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, and on November 2, 2017, we converted into Avochips, LLC, an Oregon limited liability company. On November 19, 2021, we converted from an Oregon limited liability company into BranchOut Food Inc., a Nevada corporation. 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. Our products are currently manufactured for us by two contract manufacturers, one based in the Republic of Chile, and the other in the Republic of Peru. The manufacturing facility in Peru houses our new large-scale continuous through-put dehydration machine that completed its first production run in the first quarter of 2023, and which substantially increased our production capacity. Both facilities produce dehydrated fruit and vegetable products for BranchOut using a new proprietary dehydration technology licensed by us from a third party. 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 for the manufacture 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 licenses to 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 total addressable market (“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 Results of Operations for the Three Months Ended September 30, 2023 and 2022 The following table summarizes selected items from the statement of operations for the three months ended September 30, 2023 and 2022, respectively. Three Months Ended September 30, Increase / 2023 2022 (Decrease) Net revenue $ 906,996 $ 181,930 $ 725,066 Cost of goods sold 878,664 172,830 705,834 Gross profit 28,332 9,100 19,232 Operating expenses: General and administrative 230,459 351,110 (120,651 ) Salaries and benefits 222,764 110,091 112,673 Professional services 218,160 112,519 105,641 Depreciation and amortization 55,939 37,252 18,687 Total operating expenses 727,322 610,972 116,350 Operating loss (698,990 ) (601,872 ) 97,118 Other income (expense): Interest income 3,001 2,937 64 Interest expense (10,004 ) (217,346 ) (207,342 ) Total other income (expense) (7,003 ) (214,409 ) (207,406 ) Net loss $ (705,993 ) $ (816,281 ) $ (110,288 ) Net Revenue Our net revenue for the three months ended September 30, 2023 was $906,996, compared to $181,930 for the three months ended September 30, 2022, an increase of $725,066, or 399%. The increase in revenue was primarily due to increased sales to big box retailers during the three months ended September 30, 2023. Cost of Goods Sold and Gross Profit Our cost of goods sold for the three months ended September 30, 2023 was $878,664, compared to $172,830 for the three months ended September 30, 2022, an increase of $705,834 or 408%. Cost of goods sold increased primarily due to increased costs associated with our increased sales to big box retailers during the three months ended September 30, 2023. As a result of the foregoing, we had gross profit of $28,332, or 3%, for the three months ended September 30, 2023 as compared to a gross profit of $9,100, or 5%, for the three months ended September 30, 2022. Our gross profit margin decreased slightly due to increased product costs incurred during the current period. General and Administrative Our general and administrative expense for the three months ended September 30, 2023 was $230,459, compared to $351,110 for the three months ended September 30, 2022, a decrease of $120,651 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 September 30, 2023 2022 Difference % change Advertising and marketing $ 43,042 $ 77,934 $ (34,892 ) (45 )% Travel $ 12,121 $ 14,705 $ (2,584 ) (18 )% Storage, shipping and handling $ 56,301 $ 33,726 $ 22,575 77 % Advertising and marketing expenses decreased for the three months ended September 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. 27 Salaries and Wages Salaries and wages for the three months ended September 30, 2023 was $222,764, compared to $110,091 for the three months ended September 30, 2022, an increase of $112,673, or 102%. This increase was primarily attributable to increased headcount in line with our expanded operations. Professional Fees Professional fees for the three months ended September 30, 2023 was $218,160, compared to $112,519 for the three months ended September 30, 2022, an increase of $105,641, or 94%. This increase was primarily attributable to increased consulting fees. Depreciation Expense Depreciation expense for the three months ended September 30, 2023 was $55,939, compared to $37,252 for the three months ended September 30, 2022, an increase of $18,687, or 50%. 