BranchOut Food Inc. 10-Q

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS You should read the following discussion of our financial condition and results of operations in conjunction with the condensed financial statements and the notes thereto included elsewhere in this Quarterly Report on Form 10-Q and with our audited financial statements included in our prospectus filed pursuant to Rule 424(b) under the Securities Act of 1933, as amended, with the Securities and Exchange Commission on Jun 21, 2023 (“Prospectus”). In addition to historical condensed financial information, the following discussion contains forward-looking statements that reflect our plans, estimates, and beliefs. Our actual results could differ materially from those discussed in the forward-looking statements. For a discussion of limitations in the measurement of certain of our user metrics, see the section entitled “—Limitations of Key Metrics.” Overview We were incorporated as Avochips Inc., an Oregon corporation, on February 21, 2017. On November 2, 2017, AvoChips Inc. converted into Avochips, LLC, an Oregon limited liability company and on November 19, 2021, Avochips, LLC redomiciled to Nevada in connection with a conversion from an Oregon limited liability company to a Nevada corporation, named BranchOut Food Inc. We are engaged in the development, marketing, sale, and distribution of plant-based, dehydrated fruit and vegetable snacks and powders. One of the Company’s contract manufacturers is in the Republic of Chile. The Company entered into a second contract manufacturing agreement in 2022 with a company based in the Republic of Peru. This facility in Peru houses BranchOut’s continuous through-put dehydration machine, substantially increasing production capacity. Our new large-scale continuous through-put dehydration machine was commissioned in September 2022 and we completed the first production run in the first quarter of 2023. Both facilities produce dehydrated fruit and vegetable products for BranchOut using a new proprietary dehydration technology. The Company’s customers are primarily located throughout the United States. Business Summary BranchOut is an emerging natural food brand with a licensed technology platform that enables the manufacturing and marketing of plant-based dehydrated foods. BranchOut has licensed rights from an independent third party to a new dehydration technology designed for drying and processing highly sensitive fruits and vegetables such as avocados, bananas and others. Using the licensed technology platform, we believe BranchOut’s line of branded food products speak to current consumer trends. In our experience, conventional dehydration methods, such as freeze-drying and air drying, tend to degrade most fruit and vegetables through oxidation, browning/color degradation, nutritional content reduction and/or flavor loss. As a result, certain highly sensitive fruit, such as avocados and bananas, have not previously been successfully offered as a dehydrated base for consumer products. Other dried fruit- and vegetable-based products are on the market but are of low quality. We believe that BranchOut’s licensed technology platform and process is the only way to produce quality avocado- and banana-based snack and powdered products. Additionally, we believe our licensed technology platform produces superior products when using other fruits and vegetables as the base when compared to conventional drying and dehydration technologies. With more than 17 patents registered or pending in 14 countries, BranchOut has been granted the exclusive rights to use the licensed technology platform as applied to avocados, in addition to BranchOut’s own patent pending process, and nonexclusive rights to use the licensed technology platform for other products. Our Products Over time, BranchOut plans to grow revenues strategically by penetrating the multi-billion dollar grocery market opportunity presented by our current product lines, as well as expanding our platform to include additional products that meet our strict plant-based ingredient criteria to diversify our revenue base and increase BranchOut’s TAM opportunity. BranchOut’s current products are primarily: ● BranchOut Snacks: dehydrated fruit- and vegetable-based snacks, including Avocado Chips, Chewy Banana Bites, Pineapple Chips, Brussel Sprout Crisps and Bell Pepper Crisps. ● BranchOut Powders: Avocado Powder, Banana Powder and Blueberry Powder. ● BranchOut Industrial Ingredients: Bulk Avocado Powder, dried avocado pieces and other fruit powders/pieces. BranchOut is currently developing additional products, including chocolate covered fruit items and many private label products for large retailers. 