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, the Company announced its 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 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 Blends. Entourage Labs is the Intellectual Property (IP) subsidiary of Resonate Blends. Based in Calabasas, California, the Company is a cannabis holding company centered on value-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 the Company believes is the industry gold standard in user experience. Resonate 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 and beneficial experiences. Resonate is committed to helping people live the life they love, but they do not make the medicinal vs. recreational distinction. This is a temporary legal separation in some states that should soon cease to exist. The Company believes in wellness for the whole person, especially people with insomnia, pain or anxiety who also want to enjoy friends, concerts and have satisfying intimate experiences. Resonate is designing experiences which should improve all areas of ones’ life. To accomplish this, Resonate is Mastering the Art of Experience. This is the Company’s mission. By integrating science, technology, education, branding, marketing, sales and delivery - with every customer interaction they aim to provide exceptional experiences. Cannabis has a broad range of unique characteristics, and they are dedicated to harnessing and amplifying those characteristics to support healthy empowered and engaged lifestyles. From product development through customer communication, they 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 its 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. 3 To communicate the breadth of wellness products that Resonate is developing, the Company 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. Koan 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”). 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, the Koan 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. 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. A significant competitive advantage is that the Cordials allow users to select both the experience they want and the beverage they choose to enjoy them in. 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 now offering seven unique formulations and expects to have its Sleep Cordial in production by early Q3 2022. The Sleep Cordial has been thoroughly tested and is ready for launch once the multi-serve bottles are available. This blend will only come in a multi-serve bottle based on the anticipated consumer usage patterns and testing data available to the Company. The Cordials were awarded the Golden Leaf Award as “Best New Brand of 2021” at the “Luxury Meets Cannabis Conference” held in New York City in December. Resonate also won a Cannabis Clio Award for “Brand Design” in 2021. Resonate has formalized contracts with logistical, sales and marketing partners to build a digital native strategy supporting Direct-to-Consumer (D2C) sales. The D2C sales platform launched in October 2021 and now allows California consumers the ability to order on-line and have the Cordials home delivered in most metro areas within four hours. Based on customer demand, the Company is creating a “Singles” option for the Cordials which are now available. In response to customer requests, the company is now offering five popular blends in 10-serving bottles that provide a lower cost per serving and allow users to customize their servings to their personal preference. In addition, the company is also offering a 4-pack that also lowers the cost per serving while preserving the convenience and portability of the discrete smaller bottles. The Company offers market support to select premium California dispensaries both in person and thorough the Leaf.VIP budtender training program. The Company expects that building its brand online will complement retail sales by increasing customer awareness and creating “pull-through” at brick-and-mortar facilities. The social media strategy was brought in-house during Q1 to both reduce overall costs and control the messaging to the appropriate audience for the Cordials. 4 Resonate recently hired an internal sales manager to oversee all sales efforts in Southern California and expects to hire a sales manager for Northern California in the near future. The Company implemented an in-house sales strategy in Q1 2022 to maximize both the dispensary outreach and budtender education – and to increase D2C sales platform activity. While wellness dispensaries will be a focus for the Company, the customer acquisition focus will now be towards the D2C portal. The Company has added several new retail partners in 2022 to include Atrium, Cornerstone Wellness, 99 High Tide, Artist Tree and Canni Delivery. The Cordials are now featured at West Hollywood’s The Artist Tree Studio Cannabis Lounge where music performers will be providing the entertainment events throughout the summer. The Studio Cannabis Lounge in West Hollywood is the only one of its kind in the United States and this partnership should provide users an interactive experience unavailable elsewhere. With the new in-house sales strategy in place, new wellness dispensaries are expected to grow throughout 2022 in addition to the D2C sales platform activity. Wellness dispensaries are the main target due to the demographics of the consumer and the thorough educational process these dispensaries offer to buyers in their stores. Multi-state expansion through licensing arrangements with the Cordials is also being planned. Several retailers and leading brands in multiple states have reached out to Resonate requesting the Cordials to be stocked in their dispensaries. The Company is currently evaluating where and when to open new states outside of California. A new unique edible line is currently being developed and is expected to be released towards the end of 2022. The form factor for the edible line will be unique in the market and also have the ability to target the desired experience of the consumer – similar to the Cordials. 