BOF Branchout Food Inc. - 10-K

ITEM 1A. RISK FACTORS

Investing in our securities involves a high degree of risk. You should carefully consider the risks described below, together with the other information contained in this Annual Report on Form 10-K, including our consolidated financial statements and related notes. If any of the risks described below occur, our business, financial condition, results of operations, cash flows, and prospects could be materially and adversely affected. The trading price of our common stock could decline, and you could lose all or part of your investment.

Risks Related to Our Operating History, Financial Position, and Capital Structure

We have incurred losses and negative cash flows since inception, and we may not achieve or sustain profitability.

We have incurred losses since inception. During the years ended December 31, 2025 and 2024, we incurred net losses of $6,124,672 and $4,751,516, respectively. There can be no assurance that we will not continue to incur net losses in the future. Our ability to achieve profitability depends on our ability to scale production, expand distribution, manage customer concentration, control input, labor, and logistics costs, improve manufacturing utilization and yields, and grow gross profit at a rate sufficient to cover operating expenses and public company costs. If we are unable to execute successfully on these objectives, we may continue to incur losses and negative cash flows, which could materially adversely affect our business, financial condition, and results of operations.

Our financial statements include an explanatory paragraph regarding substantial doubt about our ability to continue as a going concern.

Our audited consolidated financial statements include an explanatory paragraph from our independent registered public accounting firm expressing substantial doubt about our ability to continue as a going concern. This condition may adversely affect our ability to raise capital, negotiate favorable terms with customers and suppliers, retain employees, and execute our growth strategy. If our operating performance does not improve or we are unable to obtain additional liquidity when needed, we may be required to delay or reduce investments, scale back operations, or pursue financing or strategic alternatives on unfavorable terms, which could materially adversely affect our business.

We may require additional capital to fund operations and growth, and financing may not be available on acceptable terms or at all.

Our operating model requires significant working capital to support raw material sourcing, inventory, international transit times, and customer program requirements. We may need to raise additional capital through equity, debt, or other financings to fund operations, expand manufacturing capacity, or support growth initiatives. Financing may not be available when needed, or may be available only on unfavorable terms, including dilution to existing stockholders, restrictive covenants, increased leverage, or security interests in our assets. Any inability to obtain sufficient financing could materially adversely affect our liquidity, operations, and growth prospects.

Our current growth may not be indicative of our future growth, and our limited operating history may make it difficult to assess our future viability.

We expect that as our revenue increases, our revenue growth rate will decline. We also believe that growth of our revenue depends on several factors, including our ability to:

expand our existing channels of distribution;

develop additional channels of distribution;

grow our customer base;

effectively introduce new products;

increase awareness of our brand;

manufacture at a scale that satisfies future demand; and

effectively source key raw materials.

We may not successfully accomplish any of these objectives. We have not yet demonstrated the ability to manage rapid growth over a long period of time or achieve profitability at scale. Consequently, any predictions regarding our future success or viability may not be as accurate as they could be if we had a longer operating history or had previously achieved profitability.

Our indebtedness may adversely affect our financial condition and limit our operational and financial flexibility.

Our indebtedness and related security interests may limit our ability to incur additional debt, fund working capital needs, or pursue strategic opportunities. If we are unable to generate sufficient cash flow to service our obligations, we may be required to refinance, raise additional capital, or pursue other alternatives, which may not be available on favorable terms or at all.

Failure to maintain compliance with Nasdaq listing requirements could adversely affect the liquidity and market price of our common stock.

We have previously been subject to Nasdaq compliance matters, including monitoring related to stockholders’ equity and other continued listing requirements. If we fail to maintain compliance with applicable listing standards, we could be subject to delisting, which could reduce liquidity, limit access to capital markets, increase stock price volatility, and materially adversely affect the market price of our common stock.

The market price of our common stock may be volatile and subject to significant fluctuations, which could result in losses for investors.

The trading price of our common stock may fluctuate significantly due to factors including operating results, customer concentration, liquidity constraints, financing activities, market conditions, and investor perceptions of growth-stage companies. These fluctuations may be unrelated to our actual operating performance and could result in losses for investors.

Our ability to access the capital markets and the issuance of additional securities could dilute existing stockholders and adversely affect the market price of our common stock.

We may continue to rely on the capital markets to fund operations, support growth initiatives, and strengthen our balance sheet. To raise capital, we may issue additional shares of common stock, preferred stock, warrants, options, convertible securities, or other equity-linked instruments. The issuance of additional securities, or the potential for such issuances, could result in substantial dilution to existing stockholders and could adversely affect the market price of our common stock.

Our capital structure includes outstanding warrants, stock options, and convertible notes. The exercise or conversion of these securities could further dilute stockholders and increase the supply of shares available for sale in the public market, which could put downward pressure on our stock price. In addition, the perception that we may issue additional equity securities in the future could adversely affect the trading price of our common stock.

Access to capital markets may be limited by market conditions, our operating performance, liquidity, stock price volatility, and compliance with applicable listing requirements. If we are unable to raise capital on acceptable terms when needed, we may be required to delay or reduce investments, curtail operations, or pursue alternative financing arrangements that may be more costly or restrictive.

Because our common stock may have limited trading volume and analyst coverage, issuances of additional securities or significant sales of shares by existing stockholders could result in increased price volatility and adversely affect investor confidence. If we are unable to effectively manage our capital structure or access the capital markets on favorable terms, our business, financial condition, and growth prospects could be materially adversely affected.

Risks Related to Our Emerging Growth Company and Smaller Reporting Company Status

Because we are an emerging growth company and a smaller reporting company, our disclosures may be less comprehensive than those of other public companies.

We are an emerging growth company (“EGC”) and a smaller reporting company (“SRC”) and take advantage of certain reduced reporting, disclosure, and governance requirements, including exemptions from auditor attestation of internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act, reduced executive compensation disclosure, and extended transition periods for new accounting standards. As a result, investors may find our common stock less attractive, which could result in reduced trading activity and increased stock price volatility.

Risks Related to Internal Controls and Financial Reporting

If we fail to maintain effective internal control over financial reporting, our ability to produce accurate financial statements could be impaired.

As a public company, we are required to maintain effective internal control over financial reporting. Our operations involve complex manufacturing, inventory, cost accounting, and cross-border transactions. As we scale our business, our systems, processes, and personnel may not keep pace with growth. We may identify control deficiencies or material weaknesses, which could result in errors in our financial statements, restatements, delayed reporting, or loss of investor confidence, any of which could materially adversely affect our business and stock price.

Risks Related to Customers, Distribution, and Market Demand

A substantial portion of our net sales is derived from a limited number of customers.

A significant portion of our net sales and accounts receivable is derived from a limited number of large retail customers. As a result, our operating results, cash flows, and working capital depend on the purchasing decisions, financial condition, and payment practices of these customers. Reductions in purchase volumes, changes in pricing or promotional terms, increased chargebacks, payment delays, or the loss of a significant customer could materially adversely affect our net sales, margins, liquidity, and manufacturing utilization.

We generally do not have long-term purchase commitments from customers, and demand forecasting is difficult.

Customer purchases are typically made through purchase orders and program-based arrangements rather than long-term volume commitments. Customers may reduce, delay, or cancel orders with limited notice, contributing to revenue volatility and increasing the difficulty of forecasting demand, planning production, and managing inventory.

The consumer-packaged foods industry is highly competitive, and we may be unable to compete effectively.

