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 operating results, financial condition, liquidity and cash flows of the Company for the fiscal years ended December 31, 2024 and 2023. The discussion and analysis that follows should be read together with the section entitled “Forward Looking Statements” and our financial statements and the notes to the financial statements included elsewhere in this annual report on Form 10-K. Except for historical information, the matters discussed in this section are forward looking statements that involve risks and uncertainties and are based upon judgments concerning various factors that are beyond the Company’s control. Consequently, and because forward-looking statements are inherently subject to risks and uncertainties, the actual results and outcomes may differ materially from the results and outcomes discussed in the forward-looking statements. You are urged to carefully review and consider the various disclosures made by us in this report. Overview We were incorporated as AvoChips Inc., an Oregon corporation, on February 21, 2017, and on November 2, 2017, we converted into Avochips, LLC, an Oregon limited liability company. On November 19, 2021, we converted from an Oregon limited liability company into BranchOut Food Inc., a Nevada corporation. We are engaged in the development, marketing, sale, and distribution of plant-based, dehydrated fruit and vegetable snacks and powders. Our products have historically been manufactured for us by two contract manufacturers, one based in the Republic of Chile, and the other in the Republic of Peru, which housed our large-scale continuous through-put dehydration machine that completed its first production run in the first quarter of 2023. Our dehydrated fruit and vegetable products are produced using a new proprietary dehydration technology licensed by us from a third party. Our customers are primarily located throughout the United States. In 2024, we decided to initiate our own production facility in Peru to become vertically integrated. We recently completed the build out of the new facility, which commenced operations in December 2024, and utilizes three large-scale REV machines (a REV 60, REV 100 and REV 120) that we recently purchased from EnWave, as well as, a small REV 10 R&D machine that is being used for product development and customer sample purposes. We expect operating margins to be further improved in 2025, as we become more vertically integrated with the transition of more of our production from third party contract manufacturers to internal production. Using our licensed technology platform, we believe our lines of branded, private-label and industrial ingredient products positively address current consumer trends. In our experience, conventional dehydration methods, such as freeze-drying and air drying, tend to degrade most fruit and vegetables through oxidation, browning/color degradation, nutritional content reduction and/or flavor loss. As a result, certain highly sensitive fruits, such as avocados and bananas, have not previously been successfully offered as a dehydrated base for consumer products. We believe that our licensed technology platform and process is the only way to produce quality avocado and banana-based snack and powdered products. Additionally, we believe our licensed technology platform produces superior products when using other fruits and vegetables when compared to conventional drying and dehydration technologies. We license technology, consisting of a portfolio of patents, and purchased production machines, from EnWave, and we have been granted the exclusive rights to use the licensed technology platform as applied to several products in Peru, and avocado based products in the United States. In addition, BranchOut has the nonexclusive rights to use the licensed technology platform for other products. Our Products We plan to continue to grow revenues strategically by penetrating the multi-billion dollar grocery, industrial ingredient and online markets. Our current product line includes: ● BranchOut Snacks: dehydrated fruit and vegetable-based snacks, including Avocado Chips, Chewy Banana Bites, Pineapple Chips, Brussels Sprout Crisps, Strawberry Crisps and Bell Pepper Crisps. ● Private Label: Prunes, Carrots, Brussel Sprouts and Raisins sold to major retailers. ● BranchOut Industrial Ingredients: Banana, Mango, Blueberry, Pineapple, Cherry Tomato, Avocado and many others. We are currently developing many additional products for all sales channels. 26 Going Concern Uncertainty As of December 31, 2024, we had a cash balance of $2,329,452, a working capital deficit of $3,897,382 and had incurred recurring losses from operations resulting in an accumulated deficit of $17,562,057. Subsequent to December 31, 2024, we received gross proceeds of approximately $2.4 million from sales of our common stock in an “At-the-Market” registered offering. Although we anticipate that our results of operations will improve substantially as a result of the recent launch of our new facility in Peru, there can be no assurance in that regard. If we continue to generate substantial operating losses, we will not have sufficient funds to sustain our operations for the next twelve months and we will need to raise additional cash to fund our operations. These factors raise substantial doubt about our ability to continue as a going concern. The report of our independent registered public accounting firm that accompanies our audited financial statements in this Annual Report on Form 10-K contains an explanatory paragraph regarding the substantial