KOAN 10-K & 10-Q changes, risk factors and insider trading

Additional risk factors concerning our company, including risk factors related to EMGE, its business and financial condition, are included in our Amendment to Current Report on Form 8-K filed April 16, 2024, which is incorporated herein by reference.

Recent Acquisition, Change in Control and Change in Business Plan

Change in Control. Effective March 14, 2024, Geoffrey Selzer, our former Chief Executive Officer and Director, and Jim Morrison, our current President and Director, entered into a Securities Purchase Agreement (the Control Agreement), pursuant to which Mr. Selzer sold all 2,000,000 outstanding shares of the Company’s Series C Preferred Stock to Mr. Morrison. Mr. Morrison now possesses voting control of the Company. See Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.

EMGE Acquisition Transaction. On February 26, 2024, we entered into entered into a Share Exchange Agreement, as amended (the Exchange Agreement), with Emergent Health Corp., a publicly-traded (symbol: EMGE) Wyoming corporation (EMGE), and the holders (the EMGE Preferred Shareholders) of Series Class A Preferred Stock and the Series C Convertible Non-Voting Preferred Stock (collectively, the EMGE Equity Interests).

On March 14, 2024, the parties closed the Exchange Agreement. At the closing of the Exchange Agreement: (a) the EMGE Preferred Shareholders exchanged all of their respective EMGE Equity Interests for an equal number of shares of the Company’s to-be-designated Series F Convertible Preferred Stock that shall convert into 93% of the common stock of the Company on a fully-diluted basis (the Series F Preferred Stock), which shares of Series F Preferred Stock are currently issuable to the EMGE Preferred Shareholders and are to be issued upon the Company’s filing of a Certificate of Designation with the State of Nevada; (b) the Company consummated the Conveyance Agreement; and (c) all persons serving as directors and officers of the Company prior to the consummation of the Exchange Agreement resigned and appointed four new members of the Company’s Board of Directors.

Conveyance Agreement.

On March 14, 2024, in conjunction with our acquisition of EMGE, we entered into an Agreement of Conveyance, Transfer and Assignment of Subsidiary (the Conveyance Agreement) with two of our then-wholly-owned subsidiaries, Resonate Blends, LLC, a California limited liability company, and Entourage Labs, LLC, a California limited liability company (collectively, Resonate Blends, LLC and Entourage Labs, LLC are referred to as the “Subsidiary”), and our former Chief Executive Officer and Director, Geoffrey Selzer. Pursuant to the Conveyance Agreement, we assigned our ownership in the Subsidiary to Mr. Selzer. In consideration of our assignment of the Subsidiary, Mr. Selzer (a) assumed and agreed to pay, perform and discharge, fully and completely, all liabilities of the Subsidiary, (b) indemnified us for any loss arising from or in connection with any of such liabilities and (c) agreed to pay us (i) 20% of any proceeds from the sale of the Subsidiary that occurs prior to the one-year anniversary of the Conveyance Agreement and (ii) 10% of any proceeds from the sale of the Subsidiary that occurs after the one-year anniversary and prior to the two-year anniversary of the Conveyance Agreement.

New Business Plan.

The business plan and operations of EMGE now represent the entirety of our company’s business operations. The discussion below concerning our company’s results of operations for the years ended December 31, 2023 and 2022, and the financial condition of our company at December 31, 2023, relates only to our company prior to the consummation of the Exchange Agreement with the EMGE Preferred Shareholders. None of the information in the discussion below should be considered to be an indication of our company’s operating results for the year ending December 31, 2024, and beyond.

Current Status

In connection with the EMGE transaction, we obtained a loan from a third party and, subsequent to the closing of the EMGE transaction, we have obtained an additional loan from another third party. We remain, nevertheless, dependent on additional investment capital to continue our survival. Historically, we have raised money through convertible debt, almost always on unfavorable terms. There is no guarantee that any capital, including through convertible loan transactions, will be available to us in the future or, if available, on terms acceptable to us. The terms of the recently obtained loans are discussed below.

