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 | |
| ☒
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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: common shares as of November 20, 2023
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 | 9 |
| Item 4: | Controls and Procedures | 10 |
| PART II – OTHER INFORMATION | 12 | |
| Item 1: | Legal Proceedings | 12 |
| Item 1A: | Risk Factors | 12 |
| Item 2: | Unregistered Sales of Equity Securities and Use of Proceeds | 12 |
| Item 3: | Defaults Upon Senior Securities | 12 |
| Item 4: | Mine Safety Disclosures | 12 |
| Item 5: | Other Information | 12 |
| Item 6: | Exhibits | 12 |
| 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 three and nine months ended September 30, 2023 are not necessarily indicative of the results that can be expected for the full year.
| 3 |
Resonate Blends, Inc.
Consolidated Balance Sheets
(Unaudited)
| September 30, 2023 | December 31, 2022 | |||||||
| ASSETS | ||||||||
| Current assets | ||||||||
| Cash and cash equivalents | $ | $ | ||||||
| Inventory | ||||||||
| Other receivable | ||||||||
| Deposit on acquisition of Pegasus Specialty Vehicles LLC | ||||||||
| Total current assets | ||||||||
| Fixed assets, net | ||||||||
| Investment | ||||||||
| TOTAL ASSETS | $ | $ | ||||||
| LIABILITIES AND STOCKHOLDERS’ DEFICIT | ||||||||
| Current liabilities | ||||||||
| Accounts payable and accrued liabilities | $ | $ | ||||||
| Due to related parties | ||||||||
| Convertible notes payable | ||||||||
| Senior promissory note | ||||||||
| Derivative liability | ||||||||
| Total current liabilities | ||||||||
| Total liabilities | ||||||||
| Stockholders’ Deficit | ||||||||
| Series B - Preferred stock, shares authorized, $ par value, issued and outstanding |
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| Series C - Preferred stock, shares authorized, $ par value, issued and outstanding |
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| Series D Preferred stock shares authorized, $ par value issued and outstanding |
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| Common stock; $ par value; shares authorized; and shares issued and outstanding |
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| Common stock issuable | ||||||||
| Stock subscription receivable | ( | ) | ( | ) | ||||
| Additional paid-in capital | ||||||||
| Accumulated deficit | ( | ) | ( | ) | ||||
| Total stockholders’ deficit | ( | ) | ( | ) | ||||
| TOTAL LIABILITIES AND STOCKHOLDERS’ DEFICIT | $ | $ | ||||||
The accompanying notes are an integral part of these consolidated financial statements.
| F-1 |
Resonate Blends, Inc.
Consolidated Statements of Operations
(Unaudited)
| Three Months Ended | Nine Months Ended | |||||||||||||||
| September 30, 2023 | September 30, 2022 | September 30, 2023 | September 30, 2022 | |||||||||||||
| REVENUES | $ | $ | $ | $ | ||||||||||||
| COST OF REVENUES | ||||||||||||||||
| Gross profit | ||||||||||||||||
| OPERATING EXPENSES | ||||||||||||||||
| Advertising | ||||||||||||||||
| General and administrative | ||||||||||||||||
| Legal and professional | ||||||||||||||||
| Officer compensation | ||||||||||||||||
| Non cash management fees | ||||||||||||||||
| Total operating expenses | ||||||||||||||||
| OPERATING LOSS | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| OTHER INCOME (EXPENSES) | ||||||||||||||||
| Interest expense | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Gain (loss) on change in derivative liability | ( | ) | ||||||||||||||
| Amortization of issuance costs | ( | ) | ( | ) | ( | ) | ||||||||||
| Gain (loss) on settlement of notes payable | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Total operating income (expense) | ( | ) | ( | ) | ||||||||||||
| NET INCOME (LOSS) | $ | ( | ) | $ | $ | ( | ) | $ | ||||||||
| INCOME (LOSS) PER SHARE- basic and diluted | $ | ) | $ | $ | ) | $ | ||||||||||
| WEIGHTED AVERAGE SHARES OUTSTANDING | ||||||||||||||||
The accompanying notes are an integral part of these consolidated financial statements.
| F-2 |
Resonate Blends, Inc.
