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 unaudited condensed consolidated financial statements and the notes thereto included elsewhere in this Quarterly Report on Form 10-Q and with our audited consolidated financial statements and related notes included in our Annual Report on Form 10-K for the year ended December 31, 2025. In addition to historical 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. 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. We continue to scale manufacturing operations at our Peru Facility while supporting existing customer programs and pursuing new product opportunities. Including expansion of a new production area intended to support high-protein dehydrated cheese products in an allergen-free environment. We believe additional capacity may support future revenue growth, improved production flexibility and margin enhancement, although no assurance can be given regarding timing or results. Organizational Realignment and Manufacturing Transition Beginning in 2024, we initiated an operational transition from reliance on third-party manufacturers to in-house production through the development and ramp-up of the Peru Facility. As of December 31, 2025, the principal build-out and start-up phase of this transition was substantially complete. Products We develop, manufacture and market dehydrated fruit and vegetable products using licensed GentleDry™ technology at the Peru Facility. Our products are sold through three primary channels: BranchOut branded retail snack products, private-label products for major retailers, and fruit and vegetable ingredient products sold to food manufacturers. Our BranchOut branded products consist primarily of shelf-stable fruit and vegetable snacks designed to preserve the natural flavor, color and texture of the underlying produce. These products are distributed through grocery, club, online and direct-to-consumer channels. We also manufacture private-label dehydrated snack products for major North American retailers, which are sold under customer brands through their existing retail distribution channels. In addition, we produce dehydrated fruit and vegetable ingredients, including pieces, powders and inclusions, for use in cereals, snack bars, baked goods, salads, ready-to-eat meals and other packaged food applications. 29 We continue to develop additional fruit and vegetable snack products and ingredient formats for both branded and private label customers. Product development efforts are focused on expanding our snack portfolio, supporting private label programs for large retailers, and developing new ingredient applications for food manufacturers. From time to time, we engage with potential commercial partners and institutional customers to develop products tailored to specific applications. Operating Strategy and Key Performance Drivers BranchOut is focused on executing a growth-stage strategy that balances product innovation, distribution expansion, and disciplined manufacturing scale-up. As a manufacturing-led business, our strategy emphasizes aligning customer growth and product development with production capacity, supply-chain execution, and cost control. Key elements of our strategy include: ● Driving revenue growth through customer onboarding and product expansion , by developing new snack and ingredient products designed to generate repeat consumer demand and support scalable retail and foodservice placement. ● Expanding distribution channels across national and regional retail, club, grocery, and private-label platforms to increase product availability while maintaining disciplined customer and channel selection. ● Scaling manufacturing utilization and capacity , with a focus on achieving high utilization at our Peru Facility while investing in incremental capacity expansion to support anticipated demand, operational efficiency, and margin improvement. ● Maintaining operational discipline during scale-up , including production planning, inventory management, quality control, and supply-chain coordination, to support consistent product quality, reliable fulfillment, and cost management as volumes increase. Management believes that executing a manufacturing-led growth strategy allows us to compete effectively by pairing differentiated products with scalable operations, while managing the complexity and execution demands inherent in expanding within the consumer-packaged foods industry. Gross margin performance may be affected by sales mix, throughput levels, manufacturing efficiencies, uptime, yields, agricultural raw materials, packaging, labor and freight costs, as well as sourcing timing and spot market purchases when necessary. Operating Model and Margin Considerations Our operating results are closely tied to production volume, facility utilization, sales