Resonate Blends, Inc. 10-K/A

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations Overview We continue to make headway with our strategic objectives to position our company for long-term growth. We are laying the groundwork to scale with key sales channels now operational, including our recently launched Direct-to-Consumer sales platform. Working closely with industry-leading sales, marketing, and logistics partners for our flagship Koan Cordials product line, we have built a multi-channel distribution strategy. Following our launch into the retail chain and the opening of our e-commerce sales platform, we are turning our focus to three critical areas - education, targeted marketing, and controlling the sales process. 21 We took an ambitious approach to our original dispensary rollout and were met with a high amount of interest in our product, reflected by the roughly 80 dispensaries who requested sample kits. While the reception was very positive, we found reluctance for the dispensaries to acquire new brands particularly with the advent of the Delta variant of COVID. While the recent threat of a potential COVID-related retail lockdown in California slowed our progress on the dispensary front, we expect to gain momentum in the retail market as it starts to open up again by revisiting each of these dispensaries. Many of those initial dispensary requests have been followed up by commitments to buy once they begin bringing new brands into the stores. We believe the careful nurturing of our brand is one of our most important responsibilities as managers of Resonate Blends. Since nobody knows our product better than we do, we made the decision to bring the sales process in-house versus having an external salesforce. We are confident this move will have an immediate positive impact on revenues and allow our team to better control the narrative within the retail network in California. We plan to soon offer several packaging variations for our Cordials based on dispensary and consumer feedback. In addition to our Cordial 3-pack, we plan to soon have a single-packaged Cordial, and a multi-blends sampler SKU. We believe having these options encourages the consumer to try more blends and will allow us to do more sampling and upselling promotions. We are also designing a multi-dose bottle which will be more cost-effective for those who use our blends daily. Together, these new packaging configurations should help accelerate our sales revenue by providing consumers convenient options. We also expect to introduce two new formulations and other unique product lines that will showcase our focus on continual product development and brand innovation within our family of Koan products. While we expect to ramp up our retail footprint in the quarters ahead, we did make several key entry points to dispensaries. To that end, we recently announced nine (9) new California One Plant dispensaries and are working closely with them to co-market the Cordials across their vast network. The collaboration and communication with the One Plant team is deep and we will be exploring creative and unique marketing efforts at two of their flagship stores. We are an approved vendor for the Joy Reserve located in the Westfield Centre in Union Square (San Francisco). The Joy Reserve is the first cannabis dispensary located in a mall setting and offers consumers education and guidance to select the best products for their lifestyles. We just launched with The Joy Reserve dispensary, which is focused on bringing a better understanding of the many benefits of cannabis and how to safely pick quality products such as the Koan Cordials. This unique showcase will be used to educate consumers about plant-based wellness with an open browsing floor, free consultations and workshops. We feel this setup is ideal to introduce consumers to our Cordials and are excited to participate in this groundbreaking approach. Our products are built around the idea of “Mastering the Art of Experience”, reflecting our focus on innovation – however we are also committed on building a solid foundation of distribution, communication, and education, as we work to normalize cannabis as part of a healthy and engaged lifestyle. We are finding the education of cannabis, as it relates to wellness, and the benefits and uses of our six unique blends of Cordials to be the most effective drivers of our outreach – once consumers understand the uses and benefits, the acceptance is locked in. 22 Marketing and branding are core components of our targeted customer acquisition strategy. We have invested significantly to our overall marketing efforts, including cannabis conferences, social media outreach, Search Engine Optimization (SEO), and marketing events with our dispensary partners. We recently consolidated our digital marketing to the Flower Agency, a full digital marketing agency that assists lifestyle, wellness and cannabis brands with customer acquisition, awareness and re-engagement. Importantly, our patent-pending Koan Cordials, the world’s first cannabis-infused cordial, are starting to gain national recognition from cannabis industry leaders. We expect to see a significant uptick in press and other media mentions in the coming months. We are very encouraged with our Koan Cordials winning the show’s Gold Leaf Award for “Best New Brand of 2021” at the invitation-only “Luxury Meets Cannabis Conference”. The Gold Leaf Awards honor those visionary crossover brands, retailers, and founders that are going above and beyond both in and outside of the cannabis space — across beauty, skincare, food/beverage, and everyday wellness sectors. Koan Cordials also won a Bronze 2021 Clio Cannabis award for brand design in the packaging category. The Clio Awards is an annual global award program recognizing innovation and creative excellence in advertising, design and communication. With an established statewide infrastructure in California for manufacturing, distribution and sales, we are well-equipped to make progress with our go-forward focus on revenue generation. We are uniquely positioned to be a positive disruptive force in the wellness/lifestyle segment of the industry built on a growing body of proprietary IP, and we firmly believe that value-added brands are the future of the Cannabis industry. Over the long-term, we believe that