BranchOut Food Inc. 10-K

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS This discussion summarizes the significant factors affecting the Company’s results of operations, financial condition, liquidity, and cash flows for the fiscal years ended December 31, 2025 and 2024. The following discussion and analysis should be read in conjunction with the section entitled “Forward-Looking Statements” and the Company’s consolidated financial statements and related notes included elsewhere in this Annual Report on Form 10-K. This section contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Except for statements of historical fact, all statements regarding the Company’s expected future financial position, results of operations, cash flows, liquidity, business strategy, and plans and objectives of management are forward-looking statements. These statements are based on current expectations and assumptions that are subject to risks, uncertainties, and other factors, many of which are beyond the Company’s control, that could cause actual results to differ materially from those expressed or implied in the forward-looking statements. Readers are urged to carefully review and consider the disclosures set forth in this Annual Report on Form 10-K, including the risk factors and other cautionary statements, when evaluating these forward-looking statements. Business Overview BranchOut Food Inc. (collectively with its subsidiary, “BranchOut,” the “Company,” “we,” “us” or “our”), is a growth-stage consumer packaged foods company focused on developing, manufacturing, marketing, and distributing clean-label, plant-based dried fruit and vegetable snacks for retail and foodservice markets through BranchOut-branded products, private-label offerings, and ingredient sales. The Company operates a 50,000 square foot manufacturing facility in Pisco, Peru, (“Peru Facility”) where it produces finished goods using proprietary GentleDry™ technology licensed from EnWave Corporation. Our operating model is manufacturing-led and dependent on agricultural sourcing, production scale, and retail distribution. Company Realignment Beginning in April 2024, we initiated an organizational realignment to expand our manufacturing capabilities through the development and operation of the Peru Facility. This initiative represents a transition from reliance on third-party manufacturers to in-house production. From April 2024 through December 31, 2025, we incurred aggregate costs of approximately $6.7 million related to this initiative, consisting of (i) approximately $5.1 million of facility start-up costs, including equipment purchases, facility build-out, and initial supplies, (ii) approximately $1.2 million of idle capacity costs associated with underutilization during the ramp-up period, and (iii) approximately $0.4 million of professional fees, legal fees, and travel costs. As of December 31, 2025, the Company has substantially completed the organizational realignment. We continue to expand distribution with large national retail customers while increasing production at our Peru Facility. Operations during the year reflected continued scale-up of manufacturing and commercial activities, with production operating below normalized utilization levels. Current Operating Position We are in a growth and scaling phase. Operating results continue to be influenced by production levels, manufacturing utilization, working capital requirements, and access to capital. Our operating results during the period reflect production operating below normalized utilization. We continue to operate with recurring losses and negative working capital, and liquidity management remains a key focus. Key Considerations Going Forward Our near-term operating performance will depend primarily on revenue growth, production scale, cost management, and capital availability. Management continues to focus on increasing production volumes, improving manufacturing efficiency, managing working capital, and supporting distribution expansion. While operating leverage may improve as production scales, we remain dependent on external financing to support operations and working capital requirements. Strategic Focus Our strategy is focused on executing a manufacturing-led growth model: ● Revenue Growth: Expanding distribution of existing retail customers, developing new customer relationships, and introducing new products to support increased sales volumes. ● Manufacturing Scale: Increasing utilization at the Peru Facility and improving production efficiency. ● Margin Discipline: Managing logistics, production, and operating costs as production scales. ● Liquidity Management: Maintaining access to capital and managing working capital to support operations during the scale-up phase. 