We compete with large, branded food companies, emerging snack brands, and private-label manufacturers that have significantly greater financial, marketing, and distribution resources. Competitive pricing, promotional activity, and shifts in retailer category strategies could pressure our margins and limit our ability to grow.

Changes in consumer preferences or retailer category strategies could reduce demand for our products.

Consumer tastes and retailer merchandising priorities can shift rapidly. If demand for clean-label, fruit- and vegetable-based snacks declines, if retailers reduce shelf space, or if competing products gain preference, our net sales and operating results could be adversely affected.

Risks Related to Manufacturing, Supply Chain, Agricultural Inputs, and Seasonality

Our manufacturing operations are concentrated in a single facility in Peru, and any disruption could materially adversely affect our business, results of operations, and financial condition.

All of our production is conducted at our manufacturing facility in Pisco, Peru, which commenced operations in December 2024. As a result, our ability to meet customer demand, maintain service levels, and generate revenue depends substantially on the continued operation of this facility. Any disruption—including equipment failure, utilities interruptions, labor disruptions, facility damage, supply interruptions, natural disasters, public health events, or regulatory or governmental actions—could impair production, delay shipments, increase costs, and harm customer relationships.

Because we do not currently have redundant manufacturing capacity, any prolonged disruption could require us to reduce or suspend production. Replacing, repairing, or relocating production on a timely or cost-effective basis may not be feasible and could require significant capital investment, management attention, and time. In addition, disruptions could result in inventory shortages, lost sales, penalties or chargebacks, increased logistics costs, and reduced manufacturing utilization, which could materially adversely affect margins, cash flows, and working capital.

We are exposed to risks associated with operating in Peru.

Operating in Peru exposes us to risks related to political, economic, regulatory, labor, tax, infrastructure, and currency conditions. Changes in laws or regulations, labor disruptions, tax enforcement actions, currency controls, inflation, or political instability could increase costs, disrupt operations, or impair our ability to repatriate cash, any of which could materially adversely affect our business.

Foreign currency fluctuations could adversely affect our results of operations.

A significant portion of our costs are denominated in Peruvian soles, while substantially all of our revenues are denominated in U.S. dollars. Fluctuations in exchange rates could increase our costs, reduce margins, and adversely affect our financial results. We do not currently hedge foreign currency risk.

If we are unable to effectively manage growth and scale our systems and controls, our business and reporting could be adversely affected.

Scaling a manufacturing-led, cross-border operating model places significant demands on our organizational, operational, and financial infrastructure. If our systems, personnel, processes, and internal controls do not keep pace with growth—particularly in areas such as inventory, cost accounting, logistics, and revenue processes—we could experience operational disruptions, increased costs, delays in reporting, or reduced investor confidence.

Achieving efficient manufacturing utilization and throughput is important to our margins, and failure to do so could adversely affect profitability.

Our cost structure includes fixed and semi-fixed costs. If demand, uptime, yields, or production efficiency do not meet expectations, we may experience margin pressure, excess inventory, inventory write-downs, or increased per-unit costs.

Agricultural supply, environmental conditions, and commodity volatility could adversely affect our costs, production, and margins.

Our operating scale and sourcing flexibility are more limited than those of larger competitors, which may increase our exposure to agricultural and environmental risks. Our production depends on the availability, quality, and cost of agricultural raw materials, which are subject to volatility driven by weather conditions, climate variability, temperature extremes, drought, flooding, crop disease, and other environmental factors. Adverse growing conditions could reduce crop yields, affect raw material quality, disrupt harvest cycles, and increase input costs, which could negatively affect production volumes, gross margins, and operating results.

Water availability is also a critical factor in agricultural production and food processing. Changes in water access, drought conditions, water use restrictions, or increased competition for water resources in regions where our raw materials are sourced or where our manufacturing facility operates could disrupt supply, increase costs, or require operational adjustments.

In addition, evolving environmental; sustainability; and environmental, social and governance related expectations from regulators, customers, and investors may increase our reporting obligations, compliance costs, and operational complexity. We may be required to provide additional disclosures regarding environmental impact, sourcing practices, emissions, or sustainability metrics, which may require investments in systems, processes, and data collection. Failure to meet evolving expectations could adversely affect our reputation, customer relationships, and access to capital.

Our products and marketing may also be subject to scrutiny related to sustainability, environmental, or product claims. Regulatory agencies, competitors, consumer groups, or plaintiffs may challenge the accuracy or substantiation of claims related to sourcing, environmental impact, or sustainability practices. Such challenges could result in litigation, regulatory actions, increased compliance costs, reputational harm, or changes to our labeling or marketing practices.

If agricultural supply conditions deteriorate, commodity price volatility persists, environmental factors worsen, or sustainability-related requirements increase, and we are unable to effectively manage these risks, our production, margins, financial condition, and results of operations could be materially adversely affected.

Seasonality in harvest cycles and consumer demand may cause quarterly results to fluctuate and increase working capital requirements.

Our operating model is influenced by harvest timing for certain raw materials and seasonal shifts in consumer demand and retailer purchasing patterns. If we are unable to align production and inventory planning with harvest availability and customer ordering cycles—particularly when building shelf-stable inventory for later demand—our service levels, working capital needs, and margins could be adversely affected.

Inventory management challenges, product shelf-life limitations, and potential obsolescence could adversely affect our margins, cash flows, and operating results.

Our business requires us to maintain significant levels of inventory, including raw materials, work-in-process, and finished goods, to support customer programs, international transit times, and production planning. Although our products are shelf-stable, they have finite shelf lives and are subject to quality, freshness, and specification requirements imposed by customers and regulators. Inaccurate demand forecasting, changes in customer purchasing patterns, program delays, order cancellations, or shifts in retailer promotional strategies could result in excess, slow-moving, or obsolete inventory.

Inventory levels may also increase as a result of operational disruptions, manufacturing inefficiencies, changes in production yields, or efforts to build inventory in advance of anticipated demand or harvest availability. Excess inventory may require markdowns, write-downs, or disposal, which could adversely affect gross margins, operating results, and cash flows. In addition, inventory that approaches the end of its usable shelf life may be subject to customer rejection, reduced pricing, or increased handling and logistics costs.

Our cross-border manufacturing and distribution model further increases inventory risk due to extended production lead times, international shipping durations, customs clearance processes, and limited ability to rapidly redeploy or rework finished goods. Once inventory is produced and shipped, our ability to adjust volumes in response to demand changes is constrained, increasing the risk of excess or obsolete inventory.

If we are unable to accurately forecast demand, align production with customer requirements, or effectively manage inventory levels and shelf life, we may experience increased inventory write-downs, reduced manufacturing utilization, margin compression, and higher working capital requirements, any of which could materially adversely affect our business, financial condition, and results of operations.

Our insurance coverage may be insufficient to cover all potential losses, which could materially adversely affect our business and financial condition.

We maintain insurance coverage for certain risks associated with our business, including property damage, business interruption, product liability, general liability, workers’ compensation, and other customary coverages. However, our insurance policies are subject to deductibles, coverage limits, exclusions, and other terms that may not fully cover all potential losses. In addition, certain risks, including some types of natural disasters, cyber incidents, supply chain disruptions, regulatory actions, or catastrophic events, may be uninsurable or economically impractical to insure.

Our manufacturing operations are concentrated in a single facility in Peru, which increases our exposure to property damage, business interruption, and operational disruption risks. If a significant event were to damage our facility, disrupt operations, or result in product liability or other claims, our insurance coverage may not be sufficient to fully compensate us for the associated losses, lost revenue, remediation costs, or liabilities. Furthermore, insurance coverage may not continue to be available on commercially reasonable terms, and premiums may increase over time.

