RYTHM, Inc. (RYM) Earnings

Management highlights

- Bud & Mary's defaulted on a construction loan facility, leading to $5.3 million of design and build revenue being deferred due to a baseless lawsuit. A tight cash spending limit from an institutional lender prevented approximately $1.8 million in revenue, and customer construction/permitting delays caused ~$1.3 million impact, but orders are expected in Q4. - Over $11.2 million in new bookings were generated in Q3, excluding recurring revenues. - The rapid deployment program (RDP) had 3 new customers in Illinois, Massachusetts, and South Africa with combined expected base value of $7.5 million in cultivation hardware sales; starting to take orders in Q1 2023 and showcasing at MJBiz. - The PX10 Hydrocarbon cannabis extractor was commercially successful, installed at 3 customer sites; development of new 3.7 VFUs is complete, with shipping expected in Q1 2023. - TTK projects: Bud & Mary's project on hold; other TTK projects (Treehouse, Greenstone, Hannah) expected to complete in Q4, with recurring revenue in Q1 2023. - Agrify was recognized for best cultivation technology at the Green Market Report's Tech Summit.

Guidance

- Guidance for fiscal year 2022 was reduced from $70 million to $75 million to $65 million to $70 million due to the deferral of $5.3 million in revenue from the Bud & Mary's lawsuit.

Segment performance

In the third quarter of 2022, revenue totaled $7 million. Design and build revenue declined from $13 million in Q3 2021 to $1.3 million in Q3 2022, excluding approximately $5.3 million related to the Bud & Mary's lawsuit. Extraction-related revenue was $5.7 million in Q3 2022 (none in Q3 2021). Bookings for Q3 2022 were approximately $11.2 million, with $5.6 million related to extraction products. The backlog as of the end of Q3 was $646 million, with approximately 90% of the backlog amount derived from future TTK related recurring revenue streams (SaaS and production success fees). Cultivation qualified pipeline was over $31.1 million and extraction qualified pipeline was over $45.9 million.

Risks & headwinds

- Meritless lawsuit by Bud & Mary's caused $5.3 million in revenue deferral, with legal uncertainty around recovery. - Tight cash spending limit from an institutional lender prevented approximately $1.8 million in revenue in Q3. - Customers' unforeseen construction and permitting delays caused ~$1.3 million impact on Q3 revenue.

Analyst Q&A

• Q: Hi, good morning. This is Remy Smith on for Aaron Grey. You touched on this kind of a little bit in your opening remarks, but is there any kind of more market share, retail sales data in the markets where partners are selling products cultivated within VFUs in those legacy states?

  A: Yes, so our customers in Nevada, WhiteCloud has continued to sell through their dispensaries. They had to do a restart because of the some licensing issue, but they're basically coming back on track. And so far the flowers that they have been able to sell through the retail have been deemed as very high quality and they continue to produce – the yield continue to go up and we expect that once the resorts come to fruition, they will be able to again sell at a very high premium in the Nevada market.

• Q: Our next question is from Eric Des Lauriers of Craig-Hallum. I was wondering if you could comment a bit on the extraction businesses the overall sort of demand that you're seeing for those products and then if the sort of – taking those extraction products and really implementing the control and visibility into those and essentially creating a similar like TTK type offering for extraction.

  A: Yes, Eric, we're definitely seeing a rebound of the momentum like I said for quarter four. I think what's happening now is yes obviously due to the macro market condition in quarter three there were some holdback on the spending, but I think we're seeing a reversal of that trend even starting from October timeframe. And like I said, I think this quarter we're seeing a very, very positive reversal of that trend. What is also actually very encouraging for us is that our parts and – parts sales and also e-commerce are recording probably some of the strongest numbers that we have seen. I think what's happening now is probably some people are just kind of – instead of maybe making new purchases we're trying to basically retrofit some of their existing products. And so we're seeing a very, very strong parts and e-commerce sales out of our extraction division. And we're also seeing adoption of our new technology. As I mentioned, we launched PX10 the latest technology innovation on the hydrocarbon side and already we have three customers using this solution. And we're also seeing very, very strong interests towards some of the other new product innovations that we're introducing into the market. As to basically the consistency and quality issue that you mentioned absolutely that is something that we continue to work on. And in fact the RDP program that we are rolling out as of today actually gives customers the option to basically buy an equivalent solution beyond just cultivation. So they could actually buy complementary extraction total turnkey solution that, for example, if they purchase 56 VFUs, then we would basically do some calculation with them. And depending on the type of products that they want to produce, we would then design an extraction lab that provides them with a complete solution, so that they could actually offer more products into the market. And I think that combination of cultivation and extraction are becoming extremely, extremely attractive. And in fact a lot of the RDP programs, the customers are actually adopting or subscribing to this additional optional upgrade to take on both the extraction as well as the cultivation solutions. We are not yet ready to basically launch TTK around extraction yet. Most of the RDP programs that we're selling right now is still basically based on basically just upfront cash sales. We still need to do a bit of work to be able to turn the existing extraction equipment to be able to control remotely through cloud. And once that is completed, then we would be able to offer the TTK program, and that's something that we continue to work on.