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 September 30, 2023, other expense was $7,003 on a net basis, consisting of $10,004 of interest expense, as partially offset by $3,001 of interest income. For the three months ended September 30, 2022, other expense was $214,409 on a net basis, consisting of $217,346 of interest expense, as partially offset by $2,937 of interest income. Other expense decreased by $207,406, or 97%, primarily due to the decreased interest on debt which was mostly settled in June of 2023. Net loss Net loss for the three months ended September 30, 2023 was $705,993, compared to $816,281 for the three months ended September 30, 2022, a decreased net loss of $110,288, or 14%. The decreased net loss was primarily due to $207,342 of decreased interest expense on debt that was mostly settled in June of 2023, as partially offset by $112,673 of increased salaries and wages as we expanded our staff during the current period. 28 Results of Operations for the Nine Months Ended September 30, 2023 and 2022 The following table summarizes selected items from the statement of operations for the nine months ended September 30, 2023 and 2022, respectively. Nine Months Ended September 30, Increase / 2023 2022 (Decrease) Net revenue $ 1,347,401 $ 725,649 $ 621,752 Cost of goods sold 1,255,526 875,336 380,190 Gross profit (loss) 91,875 (149,687 ) 241,562 Operating expenses: General and administrative 552,390 745,686 (193,296 ) Salaries and benefits 910,812 430,963 479,849 Professional services 520,506 395,954 124,552 Depreciation and amortization 167,520 37,414 130,106 Total operating expenses 2,151,228 1,610,017 541,211 Operating loss (2,059,353 ) (1,759,704 ) 299,649 Other income (expense): Interest income 8,757 9,960 (1,203 ) Interest expense (406,000 ) (2,046,792 ) (1,640,792 ) Total other income (expense) (397,243 ) (2,036,832 ) (1,639,589 ) Net loss $ (2,456,596 ) $ (3,796,536 ) $ (1,339,940 ) Net Revenue Our net revenue for the nine months ended September 30, 2023 was $1,347,401, compared to $725,649 for the nine months ended September 30, 2022, an increase of $621,752, or 86%. The increase in revenue was primarily due to increased sales to big box retailers during the nine months ended September 30, 2023. Cost of Goods Sold and Gross Profit (Loss) Our cost of goods sold for the nine months ended September 30, 2023 was $1,255,526, compared to $875,336 for the nine months ended September 30, 2022, an increase of $380,190 or 43%. Cost of goods sold increased primarily in line with the increase 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 $91,875, or 7%, for the nine months ended September 30, 2023, as compared to a gross loss of $149,687, or (21%), for the nine months ended September 30, 2022. Our gross profit margin increased primarily due to cost savings realized as a result of our transition to bulk shipping arrangements during the current period. General and Administrative Our general and administrative expense for the nine months ended September 30, 2023 was $552,390, compared to $745,686 for the nine months ended September 30, 2022, a decrease of $193,296, or 26%. The largest components of our general and administrative expenses are advertising and marketing, travel, and storage, shipping and handling expense. Nine Months Ended September 30, 2023 2022 Difference % change Advertising and marketing $ 105,402 $ 273,955 $ (168,553 ) (62 )% Travel $ 41,532 $ 41,303 $ 229 1 % Storage, shipping and handling $ 153,099 $ 83,507 $ 69,592 83 % Advertising and marketing expenses decreased for the nine months ended September 30, 2023, as compared to the corresponding period in 2022 as we focused our resources on our IPO. Our travel expenses increased minimally, and storage, shipping and handling expenses increased primarily due to increased international shipping rates. 29 Salaries and Wages Salaries and wages for the nine months ended September 30, 2023 was $910,812, compared to $430,963 for the nine months ended September 30, 2022, an increase of $479,849, or 111%. This increase was primarily attributable to increased headcount in line with our expanded operations. Professional Fees Professional fees for the nine months ended September 30, 2023 was $520,506, compared to $395,954 for the nine months ended September 30, 2022, an increase of $124,552, or 31%. This increase was primarily attributable to increased consulting fees. Depreciation Expense Depreciation expense for the nine months ended September 30, 2023 was $167,520, compared to $37,414 for the nine months ended September 30, 2022, an increase of $130,106, or 348%. 