Consolidated Statement of Stockholders’ Deficit
(Unaudited)
| Preferred Stock | Preferred Stock | Additional | Common | |||||||||||||||||||||||||||||||||||||||||
| Series A | Series C | Common Stock | Paid-in | Stock | Subscription | Accumulated | ||||||||||||||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | Shares | Amount | Capital | Issuable | Receivable | Deficit | Total | ||||||||||||||||||||||||||||||||||
| Balance, December 31, 2021 | $ | $ | $ | $ | $ | $ | $ | ( | ) | $ | ( | ) | ||||||||||||||||||||||||||||||||
| Issuance of common stock in private placement | - | - | ( | ) | ||||||||||||||||||||||||||||||||||||||||
| Issuance of common stock for debt conversions | - | - | ||||||||||||||||||||||||||||||||||||||||||
| Stock issuance for services | - | - | ||||||||||||||||||||||||||||||||||||||||||
| Net income | - | - | ||||||||||||||||||||||||||||||||||||||||||
| Balance, March 31, 2022 | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||||||
| Stock issuance for services | - | - | ||||||||||||||||||||||||||||||||||||||||||
| Net income | - | - | - | |||||||||||||||||||||||||||||||||||||||||
| Balance, June 30, 2022 | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||||||
| Stock issuance for services | - | - | ||||||||||||||||||||||||||||||||||||||||||
| Stock issuance for debt conversion | - | - | ||||||||||||||||||||||||||||||||||||||||||
| Stock issuance in private placement | - | - | ||||||||||||||||||||||||||||||||||||||||||
| Net income | - | - | - | |||||||||||||||||||||||||||||||||||||||||
| Balance, September 30, 2022 | $ | $ | $ | $ | $ | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||||||||||||||||||||||||||||
The accompanying notes are an integral part of these consolidated financial statements.
| F-3 |
Resonate Blends, Inc.
Consolidated Statement of Stockholders’ Deficit
(Unaudited)
| Preferred Stock | Preferred Stock | Additional | Common | |||||||||||||||||||||||||||||||||||||||||
| Series A | Series C | Common Stock | Paid-in | Stock | Subscription | Accumulated | ||||||||||||||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | Shares | Amount | Capital | Issuable | Receivable | Deficit | Total | ||||||||||||||||||||||||||||||||||
| Balance, December 31, 2022 | $ | $ | $ | $ | $ | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||||||||||||||||||||||||||||
| Reclassification of convertible debt | - | - | - | ( | ) | ( | ) | |||||||||||||||||||||||||||||||||||||
| Exercise of warrants | - | - | - | |||||||||||||||||||||||||||||||||||||||||
| Net loss | - | - | - | ( | ) | ( | ) | |||||||||||||||||||||||||||||||||||||
| Balance, March 31, 2023 | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||||||
| Exercise of warrants | - | - | ( | ) | ||||||||||||||||||||||||||||||||||||||||
| Stock issuance for services | - | - | ||||||||||||||||||||||||||||||||||||||||||
| Issuance of common stock for commitment fees | - | - | ||||||||||||||||||||||||||||||||||||||||||
| Net loss | - | - | - | ( | ) | ( | ) | |||||||||||||||||||||||||||||||||||||
| Balance, June 30, 2023 | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||||||
| Recognition of stock issued for services | - | - | - | |||||||||||||||||||||||||||||||||||||||||
| Issuance of common stock in private placement | - | - | ||||||||||||||||||||||||||||||||||||||||||
| Conversion of convertible debt | - | - | ||||||||||||||||||||||||||||||||||||||||||
| Issuance of common stock for commitment fees | - | - | ||||||||||||||||||||||||||||||||||||||||||
| Net loss | - | - | - | ( | ) | ( | ) | |||||||||||||||||||||||||||||||||||||
| Balance, September 30, 2023 | $ | $ | $ | $ | $ | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||||||||||||||||||||||||||||
The accompanying notes are an integral part of these consolidated financial statements.
| F-4 |
Resonate Blends, Inc.