If we incur losses that are not adequately covered by insurance, or if insurance becomes unavailable or prohibitively expensive, our business, financial condition, results of operations, and cash flows could be materially adversely affected.

Tariffs imposed on the importation of our products into the United States would increase the cost of our products and could result in decreased demand for our products.

Our operations and financial results may be adversely impacted by changes in trade policies, including the imposition of tariffs, import/export restrictions, or other trade barriers. We are subject to tariffs, customs duties, and other trade-related costs. If the U.S. or other governments impose new or increased tariffs on goods imported from Peru or other countries where we manufacture our products, it could increase our production costs, reduce our profit margins, and lead to higher prices for consumers, potentially affecting demand for our products. Although tariffs imposed by the Trump administration were recently struck down by U.S. Supreme Court, there can be no assurance that other tariffs may be legally imposed in the future that will have a material adverse effect on our operations.

International logistics and customs processes could increase costs and disrupt service levels.

We export products from Peru to the United States. Freight availability, fuel costs, port congestion, transit delays, and customs clearance requirements may increase costs or delay deliveries, which could adversely affect operating results and customer relationships.

Our reliance on a limited number of key suppliers and service providers exposes us to supply chain concentration risk that could disrupt operations and adversely affect our business.

Our operations rely on a limited number of key suppliers, manufacturers of specialized equipment, packaging providers, agricultural input suppliers, logistics partners, and other service providers. In certain cases, we may depend on single-source or limited-source vendors for critical inputs, components, or services, including materials necessary for production and distribution.

If any of these suppliers or service providers experience financial distress, operational disruptions, capacity constraints, quality failures, labor shortages, cybersecurity incidents, transportation delays, or other adverse events, we may be unable to obtain sufficient materials or services on a timely or cost-effective basis. Because we may have limited bargaining power, alternative sources may not be readily available, may require significant time and cost to qualify, or may be available only on less favorable terms, which could increase costs and disrupt production or fulfillment.

Our relatively limited scale may also make us more vulnerable to supplier concentration risks, including reduced leverage in pricing negotiations, longer lead times, and greater sensitivity to vendor disruptions. If we are unable to maintain reliable supply chain relationships, manage vendor risks, or secure alternative sources when needed, our production, margins, customer relationships, and operating results could be materially adversely affected.

We rely on third-party service providers for key operational functions, and disruptions or failures by these providers could materially adversely affect our business and results of operations.

Our operations depend on third-party logistics, transportation, information technology, and service providers, and disruptions or failures by these providers could adversely affect our operations and financial results.

Inflation and cost pressures could increase operating expenses and adversely affect our margins and profitability.

Our operating results are sensitive to inflationary pressures affecting labor, transportation, raw materials, utilities, packaging, and other operating inputs. Inflation in Peru, where our manufacturing operations are located, could increase wages, benefits, and other labor-related costs, particularly in a competitive labor market. Labor cost increases, including wage inflation, workforce shortages, or changes in labor regulations, could raise our cost structure and reduce operating efficiency.

We are also exposed to fluctuations in freight and logistics costs, including ocean freight, inland transportation, fuel, and port-related expenses. Freight inflation, shipping delays, capacity constraints, or changes in global trade dynamics could increase distribution costs and reduce margins.

In addition, the cost and availability of agricultural raw materials and other commodities are subject to volatility driven by weather patterns, climate variability, supply disruptions, energy prices, and global market conditions. Increases in input costs may not be fully recoverable through pricing actions, particularly in a competitive retail environment, which could result in margin compression.

If inflationary pressures persist or intensify, and we are unable to effectively manage costs, improve operating efficiencies, or adjust pricing, our gross margins, operating results, cash flows, and financial condition could be materially adversely affected.

Political, economic, and social conditions in Peru could adversely affect our operations, costs, and financial results.

Our manufacturing operations are located in Peru, and a significant portion of our assets, employees, and operating activities are concentrated in that country. As a result, our business is subject to political, economic, and social risks specific to Peru that are beyond our control. These risks include changes in government leadership or policy, political instability, civil unrest, labor strikes, changes in labor laws or enforcement practices, tax or customs policy changes, currency controls, inflationary pressures, and disruptions to local infrastructure or public services.

Peru has experienced periods of political uncertainty and social unrest, which have, at times, disrupted transportation networks, ports, utilities, and supply chains. Such events could interfere with our ability to operate our manufacturing facility, source raw materials, transport finished goods, or export products to the United States, resulting in production delays, increased costs, or lost sales.

Economic conditions in Peru, including inflation, changes in interest rates, fluctuations in foreign exchange rates, or restrictions on the movement of capital, could increase operating costs or limit our ability to repatriate cash. In addition, changes in tax laws, customs duties, regulatory interpretations, or enforcement practices by Peruvian authorities could increase our compliance obligations, result in disputes, or adversely affect our financial results.

If political, economic, or social conditions in Peru deteriorate, or if we are unable to effectively manage the risks associated with operating in a foreign jurisdiction, our business, financial condition, results of operations, and cash flows could be materially adversely affected.

Changes in tax laws, cross-border tax matters, or adverse tax determinations in the United States or Peru could materially adversely affect our financial condition and results of operations.

We are subject to taxation in the United States and Peru, and our tax obligations are affected by the application and interpretation of complex and evolving tax laws and regulations in both jurisdictions. Changes in tax laws, tax rates, regulations, or administrative practices in either country could increase our tax liabilities, reduce our after-tax earnings, or require changes to our business structure or operations.

Our cross-border operations involve intercompany transactions, transfer pricing arrangements, and the allocation of income and expenses between jurisdictions. Tax authorities in the United States or Peru may challenge our transfer pricing positions, intercompany pricing methodologies, or the characterization of transactions, which could result in additional taxes, interest, penalties, or disputes. Such determinations could increase our effective tax rate and adversely affect our financial results.

We are also subject to indirect taxes, including value-added taxes, customs duties, and other transaction-based taxes in Peru, as well as United States federal and state income taxes. Changes in the administration, enforcement, or interpretation of these taxes, including customs valuation or import/export rules, could increase compliance costs or tax liabilities.

In addition, we may be subject to tax examinations or audits by United States or Peruvian tax authorities. The outcomes of such audits are uncertain and could result in assessments of additional taxes, interest, and penalties. Our ability to utilize net operating losses or other tax attributes may also be limited by future changes in tax law, ownership changes, or our operating performance.

If tax authorities successfully challenge our tax positions, or if tax laws or enforcement practices change in ways that increase our tax burden, our financial condition, results of operations, and cash flows could be materially adversely affected.

Risks Related to Food Safety, Product Liability, and Regulation

We are subject to extensive food safety, labeling, and product regulations, and noncompliance or quality failures could result in recalls, import holds, enforcement actions, or reputational harm.

Our products are subject to United States and foreign food safety and labeling requirements, including regulation by the U.S. Food and Drug Administration and the Food Safety Modernization Act as it applies to imported foods. Failure to comply with applicable requirements, actual or alleged contamination, labeling errors, or other product quality issues could result in product recalls, market withdrawals, import holds, fines, litigation, increased costs, and reputational harm, any of which could adversely affect our business and operating results.

In addition, regulatory requirements governing ingredient disclosures, product claims, certifications, and labeling—including evolving interpretations of terms such as “natural,” “organic,” or similar claims—may change or be subject to increased enforcement or litigation. Adverse publicity or legal challenges related to labeling or marketing claims could reduce consumer confidence, increase compliance costs, and negatively impact demand for our products.

