivation Business (Agrify Vertical Farming Units and Agrify Insights software) was sold on December 31, 2024, to CP Acquisitions, LLC (a related party) and is also presented as discontinued operations.
• The company's strategic focus has shifted to its hemp-derived beverage brand, Señorita, which was acquired on December 12, 2024.
• Continuing operations generated $18 thousand in revenue in 2024, up from $0 in 2023, solely from Señorita sales since December 2024.
• A gross loss of $71 thousand was reported from continuing operations in 2024, compared to $0 in 2023.
• Net loss from continuing operations increased to $(23,229) thousand in 2024 from $(11,931) thousand in 2023.
• Net loss from discontinued operations was $(18,517) thousand in 2024, which includes an $(11,893) thousand loss on the disposal of the Cultivation business, compared to $(6,719) thousand in 2023.
• The total net loss for 2024 widened to $(41,746) thousand from $(18,650) thousand in 2023.
• Cash and cash equivalents significantly increased to $31.2 million as of December 31, 2024, from $0.4 million in 2023, primarily driven by financing activities.
• The company regained Nasdaq compliance for the minimum bid price rule on October 22, 2024, after effecting a 1-for-15 reverse stock split on October 8, 2024.

Sentiment

Score: 3

Explanation: RYTHM, Inc. is in a transitional phase, divesting unprofitable legacy segments and pivoting to hemp-derived beverages. While the strategic direction is clear and new capital has been raised, the 2024 financial performance shows a substantial net loss and the new business segment is not yet profitable. Significant litigation and the historical 'going concern' issue (though not explicitly repeated for 2024) indicate high risk.

Positives

• Successfully acquired the Señorita hemp-derived beverage brand in December 2024, marking a strategic shift to a new growth area.
• The Señorita brand has gained acclaim, winning 'top spot in The High Times Cannabis Cup' and is available in nine U.S. states and Canada.
• Cash and cash equivalents increased significantly to $31.2 million as of December 31, 2024, from $0.4 million in 2023, providing improved liquidity.
• Regained Nasdaq compliance for the minimum bid price rule on October 22, 2024, following a 1-for-15 reverse stock split.
• Regained compliance with the Nasdaq Primary Equity Listing Rule on May 21, 2024.
• Selling, General and Administrative (SG&A) expenses decreased by $4.3 million, or 37%, in 2024 compared to 2023.
• The TRC Electronics litigation was settled in January 2025 for no cost to the company.

Negatives

• Net loss widened substantially to $(41,746) thousand in 2024 from $(18,650) thousand in 2023.
• Loss from discontinued operations increased to $(18,517) thousand in 2024, including an $(11,893) thousand loss on the disposal of the Cultivation business.
• Continuing operations generated a gross loss of $71 thousand in 2024, with only $18 thousand in revenue, indicating the new core business is in its early, unprofitable stage.
• A negative change in the fair value of warrant liabilities resulted in a $(17,902) thousand expense in 2024, compared to a $4,695 thousand gain in 2023.
• Ongoing significant litigation with Bud & Marys, Bowdoin Construction Corp., and McCutchan, Inc., carries substantial potential liabilities and requires escrow funding.
• The company has a history of recurring losses and the 2023 audit report included an explanatory paragraph regarding its ability to continue as a going concern.
• Workforce reduction of nine employees on April 1, 2025, due to the discontinuation of the Extraction Business.

Risks

• The company faces recurring losses and needs to raise additional funds to meet its obligations and sustain operations, as indicated by the 'going concern' explanatory paragraph in the 2023 audit report.
• Ongoing litigation with Bud & Marys, including claims for monetary damages related to alleged unfair trade practices, breach of contract, and conversion, with a $14.4 million allowance for credit losses.
• Litigation with Bowdoin Construction Corp. alleging breach of contract and nonpayment of approximately $7.0 million, consolidated with subcontractor suits.
• Litigation with McCutchan, Inc. seeking no less than $3 million for alleged breach of contract, misrepresentations, and unjust enrichment.
• Uncertainty in successfully collecting on judgments against Valiant Group LLC for $4.5 million (Treehouse project) and $10.0 million (Hannah Project).
• The success of the strategic shift to hemp-derived beverages is dependent on market acceptance and the ability to compete effectively in a rapidly changing environment.
• The hemp-derived beverage business operates under the Agricultural Improvement Act of 2018 and applicable state laws, which are subject to change and regulatory risks.
• While currently compliant, the company has a history of non-compliance with Nasdaq listing rules (minimum bid price, equity listing, timely filings), posing a risk of future delisting.
• Financial statements rely on significant estimates and assumptions, and actual results could differ materially from these estimates.
• The company's ability to maintain, protect, and enhance its intellectual property is crucial for its new business focus.
• The effects of increased competition and innovations by new and existing competitors in the market could adversely impact the business.
• The loss of key employees or management personnel could negatively affect operations.
• Future revenue, hiring plans, expenses, capital expenditures, and capital requirements are subject to uncertainties.

