Resonate Blends, Inc. - Quarter Report: 2023 March (Form 10-Q)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

For the quarterly period ended March 31, 2023

For the transition period from __________ to__________

Commission File Number: 000-21202

Resonate Blends, Inc.

(Exact name of registrant as specified in its charter)

26565 Agoura Road, Suite 200

Calabasas, CA 91302

(Address of principal executive offices)

571-888-0009

(Registrant’s telephone number)

(Former name, former address and former fiscal year, if changed since last report)

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.

☒ Yes ☐ No

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). ☒ Yes ☐ No

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.

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 ☒ No

Securities registered pursuant to Section 12(b) of the Act: None

State the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: 76,664,877 common shares as of May 15, 2023.

TABLE OF CONTENTS

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 months ended March 31, 2023 are not necessarily indicative of the results that can be expected for the full year.

Resonate Blends, Inc.

Consolidated Balance Sheets

(Unaudited)

The accompanying notes are an integral part of these consolidated financial statements.

Resonate Blends, Inc.

Consolidated Statements of Operations

(Unaudited)

The accompanying notes are an integral part of these consolidated financial statements.

Resonate Blends, Inc.

Consolidated Statement of Stockholders’ Deficit

(Unaudited)

The accompanying notes are an integral part of these consolidated financial statements.

Resonate Blends, Inc.

Consolidated Statements of Cash Flows

(Unaudited)

The accompanying notes are an integral part of these consolidated financial statements.

RESONATE BLENDS, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE MONTHS ENDED MARCH 31, 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. The Company also voted to approve a 1 for 5 reverse split of its outstanding common stock.

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 65,640,207 new shares of common stock of the Company in exchange for 100% 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 5% of the Company’s outstanding shares of common stock for a total of 665,072 shares were issued to the holders of Resonate in exchange for their membership interests of Resonate. These shares have anti-dilution protection. We have also agreed as part of the purchase price to issue: (ii) such number of shares of Series E Preferred Stock that will convert into 5% of the outstanding shares of common stock in the Company on a fully-diluted basis upon an annualized revenue run rate of Ten Million Dollars ($10,000,000.00) for any three (3) consecutive month trailing period; and (iii) such number of shares of Series E Preferred Stock that will convert into 5% of the outstanding shares of common stock in the Company on a fully-diluted basis upon the occurrence of the Company’s public market value reaching One Hundred Million US Dollars ($100,000,000). The shares in (ii) and (iii) shall have anti-dilution protections, except that this provision only applies for 2.5% of the outstanding shares acquired under each subsection.

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 5% of the Company’s outstanding shares of common stock for a total of 665,072 shares were issued to the holders of Entourage Labs in exchange for their membership interests of Entourage Labs. These shares have anti-dilution protection. We have also agreed as part of the purchase price to issue: (ii) such number of shares of Series E Preferred Stock that will convert into 5% of the outstanding shares of common stock in the Company on a fully-diluted basis upon an annualized revenue run rate of Ten Million Dollars ($10,000,000.00) for any three (3) consecutive month trailing period; and (iii) such number of shares of Series E Preferred Stock that will convert into 5% of the outstanding shares of common stock in the Company on a fully-diluted basis upon the occurrence of the Company’s public market value reaching One Hundred Million US Dollars ($100,000,000). The shares in (ii) and (iii) shall have anti-dilution protections, except that this provision only applies for 2.5% of the outstanding shares acquired under each subsection.

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 49% owned subsidiary, Aspire Consulting Group, LLC, a Virginia limited liability company. Pursuant to the Conveyance Agreement, the Company transferred all assets and business operations associated with its IT consulting solutions, including all of the capital stock of Aspire Consulting, to Mr. Johnson. In exchange, Mr. Johnson agreed to cancel 20,000 shares of common stock in the Company and to assume and cancel all liabilities relating to the Company’s former business.