We may be subject to product liability claims and recall.

Product contamination, spoilage, or consumer injury claims could expose us to product liability litigation, even if the claims are unfounded. Our insurance coverage may be insufficient to cover all potential liabilities, and product liability claims could materially adversely affect our business, financial condition, and reputation.

Our operations are subject to regulation in multiple jurisdictions, and regulatory changes or increased enforcement could increase costs or disrupt operations.

Our business is subject to regulation by governmental authorities in the United States and Peru, including laws related to food safety, labor, environmental practices, tax, and customs. Changes in regulatory requirements, interpretations, or enforcement practices—particularly those affecting imported foods or foreign manufacturing—could require operational changes, delay shipments, increase compliance costs, or result in enforcement actions that could materially adversely affect our business and results of operations.

Evolving environmental, labor, and sustainability regulations may increase compliance costs and operational complexity.

We are subject to environmental, labor, food safety, and employment laws and regulations in the jurisdictions in which we operate. These requirements may become more stringent over time, including increased reporting, compliance, or operational obligations related to sustainability, environmental impact, and workforce practices. Compliance with current or future regulations could increase costs, require changes to operations, or limit our ability to source materials or operate facilities as currently structured.

Risks Related to Licensed Technology and Intellectual Property

Our business depends on licensed dehydration technology, and limitations, disputes, or loss of exclusivity could materially harm our business.

Our business depends on licensed technology from EnWave Corporation, (“Enwave”), and changes to, loss of, or limitations under this license could materially adversely affect our operations and competitive position. Our production relies on proprietary vacuum-microwave dehydration technology licensed from EnWave. Because we do not own the underlying patents or core technology, our ability to manufacture certain products depends on our continued rights under the license and our compliance with its terms.

Under the license, we are required to pay ongoing royalties and satisfy contractual obligations, including certain commercial and operational requirements, to maintain our rights and, in some cases, product or territorial exclusivity. Royalty obligations and minimum or exclusivity-related payments may increase over time or become more burdensome under changing operating conditions. The license contains termination and default provisions, including for non-payment, insolvency, or breach of contractual obligations. If the license were terminated or our exclusivity rights were reduced, we could lose the ability to manufacture certain products using EnWave technology, which could materially adversely affect our business and growth strategy.

EnWave retains ownership and control of the underlying technology and certain rights related to the equipment and its operation, and our dependence on a third party for core production technology exposes us to risks related to technology availability, support, and continued cooperation. In addition, EnWave may grant licenses to other companies, including competitors, which could reduce our technological differentiation and increase competitive pressure.

Technological advancements or the development of alternative processing technologies could reduce the competitiveness or commercial value of the licensed technology over time. If royalty obligations increase, exclusivity is reduced, competing licenses are granted, the technology becomes less competitive, or the license is terminated, our business, financial condition, and results of operations could be materially adversely affected.

We may be unable to adequately protect our intellectual property and proprietary know-how.

Our competitive position depends on a combination of licensed rights, patents, trademarks, and trade secrets. Third parties may challenge patent validity, develop alternative technologies, or misappropriate proprietary know-how. Enforcement efforts may be costly and could divert management attention.

Risks Related to Information Systems and Cybersecurity

Disruptions to our information technology systems or cybersecurity incidents could harm operations, financial reporting, and our business.

We rely on information technology systems and third-party service providers to support key business functions, including production planning, inventory management, logistics coordination, order processing, financial reporting, and communications. Cybersecurity incidents—including ransomware attacks, malware infections, phishing, unauthorized access, denial-of-service attacks, and other cyber intrusions—could compromise our systems or data, disrupt operations, and adversely affect our business.

A successful ransomware or similar attack could result in the encryption or loss of critical data, operational downtime, supply chain disruptions, delays in order fulfillment, and increased costs associated with remediation, system restoration, cybersecurity enhancements, and potential ransom payments. Because our manufacturing, logistics, and reporting processes depend on system availability and data integrity, a cybersecurity incident could result in partial or complete operational shutdown, delays in production or shipments, and inability to process transactions or prepare financial information on a timely basis.

We also depend on third-party service providers, including cloud-based platforms, logistics and supply chain partners, and other vendors that process, store, or transmit sensitive operational and financial data. A cybersecurity breach affecting our suppliers, service providers, or other participants in our supply chain could expose us to data loss, operational disruption, contractual liabilities, or reputational harm, even if our own systems are not directly compromised.

Cybersecurity incidents could also result in theft, loss, or unauthorized disclosure of confidential business information, financial data, or personal information, which could expose us to litigation, regulatory investigations, penalties, and remediation costs. In addition, a significant cybersecurity incident could impair our ability to maintain effective internal control over financial reporting, delay required filings with the Securities and Exchange Commission, require public disclosure of material incidents, and harm investor confidence.

While we maintain cybersecurity controls and business continuity measures, these protections may not be sufficient to prevent or fully mitigate cybersecurity risks. The occurrence of a cybersecurity incident could materially adversely affect our operations, financial condition, results of operations, and reputation.

Risks Related to Personnel and Business Continuity

Our success depends on a limited number of key personnel, and we may have difficulty attracting and retaining qualified employees.

Our business depends on executive leadership and skilled operational, technical, and commercial personnel to scale manufacturing, manage customer relationships, maintain compliance, and satisfy public company reporting requirements. The loss of key personnel or inability to recruit and retain qualified employees could disrupt execution and adversely affect operating results.

Our Chief Financial Officer is not a full-time employee.

John Dalfonsi, our Chief Financial Officer, is not a full-time employee of the Company and is simultaneously serving other interests. There can be no assurance that we will be able to successfully manage our finance and accounting matters without a full-time Chief Financial Officer.

Labor availability, wage inflation, or workplace safety incidents could increase costs and disrupt operations.

Our manufacturing operations depend on a stable workforce and safe working conditions. Labor shortages, turnover, wage inflation, or safety incidents could reduce productivity, increase costs, and disrupt production. Changes in labor laws or enforcement practices could increase compliance burdens and operating costs.

Risks Related to Corporate Governance

Our governing documents designate Nevada courts as the exclusive forum for certain stockholder actions.

Our governing documents designate Nevada courts as the exclusive forum for certain stockholder actions, which may limit stockholders’ ability to obtain a favorable judicial forum and could discourage litigation, potentially adversely affecting stockholders’ rights.

Risks Related to Legal Proceedings and Compliance

We may be subject to litigation, regulatory proceedings, and other legal matters that could materially adversely affect our business, financial condition, and results of operations.

From time to time, we may become involved in legal proceedings, claims, and regulatory matters arising in the ordinary course of business. These may include, among others, commercial disputes, contract claims, intellectual property matters, employment and labor claims, product liability claims, consumer protection actions, regulatory or governmental investigations, and other proceedings.

Litigation and regulatory matters can be costly, time-consuming, and disruptive to our operations and may divert the attention of management and other personnel. Even when claims lack merit, the costs associated with defending or resolving such matters can be significant. Adverse outcomes, including judgments, settlements, fines, penalties, or injunctions, could materially adversely affect our financial condition, results of operations, cash flows, and reputation.

In addition, legal proceedings may result in substantial damages, increased insurance premiums, loss of intellectual property rights, changes to our business practices, or other unfavorable outcomes. We may also be subject to claims arising from customer disputes, supplier relationships, technology licensing arrangements, or cross-border operations, including matters subject to foreign jurisdictions, which may increase the complexity, cost, and uncertainty of such proceedings.

