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, which housed our large-scale continuous through-put dehydration machine that completed its first production run in the first quarter of 2023. 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. We recently completed the build out of the new facility, which commenced operations in October 2024, and utilizes three large-scale REV machines (a REV 60, REV 100 and REV 120 ) that we recently purchased from EnWave Corporation, as well as, a small REV 10 R&D machine that is being used for product development and customer sample purposes . Using our licensed technology platform, we believe our lines of branded, private-label and industrial ingredient 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. 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. 27 Going Concern Uncertainty As of September 30, 2024, the Company has incurred recurring losses from operations resulting in an accumulated deficit of $16,074,867, with working capital of $702,541. 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, and have recently opened our new facility in Peru, our costs of goods for the three and nine month periods ending September 30, 2024, 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. 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. 28 Results of Operations for the Three Months Ended September 30, 2024 and 2023 The following table summarizes selected items from the statement of operations for the three months ended September 30, 2024 and 2023, respectively. Three Months Ended September 30, Increase / 2024 2023 (Decrease) Net revenue $ 2,181,495 $ 906,996 $ 1,274,499 Cost of goods sold 1,845,155 934,603 910,552 Gross profit 336,340 (27,607 ) 363,947 Operating expenses: General and administrative 560,537 230,459 330,078 Salaries and benefits 309,433 222,764 86,669 Professional services 369,525 218,160 151,365 Total operating expenses 1,239,495 671,383 568,112 Operating loss (903,155 ) (698,990 ) 204,165 Other income (expense): Interest income 2,882 3,001 (119 ) Interest expense (370,532 ) (10,004 ) 360,528 Total other income (expense) (367,650 ) (7,003 ) 360,647 Net loss $ (1,270,805 ) $ (705,993 ) $ 564,812 Net Revenue Our net revenue for the three months ended September 30, 2024 was $2,181,495, compared to $906,996 for the three months ended September 30, 2023, an increase of $1,274,499, or 141%. The increase in revenue was primarily due to increased sales to our largest customer during the three months ended September 30, 2024. Cost of Goods Sold and Gross Profit Our cost of goods sold for the three months ended September 30, 2024 was $1,845,155, compared to $934,603 for the three months ended September 30, 2023, an increase of $910,552, or 97%. Cost of goods sold increased primarily due to increased sales during the three months ended September 30, 2024. As a result of the foregoing, we had gross profit of $336,340, representing gross margins of 15%, for the three months ended September 30, 2024 as compared to a gross loss of $27,607, or negative gross margins of 3%, for the three months ended September 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 September 30, 2024 of $60,614, compared to $55,939 for the three months ended September 30, 2023, an increase of $4,675, or 8%. General and Administrative Our general and administrative expense for the three months ended September 30, 2024 was $560,537, compared to $230,459 for the three months ended September 30, 2023, an increase of $330,078, or 143%. The largest components of our general and administrative expenses are advertising and marketing, rent, travel, commissions, and storage, shipping and handling expense, as shown below. Three Months Ended September 30, 2024 2023 Difference % change Advertising and marketing $ 125,597 $ 43,042 $ 82,555 192 % Rent $ 160,751 $ 20,069 $ 140,682 701 % Travel $ 30,502 $ 12,121 $ 18,381 152 % Commissions $ 24,910 $ 63,723 $ (38,813 ) (61 )% Storage, shipping and handling $ 118,252 $ 51,485 $ 66,767 130 % Advertising and marketing expenses increased for the three months ended September 30, 2024, compared to the corresponding period in 2023, as we focused our resources on our IPO in the prior period. Our rent increased primarily due to leases entered into in the current year, as we began to develop our operating facility in Peru, which resulted in increased travel expenses for the same reason. Sales commissions decreased as we focused most of our resources on servicing our largest customer. We expect commissions to increase as we grow. Storage, shipping and handling expenses increased primarily due to increased international shipping rates and increased production that was driven by our increased sales. 