What changed in this filing

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Item 2. Management’s Discussion and Analysis

2026-08-13 compared with 2026-05-14 · 319 added, 209 removed, 112 unchanged (83% of the section changed)

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

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

(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.

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.

(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.

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

We continue to

scale manufacturing operations at our Peru Facility while supporting existing customer programs and pursuing new product opportunities.

expansion of a new production area intended to support high-protein dehydrated cheese products in an allergen-free environment.

additional capacity may support future revenue growth, improved production flexibility and margin enhancement, although no assurance

can be given regarding timing or results.

Organizational

3 unchanged sentences

As of December 31, 2025, the principal build-out and start-up phase of this transition was substantially

We develop, manufacture and market dehydrated fruit and vegetable products

using licensed GentleDry™ technology at the Peru Facility.

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.

BranchOut branded retail snack products, private-label products for major retailers,

and fruit and vegetable ingredient products sold to food manufacturers.

BranchOut branded products consist primarily of shelf-stable fruit and vegetable snacks designed to preserve the natural flavor, color

25 unchanged sentences

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.

margin performance may be affected by sales mix, throughput levels, manufacturing efficiencies, uptime, yields, availability or shortages

of agricultural raw materials, packaging, labor and freight costs, as well as sourcing timing and spot market purchases when necessary.

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

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

The timing of raw material sourcing and reliance on spot market purchases, when necessary, may also affect margins.

Our operating results for the current period continue

to reflect the ongoing scale-up of internal manufacturing operations.

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

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.

improvements in production volumes, throughput and manufacturing efficiencies, including gains in uptime, yields and production flow,

gross margins have decreased in both the first and second quarters of 2026, due to (i) increased downtime at the plant, and lower production

levels during January and February, (ii) an unfavorable sales mix driven by a higher proportion of lower-margin bulk ingredient sales,

(iii) a shortened procurement timeline for a bulk strawberry ingredient product as discussed below, and (iv) the launch of a new mixed

variety pack to Sam’s Club.

margin is 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.

the Company scales production to support new customer programs, initial production runs are often completed on a compressed

procurement timeline to meet customer delivery requirements.

As a result, raw materials may be purchased at prevailing market prices

rather than through advance procurement, resulting in higher input costs and gross margins below the Company’s long-term

target margins for recurring products.

In certain cases, initial production runs may generate minimal or negative gross margins.

Management believes these initial production runs are an important part of securing long-term customer relationships and recurring

production volumes, which are expected to have more favorable procurement economics.

intentionally prioritizes establishing new customer relationships and securing product placements with large retailers, recognizing

that the economics of initial production runs may differ from those of recurring production.

As customer demand becomes recurring,

the Company expects to procure raw materials further in advance, negotiate more favorable pricing, and improve manufacturing

efficiencies, resulting in improved gross margins.

The Company has already secured future strawberry raw material supply under

executed procurement contracts at prices significantly lower than the raw material costs incurred for strawberry production during

the first half of 2026.

While the Company currently manufactures primarily to customer order, management believes that recently

launched products, including the variety pack and strawberry product offerings, will transition to recurring production, enabling

the Company to procure raw materials further in advance and, over time, improve manufacturing economics.

expenses primarily reflect costs associated with supporting our Peru Facility, growth initiatives to establish new customer relationships,

distribution expansion and public company requirements.

We continue to operate at a net loss and with negative working capital.

operating performance will depend on revenue growth, production scale, cost management, availability of raw materials, product mix, working

capital efficiency and continued access to capital.

4 unchanged sentences

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.

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:

profit (GAAP)

included in cost of goods sold

freight related to customer fulfillment timing requirements

gross profit (non-GAAP)

margin (GAAP)

gross margin (non-GAAP)

of Operations for the Three Months Ended March 31, 2026, and 2025

following table summarizes selected items from the statement of operations for the three months ended March 31, 2026, and 2025, respectively.

of goods sold

and administrative

and promotions

shipping and handling

depreciation included in cost of goods sold and certain air freight costs during the three and six months ended June 30, 2026 and 2025.

the three months ended June 30, 2026, gross profit (GAAP) was $96,825 versus adjusted gross profit (non-GAAP) of $0.37 million, and gross

margin was 2.2% compared to adjusted gross margin of 8.3%.

For the three months ended June 30, 2025 gross profit (GAAP) was $0.58 million

versus adjusted gross profit (non-GAAP) of $0.8 million, and gross margin was 17.8% compared to adjusted gross margin of 24.3%.

the six months ended June 30, 2026, gross profit (GAAP) was $0.5 million versus adjusted gross profit (non-GAAP) of $0.91 million, and

gross margin was 7.0% compared to adjusted gross margin of 12.9%.

