KOAN 10-Q
Resonate Blends, Inc. (KOAN)
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM
| Quarterly Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
For
the quarterly period ended
| Transition Report pursuant to 13 or 15(d) of the Securities Exchange Act of 1934 |
For the transition period from __________ to__________
Commission
File Number:
(Exact name of registrant as specified in its charter)
(State or other jurisdiction of incorporation or organization) |
(IRS Employer Identification No.) |
(Address of principal executive offices)
(Registrant’s telephone number)
(Former name, former address and former fiscal year, if changed since last report)
Securities registered pursuant to Section 12(b) of the Act: None
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
☒
Indicate
by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted and posted pursuant
to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant
was required to submit and post such files). ☒
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company.
| ☐ Large accelerated filer | ☐ Accelerated filer | |
| ☒
|
||
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate
by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). ☐ Yes
State the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date:
shares of common stock as of November 25, 2024.
TABLE OF CONTENTS
| Page | ||
| PART I – FINANCIAL INFORMATION | 3 | |
| Item 1: | Financial Statements | 3 |
| Item 2: | Management’s Discussion and Analysis of Financial Condition and Results of Operations | 4 |
| Item 3: | Quantitative and Qualitative Disclosures About Market Risk | 7 |
| Item 4: | Controls and Procedures | 7 |
| PART II – OTHER INFORMATION | 8 | |
| Item 1: | Legal Proceedings | 8 |
| Item 1A: | Risk Factors | 8 |
| Item 2: | Unregistered Sales of Equity Securities and Use of Proceeds | 8 |
| Item 3: | Defaults Upon Senior Securities | 8 |
| Item 4: | Mine Safety Disclosures | 9 |
| Item 5: | Other Information | 9 |
| Item 6: | Exhibits | 9 |
| 2 |
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Our consolidated financial statements included in this Form 10-Q are as follows:
These consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and the SEC instructions to Form 10-Q. In the opinion of management, all adjustments considered necessary for a fair presentation have been included. Operating results for the interim six months ended September 30, 2024, are not necessarily indicative of the results that can be expected for the full year.
| 3 |
RESONATE BRANDS, INC. AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
(Unaudited)
| September 30, 2024 | December 31, 2023 | |||||||
| ASSETS | ||||||||
| Current assets: | ||||||||
| Cash and cash equivalents | $ | $ | ||||||
| Advances to Pegasus Specialty Vehicles, LLC | ||||||||
| Loan receivable | ||||||||
| Total current assets | $ | $ | ||||||
| Fixed assets: | ||||||||
| Fixed assets, net | $ | $ | ||||||
| Total fixed assets | $ | |||||||
| Other assets: | ||||||||
| Investments | $ | $ | ||||||
| Total other assets | $ | $ | ||||||
| Total assets | $ | $ | ||||||
| LIABILITIES AND SHAREHOLDERS’ DEFICIT | ||||||||
| Current liabilities: | ||||||||
| Accounts payable and accrued liabilities | $ | $ | ||||||
| Loans payable | ||||||||
| Loans payable, related parties | ||||||||
| Notes payable, net of discount | ||||||||
| Notes payable, related parties | ||||||||
| Convertible notes payable | ||||||||
| Derivative liability | ||||||||
| Total current liabilities | $ | |||||||
| Shareholders’ Deficit: | ||||||||
| Series B Preferred Stock, $ par value; shares authorized; shares issued and outstanding at September 30, 2024 and December 31, 2023, respectively. | ||||||||
| Series C Preferred Stock, $ par value; shares authorized; shares issued and outstanding at September 30, 2024 and December 31, 2023, respectively. | ||||||||
| Series D Preferred Stock, $ par value; shares authorized; shares issued and outstanding at September 30, 2024 and December 31, 2023, respectively. | ||||||||
| Common stock, $ par value; shares authorized; and shares issued and outstanding at September 30, 2024 and December 31, 2023, respectively. | ||||||||
| Additional paid-in capital | ||||||||
| Common stock issuable | ||||||||
| Stock subscription receivable | ( | ) | ( | ) | ||||
| Accumulated deficit | ( | ) | ( | ) | ||||
| Total shareholders’ deficit | $ | ( | ) | ( | ) | |||
| Total liabilities and shareholders’ deficit | $ | $ | ||||||
See accompanying notes to unaudited consolidated financial statements.
| F-1 |
RESONATE BLENDS, INC.
Condensed Consolidated Statements of Operations
(Unaudited)
For the Three Months September 30, 2024 | For the Three Months September 30, 2023 | For the Nine Months Ended September 30, 2024 | For the Nine Months Ended September 30, 2023 | |||||||||||||
| Sales | $ | $ | $ | $ | ||||||||||||
| Cost of Goods Sold | ||||||||||||||||
| Gross Profit (Loss) | ||||||||||||||||
| Operating expenses: | ||||||||||||||||
| General and administrative | ||||||||||||||||
| Sales commissions | ||||||||||||||||
| Consulting | ||||||||||||||||
| Legal and professional | ||||||||||||||||
| Research and development | ||||||||||||||||
| Total operating expenses | ||||||||||||||||
| Loss from operations | ( | ) | # | ( | ( | ) | # | ( | ||||||||
| Other income (expense): | ||||||||||||||||
| Interest expense | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Gain on disposal of Resonate Blends | ||||||||||||||||
| Gain on investment | ||||||||||||||||
| Gain (loss) on change in derivative liability | ( | ) | ( | ) | ||||||||||||
| Amortization of issuance costs | ( | ) | ( | ) | ( | ) | ||||||||||
| Gain (loss) on conversion of debt | ( | ) | ( | ) | ||||||||||||
| Gain (loss) on settlement of notes payable | ( | ) | ( | ) | ||||||||||||
| Total other income (expense) | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Net loss | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
| Net loss per share - basic and diluted | $ | ) | $ | ) | $ | ) | $ | ) | ||||||||
| Weighted average shares outstanding - basic | ||||||||||||||||
See accompanying notes to consolidated financial statements.
| F-2 |
RESONATE BLENDS, INC.
