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 Annual Report on Form 10-K for the year ended December 31, 2023. 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. 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. We are engaged in the development, marketing, sale, and distribution of plant-based, dehydrated fruit and vegetable snacks and powders. Our products have historically been 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. Our dehydrated fruit and vegetable products are produced using a new proprietary dehydration technology licensed by us from a third party. Our customers are primarily located throughout the United States. In 2024, we decided to initiate our own production facility in Peru to become vertically integrated. Our new factory is currently being built out and expected to be online and operational by October 2024. We have two large-scale REV machines on order from Enwave Corporation, a REV 100 and REV 120 machine. Both are currently in transit to the Peru facility. We also purchased a small REV 10 R&D machine that is also being delivered to Peru for installation into our new facility. In addition, we expect to move the REV 60 machine that is installed at our prior leased facility to our new facility in the near term . Using our licensed technology platform, we believe our lines of both branded and private-labeled food products positively address 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 fruits, such as avocados and bananas, have not previously been successfully offered as a dehydrated base for consumer products. We believe that our 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 when compared to conventional drying and dehydration technologies. We license technology, consisting of a portfolio of patents, and purchased production machines, from Enwave, and we have been granted the exclusive rights to use the licensed technology platform as applied to avocados. In addition, BranchOut has the nonexclusive rights to use the licensed technology platform for other products. We entered into a private labeling contract with one of the world’s largest retailers in late 2022 to supply the retailer with two products for placement in half of their domestic stores. In April 2023, the same retailer agreed to carry two additional products of ours in certain of their stores. In April 2024, we received a commitment from this retailer to carry another product of ours in their stores. Based on this most recent commitment, we anticipate that our products will be carried in a total of 1,400 of this retailer’s stores in September 2024, which will increase the total annualized revenues that we may generate from this retailer to $8 million. Our Products We plan 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. Our current primary branded products are: ● BranchOut Snacks: dehydrated fruit and vegetable-based snacks, including Avocado Chips, Chewy Banana Bites, Pineapple Chips, Brussels 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. We are currently developing additional products, including dragon fruit and private label products for large retailers. Going Concern Uncertainty As of June 30, 2024, the Company has incurred recurring losses from operations resulting in an accumulated deficit of $14,804,062, with working capital of $1,302,986. We are too early in our development stage to project revenue with a necessary level of certainty; therefore, we may not have sufficient funds to sustain our operations for the next twelve months and we may need to raise additional cash to fund our operations. These factors raise substantial doubt about our ability to continue as a going concern. The Company continues to develop its operations. In the event sales do not materialize at the expected rates, management would seek additional financing or would attempt to conserve cash by further reducing expenses. There can be no assurance that we will be successful in achieving these objectives. The condensed consolidated 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 consolidated 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. Access to our Equipment in Peru; NXTDried Superfoods During the fourth quarter of 2023, NXTDried Superfoods, our contract manufacturer located in Peru, became involved in a legal dispute with its landlord and another third party, which resulted in that manufacturer suspending operations. As a result of such dispute, we currently do not have access to the dehydration machine that was previously operated by this manufacturer. Although we have been able to continue to fulfill orders by shifting fulfillment to other manufacturing sources, our costs of goods have increased as a result. In addition, during 2023, we recognized $761,085 of impairment expense, consisting of $485,265, $243,305 and $32,515 on the collectability of a note