For the six months ended June 30, 2025 gross profit (GAAP) was $1.1

million versus adjusted gross profit (non-GAAP) of $1.6 million, and gross margin was 17.2% compared to adjusted gross margin of 25.5%.

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.

margin and adjusted gross margin for the three-month period ended June 30, 2026 were also negatively impacted by the production of a

bulk strawberry ingredient product and the delivery of a new product launched at Sam’s Club.

The products incurred higher raw material

costs due to a shortened procurement timeline, resulting in margins significantly below management’s long-term target margins for

recurring products.

Management expects margins to improve as repeat customer orders provide longer procurement lead times, enabling more

efficient raw material sourcing and production planning and resulting in margins more consistent with the Company’s consumer packaged

goods business.

believe adjusted gross margin provides additional visibility into the underlying manufacturing economics of our operations by excluding

certain non-cash depreciation and unusual air freight costs.

As production continues to scale and customer orders transition from initial

product launches to recurring production, we expect reported gross margin to improve through higher manufacturing throughput, greater

operating efficiencies, and improved raw material procurement.

reconciliation of gross profit (GAAP) to adjusted gross profit (non-GAAP), and the related gross margin measures, for the six months

ended June 30, 2026 and 2025, is presented below:

Three Months Ended

Six Months Ended

Gross profit (GAAP)

Depreciation included in cost of goods sold

Air freight related to customer fulfillment timing requirements

Adjusted gross profit (non-GAAP)

Gross margin (GAAP)

Adjusted gross margin (non-GAAP)

of Operations for the Three Months Ended June 30, 2026, and 2025

following table summarizes selected items from the statement of operations for the three months ended June 30, 2026, and 2025, respectively.

Three Months Ended

Cost of goods sold

Operating expenses:

income (expense):

General and administrative

Salaries and benefits

Professional services

Shipping and handling to customers

Advertising and promotions

Total operating expenses

Operating loss

Operating margin

Other income (expense):

Interest income

Interest expense

Total other income (expense)

$ (2,720,036 )

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%.

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.

$ (1,603,156 )

$ (1,116,880 )

net revenue for the three months ended June 30, 2026 was $4.5 million, compared to $3.3 million for the three months ended June 30, 2025,

an increase of $1.2 million, or 36%.

Net revenue increased primarily due to sales of bulk strawberry ingredient and the launch of a new

branded product variety at Sam’s Club.

While the bulk ingredient product contributed meaningfully to revenue growth, it generated

lower gross margins than the Company’s targeted recurring product margins.

results may fluctuate period to period due to the timing and size of customer orders, product mix, and the seasonal nature of raw material

harvest cycles, among other factors.

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

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.

of goods sold for the three months ended June 30, 2026 was $4.4 million, compared to $2.7 million for the three months ended June 30,

2025, an increase of $1.7 million, or 62%.

Gross profit for the three months ended June 30, 2026 was $96,825, or 2.2% of net revenue,

compared to $581,667, or 17.8% of net revenue.

The increase in cost of goods sold relative to net revenue was primarily attributable

to product mix, including the manufacture of a bulk strawberry ingredient product.

Due to a compressed procurement timeline, the Company

incurred significantly higher raw material costs for this product, resulting in gross margins below the Company’s long-term target

margins for recurring products.

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%.

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.

and administrative expense for the three months ended June 30, 2026 was $1.2 million, compared to $0.85 million for the three months

June 30, 2025, an increase of $0.35 million, or 38%.

The increase was primarily related to costs associated with the settlement of an

employment-related legal matter involving the Company’s former Chief Financial Officer.

largest components of our general and administrative expenses were plant idle capacity, employment-related legal settlement, research

and development, travel, sales commissions, and royalties as shown below.

Three Months Ended

Idle capacity

Employment-related legal settlement

Research and development

Sales commissions

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 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.

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.

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.

and development expense increased due to continued product development activities.

Sales commissions decreased due to changes in

customer sales mix.

Travel expense remained relatively consistent, reflecting ongoing travel between the United States and Peru to

support operations.

increased primarily due to higher production volumes on EnWave equipment.

and wages for the three months ended June 30, 2026 were $0.68 million, compared to $0.44 million for the prior year period, an increase

of $0.24 million, or 55%.

The increase was primarily attributable to increases in stock-based compensation expense, together with higher

payroll costs associated with additional personnel to support the Company’s continued growth.

fees for the three months ended June 30, 2026 were $0.31 million, compared to $0.32 million for the three months ended June 30, 2025,

a decrease of $0.01 million, or 3%.

and handling expense for the three months ended June 30, 2026 was $0.22 million, compared to $0.16 million for the three months ended

June 30, 2025, an increase of $0.06 million, or 40%.

The increase was primarily due to more customer deliveries and increased shipping

costs during the period.