2025 Compared to 2024 For the year ended December 31, 2025, net revenue increased to $13.7 million from $6.4 million in 2024, primarily driven by increased sales volumes to existing customers and new product introductions. Gross profit increased to $2.05 million from $0.8 million in the prior year, and gross margin improved to 14.8% from 12.2%. The improvement in gross margin reflects increased internal manufacturing, changes in product mix, and logistics efficiencies during the period. Operating expenses increased to $7.4 million in 2025 from $4.7 million in 2024, reflecting expanded commercial activities, higher administrative costs associated with operating as a public company, and costs associated with scaling production at the Peru Facility. A portion of these expenses relates to production operating below normalized utilization levels. Operating loss increased to $5.4 million from $3.9 million in 2024. Net loss increased to $6.1 million from $4.8 million in the prior year; however, net loss as a percentage of revenue declined due to higher revenue and improved gross margin. Cash used in operating activities increased during 2025 primarily as a result of higher operating losses and increased investment in working capital to support revenue growth. 16 Adjusted Gross Margin (Non-GAAP) In addition to gross margin calculated in accordance with U.S. generally accepted accounting principles (“GAAP”), we use adjusted gross margin, a non-GAAP supplemental measure to evaluate underlying manufacturing performance. Non-GAAP adjusted gross margin excludes depreciation included in cost of goods sold, tariffs incurred under the International Emergency Economic Powers Act (“IEEPA”) during 2025, which were subsequently ruled unlawful by the U.S. Court of International Trade, and certain air freight costs incurred during the year ended December 31, 2025. Gross profit (GAAP) was $2.0 million versus adjusted gross profit (non-GAAP) of $3.8 million, and gross margin was 14.8% compared to adjusted gross margin of 27.8%. Beginning in April 2024, we initiated an organizational realignment to transition from third-party manufacturing to in-house production at our Peru Facility. This transition required significant upfront investment in equipment and facility build-out, resulting in increased depreciation that is not yet aligned with production throughput. Adjusted gross margin was higher than reported gross margin, reflecting the impact of this depreciation and air freight costs incurred to support customer-required timelines, primarily related to new product introductions. These air freight costs were driven by specific timing and fulfillment requirements and are not expected to recur at similar levels. Additionally, adjusted gross margin excludes the impact of a potential tariff refund of $348,752, which is treated as a gain contingency under ASC 450 and not recognized in the 2025 financial statements. We believe adjusted gross margin provides additional visibility into the underlying unit economics of our manufacturing model during this scale-up phase. As the plant gains operating experience and throughput increases, we expect reported gross margin to improve as additional products achieve manufacturing efficiency. Currently, a limited number of products are produced at or near optimal manufacturing efficiency, while other products remain in earlier stages of production and optimization. New product introductions also begin at lower efficiency levels as they transition from development into scaled production and improve over time. A reconciliation of gross profit (GAAP) to adjusted gross profit (non-GAAP), and the related gross margin measures, is presented below: 2025 Gross profit (GAAP) $ 2,034,447 Depreciation included in cost of goods sold 414,518 Air freight related to customer fulfillment and production ramp 1,022,383 IEEPA tariffs incurred in 2025 (gain contingency) 348,752 Adjusted gross profit (non-GAAP) 3,820,100 Net revenue $ 13,724,563 Gross margin (GAAP) 14.8 % Adjusted gross margin (non-GAAP) 27.8 % Operating Model and Margin Considerations Our operating results are closely tied to production volume, facility utilization, product mix, and input costs. We began operating our Peru Facility in December 2024 and are continuing to scale production. Our gross margin improvement reflects increased production volumes, improved throughput, and better manufacturing efficiency, including gains in uptime, yields, and production flow. As operations continue to scale and become more consistent, we expect further improvements in per-unit costs. Gross margin is also influenced by product mix across our BranchOut-branded, private-label, and industrial ingredient channels, as well as variability in agricultural raw materials, packaging, labor, and freight. In addition, the timing of raw material sourcing and reliance on spot market purchases, when required, can impact input costs. During 2025, production levels remained below normalized capacity as we continued to ramp up operations. As a result, a portion of fixed manufacturing costs was not absorbed into inventory and was recognized as idle capacity expense within operating expenses, which impacted operating margin. As production volumes increase and utilization improves, we expect a