26 Factors Affecting Our Results of Operations We believe our performance and continued success depend on several factors that present significant opportunities. These factors include: Investments in Product Development and Innovation We expect to continue to focus on long-term revenue growth through investments in our business. In research and development and new product development, our team is continually working on new products and iterations of our existing products. Further, we anticipate we will continue to invest significantly in our current product line in order to improve customer satisfaction, quality, and unit economics. We are committed to continuously expanding our portfolio and bringing next-generation products to market. Continued Commercial Expansion in the United States and International Markets In sales and marketing, we are also dedicating meaningful resources to expand our commercial team in the United States and in international markets. Our top commercial priorities in the United States include sales and marketing expansion to gain additional retail distribution and online sales. Ability to Grow Our Customer Base in both Online and Traditional Wholesale Distribution Channels We are currently growing our customer base through both paid and organic online channels, as well as by expanding our presence in a variety of physical retail distribution channels. Online customer acquisitions typically occur at our direct website Branchoutfood.com and Amazon.com. Our online customer acquisition program includes paid and unpaid social media, search, display and traditional media. Our products are also sold through a growing number of physical retail channels. Wholesale customers include grocery chains, club stores, among others. Customer acquisition in physical retail channels depends on, among other things, paid promotions through retailers, display and traditional media. Ability to Acquire and Retain Customers at a Reasonable Cost We believe an ability to consistently acquire and retain customers at a reasonable cost relative to projected life-time value will be a key factor affecting future performance. To accomplish this goal, we intend to balance advertising spend between online and offline channels, as well as balancing more targeted and measurable “direct response” marketing spend with advertising focused on increasing our long-term brand recognition, where success attribution is less directly measurable on a near-term basis. Ability to Drive Repeat Usage of Our Products We accrue substantial economic value from repeat users of our products who consistently re-order our products. The pace of our growth rate will be affected by the repeat usage dynamics of existing and newly acquired customers. Ability to Expand Our Product Line Our goal is to substantially expand our product line over time to increase our growth opportunity and reduce product-specific risks through diversification into multiple products each designed around daily use. Our pace of growth will be partially affected by the cadence and magnitude of new product launches over time. Ability to Expand Gross Margins Our overall profitability will be impacted by our ability to expand gross margins through effective sourcing of raw materials, controlling labor and shipping costs, as well as spreading other production-related costs over greater manufacturing volumes. Ability to Expand Operating Margins Our ability to expand operating margins will be impacted by our ability to cover fixed general and administrative costs and variable sales and marketing costs with higher revenues and gross profit dollars. Ability to Manage Our Global Supply Chain and Expand Production In-line with Demand Our ability to grow and meet future demand will be affected by our ability to properly plan for and source inventory from a variety of suppliers. 27 Ability to Optimize Key Components of Working Capital Our ability to reduce cash burn in the near-term and eventually generate positive cash flow will be partially impacted by our ability to effectively manage all the key working capital components that could influence our cash conversion cycle. Seasonality Because we are so early in our lifecycle of growth, it is difficult to discern the exact magnitude of seasonality affecting our business. Any evidence of seasonality is not discernable from our growth. Components of Our Results of Operations Net Revenue We currently derive our revenue from the sale of our finished snack and powder products. We also record as revenue any amounts billed to customers for shipping costs and record as cost of goods sold the actual shipping costs. We have elected to exclude from the measurement of the transaction price all taxes, such as sales, use, value-added, assessed by government authorities and collected from a customer. Therefore, revenue is recognized net of such taxes. Revenues are offset by customer deductions that are