cannabis, as a part of the wellness lifestyle, will become the largest segment in the burgeoning industry and we plan to be one of the leaders in this segment. Results of Operations for the Years Ended December 31, 2021 and 2020 Revenues We have generated $27,031 in revenues for the year ended December 31, 2021, as compared with no sales for the year ended December 31, 2020 on our current product line, and also no sales from the discontinued operations of our sold subsidiary, Textmunication, Inc., for the years ended December 31, 2021 and 2020, respectively. We have 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 2022. We anticipate a rollout of new packaging configurations by early Q2 2022 for our Cordials; to include both a one-pack and a multi-dose bottle which is expected to bring the cost per dose down considerably. We also plan on launching additional Cordial formulations by Q2 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. Operating Expenses Our operating expenses were $3,424,590 for the year ended December 31, 2021, as compared with $1,813,958 for the year ended December 31, 2020. The main drivers for the overall increase in operating expenses in 2021 was our focus on advertising to support our planned growth and non-cash items related to broker and employee equity compensation. We paid both cash fees and stock compensation to a broker on our Private Placement Memorandum in Q1. Within the operating expenses, there were a variety of increases, the largest of which was an increase in non-cash management fees of $1,290,362 as a result of issuing stock in 2021 in settlement of accrued but unpaid management and employee salaries from 2020 - plus vendor payment settlements. We hope that to avoid these settlement expenses for 2022 and compensate employees and vendors with available cash on hand. However, if we are forced to defer salaries and settle with shares for employees this year, due to a lack of funds, we should expect our non-cash compensation expense in 2022 to resemble that of 2021. In 2021 and 2020, we compensated a broker with combined share and cash compensation valued at $512,312 and $34,250, respectively for its services as placement agent. We expect to incur similar broker expenses as long as we are dependent on additional financing for our operations, and we expect that will be the case for the rest of 2022. We spent $604,564 more on advertising in 2021 than in 2020. This money was used 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. We believe our advertising efforts will pay dividends throughout 2022 as the awareness groundwork has been established to educate the market on our family of Cordial formulations. Professional fees increased by $45,175 in 2021 compared with 2020. With more focus on operations, we have spent more on professional fees. We expect that professional fees will increase in 2022 as we continue to ramp up operations. General and administrative expenses decreased by $520,409 in 2021 compared with 2020. This resulted from bringing several outside services in-house and not having to address outstanding debt liabilities from our previous spin-out of Textmunication Holdings, Inc. in 2020. We expect general and administrative expenses to remain fairly constant throughout 2022 due to internal changes we’ve implemented. We expect that our operating expenses will increase in 2022 over 2021 as we roll out new products along with our existing products, and the increased expenses associated with operations. Other Income We had other expenses of $2,346,362 for the year ended December 31, 2021 compared with other expenses of $143,113 for the year ended December 31, 2020. Our other expenses for the year ended December 31, 2021 was mainly attributable to a loss on revaluation of derivative liabilities. 23 Net Income/Loss We had net loss of $5,763,069 for the year ended December 31, 2021, as compared with net loss of $1,941,274 for the year ended December 31, 2020. Our increased loss in 2021 is mainly from a lack of revenue, combined with increased advertising to support our growth and significant non-cash expenses related to broker and employee equity compensation. We believe that our increased marketing activity and compensating valuable employees and partners will pay off with increased brand exposure that we expect will generate more sales for the upcoming year. Liquidity and Capital Resources As of December 31, 2021, we had total current assets of $269,518, consisting of $12,913 in cash, $10,830 in advances to suppliers and $245,776 in Inventories. Our total current liabilities as of December 31, 2021 were $4,402,886. We had a working capital deficit of $4,133,368 as of December 31, 2021, compared with a working capital deficit of $996,439 as of December 31, 2020. Cash Flows from Operating Activities Operating activities used $2,792,687 in cash for the year ended December 31, 2021, compared with cash used of $1,381,003 for the year ended December 31, 2020. Our negative operating cash flow for the year ended December 31, 2021 was largely the result of our net loss, offset mainly by the loss on derivative liabilities. Our negative operating cash flow for the year ended December 31, 2020 was largely the result also of our net loss, offset mainly by share based compensation. Cash Flows from Investing Activities Investing activities used $36,047 in cash for the year ended December 31, 2021 while we used no cash on investing activities for the year ended December 31, 2020. Cash Flows from Financing Activities Cash flows provided by financing activities during the year ended December 31, 2021 amounted to $2,727,322 compared with cash flows provided by financing activities of $1,492,213 for the year ended December 31, 2020. Our positive cash flows for the year ended December 31, 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 year ended December 31, 2020 consisted of proceeds from issuance of common stock $1,011,113, proceeds from Convertible notes payable $850,100, offset by payments of notes payable of $369,000. 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 December 31, 2021, we have an accumulated deficit of $26,864,064. 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 December 31, 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 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. 24