BranchOut Food Inc. 10-Q

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS You should read the following discussion of our financial condition and results of operations in conjunction with the condensed financial statements and the notes thereto included elsewhere in this Quarterly Report on Form 10-Q and with our audited financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2024. In addition to historical condensed financial information, the following discussion contains forward-looking statements that reflect our plans, estimates, and beliefs. Our actual results could differ materially from those discussed in the forward-looking statements. Overview We were incorporated as AvoChips Inc., an Oregon corporation, on February 21, 2017, and on November 2, 2017, we converted into Avochips, LLC, an Oregon limited liability company. On November 19, 2021, we converted from an Oregon limited liability company into BranchOut Food Inc., a Nevada corporation. We are engaged in the development, marketing, sale, and distribution of plant-based, dehydrated fruit and vegetable snacks and powders. Our products have historically been manufactured for us by two contract manufacturers, one based in the Republic of Chile, and the other in the Republic of Peru, which housed our large-scale continuous through-put dehydration machine that completed its first production run in the first quarter of 2023. Our dehydrated fruit and vegetable products are produced using a new proprietary dehydration technology licensed by us from a third party. Our customers are primarily located throughout the United States. In 2024, we decided to initiate our own production facility in Peru to become vertically integrated. We recently completed the build out of the new facility, which commenced operations in 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. 24 Going Concern Uncertainty As of March 31, 2025, we had a cash balance of $2,386,381, a working capital deficit of $2,736,656 and had incurred recurring losses from operations resulting in an accumulated deficit of $18,480,439. 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 condensed consolidated financial statements do not include any adjustments that might result from the outcome of any uncertainty as to the Company’s ability to continue as a going concern. The condensed consolidated financial statements also do not include any adjustments relating to the recoverability and classification of recorded asset amounts, or amounts and classifications of liabilities that might be necessary should the Company be unable to continue as a going concern. Our ability to scale production and distribution capabilities and further increase the value of our brands, is largely dependent on our success in raising additional capital. Peru Facility Lease On April 26, 2024, we formed BranchOut Food Sucursal Peru for the purpose of developing a production facility to produce our products in Peru. On May 10, 2024 we entered into a ten-year lease for our 50,000 square-foot food processing plant located in Peru (the “Peru Facility”). 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. We began manufacturing products at the Peru Facility in December of 2024, and produced approximately $1,450,000 of products during the first quarter of 2025. In connection with our lease of the Peru Facility, we paid $275,000 on May 10, 2024, $80,000 during the fourth quarter of 2024, and another $456,000 during the first quarter of 2025 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 $456,000 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. 25 Results of Operations for the Three Months Ended March 31, 2025 and 2024 The following table summarizes selected items from the statement of operations for the three months ended March 31, 2025 and 2024, respectively. Three Months Ended March 31, Increase / 2025 2024 (Decrease) Net revenue $ 3,193,522 $ 1,467,016 $ 1,726,506 Cost of goods sold 2,641,007 1,183,428 1,457,579 Gross profit 552,515 283,588 268,927 Operating expenses: General and administrative 685,779 319,736 366,043 Salaries and benefits 314,242 598,286 (284,044 ) Professional services 235,034 390,666 (155,632 ) Total operating expenses 1,235,055 1,308,688 (73,633 ) Operating loss (682,540 ) (1,025,100 ) (342,560 ) Other income (expense): Interest income 5,136 2,877 2,259 Interest expense (240,978 ) (28,744 ) 212,234 Total other income (expense) (235,842 ) (25,867 ) 209,975 Net loss $ (918,382 ) $ (1,050,967 ) $ (132,585 ) Net Revenue Our net revenue for the three months ended March 31, 2025 was $3,193,522, compared to $1,467,016 for the three months ended March 31, 2024, an increase of $1,726,506, or 118%. The increase in revenue was primarily due to increased sales to our two largest customers during the three months ended March 31, 2025. Cost of Goods Sold and Gross Profit Our cost of goods sold for the three months ended March 31, 2025 was $2,641,007, compared to $1,183,428 for the three months ended March 31, 2024, an increase of $1,457,579, or 123%. Cost of goods sold increased primarily due to increased sales during the three months ended March 31, 2025. As a result of the foregoing, we had gross profit of $552,515, representing gross margins of 17%, for the three months ended March 31, 2025 as compared to a gross profit of $283,588, or gross margins of 19%, for the three months ended March 31, 2024. Our gross profit margin decreased slightly due primarily to costs incurred transitioning the production of our products to the Peru Facility. We anticipate that our margins will increase as we ramp up production and utilize more of the facility’s capacity. Cost of goods sold included depreciation expense for the three months ended March 31, 2025 of $152,262, compared to $55,823 for the three months ended March 31, 2024, an increase of $96,439, or 173%. 