BranchOut Food Inc. — Q1 2024 Form 10-Q
Reporting period: Three months ended March 31, 2024; financial statements are unaudited. BranchOut develops, markets and sells dehydrated fruit and vegetable snacks and powders, using contract manufacturers and licensed dehydration technology.
Financial performance and position
| Metric | Q1 2024 | Q1 2023 / comparison |
|---|---|---|
| Net revenue | $1,467,016 | $97,340 |
| Gross profit (loss) | $283,588; 19% margin | $(29,642); (30%) margin |
| Operating expenses | $1,308,688 | $576,851 |
| Operating loss | $(1,025,100) | $(606,493) |
| Net loss | $(1,050,967); $(0.26) per share | $(777,093); $(0.26) per share |
| Cash from operations | $(503,578) | $(656,593) |
| Cash, quarter-end | $251,700 | $657,789 at Dec. 31, 2023 |
| Working capital | $399,444 | $899,150 at Dec. 31, 2023 |
At March 31, 2024, total assets were $2.69 million, total liabilities $997,069 and stockholders’ equity $1.69 million. Notes payable included $350,805 of related-party notes, net of discounts, and $34,500 of other notes; lease liabilities totaled $124,519. The $400,000 senior secured notes issued in January bear 15% interest, mature no later than December 31, 2024, and are secured by substantially all company assets. The company also reported $28,744 of interest expense.
Revenue increased substantially, primarily from the largest customer. Gross margin improved, which management attributed partly to bulk-shipping cost savings. Operating expenses rose to $1.31 million, including higher salaries and wages, professional fees, and general and administrative costs. The net loss widened 35%, principally due to higher noncash stock-based compensation and public-company compliance costs, partly offset by lower interest expense. Operating cash use improved year over year, but cash fell by $406,089 during the quarter after investing and financing activities.
Filing arithmetic note: The MD&A narrative states a revenue increase of $1,056,446, but the reported revenues imply an increase of $1,369,676; the filing text does not reconcile this discrepancy.
Outlook, risks and notable events
- Going concern: Recurring losses, a $13.86 million accumulated deficit and limited working capital raise substantial doubt about the company’s ability to continue as a going concern. Management says it is seeking customers and additional capital; there is no assurance it will raise funds or reach profitability.
- Customer concentration: One customer generated 99% of Q1 2024 net revenue and represented 93% of quarter-end receivables, creating significant concentration risk.
- Retailer opportunity: Management said an additional retailer agreement is expected to place products in 1,400 stores in September 2024 and could increase annualized revenue from that retailer to $8 million. This is an expectation, not formal company-wide guidance.
- Manufacturing: A legal dispute involving the Peru contract manufacturer suspended its operations and left BranchOut without access to its dehydration machine. The company shifted orders to alternative manufacturers and warned that costs may rise and results could be materially affected if access is not restored.
- Peru facility and funding needs: On May 10, 2024, the company entered a 10-year lease for a 50,000-square-foot Peru facility, with monthly payments starting at $8,000. It expects to resume Peruvian production in Q3 2024. It also agreed to buy a $1.267 million mortgage receivable, paid $275,000 in May, and owes the remaining $992,000 by August 10, 2024.
- Subsequent financing: On April 16, the company sold an additional $225,000 of 15% senior secured notes and warrants. The amended financing program permits up to $2 million of notes, subject to its terms, and includes additional payments and warrants for existing investors and fees payable to the CFO-affiliated Eagle Vision. The company’s January financing also involved a $40,000 cash fee to Eagle Vision and $15,000 of legal fees to its counsel.
- Nasdaq listing: Nasdaq notified the company on April 11 that its December 31, 2023 stockholders’ equity of $2.21 million was below the $2.5 million minimum. It had until May 28 to submit a compliance plan; the company expected equity sales to help restore compliance, but gave no assurance of success.
- Other commitments and controls: Maintaining exclusivity under the EnWave license entails future minimum royalties, including $100,000 for 2024 and $250,000 annually for 2025–2027, plus possible equipment purchases; the company may elect not to pay and forgo exclusivity. Management concluded disclosure controls were not effective as of March 31, 2024.
Important facts for investors to verify
- Whether the retailer expansion occurs as expected and translates into recurring sales, while reducing dependence on the single dominant customer.
- Available liquidity and the company’s ability to meet the $992,000 August mortgage-receivable payment, operating needs and debt obligations.
- Whether the Peru facility becomes operational on schedule, including equipment relocation, production costs and lease commitments.
- Progress on Nasdaq equity compliance and any further dilution or financing terms.
- The revenue-growth arithmetic discrepancy in MD&A and remediation of ineffective disclosure controls.