10-Q: Frequency Holdings Reports Q3 Net Income Amid Restructuring

Frequency Holdings Inc. reported a net income of $1.65 million for Q3 2025, driven by a significant non-cash gain on asset disposal, despite a substantial revenue decline and ongoing going concern doubts.

Summary

• Frequency Holdings Inc. (FRQN) reported a net income of $1,648,269 for the three months ended September 30, 2025, compared to $13,383,099 for the same period in 2024, primarily due to changes in the fair value of derivatives.
• For the nine months ended September 30, 2025, net income was $9,479,927, up from $2,722,956 in the prior year, largely attributable to an $11,233,944 non-cash gain on the disposal of ReachOut Technology Corp. and its subsidiaries.
• Revenue for the three months ended September 30, 2025, decreased by 75.8% to $250,319 from $1,036,171 in 2024, and for the nine months, it decreased by 64.4% to $1,582,935 from $4,447,273, primarily due to the company's restructuring.
• The company deconsolidated ReachOut Technology Corp. and its subsidiaries (Innovative Network Designs LLC and RedGear LLC) on March 31, 2025, transferring their net assets to a third party for a nominal amount.
• Frequency Holdings has formed a new flagship operating company, ReachOut Digital Intelligence (RDI), focused on cybersecurity and IT management solutions for small to medium-sized businesses (SMBs) through a subscription-based model.
• The company's strategic evolution includes shifting from larger acquisitions to smaller, high-potential firms, leveraging AI and automation, and developing new ventures like TRUSTLESS, a blockchain-based identity management platform.
• As of September 30, 2025, the company had a working capital deficit of $4,570,545, a stockholders deficit of $5,964,281, and an accumulated deficit of $11,756,230, raising substantial doubt about its ability to continue as a going concern.
• Cash used in operating activities for the nine months ended September 30, 2025, was $386,418, an improvement from $510,121 used in the prior year, but still negative.
• The company's disclosure controls and procedures were deemed not effective as of September 30, 2025.

Sentiment

Score: 3

Explanation: The sentiment is largely negative due to severe revenue decline, worsening operating losses, significant deficits, and a 'going concern' warning. While there's a non-cash net income and an ambitious strategic vision, the underlying financial health and operational performance are weak, and the effectiveness of internal controls is compromised. The reliance on convertible debt and potential for dilution further weigh down sentiment.

Positives

• Reported a net income of $9,479,927 for the nine months ended September 30, 2025, significantly higher than $2,722,956 in the prior year, primarily due to a non-cash gain on disposal.
• Achieved a substantial non-cash gain on disposal of $11,233,944 from the deconsolidation of ReachOut Technology Corp. and its subsidiaries.
• Reduced cash used in operating activities to $386,418 for the nine months ended September 30, 2025, compared to $510,121 in the prior year, indicating some operational efficiency improvements.
• Successfully restructured operations by divesting underperforming subsidiaries and establishing a new flagship, ReachOut Digital Intelligence (RDI), focused on a scalable, subscription-based cybersecurity model.
• Strategic shift towards acquiring smaller, high-potential firms and leveraging AI and automation is expected to lead to faster integration, scalability, and improved margins.
• Plans to diversify revenue streams with new ventures like TRUSTLESS, a blockchain-based identity management platform, positioning for emerging market opportunities.
• Reduced derivative expense to $390,265 for the nine months ended September 30, 2025, from $20,756,752 in the prior year, and interest expense decreased to $749,934 from $1,170,547.

Negatives

• Revenue for the nine months ended September 30, 2025, decreased significantly by 64.4% to $1,582,935 from $4,447,273 in the prior year.
• Reported a loss from operations of $(4,476,266) for the nine months ended September 30, 2025, which is worse than the $(3,434,102) loss in the prior year.
• The company has not generated profits since inception and incurred negative cash flows from operations of $386,418 for the nine months ended September 30, 2025.
• As of September 30, 2025, the company has a working capital deficit of $4,570,545, a stockholders deficit of $5,964,281, and an accumulated deficit of $11,756,230.
• Cash balance significantly decreased to $30,155 as of September 30, 2025, from $275,292 at December 31, 2024.
• Total assets decreased substantially to $102,291 as of September 30, 2025, from $539,558 at December 31, 2024.
• The CEO concluded that disclosure controls and procedures were not effective as of September 30, 2025.
• Many convertible notes payable are in default, requiring waivers and forbearance from noteholders, indicating ongoing financial strain and potential for significant dilution.

