10-K/A: Resonate Blends Faces Significant Financial Headwinds Amidst Strategic Shift to Regenerative Medicine

Resonate Blends, Inc. reported a substantial increase in net loss and working capital deficit for the fiscal year ended December 31, 2024, raising significant doubt about its ability to continue as a going concern, despite a surge in revenue driven by a recent acquisition.

Summary

• Resonate Blends, Inc. (KOAN) filed an amended annual report for the fiscal year ended December 31, 2024, highlighting a strategic shift towards regenerative medicine and nutritionally designed products.
• The company reported sales of $1,896,215 for the year ended December 31, 2024, a significant increase from $16,468 in 2023, primarily due to the acquisition of Emergent Health Corp. (EMGE) assets.
• Gross profit improved to $1,236,191 in 2024 from a loss of $97,672 in 2023.
• Operating expenses surged to $2,933,817 in 2024 from $301,551 in 2023, driven by increases in general and administrative, sales commissions, consulting, and research and development costs.
• The net loss for 2024 widened to $2,133,208, compared to a net loss of $1,415,979 in 2023.
• The company's working capital deficit increased to $3,513,398 as of December 31, 2024, from $2,150,975 as of December 31, 2023.
• An accumulated deficit of $28,869,611 was reported as of December 31, 2024.
• The independent auditors raised substantial doubt about the company's ability to continue as a going concern.
• Jim Morrison resigned as President/CEO effective March 5, 2025, but remains a Director; James W. Zimbler was appointed as the new President/CEO and Director.
• The company's disclosure controls and procedures were deemed ineffective as of December 31, 2024, and internal control over financial reporting was ineffective as of December 31, 2023, citing inadequate segregation of duties and insufficient written policies.
• Subsequent to year-end, the company issued a significant number of common shares (over 64 million shares) through the conversion of convertible notes for relatively small principal amounts, indicating substantial dilution.

Sentiment

Score: 2

Explanation: The company faces severe financial distress, evidenced by a widening net loss, increasing working capital deficit, and a going concern warning from auditors. While revenue increased due to an acquisition, operating expenses surged, and the company relies on highly dilutive financing. Ineffective internal controls further compound the negative outlook.

Positives

• Sales increased significantly to $1,896,215 in 2024 from $16,468 in 2023, primarily due to the acquisition of EMGE assets.
• Gross profit turned positive at $1,236,191 in 2024, compared to a gross loss of $97,672 in 2023.
• The company is strategically focusing on the growing regenerative medicine market with nutritionally designed products and natural stem cell mobilizing agents.

Negatives

• Net loss widened to $2,133,208 in 2024 from $1,415,979 in 2023.
• Operating expenses significantly increased to $2,933,817 in 2024 from $301,551 in 2023.
• The working capital deficit worsened to $3,513,398 as of December 31, 2024, from $2,150,975 as of December 31, 2023.
• An accumulated deficit of $28,869,611 as of December 31, 2024, indicates a history of unprofitability.
• The company's independent auditors raised substantial doubt about its ability to continue as a going concern.
• Disclosure controls and procedures were ineffective as of December 31, 2024.
• Internal control over financial reporting was ineffective as of December 31, 2023, due to inadequate segregation of duties and insufficient written policies and procedures.
• Remediation efforts for internal control weaknesses are dependent on securing additional financing, which is uncertain.
• The company historically raised money through convertible debt on unfavorable terms, leading to significant dilution.
• Shares may be subject to 'penny stock' rules, which can limit trading and liquidity.

Risks

• Uncertainty concerning the ability to continue as a going concern, which may impair the ability to raise capital.
• Incurrence of losses in prior periods and potential future losses, which could cause the common stock price to decline or materially adversely affect financial condition, debt payment ability, and cash flows.
• Inability to obtain sufficient capital to implement the full business plan, as current financial resources are insufficient.
• Reliance on third-party service providers for sales and payment processing, with potential significant impact from cyber-attacks on these providers.
• The company has not engaged third-party services for evaluations of security controls, such as penetration testing or independent audits.
• The company has no plans to register its securities in any particular state, which may limit the ability of individual stockholders to trade their shares.
• The company's shares may be subject to the provisions of Section 15(g) and Rule 15g-9 of the Exchange Act, commonly referred to as the penny stock rule, which imposes certain requirements for transactions in such stocks.