greater portion of these costs to be absorbed into product costs and a corresponding reduction in idle capacity expense. Operating expenses primarily reflect the cost of supporting our manufacturing platform and growth, including facility-related overhead, distribution expansion, and public company requirements. As the business scales, we expect operating expenses to be more effectively leveraged relative to revenue. Financial Position and Operating Scale We are in a growth and scale-up phase. Future operating performance will depend on revenue growth, production levels, cost management, and working capital requirements. While gross margin improved during 2025, we continue to operate at a net loss and have negative working capital. Future results will depend on our ability to increase production volumes, manage operating expenses, and maintain access to capital. 17 Results of Operations for the Years Ended December 31, 2025 and 2024 The following table summarizes selected items from the statement of operations for the years ended December 31, 2025 and 2024, respectively. Years Ended December 31, Increase / 2025 2024 (Decrease) Net revenue $ 13,724,563 $ 6,434,514 $ 7,290,049 Cost of goods sold 11,690,116 5,652,717 6,037,399 Gross profit 2,034,447 781,797 1,252,650 Gross margin 14.8 % 12.2 % Operating expenses: General and administrative 3,485,195 1,100,045 2,385,150 Salaries and wages 1,622,567 1,604,200 18,367 Professional services 1,142,512 1,291,141 (148,629 ) Shipping and handling 632,989 459,089 173,900 Advertising and promotions 514,661 229,763 284,898 Total operating expenses 7,397,924 4,684,238 2,713,686 Operating loss (5,363,477 ) (3,902,441 ) (1,461,036 ) Operating margin (39.1 )% (60.6) % Other income (expense): Interest income 19,400 14,156 5,244 Interest expense (780,595 ) (863,231 ) 82,636 Total other income (expense) (761,195 ) (849,075 ) 87,880 Net loss $ (6,124,672 ) $ (4,751,516 ) $ (1,373,156 ) Net margin (44.6 )% (73.8) % Net Revenue Our net revenue for the year ended December 31, 2025 was $13,724,563, compared to $6,434,514 for the year ended December 31, 2024, an increase of $7,290,049, or 113%. The increase in revenue was primarily due to higher sales to our largest customers, driven by increased volumes and new product releases. Our revenue may fluctuate due to the seasonal nature of raw material harvest cycles and variability in the timing and size of customer orders. In 2025, revenue more than doubled while gross margin improved as production efficiency increased and the business continued to scale. The Peru Facility is not yet operating at normalized utilization, and current margins still reflect early-stage operating inefficiencies and the burden of fixed cost absorption. Cost of Goods Sold and Gross Profit Cost of goods sold for the year ended December 31, 2025 was $11,690,116, compared to $5,652,717 for the year ended December 31, 2024, an increase of $6,037,399, or 107%. Cost of goods sold included $414,518 and $223,856 of depreciation related to the Peru Facility during the years ended December 31, 2025 and 2024, respectively. The increase in cost of goods sold was primarily due to higher sales volumes during the year. Gross profit for the year ended December 31, 2025 was $2,034,447, or 14.8% of net revenue, compared to $781,797 or 12.2% of net revenue, for the year ended December 31, 2024. The increase in gross margin was mainly driven by cost savings from higher proportion of production at our manufacturing facility and the use of bulk shipping arrangements. Additionally, revenue increased at a faster rate than operating expenses, reflecting higher production and sales volumes. Adjusted gross profit (non-GAAP) for the year ended December 31, 2025 was $3,820,100, or 27.8% of net revenue. Adjusted gross profit excludes depreciation included in cost of goods sold, certain air freight costs related to customer fulfillment and production ramp, and tariffs incurred under the International Emergency Economic Powers Act (“IEEPA”) during 2025, which were subsequently ruled unlawful by the U.S. Court of International Trade. The expected tariff refund is treated as a gain contingency under ASC 450 and was not recognized in the 2025 financial statements. We believe this measure provides additional insight into underlying manufacturing performance by excluding items not indicative of normalized production costs. Gross margins have not yet reached expected long-term levels, as the manufacturing facility operated below normalized utilization during the year and results continue to reflect the impact of fixed cost absorption. Gross margin may continue to be affected by changes in production volumes, input costs, and operating efficiency. The Company’s manufacturing operations include a meaningful fixed-cost component, and as production volumes increase, these costs are expected to be spread over a larger number of units, which may reduce unit production costs and improve margins. 