Condensed Statement of Stockholder’s Equity (Deficit)
For the Period from December 31, 2022 to September 30, 2024
(Unaudited)
| Preferred Stock Series A Shares | Preferred Stock Series A Amount | Preferred Stock Series C Shares | Preferred Stock Series C Amount | Common Stock Shares | Common Stock Amount | Additional Paid-in Capital | Common Stock Issuable | Subscription Receivable | Earnings (Deficit) Accumulated | Total | ||||||||||||||||||||||||||||||||||
| Balance, December 31, 2022 | $ | $ | | $ | $ | $ | $ | ( | ) | $ | ( | ) | $ | ( | ) | |||||||||||||||||||||||||||||
| Reclassification of convertible debt | - | - | - | ( | ) | ( | ) | |||||||||||||||||||||||||||||||||||||
| Exercise of warrants | - | - | ||||||||||||||||||||||||||||||||||||||||||
| Stock issuance for services | - | - | ||||||||||||||||||||||||||||||||||||||||||
| Issuance of common stock for commitment fees | - | - | ||||||||||||||||||||||||||||||||||||||||||
| Recognition of stock issued for services | - | - | - | |||||||||||||||||||||||||||||||||||||||||
| Issuance of common stock in private placement | - | - | ||||||||||||||||||||||||||||||||||||||||||
| Conversion of convertible debt | - | - | ||||||||||||||||||||||||||||||||||||||||||
| Net loss, December 31, 2023 | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||||||||
| Balance, December 31, 2023 | $ | $ | $ | $ | $ | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||||||||||||||||||||||||||||
| Stock issuance for services | - | - | ||||||||||||||||||||||||||||||||||||||||||
| Conversion of convertible debt | - | - | ||||||||||||||||||||||||||||||||||||||||||
| Settlement of derivative liabilities | - | - | - | |||||||||||||||||||||||||||||||||||||||||
| Net loss, September 30,2024 | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||||||||
| Balance, September 30, 2024 | $ | $ | $ | $ | $ | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||||||||||||||||||||||||||||
See accompanying notes to consolidated financial statements.
| F-3 |
RESONATE BLENDS, INC.
Unaudited Condensed Consolidated Statements of Cash Flows
For the Nine Months Ended September 30, 2024 | For the Nine Months Ended September 30, 2023 | |||||||
| Cash flows from operating activities | ||||||||
| Net loss | $ | ( | ) | $ | ( | ) | ||
| Adjustments to reconcile net loss to net cash used in operating activities: | ||||||||
| Accrued interest, notes payable | ||||||||
| Gain on derivative liability | ||||||||
| Share professional fees/compensation | ||||||||
| Gain on disposal of investment | ||||||||
| Gain on disposal of subsidiary | ||||||||
| Depreciation and amortization | ||||||||
| Changes in operating assets and liabilities: | ||||||||
| Inventory | ||||||||
| Other receivables | ( | ) | ||||||
| Accounts payable and accrued expenses | ||||||||
| Net cash used in operating activities | ( | ) | ||||||
| Cash flows from investing activities | ||||||||
| Deposits on acquistions | ( | ) | ( | ) | ||||
| Net cash provided by investing activities | ( | ) | ( | ) | ||||
| Cash flows from financing activities | ||||||||
| Payments to loans payable | ( | ) | ||||||
| Payments to loans payable, related parties | ( | ) | ( | ) | ||||
| Payments to convertible note payable | ( | ) | ||||||
| Proceeds from warrant exercise | ||||||||
| Proceeds from loans payable | ||||||||
| Proceeds from loans payable, related parties | ||||||||
| Proceeds from notes payable | ||||||||
| Proceeds from convertible notes payable | ||||||||
| Proceeds from issuance of common stock | ||||||||
| Net cash provided by financing activities | ||||||||
| Net increase (decrease) in cash | ( | ) | ||||||
| Cash at beginning of period | ||||||||
| Cash at end of period | $ | $ | ||||||
| Supplemental Cash Flow Information: | ||||||||
| Cash paid for interest | $ | $ | ||||||
| Cash paid for income taxes | $ | $ | ||||||
| Non-cash investing and financing information: | ||||||||
| Conversion of debt for common stock | $ | $ | ||||||
See accompanying notes to unaudited consolidated financial statements.
| F-4 |
RESONATE BLENDS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE NMONTHS ENDED SEPTEMBER 30, 2024 AND 2023
(UNAUDITED)
NOTE 1 – ORGANIZATION AND BUSINESS OPERATIONS
The Company
Resonate Blends, Inc. formerly Textmunication Holdings, Inc. (the “Company”) was incorporated on in October 1984 in the State of Georgia as Brock Control Systems. Founded by Richard T. Brock, the Company was in the sales automation market and an early developer of enterprise customer management systems. The Company went public at the end of March 1993. In February 1996, the Company changed its name to Brock International Inc., and in March 1998, the Company again changed its’ name to Firstwave Technologies, Inc.
In 2007, the Company deregistered its common stock in order to avoid the expenses of being a public company. The Company reported briefly on the OTC Disclosure & News Service in 2008. The Company again changed its name to FSTWV, Inc.
On
October 28, 2013, the Company held a shareholder meeting to reincorporate the company in the State of Nevada and concurrently change
its name to Textmunication Holdings, Inc.
On November 16, 2013, the Company entered into a Share Exchange Agreement (SEA) with Textmunication, Inc. a California corporation, whereby the sole shareholder of the Company received new shares of common stock of the Company in exchange for % of the Textmunication’s issued and outstanding shares.
On
October 25, 2019, the Company entered into a Membership Interest Purchase Agreement (the “Resonate Purchase Agreement”) with
Resonate Blends, LLC, a California limited liability company (“Resonate”), and the members of Resonate. As a result of the
transaction, Resonate became a wholly owned subsidiary of the Company. In accordance with the terms of the Purchase Agreement, at the
closing an aggregate of % of the Company’s outstanding shares of common stock for a total of shares were issued to the
holders of Resonate in exchange for their membership interests of Resonate. These shares have anti-dilution protection.
Also,
on October 25, 2019, the Company entered into a Membership Interest Purchase Agreement (the “Entourage Labs Purchase Agreement”)
with Entourage Labs, LLC, a California limited liability company (“Entourage Labs”), and the members of Entourage Labs. As
a result of the transaction, Entourage Labs became a wholly owned subsidiary of the Company. In accordance with the terms of the Purchase
Agreement, at the closing an aggregate of % of the Company’s outstanding shares of common stock for a total of shares
were issued to the holders of Entourage Labs in exchange for their membership interests of Entourage Labs. These shares have anti-dilution
protection.
In
addition, the Company entered into an Agreement of Conveyance, Transfer and Assignment of Assets and Assumption of Obligations (the “Conveyance
Agreement”) with Mark S. Johnson and the Company’s
On December 16, 2019 the Company filed Articles of Merger with the Secretary of State of Nevada in order to effectuate a merger with its wholly owned subsidiary; Resonate Blends, Inc. Shareholder approval was not required under Section 92A.180 of the Nevada Revised Statutes. As part of the merger, the Company’s board of directors authorized a change in our name to “Resonate Blends, Inc.” and the Company’s Articles of Incorporation have been amended to reflect this name change.
| F-5 |
In connection with the name change, the Company’s symbol was changed to “KOAN” that more resembles the Company’s new business focus.