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.

and promotions expense for the three months ended June 30, 2026 was $0.28 million, compared to $0.13 million for the three months ended

June 30, 2025, an increase of $0.15 million, or 124%.

The increase was primarily due to the timing of product demonstration programs

and promotional costs associated with the lunch of a new branded product at Sam’s Club.

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 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%.

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.

the three months ended June 30, 2026, other expense was $154,724, consisting of $184,551 of interest expense, partially offset by $29,768

of other income and $59 of interest income.

Other income is the recognition of tariff reimbursements received related to previously paid

import duties.

The Company received a portion of these reimbursements during the period and recognized the related income in accordance

For the three months ended June 30, 2025, other expense was $294,512, consisting of $301,112 of interest expense, partially

offset by $6,600 of interest income.

Other expense decreased by $139,788, or 47%, primarily due to lower interest expense following the

repayment of certain debt financing during 2025.

loss for the three months ended June 30, 2026 was $2.7 million, compared to $1.6 million for the three months ended June 30, 2025, an

increase of $1.1 million, or 70%.

The increase in net loss was primarily attributable to lower gross profit, as discussed above, one-time

settlement of an employment-related legal matter involving the Company’s former Chief Financial Officer, and higher personnel costs

associated with increased stock-based compensation expense.

Operating results continue to be influenced by production volumes, capacity

utilization, product mix, and raw material procurement.

of Operations for the Six Months Ended June 30, 2026, and 2025

following table summarizes selected items from the statement of operations for the six months ended June 30, 2025, and 2024, respectively.

Six Months Ended

Cost of goods sold

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.

and Capital Resources

following table summarizes our total current assets, liabilities and working capital as of March 31, 2026 and December 31, 2025.

General and administrative

Salaries and benefits

Professional services

Shipping and handling to customers

Advertising and promotions

Total operating expenses

Operating loss

Operating margin

Other income (expense):

Interest income

Interest expense

Total other income (expense)

$ (4,512,320 )

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.

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.

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.

Financing Activities

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.

$ (2,521,538 )

$ (1,990,782 )

net revenue for the six months ended June 30, 2026 was $7.1 million, compared to $6.5 million for the six months ended June 30, 2025,

an increase of $0.6 million, or 10%.

The increase in revenue was primarily due to sales of a bulk strawberry ingredient product and the

launch of a new branded product variety at Sam’s Club.

While the bulk ingredient product contributed meaningfully to revenue growth,

it generated lower gross margins than the Company’s long-term target margins for recurring products.

results may fluctuate period to period due to the timing and size of customer orders, product mix, and the seasonal nature of raw material

harvest cycles, among other factors.

of Goods Sold and Gross Profit

of goods sold for the six months ended June 30, 2026 was $6.6 million, compared to $5.3 million for the six months ended June 30, 2025,

an increase of $1.3 million, or 23%.

Gross profit for the six months ended June 30, 2026 was $0.5 million, or 7.0% of net revenue, compared

to $1.1 million, or 17.2% of net revenue, for the six months ended June 30, 2025.

The increase in cost of goods sold relative to net

revenue was primarily attributable to product mix, including the manufacture of a bulk strawberry ingredient product.

Due to a compressed

procurement timeline, the Company incurred significantly higher raw material costs for this product, resulting in gross margins substantially

below the Company’s long-term target margins for recurring products.

and Administrative Expense

and administrative expense for the six months ended June 30, 2026 was $2.0 million, compared to $1.2 million for the six months June

30, 2025, an increase of $0.8 million, or 64%.

The increase was primarily related to an increase in idle capacity expense during the

six months ended June 30, 2026 due to unallocated fixed overhead resulting from operating the Peru Facility below normal utilization

The facility began operations in December 2024, and idle capacity was not measured through March 31, 2025.

Additionally, the

Company incurred costs related to a settlement of an employment-related legal matter involving its former Chief Financial Officer.

largest components of our general and administrative expenses were plant idle capacity, employment-related legal settlement, research

and development, travel, sales commissions, and royalties as shown below.

Six Months Ended

Idle capacity

Employment-related legal settlement

Research and development

Sales commissions

and development expense increased due to continued product development activities.

Sales commissions decreased due to changes in

customer sales mix.

Travel expense increased reflecting ongoing travel between the United States and Peru to

support operations.

increased primarily due to higher production volumes on EnWave equipment.

and wages for the six months ended June 30, 2026 were $1.3 million, compared to $0.75 million for the six months ended June 30, 2025,

an increase of $0.55 million, or 79%.

The increase was primarily attributable to increases in stock-based compensation expense, together

with higher payroll costs associated with additional personnel to support the Company’s continued growth.

fees for the six months ended June 30, 2026 were $0.57 million, compared to $0.56 million for the six months ended June 30, 2025, an

increase of $0.01 million, or 3%.

and handling expense for the six months ended June 30, 2026 was $0.38 million, compared to $0.26 million for the six months ended June

30, 2025, an increase of $0.12 million, or 42%.