Future Outlook

The company expects operating expenses for the remainder of 2024 to increase due to the impact of the EMGE acquisition, though no specific prediction on the level of increase is provided. The ability to continue as a going concern is contingent upon successful additional financing and achieving profitable operations, with no assurance that such activities will generate sufficient funds.

Management Comments

• The officer resigning (James Morrison) stated in his resignation letter that his resignation as President/CEO does not in any way imply or infer that there is any dispute or disagreement relating to the Company’s operations, policies or practices.
• Management believes that information security is a critical component of the business strategy and maintains and continuously assesses and strengthens its cybersecurity program.
• Management believes that currently the company has not encountered a cybersecurity event that has had a material impact on its business.
• Management believes that current properties are adequate for current needs, but growth potential may require larger facilities due to anticipated addition of personnel.
• Management believes that the small number of board and management members does not yet warrant the adoption of a Code of Ethics.

Industry Context

Resonate Blends is pivoting its business focus to the regenerative medicine field, specifically targeting nutritionally designed products, natural stem cell mobilizing agents, and natural diet aids. This aligns with a growing trend in health and wellness towards natural, non-pharmaceutical solutions for human performance and well-being. The acquisition of EMGE assets, including Evolutionary Biologics, Apollo Biowellness, Nanosthetic, and Nanogistics, indicates a move into areas like biologics and nanotechnology within the health sector. The company aims to position itself as a leader in this niche, but faces significant financial challenges that could hinder its ability to compete effectively with more established players or well-funded startups in this innovative, yet capital-intensive, industry.

Comparison to Industry Standards

• The company's significant net losses and accumulated deficit are not in line with the financial stability typically seen in established, profitable companies within the health and wellness or regenerative medicine sectors.
• The reliance on highly dilutive convertible debt, often on unfavorable terms, is a common characteristic of early-stage or distressed companies, contrasting with more mature industry players that can access traditional equity or less restrictive debt financing.
• The stated ineffectiveness of disclosure controls and internal control over financial reporting falls below standard corporate governance practices expected of publicly traded companies, regardless of size, and could deter institutional investors.
• The rapid increase in operating expenses relative to revenue, despite revenue growth, suggests challenges in achieving operational efficiency or scaling profitably, which is a key metric for growth-oriented companies in the health industry.

Management Changes

Corporate Governance

Legal Proceedings

• No current legal proceedings.

Related Party Transactions

• Management periodically advanced funds to the company for operating expenses, totaling $221,268 as of December 31, 2024, and $70,099 as of December 31, 2023. These advances are non-interest bearing and payable upon demand.
• On March 14, 2024, the company assigned ownership of its then-wholly-owned subsidiaries, Resonate Blends, LLC and Entourage Labs, LLC, to former Chief Executive Officer and Director Geoffrey Selzer. In return, Mr. Selzer assumed all liabilities of the subsidiaries, indemnified the company, and agreed to pay a percentage of future sale proceeds from the subsidiaries (20% if sold within one year, 10% if sold between one and two years).

Stakeholder Impact

• **Shareholders**: Face significant dilution risk from ongoing convertible debt conversions, as evidenced by the issuance of over 64 million shares post-year-end for small principal amounts. The going concern warning and persistent losses indicate a high risk to investment value.
• **Employees**: The company's financial instability and dependence on future financing could impact job security and growth opportunities.
• **Creditors**: The company's substantial current liabilities and working capital deficit, coupled with the going concern warning, suggest elevated credit risk.
• **Customers**: The strategic shift to regenerative medicine products could offer new solutions, but the company's financial health might impact product development, availability, and customer support.
• **Suppliers**: The company's liquidity issues and reliance on financing could pose risks to timely payments for goods and services.

Next Steps

• Secure additional financing arrangements to continue as a going concern.
• Achieve and maintain profitable operations.
• Implement changes to enhance and improve the design of internal control over financial reporting, including appointing additional qualified personnel and adopting sufficient written policies and procedures.
• File a Certificate of Designation with the State of Nevada for the Series F Convertible Preferred Stock.

Key Dates

Recommendation

Keywords

Regenerative Medicine, Nutritionally Designed Products, Stem Cell Mobilizing Agents, Diet Aid, Secretogues, Health and Wellness, Biologics, SEC Filing, 10-K/A, Going Concern, Convertible Debt, Dilution, Internal Controls, Corporate Governance, OTC Markets, EMGE Acquisition