Effective March 14, 2024, Geoffrey Selzer, the Company’s former Chief Executive Officer and Director, and Jim Morrison, the Company’s current President and Director, entered into a Securities Purchase Agreement, pursuant to which Mr. Selzer sold all outstanding shares of the Company’s Series C Preferred Stock to Mr. Morrison for $ in cash. Mr. Morrison now possesses voting control of the Company.
On
February 26, 2024, the Company entered into entered into a Share Exchange Agreement, as amended (the “Exchange Agreement”),
with Emergent Health Corp., a Wyoming corporation (EMGE), and the holders (the “EMGE Preferred Shareholders”) of Series Class
A Preferred Stock and the Series C Convertible Non-Voting Preferred Stock (the “EMGE Equity Interests”). On March 14, 2024,
the parties closed the Exchange Agreement. At the closing of the Exchange Agreement: (a) the EMGE Preferred Shareholders exchanged all
of their respective EMGE Equity Interests for an equal number of shares of the Company’s to-be-designated Series F Convertible
Preferred Stock (the “Exchange Shares”) that shall convert into
Effective August 8, 2024, the Company entered into a Reformation of Share Exchange Agreement (the “Reformation Agreement”) with EMGE and the EMGE Preferred Shareholders. The Reformation Agreement was entered into after the Company, EMGE and the EMGE Preferred Shareholders having independently determined that the structure of the Exchange Agreement resulted in the parties’ experiencing consequences that were unintended and that would not, in the long term, be beneficial to the parties and that a reformation of the Exchange Agreement from a share-for-share structure to a share-for-asset structure would be beneficial to each of the parties.
By the Reformation Agreement, share-for-share structure of the Exchange Agreement was reformed to become a share-for-asset structure (the “Reformation”). Effecting the Reformation produced the following actions (the “Reformation Actions”):
(a) First, the issuances of the Company Exchange Shares to the EMGE Preferred Shareholders were rescinded.
(b) Next, the assignments of the EMGE Equity Interests by the EMGE Preferred Shareholders to the Company were rescinded.
(c) The Company, then, re-issued the Exchange Shares to EMGE, in consideration of the following assets of EMGE (the “Acquired Assets”):
| ● | All of the capital stock of Evolutionary Biologics, Inc.; | |
| ● | All of the capital stock of Apollo Biowellness, Inc.; | |
| ● | All of the capital stock of Nanosthetic, Inc.; and | |
| ● | All of the capital stock of Nanogistics, Inc. |
In addition, the Reformation Actions resulted in the Company’s no longer being the controlling shareholder of EMGE.
On
March 14, 2024, in conjunction with the acquisition of EMGE, we entered into an Agreement of Conveyance, Transfer and Assignment of Subsidiary
with two of the Company’s then-wholly-owned subsidiaries, Resonate Blends, LLC, a California limited liability company, and Entourage
Labs, LLC, a California limited liability company, and our former Chief Executive Officer and Director, Geoffrey Selzer. Pursuant to
the Conveyance Agreement, the Company assigned its’ ownership in the Subsidiary to Mr. Selzer.
Basis of Presentation
The accompanying unaudited interim financial statements of the Company have been prepared in accordance with accounting principles generally accepted in the United States of America and the rules of the Securities and Exchange Commission, and should be read in conjunction with the audited financial statements and notes thereto contained in the Company’s most recent Annual Financial Statements filed with the SEC on Form 10-K. In the opinion of management, all adjustments, consisting of normal recurring adjustments, necessary for a fair presentation of financial position and the results of operations for the interim period presented have been reflected herein. The results of operations for the interim period are not necessarily indicative of the results to be expected for the full year. Notes to the financial statements which would substantially duplicate the disclosures contained in the audited financial statements for the most recent fiscal period, as reported in the Form 10-K, have been omitted.
| F-6 |
Going concern
These
consolidated financial statements have been prepared in accordance with generally accepted accounting principles applicable to a going
concern, which contemplates the realization of assets and the satisfaction of liabilities and commitments in the normal course of business.
As of September 30, 2024, the Company has an accumulated deficit of $
NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Use of Estimates
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date the financial statements and the reported amount of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Consolidation
These consolidated financial statements have been prepared in accordance with U.S. GAAP and include the accounts of the Company and its wholly owned subsidiaries. All intercompany transactions and balances have been eliminated.
Cash
The Company considers all highly liquid instruments purchased with a maturity of three months or less to be cash equivalents.
The Company minimizes its credit risk associated with cash by periodically evaluating the credit quality of its primary financial institution. The balance at times may exceed federally insured limits.
Accounts receivable and allowance for doubtful accounts
Accounts
receivables are stated at the amount management expects to collect. The Company generally does not require collateral to support customer
receivables. The Company provides an allowance for doubtful accounts based upon a review of the outstanding accounts receivable, historical
collection information and existing economic conditions. As of September 30, 2024 and December 31, 2023, there’s
Revenue Recognition
The Company recognizes revenue in accordance with ASC 606, Revenue from Contracts with Customers, the core principle of which is that the Company should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the Company expects to be entitled to receive in exchange for those goods or services. To determine revenue recognition for arrangements that the Company determines are within the scope of ASC 606, the Company performs the following five steps:
| ● | Identification of the contract, or contracts, with a customer | |
| ● | Identification of the performance obligations in the contract | |
| ● | Determination of the transaction price | |
| ● | Allocation of the transaction price to the performance obligations in the contract | |
| ● | Recognition of the revenue when, or as, performance obligations are satisfied |
Revenue is generally recognized upon purchase of products by customers.
EMGE sells ingestible and topical products to retail customers across the United States of America. The Company’s standard delivery method is “free on board” shipping point. Consequently, the Company considers control of products to transfer at a single point in time when control is transferred to the customer, which is generally when products are shipped in accordance with an agreement or purchase order. Control is defined as the ability to direct the use of and obtain substantially all of the remaining benefits of the product. The Company considers the customer’s purchase order, and the Company’s corresponding sales order acknowledgement as the contract with the customer. For each contract, the Company considers the promise to transfer products to be the identified performance obligations. The Company satisfies its performance obligations under a contract with a customer by transferring goods and services in exchange for monetary consideration from the customer. Sales taxes the Company collects concurrent with revenue-producing activities are excluded from revenue.
| F-7 |
Revenue
is deferred when the Company receives payment under a contract with a customer prior to satisfying its performance obligation. As the
majority of orders are processed and shipped immediately upon receipt of payment, it is rare that revenue is deferred. There was
Significant payment terms – The Company’s contracts with its customers state the final terms of the sale, including the description, quantity, and price of each product purchased. Payments are typically due prior to delivery. Since the customer agrees to a stated rate and price in the contract that do not vary over the contract, the Company’s contracts do not contain variable consideration. Economic factors - The Company’s revenues and accounts receivable are derived primarily from the United States with no particular concentration in any industry. Sales revenue is impacted by overall economic conditions, as there are fewer sales when the Company’s customers are impacted by negative economic conditions. Returns, refunds, and warranties – The Company has a 30-day return policy on all products. As the amount of returned product is minimal, management believes that returns on any goods sold subsequent to September 30, 2024, and 2023, were not material.