doubt about our ability to continue as a going concern. The financial statements do not include any adjustments that might result from the outcome of the going concern uncertainty. NXTDried Superfoods During the fourth quarter of 2023, NXTDried Superfoods, one of our former contract manufacturers located in Peru, became involved in a legal dispute with its landlord and another third party, which resulted in that manufacturer suspending operations. As a result of such dispute, we had to fulfill orders by shifting fulfillment to other manufacturing sources until we commenced operations at our own fully integrated production facility in Peru in the fourth quarter of 2024. D uring 2023, we recognized $761,085 of impairment expense, consisting of $485,265, $243,305 and $32,515 on the collectability of a note receivable, VAT taxes receivable and prepaid inventory, respectively , owed to us by NXTDried Superfoods. Peru Facility Lease Given the situation with NXTDried Superfoods, we were required to shift fulfillment of orders to alternative manufacturing sources. On May 10, 2024 we entered into a ten-year lease for our 50,000 square-foot food processing plant located in Peru. The lease of the Peru Facility requires us to make monthly lease payments of $8,000 in the first two years of the lease, $20,000 in the third year of the lease, $22,000 in the fourth year of the lease, $24,000 in the fourth year of the lease, and $25,000 thereafter. The lease also has a 10-year renewal option, and a buy-out option under which we may purchase the facility for $1,865,456. In connection with our lease of the Peru Facility, we paid $275,000 on May 10, 2024 and another $80,000 during the fourth quarter of 2024, as part of the purchase of a first position mortgage receivable in the amount of $1,267,000, which is secured by the Peru Facility and was owed by the landlord of the Peru Facility to its former tenant. The remaining $912,000 is due and payable in monthly installments of $152,000 through June 23, 2025, at which time an additional $55,604 of interest is due, based on a 9% financing rate. Critical Accounting Policies The establishment and consistent application of accounting policies is a vital component of accurately and fairly presenting our financial statements in accordance with generally accepted accounting principles in the United States (“GAAP”), as well as ensuring compliance with applicable laws and regulations governing financial reporting. While there are rarely alternative methods or rules from which to select in establishing accounting and financial reporting policies, proper application often involves significant judgment regarding a given set of facts and circumstances and a complex series of decisions. Initial Public Offering In June 2023, we completed our IPO in which we sold 1,190,000 shares of common stock at a price of $6.00 per share pursuant to an Underwriting Agreement with Alexander Capital, L.P. (the “Underwriter”) . The Company received net proceeds of $6,226,000, after deducting underwriters’ discounts and commissions and before consideration of other issuance costs. In connection with the IPO, a total of $6,029,204 of convertible debt, consisting of $5,526,691 of principal and $502,513 of interest, was converted into 1,572,171 shares of common stock, inclusive of $179,687, consisting of $165,000 of principal and $14,687 of interest, that converted into 43,562 shares of common stock issued upon the conversion of debts held by related parties. Pursuant to the Underwriting Agreement, we also issued the Underwriter a Common Stock Purchase Warrant to purchase up to 82,110 shares of Common Stock at an exercise price of $7.20, which may be exercised for a five-year period beginning December 18, 2023. 27 Prior to the IPO, all deferred offering costs were capitalized in other noncurrent assets on the balance sheets. Deferred offering costs of $1,283,954, primarily consisting of accounting, legal, and other fees related to the Company’s IPO, were offset against the IPO proceeds upon the closing of the IPO in June 2023. Reverse Stock Split On June 15, 2023, we effected a 2.5-for-1 reverse stock split of our outstanding shares of capital stock. All issued and outstanding shares of common stock have been adjusted in these condensed financial statements, on a retrospective basis, to reflect the reverse stock split for all periods presented, as well as all common stock warrants and stock option awards which, by the terms thereof, were subject to adjustment in connection with the reverse stock split. The par value of the common stock was not adjusted by the reverse stock split. Use of Estimates The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that may affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from these estimates. Segment Reporting Under ASC 280, Segment Reporting , operating segments are defined as components of an enterprise where discrete financial information is available that is evaluated regularly by the chief operating decision maker (“CODM”), in deciding how to allocate resources and in assessing performance. The Company has two components, consisting of its sales operations in the United States, and its production operations in Peru. Therefore, the Company’s Chief Executive Officer, who is also the CODM, makes decisions and manages the Company’s operations based on these two operating segments for the manufacture and distribution of its products. Fair Value of Financial Instruments ASC 820, Fair Value Measurements and Disclosures , establishes a fair value hierarchy for instruments measured at fair value that