mix and input costs. We are focused on scaling production and optimizing manufacturing performance, while expanding our product portfolio to align with evolving customer demand and support growth across our core sales channels. Gross margin performance continues to reflect underlying improvements in production volumes, throughput and manufacturing efficiencies, including gains in uptime, yields and production flow. However, on a quarter-over-quarter basis, gross margin declined due to increased downtime at the plant, lower production levels during January and February, and an unfavorable sales mix driven by a higher proportion of lower-margin bulk ingredient sales. Gross margin is also influenced by sales mix across our branded, private-label and ingredient channels, as well as variability in agricultural raw materials, packaging, labor and freight costs. The timing of raw material sourcing and reliance on spot market purchases, when necessary, may also affect margins. 30 Our operating results for the current period continue to reflect the ongoing scale-up of internal manufacturing operations. Production levels have remained below normalized capacity during the scale-up phase. As a result, a portion of fixed manufacturing costs has not been fully absorbed into inventory and has been recognized as idle capacity expense within operating expenses. As production volumes and utilization increase, we expect improved fixed-cost absorption and greater operating leverage. Operating expenses primarily reflect costs associated with supporting our Peru Facility, growth initiatives, distribution expansion and public company requirements. We continue to operate at a net loss and with negative working capital. Future operating performance will depend on revenue growth, production scale, cost management, working capital efficiency and continued access to capital. 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 and certain air freight costs incurred during the three months ended March 31, 2026 and 2025. As of March 31, 2026 gross profit (GAAP) was $0.40 million versus adjusted gross profit (non-GAAP) of $0.54 million, and gross margin was 15.4% compared to adjusted gross margin of 20.8%. As of March 31, 2025 gross profit (GAAP) was $0.53 million versus adjusted gross profit (non-GAAP) of $0.84 million, and gross margin was 16.7% compared to adjusted gross margin of 26.7%. Adjusted gross margin was higher than reported gross margin, reflecting the impact of 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. 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, for the three months ended March 31, 2026 and 2025, is presented below: Three Months Ended March 31, 2026 March 31, 2025 Gross profit (GAAP) $ 400,660 $ 529,856 Depreciation included in cost of goods sold 91,203 151,506 Air freight related to customer fulfillment timing requirements 51,221 164,670 Adjusted gross profit (non-GAAP) 543,084 846,032 Net revenue $ 2,606,795 $ 3,170,863 Gross margin (GAAP) 15.4 % 16.7 % Adjusted gross margin (non-GAAP) 20.8 % 26.7 % 31 Results of Operations for the Three Months Ended March 31, 2026, and 2025 The following table summarizes selected items from the statement of operations for the three months ended March 31, 2026, and 2025, respectively. Three Months Ended March 31, Increase / 2026 2025 (Decrease) Net revenue $ 2,606,795 $ 3,170,863 $ (564,068 ) Cost of goods sold 2,206,135 2,641,007 (434,872 ) Gross profit 400,660 529,856 (129,196 ) Gross margin 15.4 % 16.7 % Operating expenses: General and administrative 859,220 385,639 473,581 Salaries and benefits 666,336 314,242 352,094 Professional services 260,689 235,034 25,655 Advertising and promotions 155,891 106,545 49,346 Storage, shipping and handling 77,654 133,567 (55,913 ) Total operating expenses 2,019,790 1,175,027 844,763 Operating loss (1,619,130 ) (645,171 ) (973,959 ) Operating margin (62.1 )% (20.3 )% Other income (expense): Interest income 1,749 5,136 (3,387 ) Interest expense (174,903 ) (278,347 ) 103,444 Total other income (expense) (173,154 ) (273,211 ) 100,057 Net loss $ (1,792,284 ) $ (918,382 ) $ (873,902 ) Net margin (68.8 )% (29.0 )% Net Revenue Our net revenue for the three months ended March 31, 2026 was $2.6 million, compared to $3.2 million for the three months ended March 31, 2025, a decrease of $0.56 million, or 18%. The decrease in revenue was primarily due to planned maintenance at the Peru Facility and the timing of a major customer order scheduled for delivery in the second quarter. Production levels recovered by the end of the quarter, resulting in the highest monthly kilogram output to date for the month of March 2026. Inventory increased from $2.4 million at December 31, 2025 to $4.0 million at March 31, 2026, or 69%, reflecting production in advance of the scheduled second