Resonate Blends, Inc. 10-K

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations Results of Operations for the Years Ended December 31, 2022 and 2021 Revenues We have generated $49,501 in revenues for the year ended December 31, 2022, as compared with sales of $27,031 for the year ended December 31, 2021 on our current product line. We have launched our first line of six Cordial products in California, with a seventh introduced at the end of September 2022, and we have started to generate revenues from the sale of these products. We anticipate increased revenues on our seven 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. Gross Profit 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 ended December 31, 2022. 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 accrued $19,148 in cost of revenues for the year ended December 31, 2021, resulting in a gross profit of $7,883 for the year ended December 31, 2021. 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 33.20% for the year ended December 31, 2022, 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 2023. We are also implementing new packaging configurations which we expect to stabilize our overall gross margin. Operating Expenses Our operating expenses were $1,405,828 for the year ended December 31, 2022, as compared with $2,539,288 for the year ended December 31, 2021. The main drivers for the overall decrease in operating expenses in 2022 were the reduction of legal, professional fees and salaries as well as a significant decrease in non-cash management fees. 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 $233,208 less on advertising for year ended December 31, 2022, than for the year ended 2021. We spent more on advertising for the year ended December 31, 2021 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 for the rest of 2023 as the awareness groundwork has been established to educate the market on our family of Cordial formulations. Professional fees decreased by $390,547 for the year ended December 31, 2022, over the year ended 2021. Our professional fees were less for this year compared to last year, but we expect that professional fees will increase in 2023 as we continue to ramp up operations. 22 General and administrative expenses increased by $32,793 for the year ended December 31, 2022, over the year ended 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 2023, but expenses 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 2023 over 2022 as we roll out new products along with our existing products, and the increased expenses associated with operations, and in connection with any acquisitions. Other Income/Expenses We had other income of $2,043,022 for the year ended December 31, 2022 compared with other expenses of $2,341,651 for the year ended December 31, 2021. Our other income for the year ended December 31, 2022 was mainly attributable to the gain on revaluation of derivative liabilities. Our other expenses for the year ended December 31, 2021 was mainly attributable to a loss on revaluation of derivative liabilities. Net Income/Loss We had net income of $653,627 for the year ended December 31, 2022, as compared with a net loss of $4,873,056 for the year ended December 31, 2021. Liquidity and Capital Resources As of December 31, 2022, we had total assets of $399,121 consisting of $64,419 in cash, $0 in advances to suppliers, $150,000 in other receivable and $160,492 in inventories. Our total current liabilities as of December 31, 2022 were $1,545,851. We had a working capital deficit of $1,170,940 as of December 31, 2022 compared with a working capital deficit of $4,133,368 as of December 31, 2021. Cash Flows from Operating Activities Operating activities used $1,428,467 in cash year ended December 31, 2022, compared with cash used of $2,782,102 for the year ended December 31, 2021. 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. Our negative operating cash flow for the year ended December 31, 2021 was largely the result of our net loss of $4,873,056, offset mainly by the loss on derivative liabilities of $2,011,881. Cash Flows from Investing Activities Investing activities used $0 in cash for year ended December 31, 2022, as compared with $36,048 to purchase computer equipment for the year ended December 31, 2021. Cash Flows from Financing Activities Cash flows provided by financing activities during the year ended December 31, 2022 amounted to $1,479,973, compared with cash flows provided by financing activities of $2,716,738 for the year ended December 31, 2021. 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. 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 $515,377. The features of the debt instruments and payables concerning our financing activities are detailed in the footnotes to our financial statements. 23 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, 2022, we have an accumulated deficit of $25,320,424. 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, 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. There have been no material changes to our critical accounting policies as described in the footnotes to our financial statements included in our annual report on Form 10-K for the year ended December 31, 2022; however, we consider our critical accounting policies to be those related to determining the amount of revenue to be billed, the timing of revenue recognition, stock-based compensation, capitalization and related amortization of intangible assets, impairment of assets, and the fair value of liabilities. 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