Fair Value of Financial Instruments
The carrying amounts reflected in the balance sheets for cash, accounts payable and accrued expenses approximate the respective fair values due to the short maturities of these items.
As required by the Fair Value Measurements and Disclosures Topic of the FASB ASC, fair value is measured based on a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value as follows: (Level 1) observable inputs such as quoted prices in active markets; (Level 2) inputs, other than the quoted prices in active markets, that are observable either directly or indirectly; and (Level 3) unobservable inputs in which there is little or no market data, which require the reporting entity to develop its own assumptions.
The three levels of the fair value hierarchy are described below:
Level 1: Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities;
Level 2: Quoted prices in markets that are not active, or inputs that is observable, either directly or indirectly, for substantially the full term of the asset or liability;
Level 3: Prices or valuation techniques that require inputs that are both significant to the fair value measurement and unobservable (supported by little or no market activity).
Financial assets and liabilities measured at fair value on a recurring basis are summarized below for the quarter ended June 30, 2024 and year ended December 31, 2023.
| As of September 30, 2024 | Level 1 | Level 2 | Level 3 | Total | ||||||||||||
| Liabilities | ||||||||||||||||
| Derivative Liabilities | $ | $ | $ | $ |
| As of December 31, 2023 | Level 1 | Level 2 | Level 3 | Total | ||||||||||||
| Liabilities | ||||||||||||||||
| Derivative Liabilities | $ | $ | $ | $ | ||||||||||||
Inventory
Inventory is stated at the lower of cost or net realizable value. Cost is determined on a first in, first out basis. Management compares the cost of inventory with the net realizable value and, if applicable, an allowance is made for writing down the inventory to its net realizable value, if lower than cost, inventory is reviewed for potential write-down for estimated obsolescence or unmarketable inventory based upon forecasts for future demand and market conditions. Generally, the Company only keeps inventory on hand for sales made and in which a deposit has been received.
| F-8 |
Basic net income (loss) per share is computed by dividing the net loss attributable to the common stockholders by the weighted average number of shares of common stock outstanding during the period. Fully diluted loss per share is computed similar to basic loss per share except that the denominator is increased to include the number of additional common shares that would have been outstanding if the potential common shares had been issued and if the additional common shares were dilutive.
Property and equipment
Property
and equipment are stated at cost, less accumulated depreciation provided on the straight-line method over the estimated useful lives
of the assets, which range from to
Income Taxes
Income taxes are computed using the asset and liability method. Under the asset and liability method, deferred income tax assets and liabilities are determined based on the differences between the financial reporting and tax bases of assets and liabilities and are measured using the currently enacted tax rates and laws. A valuation allowance is provided for the amount of deferred tax assets that, based on available evidence, are not expected to be realized. Because the Company has no net income, the tax benefit of the accumulated net loss has been fully offset by an equal valuation allowance.
The Company accounts for employee stock-based compensation in accordance with the guidance of FASB ASC Topic 718, Compensation – Stock Compensation which requires all share-based payments to employees, including grants of employee stock options, to be recognized in the financial statements based on their fair values. The fair value of the equity instrument is charged directly to compensation expense and credited to additional paid-in capital over the period during which services are rendered.
The Company follows ASC Topic 505-50, formerly EITF 96-18, “Accounting for Equity Instruments that are Issued to Other than Employees for Acquiring, or in Conjunction with Selling Goods and Services,” for stock options and warrants issued to consultants and other non-employees. In accordance with ASC Topic 505-50, these stock options and warrants issued as compensation for services provided to the Company are accounted for based upon the fair value of the services provided or the estimated fair market value of the option or warrant, whichever can be more clearly determined. The fair value of the equity instrument is charged directly to compensation expense and additional paid-in capital over the period during which services are rendered.
NOTE 3 – RELATED PARTY TRANSACTIONS
Management
has periodically advanced funds to the Company for operating expenses. At September 30, 2024 and December 31, 2023, amounts due related
parties were $
On
March 14, 2024, in conjunction with our acquisition of EMGE, we entered into an Agreement of Conveyance, Transfer and Assignment of Subsidiary
(the “Conveyance Agreement”) with two of our then-wholly-owned subsidiaries, Resonate Blends, LLC, a California limited liability
company, and Entourage Labs, LLC, a California limited liability company (collectively, Resonate Blends, LLC and Entourage Labs, LLC
are referred to as the “Subsidiary”), and our former Chief Executive Officer and Director, Geoffrey Selzer. Pursuant to the
Conveyance Agreement, we assigned our ownership in the Subsidiary to Mr. Selzer.
NOTE 4 - CONVERTIBLE NOTES PAYABLE
Convertible notes payable consists of the following as of September 30, 2024 and December 31, 2023:
| September 30, 2024 | December 31, 2023 | |||||||
| Convertible notes face value | $ | $ | ||||||
| Less: Discounts | ( | ) | ( | ) | ||||
| Less: Debt issuance cost | ||||||||
| Net convertible notes | $ | $ | ||||||
| F-9 |
At
December 31, 2022, $
During
the year ended December 31, 2022, the Company entered into Securities Purchase Agreements with five accredited investors, pursuant to
which we issued and sold to the investors convertible promissory notes with a total principal amount of $
On
June 27, 2022, the Company issued and sold to an accredited investor a convertible promissory note the principal amount of $
On
September 8, 2022, the Company issued and sold a senior secured convertible promissory note to AJB Capital Investments LLC (“AJB”)
for a principal amount of $
The
maturity date for repayment of the Notes is nine months from issuance and the Notes bear interest at
The Securities Purchase Agreement contain a most-favored nation provision that allows the Investor to claim any lower price from any future securities six months after this closing and a blocker on issuing variable rate investments.
During
the year ended December 31, 2023, the Company issued 5 convertible promissory notes totaling $
On
November 11, 2023, the Company issued and sold to an accredited investor a convertible promissory note the principal amount of $
In
March 2024, the Company obtained a loan from AJB Capital Investments, LLC (“AJB”) which netted the Company $
| F-10 |
The AJB Note is secured by all assets of the Company.