Risks

• Substantial doubt exists about the company's ability to continue as a going concern due to historical losses, negative operating cash flows, and significant deficits in working capital, stockholders' equity, and accumulated earnings.
• Dependence on generating sufficient cash flows from operations or obtaining additional financing through debt or equity, which could lead to significant dilution for existing shareholders.
• The company's acquisition-driven growth strategy for RDI faces risks related to integration, cultural alignment, and operational scalability, despite a shift to smaller targets.
• Rapid evolution of the technology landscape, particularly in AI and cybersecurity, requires continuous innovation and investment to maintain service relevance, posing a risk to competitive positioning.
• Market volatility, macroeconomic fluctuations, and capital availability may impact the pace of acquisitions and expansion plans.
• The company's high-growth profile and media-forward leadership may attract increased public scrutiny, requiring proactive governance and transparency.
• Many convertible notes are in default, and while waivers and forbearance have been issued, this indicates ongoing financial instability and potential for adverse terms or forced conversions.
• Concentration of credit risk with one customer accounting for approximately 70% of total accounts receivable as of September 30, 2025, and one noteholder accounting for approximately 76% of total debt.

Future Outlook

The company is executing a strategic shift to a modern holding company structure, aiming to acquire 4-10 smaller, high-potential firms annually and integrate them rapidly using AI and operational playbooks. It plans to launch and scale disruptive platforms like TRUSTLESS, a blockchain-based identity and data security platform, to diversify revenue and achieve long-term balance sheet growth. The ultimate goal is to achieve a NASDAQ uplisting and establish RDI as a nationally recognized brand in cybersecurity and IT for SMBs, emulating a customer-centric approach like T-Mobile.

Management Comments

• "The Company is currently active in the state of Nevada."
• "RDI has evolved from a regional IT services provider into a national leader in cybersecurity solutions for small to medium-sized businesses (SMBs)."
• "Management anticipates that these revenue streams [from RDI customer arrangements] will be more substantial and potentially more profitable than those contributed by ReachOut Technology Corp.s subsidiaries."
• "Our strategy is to emulate the customer-centric approach of companies like T-Mobile, offering accessible, high-quality cybersecurity services to underserved SMBs across the nation."
• "With a strong leadership team, a clear strategic vision, and a commitment to innovation, we are well-positioned to execute our growth plans and achieve a successful uplisting to NASDAQ."
• "RDI isn't just improving MSP operations—it's replacing them. By reimagining IT and cybersecurity as a national, AI-powered, subscription-based platform with media-fueled brand recognition, RDI is positioned to lead this $700B+ market into its next evolution—while creating massive long-term value for shareholders."
• "The Company has mitigated [acquisition] risks by shifting focus from larger, complex acquisitions to smaller, more agile targets with faster onboarding potential."

Industry Context

The cybersecurity and IT services industry for SMBs is highly fragmented, with many regional providers lacking specialization and scalability. Enterprise-focused firms often overlook this segment. Frequency Holdings, through its RDI subsidiary, aims to disrupt this market by building a nationally recognized brand offering enterprise-grade cybersecurity tailored for SMBs, leveraging AI for scalability and a subscription-based model. This strategy positions RDI to fill a significant market gap by combining advanced technology with a customer-centric approach, similar to how T-Mobile disrupted the telecom industry.