distinguishes between assumptions based on market data (observable inputs) and the Company’s own assumptions (unobservable inputs). Observable inputs are inputs that market participants would use in pricing the asset or liability based on market data obtained from sources independent of the Company. Unobservable inputs are inputs that reflect the Company’s assumptions about the inputs that market participants would use in pricing the asset or liability and are developed based on the best information available in the circumstances. ASC 820 identifies fair value as the exchange price, or exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. As a basis for considering market participant assumptions in fair value measurements, ASC 820 establishes a three-tier fair value hierarchy that distinguishes between the following: - Level 1 inputs to the valuation methodology are quoted prices (unadjusted) for identical assets or liabilities in active markets. - Level 2 inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets, and inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial instrument. - Level 3 inputs to valuation methodology are unobservable and significant to the fair measurement. Financial assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement. To the extent that the valuation is based on models or inputs that are less observable or unobservable in the market, the determination of fair value requires more judgment. Accordingly, the degree of judgment exercised by the Company in determining fair value is greatest for instruments categorized in Level 3. A financial instrument’s level within the fair value hierarchy is based on the lowest level of any input that is significant to the fair value measurement. Cash and Cash Equivalents Cash equivalents include money market accounts which have maturities of three months or less. For the purpose of the statements of cash flows, all highly liquid investments with an original maturity of three months or less are considered to be cash equivalents. Cash equivalents are stated at cost plus accrued interest, which approximates market value. There were no cash equivalents on hand on December 31, 2024 and 2023. 28 Cash in Excess of FDIC Insured Limits The Company maintains its cash in bank deposit accounts which, at times, may exceed federally insured limits. Accounts are guaranteed by the Federal Deposit Insurance Corporation (“FDIC”) up to $250,000, under current regulations. The Company had $1,555,223 and $407,789 in excess of FDIC insured limits on December 31, 2024 and 2023, respectively, and has not experienced any losses in such accounts. Accounts Receivable Accounts receivable is carried at their estimated collectible amounts. Trade accounts receivable is periodically evaluated for collectability based on past credit history with customers and their current financial condition. The Company had an allowance for doubtful accounts of $25,586 at December 31, 2024. No allowance for doubtful accounts was necessary at December 31, 2023. Inventory The Company’s products consist of pre-packaged and bulk-dried fruit and vegetable-based snacks, powders and ingredients purchased from contract-manufacturers in Chile and/or Peru. The Company’s contract manufacturer in Peru uses equipment purchased by the Company in its manufacturing process. Raw materials consist of packaging materials. Appropriate consideration is given to obsolescence, excessive levels, deterioration, and other factors in evaluating net realizable value. No reserve for obsolete inventories has been recognized. Inventory, consisting of raw materials and finished goods are stated at the lower of cost or net realizable value using the average cost valuation method, at December 31, 2024 and 2023, consisted of the following: December 31, 2024 2023 Raw materials $ 464,681 $ 13,734 Finished goods 1,465,854 323,071 Total inventory $ 1,930,535 $ 336,805 The Company had prepaid inventory advances on products in the amount of $123,792 and $-0- as of December 31, 2024 and 2023, respectively. Advances of 70% of estimated finish product costs are made to enable manufacturer’s purchase of raw materials to produce finished products. The remaining 30% is paid upon receipt of finished goods. Property and Equipment Property and equipment are stated at the lower of cost or estimated net recoverable amount. The cost of property, plant and equipment is depreciated using the straight-line method based on the lesser of the estimated useful lives of the assets or the lease term based on the following life expectancy: Office equipment 3 years Furniture and fixtures 5 years Equipment and machinery 5 years Repairs and maintenance expenditures are charged to operations as incurred. Major improvements and replacements, which extend the useful life of an asset, are capitalized, and depreciated over the remaining estimated useful life of the asset. When assets are retired or sold, the cost and related accumulated depreciation are eliminated, and any resulting gain or loss is reflected in operations. Depreciation expense was $171,873 and $223,856 for the years ended December 31, 2024 and 2023, respectively. Impairment of Long-Lived Assets Long-lived assets held and used by the Company are reviewed for possible impairment whenever events or circumstances indicate the carrying amount of an asset may not be recoverable or is impaired. Recoverability is assessed using undiscounted cash flows based upon historical results and current projections of earnings before interest and taxes. Impairment is measured using discounted cash flows of future operating results based upon a rate that corresponds to the cost of capital. Impairments are recognized in operating results to the extent that carrying value exceeds discounted cash flows of future operations. Our indefinite-lived brand names and trademarks acquired and are assigned an indefinite life as we anticipate that these brand names will contribute cash flows to the Company perpetually. We evaluate the recoverability of intangible assets periodically by considering events or circumstances that may warrant revised estimates of useful lives or that indicate the asset may be impaired. The Company expenses internally developed trademarks. 