AJB Capital Investments, LLC. In March 2024, the Company obtained a loan from AJB Capital Investments, LLC (“AJB”) which netted the Company $252,000 in proceeds. In consideration of such loan, the Company issued a $280,000 face amount promissory note (the “AJB Note”), with OID of $28,000, bearing interest at 12% per annum, with principal and interest payable on September 4, 2024. The Company has the right to repay the AJB Note at any time. Should the Company be in default, which shall not have been cured, the AJB Note is convertible into shares of the Company’s common stock at a conversion price that shall equal the volume weighted average trading price (a) during the previous 20 trading-day period ending on the date of issuance of the AJB Note or (b) during the previous 20 trading-day period ending on the relevant conversion date, whichever is lower.

The AJB Note is secured by all assets of our company.

In addition, we issued to AJB a pre-funded common stock purchase warrant (the “AJB Warrant”) to purchase 3,428,571 shares of our common stock, with a nominal exercise price of $.00001 per share. The AJB Warrant may be exercised on a cashless basis, Ray Vollintine. In March 2024, the Company obtained a loan from Ray Vollintine (“Vollintine”) which netted the Company $250,000 in proceeds. In consideration of such loan, the Company issued a $280,000 face amount promissory note (the “Vollintine Note”), with OID of $30,000, bearing interest at 12% per annum, with principal and interest payable on September 29, 2024. The Company has the right to repay the Vollintine Note at any time. The Vollintine Note is convertible at any time and from time to time into shares of the Company’s common stock at a conversion price that shall equal to $.035; provided, however, that, upon an event of default, the conversion price shall be the lower of (a) $.035 or (b) the volume weighted average trading price during the previous 20 trading-day period ending on the date of issuance of the Vollintine Note or during the previous 20 trading-day period ending on the relevant conversion date, whichever is lower.

The Vollintine Note is unsecured.

In addition, we issued to Vollintine a pre-funded common stock purchase warrant (the “Vollintine Warrant”) to purchase 7,200,000 shares of our common stock, with a nominal exercise price of $.00001 per share. The Vollintine Warrant may be exercised on a cashless basis, As further consideration for Vollintine’s purchasing the Vollintine Note, we entered into a make-whole agreement that assures that Vollintine shall derive not less than $250,000 in net proceeds from Vollintine’s sales of the common stock underlying the Vollintine Warrant.

Revenues

We generated $16,468 in revenues for the year ended December 31, 2023, as compared with revenues of $49,501 for the year ended December 31, 2022, during which year we launched our first line of cordial products in California.

Due to our acquisition of EMGE and divestiture of the Subsidiary on March 14, 2024, any revenues reported during the first quarter of 2024 will be attributed to the Subsidiary through March 14, 2024; thereafter, any revenues reported by our company would be attributable to the business operations of EMGE. There are no assurances that we will be successful in the implementation of our EMGE-centered business plan or become financially viable and continue as a going concern.

Gross Profit

We accrued $114,140 in cost of revenues for the year ended December 31, 2023, resulting in a gross profit of ($97,762) for the year then ended. We accrued $33,068 in cost of revenues for the year ended December 31, 2022, resulting in a gross profit of $16,433 for the year then ended. Our negative gross margin was due to promotions and the write down of products.

Due to our acquisition of EMGE and divestiture of the Subsidiary on March 14, 2024, the gross margin reported during the first quarter of 2024 will be attributed to the Subsidiary through March 14, 2024; thereafter, gross margin reported by our company would be attributable to the business operations of EMGE.

Operating Expenses

Our operating expenses were $301,551 for the year ended December 31, 2023, as compared with $1,405,828 for the year ended December 31, 2022.

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.

We spent $354,934 less on advertising for year ended December 31, 2023, than for the year ended December 31, 2022. We spent more on advertising for the year ended December 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.

Legal and professional fees decreased by $91,352 for the year ended December 31, 2023, over the year ended December 31, 2022. It is anticipated that, for all of 2024, legal and professional fees will be higher than 2023 levels, due to our acquisition of EMGE. However, no prediction can be made in this regard.