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 $180,000; and (ii) Pamela Kerwin as Chief Operating Officer (COO) of the Company with an annual salary of $120,000. Both are eligible for salary increases upon milestone achievements and other benefits. The Employment Agreement for the CEO has a term of 2 years and can’t be terminated without cause. Severance of six (6) weeks is available for termination of the COO without cause before one-year of service and eight (8) weeks after one-year of service. During the quarter ended March 31, 2023, these employment agreements were suspended.

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.

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 March 31, 2022 classifications to make them comparable to March 31, 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 March 31, 2023, the Company has an accumulated deficit of $25,701,376. The company’s ability to continue as a going concern is contingent upon the successful completion of additional financing arrangements and its ability to achieve and maintain profitable operations. While the Company is expanding its 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 the Company’s ability to continue as a going concern for a period of one year from the issuance of these financial statements. These consolidated financial statements do not include any adjustments that might arise from this uncertainty.

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 March 31, 2023 and December 31, 2022, there’s no allowance for doubtful accounts and bad debts.

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:

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.

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 March 31, 2023 and year ended December 31, 2022.

 SUMMARY OF ASSETS AND LIABILITIES MEASURED AT VALUE ON RECURRING BASIS

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.

Net income (loss) per Common Share

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 three to seven years. Expenditures for renewals or betterments are capitalized, and repairs and maintenance are charged to expense as incurred the cost and accumulated depreciation of assets sold or otherwise disposed of are removed from the accounts, and any gain or loss thereon is reflected in operations. Company policies capitalize property and equipment for cost over $1,000, asset acquired under $1,000 are charge to operations.

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.

Stock-Based Compensation

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 March 31, 2023 and December 31, 2022, amounts due related parties were $69,100 and $164,946, respectively. These advances are non-interest bearing and payable upon demand.

NOTE 4 – CONVERTIBLE NOTE PAYABLE

Convertible notes payable consists of the following as of March 31, 2023 and December 31, 2022:

 SCHEDULE OF CONVERTIBLE NOTES PAYABLE

At March 31, 2023 and December 31, 2022, $200,000 of the convertible notes were 8% Unsecured Convertible Promissory Notes (“Notes”) from an investor issued March 5, 2021. The note has an automatic conversion into equity on the maturity date, which was July 3, 2022, or if a Qualified Financing (QF) of $5,000,000 is achieved, whichever occurs first. The maturity date pricing is $0.10. A QF converts into equity at the lesser of $1.00 or 75% of the average selling price of the aggregate offering. The noteholder has expressed to the Company not to convert his Note into shares in the near term. Consequently, we have mutually agreed not to accrue interest on the this Note going forward.

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 $715,000. We received $650,000 from the Notes after applying the original issue discount to the Notes. The Securities Purchase Agreements also included 812,500 warrants with a 5 year life and exercise price of $0.40 and 650,000 commitment shares. These notes have a Fixed Conversion Price or, at the option of the Holder in the event that the Borrower fails to complete a Qualified Offering before the five (5) month anniversary of the Issue Date, the Registration Conversion Price . The “Fixed Conversion Price” shall mean $0.15 per share. The “Registration Conversion Price” shall mean 75% multiplied by the Market Price (representing a discount rate of 25%). “Market Price” means the volume weighted average of the Common Stock during the twenty (20) Trading Day period ending on the latest complete Trading Day prior to the Conversion Date.

On June 27, 2022, we issued and sold to an accredited investor a convertible promissory note the principal amount of $138,800 under a Securities Purchase Agreement of the same date. We received $128,500 from the Note after applying the original issue discount to the Note. During the three months ended March 31, 2023, the Company repaid $118,800 of this note, leaving a balance of $20,000 at March 31, 2023.

This note has a Variable Conversion Price of 73% of market price, market price is average of 3 lowest prices over previous 10 days.

Finally, on September 8, 2022, we issued and sold a senior secured convertible promissory note to AJB Capital Investments LLC for a principal amount of $600,000, together with guaranteed interest of 12% per year calendar from the date hereof. All Principal and Interest owing hereunder, along with any and all other amounts, shall be due and owing on the Maturity Date March 8, 2023. We received $540,000 from the Note after applying the original issue discount to the Note. The note is convertible at a Variable Conversion Price shall equal the volume weighted average trading price (i) during the previous twenty (20) Trading Day period ending on the date of issuance of this Note, or (ii) during the previous twenty (20) Trading Day period ending on the Conversion Date.