29 License Agreement The Company is party to a license agreement under which it is licensed to utilize certain technology and production equipment developed and manufactured by another company, relating on an exclusive basis to avocado products and on a non-exclusive basis to other products. The license is not discernible from the equipment; therefore, the license costs have been capitalized and depreciated over the useful life of the equipment. The license agreement also entitles the licensor to a royalty on all revenue from the sale of products produced using the equipment. These royalties are recognized as royalty expenses as the products are sold. There was a total of $41,673 of royalty payments made during the year ended December 31, 2024, and none during the year ended December 31, 2023. Any future minimum royalty payments or equipment purchases under this license agreement are an unrecognized commitment as they relate to retaining exclusivity of the avocado products going forward and the Company can elect not to pay as disclosed in Note 17 to the financial statements included in this 10-K. Derivatives The Company evaluates convertible notes payable, stock options, stock warrants and other contracts to determine if those contracts or embedded components of those contracts qualify as derivatives to be separately accounted for under the relevant sections of ASC Topic 815-40, Derivative Instruments and Hedging: Contracts in Entity’s Own Equity. The result of this accounting treatment could be that the fair value of a financial instrument is classified as a derivative instrument and is marked-to-market at each balance sheet date and recorded as a liability. In the event that the fair value is recorded as a liability, the change in fair value is recorded in the statement of operations as other income or other expense. Upon conversion or exercise of a derivative instrument, the instrument is marked to fair value at the conversion date and then that fair value is reclassified to equity. Financial instruments that are initially classified as equity that become subject to reclassification under ASC Topic 815-40 are reclassified to a liability account at the fair value of the instrument on the reclassification date. Revenue Recognition The Company recognizes revenue in accordance with ASC 606, Revenue from Contracts with Customer . Under ASC 606, the Company recognizes revenue from the sale of its plant-based snack products in accordance with a five-step model in which the Company evaluates the transfer of promised goods or services and recognizes revenue when customers obtain control of promised goods or services in an amount that reflects the consideration which the Company expects to be entitled to receive in exchange for those goods or services. To determine revenue recognition for arrangements that the Company determines are within the scope of ASC 606, the Company performs the following five steps: (1) identify the contract(s) with a customer, (2) identify the performance obligations in the contract, (3) determine the transaction price, (4) allocate the transaction price to the performance obligations in the contract and (5) recognize revenue when (or as) the entity satisfies a performance obligation. The Company has elected, as a practical expedient, to account for the shipping and handling as fulfillment costs, rather than as separate performance obligations, and the related costs are recorded as selling expenses in general and administrative expenses in the statement of operations. Revenue is reported net of applicable provisions for discounts, returns and allowances. Methodologies for determining these provisions are dependent on customer pricing and promotional practices. The Company records reductions to revenue for estimated product returns and pricing adjustments in the same period that the related revenue is recorded. These estimates are based on industry-based historical data, historical sales returns, if any, analysis of credit memo data, and other factors known at the time. The Company’s sales are predominantly generated from the sale of finished products to retailers, and to a lesser extent, direct to consumers through third party website platforms. These sales contain a single performance obligation, and revenue is recognized at a single point in time when ownership, risks and rewards transfer. Typically, this occurs when the goods are received by the retailer or customer, or when the title of goods is exchanged. Revenues are recognized in an amount that reflects the net consideration the Company expects to receive in exchange for the goods. The Company promotes its products with advertising, consumer incentives and trade promotions. These programs include discounts, slotting fees, coupons, rebates, in-store display incentives and volume-based incentives. Customer trade promotion and consumer incentive activities are recorded as a reduction to the transaction price based on amounts estimated as being due to customers and consumers at the end of a period. The Company derives these estimates based principally on historical utilization and redemption rates. The Company does not receive a distinct service in relation to the advertising, consumer incentives and trade promotions. Payment terms in the Company’s invoices are based on the billing schedule established in contracts and purchase orders with customers. 