UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For
the quarterly period ended
OR
| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from ________to ________.
Commission
File Number
(Exact name of registrant as specified in its charter)
| (State or other jurisdiction of incorporation or organization) | (IRS Employer Identification No.) |
(Address of principal executive offices, including zip code)
Registrant’s
telephone number, including area code:
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Trading Symbol | Name of exchange on which registered | ||
Indicate
by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2)
has been subject to filing requirements for the past 90 days.
Indicate
by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule
405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
| Large Accelerated Filer ☐ | Accelerated Filer ☐ | Smaller
Reporting Company |
Emerging
Growth Company |
If
an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying
with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
Indicate
by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐
Indicate the number of shares outstanding of each of the Registrant’s classes of common stock, as of the latest practicable date.
| Title or class | Shares outstanding as of August 18, 2023 | |
| Common Stock, $0.001 par value |
TABLE OF CONTENTS
| PART I. | FINANCIAL INFORMATION | 3 |
| Item 1. | Financial Statements (Unaudited) | 3 |
| Condensed Balance Sheets | 3 | |
| Condensed Statements of Operations | 4 | |
| Condensed Statements of Changes in Stockholders’ Equity (Deficit) | 5 | |
| Condensed Statements of Cash Flows | 6 | |
| Condensed Notes to Financial Statements (Unaudited) | 7 | |
| Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations | 26 |
| Item 4. | Controls and Procedures | 34 |
| PART II. | OTHER INFORMATION | 35 |
| Item 1. | Legal Proceedings | 35 |
| Item 1A. | Risk Factors | 35 |
| Item 6. | Exhibits | 36 |
| SIGNATURES | 37 | |
| 2 |
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
BRANCHOUT FOOD INC.
CONDENSED BALANCE SHEETS
| June 30, | December 31, | |||||||
| 2023 | 2022 | |||||||
| (Unaudited) | ||||||||
| Assets | ||||||||
| Current assets: | ||||||||
| Cash | $ | $ | ||||||
| Accounts receivable | ||||||||
| Advances on inventory purchases | ||||||||
| Inventory | ||||||||
| Other current assets | ||||||||
| Total current assets | ||||||||
| Restricted cash | ||||||||
| Deferred offering costs | ||||||||
| Property and equipment, net | ||||||||
| Right-of-use asset | ||||||||
| Note receivable | ||||||||
| Total Assets | $ | $ | ||||||
| Liabilities and Stockholders’ Equity (Deficit) | ||||||||
| Current liabilities: | ||||||||
| Accounts payable | $ | $ | ||||||
| Accounts payable, related parties | ||||||||
| Accrued expenses | ||||||||
| Convertible notes payable, related parties | ||||||||
| Convertible notes payable | ||||||||
| Notes payable, current portion | ||||||||
| Revolving line of credit | ||||||||
| Lease liability, current portion | ||||||||
| Total current liabilities | ||||||||
| Notes payable, net of current portion | ||||||||
| Lease liability, net of current portion | ||||||||
| Total Liabilities | ||||||||
| Stockholders’ Equity (Deficit): | ||||||||
| Common stock, $ par value, shares authorized; and shares issued and outstanding, respectively | ||||||||
| Additional paid-in capital | ||||||||
| Accumulated deficit | ( | ) | ( | ) | ||||
| Total Stockholders’ Equity (Deficit) | ( | ) | ||||||
| Total Liabilities and Stockholders’ Equity (Deficit) | $ | $ | ||||||
See accompanying notes to financial statements.
| 3 |
BRANCHOUT FOOD INC.
CONDENSED STATEMENTS OF OPERATIONS
(Unaudited)
| For the Three Months Ended | For the Six Months Ended | |||||||||||||||
| June 30, | June 30, | |||||||||||||||
| 2023 | 2022 | 2023 | 2022 | |||||||||||||
| Net revenue | $ | $ | $ | $ | ||||||||||||
| Cost of goods sold | ||||||||||||||||
| Gross profit (loss) | ( | ) | ( | ) | ||||||||||||
| Operating expenses: | ||||||||||||||||
| General and administrative | ||||||||||||||||
| Salaries and wages | ||||||||||||||||
| Professional fees | ||||||||||||||||
| Depreciation expense | ||||||||||||||||
| Total operating expenses | ||||||||||||||||
| Operating loss | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Other income (expense): | ||||||||||||||||
| Interest income | ||||||||||||||||
| Interest expense | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Total other income (expense) | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Net loss | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
| Weighted average common shares outstanding - basic and diluted | ||||||||||||||||
| Net loss per common share - basic and diluted | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
See accompanying notes to financial statements.
| 4 |
BRANCHOUT FOOD INC.
CONDENSED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY (DEFICIT)
(Unaudited)
| For the Three Months Ended June 30, 2023 | ||||||||||||||||||||
| Additional | Total | |||||||||||||||||||
| Common Stock | Paid-In | Accumulated | Stockholders’ | |||||||||||||||||
| Shares | Amount | Capital | Deficit | Equity (Deficit) | ||||||||||||||||
| Balance, March 31, 2023 | $ | $ | $ | ( | ) | $ | ( | ) | ||||||||||||
| Common stock issued pursuant to initial public offering | ||||||||||||||||||||
| Stock options issued for services | - | |||||||||||||||||||
| Common stock issued for debt conversions | ||||||||||||||||||||
| Common stock warrants granted to note holders pursuant to debt financing | - | |||||||||||||||||||
| Net loss | - | ( | ) | ( | ) | |||||||||||||||
| Balance, June 30, 2023 | $ | $ | $ | ( | ) | $ | ||||||||||||||
| For the Three Months Ended June 30, 2022 | ||||||||||||||||||||
| Additional | Total | |||||||||||||||||||
| Common Stock | Paid-In | Accumulated | Stockholders’ | |||||||||||||||||
| Shares | Amount | Capital | Deficit | Equity (Deficit) | ||||||||||||||||
| Balance, March 31, 2022 | $ | $ | $ | ( | ) | $ | ( | ) | ||||||||||||
| Common stock issued for services | ||||||||||||||||||||
| Stock options issued for services | - | |||||||||||||||||||
| Common stock warrants granted to note holders pursuant to debt financing | - | |||||||||||||||||||
| Net loss | - | ( | ) | ( | ) | |||||||||||||||
| Balance, June 30, 2022 | $ | $ | $ | ( | ) | $ | ( | ) | ||||||||||||
| For the Six Months Ended June 30, 2023 | ||||||||||||||||||||
| Additional | Total | |||||||||||||||||||
| Common Stock | Paid-In | Accumulated | Stockholders’ | |||||||||||||||||
| Shares | Amount | Capital | Deficit | Equity (Deficit) | ||||||||||||||||
| Balance, December 31, 2022 | $ | $ | $ | ( | ) | $ | ( | ) | ||||||||||||
| Common stock issued pursuant to initial public offering | ||||||||||||||||||||
| Stock options issued for services | - | |||||||||||||||||||
| Common stock issued for debt conversions | ||||||||||||||||||||
| Common stock warrants granted to note holders pursuant to debt financing | - | |||||||||||||||||||
| Net loss | - | ( | ) | ( | ) | |||||||||||||||
| Balance, June 30, 2023 | $ | $ | $ | ( | ) | $ | ||||||||||||||
| For the Six Months Ended June 30, 2022 | ||||||||||||||||||||
| Additional | Total | |||||||||||||||||||
| Common Stock | Paid-In | Accumulated | Stockholders’ | |||||||||||||||||
| Shares | Amount | Capital | Deficit | Equity (Deficit) | ||||||||||||||||
| Balance, December 31, 2021 | $ | $ | $ | ( | ) | $ | ( | ) | ||||||||||||
| Common stock sold for cash | ||||||||||||||||||||
| Common stock issued for services | ||||||||||||||||||||
| Stock options issued for services | - | |||||||||||||||||||
| Common stock warrants granted to note holders pursuant to debt financing | - | |||||||||||||||||||
| Modification of warrants | - | |||||||||||||||||||
| Modification of derivatives | - | |||||||||||||||||||
| Net loss | - | ( | ) | ( | ) | |||||||||||||||
| Balance, June 30, 2022 | $ | $ | $ | ( | ) | $ | ( | ) | ||||||||||||
See accompanying notes to financial statements.
| 5 |
BRANCHOUT FOOD INC.
CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
| For the Six Months Ended | ||||||||
| June 30, | ||||||||
| 2023 | 2022 | |||||||
| Cash flows from operating activities | ||||||||
| Net loss | $ | ( | ) | $ | ( | ) | ||
| Adjustments to reconcile net loss to net cash used in operating activities: | ||||||||
| Depreciation expense | ||||||||
| Amortization of debt discounts | ||||||||
| Common stock issued for services | ||||||||
| Options and warrants issued for services | ||||||||
| Amended warrants | ||||||||
| Decrease (increase) in assets: | ||||||||
| Accounts receivable | ( | ) | ||||||
| Advances on inventory purchases | ( | ) | ||||||
| Inventory | ||||||||
| Other current assets | ( | ) | ( | ) | ||||
| Right-of-use asset | ||||||||
| Increase (decrease) in liabilities: | ||||||||
| Accounts payable | ( | ) | ||||||
| Accounts payable, related parties | ( | ) | ||||||
| Accrued expenses | ( | ) | ||||||
| Net cash used in operating activities | ( | ) | ( | ) | ||||
| Cash flows from investing activities | ||||||||
| Payments received on notes receivable | ||||||||
| Purchase of property and equipment | ( | ) | ( | ) | ||||
| Net cash used in investing activities | ( | ) | ( | ) | ||||
| Cash flows from financing activities | ||||||||
| Payment of deferred offering costs | ( | ) | ( | ) | ||||
| Proceeds received on convertible notes payable, related parties | ||||||||
| Proceeds received on convertible notes payable | ||||||||
| Repayments on convertible notes payable | ( | ) | ||||||
| Proceeds received on notes payable | ||||||||
| Repayment of notes payable | ( | ) | ( | ) | ||||
| Proceeds received on revolving line of credit | ||||||||
| Repayments on revolving line of credit | ( | ) | ( | ) | ||||
| Principal payments on finance lease | ( | ) | ||||||
| Proceeds from sale of common stock | ||||||||
| Net cash provided by financing activities | ||||||||
| Net increase in cash | ||||||||
| Cash and restricted cash - beginning of period | ||||||||
| Cash - ending of period | $ | $ | ||||||
| Supplemental disclosures: | ||||||||
| Interest paid | $ | $ | ||||||
| Income taxes paid | $ | $ | ||||||
| Non-cash investing and financing transactions: | ||||||||
| Value of warrants issued as a debt discount | $ | $ | ||||||
| Value of shares issued on debt conversions | $ | $ | ||||||
| Initial recognition of right-of-use assets and lease liabilities | $ | $ | ||||||
See accompanying notes to financial statements.
| 6 |
BRANCHOUT FOOD INC.
NOTES TO THE CONDENSED FINANCIAL STATEMENTS
(Unaudited)
Note 1 – Nature of Business and Significant Accounting Policies
Nature of Business
BranchOut Food Inc. (formerly AvoLov, LLC, Avochips, LLC and Avochips Inc.) was incorporated as Avochips Inc. in Oregon on February 21, 2017. On November 19, 2021, the Company converted from an Oregon limited liability company, AvoLov, LLC, into a Nevada corporation, BranchOut Food, Inc. “BranchOut,” the “Company,” “we,” “our” or “us” is engaged in the development, marketing, sale, and distribution of plant-based, dehydrated fruit and vegetable snacks and powders. One of the Company’s contract manufacturers is in Chile. The Company entered into a second contract manufacturing agreement in 2022 with a company based in Peru. This facility houses BranchOut’s continuous through-put dehydration machine, substantially increasing production capacity. Both facilities produce dehydrated fruit and vegetable products for BranchOut using a new proprietary dehydration technology. The Company’s customers are primarily located throughout the United States.
Basis of Accounting
The accompanying unaudited condensed financial statements have been prepared by the Company in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial reporting and as required by pursuant to the rules and regulations of the U.S. Securities and Exchange Commission (“SEC”). Accordingly, they do not include all of the information and notes required by GAAP for complete financial statements. In the opinion of the Company’s management, the accompanying unaudited condensed financial statements contain all adjustments (consisting of items of a normal and recurring nature) necessary to present fairly the financial position as of June 30, 2023, the results of operations for the three and six months ended June 30, 2023 and 2022, and cash flows for the six months ended June 30, 2023 and 2022. The results of operations for the three and six months ended June 30, 2023 are not necessarily indicative of the results to be expected for the full year. The balance sheet as of December 31, 2022 was derived from our audited financial statements. The accompanying condensed financial statements and notes thereto should be read in conjunction with the audited financial statements and the related notes thereto for the year ended December 31, 2022, included in the Company’s final prospectus filed with the SEC pursuant to Rule 424(b)(4) on June 21, 2023 (Final Prospectus).
When preparing financial statements in conformity with GAAP, we must make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates.
Initial Public Offering
In
June 2023, the Company completed its initial public offering (“IPO”), including the sale and issuance of shares
of its common stock at $ per share, and warrants to purchase
Prior
to the IPO, all deferred offering costs were capitalized in other noncurrent assets on the balance sheets. Deferred offering costs of
$
Reverse Stock Split
On
June 15, 2023, the Company effected a
| 7 |
BRANCHOUT FOOD INC.
NOTES TO THE CONDENSED FINANCIAL STATEMENTS
(Unaudited)
Reclassifications
Certain reclassifications have been made to the prior years’ financial statements to conform to current year presentation. These reclassifications had no effect on previously reported results of operations or retained earnings.
Going Concern
As
shown in the accompanying condensed financial statements, as of June 30, 2023, the Company has incurred recurring losses from operations
resulting in an accumulated deficit of $
The condensed 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. These condensed 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.
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
ASC 280, Segment Reporting, requires annual and interim reporting for an enterprise’s operating segments and related disclosures about its products, services, geographic areas and major customers. An operating segment is defined as a component of an enterprise that engages in business activities from which it may earn revenues and expenses, and about which separate financial information is regularly evaluated by the chief operating decision maker in deciding how to allocate resources. The Company operates as a single segment and will evaluate additional segment disclosure requirements as it expands its operations.
Fair Value of Financial Instruments
The Company discloses the fair value of certain assets and liabilities in accordance with ASC 820 – Fair Value Measurement and Disclosures (ASC 820). Under ASC 820-10-05, the FASB establishes a framework for measuring fair value in generally accepted accounting principles and expands disclosures about fair value measurements. This statement reaffirms that fair value is the relevant measurement attribute. The adoption of this standard did not have a material effect on the Company’s financial statements as reflected herein. The carrying amounts of cash, accounts receivable, accounts payable and accrued expenses reported on the balance sheets are estimated by management to approximate fair value primarily due to the short-term nature of the instruments.
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
| 8 |
BRANCHOUT FOOD INC.
NOTES TO THE CONDENSED FINANCIAL STATEMENTS
(Unaudited)
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 $
Accounts Receivable
Accounts
receivable are carried at their estimated collectible amounts. Trade accounts receivable are periodically evaluated for collectability
based on past credit history with customers and their current financial condition. The Company had
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, and consisted of the following as of June 30, 2023 and December 31, 2022:
| June 30, | December 31, | |||||||
| 2023 | 2022 | |||||||
| Raw materials | $ | $ | ||||||
| Finished goods | ||||||||
| $ | $ | |||||||
The
Company had prepaid inventory advances on product in the amount of $
License Agreement
In 2021, the Company entered into a license agreement to acquire a license to certain production equipment developed and manufactured by another company through the purchase of that company’s equipment. The license is not discernable 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 have been no royalty payments to date, and 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 15, below.
Derivatives
We evaluate 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.
| 9 |
BRANCHOUT FOOD INC.
NOTES TO THE CONDENSED FINANCIAL STATEMENTS
(Unaudited)
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 a 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.
Expenses such as slotting fees, sales discounts, and allowances are accounted for as a direct reduction of revenues as follows for the three and six months ended June 2023 and 2022:
| For the Three Months Ended | For the Six Months Ended | |||||||||||||||
| June 30, | June 30, | |||||||||||||||
| 2023 | 2022 | 2023 | 2022 | |||||||||||||
| Revenue | $ | $ | $ | $ | ||||||||||||
| Less: slotting, discounts, and allowances | ( | ) | ||||||||||||||
| Net revenue | $ | $ | $ | $ | ||||||||||||
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 $
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 $ and $ for the six months ended June 30, 2023 and 2022, respectively.
| 10 |
BRANCHOUT FOOD INC.
NOTES TO THE CONDENSED FINANCIAL STATEMENTS
(Unaudited)
Recent Accounting Pronouncements
From time to time, new accounting pronouncements are issued by the Financial Accounting Standards Board (“FASB”) that are adopted by the Company as of the specified effective date. If not discussed, management believes that the impact of recently issued standards, which are not yet effective, will not have a material impact on the Company’s financial statements upon adoption.
In July 2023, the FASB issued Accounting Standards Update (“ASU”) 2023-03 to amend various SEC paragraphs in the Accounting Standards Codification to primarily reflect the issuance of SEC Staff Accounting Bulletin No. 120. ASU No. 2023-03, “Presentation of Financial Statements (Topic 205), Income Statement—Reporting Comprehensive Income (Topic 220), Distinguishing Liabilities from Equity (Topic 480), Equity (Topic 505), and Compensation—Stock Compensation (Topic 718): Amendments to SEC Paragraphs Pursuant to SEC Staff Accounting Bulletin No. 120, SEC Staff Announcement at the March 24, 2022 EITF Meeting, and Staff Accounting Bulletin Topic 6.B, Accounting Series Release 280—General Revision of Regulation S-X: Income or Loss Applicable to Common Stock.” ASU 2023-03 amends the ASC for SEC updates pursuant to SEC Staff Accounting Bulletin No. 120; SEC Staff Announcement at the March 24, 2022 Emerging Issues Task Force (“EITF”) Meeting; and Staff Accounting Bulletin Topic 6.B, Accounting Series Release 280 - General Revision of Regulation S-X: Income or Loss Applicable to Common Stock. These updates were immediately effective and did not have a significant impact on our financial statements.