18 General and Administrative Expense General and administrative expense for the year ended December 31, 2025 was $3,485,195, compared to $1,100,045 for the year ended December 31, 2024, an increase of $2,385,150, or 217%. The increase was primarily related to higher operating activity and the expansion of our manufacturing and administrative infrastructure. The largest components of our general and administrative expenses are plant idle capacity, loan receivable impairment, research and development, rent, travel, sales commissions, and royalties as shown below. Year Ended December 31, 2025 2024 Increase / (Decrease) % Change Idle capacity $ 1,201,233 $ - $ 1,201,233 100 % Loan receivable impairment $ 401,522 $ - $ 401,522 100 % Research and development $ 269,994 $ 18,175 $ 251,819 1,386 % Rent $ 208,416 $ 240,213 $ (31,797 ) (13 )% Travel $ 233,777 $ 167,064 $ 66,713 40 % Sales Commissions $ 373,905 $ 212,447 $ 161,458 76 % Royalties $ 250,000 $ 41,673 $ 208,327 500 % Idle capacity expense increased during 2025 due to unallocated fixed overhead associated with operating our manufacturing facility below normal utilization levels. We began operations at our manufacturing facility in Pisco, Peru in December 2024, and idle capacity was not measured in 2024. Production during 2025 was below the Peru Facility’s expected long-term capacity. These costs primarily reflect operating the facility and supporting production capabilities ahead of full utilization, as well as investments to expand distribution. As production volumes increase, a greater portion of these fixed costs are expected to be absorbed into production. Loan receivable impairment increased during 2025 to $401,522 consisting of a non-cash credit loss expense to fully reserve the Nanuva note receivable, driven by our decision to discontinue third-party manufacturing with Nanuva and the resulting uncertainty regarding repayment. Research and development expense increased as we continued product development activities. Sales commissions increased in line with higher sales volumes. Rent expense decreased modestly compared to the prior year, while travel expense increased primarily due to higher business activity. Salaries and Wages Salaries and wages for the year ended December 31, 2025 were $1,622,567, compared to $1,604,200 for the year ended December 31, 2024, an increase of $18,367, or 1%. The relatively flat year-over-year change was primarily due to lower stock-based compensation expense compared to the prior year, largely offset by higher cash compensation associated with the commencement of operations at Peru Facility. While a substantial portion of Peru production labor is capitalized to inventory then expensed in cost of goods sold, non-capitalized Peru salaries and U.S.-based salaries both increased during 2025. Professional Fees Professional fees for the year ended December 31, 2025 were $1,142,512, compared to $1,291,141 for the year ended December 31, 2024, a decrease of $148,629, or 12%. The decrease was primarily attributable to lower stock-based compensation issued to third-party service providers during 2025 compared to the prior year, as well as a reduction in legal, accounting, and advisory costs associated with operating as a public company. Shipping and Handling Shipping and handling expense for the year ended December 31, 2025 was $632,989, compared to $459,089 for the year ended December 31, 2024, an increase of $173,900, or 38%. The increase was primarily attributable to higher sales volumes during the year. The rate of increase in shipping and handling expense was lower than the rate of revenue growth, primarily due to improved pricing associated with bulk shipping arrangements. Advertising and Promotions Advertising and promotions for the year ended December 31, 2025, was $514,661, compared to $229,763 for the year ended December 31, 2024, an increase of $284,898, or 124%. This increase is primarily due to expanded product distribution, entry into new retail locations, and the introduction of new products. These expenses include costs associated with in-store product demonstrations and sampling programs, as well as customer promotional support related to merchandising, marketing, and in-store product testing. Other Income (Expense) For the year ended December 31, 2025, other expense was $761,195, consisting of $780,595 of interest expense, partially offset by $19,400 of interest income. For the year ended December 31, 2024, other expense was $849,075, consisting of $863,231 of interest expense, partially offset by $14,156 of interest income. Other expense decreased by $87,880, or 10%, primarily due to lower interest expense following the repayment of certain debt financing during 2025. Net loss Net loss for the year ended December 31, 2025 was $6,124,672, compared to $4,751,516 for the year ended December 31, 2024, an increase of $1,373,156, or 29%. Despite the increase in net loss, net loss as a percentage of net revenue improved to 44.6% for 2025, compared to 73.8% for 2024, reflecting higher revenue and improved operating performance. The