30 Expenses such as slotting fees, sales discounts, and allowances are accounted for as a direct reduction of revenues as follows: December 31, 2024 2023 Gross revenue $ 6,777,079 $ 3,184,018 Less: slotting, discounts, and allowances 260,742 358,163 Net revenue $ 6,516,337 $ 2,825,855 Cost of Goods Sold Cost of goods sold represents costs directly related to the purchase, production and manufacturing of the Company’s products. Costs include purchase costs, product development, freight-in, packaging, and print production costs. Advertising Costs The Company expenses the cost of advertising and promotions as incurred. Advertising and promotions expense was $311,586 and $162,048 for the years ended December 31, 2024 and 2023, respectively. Stock-Based Compensation The Company accounts for equity instruments issued to employees and non-employees in accordance with the provisions of ASC 718 Stock Compensation (“ASC 718”). All transactions in which the consideration provided in exchange for the purchase of goods or services consists of the issuance of equity instruments are accounted for based on the fair value of the consideration received or the fair value of the equity instrument issued, whichever is more reliably measurable. The Company issued stock-based compensation in the amount of $704,699 and $258,574 for the years ended December 31, 2024 and 2023, respectively. Basic and Diluted Loss Per Share The basic net loss per common share is computed by dividing the net loss by the weighted average number of common shares outstanding. Diluted net loss per common share is computed by dividing the net loss adjusted on an “as if converted” basis, by the weighted average number of common shares outstanding plus potential dilutive securities. For the years ended December 31, 2024 and 2023, potential dilutive securities had an anti-dilutive effect and were not included in the calculation of diluted net loss per common share. Income Taxes The Company recognizes deferred tax assets and liabilities based on differences between the financial reporting and tax basis of assets and liabilities using the enacted tax rates and laws that are expected to be in effect when the differences are expected to be recovered. The Company provides a valuation allowance for deferred tax assets for which it does not consider realization of such assets to be more likely than not. Uncertain Tax Positions In accordance with ASC 740, Income Taxes , the Company recognizes the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be capable of withstanding examination by the taxing authorities based on the technical merits of the position. These standards prescribe a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. These standards also provide guidance on de-recognition, classification, interest and penalties, accounting in interim periods, disclosure, and transition. Various taxing authorities periodically audit the Company’s income tax returns. These audits include questions regarding the Company’s tax filing positions, including the timing and amount of deductions and the allocation of income to various tax jurisdictions. In evaluating the exposures connected with these various tax filing positions, including state and local taxes, the Company records allowances for probable exposures. A number of years may elapse before a particular matter, for which an allowance has been established, is audited, and fully resolved. The Company has not yet undergone an examination by any taxing authorities. The assessment of the Company’s tax position relies on the judgment of management to estimate the exposures associated with the Company’s various filing positions. 31 Results of Operations for the Years Ended December 31, 2024 and 2023 The following table summarizes selected items from the statement of operations for the years ended December 31, 2024 and 2023, respectively. Years Ended December 31, Increase / 2024 2023 (Decrease) Net revenue $ 6,516,337 $ 2,825,855 $ 3,690,482 Cost of goods sold 5,652,717 2,922,085 2,730,632 Gross profit (loss) 863,620 (96,230 ) 959,850 Operating expenses: General and administrative 1,870,720 1,581,474 289,246 Salaries and benefits 1,604,200 1,129,858 474,342 Professional services 1,291,141 694,596 596,545 Total operating expenses 4,766,061 3,405,928 1,360,133 Operating loss (3,902,441 ) (3,502,158 ) 400,283 Other income (expense): Interest income 14,156 11,719 2,437 Interest expense (863,231 ) (435,271 ) 427,960 Total other income (expense) (849,075 ) (423,552 ) 425,523 Net loss $ (4,751,516 ) $ (3,925,710 ) $ 825,806 Net Revenue Our net revenue for the year ended December 31, 2024 was $6,516,337, compared to $2,825,855 for the year ended December 31, 2023, an increase of $3,690,482, or 131%. The increase in revenue was primarily due to increased sales to our largest customer during the year ended December 31, 2024. Cost of Goods Sold and Gross Profit (Loss) Our cost of goods sold for the year ended December 31, 2024 was $5,652,717, compared to $2,922,085 for the year ended December 31, 2023, an increase of $2,730,632, or 93%. Cost of goods sold included $171,843 and $223,856 of depreciation on production equipment during the years ended December 31, 2024 and 2023, respectively. Cost of goods sold increased primarily in line with the increase in our sales for the period. As a result of the foregoing, we had a gross profit of $863,620, or 13% of revenues, for the year ended December 31, 2024, compared to a gross operating loss of $96,230, or (3%) of revenues, for the year ended December 31, 2023. Our gross profit margin increased primarily due to cost savings realized as a result of our transition to bulk shipping arrangements and transitioning to our own production facility during the current period. 