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 nine months ended September 30, 2023, other expense was $397,243, consisting of $406,000 of interest expense, as partially offset by $8,757 of interest income. During the comparative nine months ended September 30, 2022, other expense was $2,036,832, consisting of $2,046,792 of interest expense, as partially offset by $9,960 of interest income. Other expense decreased by $1,639,589, or 80%, primarily due to the decreased amortization of debt discounts and reductions in interest expense on debt which was mostly settled in June of 2023. Net loss Net loss for the nine months ended September 30, 2023 was $2,456,596, compared to $3,796,536 during the nine months ended September 30, 2022, a decreased net loss of $1,339,940, or 35%. The decreased net loss was primarily due to $241,562 of improved gross profits and a reduction of $1,640,792 of interest expense related to the amortization of debt discounts in the prior period that were not recognized in the current period and reductions in interest expense on debt which was mostly settled in June of 2023, as partially offset by $479,849 of increased salaries and wages as we expanded our headcount during the current period. 30 Liquidity and Capital Resources The following table summarizes our total current assets, liabilities and working capital as of September 30, 2023 and December 31, 2022. September 30, December 31, 2023 2022 Current Assets $ 2,893,334 $ 1,077,973 Current Liabilities $ 613,507 $ 8,369,533 Working Capital $ 2,279,827 $ (7,291,560 ) As of September 30, 2023, we had working capital of $2,279,827. 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 products, common stock sales, and debt financing. As of September 30, 2023, we had cash of $1,008,484, total liabilities of $757,082, and an accumulated deficit of $11,341,427. 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 Nine Months Ended September 30, 2023 and the Nine Months Ended September 30, 2022 The following table sets forth the primary sources and uses of cash for the periods presented below: Nine Months Ended September 30, 2023 2022 Net cash used in operating activities $ (3,258,248 ) $ (2,013,591 ) Net cash used in investing activities (66,565 ) (22,436 ) Net cash provided by financing activities 3,784,850 1,652,220 Net change in cash $ 460,037 $ (383,807 ) Net Cash Used in Operating Activities Net cash used in operating activities was $3,258,248 for the nine months ended September 30, 2023, compared to $2,013,591 for the nine months ended September 30, 2022, an increase of $1,244,657, or 62%. The increase was primarily due to increased accounts receivable, 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 $66,565 for the nine months ended September 30, 2023, compared to $22,436 for the nine months ended September 30, 2022, a decrease of $44,129, or 197%. 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 $3,784,850 for the nine months ended September 30, 2023, compared to $1,652,220 for the nine months ended September 30, 2022, an increase of $2,132,630, or 129%. 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. ABILITY TO CONTINUE AS A GOING CONCERN As of September 30, 2023, the Company has incurred recurring losses from operations resulting in an accumulated deficit of $11,341,427, with working capital of only $2,279,827. We are too early in our development stage to project future revenue levels, and may not be able to generate sufficient funds to sustain our operations for the next twelve months. Accordingly, we may need to raise additional cash to fund our operations. These factors raise substantial doubt about the Company’s ability to continue as a going concern. In the event sales do not materialize at the expected rates, management would seek additional financing and would attempt to conserve cash by further reducing expenses. There can be no assurance that we will be successful in achieving these objectives; therefore, without sufficient financing it would be unlikely for the Company to continue as a going concern. The condensed financial statements do not include any adjustments that might result from the outcome of any uncertainty as to the Company’s ability to continue as a going concern. The condensed financial statements also do not include any adjustments relating to the recoverability and classification of recorded asset amounts, or amounts and classifications of liabilities that might be necessary should the Company be unable to continue as a going concern. Our ability to scale production and distribution capabilities and further increase the value of our brands, is largely dependent on our success in raising additional capital. CRITICAL ACCOUNTING POLICIES AND ESTIMATES Our financial results are affected by the selection and application of accounting policies and methods. In the three-month period ended September 30, 2023 there were no changes to the application of critical accounting policies previously disclosed in the Prospectus. 31 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. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The Company is not required to provide the information required by this Item as it is a “smaller reporting company,” as defined in Rule 12b-2 of the Exchange Act.