Resonate Blends, Inc. 10-Q

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. Company Overview On October 25, 2019, Resonate Blends, Inc. (formerly Textmunication Holdings Inc.) announced its entry into the cannabis industry by acquiring Resonate Blends LLC (“Resonate” or the “Company”), a California-based cannabis wellness lifestyle product company built on a proprietary system of experiential targets. Resonate is building a value-added, brand-focused cannabis organization offering premium brands of consistent quality. The Company also acquired Entourage Labs LLC (“Entourage Labs”), a sister company of Resonate. Entourage Labs is the Intellectual Property (IP) subsidiary of Resonate. Based in Calabasas, California, Resonate Blends, Inc. is a cannabis holding company centered on valued-added holistic Wellness and Lifestyle brands. The Company’s strategy is to ignite future growth by building a purpose-driven portfolio of innovative, trusted national brands, emerging brands, research organizations, and a variety of retail channels. The Company’s focus is finding mutual value between product and consumer by optimizing quality, supply chain resources and financial performance. The Company offers a family of premium cannabis-based products of consistent quality based on unique formations calibrated to Resonate Blends effects system in what we believe is the industry gold standard in user experience. The Company believes the greatest long-term value creation in the cannabis industry will be in the establishment of high quality and consistent consumer brands. Resonate hopes to become a national leader through its vision in creating a family of brands designed specifically to deliver reliable, effective, beneficial experiences. Resonate is committed to helping you live the life you love. We do not make the medicinal vs. recreational distinction. This is a temporary legal separation in some states that we expect will soon cease to exist. We believe in wellness for the whole person. We know that people with pain or anxiety also want to enjoy friends, concerts and have satisfying intimate experiences. We are designing experiences which will improve all areas of our lives. To accomplish this, Resonate is Mastering the Art of Experience. This is our mission. By integrating science, technology, education, branding, marketing, sales and delivery - with every customer interaction we aim to provide exceptional experiences. Cannabis has a broad range of unique characteristics, and we are dedicated to harnessing and amplifying those characteristics to support healthy empowered and engaged lifestyles. From product development through customer communication, we prefect and demystify cannabis bringing innovative products to an increasingly sophisticated market. Resonate Blends has a strong social mission and the Resonate team is building a successful business by focusing our knowledge, skill and energy on creating wellness-lifestyle products which will improve community by helping individuals live more satisfying, meaningful and connected lives. The need for these products currently is crucial. 14 To communicate the breadth of wellness products that Resonate is developing, our team created The Resonate System. The Resonate System graphically represents a spectrum of wellness products based on cannabis scaffolding. This system helps users easily select which product they want. Products based on The Resonate System deliver relaxation, freedom from pain and anxiety, boosts in focus and creativity, sensuality, human connection and joy. Our products are formulated around a system of interconnected experience targets that will allow you to know exactly what to expect when using them. While respecting and honoring the natural power of plant medicine, Resonate also employs advanced science, leading technology and a deep understanding of how various cannabis compounds, when working in the body, simultaneously can create unique effects and benefits (referred to as the “Entourage Effect”). Our product developers blend cannabinoids and terpenes to formulate products with specific, controllable and repeatable, beneficial effects. Through innovation, experimentation, testing and an iterative product development strategy, our team has unlocked new plant constituent combinations resulting in unique, enjoyable and extremely effective wellness products unlike anything else in the marketplace. Resonate has filed a provisional patent for protection of these formulations and products in the future. Koan, the Resonate Blends product family, is based around a comprehensive system of interconnected experience targets that allow people to select the products that best fit their lifestyle and health objectives. Koan products are dedicated to the efficacy and precision of functional experience targets across a broad range of product categories. Resonate’s initial products are a completely unique class of products called Cordials. These blends offer a wide range of experiences not currently available in the cannabis market. Our Cordials are water-soluble and use nano-emulsification technology to allow for quick onset and a sustained and nuanced experience. Single dose, healthful, subtle in taste, cordials are an ideal way for people to intentionally improve their well-being. They can be shipped directly or substituted for alcohol as a cocktail mixer. Resonate’s Cordials have been developed in partnership with an award-winning advanced infusion technology partner and were launched to the retail channel in late Q2 of 2021. The company is offering six unique blends at its initial release and expects to have additional blends by late 2021 into early 2022. We have formalized contracts with our logistical and marketing partners and are building a digital native strategy supporting direct to consumer sales. Based on customer