non-promotional or undecipherable. This includes slotting fees which are funds paid for shelve placement within the schematic at retail facilities. We expect our net revenue to increase in the foreseeable future as we increase deduction management efforts, expand our sales territories, add new customers and increase the utilization of our products by our existing customers, though net revenue may fluctuate from quarter to quarter due to a variety of factors, including availability of reimbursement, the size and success of our sales force, the number of customers who are aware of and purchase our products. Cost of Goods Sold Cost of goods sold consists primarily of finished products purchased from third-party suppliers, shipping costs, excess and obsolete inventory adjustments and royalties. Our products are manufactured to our specifications primarily by third-party suppliers in the Chile, Peru, the PRC and the United States. Cost of goods sold is recognized at the time revenue is recognized in accordance with customer agreements. Prior to selling the products, the cost of our products is recorded as inventories, net in our balance sheets. Cost of goods sold is expected to increase due primarily to increased sales volume. Gross Profit We calculate gross profit as net revenue less cost of goods sold, and gross margin as gross profit divided by net revenue. We expect our gross profit to increase in the foreseeable future as our net revenue grows, though our gross profit and gross margin have been and will continue to be affected by a variety of factors, primarily average selling prices, third-party manufacturing costs, change in mix of customers, excess and obsolete inventory adjustments, royalties and seasonality of our business. We expect our gross margin to fluctuate from period to period, however, based upon the factors described above and seasonality. General and Administrative General and administrative expenses consist primarily of commissions paid to U.S. sales representatives, salaries, bonuses, and benefits related to selling, marketing, and general and administrative functions, and stock-based compensation. In addition, selling, general, and administrative expenses consist of the costs associated with marketing initiatives, trade show and related travel, other travel expenses, insurance costs, facility expenses and other general corporate expenses. We expect general and administrative expenses to continue to increase in the foreseeable future as we continue to grow our business, though it may fluctuate from quarter to quarter. We also expect our administrative expenses, including stock-based compensation expense, to increase as we increase our headcount and expand our facilities and business processes to support our operations as a public company. Our selling, general and administrative expenses may fluctuate from period to period due to the seasonality of our business and as we continue to add direct sales territory managers in new territories. Salary and Wages Salary and wages consist of salaries and wages for full-time, as well as contract, employees of the Company. Professional Fees Professional fees consist of expenses incurred for accounting, legal, finance, consulting, audit, and transfer agent services. It also consists of stock-based compensation paid for advisory, fundraising, and financial services. We anticipate increased expenses related to audit, legal, regulatory, and tax-related services associated with being a public company, compliance with exchange listing and SEC requirements, director and officer insurance premiums and investor relations costs. We also expect to see an increase in our stock-based compensation expense with the establishment of a new equity plan associated with this offering and related grant either in the form of restricted stock units or options. Total Other Expense Other expense consists primarily of interest expense from amortization of debt discounts, and other income from interest earned on notes receivable. It also includes any gains and loss attributable to the changes in fair market value from the derivative liabilities associated with the issuance of convertible notes. 