29 Salaries and Wages Salaries and wages for the three months ended September 30, 2024 was $309,433, compared to $222,764 for the three months ended September 30, 2023, an increase of $86,669, or 39%. This increase was primarily attributable to an increased head count necessary to service our expanded sales and build out of our production facility in Peru. In addition, salaries and wages included $14,565 of non-cash, stock-based compensation related to stock options awarded during the current period. Professional Fees Professional fees for the three months ended September 30, 2024 was $369,525, compared to $218,160 for the three months ended September 30, 2023, an increase of $151,365, or 69%. This increase was primarily attributable to increased legal and consulting fees in the current period. Professional fees included $110,897 of non-cash, stock-based compensation for the three months ended September 30, 2023. Other Income (Expense) In the three months ended September 30, 2024, other expense was $367,650 on a net basis, consisting of $370,532 of interest expense, as partially offset by $2,882 of interest income. For 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. Other expense increased by $360,647, or 5,150%, primarily due to interest on increased outstanding debt as we funded our expansion into Peru during the current period. Net loss Net loss for the three months ended September 30, 2024 was $1,270,805, compared to $705,993 for the three months ended September 30, 2023, an increase of $564,812, or 80%. The increased net loss was primarily due to increased compensation and compliance costs related to reporting as a public company during the current period and increased interest expense, as partially offset by increased gross profits and a $96,332 decrease in stock-based compensation. Results of Operations for the Nine Months Ended September 30, 2024 and 2023 The following table summarizes selected items from the statement of operations for the nine months ended September 30, 2024 and 2023, respectively. Nine Months Ended September 30, Increase / 2024 2023 (Decrease) Net revenue $ 5,011,497 $ 1,347,401 $ 3,664,096 Cost of goods sold 4,242,810 1,423,046 2,819,764 Gross profit 768,687 (75,645 ) 844,332 Operating expenses: General and administrative 1,201,474 552,390 649,084 Salaries and benefits 1,257,316 910,812 346,504 Professional services 1,064,567 520,506 544,061 Total operating expenses 3,523,357 1,983,708 1,539,649 Operating loss (2,754,670 ) (2,059,353 ) 695,317 Other income (expense): Interest income 8,577 8,757 (180 ) Interest expense (518,233 ) (406,000 ) 112,233 Total other income (expense) (509,656 ) (397,243 ) 112,413 Net loss $ (3,264,326 ) $ (2,456,596 ) $ 807,730 30 Net Revenue Our net revenue for the nine months ended September 30, 2024 was $5,011,497, compared to $1,347,401 for the nine months ended September 30, 2023, an increase of $3,664,096, or 272%. The increase in revenue was primarily due to increased sales to our largest customer during the nine months ended September 30, 2024. Cost of Goods Sold and Gross Profit Our cost of goods sold for the nine months ended September 30, 2024 was $4,242,810, compared to $1,423,046 for the nine months ended September 30, 2023, an increase of $2,819,764, or 198%. Cost of goods sold increased primarily due to increased sales during the nine months ended September 30, 2024. As a result of the foregoing, we had gross profit of $768,687, representing gross margins of 15%, for the nine months ended September 30, 2024 as compared to a gross loss of $75,645, or negative gross margins of 6%, for the nine months ended September 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 nine months ended September 30, 2024 of $173,285, compared to $167,520 for the nine months ended September 30, 2023, an increase of $5,765, or 3%. General and Administrative Our general and administrative expense for the nine months ended September 30, 2024 was $1,201,474, compared to $552,390 for the nine months ended September 30, 2023, an increase of $649,084, or 118%. The largest components of our general and administrative expenses are advertising and marketing, rent, travel, commissions, and storage, shipping and handling expense, as shown below. Nine Months Ended September 30, 2024 2023 Difference % change Advertising and marketing $ 223,801 $ 105,402 $ 118,399 112 % Rent $ 160,751 $ 20,069 $ 140,682 701 % Travel $ 99,132 $ 41,532 $ 57,600 139 % Commissions $ 139,049 $ 124,488 $ 14,561 12 % Storage, shipping and handling $ 311,073 $ 153,099 $ 157,974 103 % Advertising and marketing expenses increased for the nine months ended September 30, 2024, compared to the corresponding period in 2023, as we focused our resources on our IPO in the prior period. Our rent increased primarily due to leases entered into in the current year, as we began to develop our operating facility in Peru, which resulted in increased travel expenses for the same reason. Commissions increased due to our increased sales, and storage, shipping and handling expenses increased primarily due to increased international shipping rates and increased production that was driven by our increased sales. Salaries and Wages Salaries and wages for the nine months ended September 30, 2024 was $1,257,316, compared to $910,812 for the nine months ended September 30, 2023, an increase of $346,504, or 38%. This increase was primarily attributable to $408,700 of non-cash, stock-based compensation related to stock options awarded during the current period. Professional Fees Professional fees for the nine months ended September 30, 2024 was $1,064,567, compared to $520,506 for the nine months ended September 30, 2023, an increase of $544,061, or 105%. 