receivable, VAT taxes receivable and prepaid inventory, respectively , owed to us by NXTDried Superfoods. Peru Facility Lease Given the situation with NXTDried Superfoods, we were required to shift fulfillment of orders to alternative manufacturing sources. On May 10, 2024 we entered into a ten-year lease for a 50,000 square-foot food processing plant located in Peru. We expect to relocate our dehydration machine to the Peru Facility along with a new large-scale machine we recently ordered form Enwave, and resume our Peruvian manufacturing operations there in the third quarter of 2024. The lease of the Peru Facility requires us to make monthly lease payments of $8,000 in the first two years of the lease, $20,000 in the third year of the lease, $22,000 in the fourth year of the lease, $24,000 in the fourth year of the lease, and $25,000 thereafter. The lease also has a 10-year renewal option, and a buy-out option under which we may purchase the Peru Facility for $1,865,456. In connection with our lease of the Peru Facility, we paid $275,000 on May 10, 2024, toward the purchase of a first position mortgage receivable in the amount of $1,267,000, which is secured by the Peru Facility and was owed by the landlord of the Peru Facility to its former tenant, for a purchase price of $1,267,000. The remaining $992,000 was due and payable by us on August 10, 2024, subject to certain requirements which haven’t yet been met, therefore the Company has deferred payment until a later date, to be determined. 23 Results of Operations for the Three Months Ended June 30, 2024 and 2023 The following table summarizes selected items from the statement of operations for the three months ended June 30, 2024 and 2023, respectively. Three Months Ended June 30, Increase / 2024 2023 (Decrease) Net revenue $ 1,362,986 $ 343,065 $ 1,019,921 Cost of goods sold 1,214,227 361,461 852,766 Gross profit 148,759 (18,396 ) 167,155 Operating expenses: General and administrative 321,201 141,031 180,170 Salaries and benefits 349,597 436,238 (86,641 ) Professional services 304,376 158,205 146,171 Total operating expenses 975,174 735,474 239,700 Operating loss (826,415 ) (753,870 ) 72,545 Other income (expense): Interest income 2,818 2,911 (93 ) Interest expense (118,957 ) (222,551 ) (103,594 ) Total other income (expense) (116,139 ) (219,640 ) (103,501 ) Net loss $ (942,554 ) $ (973,510 ) $ (30,956 ) Net Revenue Our net revenue for the three months ended June 30, 2024 was $1,362,986, compared to $343,065 for the three months ended June 30, 2023, an increase of $1,019,921, or 297%. The increase in revenue was primarily due to increased sales to our largest customer during the three months ended June 30, 2024. Cost of Goods Sold and Gross Profit Our cost of goods sold for the three months ended June 30, 2024 was $1,214,227, compared to $361,461 for the three months ended June 30, 2023, an increase of $852,766, or 236%. Cost of goods sold increased primarily due to increased sales during the three months ended June 30, 2024. As a result of the foregoing, we had gross profit of $148,759, representing gross margins of 11%, for the three months ended June 30, 2024 as compared to a gross loss of $18,396, or negative gross margins of 5%, for the three months ended June 30, 2023. 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. Cost of goods sold included depreciation expense for the three months ended June 30, 2024 of $56,335, compared to $55,758 for the three months ended June 30, 2023, an increase of $577, or 1%. General and Administrative Our general and administrative expense for the three months ended June 30, 2024 was $321,201, compared to $141,031 for the three months ended June 30, 2023, an increase of $180,170, or 128%. The largest components of our general and administrative expenses are advertising and marketing, travel, commissions, and storage, shipping and handling expense, as shown below. Three Months Ended June 30, 2024 2023 Difference % change Advertising and marketing $ 41,145 $ 25,691 $ 15,454 60 % Travel $ 27,220 $ 4,471 $ 22,749 509 % Storage, shipping and handling $ 88,384 $ 78,724 $ 9,660 12 % Commissions $ 47,625 $ 35,500 $ 12,125 34 % Advertising and marketing expenses increased for the three months ended June 30, 2024, compared to the corresponding period in 2023, as we focused our resources on our IPO in the prior period. Our travel expenses increased for the same reason, as we resumed our international travel after the IPO that was completed in the prior year. Storage, shipping and handling expenses increased primarily due to increased international shipping rates and increased production that was driven by our increased sales. Likewise, commissions increased due to our increased sales. Salaries and Wages Salaries and wages for the three months ended June 30, 2024 was $349,597, compared to $436,238 for the three