The Maturity Date may be extended at the sole discretion of the Borrower up to six (6) months following the date of the original Maturity Date hereunder. In the event that the Maturity Date is extended, the interest rate shall equal fifteen percent (15%) per annum for any period following the original Maturity Date, payable monthly.

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 5,571,429 shares collectively during the year ended December 31, 2022.

As of March 31, 2023 and December 31, 2022, accrued interest payable on notes payable was $153,344 and $265,480 respectively.

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:

 SCHEDULE OF DERIVATIVE LIABILITIES

NOTE 5 – COMMITMENTS AND CONTINGENCIES

Office Lease

On October 16, 2019, the Company signed a lease agreement that expires on thirty days’ notice. Rent expense was approximately $6,280 and $1,165 for the three months ended March 31, 2023 and 2022, respectively.

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 $180,000; (ii) Pamela Kerwin as Chief Operating Officer (COO) of the Company with an annual salary of $120,000; (iii) David Thielen as Chief Investment Officer (CIO) of the Company with an annual salary of $120,000. All are eligible for salary increases upon milestone achievements and other benefits. The Employment Agreement for the CEO has a term of 2 years and can’t be terminated without cause. Severance of six (6) weeks is available for termination of the COO and CIO without cause before one-year of service and eight (8) weeks after one-year of service. These agreements were suspended during the three months ended March 31, 2023.

NOTE 6 – STOCKHOLDERS’ EQUITY

During the first quarter of 2023, the Company did not issue any shares of common or preferred stock. The Company received proceeds of $6,000 from the exercise of 249,255 warrants. The 249,255 shares of common stock have yet to be issued at March 31, 2023.

During the first quarter of 2022 the Company issued a total of 904,666 shares of common stock to vendors for compensation and services rendered. The fair market value of the shares issued accounted as expenses as follows:

 SCHEDULE OF COMPENSATION AND SERVICES RENDERED

NOTE 7 – SUBSEQUENT EVENTS

On April 7, 2023, the Company paid the remaining $20,000 balance due on the 1800 Diagonal Lending, LLC convertible note that was issued on June 27, 2022 and retired the note. The principal amount of the note prior to interest and fees was $138,800.

On April 21, 2023, the Company signed a non-binding Letter of Intent (“LOI”) to acquire Pegasus Specialty Vehicles, LLC (“Pegasus”).

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. 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.

Overview 

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 looked into 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.

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 $2,632,858 as of March 31, 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.

Recent negotiations with what we believe is a more viable business opportunity for the holding company has emerged. We signed a non-binding Letter of Intent (“LOI”) with Pegasus Specialty Vehicles, LLC (“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.

Results of Operation for Three Months Ended March 31, 2023 and 2022

Revenues

We have generated $10,107 in sales for the three months ended March 31, 2023, as compared with $27,652 in sales for the three months ended March 31, 2022 on our current product line. We launched our first line of Cordial products in California in 2021, and we have started to generate revenues from the sale of these products.

We anticipate consistent revenues on our Cordials, including our newly launched Sleep Cordial, for the rest of 2023. In Q3 2022, we rolled out a new packaging configuration for our Cordials: to include a one-pack, a 4-pack to replace the 3-pack and a multi-dose bottle which is expected to bring the cost per dose down considerably. Our family of Cordial products are now fully in the market; however, it may take some time for the markets to react, gain traction and result in brand awareness among our customers. There can be no assurances, however, that customers will positively react to our products.

As explained above, we are currently in negotiations to enter the electric vehicle (EV) bus and clean energy specialty vehicle sector. If this opportunity develops, we may be revising our business plan and focus over the coming months.