improvement in net loss margin was primarily driven by an improvement in negative operating margin, which improved to 39.1% of net revenue in 2025 from 60.6% in 2024. The increase in net loss was primarily driven by continued investment in scaling production and operations at our manufacturing facility. Results for the period also reflect costs associated with operating the facility below normalized utilization as well as expanded commercial activities. Because our manufacturing model includes a significant fixed-cost component, operating results are sensitive to production volumes and sales growth, particularly during the early stages of scaling operations. Changes in production levels, operating efficiency, and sales volumes may continue to affect operating results in future periods. 19 Liquidity and Capital Resources The following table summarizes our total current assets, liabilities and working capital as of December 31, 2025 and 2024. December 31, December 31, 2025 2024 Current Assets $ 5,684,907 $ 4,916,614 Current Liabilities $ 6,269,147 $ 8,813,996 Working Capital $ (584,240 ) $ (3,897,382 ) As of December 31, 2025, we had negative working capital of $584,240 compared to negative working capital of $3,897,382 as of December 31, 2024. The improvement in working capital was primarily driven by the repayment of certain notes payable to related parties and increases in current assets, including accounts receivable and inventory. 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 December 31, 2025, we had cash of $616,278, total liabilities of $8,887,985, and an accumulated deficit of $23,686,729. As of December 31, 2024, we had cash of $2,329,452, total liabilities of $10,514,292, and an accumulated deficit of $17,562,057. Satisfaction of Cash Obligations for the Next 12 Months Our ability to meet our cash requirements is dependent on our ability to increase sales volumes, improve operating cash flows, manage working capital, and, as needed, access additional capital. Based on our current operating plan, we expect that existing cash balances and cash generated from operations will not be sufficient to fund our operating requirements for at least the next twelve months, and we may need to obtain additional financing. Historically, we have raised capital primarily through debt and convertible debt financings and the issuance of equity securities. Any additional financing may not be available when needed or may not be available on acceptable terms. In addition, any future financings may result in dilution to existing stockholders and may contain restrictive covenants that could limit our operating flexibility. Subsequent Financing Activities Subsequent to December 31, 2025, we entered into an at-the-market issuance sales agreement with Alexander Capital, L.P., under which sold shares of our common stock having an aggregate offering price of approximately $1.5 million. On January 28, 2026, we borrowed $1.5 million from Kaufman Kapital LLC (“Kaufman Kapital”) pursuant to a senior secured promissory note that matures on January 28, 2027 and bears interest at 8% per annum. The obligations under the note are secured by a lien on substantially all of our assets under an existing security agreement. In addition, in January 2026, Kaufman Kapital converted $500,000 of principal outstanding under a 12% senior secured convertible promissory note into shares of common stock. Going Concern 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. These conditions raise substantial doubt about our ability to continue as a going concern within one year after the date the consolidated financial statements are issued. We are pursuing initiatives to increase revenues and is seeking additional sources of capital to fund operations. While these actions may improve our liquidity position, there can be no assurance that they will be sufficient to alleviate the substantial doubt regarding the our ability to continue as a going concern. The accompanying consolidated financial statements have been prepared assuming we will continue as a going concern, which contemplates the realization of assets and the settlement of liabilities in the normal course of business. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty, including adjustments to the recoverability and classification of recorded asset amounts or the amounts and classification of liabilities that might be necessary should we be unable to continue as a going concern. 