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. Overview On October 25, 2019, we announced our 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 a brand-focused cannabis organization offering premium brands of consistent quality. We also acquired Entourage Labs LLC (“Entourage Labs”), a sister company of Resonate Blends. Entourage Labs is the Intellectual Property (IP) subsidiary of Resonate Blends. For the first two years, we concentrated on releasing product and brand building in California, and looked into state expansion efforts as well. Resonate followed the launch of its first six Koan products, based on The Resonate System, by releasing “Love” in Q1-2022 and “Sleep” Cordials in Q2-2022. To address the price sensitivity of the market, Resonate also produced multi-serve versions of our most popular Cordials which significantly reduced the cost per serving. The Resonate products were designed for the discriminating wellness— focused consumer and that market has been slower to develop than anticipated. The current buyers of cannabis products seem interested in purchasing the highest level of THC for the least amount of money. While we have won awards for our Koan Cordial brand, such as the LMCC award for “Best New Brand of 2021” and also a Cannabis Clio Award for “Packaging and Design”, the current environment in California has made it difficult to scale our business opportunities in a challenging market environment. Burdens such as overregulation, high taxes, price compression, the growth of the illicit market and the overpopulation of dispensaries in some areas, and no dispensaries in other areas – have made it difficult for many brands in California to succeed. The legal cannabis industry itself is laden with obstacles. There are significant restrictions on marketing activities and excessively high banking fees for compliant financial institutions. Layer upon layer of taxes raise prices of legal cannabis products so that they become cost prohibitive for customers. Many of the California dispensaries are in financial trouble and are unable to pay for the products that they have purchased. The distributor therefore prevents those accounts from ordering additional products. These and other constraints have made it difficult to build a successful business in the cannabis industry at this time. The cannabis industry is still in its infancy, so we expect continued headwinds. We recently pivoted to the cannabis consumption lounges for new revenue traction. These lounges are becoming popular in California, and we’ve teamed with several new lounges to introduce our six (6) Cordial blends into this new environment. 3 The Company’s growth strategy is to create an innovative ecosystem of companies, investments and research that all support The Resonate System and its mission of empowering the wellness market. We have a product line of Cordials and have introduced our brand and products to the market through dispensaries in California and now into cannabis consumption lounges. Although we have had some success in establishing our presence in the California market, as of the date of this filing, we have not achieved significant revenues. We have a working capital deficit of $2,632,858 as of March 31, 2023, and we are wholly dependent on capital to fund our business operations. For these reasons, there are no assurances that we will be successful in this or any of our endeavors or become financially viable and continue as a going concern. Since late 2019, we have been attempting to raise money to implement our business plan but have not been able to secure all the funds necessary to do so. The lack of sufficient funds, the present economy, the restrictions on commercial banking and the saturated nature of the cannabis industry have prevented this from happening. We have recently relied on convertible loans for working capital expenses. These loans were mostly on unfavorable terms, such as discounted conversion rights, original discounts, equity incentives and restrictive covenants. As we have been unable to raise the capital necessary to fully implement our business plan, we recently commenced a search for other business opportunities that may benefit our shareholders and allow us to raise capital to build a stronger operation. Recent negotiations with what we believe is a more viable business opportunity for the holding company has emerged. We signed a non-binding Letter of Intent (“LOI”) with Pegasus Specialty Vehicles, LLC (“Pegasus”). Pegasus is a manufacturer built on an innovative business model and manufacturing architecture providing best-in-class traditional, electric (EV) and hydrogen solutions to the multi-billion dollar school bus industry and also the broader specialty vehicle market. This leads us to believe that we will be revising our business plan and focus over the coming weeks and months. If this opportunity does not develop, however, we will continue to both seek new opportunities and look for capital to continue with our efforts in the cannabis industry. 