months ended June 30, 2023, a decrease of $86,641, or 20%. This decrease was primarily attributable to bonuses awarded in the comparative period that were not recognized in the current period. In addition, salaries and wages included $17,751 of non-cash, stock-based compensation related to stock options awarded during the current period. Professional Fees Professional fees for the three months ended June 30, 2024 was $304,376, compared to $158,205 for the three months ended June 30, 2023, an increase of $146,171, or 92%. This increase was primarily attributable to increased legal and consulting fees in the current period, as a portion of these fees were capitalized as offering costs on our IPO in the comparative period. Professional fees included $140,491 and $18,046 of non-cash, stock-based compensation for the three months ended June 30, 2024 and 2023, respectively. Other Income (Expense) In the three months ended June 30, 2024, other expense was $116,139 on a net basis, consisting of $118,957 of interest expense, as partially offset by $2,818 of interest income. For the three months ended June 30, 2023, other expense was $219,640 on a net basis, consisting of $222,551 of interest expense, as partially offset by $2,911 of interest income. Other expense decreased by $103,501, or 47%, 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 June 30, 2024 was $942,554, compared to $973,510 for the three months ended June 30, 2023, a decrease of $30,956, or 3%. The decreased net loss was primarily due to increased gross profit and decreased interest on debt, as partially offset by increased non-cash, stock-based compensation costs and compliance costs related to reporting as a public company. 24 Results of Operations for the Six Months Ended June 30, 2024 and 2023 The following table summarizes selected items from the statement of operations for the six months ended June 30, 2024 and 2023, respectively. Six Months Ended June 30, Increase / 2024 2023 (Decrease) Net revenue $ 2,830,002 $ 440,405 $ 2,389,597 Cost of goods sold 2,397,655 488,443 1,909,212 Gross profit 432,347 (48,038 ) 480,385 Operating expenses: General and administrative 640,937 321,931 319,006 Salaries and benefits 947,883 688,048 259,835 Professional services 695,042 302,346 392,696 Total operating expenses 2,283,862 1,312,325 971,537 Operating loss (1,851,515 ) (1,360,363 ) 491,152 Other income (expense): Interest income 5,695 5,756 (61 ) Interest expense (147,701 ) (395,996 ) (248,295 ) Total other income (expense) (142,006 ) (390,240 ) (248,234 ) Net loss $ (1,993,521 ) $ (1,750,603 ) $ 242,918 Net Revenue Our net revenue for the six months ended June 30, 2024 was $2,830,002, compared to $440,405 for the six months ended June 30, 2023, an increase of $2,389,597, or 543%. The increase in revenue was primarily due to increased sales to our largest customer during the six months ended June 30, 2024. Cost of Goods Sold and Gross Profit Our cost of goods sold for the six months ended June 30, 2024 was $2,397,655, compared to $488,443 for the six months ended June 30, 2023, an increase of $1,909,212, or 391%. Cost of goods sold increased primarily due to increased sales during the six months ended June 30, 2024. As a result of the foregoing, we had gross profit of $432,347, representing gross margins of 15%, for the six months ended June 30, 2024 as compared to a gross loss of $48,038, or negative gross margins of 11%, for the six months ended June 30, 2023. 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. Cost of goods sold included depreciation expense for the six months ended June 30, 2024 of $112,671, compared to $111,581 for the six months ended June 30, 2023, an increase of $1,091, or 1%. General and Administrative Our general and administrative expense for the six months ended June 30, 2024 was $640,937, compared to $321,931 for the six months ended June 30, 2023, an increase of $319,006, or 99%. The largest components of our general and administrative expenses are advertising and marketing, travel, commissions, and storage, shipping and handling expense, as shown below. Six Months Ended June 30, 2024 2023 Difference % change Advertising and marketing $ 98,204 $ 62,360 $ 35,844 57 % Travel $ 68,630 $ 29,411 $ 39,219 133 % Storage, shipping and handling $ 192,821 $ 101,614 $ 91,207 90 % Commissions $ 114,139 $ 60,765 $ 53,374 88 % Advertising and marketing expenses increased for the six months ended June 30, 2024, compared to the corresponding period in 2023, as we focused our resources on our IPO in the prior period. Our travel expenses increased for the same reason, as we resumed our international travel after the IPO that was completed in the prior year. Storage, shipping and handling expenses increased primarily due to increased international shipping rates and increased production that was driven by our increased sales. Likewise, commissions increased due to our increased sales. 