Business context and reporting period
BranchOut Food Inc. filed this unaudited Form 10-Q for the quarter and nine months ended September 30, 2023. The company develops, markets, sells, and distributes plant-based dehydrated fruit and vegetable snacks and powders. Production is handled by contract manufacturers in Chile and Peru using licensed dehydration technology; the Peru facility’s new production machine began its first production run in Q1 2023.
Financial performance and condition
| Metric | Q3 2023 | Q3 2022 | Nine months 2023 | Nine months 2022 |
|---|---|---|---|---|
| Net revenue | $907,000 | $182,000 | $1,347,000 | $726,000 |
| Gross profit (loss) | $28,000 | $9,000 | $92,000 | $(150,000) |
| Gross margin | 3% | 5% | 7% | (21%) |
| Operating loss | $(699,000) | $(602,000) | $(2,059,000) | $(1,760,000) |
| Net loss | $(706,000) | $(816,000) | $(2,457,000) | $(3,797,000) |
| Operating cash flow | Not presented quarterly | Not presented quarterly | $(3,258,000) | $(2,014,000) |
At September 30, 2023, cash was $1.01 million, current assets $2.89 million, current liabilities $614,000, and working capital $2.28 million. Total liabilities were $757,000, versus $8.40 million at December 31, 2022; stockholders’ equity was $3.60 million, versus a $5.14 million deficit. Notes payable totaled $234,500, including a $200,000 current note and $34,500 SBA loan; finance lease liabilities were $141,501. Convertible notes and the revolving credit line had been eliminated from the balance sheet by period end.
Cash increased by $460,000 over the first nine months, reflecting $3.78 million of financing cash flow—principally IPO proceeds—offset by operating and investing outflows. The company raised $6.23 million net in its June 2023 IPO and converted $6.03 million of convertible debt, including accrued interest, into common shares. Outstanding common shares were 4,007,274 at September 30 and 4,044,252 at November 13, 2023.
Material changes versus prior comparable periods
- Q3 revenue rose 399% year over year, driven primarily by sales to big-box retailers; cost of goods sold rose 408%. Gross margin fell to 3% from 5%, which management attributed to higher product costs.
- Nine-month revenue rose 86%. Gross results improved from a $150,000 loss to $92,000 profit; management cited savings from bulk shipping arrangements.
- Operating expenses increased $541,000 for the nine-month period, including higher salaries and wages, professional fees, and depreciation; general and administrative expense declined, mainly as advertising and marketing spending fell.
- Nine-month net loss narrowed 35%, primarily because prior-year interest expense included substantial debt-discount amortization and other debt costs. Operating loss nevertheless widened.
- The IPO and debt conversions substantially reduced reported liabilities and improved working capital, while shares outstanding increased materially.
Outlook, risks, contingencies, and unusual items
Management states that recurring losses and the $11.34 million accumulated deficit raise substantial doubt about the company’s ability to continue as a going concern. It says it is pursuing new customers and additional capital, and may reduce expenses if sales do not develop as expected. Management cautions it may not generate sufficient funds for the next 12 months; additional financing may be needed, with no assurance it will be available. No specific revenue, earnings, or cash-flow guidance is provided.
- Customer concentration is high: two customers accounted for 87% of nine-month revenue, and one customer represented 79% of accounts receivable at September 30.
- The company relies on contract manufacturers and licensed technology. It had $427,745 in inventory advances and $485,265 in advances to its Peruvian manufacturer; the latter is unsecured, undocumented by a promissory note, and repayable through product discounts.
- A $200,000 Hinman note bears 18% interest, is secured by Walmart receivables, and matures January 10, 2024. The filing also reports $39,583 of interest owed on previously repaid secured notes at September 30.
- Maintaining exclusivity under the EnWave license may entail annual minimum royalties of $100,000 in 2024 and $250,000 annually thereafter, plus commitments to purchase additional equipment. The filing describes these as unrecognized commitments and says the company may elect not to pay and forgo exclusivity.
- The company reported no material pending litigation and no material changes in internal control over financial reporting; management concluded disclosure controls were effective at a reasonable assurance level.
- Subsequent to quarter-end, the company issued shares for services and granted options, adding potential dilution.
Important facts for investors to verify
- Whether customer growth continues and whether the concentrated customer base and receivables convert into cash.
- Available financing and cash runway, given the going-concern warning and $3.26 million of operating cash used in nine months.
- Whether gross margins improve as sales scale, particularly after Q3’s 3% margin.
- Terms, repayment status, and interest obligations for the Hinman note and other remaining debt.
- Recovery of manufacturer advances and execution of production, license, and equipment commitments.
- Fully diluted share count, including outstanding options, warrants, and subsequent equity awards.