Consolidated Statements of Cash Flows
(Unaudited)
| Nine Months Ended | ||||||||
| September 30, 2023 | September 30, 2022 | |||||||
| Cash Flows from Operating Activities | ||||||||
| Net income (loss) | $ | ( | ) | $ | ||||
| Adjustments to reconcile net income (loss) to net cash used in operations | ||||||||
| Loss (gain) on derivative liability | ( | ) | ||||||
| Non cash interest expense | ||||||||
| Gain on settlement of notes payable | ||||||||
| Share professional fees/ compensation | ||||||||
| Depreciation and amortization | ||||||||
| Stock subscription receivable | ( | ) | ||||||
| Changes in operating assets and liabilities | ||||||||
| Inventory | ||||||||
| Advances to suppliers | ( | ) | ||||||
| Other receivables | ( | ) | ||||||
| Accounts payable and accrued expenses | ||||||||
| Due to related party | ( | ) | ||||||
| Net cash provided by (used in) operating activities | ( | ) | ||||||
| Cash Flows from Investing Activities | ||||||||
| Deposit on acquisition of Pegasus Specialty Vehicles LLC | ( | ) | ||||||
| ( | ) | |||||||
| Cash Flows from Financing Activities | ||||||||
| Proceeds from issuance of convertible notes | ||||||||
| Proceeds from subscription | ||||||||
| Proceeds from private placement | ||||||||
| Proceeds from warrant exercise | ||||||||
| Repayment of related party advances | ( | ) | ||||||
| Repayment of convertible notes | ( | ) | ||||||
| Net cash provided by (used in) financing activities | ||||||||
| Net increase (decrease) in cash | ( | ) | ||||||
| Cash, beginning of period | ||||||||
| Cash, end of period | $ | $ | ||||||
| Supplemental cash flow disclosures | ||||||||
| Cash paid for interest | $ | $ | ||||||
| Cash paid for taxes | $ | $ | ||||||
| Non-cash investing and financing activities | ||||||||
| Conversion of debt for common stock | $ | $ | ||||||
The accompanying notes are an integral part of these consolidated financial statements.
| F-5 |
RESONATE BLENDS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2023
(UNAUDITED)
NOTE 1 – ORGANIZATION AND BUSINESS OPERATIONS
The Company
Resonate Blends, 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 of 1993. In February of 1996, the Company changed its name to Brock International Inc., and in March of 1998, the Company again changed our 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 but not for long. 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. Textmunication is an online mobile marketing platform service.
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.
| F-6 |
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
Finally,
the Company entered into Employment Agreements with the following persons: (i) Geoffrey Selzer as Chief Executive Officer (CEO) of the
Company with an annual salary of $
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.
In connection with the name change, the Company’s symbol was changed to “KOAN” that more resembles the Company’s new business focus.
On June 20, 2023, the Company entered into an Agreement and Plan of Merger with Pegasus Specialty Vehicles, LLC, an Ohio limited liability company, and Pegasus Specialty Holdings LLC, an Ohio limited liability company and wholly-owned subsidiary of the Company.
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.
Reclassifications
Certain reclassifications have been made to the September 30, 2022 classifications to make them comparable to September 30, 2023.
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, 2023, the Company has an accumulated deficit of $
| F-7 |
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, 2023 and December 31, 2022, 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.
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.
| F-8 |
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 September 30, 2023 and year ended December 31, 2022.
| As of September 30, 2023 | Level 1 | Level 2 | Level 3 | Total | ||||||||||||
| Liabilities | ||||||||||||||||
| Derivative Liabilities | $ | $ | ||||||||||||||
| As of December 31, 2022 | 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.
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.
| F-9 |
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, 2023 and December 31, 2022, amounts due related
parties were $
NOTE 4 - CONVERTIBLE NOTE PAYABLE
Convertible notes payable consists of the following as of September 30, 2023 and December 31, 2022:
| September 30, 2023 | December 31, 2022 | |||||||
| Convertible notes face value | $ | $ | ||||||
| Less: Discounts | ( | ) | ||||||
| Less: Debt issuance cost | ||||||||
| Net convertible notes | $ | $ | ||||||
At
September 30, 2023 and 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, we issued and sold to an accredited investor a convertible promissory note the principal amount of $
| F-10 |
On
September 8, 2022, we 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.
In connection with the investment, the Company issued Commitment Shares to the Investors in the amount of shares collectively prior to the issuance of the extension shares on September 29, 2023.