quarter shipment. Our results may fluctuate period to period due to the timing and size of customer orders, as well as the seasonal nature of raw material harvest cycles. Cost of Goods Sold and Gross Profit Cost of goods sold for the three months ended March 31, 2026 was $2.2 million, compared to $2.6 million for the three months ended March 31, 2025, a decrease of $0.4 million, or 16%. The decrease in cost of goods sold was primarily due to lower sales volumes during the period. Gross profit for the three months ended March 31, 2026 was $0.4 million, or 15.4% of net revenue, compared to $0.5 million, or 16.7% of net revenue, for the three months ended March 31, 2025. The decrease in gross profit and gross margin was primarily due to lower sales volumes and a less favorable product mix, including a higher proportion of lower-margin bulk ingredient sales, compared to the prior year period. Current margins continue to reflect early-stage production inefficiencies. 32 General and Administrative Expense General and administrative expense for the three months ended March 31, 2026 was $0.86 million, compared to $0.39 million for the three months March 31, 2025, an increase of $0.47 million, or 123%. The increase was primarily related to idle capacity expense increased during the three months ended March 31, 2026 due to unallocated fixed overhead resulting from operating the Peru Facility below normal utilization levels. The facility began operations in December 2024, and idle capacity was not measured as of March 31, 2025. As production volumes increase, a greater portion of these fixed costs are expected to be absorbed into inventory. The largest components of our general and administrative expenses are plant idle capacity, research and development, travel, sales commissions, and royalties as shown below. Three Months Ended March 31, 2026 2025 Difference % Change Idle capacity $ 482,813 $ - $ 482,813 100 % Research and development 16,638 7,742 8,896 115 % Travel 101,620 107,445 (5,825 ) (5 )% Sales commissions 22,885 61,059 (38,174 ) (63 )% Royalties 62,500 40,585 21,915 54 % Research and development expense increased due to continued product development activities. Sales commissions decreased consistently with lower sales volumes.Travel expense remained relatively consistent, reflecting ongoing travel between the United States and Peru to support operations. Royalties increased primarily due to higher production volumes on EnWave equipment. Salaries and Wages Salaries and wages for the three months ended March 31, 2026 were $0.66 million, compared to $0.31 million for the prior year period, an increase of $0.35 million, or 112%. The increase was primarily due to $0.24 million of stock-based compensation expense, as well as annual wage increases. Professional Fees Professional fees for the three months ended March 31, 2026 were $0.26 million, compared to $0.24 million for the three months ended March 31, 2025, an increase of $0.02 million, or 11%. The increase was primarily attributable to higher compensation for the Chief Financial Officer under a consulting agreement. Shipping and Handling Shipping and handling expense for the three months ended March 31, 2026 was $0.15 million, compared to $0.11 million for the three months ended March 31, 2025, an increase of $0.04 million, or 46%. The increase was primarily due to higher shipping rates for deliveries to customers. 33 Advertising and Promotions Advertising and promotions expense for the three months ended March 31, 2026 was $0.08 million, compared to $0.13 million for the three months ended March 31, 2025, a decrease of $0.05 million, or 42%. The decrease was primarily due to the timing of product demonstration programs in line with lower branded product sales during the quarter. Other Income (Expense) For the three months ended March 31, 2026, other expense was $173,154, consisting of $174,903 of interest expense, partially offset by $1,749 of interest income. For the three months ended March 31, 2025, other expense was $273,211, consisting of $278,347 of interest expense, partially offset by $5,136 of interest income. Other expense decreased by $100,057, or 37%, primarily due to lower interest expense following the repayment of certain debt financing during 2025. Net loss Net loss for the three months ended March 31, 2026 was $1.8 million, compared to $0.9 million for the three months ended March 31, 2025, an increase of $0.9 million, or 95%. The increase in net loss was primarily due to lower sales and reduced gross margin in the current quarter, reflecting lower production in January and February due to planned facility maintenance and an unfavorable sales mix. In addition, the Company incurred higher idle capacity costs as it continued the build-out and ramp-up of the Peru Facility, with