28 Results of Operations for the Three Months Ended June 30, 2023 and 2022 The following table summarizes selected items from the statement of operations for the three months ended June 30, 2023 and 2022, respectively. Three Months Ended June 30, Increase / 2023 2022 (Decrease) Net revenue $ 343,065 $ 305,574 $ 37,491 Cost of goods sold 305,703 424,006 (118,303 ) Gross profit (loss) 37,362 (118,432 ) 155,794 Operating expenses: General and administrative 141,031 212,540 (71,509 ) Salaries and benefits 436,238 221,995 214,243 Professional services 158,205 120,132 38,073 Depreciation and amortization 55,758 81 55,677 Total operating expenses 791,232 554,748 236,484 Operating loss (753,870 ) (673,180 ) 80,690 Other income (expense): Interest income 2,911 4,050 (1,139 ) Interest expense (222,551 ) (211,158 ) 11,393 Total other income (expense) (219,640 ) (207,108 ) 12,532 Net loss $ (973,510 ) $ (880,288 ) $ 93,222 Net Revenue Our net revenue for the three months ended June 30, 2023 was $343,065, compared to $305,574 for the three months ended June 30, 2022, an increase of $37,491, or 12%. The increase in revenue was primarily due to increased sales to big box retailers during the three months ended June 30, 2023. Cost of Goods Sold and Gross Profit (Loss) Our cost of goods sold for the three months ended June 30, 2023 was $305,703, compared to $424,006 for the three months ended June 30, 2022, a decrease of $118,303 or 28%. Cost of goods sold decreased primarily due to our transition to bulk shipping arrangements. As a result of the foregoing, we had gross profit of $37,362 for the three months ended June 30, 2023 as compared to a gross loss of $118,432 for the three months ended June 30, 2022. General and Administrative Our general and administrative expense for the three months ended June 30, 2023 was $141,031, compared to $212,540 for the three months ended June 30, 2022, a decrease of $71,509 or 34%. The largest components of our general and administrative expenses are advertising and marketing, travel, and storage, shipping and handling expense. Three Months Ended June 30, 2023 2022 Difference % change Advertising and marketing $ 25,691 $ 144,770 $ (119,079 ) (82 )% Travel $ 4,471 $ 15,734 $ (11,263 ) (72 )% Storage, shipping and handling $ 73,908 $ 32,577 $ 41,331 127 % Advertising and marketing expenses decreased for the three months ended June 30, 2023 as compared to the corresponding period in 2022 as we focused our resources on our IPO. Our travel expenses decreased for the same reason, as we reduced our international travel. Storage, shipping and handling expenses increased primarily due to increased international shipping rates. 29 Salaries and Wages Salaries and wages for the three months ended June 30, 2023 was $436,238, compared to $221,995 for the three months ended June 30, 2022, an increase of $214,243, or 97%. This increase was primarily attributable to increased headcount in line with our expanded operations. Professional Fees Professional fees for the three months ended June 30, 2023 was $158,205, compared to $120,132 for the three months ended June 30, 2022, an increase of $38,073, or 32%. This increase was primarily attributable to increased consulting fees. Depreciation Expense Depreciation expense for the three months ended June 30, 2023 was $55,758, compared to $81 for the three months ended June 30, 2022, an increase of $55,677. The increase was primarily due to depreciation associated with our EnWave 60kW Vacuum Microwave Dehydration and Chiller Machines, which were installed at our contract manufacturer in Peru in the third quarter of 2022. Other Income (Expense) In the three months ended June 30, 2023, other expense was $219,640, consisting of $222,551 of interest expense, as partially offset by $2,911 of interest income. For the three months ended June 30, 2022, other expense was $207,108, consisting of $211,158 of interest expense, as partially offset by $4,050 of interest income. Other expense increased by $12,532, or 6%, primarily due to the increased interest on a greater debt burden in the current period, which was mostly settled in June of 2023. Net loss Net loss for the three months ended June 30, 2023 was $973,510, compared to $880,288 for the three months ended June 30, 2022, an increased net loss of $93,222, or 11%. The increased net loss was primarily due to $214,243 of increased salaries and wages as we expanded our staff during the current period, as partially offset by $155,794 of improved gross profits over the comparative period. 30 Results of Operations for the Six Months Ended June 30, 2023 and 2022 The following table summarizes selected items from the statement of operations for the six months ended June 30, 2023 and 2022, respectively. Six Months Ended June 30, Increase / 2023 2022 (Decrease) Net revenue $ 440,405 $ 543,719 $ (103,314 ) Cost of goods sold 376,862 702,506 (325,644 ) Gross profit (loss) 63,543 (158,787 ) 222,330 Operating expenses: General and administrative 321,931 394,576 (72,645 ) Salaries and benefits 688,048 320,872 367,176 Professional services 302,346 283,435 18,911 Depreciation and amortization 111,581 162 111,419 Total operating expenses 1,423,906 999,045 424,861 Operating loss (1,360,363 ) (1,157,832 ) 202,531 Other income (expense): Interest income 5,756 7,023 (1,267 ) Interest expense (395,996 ) (1,829,446 ) (1,433,450 ) Total other income (expense) (390,240 ) (1,822,423 ) (1,432,183 ) Net loss $ (1,750,603 ) $ (2,980,255 ) $ (1,229,652 ) Net Revenue Our net revenue for the six months ended June 30, 2023 was $440,405, compared to $543,719 for the six months ended June 30, 2022, a decrease of $103,314, or 19%. The decrease in revenue was primarily due to our having had several large purchase orders from Costco in the six months ended June 30, 2022 which were not replicated in the six months ended June 30, 2023. Cost of Goods Sold and Gross Profit (Loss) Our cost of goods sold for the six months ended June 30, 2023 was $376,862, compared to $702,506 for the six months ended June 30, 2022, a decrease of $325,644 or 46%. Cost of goods sold decreased primarily in line with the decrease in our sales for the period and a reduction in our shipping costs, which, in turn, was primarily a result of our transition to bulk shipping arrangements. As a result of the foregoing, we had gross profit of $63,543 for the six months ended June 30, 2023 as compared to a gross loss of $158,787 for the six months ended June 30, 2022. General and Administrative Our general and administrative expense for the six months ended June 30, 2023 was $321,931, compared to $394,576 for the six months ended June 30, 2022, a decrease of $71,509, or 34%. The largest components of our general and administrative expenses are advertising and marketing, travel, and storage, shipping and handling expense. Six Months Ended June 30, 2023 2022 Difference % change Advertising and marketing $ 62,360 $ 196,021 $ (133,661 ) (68 )% Travel $ 29,411 $ 26,598 $ 2,813 11 % Storage, shipping and handling $ 96,798 $ 49,781 $ 47,017 94 % Advertising and marketing expenses decreased for the six months ended June 30, 2023, as compared to the corresponding period in 2022 as we focused our resources on our IPO. Our travel expenses increased in connection with commencing new operations that required travel to Peru during the first quarter of 2023. And, storage, shipping and handling expenses increased primarily due to increased international shipping rates. 31 Salaries and Wages Salaries and wages for the six months ended June 30, 2023 was $688,048, compared to $320,872 for the six months ended June 30, 2022, an increase of $367,176, or 114%. This increase was primarily attributable to increased headcount in line with our expanded operations. Professional Fees Professional fees for the six months ended June 30, 2023 was $302,346, compared to $283,435 for the six months ended June 30, 2022, an increase of $18,911, or 7%. This increase was primarily attributable to increased consulting fees. Depreciation Expense Depreciation expense for the six months ended June 30, 2023 was $111,581, compared to $162 for the six months ended June 30, 2022, an increase of $111,419. The increase was primarily due to depreciation associated with our EnWave 60kW Vacuum Microwave Dehydration and Chiller Machines, which were installed at our contract manufacturer in Peru in the third quarter of 2022. Other Income (Expense) In the six months ended June 30, 2023, other expense was $390,240, consisting of $395,996 of interest expense, as partially offset by $5,756 of interest income. During the comparative six months ended June 30, 2022, other expense was $1,822,423, consisting of $1,829,446 of interest expense, as partially offset by $7,023 of interest income. Other expense decreased by $1,432,183, or 79%, primarily due to the decreased amortization of debt discounts in the current period. Net loss Net loss for the six months ended June 30, 2023 was $1,750,603, compared to $2,980,255 during the six months ended June 30, 2022, a decreased net loss of $1,229,652, or 41%. The decreased net loss was primarily due to $222,330 of improved gross profits and a reduction of $1,433,450 of interest expense related to the amortization of debt discounts in the prior period that were not recognized in the current period, as partially offset by $367,176 of increased salaries and wages as we expanded our headcount during the current period. 32 Liquidity and Capital Resources The following table summarizes our total current assets, liabilities and working capital as of June 30, 2023 and December 31, 2022. June 30, December 31, 2023 2022 Current Assets $ 3,512,513 $ 1,077,973 Current Liabilities $ 634,424 $ 8,369,533 Working Capital $ 2,878,089 $ (7,291,560 ) As of June 30, 2023, we had working capital of $2,878,089. We have incurred net losses since our inception and we anticipate net losses and negative operating cash flows for the near future and we may not be profitable or realize growth in the value of our assets. To date, our primary sources of capital have been cash generated from the sales of our product, common stock sales, and debt financing. As of June 30, 2023, we had cash of $1,588,794, total liabilities of $785,826, and an accumulated deficit of $10,635,434. As of