BranchOut Food Inc. — Q2 2023 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2023. Unaudited interim financial statements. BranchOut develops, markets, sells, and distributes plant-based dehydrated fruit and vegetable snacks and powders, using contract manufacturers in Chile and Peru.
Financial performance
| Metric | Q2 2023 | Q2 2022 | Six months 2023 | Six months 2022 |
|---|---|---|---|---|
| Net revenue | $343,065 | $305,574 | $440,405 | $543,719 |
| Gross profit (loss) | $37,362 | $(118,432) | $63,543 | $(158,787) |
| Gross margin | 10.9% | (38.8%) | 14.4% | (29.2%) |
| Operating loss | $(753,870) | $(673,180) | $(1,360,363) | $(1,157,832) |
| Net loss | $(973,510) | $(880,288) | $(1,750,603) | $(2,980,255) |
| Operating cash flow | Not provided for quarter | Not provided for quarter | $(2,799,724) | $(1,222,201) |
Q2 revenue increased 12% year over year, attributed primarily to big-box retailer sales. Six-month revenue declined 19%, primarily because large Costco orders in the prior-year period did not recur. Gross profit improved in both comparisons, with management citing lower costs and a shift to bulk shipping. Q2 net loss widened 11%, as higher salaries and wages more than offset improved gross profit. For the six months, net loss narrowed 41%, mainly because the prior-year period included substantially higher debt-discount amortization.
Operating expenses were $791,232 in Q2 and $1,423,906 for the first six months. Six-month salaries and wages rose 114% to $688,048, primarily due to increased headcount; depreciation increased to $111,581 following installation of production equipment in Peru. Interest expense was $395,996 for the six months, versus $1,829,446 in 2022.
Liquidity, capital and balance sheet
- At June 30, 2023, cash was $1,588,794; current assets were $3,512,513 and current liabilities were $634,424, resulting in working capital of $2,878,089. At December 31, 2022, working capital was negative $7,291,560.
- Total liabilities were $785,826, compared with $8,404,033 at year-end 2022. Convertible notes were eliminated through conversion at the IPO. Notes payable were $234,500, and the revolving credit balance was $42,750. A finance-lease liability of $164,072 was also recorded.
- Six-month financing cash flow was $3,850,171, including $6,226,000 of IPO proceeds, partly offset by debt repayments and offering costs. The IPO sold 1,190,000 shares at $6 per share; $6,029,204 of convertible principal and interest converted into 1,572,171 shares. After $1,283,954 of offering costs, the filing reports $4,942,046 of net equity from the IPO.
- Cash used in operating activities rose to $2,799,724, primarily reflecting inventory-related payments and payments on accounts payable. Cash increased by $1,040,347 over the six months.
- Inventory advances were $851,253 at June 30, 2023. Other current assets included $467,637 advanced to the Peru co-manufacturer, repayable through product discounts; this advance is unsecured and not supported by a promissory note.
Outlook, risks and notable items
- Going concern: Management states recurring operating losses, a $10,635,434 accumulated deficit, and cash that may not be sufficient to sustain operations raise substantial doubt about the company’s ability to continue as a going concern. Management is seeking new customers and additional capital. It anticipates near-term net losses and negative operating cash flows; no numerical guidance is provided.
- Customer concentration: KEHE and Walmart represented 78% of six-month 2023 net revenue; KEHE and Costco represented 88% in the comparable 2022 period. KEHE and Walmart accounted for 74% of June 2023 accounts receivable.
- Operating plans and risks: Management expects to pursue retail and online expansion, new products, and higher production volumes. Results depend on customer growth and repeat purchases, margins, working-capital management, and supply-chain execution. The filing notes that actual results may differ materially from forward-looking statements.
- Commitments: The EnWave license includes minimum royalties to retain avocado-product exclusivity, including $206,763 for 2023 and higher annual minimums thereafter; the filing describes these as unrecognized commitments that the company may elect not to pay. Additional equipment purchase requirements also apply under the agreement.
- Subsequent events: The company terminated and repaid its $42,750 Ampla line of credit in July 2023. Christopher Coulter was appointed CFO in August, replacing Douglas Durst. The filing reports no material pending litigation and no material change in market-risk disclosures.
Important facts for investors to verify
- Whether additional capital or improved operating cash flow will be needed, and how management plans to address the disclosed going-concern uncertainty.
- Whether revenue growth can be sustained despite the six-month year-over-year decline and concentration among a small number of customers.
- The collectability and commercial recovery of the manufacturer advances and the $384,628 Nanuva note receivable.
- The actual cost and obligations associated with EnWave royalties and future equipment commitments, including the company’s decision on maintaining exclusivity.
- Post-IPO share count, dilution from outstanding options and warrants, and the terms and use of proceeds from subsequent financing activity.