26 General and Administrative Our general and administrative expense for the three months ended March 31, 2025 was $685,779, compared to $319,736 for the three months ended March 31, 2024, an increase of $366,043, or 114%. The largest components of our general and administrative expenses are advertising and marketing, rent, travel, commissions, and storage, shipping and handling expense, as shown below. Three Months Ended March 31, 2025 2024 Difference % change Advertising and marketing $ 156,226 $ 57,059 $ 99,167 174 % Rent $ 50,515 $ - $ 50,515 - % Travel $ 107,445 $ 41,410 $ 66,035 159 % Commissions $ 61,059 $ 66,514 $ (5,455 ) (8 )% Storage, shipping and handling $ 106,545 $ 104,437 $ 2,108 2 % Advertising and marketing expenses increased for the three months ended March 31, 2025, compared to the corresponding period in 2024, as we increased our marketing efforts in the current period, given greater available resources. Our rent increased primarily due to leases entered into in the latter half of the prior year, as we began to develop our operating facility in Peru, which resulted in increased travel expenses for the same reason. Sales commissions decreased as we focused most of our resources on servicing our largest customer. We expect commissions to increase as we grow. Storage, shipping and handling expenses increased primarily due to increased international shipping rates and increased production that was driven by our increased sales. Salaries and Wages Salaries and wages for the three months ended March 31, 2025 was $314,242, compared to $598,286 for the three months ended March 31, 2024, a decrease of $284,044, or 47%. This decrease was primarily attributable to $376,384 of non-cash, stock-based compensation related to stock options awarded during the prior period, compared to $4,024 of non-cash, stock-based compensation related to stock options awarded during the current period. Professional Fees Professional fees for the three months ended March 31, 2025 was $235,034, compared to $390,666 for the three months ended March 31, 2024, a decrease of $155,632, or 40%. This decrease was primarily attributable to $149,594 of non-cash, stock-based compensation for the three months ended March 31, 2024 that were not incurred during the current period. Other Income (Expense) In the three months ended March 31, 2025, other expense was $235,842 on a net basis, consisting of $240,978 of interest expense, as partially offset by $5,136 of interest income. For the three months ended March 31, 2024, other expense was $25,867 on a net basis, consisting of $28,744 of interest expense, as partially offset by $2,877 of interest income. Other expense increased by $209,975, or 812%, primarily due to interest on increased outstanding debt as we funded our expansion into Peru during 2024. Net loss Net loss for the three months ended March 31, 2025 was $918,382, compared to $1,050,967 for the three months ended March 31, 2024, a decrease of $132,585, or 13%. The decreased net loss was primarily due to increased gross profits and a $521,954 decrease in stock-based compensation, as partially offset by $366,043 of increased general and administrative expenses. 27 Liquidity and Capital Resources The following table summarizes our total current assets, liabilities and working capital as of March 31, 2025 and December 31, 2024. March 31, December 31, 2025 2024 Current Assets $ 5,791,605 $ 4,916,614 Current Liabilities $ 8,528,261 $ 8,813,996 Working Capital $ (2,736,656 ) $ (3,897,382 ) As of March 31, 2025, we had negative working capital of $2,736,656. We have incurred net losses since our inception and we anticipate net losses and negative operating cash flows for the near future, and we may not be profitable or realize growth in the value of our assets. To date, our primary sources of capital have been cash generated from the sales of our products, common stock sales, and debt and equity financing. As of March 31, 2025, we had cash of $2,386,381, total liabilities of $10,230,144, and an accumulated deficit of $18,480,439. 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. Cash Flow Comparison of the Three Months Ended March 31, 2025 and the Three Months Ended March 31, 2024 The following table sets forth the primary sources and uses of cash for the periods presented below: Three Months Ended March 31, 2025 2024 Net cash used in operating activities $ (1,927,122 ) $ (503,578 ) Net cash used in investing activities (377,841 ) (40,100 ) Net cash provided by financing activities 2,461,215 137,589 Effect of exchange rate changes on cash 8,209 - Net change in cash $ 56,929 $ (406,089 ) Net Cash Used in Operating Activities Net cash used in operating activities was $1,927,122 for the three months ended March 31, 2025, compared to $503,578 for the three months ended March 31, 2024, an increase of $1,423,544, or 283%. The increase was primarily due to our increased accounts receivable as of March 31, 2025. Net Cash Used in Investing Activities Net cash used in investing activities was $377,841 for the three months ended March 31, 2025, compared to $40,100 for the three months ended March 31, 2024, an increase of $337,741, or 842%. This increase was primarily attributable to $377,841 of property and equipment purchases, compared to $50,000 of property and equipment purchases, as partially offset by $9,900 of advances received on notes receivable, in the comparative period. Net Cash Provided by Financing Activities Net cash provided by financing activities was $2,353,683 for the three months ended March 31, 2025, compared to $137,589 for the three months ended March 31, 2024, an increase of $2,216,094, or 1,611%. Our increased cash provided by financing activities was primarily from $2,445,605 of increased net proceeds received on the sale of common stock, net of $15,610 of offering costs, and $115,765 of decreased debt repayments, as partially offset by $345,000 of decreased proceeds received from related party debt financing and $276 of increased principal payments on finance leases. 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, 2025 there were no changes to the application of critical accounting policies disclosed in our Annual Report on Form 10-K for the year ended December 31, 2024. 28 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.