10-Q: Resonate Blends Reports Increased Revenue Following Emergent Health Corp. Acquisition, But Faces Going Concern Challenges

Resonate Blends, Inc. reports a significant increase in revenue for the nine months ended September 30, 2024, primarily due to the acquisition of Emergent Health Corp. assets, but also discloses ongoing concerns about its ability to continue as a going concern.

Summary

• Resonate Blends, Inc. reported a net loss of $1,555,767 for the nine months ended September 30, 2024, compared to a net loss of $1,011,432 for the same period in 2023.
• The company's revenue increased significantly to $1,349,905 for the nine months ended September 30, 2024, compared to $16,468 for the same period in 2023, primarily due to the acquisition of Emergent Health Corp. assets.
• Operating expenses also increased to $2,219,787 for the nine months ended September 30, 2024, compared to $195,627 for the same period in 2023.
• The company's working capital deficit was $3,513,398 as of September 30, 2024, compared to a deficit of $2,150,975 as of December 31, 2023.
• Resonate Blends has an accumulated deficit of $28,292,170 as of September 30, 2024.
• The company's ability to continue as a going concern is dependent on securing additional financing and achieving profitable operations.
• The company has obtained loans from AJB Capital Investments, LLC and Ray Vollintine in March 2024, but remains reliant on additional investment capital.
• The company has identified material weaknesses in its internal controls over financial reporting, including a lack of written documentation, insufficient segregation of duties, and ineffective controls over the control environment.

Sentiment

Score: 3

Explanation: The document highlights significant revenue growth due to an acquisition, but the company's substantial net loss, working capital deficit, accumulated deficit, and material weaknesses in internal controls, coupled with a going concern warning, paint a concerning picture for investors. The reliance on debt financing and the lack of profitability contribute to a negative sentiment.

Positives

• The company experienced a significant increase in revenue due to the acquisition of Emergent Health Corp. assets.
• Gross profit improved substantially compared to the same period last year.
• The company has secured additional financing through loans from AJB Capital Investments, LLC and Ray Vollintine.

Negatives

• The company continues to operate at a net loss.
• The company has a significant working capital deficit.
• The company has a substantial accumulated deficit.
• The company has identified material weaknesses in its internal controls over financial reporting.
• The company is dependent on additional investment capital to continue operations.
• The company has historically raised money through convertible debt on unfavorable terms.

Risks

• The company's ability to continue as a going concern is uncertain and dependent on securing additional financing and achieving profitability.
• The company's reliance on convertible debt financing may lead to unfavorable terms and dilution of existing shareholders.
• The material weaknesses in internal controls over financial reporting could lead to misstatements in financial reports.
• The company's high level of debt and working capital deficit could impact its ability to operate effectively.
• The company's future operating expenses are expected to increase due to the acquisition of EMGE assets.

Future Outlook

The company expects operating expenses to increase due to the acquisition of EMGE assets, but no specific guidance is provided. The company's ability to continue as a going concern is dependent on securing additional financing and achieving profitable operations.

Management Comments

• Management believes that the financial statements fairly present the company's financial position, results of operations, and cash flows.
• Management acknowledges the material weaknesses in internal controls and is working to remediate them.
• Management states that the company remains dependent on additional investment capital to continue its survival.

Industry Context

The company's shift in business focus from IT consulting to health and wellness products through the acquisition of EMGE reflects a broader trend of companies diversifying into high-growth sectors. The company's challenges in securing financing and achieving profitability are common among smaller companies in competitive markets.

Comparison to Industry Standards

• The company's revenue growth is significant, but its profitability lags behind industry standards for established companies.
• The company's reliance on convertible debt is not uncommon for early-stage companies, but the unfavorable terms suggest a higher risk profile.
• The material weaknesses in internal controls are a concern and indicate a need for significant improvements in corporate governance.
• Compared to companies like Canopy Growth Corp or Tilray in the cannabis sector, Resonate Blends is significantly smaller and earlier in its development cycle.
• The company's financial performance is not comparable to larger, more established pharmaceutical or biotech companies, such as Pfizer or Moderna, due to its size and stage of development.

Management Changes

Corporate Governance

Related Party Transactions

• Management has periodically advanced funds to the Company for operating expenses.
• On March 14, 2024, the company assigned its ownership in Resonate Blends, LLC and Entourage Labs, LLC to Geoffrey Selzer, the former CEO and Director.
• Subsequent to September 30, 2024, the Company completed the assumption of obligations of EMGE associated with the Acquired Assets in the principal amount of $335,000 plus approximately $83,000 in accrued interest, or $417,965, in the aggregate. These amounts owed by the Company as a result of such assumption are due to companies that are affiliates of James W. Zimbler, one of the Company's directors, in November 2025.

Stakeholder Impact

• Shareholders face significant risk due to the company's net losses, working capital deficit, and going concern uncertainty.
• Employees may be impacted by the company's financial instability and potential restructuring.
• Customers may be affected by the company's ability to maintain operations and deliver products.
• Suppliers and creditors face increased risk due to the company's financial challenges and reliance on debt financing.

Next Steps

• The company plans to engage a third-party firm to assist in remediating the material weakness in documentation, evaluation and testing of internal controls.
• The company intends to hire additional employees to address the material weakness regarding insufficient segregation of duties.
• The company needs to secure additional financing to continue operations.

Key Dates

Keywords

Resonate Blends, Emergent Health Corp, acquisition, revenue, net loss, convertible debt, internal controls, going concern, financial statements, working capital