demand, the company is creating a “singles” option for the Cordials which will be available later 2021 and a multi-dose option shipping in Q1 2022. Intellectual Property Intellectual Property (“IP”) development and protection continues as a core area of value creation for Resonate. The Company has developed the world’s first Cannabis Cordial. The Koan Cordials combine THC (psychoactive), CBD (non-psychoactive) with botanical terpenes to deliver an all-natural, plant-derived, single-dosed experience that can be enjoyed straight out of the bottle or poured into any beverage. These multi-use products deliver specific, predictable, reliable, effects in a format that is completely unique in the industry. The Company believes the greatest long-term value creation in the Cannabis industry will be in the establishment of high-quality consumer brands that deliver the expected experience. As cultivation, supplies and services become quickly commoditized, value-added brands represent the best opportunity for Resonate and its shareholders to support and benefit from the growth expected in the Cannabis industry. It is therefore critical for Resonate to protect its methods, formulations and packaging. On June 14, 2021, the Company successfully filed a Provisional Patent Application with the US Patent & Trademark Office (USPTO) entitled “Cannabis Nano-Emulsions for Achieving a Reliable, Targeted, Specific and Repeatable User Experience.” The invention relates to methods and formulations including a combination of cannabinoids and terpenes calculated and specifically formulated to achieve a targeted, specific and repeatable user experience. The Company is also filing for patent protection on its unique product packaging. Future Koan Product - Resonate Growth Plans For the first 12-18 months, Resonate will concentrate on releasing product and brand building in our home state of California. Resonate plans to follow the launch of its first six Koan products with others based on The Resonate System at regular intervals. Our formulas, combined with the proprietary Vertosa technology, will allow the Company to quickly deliver controlled, predictable, enjoyable effects in beverages, teas, and gummies. Vertosa is the leading provider of emulsification technology for cannabis manufacturers. Emulsification allows cannabinoids to become water-soluble so that they can be added to Cordials, beverages, gummies, etc. Vertosa and Resonate are engaged in joint research focusing on effects of various emulsification methods on cannabinoids. We are working on methods that improve user experience by refining effects and managing bioavailability. Vertosa will also be providing the emulsification required for formulas in Resonate’s product line. The cannabis industry is in its infancy. Resonate’s growth strategy is to create an innovative ecosystem of companies, investments and research that all support The Resonate System and our mission of empowering the wellness market. In addition to creating our “house” brands, the Company is also looking for other quality brands which could be incubated or targeted as either strategic partners or as acquisitions. Integrating these companies, we believe will provide consistent product quality that yields expected results and that also allows us to build a stable, successful company overall. 15 Resonate’s first commercial release is a family of six precisely targeted effect blends. These products are category-breaking offerings as they are neither tinctures nor beverages but have the benefits of both. They are emulsified, water soluble, single-serving blends that can be enjoyed privately or shared socially. Resonate offers these across California in stylish mini bottles, each containing a single serving. They can be sipped directly from the bottle or poured into beverages. Koan products offer the very high bioavailability of tinctures not possible to deliver with edibles, take effect generally within minutes and provide benefits for approximately 3 hours. Significantly, these formulas all provide a pleasant predictable experience, a gentle onset and exit and have no unpleasant sensations or aftereffects sometimes associated with cannabis products. Our current products are as follows: Calm CBD rich with a hint of THC, Calm is formulated to quiet your mind and ease you into a gentle sense of wellbeing. Wonder Our highest THC offering, Wonder is carefully crafted to bring back that youthful sense of wonder and awe we feel when we are fully engaged with our senses and environment. Balance Balance is a subtle combination of cannabinoids and terpenes formulated to bring your mind, body and spirit back to an even state of harmony and homeostasis. Create Create is formulated to stimulate your senses, spark your imagination and channel your inner muse. Led by a stimulative blend of terpenes and just the right amount of THC to inspire and facilitate the artist in you. Play We formulated Play to help you become fully immersed in the moment and the people around you. From the park to the beach to the dance floor, Play helps you find your groove and keep it going. Delight Put on your rose-colored glasses and give everything some extra sparkle with Delight. Designed to open your senses, raise your spirits and brighten your day. Acquisition of Assets On September 9, 2021, we entered into a binding letter of intent with L & G USA Inc., a Delaware corporation and L & G Canada Inc., an Ontario corporation (together “Seller”), and the stockholders of Seller, pursuant to which the Company planned to acquire substantially all of the assets from Seller associated with the Lemon & Grass business and the Koan business (the “Acquisition”). On October 27, 2021, the Company terminated the agreement. The Company is still in discussions with Seller, and the Company may or may not go through with a transaction with Seller, but if the Company does, the terms will change from the previous agreement. 