December 31, 2022, we had cash of $312,697, total liabilities of $8,404,033, and an accumulated deficit of $8,884,831. Cash Flow Comparison of the Six Months Ended June 30, 2023 and the Six Months Ended June 30, 2022 The following table sets forth the primary sources and uses of cash for the periods presented below: Six Months Ended June 30, 2023 2022 Net cash used in operating activities $ (2,799,724 ) $ (1,222,201 ) Net cash used in investing activities (10,100 ) (27,090 ) Net cash provided by financing activities 3,850,171 1,743,139 Net change in cash $ 1,040,347 $ 493,848 Net Cash Used in Operating Activities Net cash used in operating activities was $2,799,724 for the six months ended June 30, 2023, compared to $1,222,201 for the six months ended June 30, 2022, an increase of $1,577,523, or 129%. The increase was primarily due to increased inventory purchases and payments on accounts payable from our use of IPO proceeds. Net Cash Used in Investing Activities Net cash used in investing activities was $10,100 for the six months ended June 30, 2023, compared to $27,090 for the six months ended June 30, 2022, a decrease of $16,990, or 63%. This decrease was primarily attributable to decreased property and equipment purchases, as partially offset by advances received on notes receivable in the prior period that were not replicated in the current period. Net Cash Provided by Financing Activities Net cash provided by financing activities was $3,850,171 for the six months ended June 30, 2023, compared to $1,743,139 for the six months ended June 30, 2022, an increase of $2,107,032, or 121%. Our increased cash provided by financing activities was primarily from the net proceeds received in our IPO in the current period, as partially offset by debt repayments. CRITICAL ACCOUNTING POLICIES AND ESTIMATES Our financial results are affected by the selection and application of accounting policies and methods. In the six-month period ended June 30, 2023 there were no changes to the application of critical accounting policies previously disclosed in the Prospectus. 33 CAUTIONARY NOTICE REGARDING FORWARD-LOOKING STATEMENTS This report includes “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). All statements in this report, other than statements of historical fact, are “forward-looking statements” for purposes of these provisions, including any projections of earnings, revenues or other financial items, any statements of the plans and objectives of our management for future operations, any statements concerning proposed new products or services, any statements regarding the integration, development or commercialization of the business or any assets acquired from other parties, any statements regarding future economic conditions or performance, and any statements of assumptions underlying any of the foregoing. In some cases, forward-looking statements can be identified by the use of terminology such as “may,” “will,” “expects,” “plans,” “anticipates,” “intends,” “seeks,” “believes,” “estimates,” “potential,” “forecasts,” “continue,” or other forms of these words or similar words or expressions, or the negative thereof or other comparable terminology. Although we believe that the expectations reflected in the forward-looking statements contained herein are reasonable, there can be no assurance that such expectations or any of the forward-looking statements will prove to be correct, and actual results will likely differ, and could differ materially, from those projected or assumed in the forward-looking statements. Investors are cautioned not to unduly rely on any such forward-looking statements. All subsequent forward-looking statements attributable to us or persons acting on our behalf are expressly qualified in their entirety by these cautionary statements. Our actual results will likely differ, and may differ materially, from anticipated results. Financial estimates are subject to change and are not intended to be relied upon as predictions of future operating results. All forward-looking statements included in this report are made as of the date hereof and are based on information available to us as of such date. We assume no obligation to update any forward-looking statement. If we do update or correct one or more forward-looking statements, investors and others should not conclude that we will make additional updates or corrections. NOTICE REGARDING TRADEMARKS This report includes trademarks, tradenames and service marks that are our property or the property of others. Solely for convenience, such trademarks and tradenames sometimes appear without any “™” or “®” symbol. However, failure to include such symbols is not intended to suggest, in any way, that we will not assert our rights or the rights of any applicable licensor, to these trademarks and tradenames.