25 Salaries and Wages Salaries and wages for the six months ended June 30, 2024 was $947,883, compared to $688,048 for the six months ended June 30, 2023, an increase of $259,835, or 38%. This increase was primarily attributable to $394,135 of non-cash, stock-based compensation related to stock options awarded during the current period. Professional Fees Professional fees for the six months ended June 30, 2024 was $695,042, compared to $302,346 for the six months ended June 30, 2023, an increase of $392,696, or 130%. This increase was primarily attributable to increased legal and consulting fees in the current period, as a portion of these fees were capitalized as offering costs on our IPO in the comparative period. Professional fees included $290,85 and $68,492 of non-cash, stock-based compensation for the six months ended June 30, 2024 and 2023, respectively. Other Income (Expense) In the six months ended June 30, 2024, other expense was $142,006 on a net basis, consisting of $147,701 of interest expense, as partially offset by $5,695 of interest income. For the six months ended June 30, 2023, other expense was $390,240 on a net basis, consisting of $395,996 of interest expense, as partially offset by $5,756 of interest income. Other expense decreased by $248,234, or 64%, primarily due to the decreased interest on debt which was mostly settled in June of 2023. Net loss Net loss for the six months ended June 30, 2024 was $1,993,521, compared to $1,750,603 for the six months ended June 30, 2023, an increase of $242,918, or 14%. The increased net loss was primarily due to increased non-cash, stock-based compensation costs, and compliance costs related to reporting as a public company, as partially offset by increased gross profits and decreased interest on debt which was mostly settled in the prior year. Liquidity and Capital Resources The following table summarizes our total current assets, liabilities and working capital as of June 30, 2024 and December 31, 2023. June 30, December 31, 2024 2023 Current Assets $ 2,585,907 $ 1,678,243 Current Liabilities $ 1,282,921 $ 779,093 Working Capital $ 1,302,986 $ 899,150 As of June 30, 2024, we had working capital of $1,302,986. 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 June 30, 2024, we had cash of $936,061, total liabilities of $4,672,312, and an accumulated deficit of $14,804,062. As of December 31, 2023, we had cash of $657,789, total liabilities of $914,622, and an accumulated deficit of $12,810,541. 26 Cash Flow Comparison of the Six Months Ended June 30, 2024 and the Six Months Ended June 30, 2023 The following table sets forth the primary sources and uses of cash for the periods presented below: Six Months Ended June 30, 2024 2023 Net cash used in operating activities $ (1,357,463 ) $ (2,799,724 ) Net cash used in investing activities (566,431 ) (10,100 ) Net cash provided by financing activities 2,202,108 3,850,171 Effect of exchange rate changes on cash 58 - Net change in cash $ 278,272 $ 1,040,347 Net Cash Used in Operating Activities Net cash used in operating activities was $1,357,463 for the six months ended June 30, 2024, compared to $2,799,724 for the six months ended June 30, 2023, a decrease of $1,442,261, or 52%. The decrease was primarily due to our increased stock-based compensation, accounts receivable, and accounts payable, as partially offset by the $275,000 payment for other assets. Net Cash Used in Investing Activities Net cash used in investing activities was $566,431 for the six months ended June 30, 2024, compared to $10,100 for the six months ended June 30, 2023, an increase of $556,331, or 5,508%. This increase was primarily attributable to $576,331 of property and equipment purchases, as partially offset by $9,900 of advances received on notes receivable in the current period, compared to $10,100 of property and equipment purchases in the comparative period. Net Cash Provided by Financing Activities Net cash provided by financing activities was $2,202,108 for the six months ended June 30, 2024, compared to $3,850,171 for the six months ended June 30, 2023, a decrease of $1,648,063, or 43%. Our decreased cash provided by financing activities was primarily from $4,826,000 of decreased proceeds received on the sale of common stock and $10,779 of increased principal payments on finance leases, as partially offset by $578,710 of increased net proceeds received on debt financing, $2,268,791 fewer debt repayments, and $341,215 of decreased deferred offering cost payments in the prior period. 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, 2024 there were no changes to the application of critical accounting policies disclosed in our Annual Report on Form 10-K for the year ended December 31, 2023. 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.