20 Cash Flow The following table sets forth the primary sources and uses of cash for the periods presented below: Years Ended December 31, 2025 2024 Net cash used in operating activities $ (6,999,712 ) $ (4,859,816 ) Net cash used in investing activities (747,043 ) (2,822,561 ) Net cash provided by financing activities 5,998,135 9,362,621 Effect of exchange rate changes on cash 35,446 (8,581 ) Net increase (decrease) in cash $ (1,713,174 ) $ 1,671,663 Net Cash Used in Operating Activities Cash used in operating activities was $6,999,712 for the year ended December 31, 2025, compared to $4,859,816 for the year ended December 31, 2024, an increase of $2,139,896, or 44%. The increase in cash used in operating activities was primarily driven by higher operating losses and changes in working capital, including increases in accounts receivable, advances on inventory purchases, inventory, and prepaid expenses. These uses of cash were partially offset by non-cash charges, including depreciation, stock-based compensation, and amortization of debt discounts. Net Cash Used in Investing Activities Cash used in investing activities was $747,043 for the year ended December 31, 2025, compared to $2,822,561 for the year ended December 31, 2024, a decrease of $2,075,518, or 74%. The decrease in cash used in investing activities during 2025 primarily related to purchases of property and equipment, which were lower than the prior year as significant investments in Peru Facility occurred during 2024. Net Cash Provided by Financing Activities Cash provided by financing activities was $5,998,135 for the year ended December 31, 2025, compared to $9,362,621 for the year ended December 31, 2024, a decrease of $3,364,486, or 36%. The decrease in cash provided by financing activities during 2025 was primarily attributable to repayments of notes payable, including repayments to related parties, principal payments on finance lease obligations, and payment of deferred offering costs. The repayments were partially offset by proceeds from the issuance of common stock and proceeds from the exercise of warrants. In the prior year, financing activities were primarily driven by proceeds from convertible debt and equity financing. Overall, cash used in operating activities increased primarily due to higher operating losses and increased investment in working capital investment as we scaled operations, while financing activities remained the primary source of liquidity. 21 Trends, Events, and Uncertainties Our operating results, liquidity, and financial condition continue to be shaped by several key operating trends and structural characteristics of our business model that management believes are reasonably likely to have a material impact on future performance. Scaling Production and Margin Progression We began operating our Peru Facility in December 2024, transitioning from a third-party manufacturing model to in-house production. This shift is expected to improve margins over time through greater control over manufacturing processes and costs. During 2025, production volumes remained below normalized capacity as we continued to ramp up operations. As a result, fixed manufacturing costs were not fully absorbed resulting in significant idle capacity expense, which impacted the operating margin. Our current focus is on increasing throughput, expanding distribution, broadening our product portfolio, and onboarding new customers. At the same time, we are working to improve uptime, yields, and overall production flow. As volumes increase and operations become more consistent, we expect per-unit costs to decline and fixed costs to be more fully absorbed. The pace of these improvements will depend on demand growth and our ability to execute efficiently at scale. Revenue Growth and Demand Variability Our growth is being driven by expansion within existing retail accounts, the addition of new customers, and continued product development across our BranchOut-branded, private-label, and industrial ingredient product lines. We work closely with both existing and prospective customers to develop products tailored to their shelf and category needs. Customer ordering patterns are typically based on purchase orders rather than long-term commitments, which can result in variability in the timing and level of revenue. This requires ongoing discipline in production planning and inventory management as we scale. To support customer demand and improve inventory flexibility, we have also focused on extending the shelf life of our products. Consumer Demand for Clean-Label and Better-for-You Snacks Consumer interest in snacks made with simple ingredients and perceived health benefits continues to influence our category. Retailers are allocating shelf space to products positioned around clean-label, plant-based, limited-ingredient and/or minimally processed, which aligns with our product portfolio. At the same time, the category remains competitive, with ongoing pressure from pricing, promotional activity, and shifting consumer preferences. As we expand distribution and introduce new products, our performance will depend in part on our ability to stay relevant with consumers and maintain our position within these retail channels. Product Innovation and Manufacturing Capability Expansion We are working with certain large retail customers to develop new snack products aligned with evolving consumer preferences, including products with higher protein and fiber content. These products are expected to incorporate combinations of fruit and high-protein dairy ingredients. To support these