Our insurance coverage may not be sufficient to cover all potential losses associated with legal claims, and some types of claims may not be covered by insurance at all. If we are required to record significant legal expenses, damages, or settlement costs, our business, financial condition, and results of operations could be materially adversely affected.

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

This discussion summarizes the significant factors affecting the Company’s results of operations, financial condition, liquidity, and cash flows for the fiscal years ended December 31, 2025 and 2024. The following discussion and analysis should be read in conjunction with the section entitled “Forward-Looking Statements” and the Company’s consolidated financial statements and related notes included elsewhere in this Annual Report on Form 10-K.

This section contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Except for statements of historical fact, all statements regarding the Company’s expected future financial position, results of operations, cash flows, liquidity, business strategy, and plans and objectives of management are forward-looking statements. These statements are based on current expectations and assumptions that are subject to risks, uncertainties, and other factors, many of which are beyond the Company’s control, that could cause actual results to differ materially from those expressed or implied in the forward-looking statements. Readers are urged to carefully review and consider the disclosures set forth in this Annual Report on Form 10-K, including the risk factors and other cautionary statements, when evaluating these forward-looking statements.

Business Overview

BranchOut Food Inc. (collectively with its subsidiary, “BranchOut,” the “Company,” “we,” “us” or “our”), is a growth-stage consumer packaged foods company focused on developing, manufacturing, marketing, and distributing clean-label, plant-based dried fruit and vegetable snacks for retail and foodservice markets through BranchOut-branded products, private-label offerings, and ingredient sales. The Company operates a 50,000 square foot manufacturing facility in Pisco, Peru, (“Peru Facility”) where it produces finished goods using proprietary GentleDry™ technology licensed from EnWave Corporation. Our operating model is manufacturing-led and dependent on agricultural sourcing, production scale, and retail distribution.

Company Realignment

Beginning in April 2024, we initiated an organizational realignment to expand our manufacturing capabilities through the development and operation of the Peru Facility. This initiative represents a transition from reliance on third-party manufacturers to in-house production.

From April 2024 through December 31, 2025, we incurred aggregate costs of approximately $6.7 million related to this initiative, consisting of (i) approximately $5.1 million of facility start-up costs, including equipment purchases, facility build-out, and initial supplies, (ii) approximately $1.2 million of idle capacity costs associated with underutilization during the ramp-up period, and (iii) approximately $0.4 million of professional fees, legal fees, and travel costs. As of December 31, 2025, the Company has substantially completed the organizational realignment. We continue to expand distribution with large national retail customers while increasing production at our Peru Facility. Operations during the year reflected continued scale-up of manufacturing and commercial activities, with production operating below normalized utilization levels.

Current Operating Position

We are in a growth and scaling phase. Operating results continue to be influenced by production levels, manufacturing utilization, working capital requirements, and access to capital. Our operating results during the period reflect production operating below normalized utilization. We continue to operate with recurring losses and negative working capital, and liquidity management remains a key focus.

Key Considerations Going Forward

Our near-term operating performance will depend primarily on revenue growth, production scale, cost management, and capital availability. Management continues to focus on increasing production volumes, improving manufacturing efficiency, managing working capital, and supporting distribution expansion. While operating leverage may improve as production scales, we remain dependent on external financing to support operations and working capital requirements.

Strategic Focus

Our strategy is focused on executing a manufacturing-led growth model:

Revenue Growth: Expanding distribution of existing retail customers, developing new customer relationships, and introducing new products to support increased sales volumes.

Manufacturing Scale: Increasing utilization at the Peru Facility and improving production efficiency.

Margin Discipline: Managing logistics, production, and operating costs as production scales.

Liquidity Management: Maintaining access to capital and managing working capital to support operations during the scale-up phase.

2025 Compared to 2024

For the year ended December 31, 2025, net revenue increased to $13.7 million from $6.4 million in 2024, primarily driven by increased sales volumes to existing customers and new product introductions. Gross profit increased to $2.05 million from $0.8 million in the prior year, and gross margin improved to 14.8% from 12.2%. The improvement in gross margin reflects increased internal manufacturing, changes in product mix, and logistics efficiencies during the period.

Operating expenses increased to $7.4 million in 2025 from $4.7 million in 2024, reflecting expanded commercial activities, higher administrative costs associated with operating as a public company, and costs associated with scaling production at the Peru Facility. A portion of these expenses relates to production operating below normalized utilization levels. Operating loss increased to $5.4 million from $3.9 million in 2024. Net loss increased to $6.1 million from $4.8 million in the prior year; however, net loss as a percentage of revenue declined due to higher revenue and improved gross margin.

Cash used in operating activities increased during 2025 primarily as a result of higher operating losses and increased investment in working capital to support revenue growth.

Adjusted Gross Margin (Non-GAAP)

In addition to gross margin calculated in accordance with U.S. generally accepted accounting principles (“GAAP”), we use adjusted gross margin, a non-GAAP supplemental measure to evaluate underlying manufacturing performance. Non-GAAP adjusted gross margin excludes depreciation included in cost of goods sold, tariffs incurred under the International Emergency Economic Powers Act (“IEEPA”) during 2025, which were subsequently ruled unlawful by the U.S. Court of International Trade, and certain air freight costs incurred during the year ended December 31, 2025. Gross profit (GAAP) was $2.0 million versus adjusted gross profit (non-GAAP) of $3.8 million, and gross margin was 14.8% compared to adjusted gross margin of 27.8%.

Beginning in April 2024, we initiated an organizational realignment to transition from third-party manufacturing to in-house production at our Peru Facility. This transition required significant upfront investment in equipment and facility build-out, resulting in increased depreciation that is not yet aligned with production throughput.

Adjusted gross margin was higher than reported gross margin, reflecting the impact of this depreciation and air freight costs incurred to support customer-required timelines, primarily related to new product introductions. These air freight costs were driven by specific timing and fulfillment requirements and are not expected to recur at similar levels. Additionally, adjusted gross margin excludes the impact of a potential tariff refund of $348,752, which is treated as a gain contingency under ASC 450 and not recognized in the 2025 financial statements.

We believe adjusted gross margin provides additional visibility into the underlying unit economics of our manufacturing model during this scale-up phase. As the plant gains operating experience and throughput increases, we expect reported gross margin to improve as additional products achieve manufacturing efficiency. Currently, a limited number of products are produced at or near optimal manufacturing efficiency, while other products remain in earlier stages of production and optimization. New product introductions also begin at lower efficiency levels as they transition from development into scaled production and improve over time.

A reconciliation of gross profit (GAAP) to adjusted gross profit (non-GAAP), and the related gross margin measures, is presented below:

Gross profit (GAAP)

Depreciation included in cost of goods sold

Air freight related to customer fulfillment and production ramp

IEEPA tariffs incurred in 2025 (gain contingency)

Adjusted gross profit (non-GAAP)

Net revenue

Gross margin (GAAP)

Adjusted gross margin (non-GAAP)

Operating Model and Margin Considerations

Our operating results are closely tied to production volume, facility utilization, product mix, and input costs. We began operating our Peru Facility in December 2024 and are continuing to scale production.

Our gross margin improvement reflects increased production volumes, improved throughput, and better manufacturing efficiency, including gains in uptime, yields, and production flow. As operations continue to scale and become more consistent, we expect further improvements in per-unit costs. Gross margin is also influenced by product mix across our BranchOut-branded, private-label, and industrial ingredient channels, as well as variability in agricultural raw materials, packaging, labor, and freight. In addition, the timing of raw material sourcing and reliance on spot market purchases, when required, can impact input costs.

