Zacks Initiates Coverage of RYTHM With Underperform Recommendation

Core Viewpoint - RYTHM, Inc. has been assigned an "Underperform" rating due to concerns over its financial health, operational sustainability, and legal exposure while attempting to grow in the cannabis and hemp wellness market [1] Financial Health - As of Q3 2025, RYTHM has $90.6 million in debt, primarily in related-party convertible notes, and only $35.6 million in cash, leading to refinancing pressure and potential shareholder dilution [2] - For the first nine months of 2025, RYTHM generated $6.6 million in revenues but incurred a net loss of $19.7 million, with selling, general, and administrative expenses at $21.5 million, indicating a misalignment between costs and revenue generation [3] - The company experienced a cash burn of $20.5 million during the same period, which is unsustainable without significant margin improvement or external funding [3] Structural Risks - RYTHM's revenue is concentrated among a few customers, with one related party accounting for 18% of receivables, exposing the company to risks related to contract renegotiation and payment delays [4] - The company faces unresolved legal disputes with claims totaling over $24 million, which could further strain liquidity and increase dependence on costly financing [4] Strategic Realignment - RYTHM has undertaken a strategic realignment by divesting its cultivation business and focusing on hemp-derived THC beverages and edibles, which may improve long-term prospects [5] - The acquisition of the Señorita brand and the launch of new products like Strawberry Supernova Comets reflect a shift towards capital-light, margin-enhancing segments [5] Industry Outlook - The cannabis industry is experiencing strong tailwinds from legalization across more states, increasing demand for low-calorie, alcohol-alternative beverages, and evolving consumer preferences towards wellness [6] - RYTHM's brand portfolio includes beverages, edibles, and wellness products, with retail placements in chains like Total Wine and Binny's, positioning the company for future growth if it can navigate short-term challenges [6] Market Performance - RYTHM's share price has significantly declined over the past year, with its valuation appearing discounted compared to peers, indicating that investors are factoring in substantial execution risk and potential for further dilution [7] Strategic Risks - Despite the shift towards a brand-centric, capital-light model aligning with broader trends, RYTHM's high leverage, ongoing losses, legal liabilities, and customer concentration present significant risks that may overshadow potential benefits in the near term [8]