• Q: Our next question is from Anthony Vendetti of Maxim Group. I just wanted to go over a couple of the numbers. So the qualify – did you say the qualified pipeline has about $31.1 million in cultivation and $45.9 million in extraction? And usually, or sometimes you give a backlog number I'm sure the signed contracts, what was the backlog number at the end of the third quarter? And then with the Bud & Mary's lawsuit, can you talk about where that's currently at? And I know you probably don't have an exact timeline of how this is expected to roll out. These things could take sometimes years. But have you had any settlement talks with them? Maybe just give us an update on where you are with Bud & Mary's. And then in terms of new business in terms of building a pipeline, how has this lawsuit impacted future business? Does this take – is it taking a little bit longer to close new business as maybe customers are wondering what the issues are or have you seen a change at this point?

  A: That's correct, $31.1 million and $45.9 million. Yes, yes. Yes, Anthony, we actually did, I gave that number as part of my script. So the backlog number as reported in my script was 646 million as of the end of the third quarter. Obviously, the majority of that being SaaS related fees and production base fees, and that amount of that backlog number that represents about 90% of the total backlog number. Anthony, as much as I would love to, I don't think we are allowed to basically get into the details while the legal is underway. But what I can tell you is that we are very, very confident that we will be able to recover 100% of basically everything that we invested into this project. And we have both the resources as well as the legal means to go after this. And as I mentioned earlier, also that the project does come with both the corporate as well as personal guarantee from David Morgan, the Founder and CEO of Bud & Mary’s. And the – while – unfortunately, while the depending lawsuit is still ongoing, I basically was advised that we’re not allowed to discuss too much of it, but it is moving in the right direction, and we have all the resources as well as the legal means to recover. That is correct. So the corporate guarantees we have both the corporate as well as personal guarantees. On the corporate side, they own the dispensary license. They have a home delivery license as well as two multiple cultivation licenses and product manufacturing license. And as I mentioned earlier, this is actually guaranteed by not only corporate, but David Morgan, the Founder, CEO personally. So, Anthony, I think as we have kind of emphasized given that kind of change in the market condition we have decided to not invest further into the TTK project or future TTK projects at this moment. Obviously, the ones that we are committed to every single one of them, we have the resources to basically bring them to fruition, right? And that’s basically the three that I talked about earlier. We have resources dedicated for Bud & Mary’s and also we have other TTK projects such as Gold Leaf that we have allocated VFU equipment towards. So all those projects we will – we are fully committed to basically bringing to a fruition. Now, simultaneously, what is really picking up steam is the rapid deployment program, right? In the past, TTK, as you know, it’s a basically a large – long-term investment that requires substantial capital outlay from the company up front. And given kind of the market condition today, I don’t believe that the market no longer has that sort of appetite. The RDP program is really what is selling out there. People can get started with $2 million to $3 million investment, and in fact, if they could get – started with even less capital, they could just basically purchase eight of our VFUs and then they would have sufficient biomass to maybe support one dispensary. So it really kind of gives the customers the flexibility to be able to scale over time, and also not having to wait 12 months, 15 months, large capital outlay to get projects going. So this rapid deployment program is really what’s picking up steam. And unlike the TTK program where it requires Agrify to put in all the capital up front and invests at our risk. We are basically selling, right, all the hardware with margin plus, there’s also recurring stats and production fees attached to it. And I think this new model is really what’s resonating. And even with very little marketing, we actually, in fact, initially did not plan to really kind of sell this or market this until MJBiz, but as I mentioned earlier, we’re already seeing tremendous traction and with MJBiz coming up. I think, it’s just going to pick up even more steam. So it’s a pivot of our business model, which I think is the right thing to do given, the current market condition.

• Q: Our next question is from Scott Fortune of ROTH Capital Partners. Just looking for some color on your recent harvest metrics with the RDP set to roll out here. Just wondering if you’ve seen any improvements you want to call out on the yield or the potency side and just kind of how you’re looking at further improving the VFU product moving forward here in this environment? And then just looking for an update on the status of your supply chain and whether or not you’ve seen those headwinds kind of begin to abate here. Just if you could unpack the changes you’ve seen within your supply chain and this environment, that would be helpful too.

  A: Yes, so and Nick, so basically the RDP program as I mentioned, we are just now taking orders. So they have actually not been shipped. We are expecting to ship some of the existing orders in the coming quarter. So we don’t not – we do not yet have the operating metrics for those RDP program just yet, but they’re using our traditional 3.6 VFUs. So I would say that you can expect to pretty much get the same sort of results from the 3.6. As I’ve also mentioned earlier the new 3.7 VFU development is now complete and we can actually begin to ship the 3.7 units in first quarter of next year. And we believe that you could expect to have even better yield and results from the new 3.7 VFUs, which we will also be featuring and showcasing at the upcoming MJBiz. Yes, I think on the cultivation side, we have sufficient inventory to basically fulfill, our most immediate customer orders. So from that perspective, I think, supply chain is not going to necessarily affect our ability to ship these units. I think construction delays are still maybe happening, but we’re seeing that pressure subside or basically reducing. So, we do expect that on the cultivation front, supply chain is probably not going to be too big of an issue. On the extraction front, yes, we do still kind of work with our vendor suppliers. Obviously, in Q3 probably not so much of the supply chain issue, but obviously because of the cash spent covenant. we weren’t able to fulfill some of that orders. But I think that is something that we still have to qualify during quarter four. But I think it seems like both internally and externally supply chain pressure is probably getting resolved. But it’s not completely, but we definitely see some improvements around that.