Note 2 – Related Party Transactions
Accounts Payable
As
of June 30, 2023 and December 31, 2022, the Company owed Chase Innovations, Inc., a Company owned by our then
Chief Financial Officer, Douglas Durst, $
Convertible Notes Payable
As
disclosed in Note 10, below, On January 5, 2023, the Company sold an unsecured convertible promissory note to the Chief Executive Officer’s
parents, Mr. Tom and Mrs. Carol Healy, bearing interest at
As
disclosed in Note 10, below, the Company’s then Chief Financial Officer, Douglas Durst, holds an unsecured convertible
promissory note (“CFO Note”), in the face amount of $
As
disclosed in Note 10, below, the Company’s Chief Financial Officer, Chris Coulter, holds an unsecured convertible promissory
note (“Coulter Note”), in the face amount of $
Note 3 – Fair Value of Financial Instruments
Under FASB ASC 820-10-5, fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (an exit price). The standard outlines a valuation framework and creates a fair value hierarchy in order to increase the consistency and comparability of fair value measurements and the related disclosures. Under GAAP, certain assets and liabilities must be measured at fair value, and FASB ASC 820-10-50 details the disclosures that are required for items measured at fair value.
The Company has cash, notes receivable, derivative liabilities and debts that must be measured under the fair value standard. The Company’s financial assets and liabilities are measured using inputs from the three levels of the fair value hierarchy. The three levels are as follows:
Level 1 - Inputs are unadjusted quoted prices in active markets for identical assets or liabilities that the Company has the ability to access at the measurement date.
Level 2 - Inputs include quoted prices for similar assets and liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, inputs other than quoted prices that are observable for the asset or liability (e.g., interest rates, yield curves, etc.), and inputs that are derived principally from or corroborated by observable market data by correlation or other means (market corroborated inputs).
Level 3 - Unobservable inputs that reflect our assumptions about the assumptions that market participants would use in pricing the asset or liability.
| 11 |
BRANCHOUT FOOD INC.
NOTES TO THE CONDENSED FINANCIAL STATEMENTS
(Unaudited)
The following schedule summarizes the valuation of financial instruments at fair value on a recurring basis in the balances sheet as of June 30, 2023 and December 31, 2022:
| Fair Value Measurements at June 30, 2023 | ||||||||||||
| Level 1 | Level 2 | Level 3 | ||||||||||
| Assets | ||||||||||||
| Cash | $ | $ | $ | |||||||||
| Right-of-use-asset | ||||||||||||
| Notes receivable | ||||||||||||
| Total assets | ||||||||||||
| Liabilities | ||||||||||||
| Notes payable | ||||||||||||
| Revolving line of credit | ||||||||||||
| Lease liability | ||||||||||||
| Total liabilities | ||||||||||||
| $ | $ | $ | ||||||||||
| Fair Value Measurements at December 31, 2022 | ||||||||||||
| Level 1 | Level 2 | Level 3 | ||||||||||
| Assets | ||||||||||||
| Cash | $ | $ | $ | |||||||||
| Cash, restricted | ||||||||||||
| Notes receivable | ||||||||||||
| Total assets | ||||||||||||
| Liabilities | ||||||||||||
| Convertible notes payable, related parties | ||||||||||||
| Convertible notes payable | ||||||||||||
| Notes payable | ||||||||||||
| Revolving line of credit | ||||||||||||
| Total liabilities | ||||||||||||
| $ | $ | ( | ) | $ | ( | ) | ||||||
There were no transfers of financial assets or liabilities between Level 1, Level 2 and Level 3 inputs for the six months ended June 30, 2023 or the year ended December 31, 2022.
Note 4 – Major Customers and Accounts Receivable
The
Company had certain customers whose revenue individually represented
For
the six months ended June 30, 2023, two customers, KEHE distributors and Wal-Mart, accounted for
For
the six months ended June 30, 2023, two customers, KEHE distributors and Wal-Mart, accounted for
| 12 |
BRANCHOUT FOOD INC.
NOTES TO THE CONDENSED FINANCIAL STATEMENTS
(Unaudited)
Note 5 – Other Current Assets
Other current assets consisted of the following as of June 30, 2023 and December 31, 2022:
| June 30, | December 31, | |||||||
| 2023 | 2022 | |||||||
| Prepaid insurance costs | $ | $ | ||||||
| Prepaid advertising and trade show fees | ||||||||
| Prepaid professional fees | ||||||||
| Prepaid taxes | ||||||||
| Refunds receivable | ||||||||
| Interest receivable | ||||||||
| Advances to co-manufacturer, NXTDried(1) | ||||||||
| Total | $ | $ | ||||||
| (1) |
Note 6 – Restricted Cash
On
May 7, 2021, the Company entered into a secured loan agreement (“Loan Agreement”) with EnWave Corporation (“EnWave”)
that was partially collateralized with a cash pledge in the amount of $
The following table provides a reconciliation of cash and restricted cash reported within the balance sheets that sum to the total of the same such amounts shown in the statements of cash flows as of June 30, 2023 and December 31, 2022:
| June 30, | December 31, | |||||||
| 2023 | 2022 | |||||||
| Cash | $ | $ | ||||||
| Restricted cash | ||||||||
| Total cash and restricted cash | $ | $ | ||||||
Note 7 – Property and Equipment
Property and equipment as of June 30, 2023 and December 31, 2022 consisted of the following:
| June 30, | December 31, | |||||||
| 2023 | 2022 | |||||||
| Equipment and machinery | $ | $ | ||||||
| Less: Accumulated depreciation | ( | ) | ( | ) | ||||
| Total property and equipment, net | $ | $ | ||||||
Depreciation
of property and equipment was $
| 13 |
BRANCHOUT FOOD INC.
NOTES TO THE CONDENSED FINANCIAL STATEMENTS
(Unaudited)
Note 8 – Notes Receivable
Nanuva Note Receivable
On
February 4, 2021, the Company entered into a Manufacturing and Distributorship Agreement (“MDA”) with Natural Nutrition SpA,
a Chilean company (“Nanuva”), in which the Company loaned $
| Exclusivity | Minimum Volume | |||||
| Product | Territories | (Kg/month)(“MOQ”) | ||||
| Avocado Powder | Worldwide (except Chile) | |||||
| Banana Chips | Worldwide (except Chile) | |||||
| Avocado Snacks | North America (Canada and USA) | |||||
| Avocado Chips | Worldwide | |||||
| Other Powders | No Exclusivity | - | ||||
Note 9 – Accrued Expenses
Accrued expenses consisted of the following as of June 30, 2023 and December 31, 2022, respectively:
| June 30, | December 31, | |||||||
| 2023 | 2022 | |||||||
| Accrued payroll and taxes | $ | $ | ||||||
| Accrued interest | ||||||||
| Accrued chargebacks | ||||||||
| Total accrued expenses | $ | $ | ||||||
Note 10 – Convertible Notes Payable, Related Parties
Convertible notes payable, related parties consisted of the following at June 30, 2023 and December 31, 2022, respectively:
| June 30, | December 31, | |||||||
| 2023 | 2022 | |||||||
| On January 5, 2023, the Company sold an unsecured convertible promissory note for $ | $ | $ | ||||||
| 14 |
BRANCHOUT FOOD INC.
NOTES TO THE CONDENSED FINANCIAL STATEMENTS
(Unaudited)
| On December 31, 2021, the Company sold a convertible promissory note (“CFO
Note”) to the Company’s then Chief Financial Officer, Douglas Durst, in the face amount of $ | ||||||||
| On May 28, 2020, the Company sold a convertible promissory note (“Coulter Note”) to the Company’s Chief Financial Officer, Chris Coulter, in the face amount of $ | ||||||||
| Convertible notes payable, related parties | $ | $ |
In
accordance with ASC 470-20 Debt with Conversion and Other Options, the Company recorded total discounts of $
In accordance with ASC 815-15, the Company determined that the variable conversion feature and shares to be issued on the Convertible Notes, Related Parties represented embedded derivative features, and these are shown as derivative liabilities on the balance sheet. The Company calculated the fair value of the compound embedded derivatives associated with the convertible debentures utilizing a Monte Carlo simulation model.
The
Company recorded interest expense pursuant to the stated interest rates on the Convertible Notes, Related Parties in the amount of $
| 15 |
BRANCHOUT FOOD INC.
NOTES TO THE CONDENSED FINANCIAL STATEMENTS
(Unaudited)
Note 11 – Convertible Notes Payable
Convertible notes payable consists of the following at June 30, 2023 and December 31, 2022, respectively:
| June 30, | December 31, | |||||||
| 2023 | 2022 | |||||||
| On various origination dates between January 5, 2023 and March 27, 2023, the Company sold a total of ten (10) individual convertible promissory notes (“First Quarter of 2023 Convertible Notes”) with substantially the same terms in exchange for gross proceeds of $. The unsecured First Quarter of 2023 Convertible Notes, bearing interest at % per annum, matured on the earlier of: a) , b) the closing of a Qualified Subsequent Financing, c) the closing of a change of control, or d) the Company’s S-1 registration statement being declared effective and . Each First Quarter of 2023 Convertible Notes was convertible at a fixed conversion price of $ per common share, and all interest shall be deemed to have stopped accruing as of a date selected by the Company that is up to 10 days prior to the effective date of the registration statement filed in connection with the IPO. Each note is mandatorily convertible upon the Company’s S-1 registration statement being declared effective and . The public offering proceeds threshold has subsequently been amended to $, along with all of the other outstanding convertible notes. The First Quarter of 2023 Convertible Notes carry a default interest rate of % per annum. On June 15, 2023, the notes, consisting of an aggregate $ of principal and $ of interest, were converted into shares of common stock. The notes were converted in accordance with the conversion terms; therefore, no gain or loss had been recognized. | $ | $ | ||||||
| On various origination dates between October 28, 2022 and December 13, 2022, the Company sold a total of sixteen (16) individual convertible promissory notes (“2022 Convertible Notes”) with substantially the same terms in exchange for gross proceeds of $. The unsecured Convertible Notes, bearing interest at % per annum, matured on the earlier of: a) June 30, 2023, as extended from the original maturity date of , b) the closing of a Qualified Subsequent Financing, c) the closing of a change of control, or d) the Company’s S-1 registration statement being declared effective and . Each note was convertible at a fixed conversion price of $ per common share, and all interest shall be deemed to have stopped accruing as of a date selected by the Company that is up to 10 days prior to the effective date of the registration statement filed in connection with the IPO. Each note is mandatorily convertible upon the Company’s S-1 registration statement being declared effective and . The public offering proceeds threshold has subsequently been amended to $. The notes carry a default interest rate of % per annum. On June 15, 2023, the notes, consisting of an aggregate $ of principal and $ of interest, were converted into shares of common stock. The notes were converted in accordance with the conversion terms; therefore, no gain or loss had been recognized. | ||||||||
| 16 |
BRANCHOUT FOOD INC.