Future Outlook

The company expects to debut a fourth Señorita flavor, low-calorie Ranch Water, in 2025, with plans for expansion and future availability in premier on-premises destinations. The company will not enter into any new TTK Solutions. Several debt instruments have maturity dates in 2025. Ongoing litigation with Bud & Marys and Bowdoin Construction Corp. are in discovery phases, with status reports due to court on March 21, 2025, and discovery concluding in June 2025, respectively. The company is also evaluating the impact of new accounting standards ASU 2023-09 and ASU 2024-03 on its financial statements.

Management Comments

• We have based these forward-looking statements largely on our current expectations and projections about future events and financial trends that we believe may affect our financial condition, results of operations, business strategy and plans and our objectives for future operations.
• We are 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 believes minimal credit risk exists with respect to these financial institutions and the Company has not experienced any losses on such amounts.
• The Company believes its tax positions are all highly certain of being upheld upon examination.
• Management currently estimates that the Company’s aggregate net loss exposure with respect to these cases is within the range of approximately $150 thousand to $300 thousand.

Industry Context

RYTHM, Inc. is undergoing a significant strategic pivot, exiting the cannabis cultivation and extraction equipment market, where it was previously a 'leading provider' but faced 'slowdown in the demand.' The company's new focus on hemp-derived beverages aligns with a 'growing generational demand for adult beverage alternatives.' The Señorita brand's recognition in 'The High Times Cannabis Cup' and its distribution in major retailers suggest a competitive entry into the burgeoning hemp-derived THC beverage market, which operates under evolving regulatory frameworks like the 2018 Farm Bill and state laws.

Comparison to Industry Standards

• The Señorita brand achieved the 'top spot in The High Times Cannabis Cup just one year after inception,' indicating strong product recognition and quality within its niche, comparable to leading brands in competitive beverage markets.
• Señorita beverages are available at 'top retailers including Total Wine, ABC Fine Wine & Spirits, and Binnys in nine U.S. states and Canada,' suggesting a distribution network that rivals established beverage brands.
• The company's previous 'TTK Solution' for cultivation was described as 'the industry's first-of-its-kind program,' though this business segment has now been discontinued.
• The 'going concern' explanatory paragraph in the 2023 audit report from Marcum LLP indicated a financial health below industry standards for a publicly traded company, although the 2024 audit report from GuzmanGray does not explicitly repeat this for the current year, the historical context remains relevant.

Management Changes

Corporate Governance

Legal Proceedings

• **Bud & Marys Litigation**: Company provided notice of default on September 15, 2022. Bud & Marys filed a complaint on October 5, 2022, alleging unfair/deceptive trade practices, breach of contract, and conversion, seeking monetary damages. Company filed counterclaims for breach of contract, unjust enrichment, and enforcement of guarantees. A $14.4 million allowance for credit losses was recorded as of December 31, 2024. Status report to court is due March 21, 2025. This matter is subject to a $1.5 million escrow litigation reserve agreement.
• **Bowdoin Construction Corp. Litigation**: Filed February 22, 2023, alleging breach of contract and nonpayment of approximately $7.0 million. Two subcontractors (Hannon Electric, Inc. for $1.498 million and Electric Supply Center Corp for $93 thousand) filed separate suits, which have been consolidated. Discovery phase concludes June 2025. This matter is subject to a $1.5 million escrow litigation reserve agreement.
• **McCutchan, Inc. Litigation**: Filed March 5, 2024, alleging breach of contract, voidable contract, interference, unjust enrichment, and defamation, seeking no less than $3 million. Discovery process is ongoing, with initial responses due November 7, 2024. This matter is subject to a $1.5 million escrow litigation reserve agreement.
• **Valiant Group LLC Litigation**: Company obtained judgments against Valiant in Nevada ($4.5 million for Treehouse project) and Washington ($10.0 million for Hannah Project) for overbilling, misrepresentation, and breach of contract. The company is seeking to enforce these judgments. This matter is subject to a $1.5 million escrow litigation reserve agreement.
• **TRC Electronics Litigation**: Filed April 13, 2023, alleging breach of contract and promissory estoppel, seeking $0.5 million. This matter was settled in January 2025 for no cost to the company.
• **Other Litigation**: The company is pursuing 10 separate legal proceedings to collect approximately $1.8 million in outstanding receivables. An aggregate net loss exposure for other minor cases is estimated at $150 thousand to $300 thousand, with an accrual of $150 thousand recorded.
• **Former Sales VP Litigation**: Filed February 9, 2022, claiming back wages, commission, and equity under Massachusetts labor laws. Discovery is ongoing, and a final pretrial conference is scheduled for April 10, 2025.