During
the nine months ended September 30, 2023, the Company issued 3 convertible promissory notes totaling $
As
of September 30, 2023 and December 31, 2022, accrued interest payable on notes payable was $
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, 2023 | December 31, 2022 | |||||||
| Exercise price | $ | - $ | $ | |||||
| Expected volatility | % | % | ||||||
| Risk-free interest rate | % | % | ||||||
| Expected term (in years) | ||||||||
| Expected dividend rate | % | % | ||||||
| F-11 |
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 $
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,
| F-12 |
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.
The Closing of the Merger is expected to occur as soon as practicable after the satisfaction or waiver of all the conditions to Closing in the Merger Agreement, which is currently expected to be in the 4th quarter of calendar year 2023.
NOTE 8 – COMMITMENTS AND CONTINGENCIES
Office Lease
On
October 16, 2019,
Executive Employment Agreement
On
October 25, 2019 the Company entered into Employment Agreements with the following persons: (i) Geoffrey Selzer as Chief Executive Officer
(CEO) of the Company with an annual salary of $
NOTE 9 – STOCKHOLDERS’ EQUITY
During the nine months ended September 30, 2023, the Company issued the following shares of common stock:
| ● | The
Company issued shares of common stock for the exercise of a warrant for proceeds of $ | |
| ● | The
Company issued shares of common stock under a consulting agreement with a 1 year term. The shares were valued at $ | |
| ● | The
Company issued a total of shares of common stock as commitment fees under borrowing agreements. The Company recognized
$ | |
| ● | The
Company issued shares of common stock for $ | |
| ● | The
Company issued a total of shares of common stock as to convert a convertible note of $ |
During the nine months ended September 30, 2022, the Company issued the following shares of common stock:
| ● | The
Company issued shares of common stock for services for $ | |
| ● | The
Company issued shares of common stock for $ | |
| ● | The
Company issued a total of shares of common stock as to convert convertible notes and accrued interest of $ |
NOTE 10 – SUBSEQUENT EVENTS
On
October 13, 2023, we issued a Promissory Note to an accredited investor in the principal amount of $
All principal on the note is convertible at the investors’ option into our common stock in the next funding round which, if it occurs, is expected to be priced at approximately $ per share issued in a preferred stock.
We were required to issue a total of shares of our common stock in connection with the notes as commitment shares.
On
October 26, 2023, we issued a three-month Promissory Note to an accredited investor in the principal amount of $
We were required to issue a total of shares of our common stock in connection with the notes as commitment shares.
On
November 13, 2023, we issued a Promissory Note to an accredited Noteholder for $
| 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.
Actual results may differ materially from these expectations due to uncertainties related to the successful completion of our acquisition of Pegasus Specialty Vehicles, LLC, or our failure to complete such acquisition; the impact of the pendency of our acquisition on our business and operations; the timing and expected financing and the merger; the possibility that any or all of the various conditions to the consummation of the merger may not be satisfied or waived in a timely manner, if at all; the possibility of business disruptions due to transaction-related uncertainty; and the occurrence of any event, change or other circumstance that could give rise to the termination of the merger agreement.
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.
Overview
Our History and Experience in the Cannabis Space
On October 25, 2019, we announced our entry into the cannabis industry by acquiring Resonate Blends LLC (“Resonate Blends”), a California-based cannabis wellness lifestyle product company built on a proprietary system of experiential targets. Resonate Blends is a brand-focused cannabis organization offering premium brands of consistent quality. We also acquired Entourage Labs LLC (“Entourage Labs”), a sister company of Resonate Blends. Entourage Labs is the Intellectual Property (IP) subsidiary of Resonate Blends.
For the first two years, we concentrated on releasing product and brand building in California and investigated state expansion efforts as well. Resonate followed the launch of its first six Koan products, based on The Resonate System, by releasing “Love” in Q1-2022 and “Sleep” Cordials in Q2-2022. To address the price sensitivity of the market, Resonate also produced multi-serve versions of our most popular Cordials which significantly reduced the cost per serving. The Resonate products were designed for the discriminating wellness— focused consumer and that market has been slower to develop than anticipated. The current buyers of cannabis products seem interested in purchasing the highest level of THC for the least amount of money.