In
March 2024, the Company obtained a loan from Ray Vollintine (“Vollintine”) which netted the Company $
The Vollintine Note is unsecured.
In
addition, the Company issued to Vollintine a pre-funded common stock purchase warrant (the “Vollintine Warrant”) to purchase
shares of our common stock, with a nominal exercise price of $
The Company accounts for the fair value of the conversion features of its convertible debt in accordance with ASC Topic No. 815-15 “Derivatives and Hedging; Embedded Derivatives” (“Topic No. 815-15”). Topic No. 815-15 requires the Company to bifurcate and separately account for the conversion features as an embedded derivative contained in the Company’s convertible debt. The Company is required to carry the embedded derivative on its balance sheet at fair value and account for’ any unrealized change in fair value as a component of results of operations. The Company values the embedded derivatives using the Black-Scholes pricing model.
NOTE 5 – DERIVATIVE LIABILITIES
Certain of the above convertible notes contained an embedded conversion option with a conversion price that could result in issuing an undeterminable amount of future common stock to settle the host contract. Accordingly, the embedded conversion option is required to be bifurcated from the host instrument (convertible note) and treated as a liability, which is calculated at fair value, and marked to market at each reporting period.
The Company used the Black-Scholes pricing model to estimate the fair value of its embedded conversion option and warrant liabilities on both the commitment date and the remeasurement date with the following inputs:
| September 30, 2024 | December 31, 2023 | |||||||
| Exercise price | $ | $ | ||||||
| Expected volatility | % | % | ||||||
| Risk-free interest rate | % | % | ||||||
| Expected term (in years) | ||||||||
| Expected dividend rate | % | % | ||||||
NOTE 6 – SENIOR PROMISSORY NOTE
On
June 20, 2023, the Company signed a Securities Purchase Agreement (“SPA”) with an accredited investor, pursuant to which
the Company issued and sold to the accredited investor a
The
Company received $
The
maturity date for repayment of the Senior Promissory Note is
As additional consideration, the Company issued shares of its common stock as commitment shares. The Company was required to issue an additional commitment shares due to the Senior Promissory Note not being prepaid at 60 days as required in the SPA. The Company is currently working with investor to address the entire Note payoff.
In the agreements, the Company agreed to certain restrictive covenants, including a restriction on borrowing and a most favored nation clause in favor of the accredited investor for any future offerings not specifically exempted.
On
June 20, 2023, the Company and Pegasus Specialty Vehicles, LLC entered into a Loan and Security Agreement whereby the Company lent to
Pegasus the principal amount of $
| F-11 |
NOTE 7 – AGREEMENT AND PLAN OF MERGER WITH PEGASUS SPECIALTY VEHICLES, LLC
On June 20, 2023, the Company entered into an Agreement and Plan of Merger with Pegasus Specialty Vehicles, LLC, an Ohio limited liability company (“Pegasus”), and Pegasus Specialty Holdings LLC, an Ohio limited liability company and wholly-owned subsidiary of the Company (“Pegasus Sub”).
The Merger Agreement provides that at the closing, subject to terms and conditions, Pegasus Sub will merge with and into Pegasus, with Pegasus surviving as a wholly-owned subsidiary of the Company. At Closing of the Merger, the issued and outstanding common shares of Pegasus will automatically be converted into the right to receive an aggregate of shares of Series AA Preferred Stock of the Company.
The
Company, Pegasus, and Pegasus Sub have each made various representations and warranties and agreed to certain covenants in the Merger
Agreement, including a covenant by the Company that it would raise $
Consummation
of the Merger is subject to the satisfaction or, if permitted by applicable law, waiver, by the Company, Pegasus, or both of various
conditions. For Pegasus, these conditions include, without limitation,
The Merger Agreement contains certain termination rights including the right of the parties to mutually agree upon termination, and by each of the Company and Pegasus unilaterally if the other party has committed a violation of the covenants, representations and warranties in the Merger Agreement.
The Merger Agreement, the Merger, and the transactions contemplated thereby were unanimously approved by the board of directors of Pegasus, and unanimously approved by the board of directors of the Company.
On December 7, 2023, the Company notice received a notice of termination from Pegasus notifying the Company that the Agreement and Plan of Merger has been terminated.
At
December 31, 2023, Pegasus owed the Company $
On
February 26, 2024, the Company entered into entered into a Share Exchange Agreement, as amended (the Exchange Agreement), with Emergent
Health Corp., a Wyoming corporation (EMGE), and the holders (the EMGE Preferred Shareholders) of Series Class A Preferred Stock and the
Series C Convertible Non-Voting Preferred Stock (the EMGE Equity Interests). On March 14, 2024, the parties closed the Exchange Agreement.
At the closing of the Exchange Agreement:
Effective August 8, 2024, the Company entered into a Reformation of Share Exchange Agreement (the Reformation Agreement) with EMGE and the EMGE Preferred Shareholders. The Reformation Agreement was entered into after the Company, EMGE and the EMGE Preferred Shareholders having independently determined that the structure of the Exchange Agreement resulted in the parties’ experiencing consequences that were unintended and that would not, in the long term, be beneficial to the parties and that a reformation of the Exchange Agreement from a share-for-share structure to a share-for-asset structure would be beneficial to each of the parties.
| F-12 |
By the Reformation Agreement, share-for-share structure of the Exchange Agreement was reformed to become a share-for-asset structure (the Reformation). Effecting the Reformation produced the following actions (the Reformation Actions):
(a) First, the issuances of the Company Exchange Shares to the EMGE Preferred Shareholders were rescinded.
(b) Next, the assignments of the EMGE Equity Interests by the EMGE Preferred Shareholders to the Company were rescinded.
(c) The Company, then, re-issued the Exchange Shares to EMGE, in consideration of the following assets of EMGE (the “Acquired Assets”):
| ● | All of the capital stock of Evolutionary Biologics, Inc.; | |
| ● | All of the capital stock of Apollo Biowellness, Inc.; | |
| ● | All of the capital stock of Nanosthetic, Inc.; and | |
| ● | All of the capital stock of Nanogistics, Inc. |
In addition, the Reformation Actions resulted in the Company’s no longer being the controlling shareholder of EMGE.
NOTE 9 – STOCKHOLDERS’ EQUITY
During the nine months ended September 30, 2024, the Company issued the following shares of common stock:
| ● | The
Company issued a total of shares of common stock to convert a convertible note and accrued interest of $ |
| ● | The Company issued a total of shares of common stock to convert a convertible note of $ |
NOTE 10 – SUBSEQUENT EVENTS
Management has evaluated subsequent events, in accordance with FASB ASC Topic 855, “Subsequent Events,” through the date which the financial statements were available to be issued and there are no material subsequent events, except as described below.