32 General and Administrative Expense Our general and administrative expense for the year ended December 31, 2024 was $1,870,720, compared to $1,581,474 for the year ended December 31, 2023, an increase of $289,246, or 18%. The largest components of our general and administrative expenses are advertising and marketing, rent, travel, commissions, and storage, shipping and handling expense, as shown below. Year Ended December 31, 2024 2023 Difference % Change Advertising and marketing $ 311,586 $ 162,048 $ 149,538 92 % Rent $ 240,213 $ 37,439 $ 202,774 542 % Travel $ 167,064 $ 58,385 $ 108,679 186 % Commissions $ 212,447 $ 186,365 $ 26,082 14 % Storage, shipping and handling $ 459,089 $ 241,017 $ 218,072 90 % Asset impairment expense $ - $ 761,085 $ (761,085 ) N/A Advertising and marketing expenses increased for the year ended December 31, 2024, as compared to the corresponding period in 2023, as we focused our resources on growing our sales. Our rent increased primarily due to leases entered into in the current year, as we began to develop our operating facility in Peru, which also resulted in increased travel expenses. Commissions increased due to our increased sales, and storage, shipping and handling expenses increased primarily due to increased international shipping rates and increased production that was driven by our increased sales. In addition, during 2023, we recognized $761,085 of impairment expense, consisting of $485,265, $243,305 and $32,515 on the collectability of a note receivable, VAT taxes receivable and prepaid inventory, respectively , related to amounts owed from NXTDried Superfoods, one of our prior co-manufacturers. Salaries and Wages Salaries and wages for the year ended December 31, 2024 was $1,604,200, compared to $1,129,858 for the year ended December 31, 2023, an increase of $474,342, or 42%. This increase was primarily attributable to increased headcount in line with our expanded operations, including $414,614 of non-cash, stock-based compensation related to stock options awarded during the current year. Professional Fees Professional fees for the year ended December 31, 2024 was $1,291,141, compared to $694,596 for the year ended December 31, 2023, an increase of $596,545, or 86%. This increase was primarily attributable to increased consulting fees. Professional fees included $290,085 and $258,574 of non-cash, stock-based compensation related to common stock and stock options awarded during the years ended December 31, 2024 and 2023, respectively. Other Income (Expense) In the year ended December 31, 2024, other expense was $849,075, consisting of $863,231 of interest expense, as partially offset by $14,156 of interest income. During the year ended December 31, 2023, other expense was $423,552, consisting of $435,271 of interest expense, as partially offset by $11,719 of interest income. Other expense increased by $425,523, or 100%, primarily due to interest on increased outstanding debt as we funded our expansion into Peru during the current year. Net loss Net loss for the year ended December 31, 2024 was $4,751,516, compared to $3,925,710 during the year ended December 31, 2023, an increased net loss of $825,806, or 21%. The increased net loss was primarily due to increased compensation and compliance costs related to reporting as a public company, $427,960 of increased interest expense, and $536,074 of increased stock-based compensation during the current year, as partially offset by increased gross profits during the current year, in addition to $761,085 of impairment expense in 2023 that wasn’t incurred in the current year. 33 Liquidity and Capital Resources The following table summarizes our total current assets, liabilities and working capital as of December 31, 2024 and December 31, 2023. December 31, December 31, 2024 2023 Current Assets $ 4,916,614 $ 1,678,243 Current Liabilities $ 8,813,996 $ 779,093 Working Capital $ (3,897,382 ) $ 899,150 As of December 31, 2024, we had negative working capital of $3,897,382. We have incurred net losses since our inception and we anticipate net losses and negative operating cash flows for the near future. To date, our primary sources of capital have been cash generated from the sales of our products, common stock sales, and debt and convertible debt financing. 