During 2025, production levels remained below normalized capacity as we continued to ramp up operations. As a result, a portion of fixed manufacturing costs was not absorbed into inventory and was recognized as idle capacity expense within operating expenses, which impacted operating margin. As production volumes increase and utilization improves, we expect a greater portion of these costs to be absorbed into product costs and a corresponding reduction in idle capacity expense.

Operating expenses primarily reflect the cost of supporting our manufacturing platform and growth, including facility-related overhead, distribution expansion, and public company requirements. As the business scales, we expect operating expenses to be more effectively leveraged relative to revenue.

Financial Position and Operating Scale

We are in a growth and scale-up phase. Future operating performance will depend on revenue growth, production levels, cost management, and working capital requirements. While gross margin improved during 2025, we continue to operate at a net loss and have negative working capital. Future results will depend on our ability to increase production volumes, manage operating expenses, and maintain access to capital.

Results of Operations for the Years Ended December 31, 2025 and 2024

The following table summarizes selected items from the statement of operations for the years ended December 31, 2025 and 2024, respectively.

Years Ended

December 31,

Increase /

(Decrease)

Net revenue

Cost of goods sold

Gross profit

Gross margin

Operating expenses:

General and administrative

Salaries and wages

Professional services

Shipping and handling

Advertising and promotions

Total operating expenses

Operating loss

Operating margin

Other income (expense):

Interest income

Interest expense

Total other income (expense)

Net loss

Net margin

Net Revenue

Our net revenue for the year ended December 31, 2025 was $13,724,563, compared to $6,434,514 for the year ended December 31, 2024, an increase of $7,290,049, or 113%. The increase in revenue was primarily due to higher sales to our largest customers, driven by increased volumes and new product releases. Our revenue may fluctuate due to the seasonal nature of raw material harvest cycles and variability in the timing and size of customer orders.

In 2025, revenue more than doubled while gross margin improved as production efficiency increased and the business continued to scale. The Peru Facility is not yet operating at normalized utilization, and current margins still reflect early-stage operating inefficiencies and the burden of fixed cost absorption.

Cost of Goods Sold and Gross Profit

Cost of goods sold for the year ended December 31, 2025 was $11,690,116, compared to $5,652,717 for the year ended December 31, 2024, an increase of $6,037,399, or 107%. Cost of goods sold included $414,518 and $223,856 of depreciation related to the Peru Facility during the years ended December 31, 2025 and 2024, respectively. The increase in cost of goods sold was primarily due to higher sales volumes during the year.

Gross profit for the year ended December 31, 2025 was $2,034,447, or 14.8% of net revenue, compared to $781,797 or 12.2% of net revenue, for the year ended December 31, 2024. The increase in gross margin was mainly driven by cost savings from higher proportion of production at our manufacturing facility and the use of bulk shipping arrangements. Additionally, revenue increased at a faster rate than operating expenses, reflecting higher production and sales volumes.

Adjusted gross profit (non-GAAP) for the year ended December 31, 2025 was $3,820,100, or 27.8% of net revenue. Adjusted gross profit excludes depreciation included in cost of goods sold, certain air freight costs related to customer fulfillment and production ramp, and tariffs incurred under the International Emergency Economic Powers Act (“IEEPA”) during 2025, which were subsequently ruled unlawful by the U.S. Court of International Trade. The expected tariff refund is treated as a gain contingency under ASC 450 and was not recognized in the 2025 financial statements. We believe this measure provides additional insight into underlying manufacturing performance by excluding items not indicative of normalized production costs.

Gross margins have not yet reached expected long-term levels, as the manufacturing facility operated below normalized utilization during the year and results continue to reflect the impact of fixed cost absorption. Gross margin may continue to be affected by changes in production volumes, input costs, and operating efficiency. The Company’s manufacturing operations include a meaningful fixed-cost component, and as production volumes increase, these costs are expected to be spread over a larger number of units, which may reduce unit production costs and improve margins.

General and Administrative Expense

General and administrative expense for the year ended December 31, 2025 was $3,485,195, compared to $1,100,045 for the year ended December 31, 2024, an increase of $2,385,150, or 217%. The increase was primarily related to higher operating activity and the expansion of our manufacturing and administrative infrastructure. The largest components of our general and administrative expenses are plant idle capacity, loan receivable impairment, research and development, rent, travel, sales commissions, and royalties as shown below.

Year Ended December 31,

Increase / (Decrease)

% Change

Idle capacity

Loan receivable impairment

Research and development

Rent

Travel

Sales Commissions

Royalties

Idle capacity expense increased during 2025 due to unallocated fixed overhead associated with operating our manufacturing facility below normal utilization levels. We began operations at our manufacturing facility in Pisco, Peru in December 2024, and idle capacity was not measured in 2024. Production during 2025 was below the Peru Facility’s expected long-term capacity. These costs primarily reflect operating the facility and supporting production capabilities ahead of full utilization, as well as investments to expand distribution. As production volumes increase, a greater portion of these fixed costs are expected to be absorbed into production.

Loan receivable impairment increased during 2025 to $401,522 consisting of a non-cash credit loss expense to fully reserve the Nanuva note receivable, driven by our decision to discontinue third-party manufacturing with Nanuva and the resulting uncertainty regarding repayment.

Research and development expense increased as we continued product development activities. Sales commissions increased in line with higher sales volumes. Rent expense decreased modestly compared to the prior year, while travel expense increased primarily due to higher business activity.

Salaries and Wages

Salaries and wages for the year ended December 31, 2025 were $1,622,567, compared to $1,604,200 for the year ended December 31, 2024, an increase of $18,367, or 1%. The relatively flat year-over-year change was primarily due to lower stock-based compensation expense compared to the prior year, largely offset by higher cash compensation associated with the commencement of operations at Peru Facility. While a substantial portion of Peru production labor is capitalized to inventory then expensed in cost of goods sold, non-capitalized Peru salaries and U.S.-based salaries both increased during 2025.

Professional Fees

Professional fees for the year ended December 31, 2025 were $1,142,512, compared to $1,291,141 for the year ended December 31, 2024, a decrease of $148,629, or 12%. The decrease was primarily attributable to lower stock-based compensation issued to third-party service providers during 2025 compared to the prior year, as well as a reduction in legal, accounting, and advisory costs associated with operating as a public company.

Shipping and Handling

Shipping and handling expense for the year ended December 31, 2025 was $632,989, compared to $459,089 for the year ended December 31, 2024, an increase of $173,900, or 38%. The increase was primarily attributable to higher sales volumes during the year. The rate of increase in shipping and handling expense was lower than the rate of revenue growth, primarily due to improved pricing associated with bulk shipping arrangements.

Advertising and Promotions

Advertising and promotions for the year ended December 31, 2025, was $514,661, compared to $229,763 for the year ended December 31, 2024, an increase of $284,898, or 124%. This increase is primarily due to expanded product distribution, entry into new retail locations, and the introduction of new products. These expenses include costs associated with in-store product demonstrations and sampling programs, as well as customer promotional support related to merchandising, marketing, and in-store product testing.

Other Income (Expense)

For the year ended December 31, 2025, other expense was $761,195, consisting of $780,595 of interest expense, partially offset by $19,400 of interest income. For the year ended December 31, 2024, other expense was $849,075, consisting of $863,231 of interest expense, partially offset by $14,156 of interest income. Other expense decreased by $87,880, or 10%, primarily due to lower interest expense following the repayment of certain debt financing during 2025.