NOTES TO THE CONDENSED FINANCIAL STATEMENTS
(Unaudited)
| On June 6, 2022, the Company completed the sale of a (i) convertible promissory note in the principal amount of $ (“Fluffco Convertible Note”) to Fluffco, LLC (“Fluffco”), and (ii) a -year warrant to purchase shares of the Company’s common stock at an exercise price of $ per share, for an aggregate purchase price of $, pursuant to a Securities Purchase Agreement between the Company and Fluffco (the “Purchase Agreement”). The unsecured convertible note carried interest at % per annum and a default rate of %, which was mandatorily convertible upon the date on which a registration statement for the Company’s underwritten public offering of its common stock with total proceeds to the Company of not less than $ was effective, at a fixed conversion price of $ per common share. The note matured on , and all interest was deemed to have stopped accruing as of a date selected by the Company that was up to 10 days prior to the effective date of the registration statement filed in connection with the IPO. The aggregate estimated value using the Black-Scholes Pricing Model, based on a volatility rate of % and a call option value of $, was $, and was amortized as a debt discount over the life of the loan. The Company received net proceeds of $ after deductions of debt discounts, consisting of $ of legal fees. The maturity dates were extended to June 30, 2023 and the public offering proceeds threshold had been amended to $. On June 15, 2023, the note, consisting of $ of principal and $ of interest, was converted into shares of common stock. The note was converted in accordance with the conversion terms; therefore, no gain or loss had been recognized. | ||||||||
| On May 26, 2022, the Company completed the sale of a (i) convertible promissory note in the principal amount of $ (“Foss Convertible Note”) to Don Foss (“Foss”), and (ii) a -year warrant to purchase shares of the Company’s common stock at an exercise price of $ per share, for an aggregate purchase price of $, pursuant to a Securities Purchase Agreement between the Company and Foss (the “Purchase Agreement”). The unsecured convertible note carried interest at % per annum and a default rate of %, which was mandatorily convertible upon the date on which a registration statement for the Company’s underwritten public offering of its common stock with total proceeds to the Company of not less than $ was effective, at a fixed conversion price of $ per common share. The note matured on , and all interest was deemed to have stopped accruing as of a date selected by the Company that is up to 10 days prior to the effective date of the registration statement filed in connection with the IPO. The aggregate estimated value using the Black-Scholes Pricing Model, based on a volatility rate of % and a call option value of $, was $, and was amortized as a debt discount over the life of the loan. The Company received net proceeds of $ after deductions of debt discounts, consisting of $ of legal fees. The maturity dates were extended to June 30, 2023 and the public offering proceeds threshold had been amended to $. On June 15, 2023, the note, consisting of $ of principal and $ of interest, was converted into shares of common stock. The note was converted in accordance with the conversion terms; therefore, no gain or loss had been recognized. | ||||||||
| On various origination dates between February 15, 2022 and February 25, 2022, the Company sold two (2) individual convertible promissory notes (“First Convertible Eagle Vision Notes”) with a face value of $ each, under substantially the same terms. The unsecured convertible notes carried interest at % per annum and a default rate of %, which were mandatorily convertible upon the date on which a registration statement for the Company’s underwritten public offering of its common stock with total proceeds to the Company of not less than $ was effective, at a fixed conversion price of $ per common share. The notes matured on , and all interest was deemed to have stopped accruing as of a date selected by the Company that was up to 10 days prior to the effective date of the registration statement filed in connection with the IPO. The maturity dates were extended to June 30, 2023 and the public offering proceeds threshold had been amended to $. On June 15, 2023, the notes, consisting of an aggregate $ of principal and $ of interest, were converted into shares of common stock. The notes were converted in accordance with the conversion terms; therefore, no gain or loss had been recognized. |
| 17 |
BRANCHOUT FOOD INC.
NOTES TO THE CONDENSED FINANCIAL STATEMENTS
(Unaudited)
| On various origination dates between March 1, 2018 and December 31, 2021, the Company sold a total of fifty-two (52) individual convertible promissory notes (“Convertible Notes”) with substantially the same terms, for total proceeds of $. The unsecured Convertible Notes carried interest at % per annum, which originally carried an automatic conversion upon (i) a Qualified Financing, consisting of the closing of the sale of shares of its stock of at least $, at a conversion rate of the lesser of (i) the product of (x) eight-tenths (0.8) and (y) the price per share paid by the purchasers of the preferred stock sold in the Qualified Financing and (ii) the price per share obtained by dividing $ (the “Valuation Cap”) by the Company’s fully-diluted capitalization immediately prior to the Qualified Financing (excluding any shares issued upon conversion of convertible debt), were amended on December 17, 2021 to be automatically converted upon the date on which a registration statement for the Company’s underwritten public offering of its common stock with total proceeds to the Company of not less than $, as amended, was effective at fixed conversion prices of either $ or $ per common share (six (6) of the Convertible Notes, totaling $ of principal, were amended to convert at $ per common share, and forty-six (46) of the Convertible Notes, totaling $ of principal, were amended to convert at $ per common share), and all interest was deemed to have stopped accruing as of a date selected by the Company that was up to 10 days prior to the effective date of the registration statement filed in connection with the IPO. On February 14, 2022, one of the Convertible Notes was repaid, consisting of $ of principal and $ of interest. The Convertible Notes were originally set to mature after eighteen months but were later amended to extend the maturity to and the public offering proceeds threshold had been amended to $. On June 15, 2023, the notes, consisting of an aggregate $ of principal and $ of interest, were converted into shares of common stock. The notes were converted in accordance with the conversion terms; therefore, no gain or loss had been recognized. | ||||||||
| Total convertible notes payable | $ | $ |
In accordance with ASC 470, the Company recorded total discounts of $ for the embedded derivative features of the convertible debts incurred as of December 31, 2022. The discounts were amortized to interest expense over the term of the debentures using the effective interest method. The Company recorded $ of interest expense pursuant to the amortization of note discounts for the six months ended June 30, 2022.
In accordance with ASC 815, the Company determined that the variable conversion feature and shares to be issued on the Convertible Notes represented embedded derivative features, and these are shown as derivative liabilities on the balance sheet. The Company calculated the fair value of the compound embedded derivatives associated with the convertible debentures utilizing a Monte Carlo simulation model. In 2021, under ASC 480-10-25, the conversion feature of the convertible notes was accounted for as a liability since the conversion was a discount to the IPO price, which “lacked risk” for the note holder and forced liability accounting. Effective January 1, 2022, the convertible notes with , therefore in 2022, ASC 480-10-25 no longer applies given the fixed conversion rate and the derivative liability was removed.
The Company recorded interest expense pursuant to the Convertible Notes in the amount of $ and $, consisting of stated interest rates on the Convertible Notes in the amount of $ and $, and $-- and $ of amortized debt discounts, for the six months ended June 30, 2023 and 2022, respectively, including $ of amortized debt discounts on warrants for the six months ended June 30, 2022.
Note 12 – Notes Payable
On
June 12, 2023, we accepted subscriptions for $
| 18 |
BRANCHOUT FOOD INC.
NOTES TO THE CONDENSED FINANCIAL STATEMENTS
(Unaudited)
In
addition to the Senior Secured Notes, each investor received a warrant to purchase shares of our common stock at $
On
March 15, 2023, the Company completed the sale of a Note to The John & Kristen Hinman Trust Dated February 23, 2016 (“Hinman”,
“the Hinman Note”), pursuant to the Loan Agreement between the Company and Hinman. The Hinman Note bears interest at
On
May 7, 2021, we accepted subscriptions for $
The documentation with the investors of our May 2021 Bridge Financing contains affirmative covenants required us to make available to the investors our officers, senior employees, and public accounts to discuss and advise on the affairs of the company and provide to them monthly financial statements and annual budgets. We were also required to file a registration statement with the SEC in connection with an initial public offering. The negative covenants in the documentation precluded us from incurring indebtedness senior to the Senior Secured Notes, incur any lien on our real or personal property, and dispose of any property outside the ordinary course of business.
In
addition to the Senior Secured Notes, each investor received a warrant to purchase shares of our common stock at $
On
December 8, 2020, we accepted subscriptions for $
| 19 |
BRANCHOUT FOOD INC.
NOTES TO THE CONDENSED FINANCIAL STATEMENTS
(Unaudited)
The Senior Secured Notes were a general secured obligation of the Company, senior in all respects to the liens, terms, covenants, and conditions of all existing debt of the Company, except for our loans from Small Business Administration. We executed a Security Agreement concurrently with the issuance of the Notes and filed UCC financing statements with the Oregon Secretary of State.