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 $290,085 and $179,389 of non-cash, stock-based compensation for the nine months ended September 30, 2024 and 2023, respectively. Other Income (Expense) In the nine months ended September 30, 2024, other expense was $509,656 on a net basis, consisting of $518,233 of interest expense, as partially offset by $8,577 of interest income. For the nine months ended September 30, 2023, other expense was $397,243 on a net basis, consisting of $406,000 of interest expense, as partially offset by $8,757 of interest income. Other expense decreased by $112,413, or 28%, primarily due to interest on increased outstanding debt as we funded our expansion into Peru during the current period. Net loss Net loss for the nine months ended September 30, 2024 was $3,264,326, compared to $2,456,596 for the nine months ended September 30, 2023, an increase of $807,730, or 33%. The increased net loss was primarily due to increased compensation and compliance costs related to reporting as a public company, including a $519,396 increase in stock-based compensation during the current period and increased interest expense, as partially offset by increased gross profits. Liquidity and Capital Resources The following table summarizes our total current assets, liabilities and working capital as of September 30, 2024 and December 31, 2023. September 30, December 31, 2024 2023 Current Assets $ 3,341,293 $ 1,678,243 Current Liabilities $ 2,638,752 $ 779,093 Working Capital $ 702,541 $ 899,150 As of September 30, 2024, we had working capital of $702,541. 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 and equity financing. As of September 30, 2024, we had cash of $1,069,193, total liabilities of $8,042,725, and an accumulated deficit of $16,074,867. As of December 31, 2023, we had cash of $657,789, total liabilities of $914,622, and an accumulated deficit of $12,810,541. 31 Cash Flow Comparison of the Nine Months Ended September 30, 2024 and the Nine Months Ended September 30, 2023 The following table sets forth the primary sources and uses of cash for the periods presented below: Nine Months Ended September 30, 2024 2023 Net cash used in operating activities $ (3,259,049 ) $ (3,258,248 ) Net cash used in investing activities (2,095,691 ) (66,565 ) Net cash provided by financing activities 5,767,938 3,784,850 Effect of exchange rate changes on cash (1,794 ) - Net change in cash $ 411,404 $ 460,037 Net Cash Used in Operating Activities Net cash used in operating activities was $3,259,049 for the nine months ended September 30, 2024, compared to $3,258,248 for the nine months ended September 30, 2023, an increase of $801. The increase was primarily due to our increased net loss and increased inventory purchases, as adjusted for increased stock-based compensation, increased accounts payable, and a $275,000 payment for other assets. Net Cash Used in Investing Activities Net cash used in investing activities was $2,095,691 for the nine months ended September 30, 2024, compared to $66,565 for the nine months ended September 30, 2023, an increase of $2,029,126, or 3,048%. This increase was primarily attributable to $2,120,337 of property and equipment purchases, as partially offset by $24,646 of advances received on notes receivable in the current period, compared to $66,565 of property and equipment purchases in the comparative period. Net Cash Provided by Financing Activities Net cash provided by financing activities was $5,767,938 for the nine months ended September 30, 2024, compared to $3,784,850 for the nine months ended September 30, 2023, an increase of $1,983,088, or 52%. Our increased cash provided by financing activities was primarily from $3,703,710 of increased net proceeds received on debt financing, $2,071,439 of decreased debt repayments, $326,975 of decreased deferred offering cost payments, and $3,964 of decreased principal payments on finance leases, as partially offset by $4,123,000 of decreased proceeds received on the sale of common stock. CRITICAL ACCOUNTING POLICIES AND ESTIMATES Our financial results are affected by the selection and application of accounting policies and methods. In the nine-month period ended September 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. 32 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.