Net loss

Net loss for the year ended December 31, 2025 was $6,124,672, compared to $4,751,516 for the year ended December 31, 2024, an increase of $1,373,156, or 29%. Despite the increase in net loss, net loss as a percentage of net revenue improved to 44.6% for 2025, compared to 73.8% for 2024, reflecting higher revenue and improved operating performance. The improvement in net loss margin was primarily driven by an improvement in negative operating margin, which improved to 39.1% of net revenue in 2025 from 60.6% in 2024.

The increase in net loss was primarily driven by continued investment in scaling production and operations at our manufacturing facility. Results for the period also reflect costs associated with operating the facility below normalized utilization as well as expanded commercial activities. Because our manufacturing model includes a significant fixed-cost component, operating results are sensitive to production volumes and sales growth, particularly during the early stages of scaling operations. Changes in production levels, operating efficiency, and sales volumes may continue to affect operating results in future periods.

Liquidity and Capital Resources

The following table summarizes our total current assets, liabilities and working capital as of December 31, 2025 and 2024.

December 31,

December 31,

Current Assets

Current Liabilities

Working Capital

As of December 31, 2025, we had negative working capital of $584,240 compared to negative working capital of $3,897,382 as of December 31, 2024. The improvement in working capital was primarily driven by the repayment of certain notes payable to related parties and increases in current assets, including accounts receivable and inventory.

To date, our primary sources of capital have been cash generated from the sales of our products, common stock sales, and debt and equity financing. As of December 31, 2025, we had cash of $616,278, total liabilities of $8,887,985, and an accumulated deficit of $23,686,729. As of December 31, 2024, we had cash of $2,329,452, total liabilities of $10,514,292, and an accumulated deficit of $17,562,057.

Satisfaction of Cash Obligations for the Next 12 Months

Our ability to meet our cash requirements is dependent on our ability to increase sales volumes, improve operating cash flows, manage working capital, and, as needed, access additional capital. Based on our current operating plan, we expect that existing cash balances and cash generated from operations will not be sufficient to fund our operating requirements for at least the next twelve months, and we may need to obtain additional financing.

Historically, we have raised capital primarily through debt and convertible debt financings and the issuance of equity securities. Any additional financing may not be available when needed or may not be available on acceptable terms. In addition, any future financings may result in dilution to existing stockholders and may contain restrictive covenants that could limit our operating flexibility.

Subsequent Financing Activities

Subsequent to December 31, 2025, we entered into an at-the-market issuance sales agreement with Alexander Capital, L.P., under which sold shares of our common stock having an aggregate offering price of approximately $1.5 million.

On January 28, 2026, we borrowed $1.5 million from Kaufman Kapital LLC (“Kaufman Kapital”) pursuant to a senior secured promissory note that matures on January 28, 2027 and bears interest at 8% per annum. The obligations under the note are secured by a lien on substantially all of our assets under an existing security agreement. In addition, in January 2026, Kaufman Kapital converted $500,000 of principal outstanding under a 12% senior secured convertible promissory note into shares of common stock.

Going Concern

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. These conditions raise substantial doubt about our ability to continue as a going concern within one year after the date the consolidated financial statements are issued.

We are pursuing initiatives to increase revenues and is seeking additional sources of capital to fund operations. While these actions may improve our liquidity position, there can be no assurance that they will be sufficient to alleviate the substantial doubt regarding the our ability to continue as a going concern.

The accompanying consolidated financial statements have been prepared assuming we will continue as a going concern, which contemplates the realization of assets and the settlement of liabilities in the normal course of business. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty, including adjustments to the recoverability and classification of recorded asset amounts or the amounts and classification of liabilities that might be necessary should we be unable to continue as a going concern.

Cash Flow

The following table sets forth the primary sources and uses of cash for the periods presented below:

Years Ended

December 31,

Net cash used in operating activities

Net cash used in investing activities

Net cash provided by financing activities

Effect of exchange rate changes on cash

Net increase (decrease) in cash

Net Cash Used in Operating Activities

Cash used in operating activities was $6,999,712 for the year ended December 31, 2025, compared to $4,859,816 for the year ended December 31, 2024, an increase of $2,139,896, or 44%. The increase in cash used in operating activities was primarily driven by higher operating losses and changes in working capital, including increases in accounts receivable, advances on inventory purchases, inventory, and prepaid expenses. These uses of cash were partially offset by non-cash charges, including depreciation, stock-based compensation, and amortization of debt discounts.

Net Cash Used in Investing Activities

Cash used in investing activities was $747,043 for the year ended December 31, 2025, compared to $2,822,561 for the year ended December 31, 2024, a decrease of $2,075,518, or 74%. The decrease in cash used in investing activities during 2025 primarily related to purchases of property and equipment, which were lower than the prior year as significant investments in Peru Facility occurred during 2024.

Net Cash Provided by Financing Activities

Cash provided by financing activities was $5,998,135 for the year ended December 31, 2025, compared to $9,362,621 for the year ended December 31, 2024, a decrease of $3,364,486, or 36%. The decrease in cash provided by financing activities during 2025 was primarily attributable to repayments of notes payable, including repayments to related parties, principal payments on finance lease obligations, and payment of deferred offering costs. The repayments were partially offset by proceeds from the issuance of common stock and proceeds from the exercise of warrants. In the prior year, financing activities were primarily driven by proceeds from convertible debt and equity financing.

Overall, cash used in operating activities increased primarily due to higher operating losses and increased investment in working capital investment as we scaled operations, while financing activities remained the primary source of liquidity.

Trends, Events, and Uncertainties

Our operating results, liquidity, and financial condition continue to be shaped by several key operating trends and structural characteristics of our business model that management believes are reasonably likely to have a material impact on future performance.

Scaling Production and Margin Progression

We began operating our Peru Facility in December 2024, transitioning from a third-party manufacturing model to in-house production. This shift is expected to improve margins over time through greater control over manufacturing processes and costs.

During 2025, production volumes remained below normalized capacity as we continued to ramp up operations. As a result, fixed manufacturing costs were not fully absorbed resulting in significant idle capacity expense, which impacted the operating margin.

Our current focus is on increasing throughput, expanding distribution, broadening our product portfolio, and onboarding new customers. At the same time, we are working to improve uptime, yields, and overall production flow. As volumes increase and operations become more consistent, we expect per-unit costs to decline and fixed costs to be more fully absorbed. The pace of these improvements will depend on demand growth and our ability to execute efficiently at scale.

Revenue Growth and Demand Variability

Our growth is being driven by expansion within existing retail accounts, the addition of new customers, and continued product development across our BranchOut-branded, private-label, and industrial ingredient product lines. We work closely with both existing and prospective customers to develop products tailored to their shelf and category needs.

Customer ordering patterns are typically based on purchase orders rather than long-term commitments, which can result in variability in the timing and level of revenue. This requires ongoing discipline in production planning and inventory management as we scale.

To support customer demand and improve inventory flexibility, we have also focused on extending the shelf life of our products.

Consumer Demand for Clean-Label and Better-for-You Snacks

Consumer interest in snacks made with simple ingredients and perceived health benefits continues to influence our category. Retailers are allocating shelf space to products positioned around clean-label, plant-based, limited-ingredient and/or minimally processed, which aligns with our product portfolio.

At the same time, the category remains competitive, with ongoing pressure from pricing, promotional activity, and shifting consumer preferences. As we expand distribution and introduce new products, our performance will depend in part on our ability to stay relevant with consumers and maintain our position within these retail channels.