The documentation with the investors of our December 2020 Bridge Financing contains affirmative covenants that require us to make available to the investors our officers, senior employees, and public accounts to discuss and advise on the affairs of the company and provide to them monthly financial statements and annual budgets. We were also required to file a registration statement with the SEC in connection with an initial public offering. The negative covenants in the documentation preclude us from incurring indebtedness senior to the Senior Secured Notes, incur any lien on our real or personal property, and dispose of any property outside the ordinary course of business.
In
addition to the Senior Secured Notes, each investor received a warrant to purchase shares of our common stock at $
On
May 17, 2020, the Company entered into a loan authorization and loan agreement with the United States Small Business Administration (the
“SBA”), as lender, pursuant to the SBA’s Economic Injury Disaster Loan (“EIDL”) assistance program in light
of the impact of the COVID-19 pandemic on the Company’s business (the “EIDL Loan Agreement”) encompassing a $
Notes payable consists of the following as of June 30, 2023 and December 31, 2022:
| June 30, | December 31, | |||||||
| 2023 | 2022 | |||||||
| Total notes payable | $ | $ | ||||||
| Less: unamortized debt discounts | ||||||||
| Notes payable | $ | $ | ||||||
| Less: current maturities | ||||||||
| Notes payable, less current maturities | $ | $ | ||||||
The
Company recognized $
| 20 |
BRANCHOUT FOOD INC.
NOTES TO THE CONDENSED FINANCIAL STATEMENTS
(Unaudited)
Note 13 – Revolving Line of Credit
On
October 1, 2021, we entered into a Growth Line of Credit Agreement (“LOC”) with Ampla LLC, formerly known as Gourmet Growth
(“Gourmet Growth”), which allows us to draw funds from time to time, up to an aggregate principal amount of $
The
Company’s balance of the LOC was $
The
Company recorded interest expense pursuant to the stated interest rates on the LOC in the amount of $
The Company recognized interest expense for the six months ended June 30, 2023 and 2022 respectively, as follows:
| June 30, | June 30, | |||||||
| 2023 | 2022 | |||||||
| Interest on convertible notes payable, related parties | $ | $ | ||||||
| Interest on convertible notes payable | ||||||||
| Interest on notes payable | ||||||||
| Amortization of debt discounts | ||||||||
| Amortization of debt discounts, warrants | ||||||||
| Amended warrants | ||||||||
| Amortization of debt discounts, derivatives | ||||||||
| Interest on revolving line of credit | ||||||||
| Finance charge on letter of credit | ||||||||
| Interest on credit cards | ||||||||
| Total interest expense | $ | $ | ||||||
The aggregate amounts of maturities of notes payable during each of the five years following the balance sheet date and thereafter, including amounts due within one year and classified as current, are as follows:
| Fiscal Year Ending | Note Payable Maturities | |||||||||||
| December 31, | EIDL | Hinman | Total | |||||||||
| 2023* | $ | $ | $ | |||||||||
| 2024 | ||||||||||||
| 2025 | ||||||||||||
| 2026 | ||||||||||||
| 2027 | ||||||||||||
| 2028 and thereafter | ||||||||||||
| $ | $ | $ | ||||||||||
| Less effects of discounting | ||||||||||||
| Total notes payable | $ | $ | $ | |||||||||
| * |
| 21 |
BRANCHOUT FOOD INC.
NOTES TO THE CONDENSED FINANCIAL STATEMENTS
(Unaudited)
Note 14 – Leases
The
Company has financed production equipment with an acquisition cost of approximately $
The components of lease expense were as follows:
| For the Six Months Ended | ||||||||
| June 30, | ||||||||
| 2023 | 2022 | |||||||
| Finance lease cost: | ||||||||
| Amortization of right-of-use asset | $ | $ | ||||||
| Interest on lease liability | ||||||||
| Total finance lease cost | $ | $ | ||||||
Supplemental balance sheet information related to leases was as follows:
| June 30, | December 31, | |||||||
| 2023 | 2022 | |||||||
| Finance lease: | ||||||||
| Finance lease assets | $ | $ | ||||||
| Current portion of finance lease liability | $ | |||||||
| Noncurrent finance lease liability | ||||||||
| Total finance lease liability | $ | $ | ||||||
| Weighted average remaining lease term: | ||||||||
| Finance lease | ||||||||
| Weighted average discount rate: | ||||||||
| Finance lease | % | |||||||
Supplemental cash flow and other information related to finance leases was as follows:
| For the Six Months Ended | ||||||||
| June 30, | ||||||||
| 2023 | 2022 | |||||||
| Cash paid for amounts included in the measurement of lease liabilities: | ||||||||
| Finance cash flows used for finance leases | $ | $ | ||||||
| Leased assets obtained in exchange for lease liabilities: | ||||||||
| Total finance lease liabilities | $ | $ | ||||||
The future minimum lease payments due under finance leases as of June 30, 2023 is as follows:
| Year Ending | Minimum Lease | |||
| December 31, | Commitments | |||
| 2023 (for the six months remaining) | $ | |||
| 2024 | ||||
| 2025 | ||||
| 2026 | ||||
| 2027 and thereafter | ||||
| $ | ||||
| Less effects of discounting | ||||
| Lease liability recognized | $ | |||
| 22 |
BRANCHOUT FOOD INC.
NOTES TO THE CONDENSED FINANCIAL STATEMENTS
(Unaudited)
Note 15 – Commitments and Contingencies
Legal Matters
From time to time, the Company may be a party to various legal matters, threatened claims, or proceedings in the normal course of business. Legal fees and other costs associated with such actions are expensed as incurred. The Company assesses, in conjunction with its legal counsel, the need to record a liability for litigation and contingencies. Legal accruals are recorded when and if it is determined that a loss related to a certain matter is both probable and reasonably estimable.
Finance Lease
The
Company leases equipment under a non-cancelable finance lease payable in monthly installments of $
Revolving Line of Credit
The Company has contractual obligations under its LOC. Additionally, the Company from time to time may be involved in various inquiries, administrative proceedings and litigation relating to matters arising in the normal course of business. The Company is not aware of any inquiries or administrative proceedings and is not currently a defendant in any material litigation and is not aware of any threatened litigation that could have a material effect on the Company.
Other Contractual Commitments
On January 19, 2022, the Company entered into a contract manufacturing agreement with NXTDried Superfoods SAC to produce for the Company products for distribution. The Company agreed to pre-pay for inventory via an advance to enable the Manufacturer to invest in necessary processing facilities that will be reimbursed to the Company on an agreed per kg basis over the period from 2022 to 2026.
On May 7, 2021, the Company entered into a license agreement (“License Agreement”) with EnWave, pursuant to which EnWave licensed the EnWave technology, a collection of patents and intellectual property used to manufacture and operate vacuum microwave dehydration machines (the “EnWave Equipment”), to the Company. The License Agreement entitles EnWave to a fixed royalty percentage on all revenue from the sale of products produced using EnWave Equipment, net of trade or volume discounts, refunds paid, settled claims for damaged goods, applicable excise, sales and withholding taxes imposed at the time of the sale, and provides the Company with certain exclusivity rights. In order to maintain the exclusivity of the avocado products, the Company agreed to annual royalty minimums as follows:
| Year | Exclusivity Retention Royalty | |||
| 2021 | $ | |||
| 2022 | ||||
| 2023 | ||||
| 2024 | ||||
| 2025 and each subsequent year of the term | ||||
| 2026 | ||||
| 2027 | ||||
| Total* | $ | |||
The
unrecognized commitment thereafter is $
In
addition to the initial EnWave Equipment we purchased, the Company agreed to the purchase of additional equipment over time. The additional
equipment purchase schedule requires the Company to purchase a “Second EnWave Machine” on or before, June 30, 2023, and pay
a non-refundable down payment of
| 23 |
BRANCHOUT FOOD INC.
NOTES TO THE CONDENSED FINANCIAL STATEMENTS
(Unaudited)
Note 16 – Changes in Stockholders’ Deficit
Preferred Stock
The Company has authorized shares of $ par value preferred stock. As of June 30, 2023, of the preferred stock had been designated or issued.
Common Stock
The Company has authorized shares of $ par value common stock. As of June 30,2023, a total of shares of common stock had been issued. Each holder of common stock is entitled to one vote for each share of common stock held.
Initial Public Offering
In
June 2023, the Company completed its IPO, which included the sale and issuance of shares of its common stock at $ per share,
and warrants to purchase
Debt Conversions
In
connection with the IPO, a total of $
Note 17 – Common Stock Options
Stock Incentive Plan
Our board of directors and shareholders adopted our 2022 Omnibus Equity Incentive Plan on January 1, 2022 (the “2022 Plan”). Our 2022 Plan allows for the grant of a variety of equity vehicles to provide flexibility in implementing equity awards, including nonqualified stock options, incentive stock options, stock appreciation rights, restricted stock, restricted stock units, performance shares, performance units, incentive bonus awards, other cash-based awards and other stock-based awards. The number of shares reserved for issuance under the 2020 Equity Plan was initially an aggregate of shares, as adjusted on June 15, 2023 in connection with the Company’s reverse stock split, subject to annual increases under the plan. There were options with a weighted average exercise price of $per share outstanding as of June 30, 2023.