While we have won awards for our Koan Cordial brand, such as the LMCC award for “Best New Brand of 2021” and also a Cannabis Clio Award for “Packaging and Design”, the current environment in California has made it difficult to scale our business opportunities in a challenging market environment. Burdens such as overregulation, high taxes, price compression, the growth of the illicit market and the overpopulation of dispensaries in some areas, and no dispensaries in other areas – have made it difficult for many brands in California to succeed.
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The legal cannabis industry Itself is laden with obstacles. There are significant restrictions on marketing activities and excessively high banking fees for compliant financial institutions. Layer upon layer of taxes raise prices of legal cannabis products so that they become cost prohibitive for customers. Many of the California dispensaries are in financial trouble and are unable to pay for the products that they have purchased. The distributor therefore prevents those accounts from ordering additional products. These and other constraints have made it difficult to build a successful business in the cannabis industry at this time. The cannabis industry is still in its infancy, so we expect continued headwinds. We recently pivoted to the cannabis consumption lounges for new revenue traction. These lounges are becoming popular in California, and we’ve teamed with several new lounges to introduce our six (6) Cordial blends into this new environment.
The Company’s growth strategy is to create an innovative ecosystem of companies, investments and research that all support The Resonate System and its mission of empowering the wellness market. We have a product line of Cordials and have introduced our brand and products to the market through dispensaries in California and now into cannabis consumption lounges. Although we have had some success in establishing our presence in the California market, as of the date of this filing, we have not achieved significant revenues. We have a working capital deficit of $2,118,418 as of September 30, 2023, and we are wholly dependent on capital to fund our business operations. For these reasons, there are no assurances that we will be successful in this or any of our endeavors or become financially viable and continue as a going concern.
Since late 2019, we have been attempting to raise money to implement our business plan but have not been able to secure all the funds necessary to do so. The lack of sufficient funds, the present economy, the restrictions on commercial banking and the saturated nature of the cannabis industry have prevented this from happening. We have recently relied on convertible loans for working capital expenses. These loans were mostly on unfavorable terms, such as discounted conversion rights, original discounts, equity incentives and restrictive covenants. As we have been unable to raise the capital necessary to fully implement our business plan, we recently commenced a search for other business opportunities that may benefit our shareholders and allow us to raise capital to build a stronger operation.
The Merger Agreement with Pegasus Specialty Vehicles, LLC
Recent negotiations with what we believe is a more viable business opportunity for the holding company has emerged. On June 20, 2023, we entered into an Agreement and Plan of Merger (the “Merger Agreement”) with Pegasus Specialty Vehicles, LLC (“Pegasus”), and Pegasus Specialty Holdings LLC, an Ohio limited liability company and our wholly-owned subsidiary (“Merger Sub”).
The Merger Agreement provides that at the closing (the “Closing”), subject to the terms and conditions set forth in the Merger Agreement, Merger Sub will merge with and into the Company (the “Merger”), with Pegasus surviving the Merger as a wholly-owned subsidiary of our 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 623,500 shares of Series AA Preferred Stock of Parent (the “Merger Consideration”).
Each of our company, Pegasus, and Merger Sub has made various representations and warranties and agreed to certain covenants in the Merger Agreement, including a covenant by us that we would raise $3,000,000 less costs in new financing at Closing, with $500,000 of such amount less costs loaned pre-Closing to Pegasus under a secured promissory note. Pegasus has a covenant that it would grant a security interest to us in all of its assets on the $500,000 loan, subordinate to other security interests as to the same collateral.
Consummation of the Merger is subject to the satisfaction or, if permitted by applicable law, waiver, by us, Pegasus, or both of various conditions. For Pegasus, these conditions include, without limitation, (i) an agreeable plan to spin out the existing cannabis assets and operations, (ii) an agreeable plan to transfer the outstanding shares of Series C Preferred Stock of our company to Brian Barrington simultaneously to the date of the aforementioned spin-out; (iii) an agreeable plan to retire the Series E Designation; (iv) financing by us of $3,000,000 less costs; (v) the filing of the Certificate of Designation for the Series AA Preferred Stock with the Secretary of State of Nevada; and (vi) certain other customary conditions. For us, these conditions include, without limitation, (i) a secured promissory note issued by Pegasus to us in the amount of $500,000 with the collateral being a UCC lien subordinate to other lenders; (ii) the payback by us of certain advances contributed by corporate officers and others in our company in an amount not to exceed $140,000; (iii) resolutions of the equity holders of Pegasus approving the Merger Agreement and the transactions contemplated; and (iv) certain other customary conditions.