Related Party Transactions

• **Sale of Cultivation Business**: On December 31, 2024, the Cultivation Business was sold to CP Acquisitions, LLC, an entity affiliated with Raymond Chang (former Chairman and CEO). The consideration included the assumption by CP of approximately $7 million in secured indebtedness and certain other liabilities.
• **CP Acquisitions Junior Secured Note**: Issued to CP (affiliated with former Chairman and CEO) on October 27, 2023, for up to $3.0 million, later amended to $4.0 million and maturity extended to December 31, 2024. This note was assumed by CP in the Cultivation Business sale.
• **Consolidated CP Acquisitions Note**: On January 25, 2024, various outstanding debts with CP (affiliated with former Chairman and CEO) were consolidated into a Restated Note with a principal of $18.3 million. CP converted approximately $3.9 million of principal into 178,108 shares of Common Stock. This note was assumed by CP in the Cultivation Business sale.
• **GIC Acquisition Note**: Issued to GIC Acquisition, LLC (owned and managed by Raymond Chang, former Chairman and CEO) on July 12, 2023, for up to $0.5 million, with maturity extended to December 31, 2025. On May 21, 2024, the note was amended to approximately $2.29 million, and GIC converted all outstanding principal into Pre-Funded Warrants.
• **2024 CP Note**: Issued to CP on August 14, 2024, for up to $1.5 million, later amended to $3.0 million. This note was assumed by CP in the Cultivation Business sale.
• **Green Thumb Convertible Note**: On November 5, 2024, the company issued a Secured Convertible Note to RSLGH, LLC, a subsidiary of Green Thumb Industries Inc. (a related party). The note provides for advances of up to $20.0 million, with $10.0 million advanced upon issuance. Green Thumb Industries is listed with a net related party payable of $(10,487) thousand as of December 31, 2024.
• **Public Offering Participation**: Raymond Chang, former Chairman and CEO, participated in the public offering on February 27, 2024, on the same terms as other investors.
• **Private Placement Participation**: Benjamin Kovler, current Chairman and Interim CEO, participated in the private placement on November 20, 2024, purchasing 10,000 shares of Common Stock.

Stakeholder Impact

• **Shareholders**: Face significant dilution from multiple capital raises and warrant exercises. The reverse stock splits (1-for-20 and 1-for-15) have reduced outstanding shares. Widening net losses and ongoing litigation create uncertainty, while the strategic shift to hemp-derived beverages offers potential, but unproven, future growth.
• **Employees**: Nine employees were impacted by workforce reductions on April 1, 2025, due to the discontinuation of the Extraction Business. There have been significant management changes at the CEO and Board levels.
• **Customers**: Former customers of the Cultivation and Extraction businesses will need to find alternative suppliers as these segments have been discontinued. The company's new focus targets a different consumer base with its Señorita beverages.
• **Creditors**: The company has undergone related party debt restructuring and conversions, altering its debt profile. The Green Thumb Note is a secured obligation, impacting the seniority of other debts.
• **Suppliers**: The dispute with Mack Molding Co. has been settled, but the company is exiting the VFU business, affecting its relationship with this former key supplier.

Next Steps

• Debut of a fourth Señorita flavor, low-calorie Ranch Water, expected in 2025.
• Expansion and future availability of Señorita in premier on-premises destinations.
• Ongoing discovery process for Bowdoin Construction Corp. litigation, concluding in June 2025.
• Status report to court on March 21, 2025, for Bud & Marys litigation.
• Final pretrial conference scheduled for April 10, 2025, for former sales VP litigation.
• Evaluation of the impact of new accounting standards ASU 2023-09 and ASU 2024-03 on financial statements.

Key Dates

Recommendation

RYTHM, Inc. is in a critical transition, divesting its unprofitable cultivation and extraction businesses to focus on the hemp-derived beverage market with its Señorita brand. This strategic pivot, while potentially offering long-term growth, is in its very early stages, as evidenced by the minimal revenue and gross loss from continuing operations in 2024. The company has successfully raised significant capital and addressed Nasdaq compliance issues, which are positive steps for liquidity and listing status. However, the substantial net loss for 2024, including a large loss on the disposal of a business segment, and the ongoing, material legal proceedings create considerable financial and operational uncertainty. A seasoned investor would likely adopt a 'hold' stance to observe the execution of the new strategy, the financial performance of the Señorita brand, and the resolution of outstanding litigation before making a more definitive investment decision. The current situation presents both high risk and potential, but unproven, reward.

Keywords

RYTHM Inc., Agrify Corporation, discontinued operations, Extraction Business, Cultivation Business, Señorita, hemp-derived beverages, cannabis industry, financial results, strategic shift, Nasdaq compliance, litigation, capital raise, financial performance, corporate governance, Form 8-K