Common Stock Options Issued for Services
On
February 28, 2023, the Company awarded fully vested options to purchase shares of common stock under the 2022 Plan at an exercise
price equal to $ per share, exercisable over a ten-year period to an employee. The estimated value using the Black-Scholes Pricing
Model, based on a volatility rate of % and a call option value of $
| 24 |
BRANCHOUT FOOD INC.
NOTES TO THE CONDENSED FINANCIAL STATEMENTS
(Unaudited)
Note 18 – Common Stock Warrants
Warrants
to purchase a total of
Underwriters’ Warrants Issued Pursuant to IPO
In
June 21, 2023, the Company issued warrants to purchase
Note 19 - Income Taxes
The
Company incurred a net operating loss for the six months ended June 30, 2023, accordingly, no provision for income taxes has been recorded.
In addition, no benefit for income taxes has been recorded due to the uncertainty of the realization of any tax assets. On June 30, 2023,
the Company had approximately $
The
effective income tax rate for the six months ended June 30, 2023 and 2022, was
The Company has incurred cumulative losses which make realization of a deferred tax asset difficult to support in accordance with ASC 740. Based on the available objective evidence, including the Company’s history of its loss, management believes it is more likely than not that the net deferred tax assets will not be fully realizable. Accordingly, a valuation allowance has been recorded against the Federal and state deferred tax assets as of June 30, 2023 and December 31, 2022.
Additionally, in accordance with ASC 740, the Company has evaluated its tax positions and determined there are no uncertain tax positions.
Note 20 – Subsequent Events
We have evaluated subsequent events through August 18, 2023, which is the date these Financial Statements were available to be issued, noting no reportable event, except as follows:
Revolving Line of Credit Repayment
On
July 13, 2023, the Company terminated its revolving line of credit with Ampla LLC, formerly known as Gourmet Growth, and paid a total
of $
Options Granted
On
August 8, 2023, the Company granted options to purchase an aggregate shares of the Company’s common stock, having an exercise
price of $ per share, exercisable over a -year term, to its chairman of the audit committee. The options will vest monthly over
a -year period. The estimated value using the Black-Scholes Pricing Model, based on a volatility rate of % and a call option value
of $
On
August 8, 2023, the Company granted options to purchase an aggregate shares of the Company’s common stock, having an exercise
price of $ per share, exercisable over a -year term, to one of its directors. The options will vest monthly over a -year period.
The estimated value using the Black-Scholes Pricing Model, based on a volatility rate of % and a call option value of $
Warrants Granted
On
July 1, 2023, the Company issued warrants to purchase an aggregate total of
Appointment of CFO
On August 14, 2023, the Company appointed Christopher Coulter to replace Mr. Douglas Durst as the Company’s Chief Financial Officer. Mr. Coulter’s compensation and employment agreement will be filed in a subsequent 8K filing.
| 25 |
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 prospectus filed pursuant to Rule 424(b) under the Securities Act of 1933, as amended, with the Securities and Exchange Commission on Jun 21, 2023 (“Prospectus”). 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. For a discussion of limitations in the measurement of certain of our user metrics, see the section entitled “—Limitations of Key Metrics.”
Overview
We were incorporated as Avochips Inc., an Oregon corporation, on February 21, 2017. On November 2, 2017, AvoChips Inc. converted into Avochips, LLC, an Oregon limited liability company and on November 19, 2021, Avochips, LLC redomiciled to Nevada in connection with a conversion from an Oregon limited liability company to a Nevada corporation, named BranchOut Food Inc.
We are engaged in the development, marketing, sale, and distribution of plant-based, dehydrated fruit and vegetable snacks and powders. One of the Company’s contract manufacturers is in the Republic of Chile. The Company entered into a second contract manufacturing agreement in 2022 with a company based in the Republic of Peru. This facility in Peru houses BranchOut’s continuous through-put dehydration machine, substantially increasing production capacity. Our new large-scale continuous through-put dehydration machine was commissioned in September 2022 and we completed the first production run in the first quarter of 2023. Both facilities produce dehydrated fruit and vegetable products for BranchOut using a new proprietary dehydration technology. The Company’s customers are primarily located throughout the United States.
Business Summary
BranchOut is an emerging natural food brand with a licensed technology platform that enables the manufacturing and marketing of plant-based dehydrated foods. BranchOut has licensed rights from an independent third party to a new dehydration technology designed for drying and processing highly sensitive fruits and vegetables such as avocados, bananas and others. Using the licensed technology platform, we believe BranchOut’s line of branded food products speak to 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 fruit, such as avocados and bananas, have not previously been successfully offered as a dehydrated base for consumer products. Other dried fruit- and vegetable-based products are on the market but are of low quality. We believe that BranchOut’s 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 as the base when compared to conventional drying and dehydration technologies. With more than 17 patents registered or pending in 14 countries, BranchOut has been granted the exclusive rights to use the licensed technology platform as applied to avocados, in addition to BranchOut’s own patent pending process, and nonexclusive rights to use the licensed technology platform for other products.
Our Products
Over time, BranchOut plans to grow revenues strategically by penetrating the multi-billion dollar grocery market opportunity presented by our current product lines, as well as expanding our platform to include additional products that meet our strict plant-based ingredient criteria to diversify our revenue base and increase BranchOut’s TAM opportunity. BranchOut’s current products are primarily:
| ● | BranchOut Snacks: dehydrated fruit- and vegetable-based snacks, including Avocado Chips, Chewy Banana Bites, Pineapple Chips, Brussel Sprout Crisps and Bell Pepper Crisps. | |
| ● | BranchOut Powders: Avocado Powder, Banana Powder and Blueberry Powder. | |
| ● | BranchOut Industrial Ingredients: Bulk Avocado Powder, dried avocado pieces and other fruit powders/pieces. |
BranchOut is currently developing additional products, including chocolate covered fruit items and many private label products for large retailers.
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Factors Affecting Our Results of Operations
We believe our performance and continued success depend on several factors that present significant opportunities. These factors include:
Investments in Product Development and Innovation
We expect to continue to focus on long-term revenue growth through investments in our business. In research and development and new product development, our team is continually working on new products and iterations of our existing products. Further, we anticipate we will continue to invest significantly in our current product line in order to improve customer satisfaction, quality, and unit economics. We are committed to continuously expanding our portfolio and bringing next-generation products to market.
Continued Commercial Expansion in the United States and International Markets
In sales and marketing, we are also dedicating meaningful resources to expand our commercial team in the United States and in international markets. Our top commercial priorities in the United States include sales and marketing expansion to gain additional retail distribution and online sales.
Ability to Grow Our Customer Base in both Online and Traditional Wholesale Distribution Channels
We are currently growing our customer base through both paid and organic online channels, as well as by expanding our presence in a variety of physical retail distribution channels. Online customer acquisitions typically occur at our direct website Branchoutfood.com and Amazon.com. Our online customer acquisition program includes paid and unpaid social media, search, display and traditional media. Our products are also sold through a growing number of physical retail channels. Wholesale customers include grocery chains, club stores, among others. Customer acquisition in physical retail channels depends on, among other things, paid promotions through retailers, display and traditional media.
Ability to Acquire and Retain Customers at a Reasonable Cost
We believe an ability to consistently acquire and retain customers at a reasonable cost relative to projected life-time value will be a key factor affecting future performance. To accomplish this goal, we intend to balance advertising spend between online and offline channels, as well as balancing more targeted and measurable “direct response” marketing spend with advertising focused on increasing our long-term brand recognition, where success attribution is less directly measurable on a near-term basis.
Ability to Drive Repeat Usage of Our Products
We accrue substantial economic value from repeat users of our products who consistently re-order our products. The pace of our growth rate will be affected by the repeat usage dynamics of existing and newly acquired customers.
Ability to Expand Our Product Line
Our goal is to substantially expand our product line over time to increase our growth opportunity and reduce product-specific risks through diversification into multiple products each designed around daily use. Our pace of growth will be partially affected by the cadence and magnitude of new product launches over time.
Ability to Expand Gross Margins
Our overall profitability will be impacted by our ability to expand gross margins through effective sourcing of raw materials, controlling labor and shipping costs, as well as spreading other production-related costs over greater manufacturing volumes.
Ability to Expand Operating Margins
Our ability to expand operating margins will be impacted by our ability to cover fixed general and administrative costs and variable sales and marketing costs with higher revenues and gross profit dollars.
Ability to Manage Our Global Supply Chain and Expand Production In-line with Demand
Our ability to grow and meet future demand will be affected by our ability to properly plan for and source inventory from a variety of suppliers.
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Ability to Optimize Key Components of Working Capital
Our ability to reduce cash burn in the near-term and eventually generate positive cash flow will be partially impacted by our ability to effectively manage all the key working capital components that could influence our cash conversion cycle.
Seasonality
Because we are so early in our lifecycle of growth, it is difficult to discern the exact magnitude of seasonality affecting our business. Any evidence of seasonality is not discernable from our growth.
Components of Our Results of Operations
Net Revenue
We currently derive our revenue from the sale of our finished snack and powder products. We also record as revenue any amounts billed to customers for shipping costs and record as cost of goods sold the actual shipping costs. We have elected to exclude from the measurement of the transaction price all taxes, such as sales, use, value-added, assessed by government authorities and collected from a customer. Therefore, revenue is recognized net of such taxes. Revenues are offset by customer deductions that are non-promotional or undecipherable. This includes slotting fees which are funds paid for shelve placement within the schematic at retail facilities. We expect our net revenue to increase in the foreseeable future as we increase deduction management efforts, expand our sales territories, add new customers and increase the utilization of our products by our existing customers, though net revenue may fluctuate from quarter to quarter due to a variety of factors, including availability of reimbursement, the size and success of our sales force, the number of customers who are aware of and purchase our products.