16 Competitive Landscape The cannabis market still primarily consists of products of varying quality and poor branding. Much of the branding is heavy “stoner” or hospital medicinal, and differentiation between products is difficult. As a result, finding a product with controllable, consistent effects is difficult. Even products of high and reliable quality all look alike and have no shelf appeal. In addition, there is a mismatch between the fastest growing demographic and many current product offerings, which are designed to be inhaled. This is exactly why we have developed Koan Cordials, tasty, single serving, healthy cannabis products with timeless, exceptional branding. As the market matures, some companies are recognizing the importance of branding. Branded category leaders represent the 10 spots among best-selling products and sales data supports the desire among consumers for branded products. This is further supported by Headset, data (the leading industry provider of retail buying patterns), which shows that brands are leading every category in cannabis. Further, branded products command higher prices. Some branded products generate pricing as high as 151%, over industry average. The Resonate team excels in product branding. There is no product in the marketplace exactly like our Koan products currently. Other companies offer tinctures (which are concentrated herbal extracts made by soaking the bark, berries, leaves (dried or fresh), or roots from one or more plants in alcohol or vinegar), tea, salves, patches, and cosmetics and vapes, and some of them provide effects which may be similar to those the Koan products will provide, but we believe that none are equal to ours with respect to quality, efficacy, consistency and scope. Our products are water soluble and can be enjoyed privately or poured in beverages and shared socially. We believe that the total experience offered by our products cannot be found elsewhere in the industry. While there are several very fine products in the premium cannabis space, there is not yet a dominant brand in any category. Some are leading but no brand dominates. Data indicates that our targeted demographic seeks out trusted brands when making product selections. Resonate is bringing to market custom, reliable, experience-targeted products. which can be sipped or shared, offered under a well-crafted brand supported by an accessible information system. We provide The Resonate System so customers can understand what to expect and can make informed confident selections. Marketing and Sales Plan The cannabis industry is changing daily in response to updated regulations, customer product education, new interest from various demographics and now the COVID-19 pandemic. As a result, we are constantly attentive to these changes as they affect the marketing of our products. Our initial marketing strategy was to launch in select dispensaries in Los Angeles and to support the launch with dispensary promotional material and location-based marketing. However, in the current market the Company has decided to modify this strategy. Paradoxically, retail restrictions and safety regulations were beneficial for us, as these allowed us to reprioritize our sales approach and to build a marketing plan around on-line dispensaries with wide delivery networks. Although retail restrictions will eventually be relaxed, we do not expect that storefront dispensaries will return to the dominant role they played in the cannabis industry before COVID-19 for several reasons. 17 Dispensaries are generally small, making social distancing difficult. Limitations on a customers’ ability to touch and smell products reduces the value of in-person shopping. Restrictions on the number of people allowed in these small spaces will create waiting lines outside stores, which will be inconvenient and even embarrassing for some. Finally, we have learned that a significant number of customers, particularly in our targeted demographic, really prefer the privacy and convenience of having products delivered to their homes. For all these reasons, we have decided to focus our sales efforts on select high-end retail dispensaries and on-line, delivery and e-commerce outlets. In response to the sudden change in customer buying preferences, Resonate has implemented a plan to sell directly to consumers. We are partnering with an on-line platform which will allow us to communicate the value of our products directly to consumers. This platform will connect consumers to a licensed retail and California-wide home delivery network. This direct-to-consumer approach has significant benefits for us. First, it allows us to control our brand messaging and to assure that we can provide the information and education customers need to make confident and informed product choices. Through this method, we also have access to customer information, which is not available from dispensaries, which allows us to employ successful marketing techniques used by leading on-line retailers such as customer loyalty programs, memberships, ambassadors, etc., to build brand awareness and increase sales. It is also better for us financially as it increases our profit margin. Therefore, our marketing budget and energy is now being channeled into appropriate programmatic advertising, developing informational materials for customers on our website, and developing professional and effective social media, search engine optimization and direct to consumer marketing campaigns. We also offer market suppose and to select premium California dispensaries both in person and thorough the Leaf.VIP budtender training program. We expect that building our brand online will complement retail sales by increasing customer awareness and creating “pull-through” at brick-and-mortar facilities. Resonate has partnered with Good People LLC as its state-wide Koan Cordial sales team. Good People is working closely with Resonate Blends’ marketing team to plan events, train budtenders, schedule and track relevant promotions and inform the innovation pipeline with field insights. In addition, Resonate is currently recruiting two internal sales managers to oversee all sales efforts in Northern and Southern California. Koan Cordials dispensary buyer sample kits are now available through Good People and dispensaries are now stocking the product in strategic geographical locations. Partnerships Product Development: The Company signed a custom development contract with Vertosa in March of 2020, the leading provider of safe, reliable emulsion bases for infused product developers. This contract was a major milestone for the Company as it selected its strategic partners to develop innovative products and solutions. Vertosa is an award-winning strategic partner who will assist the Company in the launch of its first unique category of six water soluble products. These multi-use products deliver specific, predictable, reliable, effects in a format that is completely unique in the industry. The first product developed collaboratively is the Cordial product line, but both companies expect several other products to be developed over time utilizing Vertosa’s emulsification technology. The Vertosa and Resonate teams share a mission of maximizing the benefits of cannabinoids and plant medicine. Resonate selected Vertosa as a development partner because the Vertosa systems’ industry leading emulsification technology makes them highly stable, bioavailable, and water compatible. All of Vertosa’s inactive base materials are FDA approved and are lab tested for quality. Vertosa’s Hemp-derived CBD Emulsion System is now certified organic by CCOF , a United States Department of Agriculture-accredited certifier and non-profit advocacy group, and the company has also received its Good Manufacturing Practice (GMP) certification , confirming that its offerings follow regulations promulgated by the US Food and Drug Administration and are safe, pure, and effective. In addition, Vertosa is expanding into other legal states, and this paves the way for Resonate to follow behind moving beyond California while still assuring strict standards and high production quality for our products. Manufacturing: The Company partnered with The Galley, a California licensed Type N – Infused Products Manufacturer based in Santa Rosa, California. The Galley produces and packages premium award-winning products and has worked with some of the most popular brands in the industry. The Galley is built to FDA and CDPH standards and is focused on high demand areas of production – Edibles, Topicals, Tinctures, Chocolate, Hard Candies, Gummies, Pre-Rolls, Flower, Vapes and Beverages. Resonate Blends was granted a Type S: Shared Facility - Adult and Medicinal Cannabis Manufacturing License on July 23, 2021. The license allows Resonate Blends to manufacture cannabis products at the licensed facility of The Galley. 18 Resonate and The Galley entered into a Master Services Agreement in which The Galley will manufacture and package Resonate’s first family of products to precise specifications. The Galley and Resonate have been in frequent contact throughout Resonate’s development period and are now supporting the production of the Company’s unique family of wellness lifestyle products. Resonate’s first of its kind offerings are emulsified through the advanced infusion technology provided by award-winning Vertosa and collaboratively developed to push the state of the art in its cannabis products. Distribution: Because of the unique nature of Resonate’s Koan products and the recent expansion of home delivery services in the cannabis industry, Resonate has prioritized a direct-to-consumer method as a key sales strategy. Resonate has identified a technology partner who will add an e-commerce feature to the Koan web site that will allow the Company to sell products directly to consumers using a licensed California state-wide delivery network for fulfilment. In addition to direct sales, the company plans to offer products to select premium dispensaries throughout California. These products will be delivered to retail establishments by a leading cannabis full-service distributor. The Company contracted with The Vault 3PL to provide logistics and state-wide distribution for Resonate’s Koan Cordials, its product line of unique experience blends currently available in California. Resonate is also developing relationships with a variety of complementary distribution channels such as subscription box companies and other non-storefront reseller organizations. 19 To summarize, we have signed and announced definitive agreements with various partners to execute on our overall business strategy. Our partner Vertosa is expected to develop our unique formulations through its advanced nano-emulsification process, The Galley is expected to assemble and package, the Good People to sell the products, the Vault 3PL Distribution to distribute our products and, we just engaged with The Flower Agency to actively market our social media channels to the California market. Our principal executive office is located at 26565 Agoura Road, Suite 200, Calabasas, CA 91302. Our executive telephone number is (571) 888-0009. Results of Operation for Three and Nine Months Ended September 30, 2021 and 2020 Revenues We have generated $7,574 and $7,574 in sales for the three and nine months ended September 30, 2021, respectively, as compared with no sales for the three and nine months ended September 30, 2020 on our current product line, but sales of $0 and $477,734 from the discontinued operations of our sold subsidiary, Textmunication, Inc., for the three and nine months ended September 30, 2020, respectively. We recently launched our first line of six Cordial products in California and we have started to generate revenues from the sale of these products. We anticipate increased revenues on our six Cordials for the rest of the year. We anticipate a rollout of new packaging configurations by early 2022 for our Cordials; to include both a one-pack and a multi-dose bottle which will bring the cost per dose down considerably. We also plan on launching additional Cordial formulations by early 2022, which we hope will contribute to increasing our revenues. As we have just launched our products, 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. 