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. As of December 31, 2023, we had cash of $657,789, total liabilities of $914,622, and an accumulated deficit of $12,810,541. Cash Flow Comparison of the Year Ended December 31, 2024 and the Year Ended December 31, 2023 The following table sets forth the primary sources and uses of cash for the periods presented below: Year Ended December 31, 2024 2023 Net cash used in operating activities $ (4,859,816 ) $ (3,529,372 ) Net cash used in investing activities (2,822,561 ) (116,565 ) Net cash provided by financing activities 9,362,621 3,755,279 Effect of exchange rate changes on cash (8,581 ) - Net change in cash $ 1,671,663 $ 109,342 Net Cash Used in Operating Activities Net cash used in operating activities was $4,859,816 for the year ended December 31, 2024, compared to $3,529,372 for the year ended December 31, 2023, an increase of $1,330,444, or 38%. The increase was primarily due to our increased net loss and increased purchases of inventory and other assets, as adjusted for increased stock-based compensation, increased accounts payable, and $761,085 of impairment expense on the collectability of a note receivable, VAT taxes receivable and prepaid inventory during the prior year . Net Cash Used in Investing Activities Net cash used in investing activities was $2,822,561 for the year ended December 31, 2024, compared to $116,565 for the year ended December 31, 2023, an increase of $2,705,996, or 2,321%. This increase was primarily attributable to increased property and equipment purchases of $2,847,207 during the current year, as partially offset by $24,646 of advances received on notes receivable in the current year that were not replicated in the prior year, and $116,565 of property and equipment purchases in the prior year. Net Cash Provided by Financing Activities Net cash provided by financing activities was $9,362,621 for the year ended December 31, 2024, compared to $3,755,279 for the year ended December 31, 2023, an increase of $5,607,342, or 149%. Our increased cash provided by financing activities was primarily from $7,071,898 of increased net proceeds received on debt and convertible debt financing, $206,183 of decreased deferred offering cost payments, and $5,489 of decreased principal payments on finance leases, as partially offset by $1,697,203 of decreased proceeds received on the sale of common stock. Our financing activities during the year ended December 31, 2024 are further described below. 34 Debt Financing Kaufman Convertible Note Pursuant to a Securities Purchase Agreement dated July 15, 2025 (as amended, the “SPA”) on July 24, 2024 Kaufman Capital LLC (“Kaufman Capital”) purchased from us (i) a 12% Senior Secured Convertible Promissory Note in the principal amount of up to $3,400,000 (the “Convertible Note”), convertible into shares of common stock at a fixed price of $0.7582 per share, (ii) a warrant to purchase 1,000,000 shares of common stock at an exercise price of $1.00 per share, and (iii) a warrant to purchase 500,000 shares of common stock at an exercise price of $1.50 per share, in consideration of an initial loan in the principal amount of $2,000,000 made to the Company under the Convertible Note. On December 9, 2024, Kaufman Kapital made an additional loan to the Company under the Convertible Note in the amount of $1,400,000. The Convertible Note matures on the earlier of (i) December 31, 2025, (ii) the sale by the Company of $5,000,000 of equity or debt securities in a single transaction or series of related transactions (excluding certain specified transactions), or (iii) the closing of a change of control transaction as provided in the Convertible Note. Loans outstanding under the Convertible Note bear interest at an initial rate of 12% per annum, and together with accrued principal are convertible into common stock. The Company’s obligations under the Convertible Note are secured by a lien granted to Kaufman Kapital on substantially all of the Company’s assets pursuant to a Security Agreement entered between the Company and Kaufman Kapital (the “Security Agreement”). Kaufman Promissory Note On August 30, 2024, the Company borrowed $1,200,000 from Kaufman Kapital pursuant to a Senior Secured Promissory Note in the principal amount of $1,200,000 (the “Note”) issued by the Company to Kaufman Kapital. The Note matures on June 30, 2025. The loan under the Note bears interest at a rate of 15% per annum. The Company’s obligations under the Note are secured by a lien on substantially all of the Company’s assets pursuant to the Security Agreement. Eagle Vision Promissory Notes On various dates from January 9, 2024 through May 22, 2024, the Company completed the sale of an aggregate $1,675,000 of Senior Secured Promissory Notes (“Senior Notes”) and warrants to purchase an aggregate of 518,750 shares of the Company’s common stock, to a group of Investors (“Investors”) led by Eagle Vision Fund LP (“Eagle Vision”), an affiliate of John Dalfonsi, CFO of the Company, pursuant to a subscription agreement between the Company and the Investors. The Notes mature on the earlier of December 31, 2025, or the occurrence of a “Qualified Subsequent Financing” or “Change of Control” and bear interest at a rate of 15% per annum. The Company’s obligations under the Notes are secured by liens on substantially all of the Company’s assets pursuant to the terms of a Security Agreement between the Company and the Investors. Equity Investments ATM Financing On October 23, 2024, we entered into an ATM Agreement with Alexander Capital for the sale of shares of common stock from time to time through Alexander Capital having an aggregate offering price of up to $3 million. As of December 31, 2024, we had sold 1,317,307 shares of common stock under the ATM Agreement resulting in gross proceeds of approximately $2.5 million and aggregate net proceeds of approximately $2.3 million, after deducting expenses, including a 3% commission paid to Alexander Capital. Subsequent to December 31, 2024, the ATM Agreement was amended to increase the aggregate offering price of shares of common stock that may be sold under the ATM Agreement to $5 million. Following December 31, 2024, we sold 1,303,115 additional shares of common stock under the ATM Agreement for gross proceeds of approximately $2.5 million and aggregate net proceeds of approximately $2.4 million. As of the date of the filing of this Annual Report on Form 10-K, as a result of such sales of common stock under the ATM Agreement, the Company believes it has stockholders’ equity in excess of $2.5 million, in compliance with Nasdaq Listing Rule 5550(b)(1). Related Party Financing On July 15, 2024, the Company entered into subscription agreements with three related parties, consisting of Eric Healy, the Company’s Chief Executive Officer; Eagle Vision, an affiliate of John Dalfonsi, the Company’s Chief Financial Officer; and the Company’s President, pursuant to which such investors agreed to purchase $525,000 of “Units” from the Company, each Unit consisting of (i) 100 shares of common stock, and (ii) a warrant to purchase 125 shares of common stock over the following ten years at an exercise price of $1.00 per share, at a purchase price per Unit equal to $75.82. The Company completed the sale of the Units to Eric Healy and the Company’s President on July 23, 2024, and the sale of the Units to Eagle Vision on August 30, 2024, resulting in the issuance of an aggregate of 692,429 shares of common stock and warrants to purchase 865,536 shares of common stock. 35 Follow-on Public Offering On June 26, 2024, we sold 1,750,000 shares of common stock in a public offering at a price of $0.80 per share, less underwriting discounts and commissions, and on July 19, 2024, the underwriter in the offering exercised its over-allotment option to purchase an additional 222,500 shares of common stock. We received aggregate net proceeds in this offering of $1,164,685 after deducting the underwriting discounts and commissions and offering expenses. Satisfaction of our Cash Obligations for the Next 12 Months As of December 31, 2024, we had incurred recurring losses from operations resulting in an accumulated deficit of $17,562,057, cash on hand of $2,329,452 and negative working capital of $3,897,382. Subsequent to December 31, 2024, we received gross proceeds of approximately $2.4 million from sales of our common stock in an “At-the-Market” offering. However, assuming we continue to generate substantial losses from operations, we will not have sufficient funds to fund our operations at their current levels for the next twelve months. Although we anticipate that our results of operations will improve substantially as a result of the recent launch of our new facility in Peru, there can be no assurance in that regard, and we may be required to obtain additional financing to fund operations. Since inception, we have raised funds primarily through debt and convertible debt financing, and the sale of equity securities. No assurance can be given that any future financing will be available if required, or, if available, that it will be on terms that are satisfactory to us. Even if we are able to obtain additional financing, it may contain undue restrictions on our operations or cause substantial dilution for our stockholders. We cannot guarantee that we will become profitable. Even if we achieve profitability, given the competitive and evolving nature of the industry in which we operate, we may not be able to sustain or increase profitability and our failure to do so would adversely affect our business, including our ability to raise additional funds. The accompanying financial statements appearing in this 10-K have been prepared assuming that we will continue as a going concern, which contemplates continuity of operations, realization of assets, and liquidation of liabilities in the normal course of business. The financial statements do not include any adjustments related 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. Off-Balance Sheet Arrangements We did not have any off-balance sheet arrangements, such as structured finance, special purpose entities, or variable interest entities during the years ended December 31, 2024 and 2023. Emerging Growth Company As an emerging growth company under the JOBS Act, we are eligible to take advantage of certain exemptions from various reporting requirements that are applicable to other public companies that are not emerging growth companies. We have elected to avail ourselves of this exemption from new or revised accounting standards and, therefore, while we are an emerging growth company, we will not be subject to new or revised accounting standards at the same time that they become applicable to other public companies that are not emerging growth companies. As a result, our financial statements and interim financial statements may not be comparable to companies that comply with new or revised accounting pronouncements as of public company effective dates. We will remain an emerging growth company until the earliest of (i) the last day of our first fiscal year in which we have total annual gross revenues of $1.235 billion or more, (ii) the last day of the first fiscal year in which we become a “large accelerated filer” as defined in Rule 12b-2 under the Exchange Act, with at least $700 million of equity securities held by non-affiliates as of the end of the last business day of the second quarter of that fiscal year, (iii) the date on which we have issued, in any three-year period, more than $1.0 billion in non-convertible debt securities, or (iv) the last day of our fiscal year after the fifth anniversary of the date of the completion of our IPO. EnWave Contract Pursuant to the terms of the Licensing Agreement with EnWave, we cannot undertake any transaction that would result in a change of control of us without the prior written consent of EnWave. 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. 36