Comparison to Industry Standards

• RDI's approach of sub-minute response times and issue resolution within 15 minutes for client calls, augmented by AI copilots for L1 support, aims to significantly outperform traditional MSPs that often suffer from delayed response and inefficient frontline support.
• The company's focus on proactive strategic engagement with dedicated vCIOs/vCISOs and continuous cybersecurity posture analysis contrasts with many small IT providers who lack advanced cybersecurity capabilities or compliance readiness support.
• RDI's advanced security infrastructure, including 24/7 SOC-backed protection, anti-phishing training, and compliance solutions (HIPAA, CMMC, NIST 800-171), positions it against traditional providers offering only basic security tools like antivirus and firewalls.
• The strategic shift to a holding company model, akin to Berkshire Hathaway's capital efficiency and Alphabet's innovation strategy, is a sophisticated approach uncommon among typical regional IT service providers, allowing for diversified, high-growth ventures like TRUSTLESS.

Management Changes

Corporate Governance

Legal Proceedings

• Prior to March 31, 2025, the company's consolidated subsidiaries (IND & RedGear LLC) were involved in certain legal proceedings related to purchase disputes. Upon deconsolidation, all related assets, liabilities, and obligations were retained by the former subsidiaries, and the company has no guarantees, indemnities, or other commitments related to these matters.

Related Party Transactions

• As of September 30, 2025, the company owes its CEO $210,008 for advances made for operating costs, which are non-interest bearing and due on demand.
• The company occupies office space owned by "Value Industrial Partners MDG LLC," a private entity controlled by the CEO, under an informal month-to-month arrangement at $3,716 per month, starting July 2025.
• On December 27, 2024, the board approved a Debt Cancellation and Exchange Agreement to satisfy $2,440,950 in liabilities owed to the CEO and a private company he controlled, by authorizing a new series of preferred stock to be issued to First Portfolio Management LLC.

Stakeholder Impact

• **Shareholders:** Face significant dilution risk from numerous convertible notes and warrants, many of which are in default. The 'going concern' warning indicates a high risk to investment value. The non-cash net income may obscure underlying operational challenges.
• **Employees:** The company has approximately twenty-two full-time and part-time employees. The restructuring and strategic shift could impact roles and responsibilities, though the focus on AI and automation might imply efficiency gains rather than immediate headcount reductions.
• **Customers:** The new RDI strategy aims to provide enhanced cybersecurity and IT management solutions, potentially benefiting SMB customers with improved service depth, response times, and advanced security infrastructure.
• **Creditors/Noteholders:** Many convertible notes are in default, requiring waivers and forbearance, indicating elevated credit risk. The conversion features of these notes could lead to significant equity dilution if exercised.
• **Management:** The CEO, Richard Jordan, has taken on significant leadership roles and is central to the company's strategic vision and media presence. Related party transactions with the CEO and his controlled entities are disclosed.

Next Steps

• Generate sufficient cash flows from operations to meet obligations and address the going concern doubt.
• Reduce expenses or obtain additional financing through the sale of debt and/or equity securities.
• Continue the strategic shift to a modern holding company structure, acquiring smaller, high-potential firms.
• Integrate acquired firms rapidly using AI, operational playbooks, and centralized support infrastructure.
• Launch and scale disruptive platforms, such as TRUSTLESS, a blockchain-based identity management platform.
• Work towards achieving a NASDAQ uplisting.
• Improve disclosure controls and procedures, which were deemed not effective as of September 30, 2025.

Key Dates

Recommendation

Despite reporting a net income, this is primarily driven by a non-cash gain on asset disposal, masking a severe 64.4% decline in revenue and worsening operating losses. The company explicitly states 'substantial doubt' about its ability to continue as a going concern, indicating fundamental financial instability. Significant working capital, stockholders, and accumulated deficits, coupled with a low cash balance and negative operating cash flows, paint a dire picture. The ineffectiveness of disclosure controls and procedures raises governance concerns. While the strategic vision for RDI and new ventures like TRUSTLESS is ambitious, the current financial health and high risk of dilution from numerous defaulted convertible notes make the stock highly speculative and prone to further downside. A seasoned investor would prioritize financial stability and operational performance over future potential when the 'going concern' is in question.

Keywords

Cybersecurity, IT Services, Managed Service Provider, SMB, AI, Blockchain, Identity Management, Acquisition Strategy, Going Concern, Convertible Debt, FRQN, ReachOut Digital Intelligence, TRUSTLESS