Assumption of Debt
Further to the Reformation Agreement, subsequent to
September 30, 2024, the Company completed the assumption of obligations of EMGE associated with the Acquired Assets in the principal amount
of $
| F-13 |
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Forward-Looking Statements
Certain statements, other than purely historical information, including estimates, projections, statements relating to our business plans, objectives, and expected operating results, and the assumptions upon which those statements are based, are “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. These forward-looking statements generally are identified by the words “believes,” “project,” “expects,” “anticipates,” “estimates,” “intends,” “strategy,” “plan,” “may,” “will,” “would,” “will be,” “will continue,” “will likely result,” and similar expressions. We intend such forward-looking statements to be covered by the safe-harbor provisions for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995 and are including this statement for purposes of complying with those safe-harbor provisions. Forward-looking statements are based on current expectations and assumptions that are subject to risks and uncertainties which may cause actual results to differ materially from the forward-looking statements. Our ability to predict results or the actual effect of future plans or strategies is inherently uncertain.
Other factors which could have a material adverse effect on our operations and future prospects on a consolidated basis include but are not limited to changes in economic conditions, legislative/regulatory changes, availability of capital, interest rates, competition, and generally accepted accounting principles. These risks and uncertainties should also be considered in evaluating forward-looking statements and undue reliance should not be placed on such statements. We undertake no obligation to update or revise publicly any forward-looking statements, whether as a result of new information, future events or otherwise. Further information concerning our business, including additional factors that could materially affect our financial results, is included herein and in our other filings with the SEC, including the risks and uncertainties identified under the heading “Risk Factors” in the Company’s most recent Annual Report on Form 10-K.
Recent Acquisition, Change in Control and Change in Business Plan
Change in Control. Effective March 14, 2024, Geoffrey Selzer, our former Chief Executive Officer and Director, and Jim Morrison, our current President and Director, entered into a Securities Purchase Agreement (the Control Agreement), pursuant to which Mr. Selzer sold all 2,000,000 outstanding shares of the Company’s Series C Preferred Stock to Mr. Morrison. Mr. Morrison now possesses voting control of the Company.
EMGE Acquisition Transaction. On February 26, 2024, the Company entered into entered into a Share Exchange Agreement, as amended (the “Exchange Agreement”), with Emergent Health Corp., a Wyoming corporation (EMGE), and the holders (the “EMGE Preferred Shareholders”) of Series Class A Preferred Stock and the Series C Convertible Non-Voting Preferred Stock (the “EMGE Equity Interests”). On March 14, 2024, the parties closed the Exchange Agreement. At the closing of the Exchange Agreement: (a) the EMGE Preferred Shareholders exchanged all of their respective EMGE Equity Interests for an equal number of shares of the Company’s to-be-designated Series F Convertible Preferred Stock (the “Exchange Shares”) that shall convert into 93% of the common stock of the Company on a fully-diluted basis (the “Series F Preferred Stock”), which shares of Series F Preferred Stock are currently issuable to the EMGE Preferred Shareholders and are to be issued upon the Company’s filing of a Certificate of Designation with the State of Nevada; (b) the Company consummated the Conveyance Agreement; and (c) all persons serving as directors and officers of the Company prior to the consummation of the Exchange Agreement resigned and appointed four new members of the Company’s Board of Directors.
Effective August 8, 2024, the Company entered into a Reformation of Share Exchange Agreement (the “Reformation Agreement”) with EMGE and the EMGE Preferred Shareholders. The Reformation Agreement was entered into after the Company, EMGE and the EMGE Preferred Shareholders having independently determined that the structure of the Exchange Agreement resulted in the parties’ experiencing consequences that were unintended and that would not, in the long term, be beneficial to the parties and that a reformation of the Exchange Agreement from a share-for-share structure to a share-for-asset structure would be beneficial to each of the parties.
By the Reformation Agreement, share-for-share structure of the Exchange Agreement was reformed to become a share-for-asset structure (the “Reformation”). Effecting the Reformation produced the following actions (the “Reformation Actions”):
(a) First, the issuances of the Company Exchange Shares to the EMGE Preferred Shareholders were rescinded.
(b) Next, the assignments of the EMGE Equity Interests by the EMGE Preferred Shareholders to the Company were rescinded.
(c) The Company, then, re-issued the Exchange Shares to EMGE, in consideration of the following assets of EMGE (the “Acquired Assets”):
| ● | All of the capital stock of Evolutionary Biologics, Inc.; | |
| ● | All of the capital stock of Apollo Biowellness, Inc.; | |
| ● | All of the capital stock of Nanosthetic, Inc.; and | |
| ● | All of the capital stock of Nanogistics, Inc. |
In addition, the Reformation Actions resulted in the Company’s no longer being the controlling shareholder of EMGE.
| 4 |
Conveyance Agreement.
On March 14, 2024, in conjunction with our acquisition of EMGE, we entered into an Agreement of Conveyance, Transfer and Assignment of Subsidiary (the Conveyance Agreement) with two of our then-wholly-owned subsidiaries, Resonate Blends, LLC, a California limited liability company, and Entourage Labs, LLC, a California limited liability company (collectively, Resonate Blends, LLC and Entourage Labs, LLC are referred to as the “Subsidiary”), and our former Chief Executive Officer and Director, Geoffrey Selzer. Pursuant to the Conveyance Agreement, we assigned our ownership in the Subsidiary to Mr. Selzer. In consideration of our assignment of the Subsidiary, Mr. Selzer (a) assumed and agreed to pay, perform and discharge, fully and completely, all liabilities of the Subsidiary, (b) indemnified us for any loss arising from or in connection with any of such liabilities and (c) agreed to pay us (i) 20% of any proceeds from the sale of the Subsidiary that occurs prior to the one-year anniversary of the Conveyance Agreement and (ii) 10% of any proceeds from the sale of the Subsidiary that occurs after the one-year anniversary and prior to the two-year anniversary of the Conveyance Agreement.
New Business Plan.
The business plan and operations of EMGE now represent the entirety of our company’s business operations. The discussion below concerning the nine months ended September 30, 2024, include the operating results of the acquired EMGE assets from March 14, 2024, through September 30, 2024. The discussion below concerning our company’s results of operations for the nine months ended September 30, 2023, relate only to our company prior to the consummation of the Exchange Agreement, as amended and reformed. None of the information in the discussion below should be considered to be an indication of our company’s operating results for the year ending December 31, 2024, and beyond.