Cost of Goods Sold
Cost of goods sold consists primarily of finished products purchased from third-party suppliers, shipping costs, excess and obsolete inventory adjustments and royalties. Our products are manufactured to our specifications primarily by third-party suppliers in the Chile, Peru, the PRC and the United States. Cost of goods sold is recognized at the time revenue is recognized in accordance with customer agreements. Prior to selling the products, the cost of our products is recorded as inventories, net in our balance sheets. Cost of goods sold is expected to increase due primarily to increased sales volume.
Gross Profit
We calculate gross profit as net revenue less cost of goods sold, and gross margin as gross profit divided by net revenue. We expect our gross profit to increase in the foreseeable future as our net revenue grows, though our gross profit and gross margin have been and will continue to be affected by a variety of factors, primarily average selling prices, third-party manufacturing costs, change in mix of customers, excess and obsolete inventory adjustments, royalties and seasonality of our business. We expect our gross margin to fluctuate from period to period, however, based upon the factors described above and seasonality.
General and Administrative
General and administrative expenses consist primarily of commissions paid to U.S. sales representatives, salaries, bonuses, and benefits related to selling, marketing, and general and administrative functions, and stock-based compensation. In addition, selling, general, and administrative expenses consist of the costs associated with marketing initiatives, trade show and related travel, other travel expenses, insurance costs, facility expenses and other general corporate expenses.
We expect general and administrative expenses to continue to increase in the foreseeable future as we continue to grow our business, though it may fluctuate from quarter to quarter. We also expect our administrative expenses, including stock-based compensation expense, to increase as we increase our headcount and expand our facilities and business processes to support our operations as a public company. Our selling, general and administrative expenses may fluctuate from period to period due to the seasonality of our business and as we continue to add direct sales territory managers in new territories.
Salary and Wages
Salary and wages consist of salaries and wages for full-time, as well as contract, employees of the Company.
Professional Fees
Professional fees consist of expenses incurred for accounting, legal, finance, consulting, audit, and transfer agent services. It also consists of stock-based compensation paid for advisory, fundraising, and financial services. We anticipate increased expenses related to audit, legal, regulatory, and tax-related services associated with being a public company, compliance with exchange listing and SEC requirements, director and officer insurance premiums and investor relations costs. We also expect to see an increase in our stock-based compensation expense with the establishment of a new equity plan associated with this offering and related grant either in the form of restricted stock units or options.
Total Other Expense
Other expense consists primarily of interest expense from amortization of debt discounts, and other income from interest earned on notes receivable. It also includes any gains and loss attributable to the changes in fair market value from the derivative liabilities associated with the issuance of convertible notes.
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Results of Operations for the Three Months Ended June 30, 2023 and 2022
The following table summarizes selected items from the statement of operations for the three months ended June 30, 2023 and 2022, respectively.
| Three Months Ended | ||||||||||||
| June 30, | Increase / | |||||||||||
| 2023 | 2022 | (Decrease) | ||||||||||
| Net revenue | $ | 343,065 | $ | 305,574 | $ | 37,491 | ||||||
| Cost of goods sold | 305,703 | 424,006 | (118,303 | ) | ||||||||
| Gross profit (loss) | 37,362 | (118,432 | ) | 155,794 | ||||||||
| Operating expenses: | ||||||||||||
| General and administrative | 141,031 | 212,540 | (71,509 | ) | ||||||||
| Salaries and benefits | 436,238 | 221,995 | 214,243 | |||||||||
| Professional services | 158,205 | 120,132 | 38,073 | |||||||||
| Depreciation and amortization | 55,758 | 81 | 55,677 | |||||||||
| Total operating expenses | 791,232 | 554,748 | 236,484 | |||||||||
| Operating loss | (753,870 | ) | (673,180 | ) | 80,690 | |||||||
| Other income (expense): | ||||||||||||
| Interest income | 2,911 | 4,050 | (1,139 | ) | ||||||||
| Interest expense | (222,551 | ) | (211,158 | ) | 11,393 | |||||||
| Total other income (expense) | (219,640 | ) | (207,108 | ) | 12,532 | |||||||
| Net loss | $ | (973,510 | ) | $ | (880,288 | ) | $ | 93,222 | ||||
Net Revenue
Our net revenue for the three months ended June 30, 2023 was $343,065, compared to $305,574 for the three months ended June 30, 2022, an increase of $37,491, or 12%. The increase in revenue was primarily due to increased sales to big box retailers during the three months ended June 30, 2023.
Cost of Goods Sold and Gross Profit (Loss)
Our cost of goods sold for the three months ended June 30, 2023 was $305,703, compared to $424,006 for the three months ended June 30, 2022, a decrease of $118,303 or 28%. Cost of goods sold decreased primarily due to our transition to bulk shipping arrangements. As a result of the foregoing, we had gross profit of $37,362 for the three months ended June 30, 2023 as compared to a gross loss of $118,432 for the three months ended June 30, 2022.
General and Administrative
Our general and administrative expense for the three months ended June 30, 2023 was $141,031, compared to $212,540 for the three months ended June 30, 2022, a decrease of $71,509 or 34%. The largest components of our general and administrative expenses are advertising and marketing, travel, and storage, shipping and handling expense.
| Three Months Ended June 30, | ||||||||||||||||
| 2023 | 2022 | Difference | % change | |||||||||||||
| Advertising and marketing | $ | 25,691 | $ | 144,770 | $ | (119,079 | ) | (82 | )% | |||||||
| Travel | $ | 4,471 | $ | 15,734 | $ | (11,263 | ) | (72 | )% | |||||||
| Storage, shipping and handling | $ | 73,908 | $ | 32,577 | $ | 41,331 | 127 | % | ||||||||
Advertising and marketing expenses decreased for the three months ended June 30, 2023 as compared to the corresponding period in 2022 as we focused our resources on our IPO. Our travel expenses decreased for the same reason, as we reduced our international travel. Storage, shipping and handling expenses increased primarily due to increased international shipping rates.
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Salaries and Wages
Salaries and wages for the three months ended June 30, 2023 was $436,238, compared to $221,995 for the three months ended June 30, 2022, an increase of $214,243, or 97%. This increase was primarily attributable to increased headcount in line with our expanded operations.
Professional Fees
Professional fees for the three months ended June 30, 2023 was $158,205, compared to $120,132 for the three months ended June 30, 2022, an increase of $38,073, or 32%. This increase was primarily attributable to increased consulting fees.
Depreciation Expense
Depreciation expense for the three months ended June 30, 2023 was $55,758, compared to $81 for the three months ended June 30, 2022, an increase of $55,677. The increase was primarily due to depreciation associated with our EnWave 60kW Vacuum Microwave Dehydration and Chiller Machines, which were installed at our contract manufacturer in Peru in the third quarter of 2022.
Other Income (Expense)
In the three months ended June 30, 2023, other expense was $219,640, consisting of $222,551 of interest expense, as partially offset by $2,911 of interest income. For the three months ended June 30, 2022, other expense was $207,108, consisting of $211,158 of interest expense, as partially offset by $4,050 of interest income. Other expense increased by $12,532, or 6%, primarily due to the increased interest on a greater debt burden in the current period, which was mostly settled in June of 2023.
Net loss
Net loss for the three months ended June 30, 2023 was $973,510, compared to $880,288 for the three months ended June 30, 2022, an increased net loss of $93,222, or 11%. The increased net loss was primarily due to $214,243 of increased salaries and wages as we expanded our staff during the current period, as partially offset by $155,794 of improved gross profits over the comparative period.
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Results of Operations for the Six Months Ended June 30, 2023 and 2022
The following table summarizes selected items from the statement of operations for the six months ended June 30, 2023 and 2022, respectively.
| Six Months Ended | ||||||||||||
| June 30, | Increase / | |||||||||||
| 2023 | 2022 | (Decrease) | ||||||||||
| Net revenue | $ | 440,405 | $ | 543,719 | $ | (103,314 | ) | |||||
| Cost of goods sold | 376,862 | 702,506 | (325,644 | ) | ||||||||
| Gross profit (loss) | 63,543 | (158,787 | ) | 222,330 | ||||||||
| Operating expenses: | ||||||||||||
| General and administrative | 321,931 | 394,576 | (72,645 | ) | ||||||||
| Salaries and benefits | 688,048 | 320,872 | 367,176 | |||||||||
| Professional services | 302,346 | 283,435 | 18,911 | |||||||||
| Depreciation and amortization | 111,581 | 162 | 111,419 | |||||||||
| Total operating expenses | 1,423,906 | 999,045 | 424,861 | |||||||||
| Operating loss | (1,360,363 | ) | (1,157,832 | ) | 202,531 | |||||||
| Other income (expense): | ||||||||||||
| Interest income | 5,756 | 7,023 | (1,267 | ) | ||||||||
| Interest expense | (395,996 | ) | (1,829,446 | ) | (1,433,450 | ) | ||||||
| Total other income (expense) | (390,240 | ) | (1,822,423 | ) | (1,432,183 | ) | ||||||
| Net loss | $ | (1,750,603 | ) | $ | (2,980,255 | ) | $ | (1,229,652 | ) | |||
Net Revenue
Our net revenue for the six months ended June 30, 2023 was $440,405, compared to $543,719 for the six months ended June 30, 2022, a decrease of $103,314, or 19%. The decrease in revenue was primarily due to our having had several large purchase orders from Costco in the six months ended June 30, 2022 which were not replicated in the six months ended June 30, 2023.