Gross Profit

We incurred $8,572 in cost of revenues for the three months ended March 31, 2023, resulting in a gross profit of $1,535 for the three months ended March 31, 2023. 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. We incurred $12,857 in cost of revenues for the three months ended March 31, 2022, resulting in a gross profit of $14,795 for the three months ended March 31, 2022. In addition, our gross margin percentage was 15% for the three months ended March 31, 2023 due to initial discounting in developing new market share, which we hope will stabilize in the 35% to 43% range as we implement cost saving measures and roll out new products to increase sales for the balance of 2023. We are also implementing new packaging configurations which we expect to stabilize our overall gross margin.

Operating Expenses

Our operating expenses were $98,421 for the three months ended March 31, 2023, as compared with $655,619 for the three months ended March 31, 2022.

The main drivers for the overall decrease in operating expenses in 2023 were the reduction of advertising, salaries as well as not issuing any shares for compensation or services.

Unless we engage in a business combination with an opportunity within the electric vehicle (EV) bus and clean energy specialty vehicle sector, our continued focus on sales, advertising, marketing and new product development costs to support our planned growth is expected to increase throughout 2023.

We spent $152,187 less on advertising for the three months ended March 31, 2023, than for the three months ended March 31, 2022. We spent more on advertising for the three months ended March 31, 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 $12,710 for the three months ended March 31, 2023, over the three months ended March 31, 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 an opportunity within the electric vehicle (EV) bus and clean energy specialty vehicle sector.

General and administrative expenses increased by $39,656 for the three months ended March 31, 2023, over the three months ended March 31, 2022. We expect general and administrative expenses to remain fairly constant throughout 2023, but expenses could increase significantly if we acquire new companies as part of our overall corporate strategy or 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 an opportunity within the electric vehicle (EV) bus and clean energy specialty vehicle sector.

Other Income

We had other expenses of $284,066 for the three months ended March 31, 2023, compared with other income of $1,130,864 for the same period ended March 31, 2022.

Our other expense for the three months ended March 31, 2023 was mainly attributable a loss on the remeasurement of derivative liabilities, interest expense and amortization of debt discounts on convertible notes.

Our other income for the three months ended March 31, 2022 was mainly attributable to the gain on remeasurement of derivative liabilities.

Net Income

We had a net loss of $(380,952) for the three months ended March 31, 2023, as compared with net income of $653,627 for the three months ended March 31, 2022.

Liquidity and Capital Resources

As of March 31, 2023, we had total current assets of $236,114 consisting of $1,042 in cash, $120,000 in other receivable and $115,072 in inventory. Our total current liabilities as of March 31, 2023 were $2,026,144. We had a working capital deficit of $1,790,030 as of March 31, 2023 compared with a working capital deficit of $1,170,940 as of December 31, 2022.

Cash Flows from Operating Activities

Operating activities provided $145,269 in cash for the three months period ended March 31, 2023, compared with cash used of $483,386 for the three months period ended March 31, 2022. Our operating cash flow for the three months period ended March 31, 2023 was largely the result of an increase in accounts payable of $210,134, offset by our net loss, net of non-cash charges, of $140,285. Our negative operating cash flow for the three months period ended March 31, 2022 was largely the result of our net loss, net of non-cash charges, of $467,658.

Cash Flows from Investing Activities

We did not use cash for investing activities for the three months ended March 31, 2023 or 2022.

Cash Flows from Financing Activities

Cash flows used in financing activities during the three months ended March 31, 2023 amounted to $208,646, compared with cash flows provided by financing activities of $655,000 for the three months period ended March 31, 2022. Our use of cash flows for the three months period ended March 31, 2023 consisted of repayments of convertible and related party debt. Our positive cash flows for the three months ended March 31, 2022 consisted of proceeds from Convertible notes payable of $650,000.

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 also plan to raise money in the sale of our equity and 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.

Going Concern

As of March 31, 2023, we have an accumulated deficit of $25,701,376. 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 March 31, 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 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 March 31, 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 March 31, 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 March 31, 2023, our disclosure controls and procedures, and our internal control over financial reporting, were not effective at the reasonable assurance level:

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 March 31, 2023, 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

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.

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

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.