General and administrative expenses decreased by $46,154 for the year ended December 31, 2023, over the year ended December 31, 2022. It is anticipated that, for all of 2024, general and administrative expenses will be higher than 2023 levels, due to our acquisition of EMGE. However, no prediction can be made in this regard.

Officer compensation decreased by $405,375 for the year ended December 31, 2023, over the year ended December 31, 2022. Our officer compensation declined as we suspended payments of officer salaries during 2023, but we expect that officer compensation will increase for all of 2024, following our acquisition of EMGE.

Non-cash management fees decreased by $206,462 for the year ended December 31, 2023, over the year ended December 31, 2022. Our non-cash management fees were less in 2023 compared to 2022, as we did not issue shares for services during 2023. It is possible, however, that non-cash management fees may increase for all of 2024, in light of our acquisition of EMGE. However, no prediction can be made in this regard.

Other Income / Expense

We had other expense of $1,016,759 and other income of $2,043,022 for the years ended December 31, 2023 and 2022, respectively.

Our other expense for the year ended December 31, 2023, was mainly attributable to a loss on the change in derivative liability, interest expense and the amortization of debt issuance costs.

Our other income for the year ended December 31, 2022, was mainly attributable to the gain on revaluation of derivative liabilities.

We are unable to predict our other income/expense for all of 2024.

Net Income / Loss

We had a net loss of $1,415,979 and net income of $653,627 for the years ended December 31, 2023 and 2022, respectively.

It is expected that, for all of 2024, we will report a net loss. However, we are unable to make any prediction, in this regard.

Cash Flows Provided by / Used in Operating Activities

Operating activities provided $11,166 in cash for the year period ended December 31, 2023, compared with cash used of $1,428,467 for the year ended December 31, 2022. Our positive operating cash flow for the year ended December 31, 2023, was largely the result of an increase in accounts payable and accrued expenses. Our negative operating cash flow for the year ended December 31, 2022, was largely the result of our unrealized gain on derivative liability of $2,213,527, offset by our net income of $653,627.

In light of the EMGE acquisition, we are unable to predict cash flows from operating activities for all of 2024.

Cash Flows Used in Investing Activities

For the year ended December 31, 2023, we used $805,000 in investing activities as an advance to Pegasus Specialty Vehicles. We did not use cash for investing activities for the year ended December 31, 2022.

In light of the EMGE acquisition, we are unable to predict cash flows from investing activities for all of 2024.

Cash Flows Provided by Financing Activities

Cash flows provided by financing activities during the year ended December 31, 2023, amounted to $736,353, compared with cash flows provided by financing activities of $1,479,973 for the year ended December 31, 2022. Our positive cash flows for the year ended December 31, 2023, consisted of net proceeds from convertible debentures of $791,200, 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 year ended December 31, 2022, consisted of proceeds from issuance of common stock of $91,173 and proceeds from convertible notes payable of $1,388,800.

In light of the EMGE acquisition, we are unable to predict cash flows from financing activities for all of 2024.

Please see “Risk Factors” in Item 2.01. Completion of Acquisition or Disposition of Assets of our amended Current Report on Form 8-K filed on April 16, 2024, which are incorporated herein by this reference.

Recent Acquisition, Change in Control and Change in Business Plan

(a) First, the issuances of the Company Exchange Shares to the EMGE Preferred Shareholders were rescinded.

(b) Next, the assignments of the EMGE Equity Interests by the EMGE Preferred Shareholders to the Company were rescinded.

(c) The Company, then, re-issued the Exchange Shares to EMGE, in consideration of the following assets of EMGE (the “Acquired Assets”):

Operating Expenses. Our operating expenses were $2,219,787 (unaudited) and $195,627 (unaudited) for Interim 2024 and Interim 2023, respectively. Our operating expenses for the remainder of 2024 can be expected to increase as the effects of the acquisition of EMGE impact our operating results. No prediction as to the level of operating expenses for all of 2024 can be made in this regard, however.

In addition, we issued to AJB a pre-funded common stock purchase warrant (the AJB Warrant) to purchase 3,428,571 shares of our common stock, with a nominal exercise price of $.00001 per share. The AJB Warrant may be exercised on a cashless basis.