Cost of Goods Sold and Gross Profit (Loss)
Our cost of goods sold for the six months ended June 30, 2023 was $376,862, compared to $702,506 for the six months ended June 30, 2022, a decrease of $325,644 or 46%. Cost of goods sold decreased primarily in line with the decrease in our sales for the period and a reduction in our shipping costs, which, in turn, was primarily a result of our transition to bulk shipping arrangements. As a result of the foregoing, we had gross profit of $63,543 for the six months ended June 30, 2023 as compared to a gross loss of $158,787 for the six months ended June 30, 2022.
General and Administrative
Our general and administrative expense for the six months ended June 30, 2023 was $321,931, compared to $394,576 for the six months ended June 30, 2022, a decrease of $71,509, or 34%. The largest components of our general and administrative expenses are advertising and marketing, travel, and storage, shipping and handling expense.
| Six Months Ended June 30, | ||||||||||||||||
| 2023 | 2022 | Difference | % change | |||||||||||||
| Advertising and marketing | $ | 62,360 | $ | 196,021 | $ | (133,661 | ) | (68 | )% | |||||||
| Travel | $ | 29,411 | $ | 26,598 | $ | 2,813 | 11 | % | ||||||||
| Storage, shipping and handling | $ | 96,798 | $ | 49,781 | $ | 47,017 | 94 | % | ||||||||
Advertising and marketing expenses decreased for the six months ended June 30, 2023, as compared to the corresponding period in 2022 as we focused our resources on our IPO. Our travel expenses increased in connection with commencing new operations that required travel to Peru during the first quarter of 2023. And, storage, shipping and handling expenses increased primarily due to increased international shipping rates.
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Salaries and Wages
Salaries and wages for the six months ended June 30, 2023 was $688,048, compared to $320,872 for the six months ended June 30, 2022, an increase of $367,176, or 114%. This increase was primarily attributable to increased headcount in line with our expanded operations.
Professional Fees
Professional fees for the six months ended June 30, 2023 was $302,346, compared to $283,435 for the six months ended June 30, 2022, an increase of $18,911, or 7%. This increase was primarily attributable to increased consulting fees.
Depreciation Expense
Depreciation expense for the six months ended June 30, 2023 was $111,581, compared to $162 for the six months ended June 30, 2022, an increase of $111,419. The increase was primarily due to depreciation associated with our EnWave 60kW Vacuum Microwave Dehydration and Chiller Machines, which were installed at our contract manufacturer in Peru in the third quarter of 2022.
Other Income (Expense)
In the six months ended June 30, 2023, other expense was $390,240, consisting of $395,996 of interest expense, as partially offset by $5,756 of interest income. During the comparative six months ended June 30, 2022, other expense was $1,822,423, consisting of $1,829,446 of interest expense, as partially offset by $7,023 of interest income. Other expense decreased by $1,432,183, or 79%, primarily due to the decreased amortization of debt discounts in the current period.
Net loss
Net loss for the six months ended June 30, 2023 was $1,750,603, compared to $2,980,255 during the six months ended June 30, 2022, a decreased net loss of $1,229,652, or 41%. The decreased net loss was primarily due to $222,330 of improved gross profits and a reduction of $1,433,450 of interest expense related to the amortization of debt discounts in the prior period that were not recognized in the current period, as partially offset by $367,176 of increased salaries and wages as we expanded our headcount during the current period.
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Liquidity and Capital Resources
The following table summarizes our total current assets, liabilities and working capital as of June 30, 2023 and December 31, 2022.
| June 30, | December 31, | |||||||
| 2023 | 2022 | |||||||
| Current Assets | $ | 3,512,513 | $ | 1,077,973 | ||||
| Current Liabilities | $ | 634,424 | $ | 8,369,533 | ||||
| Working Capital | $ | 2,878,089 | $ | (7,291,560 | ) | |||
As of June 30, 2023, we had working capital of $2,878,089. 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 product, common stock sales, and debt financing. As of June 30, 2023, we had cash of $1,588,794, total liabilities of $785,826, and an accumulated deficit of $10,635,434. As of December 31, 2022, we had cash of $312,697, total liabilities of $8,404,033, and an accumulated deficit of $8,884,831.
Cash Flow
Comparison of the Six Months Ended June 30, 2023 and the Six Months Ended June 30, 2022
The following table sets forth the primary sources and uses of cash for the periods presented below:
| Six Months Ended | ||||||||
| June 30, | ||||||||
| 2023 | 2022 | |||||||
| Net cash used in operating activities | $ | (2,799,724 | ) | $ | (1,222,201 | ) | ||
| Net cash used in investing activities | (10,100 | ) | (27,090 | ) | ||||
| Net cash provided by financing activities | 3,850,171 | 1,743,139 | ||||||
| Net change in cash | $ | 1,040,347 | $ | 493,848 | ||||
Net Cash Used in Operating Activities
Net cash used in operating activities was $2,799,724 for the six months ended June 30, 2023, compared to $1,222,201 for the six months ended June 30, 2022, an increase of $1,577,523, or 129%. The increase was primarily due to increased inventory purchases and payments on accounts payable from our use of IPO proceeds.
Net Cash Used in Investing Activities
Net cash used in investing activities was $10,100 for the six months ended June 30, 2023, compared to $27,090 for the six months ended June 30, 2022, a decrease of $16,990, or 63%. This decrease was primarily attributable to decreased property and equipment purchases, as partially offset by advances received on notes receivable in the prior period that were not replicated in the current period.
Net Cash Provided by Financing Activities
Net cash provided by financing activities was $3,850,171 for the six months ended June 30, 2023, compared to $1,743,139 for the six months ended June 30, 2022, an increase of $2,107,032, or 121%. Our increased cash provided by financing activities was primarily from the net proceeds received in our IPO in the current period, as partially offset by debt repayments.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Our financial results are affected by the selection and application of accounting policies and methods. In the six-month period ended June 30, 2023 there were no changes to the application of critical accounting policies previously disclosed in the Prospectus.
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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
Quantitative and qualitative disclosures about currency exchange rate risk and interest rate risk are included in Part II, Item 7A “Quantitative and Qualitative Disclosures About Market Risk” in the 2022 Annual Report on Form 10-K. In the six-month period ended June 30, 2023, there were no material changes from the information provided therein.
ITEM 4. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
Our management is responsible for establishing and maintaining adequate disclosure controls and procedures for our company. Consequently, our management, with the participation of our chief executive officer and chief financial officer, evaluated the effectiveness of our disclosure controls and procedures pursuant to Rule 13a-15 under the Exchange Act as of June 30, 2023. In designing and evaluating the disclosure controls and procedures, management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives. In addition, the design of disclosure controls and procedures must reflect the fact that there are resource constraints, and that management is required to apply its judgment in evaluating the benefits of possible controls and procedures relative to their costs. Based on that evaluation, our chief executive officer and chief financial officer concluded that our disclosure controls and procedures are designed at a reasonable assurance level and are effective to provide reasonable assurance that information we are required to disclose in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms, and that such information is accumulated and communicated to our management, including our chief executive officer and chief financial officer, as appropriate, to allow timely decisions regarding required disclosure.
Changes in Internal Control Over Financial Reporting
During the six-month period ended June 30, 2023, there were no changes in our internal control over financial reporting that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934).
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PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
We may become, from time to time, involved in routine litigation or subject to disputes or claims related to our business activities. We are not currently party to any pending legal proceedings that we believe would, individually or in the aggregate, have a material adverse effect on our financial condition, cash flows or results of operations.
ITEM 1A. RISK FACTORS
In addition to other information set forth in this report, readers should carefully consider the risk factors discussed in the Prospectus. Any of the risk factors disclosed in the Prospectus or our reports could materially affect our business, financial condition or future results. The risks described in the Prospectus are not the only risks we face. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially and adversely affect our business, financial condition and/or operating results.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
The following issuances of our securities during the three-month period ended June 30, 2023 were exempt from the registration requirements of the Securities Act of 1933 pursuant to Section 4(a)(2) thereof and/or Rule 506 of Regulation D promulgated thereunder.
On June 12, 2023, we issued senior secured promissory notes in aggregate principal amount of $170,000 and stock purchase warrants to four accredited investors. The principal balance of the notes was paid in full during the second quarter of 2023. The stock purchase warrants have an exercise price of $6.00 per share and are exercisable up to ten years from the issuance date of July 1, 2023. The aggregate number of shares available for purchase under the warrants is 30,000 shares.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
None
ITEM 4. MINE SAFETY DISCLOSURES
None.
ITEM 5. OTHER INFORMATION
None
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ITEM 6. EXHIBITS.
| * | Filed herewith |
| ** | Previously filed |
| † | Indicates management contract or compensatory plan or arrangement |
| £ | Portions of this exhibit have been redacted pursuant to Item 601(b)(10)(iv) of Regulation S-K |
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the registration has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| Signature | Title | Date | ||
| /s/ Eric Healy | Chief Executive Officer | August 21, 2023 | ||
| Eric Healy | (Principal Executive Officer) | |||
| /s/ Christopher Coulter | Chief Financial Officer | August 21, 2023 | ||
| Christopher Coulter | (Principal Accounting and Financial Officer) |
| 37 |