The increase was primarily due to more customer deliveries and increased shipping costs

during the period.

and Promotions

and promotions expense for the six months ended June 30, 2026 was $0.36 million, compared to $0.26 million for the six months ended June

30, 2025, an increase of $0.1 million, or 39%.

The increase was primarily due to the timing of product demonstration programs and promotional

costs associated with the lunch of a new branded product at Sam’s Club.

Income (Expense)

the six months ended June 30, 2026, other expense was $327,878, consisting of $359,454 of interest expense, partially offset by $1,808

of interest income and $29,768 of other income.

Other income is the recognition of tariff reimbursements received related to previously

import duties.

The Company received a portion of these reimbursements during the period and recognized the related income in

accordance with U.S.

For the six months ended June 30, 2025, other expense was $567,723, consisting of $579,459 of interest expense,

partially offset by $11,736 of interest income.

Other expense decreased by $239,845, or 42%, primarily due to lower interest expense

following the repayment of certain debt financing during 2025.

loss for the six months ended June 30, 2026 was $4.5 million, compared to $2.5 million for the six months ended June 30, 2025, an increase

of $2.0 million, or 79%.

The increase in net loss was primarily attributable to lower gross profit, as discussed above, higher idle capacity

costs, higher personnel costs associated with increased stock-based compensation expense, and costs related to the settlement of an employment-related

legal matter involving the Company’s former Chief Financial Officer.

Operating results continue to be influenced by production

volumes, capacity utilization, product mix, and raw material procurement.

and Capital Resources

following table summarizes our total current assets, liabilities and working capital as of June 30, 2026 and December 31, 2025.

Current Assets

Current Liabilities

Working Capital

of June 30, 2026, we had working capital of $.24 million, compared to negative working capital of $0.6 million as of December 31, 2025.

The Company’s working capital position at June 30, 2026 primarily reflects the financing of rapid revenue growth.

volumes increased investments in accounts receivable and inventory, while these working capital requirements were funded through increased

accounts payable and borrowings under the Company’s promissory note with Kaufman Kapital.

date, our primary sources of capital have been cash generated from the sales of our products, common stock sales, and debt and equity

As of June 30, 2026, we had cash of $0.21 million, total liabilities of $12.8 million, and an accumulated deficit of $28.2

million, compared to cash of $0.6 million, total liabilities of $8.9 million, and an accumulated deficit of $23.7 million as of December

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.

have incurred net losses since our inception and we anticipate net losses and negative operating cash flows for the near future, and

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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.

of the Three Months Ended March 31, 2026, and the Three Months Ended March 31, 2025

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.

of the Six Months Ended June 30, 2026, and the Six Months Ended June 30, 2025

following table sets forth the primary sources and uses of cash for the periods presented below:

cash used in operating activities

Six Months Ended

Net cash used in operating activities

$ (4,884,193 )

$ (3,963,245 )

cash used in investing activities

cash provided by financing activities

of exchange rate changes on cash

change in cash

Net cash used in investing activities

Net cash provided by financing activities

Effect of exchange rate changes on cash

Net change in cash

$ (1,688,323 )

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.

used in operating activities was $4.8 million for the six months June 30, 2026, compared to $4.0 million for the six months June 30,

2025, an increase of $0.8 million, or 23%.

Cash used in operating activities increased primarily due to increased investments in working

capital to support revenue growth, including higher accounts receivable and inventory balances, together with a higher net loss.

working capital investments were partially offset by increases in accounts payable and accrued expenses, reflecting the timing of vendor

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%.

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.

used in investing activities was $0.72 million for the six months ended June 30, 2026, compared to $0.5 million for the six months ended

June 30, 2025, an increase of $0.22 million, or 47%.

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

Cash Provided by Financing Activities

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.

provided by financing activities was $5.3 million for the six months ended June 30, 2026, compared to $2.7 million for the six months

ended June 30, 2025, an increase of $2.5 million, or 92%.

The increase was primarily attributable to $3.0 million in proceeds from a

promissory note to fund working capital needs to support revenue growth, partially offset by lower proceeds from equity issuances during

the current period.

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.

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.

the six months ended June 30, 2026, exchange rate changes decreased cash and cash equivalents by $56,414, compared to an increase of

$28,763 in the prior-year period.

The change reflects fluctuations in the exchange rate between the Peruvian sol and the U.S.

on cash balances held by the Company’s Peru subsidiary.

ACCOUNTING POLICIES AND ESTIMATES

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.

In the six months ended June 30,

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.

NOTICE REGARDING FORWARD-LOOKING STATEMENTS

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Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 2. Management’s Discussion and Analysis