production remaining below normalized levels. Operating expenses increased due to higher personnel costs associated with increased headcount at the Peru Facility and higher stock-based compensation expense. Operating results remain sensitive to production volumes, capacity utilization and sales mix. Liquidity and Capital Resources The following table summarizes our total current assets, liabilities and working capital as of March 31, 2026 and December 31, 2025. March 31, December 31, 2026 2025 Current Assets $ 7,736,312 $ 5,684,907 Current Liabilities $ 8,847,203 $ 6,269,147 Working Capital $ (1,110,891 ) $ (584,240 ) As of March 31, 2026, we had negative working capital of $1.1 million, compared to negative working capital of $0.6 million as of December 31, 2025. The decrease in working capital was primarily driven by increased inventory levels for anticipated second quarter deliveries, continued investment in the Peru Facility and our net loss. To date, our primary sources of capital have been cash generated from the sales of our products, common stock sales, and debt and equity financings. As of March 31, 2026, we had cash of $0.9 million, total liabilities of $11.2 million, and an accumulated deficit of $25.5 million, compared to cash of $0.6 million, total liabilities of $8.9 million, and an accumulated deficit of $23.7 million as of March 31, 2025. Liquidity Outlook 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. 34 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 March 31, 2026, we borrowed $750,000 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. 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 condensed consolidated financial statements are issued. We are pursuing initiatives to increase revenues and are 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 our ability to continue as a going concern. The accompanying condensed 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 condensed 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. Cash Flow Comparison of the Three Months Ended March 31, 2026, and the Three Months Ended March 31, 2025 The following table sets forth the primary sources and uses of cash for the periods presented below: Three Months Ended March 31, 2026 2025 Net cash used in operating activities $ (2,095,942 ) $ (1,937,207 ) Net cash used in investing activities (515,390 ) (377,841 ) Net cash provided by financing activities 2,968,960 2,363,768 Effect of exchange rate changes on cash (56,245 ) 8,209 Net change in cash $ 301,383 $ 56,929 Net Cash Used in Operating Activities Cash used in operating activities was $2.1 million for the three months March 31, 2026, compared to $1.9 million for the three months March 31, 2025, an increase of $0.2 million, or 8%. Cash used in operating activities was relatively consistent with the prior year period, as higher net losses and increased inventory investment to support anticipated second quarter deliveries were substantially offset by improved collections of accounts receivable and higher accounts payable balances. Net Cash Used in Investing Activities Cash used in investing activities was $0.5 million for the three months ended March 31, 2026, compared to $0.4 million for the three months ended March 31, 2025, an increase of $0.1 million, or 36%. The increase was primarily attributable to purchases of property and equipment related to the build-out of new production space at the Peru Facility intended to manufacture high-protein dehydrated cheese products in an allergen-free environment. Net Cash Provided by Financing Activities Cash provided by financing activities was $3.0 million for the three months ended March 31, 2026, compared to $2.4 million for the three months ended March 31, 2025, an increase of $0.6 million, or 26%. The increase was primarily attributable to $1.5 million in proceeds received from a promissory note issued in January 2026, partially offset by lower proceeds from equity issuances during the current period. Effect of Exchange Rate Changes on Cash For the three months ended March 31, 2026, the effect of exchange rate changes on cash and cash equivalents was a $56,245 decrease in cash, compared to an $8,209 increase in the prior-year period. The change primarily reflects fluctuations in the value of the Peruvian sol relative to the U.S. dollar on cash balances held by the Company’s Peru subsidiary. 35 CRITICAL ACCOUNTING POLICIES AND ESTIMATES Our financial results are affected by the selection and application of accounting policies and methods. In the three-month period ended March 31, 2026 there were no material changes in the Company’s critical accounting policies and estimates from those disclosed in the Annual Report on Form 10-K for the year ended December 31, 2025. 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.