20 Operating Expenses Our operating expenses were $762,912 for the three months ended September 30, 2021, as compared with $236,160 for the three months ended September 30, 2020. Our operating expenses were $2,937,437 for the nine months ended September 30, 2021, as compared with $1,445,463 for the nine months ended September 30, 2020. The main reasons for the increased operating expense in 2021 was a result of our efforts to increase spending on advertising, as well as increased legal and professional fees and non-cash management fees. We expect that our operating expenses will increase in 2021 over 2020 because of our product launch and the increased expenses associated with operations. Other Income/Expenses We had other income of $866,917 for the three months ended September 30, 2021 compared with other expenses of $86,910 for the same period ended September 30, 2020. We had other expenses of $3,398,548 for the nine months ended September 30, 2021 compared with other expenses of $712,625 for the same period ended September 30, 2020. We recorded a gain on revaluation of derivative liabilities in the amount of $961,857 that contributed to our other income for the quarter ended September 30, 2021. Our other expenses for the nine months ended September 30, 2021 was mainly attributable to a loss on revaluation of derivative liabilities. Net Loss We had net income of $99,274 for the three months ended September 30, 2021, as compared with net loss of $351,399 for the three months ended September 30, 2020. We had net loss of $6,340,715 for the nine months ended September 30, 2021, as compared with net loss of $2,142,310 for the nine months ended September 30, 2020. Liquidity and Capital Resources As of September 30, 2021, we had total current assets of $649,017, consisting of $390,534 in cash and $258,483 in prepaids and inventory. Our total current liabilities as of September 30, 2021 were $5,387,805. We had a working capital deficit of $4,738,788 as of September 30, 2021, compared with a working capital deficit of $996,439 as of December 31, 2020. Cash Flows from Operating Activities Operating activities used $2,415,066 in cash for the nine months ended September 30, 2021, compared with cash used of $1,401,301 for the nine months ended September 30, 2020. Our negative operating cash flow for the nine months ended September 30, 2021 was largely the result of our net loss of $6,340,714, offset by share based compensation of $1,267,297. Our negative operating cash flow for the nine months ended September 30, 2020 was largely the result of our net loss of $2,142,310, offset by loss on derivative liability of $536,819 and share based compensation of $198,514. Cash Flows from Investing Activities We used cash on investing activities to purchase computer equipment for the nine months ended September 30, 2021 with no cash used for the same period ended 2020. Cash Flows from Financing Activities Cash flows provided by financing activities during the nine months ended September 30, 2021 amounted to $2,727,322 compared with cash flows provided by financing activities of $1,119,943 for the nine months ended September 30, 2020. Our positive cash flows for the nine months ended September 30, 2021 consisted of proceeds from issuance of common stock of $1,367,115, proceeds from Convertible notes payable of $1,865,000, offset by payments of notes payable of $504,793. Our positive cash flows for the nine months ended September 30, 2020 consisted of proceeds from issuance of common stocks $540,000, proceeds from Convertible notes payable $806,000, offset by payments of notes payable of $226,057. 21 From December 1, 2020 through March 15, 2021, we sold units priced at $25,000 per unit where each unit consisted of (i) an 8.0% Note in the principal amount of $25,000 convertible into Common Stock (the “Note) and (ii) a warrant for the purchase of 83,333 shares of the Company’s Common Stock (the “Warrant”). We sold 90 Units for total proceeds of $2,265,000. After paying finder fees of $187,450 to our placement agent, we netted $2,077,550, which will be used for working capital. In addition, we also entered into subscription agreements in connection with an equity placement offering of a maximum of $2,000,000 in units (the “Equity Units”) where each Equity Unit consists of one share of Common Stock at a purchase price of $0.15 and a warrant to purchase 0.5 share(s) of Common Stock at an exercise price of $0.225 per share. We sold 6,983,333 Equity Units for total proceeds of $1,047,500. After paying finder fees of $100,763 to our placement agent, we netted $946,737, which was used to pay off the remaining convertible note debt and will also be used for working capital. Until we can generate sufficient revenues to sustain operations, we are dependent on investment capital to continue our survival. 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 September 30, 2021, we have an accumulated deficit of $27,441,709. 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, 2021, 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 because 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. 22