10-K: Resonate Blends Faces 'Going Concern' Doubts Amidst Expanding Losses and Strategic Pivot

Resonate Blends, Inc. (KOAN) reported a significant increase in net loss and working capital deficit for the fiscal year ended December 31, 2024, prompting auditors to raise substantial doubt about its ability to continue as a going concern.

Summary

• Resonate Blends, Inc. (KOAN) reported a net loss of $2,133,208 for the fiscal year ended December 31, 2024, a substantial increase from $1,415,979 in 2023.
• The company's working capital deficit worsened to $3,513,398 as of December 31, 2024, compared to $2,150,975 in the prior year.
• Auditors have expressed substantial doubt about the company's ability to continue as a going concern due to recurring operating losses and a significant working capital deficit.
• The company completed the acquisition of Emergent Health Corp. (EMGE) on March 14, 2024, which contributed $1,349,905 in sales for the nine months ended September 30, 2024.
• Total sales for the full year 2024 reached $1,896,215, a significant increase from $16,468 in 2023, primarily driven by the EMGE acquisition.
• Gross profit for 2024 was $1,236,191, a turnaround from a gross loss of $97,672 in 2023.
• Operating expenses surged to $2,933,817 in 2024 from $301,551 in 2023, largely due to the EMGE acquisition.
• James Morrison resigned as President/CEO on March 5, 2025, but remains a Director; James W. Zimbler was appointed as the new President/CEO and Director.
• The company assigned its former wholly-owned subsidiaries, Resonate Blends, LLC and Entourage Labs, LLC, to former CEO Geoffrey Selzer, who assumed their liabilities.
• Jim Morrison acquired voting control of the company by purchasing all 2,000,000 outstanding shares of Series C Preferred Stock from Geoffrey Selzer for $10.00.
• The company's disclosure controls and procedures were deemed ineffective as of December 31, 2024, and internal controls over financial reporting were ineffective as of December 31, 2023, citing inadequate segregation of duties and insufficient written policies.
• Remediation of internal control weaknesses is dependent on securing additional financing.
• The company continues to rely on convertible debt for financing, having secured new loans in March 2024 from AJB Capital Investments, LLC ($252,000 net proceeds) and Ray Vollintine ($250,000 net proceeds).
• Subsequent to year-end, the company issued a significant number of common shares (over 64 million shares) to convert various convertible notes in January-March 2025.

Sentiment

Score: 2

Explanation: The sentiment is overwhelmingly negative due to significant and increasing net losses, a worsening working capital deficit, and an explicit 'going concern' warning from auditors. While there's a strategic pivot and revenue growth from an acquisition, the underlying financial health and internal control weaknesses present severe challenges and high risk.

Positives

• The company experienced a substantial increase in sales, reaching $1,896,215 in 2024 compared to $16,468 in 2023, primarily driven by the acquisition of EMGE.
• Gross profit turned positive in 2024, reaching $1,236,191, a significant improvement from a gross loss of $97,672 in 2023.
• The strategic pivot into Regenerative Medicine and nutritionally designed products, following the EMGE acquisition, represents a new business direction with potential for growth.
• The company has successfully secured additional loans and converted debt to common stock, indicating some ability to attract capital, albeit on unfavorable terms.

Negatives

• The net loss significantly widened to $2,133,208 in 2024 from $1,415,979 in 2023.
• The working capital deficit increased substantially to $3,513,398 as of December 31, 2024, from $2,150,975 in 2023, indicating severe liquidity issues.
• The company's accumulated deficit grew to $28,869,611 as of December 31, 2024.
• Operating expenses increased dramatically to $2,933,817 in 2024, outpacing revenue growth and contributing to the increased net loss.
• The independent auditors raised substantial doubt about the company's ability to continue as a going concern.
• Disclosure controls and procedures were deemed ineffective as of December 31, 2024, and internal controls over financial reporting were ineffective as of December 31, 2023, highlighting significant governance weaknesses.
• The company historically raises money through convertible debt on unfavorable terms, leading to significant dilution.
• The merger agreement with Pegasus Specialty Vehicles, LLC was terminated, and Pegasus still owes the company $970,000 in advances, impacting current assets.

Risks

• Uncertainty concerning the company's ability to continue as a going concern, which may impair its ability to raise capital.
• Risk of not achieving significant revenues in the future, which could prevent the company from remaining a going concern.
• Incurrence of future losses could cause the common stock price to decline and materially adversely affect financial condition, debt repayment ability, and cash flows.
• Inability to obtain sufficient capital to implement the full business plan and satisfy working capital needs.
• Reliance on third-party service providers for sales and payment processing exposes the company to cybersecurity risks from those providers.
• The company's common stock trades on the OTCQB, which has a limited market, and there is no assurance a regular trading market will develop or be sustained, potentially limiting shareholders' ability to resell securities.
• The company's shares may be subject to the 'penny stock rule' (Section 15(g) and Rule 15g-9 of the Exchange Act), which imposes certain requirements for transactions in such stocks.
• The company's internal control over financial reporting was not effective due to inadequate segregation of duties, ineffective risk assessment, and insufficient written policies and procedures, which could lead to material misstatements.
• Remediation efforts for internal control weaknesses are dependent on securing additional financing, and failure to do so could adversely affect these efforts.