Current Status
In connection with the EMGE transaction, we obtained a loan from a third party and, subsequent to the closing of the EMGE transaction, we have obtained an additional loan from another third party. We remain, nevertheless, dependent on additional investment capital to continue our survival. Historically, we have raised money through convertible debt, almost always on unfavorable terms. 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. The terms of the recently obtained loans are discussed below.
AJB Capital Investments, LLC. In March 2024, the Company obtained a loan from AJB Capital Investments, LLC (“AJB”) which netted the Company $252,000 in proceeds. In consideration of such loan, the Company issued a $280,000 face amount promissory note (the “AJB Note”), with OID of $28,000, bearing interest at 12% per annum, with principal and interest payable on September 4, 2024. The Company has the right to repay the AJB Note at any time. Should the Company be in default, which shall not have been cured, the AJB Note is convertible into shares of the Company’s common stock at a conversion price that shall equal the volume weighted average trading price (a) during the previous 20 trading-day period ending on the date of issuance of the AJB Note or (b) during the previous 20 trading-day period ending on the relevant conversion date, whichever is lower.
The AJB Note is secured by all assets of our company.
In addition, we issued to AJB a pre-funded common stock purchase warrant (the “AJB Warrant”) to purchase 3,428,571 shares of our common stock, with a nominal exercise price of $.00001 per share. The AJB Warrant may be exercised on a cashless basis,
Ray Vollintine. In March 2024, the Company obtained a loan from Ray Vollintine (“Vollintine”) which netted the Company $250,000 in proceeds. In consideration of such loan, the Company issued a $280,000 face amount promissory note (the “Vollintine Note”), with OID of $30,000, bearing interest at 12% per annum, with principal and interest payable on September 29, 2024. The Company has the right to repay the Vollintine Note at any time. The Vollintine Note is convertible at any time and from time to time into shares of the Company’s common stock at a conversion price that shall equal to $.035; provided, however, that, upon an event of default, the conversion price shall be the lower of (a) $.035 or (b) the volume weighted average trading price during the previous 20 trading-day period ending on the date of issuance of the Vollintine Note or during the previous 20 trading-day period ending on the relevant conversion date, whichever is lower.
The Vollintine Note is unsecured.
In addition, we issued to Vollintine a pre-funded common stock purchase warrant (the “Vollintine Warrant”) to purchase 7,200,000 shares of our common stock, with a nominal exercise price of $.00001 per share. The Vollintine Warrant may be exercised on a cashless basis, As further consideration for Vollintine’s purchasing the Vollintine Note, we entered into a make-whole agreement that assures that Vollintine shall derive not less than $250,000 in net proceeds from Vollintine’s sales of the common stock underlying the Vollintine Warrant.
| 5 |
Results of Operation for Nine Months Ended September 30, 2024 and 2023
Revenues. We reported $1,349,905 (unaudited) and $16,468 (unaudited) in sales for the nine months ended September 30, 2024 (“Interim 2024”) and 2023 (“Interim 2023”), respectively. All of our revenues for Interim 2024 were attributable to the business operations of EMGE for the period from the acquisition date, March 14, 2024. All revenues reported for Interim 2023 were attributable to the Subsidiary.
Gross Profit. For Interim 2024, our cost of revenue was $477,079 (unaudited), compared to cost of revenue of $13,257 (unaudited) for Interim 2023, resulting in a gross profit of $872,826 (unaudited) for Interim 2024 and a gross profit of $3,211 (unaudited) for Interim 2023.
All cost of revenue and gross profit for Interim 2024 were attributable to the business operations of EMGE for the period from the acquisition date, March 14, 2024. All cost of revenue and gross profit reported for Interim 2023 were attributable to the Subsidiary.
Operating Expenses. Our operating expenses were $2,219,787 (unaudited) and $195,627 (unaudited) for Interim 2024 and Interim 2023, respectively. Our operating expenses for the remainder of 2024 can be expected to increase as the effects of the acquisition of EMGE impact our operating results. No prediction as to the level of operating expenses for all of 2024 can be made in this regard, however.
Other Income/Expense. We had other expense of $208,805 (unaudited) for Interim 2024, compared to $819,016 (unaudited) in other expense for Interim 2023.
Net Income/Loss. For Interim 2024, we had a net loss of $1,555,767 (unaudited), compared to a net loss of $1,011,432 (unaudited) for Interim 2023.
Liquidity and Capital Resources
In connection with the EMGE transaction, we obtained a loan from a third party and, subsequent to the closing of the EMGE transaction, we have obtained an additional loan from another third party. We remain, nevertheless, dependent on additional investment capital to continue our survival. Historically, we have raised money through convertible debt, almost always on unfavorable terms. 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. The terms of the recently obtained loans are discussed below.
AJB Capital Investments, LLC. In March 2024, the Company obtained a loan from AJB Capital Investments, LLC (AJB) which netted the Company $252,000 in proceeds. In consideration of such loan, the Company issued a $280,000 face amount promissory note (the AJB Note), with OID of $28,000, bearing interest at 12% per annum, with principal and interest payable on September 4, 2024. The Company has the right to repay the AJB Note at any time. Should the Company be in default, which shall not have been cured, the AJB Note is convertible into shares of the Company’s common stock at a conversion price that shall equal the volume weighted average trading price (a) during the previous 20 trading-day period ending on the date of issuance of the AJB Note or (b) during the previous 20 trading-day period ending on the relevant conversion date, whichever is lower.
The AJB Note is secured by all assets of our company.
In addition, we issued to AJB a pre-funded common stock purchase warrant (the AJB Warrant) to purchase 3,428,571 shares of our common stock, with a nominal exercise price of $.00001 per share. The AJB Warrant may be exercised on a cashless basis.
In March 2024, the Company obtained a loan from Ray Vollintine (Vollintine) which netted the Company $250,000 in proceeds. In consideration of such loan, the Company issued a $280,000 face amount promissory note (the Vollintine Note), with OID of $30,000, bearing interest at 12% per annum, with principal and interest payable on September 29, 2024. The Company has the right to repay the Vollintine Note at any time. The Vollintine Note is convertible at any time and from time to time into shares of the Company’s common stock at a conversion price that shall equal to $.035; provided, however, that, upon an event of default, the conversion price shall be the lower of (a) $.035 or (b) the volume weighted average trading price during the previous 20 trading-day period ending on the date of issuance of the Vollintine Note or during the previous 20 trading-day period ending on the relevant conversion date, whichever is lower.
The Vollintine Note is unsecured.