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 Months Ended March 31, 2023 and 2022 Revenues We have generated $10,107 in sales for the three months ended March 31, 2023, as compared with $27,652 in sales for the three months ended March 31, 2022 on our current product line. We launched our first line of Cordial products in California in 2021, and we have started to generate revenues from the sale of these products. We anticipate consistent revenues on our 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. As explained above, we are currently in negotiations to enter the electric vehicle (EV) bus and clean energy specialty vehicle sector. If this opportunity develops, we may be revising our business plan and focus over the coming months. Gross Profit We incurred $8,572 in cost of revenues for the three months ended March 31, 2023, resulting in a gross profit of $1,535 for the three months ended March 31, 2023. 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 incurred $12,857 in cost of revenues for the three months ended March 31, 2022, resulting in a gross profit of $14,795 for the three months ended March 31, 2022. In addition, our gross margin percentage was 15% for the three months ended March 31, 2023 due to initial discounting in developing new market share, which 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. 4 Operating Expenses Our operating expenses were $98,421 for the three months ended March 31, 2023, as compared with $655,619 for the three months ended March 31, 2022. The main drivers for the overall decrease in operating expenses in 2023 were the reduction of advertising, salaries as well as not issuing any shares for compensation or services. Unless we engage in a business combination with an opportunity within the electric vehicle (EV) bus and clean energy specialty vehicle sector, 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 $152,187 less on advertising for the three months ended March 31, 2023, than for the three months ended March 31, 2022. We spent more on advertising for the three months ended March 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. Professional fees decreased by $12,710 for the three months ended March 31, 2023, over the three months ended March 31, 2022. Our professional fees were less for this quarter compared to the same quarter last year, but we expect that professional fees will increase in 2023 as we continue to ramp up operations or if we engage in a business combination with an opportunity within the electric vehicle (EV) bus and clean energy specialty vehicle sector. General and administrative expenses increased by $39,656 for the three months ended March 31, 2023, over the three months ended March 31, 2022. 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 or We expect general and administrative expenses to remain fairly constant throughout 2023, but expenses could increase significantly if we engage in a business combination with an opportunity within the electric vehicle (EV) bus and clean energy specialty vehicle sector. Other Income We had other expenses of $284,066 for the three months ended March 31, 2023, compared with other income of $1,130,864 for the same period ended March 31, 2022. Our other expense for the three months ended March 31, 2023 was mainly attributable a loss on the remeasurement of derivative liabilities, interest expense and amortization of debt discounts on convertible notes. Our other income for the three months ended March 31, 2022 was mainly attributable to the gain on remeasurement of derivative liabilities. Net Income We had a net loss of $(380,952) for the three months ended March 31, 2023, as compared with net income of $653,627 for the three months ended March 31, 2022. Liquidity and Capital Resources As of March 31, 2023, we had total current assets of $236,114 consisting of $1,042 in cash, $120,000 in other receivable and $115,072 in inventory. Our total current liabilities as of March 31, 2023 were $2,026,144. We had a working capital deficit of $1,790,030 as of March 31, 2023 compared with a working capital deficit of $1,170,940 as of December 31, 2022. 5 Cash Flows from Operating Activities Operating activities provided $145,269 in cash for the three months period ended March 31, 2023, compared with cash used of $483,386 for the three months period ended March 31, 2022. Our operating cash flow for the three months period ended March 31, 2023 was largely the result of an increase in accounts payable of $210,134, offset by our net loss, net of non-cash charges, of $140,285. Our negative operating cash flow for the three months period ended March 31, 2022 was largely the result of our net loss, net of non-cash charges, of $467,658. Cash Flows from Investing Activities We did not use cash for investing activities for the three months ended March 31, 2023 or 2022. Cash Flows from Financing Activities Cash flows used in financing activities during the three months ended March 31, 2023 amounted to $208,646, compared with cash flows provided by financing activities of $655,000 for the three months period ended March 31, 2022. Our use of cash flows for the three months period ended March 31, 2023 consisted of repayments of convertible and related party debt. Our positive cash flows for the three months ended March 31, 2022 consisted of proceeds from Convertible notes payable of $650,000. 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 March 31, 2023, we have an accumulated deficit of $25,701,376. 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 March 31, 2023, 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. 6 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.