Future Outlook

The company expects operating expenses to increase for the remainder of 2024 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 current efforts will generate sufficient funds.

Management Comments

• "The Officer resigning has 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 Companys operations, policies or practices."
• "We believe we are positioning our company as a leader in the field of Regenerative Medicine defined by the National Institute of Health using nutritionally designed products."
• "We are focusing our current efforts on marketing licensed patent-pending natural stem cell mobilizing agents capable of enhancing each individuals ability to mobilize their own adult stem cells from their bone marrow."
• "We are licensed under a patent-pending application to market a dual acting all natural diet aid designed to help control hunger through normal body signals to the brain and stomach."
• "Research and development activities center on exploring other areas, such as Secretogues that can naturally enhance a persons own growth hormone production and similar all natural bioactive formulations to enhance human performance safely, ethically, legally and utilizing known body mechanisms without the use of drugs."
• "We remain, nevertheless, dependent on additional investment capital to continue our survival."
• "There is no guarantee that any capital, including through convertible loan transactions, will be available to us in the future or, if available, on terms acceptable to us."
• "While we are expanding our best efforts to achieve the above plans, there is no assurance that any such activity will generate funds that will be available for operations."
• "We believe that the small number of board and management members do not yet warrant the adoption of a Code of Ethics."
• "We have not yet entered into an employment agreement with, or otherwise compensated, our new President, Jim Morrison. It is expected that, in the near future, we will enter into an employment agreement with Mr. Morrison, the terms of which have not been determined."

Industry Context

Resonate Blends is pivoting into the Regenerative Medicine and health & wellness sector, focusing on natural products like stem cell mobilizers and diet aids. This aligns with a growing consumer interest in natural health solutions and preventative medicine. The company's strategy to market licensed patent-pending agents and explore bioactive formulations positions it within the emerging and competitive nutraceutical and biotech industries. However, its small scale and significant financial challenges contrast sharply with established players in these capital-intensive fields.

Comparison to Industry Standards

• The company's financial performance, characterized by recurring losses and a substantial working capital deficit, falls significantly below industry standards for sustainable operations in the health and wellness or biotech sectors.
• The reliance on convertible debt, often on unfavorable terms, is typical of early-stage or distressed companies struggling to secure traditional financing, unlike more mature or well-capitalized industry peers.
• The lack of a separately designated audit committee and a formal Code of Ethics, as well as identified material weaknesses in internal controls, indicates corporate governance practices that are below the standards expected of publicly traded companies, especially those seeking to attract significant investment.
• While the company is pursuing innovative product areas like natural stem cell mobilizing agents, its current financial state and operational infrastructure do not allow for direct comparison to established pharmaceutical or large nutraceutical companies with robust R&D budgets and commercialization capabilities.

Management Changes

Corporate Governance

Related Party Transactions

• Management has periodically advanced funds to the Company, with $221,268 due to related parties as of December 31, 2024.
• On March 14, 2024, former CEO Geoffrey Selzer sold all 2,000,000 outstanding shares of Series C Preferred Stock to Jim Morrison for $10.00, granting Mr. Morrison voting control of the company.
• On March 14, 2024, the company entered into a Conveyance Agreement with former CEO Geoffrey Selzer, assigning ownership of its then-wholly-owned subsidiaries (Resonate Blends, LLC and Entourage Labs, LLC) to Mr. Selzer. In return, Mr. Selzer assumed all liabilities of the subsidiaries and agreed to pay the company a percentage of future sale proceeds (20% within one year, 10% within two years).

Stakeholder Impact

• **Shareholders**: Face significant dilution risk from ongoing convertible debt conversions and potential future capital raises. The 'going concern' doubt and ineffective internal controls pose substantial risks to investment value. The limited trading market on OTCQB also impacts liquidity.
• **Employees**: While not explicitly detailed, the company's precarious financial position and dependence on future financing could create job insecurity or limit growth opportunities.
• **Customers**: The strategic pivot to Regenerative Medicine products may offer new solutions, but the company's financial instability could impact product development, availability, or customer support.
• **Suppliers**: The company's working capital deficit and reliance on financing could pose risks to timely payments, potentially affecting supplier relationships.
• **Creditors**: Existing creditors, particularly holders of unsecured convertible notes, face elevated risk due to the company's 'going concern' issues and large accumulated deficit. Secured creditors have a better position but still face overall company risk.

Next Steps

• Secure additional financing arrangements to address working capital needs and ensure continued operations.
• Achieve and maintain profitable operations to alleviate going concern doubts.
• 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.
• Enter into an employment agreement with the new President, Jim Morrison, with terms yet to be determined.
• Continue research and development activities in areas such as Secretogues and other natural bioactive formulations.

Key Dates

Recommendation

Keywords

Regenerative Medicine, Nutritionally Designed Products, Stem Cell Mobilizing Agents, Diet Aid, Health and Wellness, SEC Filing, 10-K, Going Concern, Convertible Debt, Acquisition, EMGE, KOAN, Biologics, Nanotechnology, Corporate Governance, Financial Reporting