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The Merger Agreement contains certain termination rights including the right of the parties to mutually agree upon termination, and by each of Pegasus and our company 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 our company, and unanimously approved by the board of directors of Pegasus and Merger Sub.
The Closing of the Merger is expected to occur as soon as practicable after the satisfaction or waiver of all the conditions to Closing in the Merger Agreement, which is currently expected to be in the 4th quarter of calendar year 2023.
Also on June 20, 2023, we signed a Securities Purchase Agreement (the “Purchase Agreement”) with an accredited investor (the “Investor”), pursuant to which we issued and sold to the Investor a 15% OID Senior Promissory Note (non-convertible), dated June 20, 2023, in the principal amount of $575,000 (the “Note”). The Note is secured by all of Pegasus’ assets under a separate security agreement between the Investor and Pegasus.
We received $500,000 from the Note after applying the original issue discount to the Note, $30,000 of which was used to pay a commission to a broker as placement agent and $30,000 was paid to the lender for its legal fees, and the balance was tendered to us to lend to Pegasus under a Loan and Security Agreement (described below) (the “Loan”).
The maturity date for repayment of the Note is September 20, 2023, and the Note bears interest at 15% per annum starting 60 days after issuance and interest payable in cash monthly thereafter. We may prepay the Note at any time, but if we repay the Note after 60 days, it is required to pay a premium of 104% of the principal amount.
As additional consideration, we agreed to issue to the Investor 1,318,000 shares of our common stock as commitment shares. We are required to issue additional commitment shares in the event the Note is not prepaid at 60 days. Pursuant to a Registration Rights Agreement (the “Registration Agreement”), we have agreed to register the Investor shares with the SEC no later than 90 days from the issuance of the Note.
In the Purchase Agreement, we agreed to certain restrictive covenants, including a restriction on borrowing and a most favored nation clause in favor of Investor for any future offerings not specifically exempted.
Also on June 20, 2023, we and Pegasus entered into a Loan and Security Agreement in the principal amount of $575,000 whereby we lent to Pegasus funds received from the June 20, 2023 Purchase Agreement less expenses secured by all of Pegasus’ assets but subordinate to the security interest of Investor and other lenders of Pegasus.
Pegasus is a manufacturer built on an innovative business model and manufacturing architecture providing best-in-class traditional, electric (EV) and hydrogen solutions to the multi-billion dollar school bus industry and also the broader specialty vehicle market. This leads us to believe that we will be revising our business plan and focus over the coming weeks and months. If this opportunity does not develop, however, we will continue to both seek new opportunities and look for capital to continue with our efforts in the cannabis industry.
The principal executive office is located at 26565 Agoura Road, Suite 200, Calabasas, CA 91302. The executive telephone number is (571) 888-0009.
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Results of Operation for Three and Nine Months Ended September 30, 2023 and 2022
Revenues
We have generated $0 and $16,468 in sales for the three and nine months ended September 30, 2023, respectively, as compared with $10,429 and $40,917 in sales for the three and nine months ended September 30, 2022, respectively, on our current product line.
We don’t anticipate increased revenues on our seven Cordials including our newly launched Sleep Cordial, for the rest of 2023, due to the challenging market conditions we have experienced in the cannabis industry in California, as disclosed above. There can be no assurances, however, that customers will positively react to our products. For these reasons, there are no assurances that we will be successful in this or any of our endeavors or become financially viable and continue as a going concern.
As explained above, we are currently under contract of the Merger Agreement to enter the electric vehicle (EV) bus and clean energy specialty vehicle sector. If this opportunity develops, subject to closing conditions and the availability of financing, we may be revising our business plan and focus over the coming months.