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 and Six Months Ended June 30, 2022 and 2021 Revenues We have generated $2,836 and $30,488 in sales for the three and six months ended June 30, 2022, respectively, as compared with no sales for the three and six months ended June 30, 2021 on our current product line. We launched our first line of seven Cordial products in California and we have started to generate revenues from the sale of these products. We anticipate increased revenues on our seven Cordials and newly anticipated Cordials, such as Sleep Cordial, discussed below, for the rest of 2022. We anticipate a rollout of new packaging configurations in Q3 2022 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. We also plan on launching additional Cordial formulations by late Q3 2022, to include our new Sleep Cordial - and a new line of edibles in late 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. Gross Profit We paid $2,421 and $15,278 in cost of revenues for the three and six months ended June 30, 2022, respectively, resulting in a gross profit of $415 and $15,210 for the three and six months ended June 30, 2022, respectively. We have not had any historical data to compare our margins for the sale of our new products. Our gross margin, which is the difference between our revenues and our cost of revenues, is expected to increase in future quarters as we work to increase our efficiency and lessen costs. In addition, our gross margin percentage, which was 14.6% and 49.90% for the three and six months ended June 30, 2022, respectively, and 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 2022. We are also implementing new packaging configurations which we expect to stabilize our overall gross margins. Operating Expenses Our operating expenses were $290,211 and $945,830 for the three and six months ended June 30, 2022, respectively, as compared with $1,397,013 and $2,175,025 for the three and six months ended June 30, 2021, respectively. 5 The main drivers for the overall decrease in operating expenses in Q2 2022 were the reduction of Legal, Professional Fees and Salaries as well as a significant decrease in non-cash management fees. Not having these non-cash management and broker fees would reduce our operating expenses by $1,106,802 and $1,229,195 for the three and six months ended June 30, 2022, respectively. Our continued focus on sales, advertising, marketing and new product development costs to support our planned growth is expected to increase throughout 2022. We spent and $87,738 less and $24,358 more on advertising for the three and six months ended June 30, 2022, respectively, than for the same periods in 2021. We spent more on advertising for the six-month ended June 30, 2022 particularly the first quarter 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 decreased by $45,687 and $337,156 for the three and six months ended June 30, 2022, respectively, over for the same periods in 2021. Our professional fees were less for this period compared to last period, but we expect that professional fees will increase in 2022 as we continue to ramp up operations. General and administrative expenses increased by $90,734 and decreased by $32,872 for the three and six months ended June 30, 2022, respectively, over for the same periods in 2021. The increased expenses resulted from establishing our internal sales team, attending strategic trade shows and bringing on consultants and financial analysts to assist in analyzing our acquisition strategy. We expect general and administrative expenses to remain fairly constant throughout 2022, but they could increase significantly if we acquire new companies as part of our overall corporate strategy. We also 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/Expenses We had other income of $501,526 and $1,632,390 for the three and six months ended June 30, 2022, respectively, compared with other expenses of $3,984,516 and $4,264,966 for the same period ended June 30, 2021, respectively. The main reason for our other income in 2022 was the gain on revaluation of derivative liabilities. The main reason for our other expenses in 2021 was the loss on revaluation of derivative liabilities. Net Income/Loss We had net income of $211,730 and $701,770 for the three and six months ended June 30, 2022, as compared with a net loss of $5,381,529 and $6,439,991 for the three and six months ended June 30, 2021, respectively. Liquidity and Capital Resources As of June 30, 2022, we had total current assets of $315,546 consisting of $34,823 in cash, $14,551 in advances to suppliers and $266,172 in inventories. Our total current liabilities as of June 30, 2022 were $3,404,366. We had a working capital deficit of $3,088,810 as of June 30, 2022 compared with a working capital deficit of $3,306,752 as of March 31, 2022 and $4,133,368 as of December 31, 2021. Cash Flows from Operating Activities Operating activities used $1,009,564 in cash for the six months ended June 30, 2022, compared with cash used of $1,802,187 for the six months ended June 30, 2021. Our negative operating cash flow for the six months ended June 30, 2022 was largely the result of our unrealized gain on derivative liability of $1,687,112, offset by our net income of 701,770. Our negative operating cash flow for the six months ended June 30, 2021 was largely the result of our net loss of $6,439,991, offset by share based compensation of $986,121. 6 Cash Flows from Investing Activities Investing activities used $0 in cash for the six months ended June 30, 2022, as compared with $21,063 to purchase various office furniture and equipment for the six months ended June 30, 2021. Cash Flows from Financing Activities Cash flows provided by financing activities during the six months ended June 30, 2022 amounted to $1,031,474, compared with cash flows provided by financing activities of $2,684,794 for the six months ended June 30, 2021. Our positive cash flows for the six months ended June 30, 2022 consisted of proceeds from issuance of common stock of $392,674, proceeds from Convertible notes payable of $788,800, offset by payments of notes payable of $150,000. Our positive cash flows for the six months ended June 30, 2021 consisted of proceeds from issuance of common stock of $1,319,587, proceeds from Convertible notes payable of $1,870,000, offset by payments of notes payable of $504,793. 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 June 30, 2022, we have an accumulated deficit of $25,272,281. 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 June 30, 2022, 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. 7