In addition, we issued to Vollintine a pre-funded common stock purchase warrant (the Vollintine Warrant) to purchase 7,200,000 shares of our common stock, with a nominal exercise price of $.00001 per share. The Vollintine Warrant may be exercised on a cashless basis, As further consideration for Vollintine’s purchasing the Vollintine Note, we entered into a make-whole agreement that assures that Vollintine shall derive not less than $250,000 in net proceeds from Vollintine’s sales of the common stock underlying the Vollintine Warrant.
| 6 |
As of September 30, 2024, we had total current assets of $1,044,236 (unaudited), consisting of $68,236 (unaudited) in cash, $6,000 loan receivable and $970,000 (unaudited) in advances to former acquisition partner-company. Our total current liabilities as of September 30, 2024, were $4,557,634 (unaudited). Our working capital deficit was $3,513,398 (unaudited) as of September 30, 2024, compared to our working capital deficit of $2,150,975 (unaudited) as of December 31, 2023.
Going Concern
As of September 30, 2024, we have an accumulated deficit of $28,292,170 (unaudited). Our ability to continue as a going concern is contingent upon the successful completion of additional financing arrangements and our ability to achieve and maintain profitable operations. 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. These conditions raise substantial doubt about our ability to continue as a going concern. These financial statements do not include any adjustments that might arise from this uncertainty.
Off Balance Sheet Arrangements
As of September 30, 2024, there were no off-balance sheet arrangements.
Critical Accounting Policies
In December 2001, the SEC requested that all registrants list their most “critical accounting polices” in the Management Discussion and Analysis. The SEC indicated that a “critical accounting policy” is one which is both important to the portrayal of a company’s financial condition and results, and requires management’s most difficult, subjective or complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain. Our critical accounting policies are disclosed in Note 2 of our audited financial statements included in the Form 10-K for the year ended December 31, 2023, filed with the Securities and Exchange Commission.
Recent Accounting Pronouncements
No new accounting pronouncements issued or effective during the fiscal year has had or is expected to have a material impact on the financial statements.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
A smaller reporting company is not required to provide the information required by this Item.
Item 4. Controls and Procedures
Disclosure Controls and Procedures
We conducted an evaluation, with the participation of our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended, or the Exchange Act, as of September 30, 2024, to ensure that information required to be disclosed by us in the reports filed or submitted by us under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the Securities Exchange Commission’s rules and forms, including to ensure that information required to be disclosed by us in the reports filed or submitted by us under the Exchange Act is accumulated and communicated to our management, including our principal executive and principal financial officer, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that as of September 30, 2024, our disclosure controls and procedures were not effective at the reasonable assurance level due to the material weaknesses identified and described below.
Our principal executive officers do not expect that our disclosure controls or internal controls will prevent all error and all fraud. Although our disclosure controls and procedures were designed to provide reasonable assurance of achieving their objectives and our principal executive officers have determined that our disclosure controls and procedures are effective at doing so, a control system, no matter how well conceived and operated, can provide only reasonable, not absolute assurance that the objectives of the system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of simple error or mistake. Additionally, controls can be circumvented if there exists in an individual a desire to do so. There can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions.
| 7 |
Remediation Plan to Address the Material Weaknesses in Internal Control over Financial Reporting
A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of our annual or interim financial statements will not be prevented or detected on a timely basis. Management identified the following three material weaknesses that have caused management to conclude that, as of September 30, 2024, our disclosure controls and procedures, and our internal control over financial reporting, were not effective at the reasonable assurance level:
| 1. | We do not have written documentation of our internal control policies and procedures. Written documentation of key internal controls over financial reporting is a requirement of Section 404 of the Sarbanes-Oxley Act as of the period ending June 30, 2024. Management evaluated the impact of our failure to have written documentation of our internal controls and procedures on our assessment of our disclosure controls and procedures and has concluded that the control deficiency that resulted represented a material weakness. | |
| 2. | We do not have sufficient segregation of duties within accounting functions, which is a basic internal control. Due to our size and nature, segregation of all conflicting duties may not always be possible and may not be economically feasible. However, to the extent possible, the initiation of transactions, the custody of assets and the recording of transactions should be performed by separate individuals. Management evaluated the impact of our failure to have segregation of duties on our assessment of our disclosure controls and procedures and has concluded that the control deficiency that resulted represented a material weakness. | |
| 3. | Effective controls over the control environment were not maintained. Specifically, a formally adopted written code of business conduct and ethics that governs our employees, officers, and directors was not in place. Additionally, management has not developed and effectively communicated to employees its accounting policies and procedures. This has resulted in inconsistent practices. Further, our Board of Directors does not currently have any independent members and no director qualifies as an audit committee financial expert as defined in Item 407(d)(5)(ii) of Regulation S-K. Since these entity level programs have a pervasive effect across the organization, management has determined that these circumstances constitute a material weakness. |
To address these material weaknesses, management performed additional analyses and other procedures to ensure that the financial statements included herein fairly present, in all material respects, our financial position, results of operations and cash flows for the periods presented. Accordingly, we believe that the financial statements included in this report fairly present, in all material respects, our financial condition, results of operations and cash flows for the periods presented.
To remediate the material weakness in our documentation, evaluation and testing of internal controls we plan to engage a third-party firm to assist us in remedying this material weakness once resources become available.
We intend to remedy our material weakness with regard to insufficient segregation of duties by hiring additional employees in order to segregate duties in a manner that establishes effective internal controls once resources become available.
Changes in Internal Control over Financial Reporting
No change in our system of internal control over financial reporting occurred during the period covered by this report, the period ended September 30, 2024, that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
PART II – OTHER INFORMATION
Item 1. Legal Proceedings
We are not a party to any pending legal proceeding. We are not aware of any pending legal proceeding to which any of our officers, directors, or any beneficial holders of 5% or more of our voting securities are adverse to us or have a material interest adverse to us.
Item 1A: Risk Factors
Please see “Risk Factors” in Item 2.01. Completion of Acquisition or Disposition of Assets of our amended Current Report on Form 8-K filed on April 16, 2024, which are incorporated herein by this reference.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
During the three months ended September 30, 2024, we did not issue any unregistered securities not previously reported.
Item 3. Defaults upon Senior Securities
None
| 8 |
Item 4. Mine Safety Disclosures
None
Item 5. Other Information
None
Item 6. Exhibits
| * Filed herewith | |
| **Provided herewith |
| 9 |
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| Resonate Blends, Inc. | ||
| Date: | November 25, 2024 | |
| By: | /s/ Jim Morrison | |
| Jim Morrison | ||
| Title: | President, Principal Executive Officer, Principal Financial Officer, Principal Accounting Officer and Director | |
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