Gross Profit
We paid $0 and $13,257 in cost of revenues for the three and nine months ended September 30, 2023, respectively, resulting in a gross profit of $0 and $3,211 for the three nine months ended September 30, 2023, respectively. We paid $9,718 and $24,996 in cost of revenues for the three and nine months ended September 30, 2022, respectively, resulting in a gross profit of $711 and $15,921 for the three and nine months ended September 30, 2022, respectively.
We have had little historical data to compare our margins for the sale of our new products, which were introduced into the retail channel in late Q2 of 2021. If we are unable to consummate the Merger Agreement with Pegasus, we hope our work to continue to penetrate the market. We are also implementing new packaging configurations which we expect to stabilize our overall gross margin.
Operating Expenses
Our operating expenses were $46,975 and $195,627 for the three and nine months ended September 30, 2023, respectively, as compared with $218,876 and $1,164,706 for the three and nine months ended September 30, 2022, respectively.
The main drivers for the overall decrease in operating expenses in 2023 were the reduction of legal, professional fees and salaries as well as a significant decrease in non-cash management fees.
Unless we engage in a business combination Pegasus, our continued focus on sales, advertising, marketing and new product development costs to support our planned growth is expected to increase throughout 2023, subject to the issues we have been experiencing in the industry, as explained above.
We spent $316,683 less on advertising for the nine months ended September 30, 2023, than for the nine months ended September 30, 2022. We spent more on advertising for the nine months ended September 30, 2022 to introduce our Koan Cordials to the California retail channel, perform Search Engine Optimization (SEO), conduct Programmatic advertising, hire a professional agency to promote our Cordials on social media channels and other general advertising methods.
Professional fees decreased by $73,472 for the nine months ended September 30, 2023, over the nine months ended September 30, 2022. Our professional fees were less for this quarter compared to the same quarter last year, but we expect that professional fees will increase in 2023 as we continue to ramp up operations or if we engage in a business combination with Pegasus as described above.
General and administrative expenses decreased by $36,462 for the nine months ended September 30, 2023, over the nine months ended September 30, 2022. We expect general and administrative expenses to remain fairly constant throughout 2023, but expenses could increase significantly if we engage in a business combination with Pegasus.
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Officer compensation decreased by $336,000 for the nine months ended September 30, 2023, over the nine months ended September 30, 2022. Our officer compensation was less for this quarter compared to the same quarter last year as we suspended payments of officer salaries during 2023, but we expect that officer compensation will increase in 2023 as we continue to ramp up operations or if we engage in a business combination with Pegasus as described above.
Non-cash management fees decreased by $206,462 for the nine months ended September 30, 2023, over the nine months ended September 30, 2022. Our non-cash management fees were less for this quarter compared to the same quarter last year as we did not issue shares for services during 2023, but non-cash management fees may increase in 2023 as we continue to ramp up operations or if we engage in a business combination with Pegasus as described above.
Other Income / Expense
We had other expense of $181,195 and $819,016 for the three and nine months ended September 30, 2023, respectively, compared with other income of $280,267 and $1,912,657 for the three and nine months ended September 30, 2022, respectively.
Our other expense for the nine months ended September 30, 2023 was mainly attributable a loss on the change in derivative liability, interest expense and the amortization of debt issuance costs.
Our other income for the nine months ended September 30, 2022 was mainly attributable the gain on revaluation of derivative liabilities.
Net Income / Loss
We had net losses of $228,170 and $1,011,432 for the three and nine months ended September 30, 2023, respectively, as compared with net income of $61,102 and $763,872 for the three and nine months ended September 30, 2022, respectively.
Liquidity and Capital Resources
As of September 30, 2023, we had total current assets of $941,471 consisting of $588 in cash, $120,000 in other receivables, $720,000 in a deposit on the acquisition of Pegasus Specialty Vehicles and $100,883 in inventories. Our total current liabilities as of September 30, 2023 were $2,960,056. We had a working capital deficit of $2,018,585 as of September 30, 2023 compared with a working capital deficit of $1,170,940 as of December 31, 2022.