initiatives, the Company incurred capital expenditures in the first quarter of 2026 to expand manufacturing capabilities at the Peru Facility, including the installation of additional dehydration capacity for high-protein dairy applications. This expansion is expected to increase production flexibility, enable manufacturing in an allergen-controlled environment, and support more efficient production processes. From a manufacturing perspective, these products are expected to be more efficient to produce than certain existing products, as they require less raw material preparation and are anticipated to yield higher protein density following dehydration. As a result, as production volumes increase and these products are commercialized, they may contribute to improved gross margins. The timing and extent of revenue associated with these products will depend on successful product development, customer acceptance, and commercialization. There can be no assurance that these initiatives will result in material revenue or improved operating results. Working Capital and Cash Flow Dynamics Our operating model requires a meaningful investment in working capital to support inventory for both existing orders and anticipated demand. Production is planned in advance of customer needs and aligned with agricultural harvest cycles, which results in inventory being manufactured ahead of sales. From raw material sourcing through production, international shipment, and delivery to customers, the process generally spans six to eight weeks, followed by standard customer payment terms. This creates a longer operating cycle and timing differences between when cash is invested and when it is collected. As we scale, we remain focused on managing inventory levels, aligning production with demand, and improving cash conversion efficiency. Supply Chain and Input Costs Our cost structure is significantly influenced by agricultural raw materials, which are subject to seasonal harvest cycles and availability. When sourcing is planned in advance, we are generally able to secure more stable pricing. However, when demand changes or production planning does not align with harvest timing, we may rely on spot market purchases, which typically carry higher costs. As we scale, we are focused on improving demand forecasting, production planning, and supplier coordination to better align raw material sourcing with our production schedule and reduce reliance on higher-cost spot purchases. In addition to raw materials, our cost structure includes labor, packaging, freight, and indirect taxes such as Peru value-added tax (IGV). These costs can fluctuate based on production levels, wage pressures, logistics conditions, and the timing of exports and recoverability of VAT credits. We are focused on improving overall cost management across these areas through increased production efficiency, better planning, and scale. 22 Critical Accounting Estimates The preparation of the Company’s consolidated financial statements in conformity with U.S. generally accepted accounting principles (“GAAP”) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, revenues and expenses, and related disclosures. Management bases its estimates on historical experience, current conditions, and various other assumptions believed to be reasonable under the circumstances. Actual results may differ from these estimates, and such differences may be material to the consolidated financial statements. Management believes the following accounting estimates involve a higher degree of judgment and complexity and are most critical to understanding the Company’s financial condition and results of operations. Revenue Recognition The Company recognizes revenue when control of goods is transferred to customers in an amount that reflects the consideration it expects to receive. Revenue is primarily derived from the sale of finished food products to retail, private-label, and ingredient customers. Judgments are required in determining the timing of revenue recognition, estimating variable consideration such as customer deductions, promotional allowance, and evaluating collectability. Changes in customer programs, pricing arrangements, or sales incentives may affect the timing and amount of revenue recognized. Inventory Valuation Inventory valuation requires significant management judgment. Cost includes allocated fixed manufacturing overhead based on normal production capacity. Because actual production levels during 2025 were below the capacity of the Peru facility, a portion of fixed overhead was expensed to idle capacity as incurred. Determining normal capacity involves judgment regarding expected production volumes and future utilization of the Company’s Peru manufacturing facility. Inventory is also evaluated for recoverability and stated at the lower of cost or net realizable value. Net realizable value estimates require assumptions regarding expected selling prices, trade allowances, sales commissions, outbound freight, product turnover, and