Product Innovation and Manufacturing Capability Expansion

We are working with certain large retail customers to develop new snack products aligned with evolving consumer preferences, including products with higher protein and fiber content. These products are expected to incorporate combinations of fruit and high-protein dairy ingredients. To support these initiatives, the Company incurred capital expenditures in the first quarter of 2026 to expand manufacturing capabilities at the Peru Facility, including the installation of additional dehydration capacity for high-protein dairy applications. This expansion is expected to increase production flexibility, enable manufacturing in an allergen-controlled environment, and support more efficient production processes.

From a manufacturing perspective, these products are expected to be more efficient to produce than certain existing products, as they require less raw material preparation and are anticipated to yield higher protein density following dehydration. As a result, as production volumes increase and these products are commercialized, they may contribute to improved gross margins.

The timing and extent of revenue associated with these products will depend on successful product development, customer acceptance, and commercialization. There can be no assurance that these initiatives will result in material revenue or improved operating results.

Working Capital and Cash Flow Dynamics

Our operating model requires a meaningful investment in working capital to support inventory for both existing orders and anticipated demand. Production is planned in advance of customer needs and aligned with agricultural harvest cycles, which results in inventory being manufactured ahead of sales.

From raw material sourcing through production, international shipment, and delivery to customers, the process generally spans six to eight weeks, followed by standard customer payment terms. This creates a longer operating cycle and timing differences between when cash is invested and when it is collected.

As we scale, we remain focused on managing inventory levels, aligning production with demand, and improving cash conversion efficiency.

Supply Chain and Input Costs

Our cost structure is significantly influenced by agricultural raw materials, which are subject to seasonal harvest cycles and availability. When sourcing is planned in advance, we are generally able to secure more stable pricing. However, when demand changes or production planning does not align with harvest timing, we may rely on spot market purchases, which typically carry higher costs.

As we scale, we are focused on improving demand forecasting, production planning, and supplier coordination to better align raw material sourcing with our production schedule and reduce reliance on higher-cost spot purchases.

In addition to raw materials, our cost structure includes labor, packaging, freight, and indirect taxes such as Peru value-added tax (IGV). These costs can fluctuate based on production levels, wage pressures, logistics conditions, and the timing of exports and recoverability of VAT credits. We are focused on improving overall cost management across these areas through increased production efficiency, better planning, and scale.

Critical Accounting Estimates

The preparation of the Company’s consolidated financial statements in conformity with U.S. generally accepted accounting principles (“GAAP”) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, revenues and expenses, and related disclosures. Management bases its estimates on historical experience, current conditions, and various other assumptions believed to be reasonable under the circumstances. Actual results may differ from these estimates, and such differences may be material to the consolidated financial statements.

Management believes the following accounting estimates involve a higher degree of judgment and complexity and are most critical to understanding the Company’s financial condition and results of operations.

Revenue Recognition

The Company recognizes revenue when control of goods is transferred to customers in an amount that reflects the consideration it expects to receive. Revenue is primarily derived from the sale of finished food products to retail, private-label, and ingredient customers. Judgments are required in determining the timing of revenue recognition, estimating variable consideration such as customer deductions, promotional allowance, and evaluating collectability. Changes in customer programs, pricing arrangements, or sales incentives may affect the timing and amount of revenue recognized.

Inventory Valuation

Inventory valuation requires significant management judgment. Cost includes allocated fixed manufacturing overhead based on normal production capacity. Because actual production levels during 2025 were below the capacity of the Peru facility, a portion of fixed overhead was expensed to idle capacity as incurred. Determining normal capacity involves judgment regarding expected production volumes and future utilization of the Company’s Peru manufacturing facility.

Inventory is also evaluated for recoverability and stated at the lower of cost or net realizable value. Net realizable value estimates require assumptions regarding expected selling prices, trade allowances, sales commissions, outbound freight, product turnover, and demand forecasts. These assumptions are based on historical experience, current contractual terms, and market conditions as of the balance sheet date.

Changes in production levels, demand forecasts, pricing, trade programs, or other market conditions could materially impact inventory valuation and cost of goods sold in future periods.

Stock-Based Compensation

The Company accounts for stock-based compensation in accordance with ASC 718, which requires measurement of compensation cost based on the fair value of equity instruments on the grant date. Determining fair value involves the use of valuation models and assumptions, including expected volatility, risk-free interest rate, expected term, and forfeiture rates. Changes in these assumptions may materially affect the amount and timing of stock-based compensation expense.

Warrants and Convertible Instruments

The Company has issued warrants and convertible instruments that require evaluation under U.S. GAAP to determine appropriate classification as equity or liabilities. Certain instruments require valuation using option-pricing models and involve assumptions related to volatility, discount rates, and expected term. Changes in these assumptions may impact recorded amounts of equity, liabilities, and non-cash expense.

Long-Lived Assets and Manufacturing Equipment

The Company evaluates long-lived assets, including manufacturing equipment and facility-related assets, for impairment when events or changes in circumstances indicate that the carrying value may not be recoverable. This evaluation requires management to estimate future cash flows, production levels, and operating performance. Changes in production utilization, operating results, or market conditions could result in impairment charges in future periods.

Going Concern and Liquidity

Management evaluates the Company’s ability to continue as a going concern based on its current financial condition, operating results, cash flows, and access to capital. This assessment requires judgment regarding future revenue, operating performance, working capital needs, and the availability of financing. If actual results differ from management’s assumptions, the Company’s liquidity and financial condition could be adversely affected.

Foreign Currency Translation

The Company’s financial results include operations in Peru, where the functional currency is the Peruvian sol. The translation of foreign currency financial statements into U.S. dollars requires the use of exchange rates at the balance sheet date for assets and liabilities and average exchange rates for revenues and expenses. As a result, the Company’s reported financial position and results of operations are subject to fluctuations in foreign currency exchange rates. Changes in exchange rates may impact accumulated other comprehensive income as well as period-to-period comparability of operating results.

Recently Issued Accounting Pronouncements

The Company considers the applicability and impact of new accounting standards issued by the Financial Accounting Standards Board (“FASB”). The Company adopted ASU 2023-07, Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures, during the year ended December 31, 2024 and ASU 2023-09, Income Taxes (Topic 740): Improvements to Income Tax Disclosures, during the year ended December 31, 2025. The adoption of these standards primarily resulted in enhanced disclosures and did not have a material impact on the Company’s consolidated financial position, results of operations, or cash flows.

In November 2024, the FASB issued ASU 2024-03, Income Statement—Reporting Comprehensive Income—Expense Disaggregation Disclosures, which requires additional disaggregation of certain income statement expenses in the notes to the financial statements. The guidance is effective for annual reporting periods beginning after December 15, 2026, with interim reporting required beginning after December 15, 2027. The Company is currently evaluating the impact of this guidance on its financial statement disclosures.

In July 2025, the FASB issued ASU 2025-05, Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses for Accounts Receivable and Contract Assets, which introduces a practical expedient for estimating expected credit losses on certain accounts receivable and contract assets. The guidance is effective for the Company beginning January 1, 2026. The Company is currently evaluating the impact of this update on its consolidated financial statements.

Off-Balance Sheet Arrangements

As of December 31, 2025 and 2024, the Company did not have any off-balance sheet arrangements, as defined in Item 303 of Regulation S-K, that have or are reasonably likely to have a material effect on its financial condition, results of operations, liquidity, capital expenditures, or capital resources.