Cash Flows Provided by / Used in Operating Activities
Operating activities provided $89,816 in cash for the nine months period ended September 30, 2023, compared with cash used of $1,476,854 for the nine months period ended September 30, 2022. Our positive operating cash flow for the nine months period ended September 30, 2023, was largely the result of an increase in accounts payable and accrued expenses. Our negative operating cash flow for the nine months ended September 30, 2022 was largely the result of our unrealized gain on derivative liability of $2,213,527, offset by our net income of $763,872.
Cash Flows Used in Investing Activities
For the nine months ended September 30, 2023, the company used $720,000 in investing activities as a deposit on the acquisition of Pegasus Specialty Vehicles. We did not use cash for investing activities for the nine months ended September 30, 2022.
Cash Flows Provided by Financing Activities
Cash flows provided by financing activities during the nine months ended September 30, 2023 amounted to $566,353, compared with cash flows provided by financing activities of $1,738,781 for the nine months ended September 30, 2022. Our positive cash flows for the nine months period ended September 30, 2023, consisted of net proceeds from convertible debentures of $621,200, proceeds from the sale of warrants of $30,000, proceeds from the sale of common stock of $10,000 offset by the repayment of related party advances of $94,847. Our positive cash flows for the nine months ended September 30, 2022, consisted of proceeds from issuance of common stock of $349,981 and proceeds from convertible notes payable of $1,388,800.
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The features of the debt instruments and payables concerning our financing activities are detailed in the footnotes to our financial statements.
We are dependent on investment capital to continue our survival. We have raised money through convertible debt, almost always on unfavorable terms. There is no guarantee that these small convertible loans will be available to us in the future or on terms acceptable to us.
We recently raised $500,000 from the sale of the Note in connection with the covenant made in the Merger Agreement to raise $3,000,000 in funding, with $500,000 available prior to Closing. We plan to raise money in the sale of our equity and/or debt securities. There can be no assurance of funds from these efforts or that any other type of additional financing will be available to us on acceptable terms, or at all.
Any securities offered will not be or have not been registered under the Securities Act and may not be offered or sold in the United States absent registration or an applicable exemption from registration requirements.
Going Concern
As of September 30, 2023, we have an accumulated deficit of $26,331,856. 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, 2023, 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, 2022, 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.
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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, 2023, 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, 2023, 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.
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, 2023, 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 September 30, 2023. 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. |
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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, 2023, that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
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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
See risk factors included in our Annual Report on Form 10-K for the year ended December 31, 2022 filed on April 17, 2023.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
The information set forth below relates to our issuances of securities without registration under the Securities Act of 1933 during the nine months ended September 30, 2023:
| ■ | The Company issued 1,273,273 shares of common stock for the exercise of a warrant for proceeds of $30,000; | |
| ■ | The Company issued 250,000 shares of common stock under a one year consulting agreement; | |
| ■ | The Company issued a total of 2,460,500 shares of common stock as commitment fees under borrowing agreements; and | |
| ■ | The Company issued a total of 250,000 shares of common stock to vendors for compensation and services rendered. | |
| ■ | The Company issued a total of 137,500 shares of common stock for proceeds of $10,000 | |
| ■ | The Company issued a total of 3,282,219 shares of common stock for the conversion of convertible debt. |
These securities were issued pursuant to Section 4(2) of the Securities Act and/or Rule 506 promulgated thereunder. The holders represented their intention to acquire the securities for investment only and not with a view towards distribution. The investors were given adequate information about us to make an informed investment decision. We did not engage in any general solicitation or advertising. We directed our transfer agent to issue the stock certificates with the appropriate restrictive legend affixed to the restricted stock.
Item 3. Defaults upon Senior Securities
None
Item 4. Mine Safety Disclosures
None
Item 5. Other Information
None
Item 6. Exhibits
| Exhibit Number | Description of Exhibit | |
| 3.1 | Certificate of Amendment dated July 20, 2020 | |
| 31.1 | Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | |
| 31.2 | Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | |
| 32.1 | Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 | |
| 101** | The following materials from the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2023, formatted in Extensible Business Reporting Language (XBRL). | |
| **Provided herewith |
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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 20, 2023 | |
| By: | /s/ Geoffrey Selzer | |
| Geoffrey Selzer | ||
| Title: | President, Chief Executive Officer, Principal Executive Officer, Principal Financial Officer, Principal Accounting Officer and Director |
|
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