demand forecasts. These assumptions are based on historical experience, current contractual terms, and market conditions as of the balance sheet date. Changes in production levels, demand forecasts, pricing, trade programs, or other market conditions could materially impact inventory valuation and cost of goods sold in future periods. Stock-Based Compensation The Company accounts for stock-based compensation in accordance with ASC 718, which requires measurement of compensation cost based on the fair value of equity instruments on the grant date. Determining fair value involves the use of valuation models and assumptions, including expected volatility, risk-free interest rate, expected term, and forfeiture rates. Changes in these assumptions may materially affect the amount and timing of stock-based compensation expense. Warrants and Convertible Instruments The Company has issued warrants and convertible instruments that require evaluation under U.S. GAAP to determine appropriate classification as equity or liabilities. Certain instruments require valuation using option-pricing models and involve assumptions related to volatility, discount rates, and expected term. Changes in these assumptions may impact recorded amounts of equity, liabilities, and non-cash expense. Long-Lived Assets and Manufacturing Equipment The Company evaluates long-lived assets, including manufacturing equipment and facility-related assets, for impairment when events or changes in circumstances indicate that the carrying value may not be recoverable. This evaluation requires management to estimate future cash flows, production levels, and operating performance. Changes in production utilization, operating results, or market conditions could result in impairment charges in future periods. Going Concern and Liquidity Management evaluates the Company’s ability to continue as a going concern based on its current financial condition, operating results, cash flows, and access to capital. This assessment requires judgment regarding future revenue, operating performance, working capital needs, and the availability of financing. If actual results differ from management’s assumptions, the Company’s liquidity and financial condition could be adversely affected. 23 Foreign Currency Translation The Company’s financial results include operations in Peru, where the functional currency is the Peruvian sol. The translation of foreign currency financial statements into U.S. dollars requires the use of exchange rates at the balance sheet date for assets and liabilities and average exchange rates for revenues and expenses. As a result, the Company’s reported financial position and results of operations are subject to fluctuations in foreign currency exchange rates. Changes in exchange rates may impact accumulated other comprehensive income as well as period-to-period comparability of operating results. Recently Issued Accounting Pronouncements The Company considers the applicability and impact of new accounting standards issued by the Financial Accounting Standards Board (“FASB”). The Company adopted ASU 2023-07, Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures, during the year ended December 31, 2024 and ASU 2023-09, Income Taxes (Topic 740): Improvements to Income Tax Disclosures, during the year ended December 31, 2025. The adoption of these standards primarily resulted in enhanced disclosures and did not have a material impact on the Company’s consolidated financial position, results of operations, or cash flows. In November 2024, the FASB issued ASU 2024-03, Income Statement—Reporting Comprehensive Income—Expense Disaggregation Disclosures, which requires additional disaggregation of certain income statement expenses in the notes to the financial statements. The guidance is effective for annual reporting periods beginning after December 15, 2026, with interim reporting required beginning after December 15, 2027. The Company is currently evaluating the impact of this guidance on its financial statement disclosures. In July 2025, the FASB issued ASU 2025-05, Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses for Accounts Receivable and Contract Assets, which introduces a practical expedient for estimating expected credit losses on certain accounts receivable and contract assets. The guidance is effective for the Company beginning January 1, 2026. The Company is currently evaluating the impact of this update on its consolidated financial statements. Off-Balance Sheet Arrangements As of December 31, 2025 and 2024, the Company did not have any off-balance sheet arrangements, as defined in Item 303 of Regulation S-K, that have or are reasonably likely to have a material effect on its financial condition, results of operations, liquidity, capital expenditures, or capital resources. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK We are a smaller reporting company as defined by Rule 12b-2 of the Securities Exchange Act of 1934 and are not required to provide the information under this item. 24